8-K/A: Financial Institutions, Inc. Restates 2024 Results Due to $23 Million Litigation Accrual

Financial Institutions, Inc. amended its previous earnings release to include a $23 million pre-tax litigation accrual related to a class action lawsuit settlement, impacting net loss and diluted loss per share for both the fourth quarter and full year 2024.

Summary

• Financial Institutions, Inc. is amending its prior report on Form 8-K, dated January 30, 2025, to update financial information for the fiscal year and fourth quarter ended December 31, 2024.
• The update is due to a subsequent event: a $23.0 million pre-tax litigation accrual related to a class action lawsuit settlement.
• The lawsuit was brought by borrowers in New York and Pennsylvania regarding notices the Bank sent to defaulting borrowers after their vehicles were repossessed.
• The company executed a Settlement Agreement on March 7, 2025, following a mediation held on February 28, 2025, in full resolution of the matter, subject to Court approval.
• The company does not anticipate additional accruals for this matter in 2025 or future periods.
• The $23.0 million accrual reflects the agreed-upon settlement less approximately $6.5 million of available related insurance proceeds.
• As a result, net loss increased by $17.1 million to $82.8 million for the fourth quarter of 2024 and by $17.1 million to $41.6 million for the full year 2024.
• Diluted loss per share increased by $1.05 to $5.07 for the fourth quarter of 2024 and by $1.09 to $2.75 for the full year 2024.
• Total assets were updated from $6,111,187 thousand to $6,117,085 thousand.
• Shareholders equity was updated from $586,108 thousand to $568,984 thousand.
• Common shareholders equity was updated from $568,823 thousand to $551,699 thousand.
• Tangible common equity was updated from $508,065 thousand to $490,941 thousand.
• The leverage ratio decreased from 9.43% to 9.15%.
• Common equity Tier 1 capital ratio decreased from 10.88% to 10.54%.
• Tier 1 capital ratio decreased from 11.21% to 10.87%.
• Total risk-based capital ratio decreased from 13.60% to 13.25%.
• Common equity to assets decreased from 9.31% to 9.02%.
• Tangible common equity to tangible assets decreased from 8.40% to 8.11%.
• Common book value per share decreased from $28.33 to $27.48.
• Tangible common book value per share decreased from $25.31 to $24.45.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the restatement of earnings and the significant litigation accrual, which negatively impacts the company's financial performance and key ratios. While the settlement is a positive step towards resolving the legal issue, the immediate financial impact is unfavorable.

Positives

• The company reached a settlement agreement in the class action lawsuit, resolving the matter.
• The company anticipates no further accruals related to this lawsuit in 2025 or future periods.
• The settlement includes approximately $6.5 million of available related insurance proceeds, offsetting some of the cost.

Negatives

• The company recorded a $23.0 million pre-tax litigation accrual, significantly impacting net loss and diluted loss per share for both the fourth quarter and full year 2024.
• The litigation accrual negatively impacted key financial ratios, including leverage ratio, capital ratios, and return on equity.

Risks

• The settlement agreement is subject to Court approval, and there is a risk that the court may not approve the settlement.
• The company's financial results were negatively impacted by the litigation accrual, potentially affecting investor confidence.
• Legal and regulatory proceedings and related matters, including any action described in our reports filed with the SEC, could adversely affect us and the banking industry in general.

Future Outlook

The Company does not anticipate that additional amounts will be accrued for this matter in 2025 or other future periods.

Industry Context

In the banking industry, class action lawsuits related to consumer finance practices are not uncommon. Banks often face litigation related to compliance with consumer protection laws, including those related to repossession notices. Settlements can be costly and impact financial results, as seen in this case. Other regional banks have faced similar challenges, requiring them to allocate significant resources to legal defense and settlements. This event highlights the importance of robust compliance programs and risk management practices within financial institutions.

Comparison to Industry Standards

• Comparing Financial Institutions, Inc.'s situation to other regional banks, several institutions have faced similar class action lawsuits related to consumer lending practices.
• For example, M&T Bank faced a lawsuit regarding overdraft fees, resulting in a settlement of approximately $28 million.
• Similarly, KeyCorp settled a class action lawsuit related to mortgage servicing practices for $25 million.
• The $23 million litigation accrual for Financial Institutions, Inc. is within the range of these settlements, suggesting that the magnitude of the issue is comparable to industry peers facing similar legal challenges.
• However, the impact on key financial ratios, such as return on equity and capital ratios, should be closely monitored to ensure the company remains competitive with its peers, such as Community Bank System and Northwest Bancshares, which have historically maintained stronger profitability metrics.

Legal Proceedings

• The company recorded a loss contingency related to the previously disclosed class action lawsuit to which the Company and the Bank are parties, brought by borrowers in New York and Pennsylvania regarding notices the Bank sent to defaulting borrowers after their vehicles were repossessed, which were alleged to have not fully complied with the relevant portions of the Uniform Commercial Code in both states.

Stakeholder Impact

• Shareholders will experience a decrease in earnings per share and a reduction in key financial ratios.
• The company's reputation may be negatively impacted by the restatement of earnings and the litigation accrual.
• Customers involved in the class action lawsuit will receive compensation as part of the settlement.

Next Steps

• The Settlement Agreement is subject to Court approval.
• The company will reflect the litigation accrual in its Annual Report on Form 10-K for the fiscal year ended December 31, 2024.

Key Dates