Financial Institutions, Inc. (FISI) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Thank you for joining today's financial institution investor call. My name is Tia, and I will be your moderator for today's call. [Operator Instructions] I would now like to pass the call over to your host, Kate Croft, Director of Investor Relations. Please proceed.

Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham. He will be joined by additional members of the company's leadership team during the question-and-answer session. Today's prepared comments and Q&A will include forward-looking statements. Actual results may differ materially from forward-looking statements due to a variety of risks, uncertainties and other factors. We refer you to today's Form 8-K/A and our latest investor presentation as well as historical SEC filings for a safe harbor description and a detailed discussion of the risk factors relating to forward-looking statements. We'll also discuss certain non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures. Reconciliations of these measures to GAAP financial measures were provided in the Form 8-K/A filed today. Our SEC filings and our latest investor presentation are available on our Investor Relations website, www.fisi-investors.com. Please note that this call includes information that may only be accurate as of today's date, March 10, 2025. I'll now turn the call over to President and CEO, Marty Birmingham.

Thank you, Kate, and thank you, everyone, for joining us for the call this afternoon. As we announced, the company and plaintiffs have settled a civil lawsuit filed in Pennsylvania state court back in 2017. While subject to court approval, we believe this settlement, which fully resolved this matter is a positive outcome for the company. I'd like to provide some background, review key terms and discuss the accounting considerations and financial impact before addressing questions you may have. Importantly, this does not have any impact on the 2025 guidance we shared with you in January. In addition, as a matter of public record, we initiated a suit against our formal -- excuse me, in addition, as a matter of public record, we initiated a suit against our former external legal counsel nearly 18 months ago for malpractice for their handling of this case, and we intend to aggressively pursue all rights and remedies available to us, which includes seeking damages for the settlement, associated legal and other expenses we incurred as a result of what we believe were our former attorneys clear errors at the inception of the filing of the proceeding. As we've regularly disclosed through our quarterly and annual SEC filings for many years, the civil suit was filed in May 2017 and relates to language and notices issued beginning in 2011 to defaulting borrowers whose vehicles were repossessed by the bank. The plaintiffs alleged that those notices did not fully comply with the relevant portions of the Uniform Commercial Code in New York and Pennsylvania. There is no allegation or evidence that the bank acted improperly or negligently. There also is no allegation or evidence that any borrower sustain any harm. However, under the applicable legal standards, value to include certain language in the notice triggered statutory damages. Class action certification was granted in 2021 by the court in Pennsylvania. Prior efforts to resolve this case included some voluntary nonbinding mediations in 2021 and 2022 were unsuccessful. Given this prior history, we were not overly optimistic about our ability to reach an agreement and continue to prepare for the bench trial scheduled to begin in the first week of May 2025. The third mediation took place on February 28, 2025, and the parties came to a preliminary agreement. We and our trial counsel view the proposed terms as acceptable and after extensive discussion, our Board unanimously approved them. The March 7 settlement agreement is subject to approval by the court. The proposed terms include the release of liability on approximately $55 million of loans that were fully charged off years ago and the discontinuance of adverse credit reporting for those borrowers. In addition, the terms include a $29.5 million settlement payment, of which $6.5 million was covered by remaining available insurance proceeds. Based on our review of accounting guidelines and discussion with our external auditors, we are required to record this as a 2024 event. We have not previously accrued a contingent liability for this matter because given our defenses, we were unable to conclude whether a liability was probable to occur nor were we able to reasonably estimate the amount of potential loss given the impact of several defenses we asserted had on the bank's potential exposure. Given the Board's approval of the settlement amount on March 3, we determined the need to record an accrual for the fourth quarter. The amended 8-K that we filed today includes details on all line items that have been updated, and we have published a revised quarterly investor deck on our Investor Relations website to reflect the full impact of the settlement. Among the key changes, we recorded a $23 million pretax provision for litigation settlement on the noninterest expense. This reflects the benefit of $6.6 million in the insurance proceeds that we were able to apply towards the $29.5 million settlement. The after-tax impact of the charge is $17.1 million. As a result, net loss available to common shareholders increased to $82.8 million for the fourth quarter and $41.6 million for the year. Diluted losses per share were $5.07 and $2.75 for the quarter and year, respectively. Even with the litigation provision taken at the holding company level, each of financial institutions incorporated regulatory capital ratios were only revised down by approximately 30 basis points, and they remain comfortably well above well-capitalized levels. In addition, our updated tangible common equity to tangible assets ratio remains well above 8%. While the settlement clearly impacts our 2024 results, we believe this matter is fully resolved, supported by the executed settlement agreement and subject to final court approval. We expect the approval that has been booked as of 12/31 to be sufficient to satisfy the final settlement. The settlement also has no impact on the 2025 guidance we shared with you earlier this year, including our expectations to achieve return on average assets of at least 110 basis points, return on average equity of at least 11.25% and an efficiency ratio below 60%. With about 3 weeks remaining in the first quarter, I'm pleased to report that the bank's performance to date has been sound with revenue and expenses tracking as expected and credit performing favorable to plan. We look forward to updating you all on our full first quarter results at next month's earnings call, which is going to be scheduled for April 29. Finally, as many of you know, over a year ago, we announced our decision to exit the Pennsylvania auto market, simplifying the business and focusing on new car dealerships in our core upstate New York market. Given our refined focus since last year, we continue to expect consumer direct balances to end 2025 relatively flat as compared to the end of 2024. That concludes my prepared remarks. Operator, can you please open the call for questions?

