NOTES TO FINANCIAL STATEMENTS
December 31, 2021 and 2020
(1.) DESCRIPTION OF THE PLAN
The following description of the Financial Institutions, Inc. 401(k) Plan (the “Plan”) provides only general information. Participants should refer to the Plan document for a complete description of the Plan.
General
The Plan was originally established in 1986 and has since been amended. The Plan is a defined contribution plan covering all employees of Financial Institutions, Inc. (the “Company”) and its subsidiaries and who have attained the age of 18.
The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”) and is administered by the Plan Administration Committee of the Company. The Vanguard Group, Inc. (“Vanguard”) is a party-in-interest of the Plan and serves as the Plan’s custodian, trustee and as record keeper to maintain the individual accounts for each Plan participant.
Contributions
Eligible participants may contribute up to 100% of their pre-tax annual compensation, as defined by the Plan, subject to annual limits established by the Internal Revenue Service (“IRS”). Participants may also contribute rollovers from other qualified plans.
All Plan participants who are older than 50 as of the beginning of the calendar year or who attain age 50 during the calendar year whose elective contributions have reached the IRS limit are permitted under the Plan to make catch-up contributions up to the IRS catch-up contribution limit.
Employees not opting out of participation in the Plan are treated as if they had elected to contribute 3% of their salary with automatic increases to 4% in the third year, 5% in the fourth year and 6% in the fifth and subsequent years.
The Company may make discretionary profit-sharing contributions; however, no discretionary profit-sharing contribution was declared for the years ended December 31, 2021 and 2020.
Investment Options
Participants direct the investment of all contributions, including any Company profit-sharing contributions, into various investment options offered by the Plan. Investment options currently available include various mutual funds, common/collective trust funds and common stock of the Company.
Participant Accounts
Each participant’s account is credited with the participant’s and the Company’s contributions and plan earnings/losses and is charged with an allocation of administrative expenses if the Company does not pay those expenses from its own assets. All amounts in participant accounts are participant directed.
Vesting
Participants are vested immediately in their contributions and the earnings/losses thereon. Participants become fully vested in Company contributions after two years of continuous service.
Forfeited Accounts
When certain terminations of participation occur, the non-vested portion of the participant’s account, as defined by the Plan, represents a forfeiture. Such forfeitures are used for payment of Plan administrative expenses or to reduce future employer contributions. Forfeitures used for Plan administrative expenses totaled $78 for each of the years ended December 31, 2021 and 2020. There were $40,000 of forfeitures used to reduce employer contributions for the year ended December 31, 2021 and no forfeitures used to reduce employer contributions for the year ended December 31, 2020. Accumulated forfeitures available for payment of Plan administrative expenses or to reduce future employer contributions totaled $15,717 and $48,187 as of December 31, 2021 and 2020, respectively.
Payment of Benefits
Participants may withdraw all or a portion of their vested balance upon termination of employment due to separation from service, retirement, disability, or death, or upon financial hardship as defined in the Internal Revenue Code (“IRC”). When a participant terminates employment, the participant may elect to receive benefits in a lump-sum distribution or a deferred annuity. If the participant’s vested account balance is $1,000 or less a lump-sum cash payment is made.
Withdrawal of an active employee’s before-tax contributions prior to a participant reaching age 59-1/2 may only be made on account of financial hardship as determined by the Trustee.
- 6 -
FINANCIAL INSTITUTIONS, INC. 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 2021 and 2020
(1.) DESCRIPTION OF THE PLAN (Continued)
Notes Receivable from Participants
The minimum amount participants may borrow from the Plan is $1,000. Participants may borrow from their accounts up to the lesser of $50,000 or 50% of their vested account balance. Note terms must not exceed five years unless the proceeds are to be used for the purchase of a principal residence, in which case the repayment period may not exceed 15 years. The notes are secured by the participants’ accounts and generally bear interest at 2% above the prime rate (rates range from 5.25% to 7.50% for notes outstanding at December 31, 2021) at the time of the note origination. Principal and interest are paid ratably through after-tax payroll deductions.
Administrative Expenses
A portion of the Plan’s administrative expenses are paid by the Company. All investment related expenses, and the balance of administrative expenses, are paid by the Plan and participants.
A Plan expense account (the “ERISA account”) is maintained to hold revenue sharing funds the Plan receives from Vanguard pursuant to an agreement between Vanguard and the Plan. These revenue sharing funds are available to pay qualified Plan administrative expenses. At December 31, 2021 and 2020, the ERISA account balance was $20,199 and $20,197, respectively. During 2021 and 2020, $-0- was used to pay Plan expenses.
