NOTES TO FINANCIAL STATEMENTS
December 31, 2015 and 2014
(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 who have attained the age of 20-1/2.
The Plan is subject to the provisions of the
Employee Retirement Income Security Act of 1974 (ERISA) and is administered by the Executive Management Committee of the Company. Charles Schwab Bank (Schwab) serves as the Plans custodian and trustee. Milliman, Inc. is
a party-in-interest of the Plan and serves 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.
For each participant, the Company makes contributions to the
Plan equal to 100% of the first 3% of the participants eligible compensation contributed and 50% of the next 3% of the participants eligible compensation contributed. The Company may also make an additional discretionary matching
contribution; however no discretionary contribution was declared for the years ended December 31, 2015 or 2014.
Investment Options
Participants direct the investment of their contributions and the Companys matching contributions into various investment options offered by the Plan.
Investment options currently available include various mutual funds, a common/collective trust fund and common stock of the Company.
Participant
Accounts
Each participants account is credited with the participants and the Companys 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 nonvested portion of the participants account, as defined by the Plan, represents a forfeiture. Such forfeitures are used to reduce future employer contributions. There were no forfeitures used to reduce employer
contributions for the years ended December 31, 2015 and 2014. Accumulated forfeitures available to reduce future employer contributions totaled $64,874 and $31,783 as of December 31, 2015 and 2014, respectively.
- 6 -
FINANCIAL INSTITUTIONS, INC. 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 2015 and 2014
(1.)
DESCRIPTION OF THE PLAN (Continued)
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
participants vested account balance is $1,000 or less a lump-sum cash payment is made.
Withdrawal of an active employees 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.
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 7.75% for notes outstanding at December 31, 2015) at the time of the note origination. Principal and interest are paid
ratably through after-tax payroll deductions.
Administrative Expenses
A portion of the Plans administrative expenses are paid by the Company. All investment related expenses, and the balance of administrative expenses, are
paid by the participants.
(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).
Investment
Valuation and Income Recognition
The Plans 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 (depreciation) includes the Plans gains and losses on investments bought and sold as well as held during
the year. 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 (depreciation) 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 Plans 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, 2015 and 2014
(2.)
SIGNIFICANT ACCOUNTING POLICIES (Continued)
Risks and Uncertainties
The Plan provides for a choice of investment options, including various mutual funds, a common/collective trust fund and common stock of the Company. The
Plans 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 matching contributions are recognized when declared by the Company.
Distributions
Distributions are recorded by the Plan when paid.
New
Accounting Pronouncements
In May 2015, the FASB issued ASU No. 2015-07,
Disclosures for Investments In Certain Entities that Calculate Net
Asset Value Per Share (or its Equivalent)
(ASU 2015-07). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy investments for which fair values are estimated using the net asset value practical expedient
provided by ASC 820. Disclosures about investments in certain entities that calculate net asset value per share are limited under ASU 2015-07 to those investments for which the entity has elected to estimate the fair value using the net asset value
practical expedient. ASU 2015-07 is effective for entities (other than public business entities) for fiscal years beginning after December 15, 2016, with retrospective application to all periods presented. Early application is permitted. The
Plan has elected to early adopt ASU 2015-07 as of December 31, 2015 and has applied the provisions retrospectively.
In July 2015, the FASB
issued ASU No. 2015-12,
Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965), Part I. Fully Benefit-Responsive Investment
Contracts, Part II. Plan Investment Disclosures, Part III. Measurement Date Practical Expedient
(ASU 2015-12). The FASB issued this update in response to a proposal developed by the Emerging Issues Task Force
(EITF) to reduce complexity in employee benefit plan accounting. Part I eliminates the requirement to measure and disclose the fair value of fully benefit-responsive contracts. Contract value is the only required measure for fully
benefit-responsive investment contracts. Part II eliminates the requirement to disclose individual investments which comprise 5% or more of total net assets available for benefits, as well as the net appreciation or depreciation of fair values
by type. Part II also requires plans to continue to disaggregate investments that are measured using fair value by general type; however, plans are no longer required to also disaggregate investments by nature, characteristics and risks.
Furthermore, the disclosure of information about fair value measurements shall be provided by general type of plan asset. Part III allows plans to measure investments using values from the end of the calendar month closest to the plans
fiscal year end. The amendments in ASU 2015-12 are effective for fiscal years beginning after December 15, 2015; early application is permitted. The Plan elected to early adopt ASU 2015-12 Parts I and II as of December 31, 2015 and has
applied the provisions retrospectively. ASU 2015-12 Part III is not applicable to the Plan.
