8-K: Primis Financial Corp. Restates Financials Due to Loan Transfer Errors and Internal Control Weaknesses

Primis Financial Corp. announced it will restate several quarterly financial statements and its Q4 earnings release due to errors in loan transfer accounting and internal control weaknesses.

Summary

• Primis Financial Corp. has determined that previously issued unaudited interim consolidated financial statements for the first three quarters of 2023 should no longer be relied upon due to incorrect accounting for loan transfers.
• The company incorrectly treated approximately $33.7 million in loan transfers as sales instead of secured borrowings.
• This error impacts the financial statements for the three months ended March 31, 2023, the three and six months ended June 30, 2023, and the three and nine months ended September 30, 2023.
• The company also announced that the earnings release and investor presentation from January 26, 2024, should not be relied upon due to a subsequent event confirming losses on a receivable, a failed loan sale, and an insufficient allowance for credit losses.
• The restated financials will show changes in total loans, total assets, other borrowings, total funding sources, total liabilities, stockholders' equity, interest income, interest expense, provision for credit losses, noninterest income, noninterest expense, income tax expense, and net income.
• The company expects to report a material weakness in its internal controls over financial reporting.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the restatement of financial statements, the identification of a material weakness in internal controls, and the potential impact on investor confidence. While the company is taking steps to correct the issues, the overall tone is concerning.

Positives

• The company is taking steps to correct the errors and restate the financial statements.
• The company is implementing and enhancing controls to remediate any control deficiencies.
• The restatement of the Q4 earnings materials will result in no impact to net income.

Negatives

• The company incorrectly accounted for loan transfers, leading to the need for restatements.
• The company has identified a material weakness in its internal controls over financial reporting.
• Investors should no longer rely on previously issued financial statements and earnings releases for the affected periods.
• The restatements will result in a decrease in net income for the first three quarters of 2023.

Risks

• The restatements could negatively impact investor confidence.
• The material weakness in internal controls could lead to further issues in the future.
• The company's remediation plan may not be fully effective.
• There is a risk of further financial restatements or adjustments.

Future Outlook

The company intends to file amended Quarterly Reports on Form 10-Q and an amended Current Report on Form 8-K as soon as practicable. Management is reassessing the effectiveness of the company's internal control over financial reporting and expects to report a material weakness.

Management Comments

• The Audit Committee and management concluded that previously issued financial statements should no longer be relied upon.
• Management determined that the transfer of loans did not qualify for sales treatment under U.S. GAAP.
• Management is reassessing the effectiveness of the company's internal control over financial reporting.

Industry Context

This announcement highlights the importance of accurate accounting practices and robust internal controls in the financial industry. Errors in loan transfer accounting can have significant impacts on financial statements and investor confidence. This is particularly relevant for financial institutions that engage in frequent loan transactions.

Comparison to Industry Standards

• The restatement of financial statements due to loan transfer errors is not uncommon in the banking industry, but it does raise concerns about the effectiveness of internal controls.
• Other banks, such as First Republic Bank, have faced similar issues with loan accounting and internal control weaknesses, leading to significant financial and reputational damage.
• The fact that Primis is restating multiple quarters and its Q4 earnings release suggests a more systemic issue than a one-off error.
• Compared to industry best practices, Primis's internal controls appear to be deficient, requiring significant remediation efforts.

Stakeholder Impact

• Shareholders will be impacted by the restatement of financial statements and the potential decrease in investor confidence.
• Employees may be affected by the internal control weaknesses and the company's remediation efforts.
• Customers and suppliers may experience uncertainty due to the financial restatements.

Next Steps

• The company intends to file amended Quarterly Reports on Form 10-Q as soon as practicable.
• The company intends to file an amended Current Report on Form 8-K restating and replacing the Q4 Earnings Materials as soon as practicable.
• Management intends to implement and enhance controls to remediate any control deficiencies.
• The company's remediation plan with respect to such material weaknesses is expected to be described in the 2023 Form 10-K.

Key Dates

Keywords

financial restatement, loan transfers, internal control weakness, accounting errors, financial reporting, secured borrowings, material weakness, Primis Financial Corp, FORVIS LLP