(2.) SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The financial statements of the Plan are prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”).
Impacts Related to COVID-19 Pandemic
The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. This pandemic has adversely affected global economic activity and contributed to volatility in financial markets. Since the values of the Plan’s individual investments have and will fluctuate in response to changing market conditions, the amount of losses that will be recognized in subsequent periods, if any, and related impact on the Plan’s liquidity cannot be determined at this time.
The Plan adopted certain features specified in Federal regulations of the Coronavirus Aid Relief and Economic Security Act for qualifying participants including COVID-19 distribution options of up to $100,000, deferment of loan payments, and elimination of 2020 Required Minimum Distributions for those participants who meet certain qualifications.
Investment Valuation and Income Recognition
The Plan’s investments are stated at fair value as of the last trading date for the periods presented. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation includes the Plan’s gains and losses on investments bought and sold as well as held during the year, and also includes interest and dividend income. Investment management fees and operating expenses charged to the Plan for investments in the mutual funds are deducted from income earned on a daily basis and are reflected as a component of net appreciation in fair value of investments.
Fair Value Measurements
The Plan performs fair value measurements in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”). Refer to Note 3 for the fair value measurement disclosures associated with the Plan’s investments.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of net assets available for benefits and the changes in net assets available for benefits during the reporting period. Actual results could differ from those estimates.
- 7 -
FINANCIAL INSTITUTIONS, INC. 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 2021 and 2020
(2.) SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risks and Uncertainties
The Plan provides for a choice of investment options, including various mutual funds, common/collective trust funds and common stock of the Company. The Plan’s exposure to credit loss in the event of nonperformance of investments is limited to the carrying value of such investments. Investment securities, in general, are exposed to various risks, such as interest rate, credit, and overall market volatility risk. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect the amounts reported in the statements of net assets available for benefits and participant account balances.
Notes Receivable from Participants
Notes receivable from participants are measured at their unpaid principal balance plus any accrued but unpaid interest. Delinquent notes receivable are reclassified as distributions in accordance with the terms of the Plan document.
Contributions
Contributions from participants and any related employer match are recognized on the accrual basis as participants earn salary deferrals. Additional discretionary employer profit-sharing contributions are recognized when declared by the Company.
Distributions
Distributions are recorded by the Plan when paid.
(3.) FAIR VALUE MEASUREMENTS
The Plan performs fair value measurements in accordance with the guidance provided by ASC 820. When determining the fair value measurements for assets and liabilities required to be recorded at their fair values, the Plan considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the assets or liabilities, such as inherent risk, transfer restrictions, and risk of nonperformance.
ASC 820 establishes a fair value hierarchy that requires the Plan to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:
Level 1: observable inputs based on quoted prices in active markets for identical assets or liabilities;
Level 2: inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; or
Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair values of the assets or liabilities.
- 8 -
FINANCIAL INSTITUTIONS, INC. 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 2021 and 2020
(3.) FAIR VALUE MEASUREMENTS (Continued)
Investments Measured at Fair Value on a Recurring Basis
The fair value of the Plan’s assets at December 31, 2021 and 2020, by level within the fair value hierarchy, is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted
Prices
in Active
Markets
for
Identical
Assets or Liabilities
(Level 1) |
|
|
Significant Other Observable Inputs
(Level 2) |
|
|
Significant Unobservable Inputs
(Level 3) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
35,915 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
35,915 |
|
Mutual funds |
|
60,482,608 |
|
|
|
— |
|
|
|
— |
|
|
|
60,482,608 |
|
Financial Institutions, Inc. common stock |
|
2,312,652 |
|
|
|
— |
|
|
|
— |
|
|
|
2,312,652 |
|
|
$ |
62,831,175 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
62,831,175 |
|
Common/collective trust funds (a) |
|
|
|
|
|
|
|
|
|
|
3,768,257 |
|
Total investments |
|
|
|
|
|
|
|
|
|
$ |
66,599,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
68,383 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
68,383 |
|
Mutual funds |
|
52,838,432 |
|
|
|
— |
|
|
|
— |
|
|
|
52,838,432 |
|
Financial Institutions, Inc. common stock |
|
1,629,866 |
|
|
|
— |
|
|
|
— |
|
|
|
1,629,866 |
|
|
$ |
54,536,681 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
54,536,681 |
|
Common/collective trust funds (a) |
|
|
|
|
|
|
|
|
|
|
3,807,960 |
|
Total investments |
|
|
|
|
|
|
|
|
|
$ |
58,344,641 |
|
(a) In accordance with Subtopic 820-10, certain investments that were measured at net asset value per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the line items presented in the statements of net assets available for benefits.