- 8 -
FINANCIAL INSTITUTIONS, INC. 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 2015 and 2014
(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 assets or liabilitys 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.
Investments Measured at
Fair Value on a Recurring Basis
The fair value of the Plans assets at December 31, 2015 and 2014, 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, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
480,569
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
480,569
|
|
Mutual funds
|
|
|
33,552,254
|
|
|
|
|
|
|
|
|
|
|
|
33,552,254
|
|
Financial Institutions, Inc. common stock
|
|
|
2,554,748
|
|
|
|
|
|
|
|
|
|
|
|
2,554,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,587,571
|
|
|
$
|
|
|
|
$
|
|
|
|
|
36,587,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common/collective trust fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,961,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,549,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
708,535
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
708,535
|
|
Mutual funds
|
|
|
33,320,500
|
|
|
|
|
|
|
|
|
|
|
|
33,320,500
|
|
Financial Institutions, Inc. common stock
|
|
|
2,168,358
|
|
|
|
|
|
|
|
|
|
|
|
2,168,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,197,393
|
|
|
$
|
|
|
|
$
|
|
|
|
|
36,197,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common/collective trust fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,854,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
40,052,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no transfers between Level 1 and Level 2 or 3 during the years ended December 31, 2015 and 2014.
The Plans 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.
- 9 -
FINANCIAL INSTITUTIONS, INC. 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 2015 and 2014
(3.) FAIR
VALUE MEASUREMENTS (Continued)
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 Companys 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 fund:
The Plan offers participants the Union Bond & Trust Company Stable Value Fund,
managed by Morley Capital Management, Inc. (the Morley Stable Value Fund), 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.
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 trustee. 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 discontinue its contributions at any
time and 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.) RECONCILIATION TO FORM 5500
The following is a
reconciliation of net assets available for benefits per the financial statements to the Plans Form 5500 at December 31, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Net assets available for benefits per the financial statements
|
|
$
|
41,612,694
|
|
|
$
|
40,995,894
|
|
Adjustment for valuation of common/collective trust
|
|
|
(8,672
|
)
|
|
|
(36,106
|
)
|
Other
|
|
|
|
|
|
|
(11,009
|
)
|
|
|
|
|
|
|
|
|
|
Net assets available for benefits per the Form 5500
|
|
$
|
41,604,022
|
|
|
$
|
40,948,779
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the net increase in net assets available for benefits per the financial statements to the
Plans Form 5500 for the year ended December 31, 2015:
|
|
|
|
|
Net increase in net assets available for benefits per the financial statements
|
|
$
|
616,800
|
|
Net change in fair value adjustment of common/collective trust
|
|
|
27,434
|
|
Net change in liabilities
|
|
|
11,009
|
|
|
|
|
|
|
Net gain per the Form 5500
|
|
$
|
655,243
|
|
|
|
|
|
|
The fair value adjustment represents the difference between contract value of the common/collective trust as included in the
statement of changes in net assets available for benefits for the year ended December 31, 2015, and the fair value of the common/collective trust as reported in the Form 5500.
- 10 -
FINANCIAL INSTITUTIONS, INC. 401(K) PLAN
NOTES TO FINANCIAL STATEMENTS
December 31, 2015 and 2014
(6.) TAX STATUS
The IRS has determined and informed the Company by a letter dated June 1, 2010, that the Plan is designed in accordance with applicable sections of the
IRC. 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, 2015 and 2014.
(7.) PARTY-IN-INTEREST TRANSACTIONS
Transactions in shares of the Companys common stock qualify as party-in-interest transactions under the provisions of ERISA. During the year ended
December 31, 2015 and 2014, the Plan made purchases of approximately $125,000 and $389,000 and sales of approximately $272,000 and $328,000, respectively, of the Companys common stock. Notes receivable from participants, totaling
$1,063,468 and $943,740 at December 31, 2015 and 2014, respectively, are also considered party-in-interest transactions.
The Plan invests in the
Schwab Retirement Advantage Money Fund, which is managed by Charles Schwab Bank, custodian of the Plan. Transactions in such investments qualify as party-in-interest transactions.
(8.) SUBSEQUENT EVENTS
Subsequent events and
transactions have been evaluated through June 24, 2016, which is the date the financial statements were available to be issued. Other than the plan amendment, as described below, there were no events or transactions discovered during this
evaluation that require recognition or disclosure in the financial statements.
Effective January 1, 2016, the Plan was amended and the
Companys matching contribution was discontinued.
- 11 -
Column (d), cost, has been omitted, as all investments are participant directed.