[Operator Instructions] The first question comes from the line of Matthew Breese with Stephens Inc.

Marty, maybe the first one and understanding it's going to be complex, but what was it in the notices that was allegedly not in compliance?

Matt, there were a few things. One was related to the disclosure of how storage fees were calculated. We thought that we had a strong defense against that. The other was related to verbiage and how the consumers could contact the bank to discuss the total liability owed. In the case of strict liability as we view it as it pertains to required disclosure in those collection statements.

Okay. And I forget which notice or what -- some of the materials that are out there suggest that there's some release of debt. But Marty, you had said that these were loans that have been fully charged off. Could you help me square those 2 points?

Yes. So these loans were all charged off. At this point, we are going to acknowledge the credit reporting agencies, et cetera, that it's been no negative report related to them. Matt, there were some judgments filed against a smaller portion of that $55 million, where we were receiving some recoveries at a very modest level, and we're going to work with the appropriate agencies to remove those judgments and collection efforts.

Okay. And then the last one tied to this is, why is this a fourth quarter event? I'm having a tough time understanding why this is being retroactively applied.

Sure. So it's a type 1 subsequent event disclosure. So settling a lawsuit after the balance sheet date, but before the financial statements are issued through the 10-K falls squarely into that. We've had a lot of conversations with our external auditors on the topic as well as following GAAP guidance, which required us to reopen the books for the fourth quarter.

Okay. And then look, while I got you guys, the markets are a bit haywire right now. And I'm curious what you're seeing from a regular way kind of course of business. Are you seeing disruption with customers or customers kind of stalling and not taking on borrowing? Would be curious anything you have to offer while the market is doing what it's doing.

Yes. This is a breaking real-time issue. I think post the election, our borrowers were feeling a sense of confidence, and we're moving along that path. So we've not seen a change in that, but I understand why you asked the question because it looks like there is a lot of volatility in the market today and likely given our tariffs -- the impact of tariffs, geopolitical risk, et cetera, that there's a lot that will flow through here.

And Matt, this is Jack. When we build our financial plan for the year, we took the uncertainty that existed in the market into the financial planning. So that played into the loan growth projections and balance sheet projections that we outlined during our 2025 guidance. As Marty mentioned, though, we're seeing the balance sheet shake out in P&L relative to plan. So it hasn't really had an impact on our financials to date.

The next question comes from the line of Damon DelMonte with KBW.

Just curious, does this have any impact on the go-forward indirect auto business or not really because you've exited the market where the litigation was taking place?

I would say it's the latter. The issue is, as Jack said, strict liability related to these disclosures, which were fixed many, many years ago, highly technical issue, but that has resulted in this unfortunate outcome. Otherwise, as we've guided, we remain committed to the number -- the absolute number that we've been talking about for year-end 2025.

The decision to exit the PA market was more grounded in driving efficiency from the line of business and cutting some costs out of servicing the dealers that we had in that area. And our approach to maintaining a lower level of growth in the indirect book, as you've seen over time as that portfolio has become a much lower percentage of loan footings than where it was historically. We're focused on our upstate New York market and our guidance to maintain flattish balances in the portfolio has not changed.

Got it. Okay. And then just lastly, is there any type of regulatory concern here? Any commentary from your regulators on this settlement?

I'm sure you can appreciate, we've been proactively communicating with our regulators, including this issue, and we'll continue to work hard to meet their expectations. Our capital ratios remain well above well-capitalized thresholds and anything beyond that is in a good position.

[Operator Instructions] The next question comes from the line of Richard Lashley with PL Capital.

I'm curious why the period that was at risk continued on until 2021 when the lawsuit was filed in 2017. Is that part of your suit against the external counsel? I guess why weren't the practices cleaned up in 2017?

Yes. So the independent of the May 2017 legal action, we had updated the language in our documentation, which has been reviewed by a third-party legal counsel to confirm that remain compliant. However, the class extended through 2021 to ensure broad coverage of any potential impacted borrowers. So it was just to improve protection against the company upon settlement.

So the vast majority of the affected consumers were pre-2017?

Yes.

Okay. And are you aware of any other banks that have been sued for similar things? In other words, is this a broad plaintiffs lawyers pursuit of many banks and other lenders? Or is this unique to financial institutions?

It's a niche business by the plaintiffs attorney that brought this before us. There have been other financial institutions that have been impacted by this in the past. I can't comment on who they are exactly. That's not something we would do on this call, but yes, it has impacted other financial institutions.

And I know you can't discuss your legal case against your external counsel, but what's the basic theory? Is the theory that they didn't advise you on how to provide the proper notice or that they advised you regarding how to handle the litigation? In other words, was it related to the consumer harm? Or was it related to the advice you got in the litigation?

It's related to advice. A case that was filed in September 2023 was public and would encourage you to look it up. That lays out the basis of it. And now, Rich, we have a hard number where we have been harmed and injured, which I said, we are going to pursue aggressively.

Is there a way you could provide a reference or circulate, Kate -- maybe Kate could circulate a link to the lawsuit? That would be appreciated.

[indiscernible]

Thank you.

There are no additional questions left at this time. I will hand the call back to Marty Birmingham.

I want to thank everyone for their participation this afternoon, and we look forward to connecting again next month at our first quarter earnings call. Thank you, operator.

That concludes today's conference call. Thank you. You may now disconnect your lines.