There were no transfers between Level 1 and Level 2 or 3 during the years ended December 31, 2021 and 2020.
The Plan’s valuation techniques used to measure the fair values of cash and cash equivalents, mutual funds and Financial Institutions, Inc. common stock that were classified as Level 1 in the table above were derived from quoted market prices as substantially all of these instruments have active markets.
The following is a description of the valuation methodologies used for instruments held by the Plan measured at fair value:
Cash and cash equivalents: Cash and cash equivalents are valued at cost plus accrued interest, which approximates fair value.
Mutual funds: The shares of registered investment companies are valued at quoted market prices.
Common stock: The Company’s common stock is traded on a national securities exchange and is valued at the last reported sales price on the last day of the Plan year.
Common/collective trust funds: The Plan offers participants the Vanguard Retirement Savings Trust III, which invests primarily in benefit responsive investment contracts with insurance companies, banks and other financial institutions and is reported at fair value in the statements of net assets available for benefits. There were no significant unfunded commitments or redemption restrictions on these investments.
- 9 -
FINANCIAL INSTITUTIONS, INC. 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 2021 and 2020
(3.) FAIR VALUE MEASUREMENTS (Continued)
The trustee of the common/collective trust uses various valuation techniques to measure the fair value of the assets within the fund. The fair value of conventional investment contracts is determined using a discounted cash flow methodology where the individual contract cash flows are discounted at the prevailing interpolated yield curve rate as of year-end. Underlying investments of the synthetic investment contracts are generally valued as follows: domestic and foreign fixed income securities are valued at fair value based on market values obtained from independent pricing services, quotes by dealers who are market makers in these securities, or by a methodology approved by the trustees. Accrued interest, if any, on the underlying investments is added to the fair value of the investments for presentation purposes. Commercial paper and other investment securities with less than 60 days to maturity when purchased are valued at amortized cost, which approximates fair value. Investments in regulated investment companies, collective investment trusts and separate accounts are valued at the net asset value per share/unit. The fair value of the wrap contracts is determined using the market approach discounting methodology which incorporates the difference between current market level rates for contract level wrap fees and the wrap fee being charged. The difference is calculated as a dollar value and discounted by the prevailing interpolated yield curve as of year-end.
(4.) PLAN TERMINATION
Although it has not expressed any intent to do so, the Company has the right under the Plan to terminate the Plan subject to the provisions of ERISA. In the event of Plan termination, participants will be entitled to the entire amount of their account balances at the date of such termination.
(5.) TAX STATUS
The Plan uses a prototype plan document sponsored by Vanguard. Vanguard received an opinion letter from the IRS dated March 31, 2014, which states that the prototype plan document satisfies the applicable provisions of the IRC. The Plan itself has not received a determination letter from the IRS. However, the Plan administrator believes that the Plan is designed and is currently being operated in compliance with the applicable requirements of the IRC. Therefore, the Plan administrator believes the Plan was qualified and the related trust was tax-exempt as of December 31, 2021 and 2020.
(6.) PARTY-IN-INTEREST TRANSACTIONS
Transactions in shares of the Company’s common stock qualify as party-in-interest transactions under the provisions of ERISA. During the years ended December 31, 2021 and 2020, the Plan made purchases of approximately $234,000 and $190,000 and sales of approximately $233,000 and $160,000, respectively, of the Company’s common stock. The Plan’s investment in the Company’s common stock represents approximately 3.4% and 2.8% of the net assets available for benefits at December 31, 2021 and 2020, respectively. Notes receivable from participants, totaling $779,148 and $764,832 at December 31, 2021 and 2020, respectively, are also considered party-in-interest transactions.
The Plan invests in various mutual funds and a common/collective trust that are managed by Vanguard, custodian, trustee and recordkeeper of the Plan. Transactions in such investments qualify as party-in-interest transactions.
(7.) SUBSEQUENT EVENTS
Subsequent events and transactions have been evaluated through June 17, 2022, which is the date the financial statements were issued. There were no events or transactions discovered during this evaluation that require recognition or disclosure in the financial statements.
- 10 -
