Good day, ladies and gentlemen. Thank you for joining today's Financial Institutions investor call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call, with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I will now identify and 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, Martin K. 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 board, 8-K, 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 their non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures. Our reconciliations of these measures to GAAP financial measures were provided in the form 8-K filed today. Our SEC filings and our latest investor presentation are available on our investor relations website at www.fisi-investors.com.
Please note this call includes information that may only be accurate as of today's date, March 10th, 2025. I'll now turn the call over to President and CEO, Martin K. 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. Subject to court approval, we believe this settlement will fully resolve this matter with a positive outcome for the company. I'd like to provide some background with you, 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 former external legal counsel nearly 18 months ago for malpractice for their handling of this case.
We intend to aggressively pursue all rights and remedies available to us, which include seeking damages for the settlement, appropriate legal, and other expenses we incurred as a result of what we believe were our former attorney's 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 in 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 was no allegation or evidence that the bank acted improperly or negligently. There also was no allegation or evidence that any borrower sustained any harm.
However, under the applicable legal standards, failure to include certain language in the notice triggers statutory damages. Class action certification was granted in 2021 by the court in Pennsylvania. Prior efforts to resolve this case, including through voluntary non-binding mediations in 2021 and 2022, were unsuccessful. Given this prior history, we were not overly optimistic about our ability to reach an agreement and continued 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 viewed 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 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 is 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 included contingent liability for this matter because, given our defenses, we were unable to conclude whether liability was probable to occur or 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 3rd, 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 pre-tax provision for litigation settlement under non-interest expense. This reflects the benefit of $6.6 million in insured 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' 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 accrual 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 three 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 better 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 29th. Finally, as many of you know, over a year ago, we announced our decision to exit the auto market simplifying the business and focusing on new car dealerships in our core upstate New York market. Here's our refined focus since last year. We continue to expect consumer indirect balances to end 2025 relatively flat as compared to the end of 2024. I conclude my prepared remarks. Operator, can you please open the call for questions?
We will now begin the Q&A session. If you would like to ask a question, please press star followed by one on your touch-tone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. We will pause here briefly to allow questions to generate in queue. The first question comes from the line of Matthew Breese with Stephens Inc. Please proceed.
Good afternoon. Hey, 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?
Yeah, there were a few things I did. 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. It was a case of strict liability as we view it as it pertains to required disclosure in those collection statements.
Okay. I forget which notice or what some of the materials that are out there suggest that there's some release of debt, but Markety, you had said that these were loans that had been fully charged off. Could you help me square those two points?
Yes. These loans were all charged off. At this point, we are going to acknowledge to the credit reporting agencies, etc., that there has been no negative reporting related to them. Yeah, Matt, there were some judgments filed against a smaller portion of that $55 million where we were receiving some recovery at a very modest level, and we are going to work with the appropriate agencies to remove those judgments and collection efforts.
Okay. 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.
It's a type one subsequent event disclosure. Settling a lawsuit after the balance sheet date or 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. 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 are customers kind of stalling and not taking on or borrowing? Would be curious anything you have to offer while the Market's doing what it's doing. Thank you.
Yeah. 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. We have 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 the impact of tariffs, geopolitical risk, etc., that there is a lot that will flow through here.
Matt, this is Jack. When we built our financial plan for the year, we took the uncertainty that existed in the Market get things into financial planning. That played into the loan growth projections and balance sheet projections that we outlined during our 2025 guidance. As Markety mentioned, though, we're seeing the balance sheet shake out and P&L relative to plan. It has not really had an impact on the financials today.
I'll leave it there. Thanks for taking my questions.
Yeah.
Thank you. The next question comes from Damon DelMonte. With KBW please proceed?
Hey, good afternoon, guys. Thanks for taking my question. 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 absolute number that we've been talking about for year-end 2025.
The decision, guys, that the PA market was more grounded in driving efficiency for the line of business and cutting some costs out of servicing the dealers that we had in that area. Our approach to maintaining a lower level of growth in the indirect work, as you've seen over time, is that portfolio has become a much lower percentage of loan footings than where it was historically. We are focused on our Upstate New York market and our guidance to maintain flattish balances in the portfolio has not changed.
Got it. Okay. Lastly, is there any type of regulatory concern here? Any commentary from your regulators on this settlement?
I truly 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 has been in a good position.
Got it. Okay, great. That's all that I had. Thanks for taking the question.
Thank you. Again, to ask a question, please press star one. Okay. The next question comes from Richard Lasley with PL Capital. Please proceed.
Hi, everyone. 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?
Yeah. 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 we're being compliant. However, the class extended through 2021 to ensure broad coverage of any potential impacted borrowers. It was just to improve protection against the company upon settlement.
The vast majority of the affected consumers were pre-2017?
Yes.
Okay. Are you aware of any other banks that have been sued for similar things? In other words, is this a broad plaintiff lawyer's pursuit of many banks and other lenders, or is this unique to Financial Institutions?
Yeah. It's a niche business by the plaintiff's 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.
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?
Right. It's related to their advice. It's a case that was filed in September 2023. It's public, and we'd encourage you to look it up. That lays out the basis of it. Now, Rich, we have a hard number where we have been harmed and injured. As I said, we are going to pursue aggressively.
Is there a way you could provide a reference or circulate? Maybe Kate could circulate a link to the lawsuit. That'd be appreciated. Thank you.
That's all I have. Thank you.
All right. Thank you.
Thank you. There are no additional questions left at this time. I will hand the call back to Martin K. Birmingham.
I want to thank everyone for their participation this afternoon, and 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 line.