Financial Institutions Inc. in Warsaw, New York, took a bad outcome and made it retroactively worse on Monday.
The company announced an agreement to settle a class-action lawsuit connected to its auto loan notification practices for $29.5 million.
The after-tax impact of the settlement boosted Financial Institutions’ fourth-quarter loss to $82.5 million, up more than $16 million from its previously reported quarterly loss.
CEO Martin Birmingham said during a conference call with analysts that the settlement “fully resolves this matter and provides a positive impact for the company.” He reiterated full-year guidance that calls for a return on average assets of 1.10% during 2025.
Financial Institutions is the holding company for the 143-year-old Five Star Bank, which was the defendant in the lawsuit.
While the settlement puts modest downward pressure on the company’s capital levels, they all remain “comfortably” above the well-capitalized threshold, Birmingham said. The bank’s Common Equity Tier 1 ratio fell to 10.54% from the previously reported 10.88% level.
Because the settlement, which was finalized March 7, occurred prior to the filing of the company’s 10-K annual report with the Securities and Exchange Commission, it qualified for inclusion in Financial Institutions’ fourth-quarter results, Chief Financial Officer Jack Plants said on the conference call.
The $6.1 billion-asset Financial Institutions had earlier reported a $65.7 million loss for the three months ending Dec. 31, 2024, after selling $653 million in securities at a $100 million loss.
The settlement covers about 5,300 “secured obligations” totaling $55 million, according to documents filed Friday in the Court of Common Pleas for Philadelphia County. The borrowers had their vehicles repossessed.
The contested notifications concerned disclosures of storage fee calculations, as well as language informing consumers how they could contact Financial Institutions to discuss the amounts they owed, Plants said. The plaintiffs argued the disclosures fell short of the standards established by the New York and Pennsylvania Uniform Commercial Code, according to Birmingham.
Financial Institutions denied wrongdoing but decided to settle to avoid “the burden, expense, and uncertainty of continuing litigation and the sizable risks associated in the event Plaintiffs were successful on their claims,” the company said in its March 7 court filing.
“There is no allegation or evidence that the bank acted improperly or negligently,” Birmingham said Monday.
The case had been scheduled to go to trial during the first week of May. After two prior mediation efforts failed to produce a settlement, the sides agreed to a third mediation session. That Feb. 28 meeting produced an agreement that Financial Services’ board approved the following week after “extensive discussions,” Birmingham said.
The settlement requires the bank to cease collections activity. Financial Institutions had previously charged off all impacted loans, which were made to borrowers in Pennsylvania and New York, according to Birmingham.
The after-tax impact of the settlement for Financial Institutions included $6.5 million in insurance proceeds.
Attorneys representing the borrowers will receive $11.8 million of the $29.5 million settlement, according to the March 7 court filing. The filing identified the class counsel as Flitter Milz, P.C., headquartered in Narbeth, Pennsylvania.
Birmingham called the litigation a “niche business” for the plaintiffs’ attorneys involved in the case. “There have been other financial institutions that have been impacted by this in the past,” he said, though he declined to identify any of them.
The settlement does not end the legal maneuvering connected to the case.
Financial Institutions is suing its previous legal counsel, Rochester, New York -based Harter, Secrest and Emory, “for what we believe were our former attorneys’ clear errors at the inception of the filing of the proceeding,” Birmingham said. “We intend to aggressively pursue all rights and remedies available to us.”