10-Q/A: Primis Financial Corp. Restates Q1 2023 Financials Due to Accounting Errors and Fraud

Primis Financial Corp. has amended its Q1 2023 report to restate financials due to loan transfer accounting errors and the recognition of fraud losses.

Summary

• Primis Financial Corp. is filing an amendment to its Q1 2023 report to restate financial statements due to accounting errors related to loan transfers and the recognition of employee loan fraud.
• The restatement impacts the financial statements for the quarters ended March 31, 2023, and March 31, 2022.
• The company discovered that certain loan transfers in Q1 2023 should have been accounted for as secured borrowings, not sales.
• Additionally, the company corrected accounting for a consumer loan program after receiving a non-objection from the SEC.
• The company also recognized fraud losses from an employee loan fraud discovered in June 2023, impacting opening equity in the earliest period presented.
• The restatement resulted in a decrease in net income for the three months ended March 31, 2023, from $5.8 million to $8.4 million and a decrease in net income for the three months ended March 31, 2022 from $4.6 million to $4.5 million.
• The company's total assets increased to $4.2 billion as of March 31, 2023, up from $3.6 billion at the end of 2022.
• Total deposits increased to $3.7 billion at March 31, 2023, compared to $2.7 billion at December 31, 2022.

Sentiment

Score: 4

Explanation: The document reveals significant issues including accounting errors, fraud, and material weaknesses in internal controls, which negatively impact investor confidence. While there are some positive aspects like deposit growth, the overall tone is cautious due to the restatement and control issues.

Positives

• Total assets increased by 18% to $4.2 billion.
• Total deposits grew by 35% to $3.7 billion.
• Non-time deposits increased by 40% to $3.2 billion.
• The company's digital deposit platform saw substantial growth.
• The company has $541.6 million of unused and available FHLB lines of credit.
• The company has $165 million in securities available for utilization with the Bank Term Funding Program.

Negatives

• The company had to restate its Q1 2023 financials due to accounting errors and fraud.
• Net interest margin decreased to 2.81% in Q1 2023 from 2.96% in Q1 2022.
• Noninterest expenses increased by 41% due to higher employee compensation and data processing costs.
• The company identified a material weakness in internal controls over financial reporting related to loan transfers.
• The company experienced a $4.4 million in charge-offs during the quarter.
• The company's uninsured deposits were approximately 26% of total deposits.

Risks

• The company identified a material weakness in internal controls over financial reporting related to loan transfers.
• The company is still working to remediate previously identified material weaknesses in internal controls.
• The company faces increased competition for deposits and rising funding costs.
• The company is exposed to interest rate risk and potential fluctuations in net interest income.
• The company is subject to regulatory scrutiny and potential new regulations.
• The company is exposed to credit risk in its loan portfolio and potential for increased loan losses.
• The company is exposed to risks related to its investment securities portfolio, including potential impairment.
• The company is exposed to risks related to a third-party's ability to satisfy its contractual obligation to reimburse for waived interest on loans with promotional features.

Future Outlook

The company has not revised forward-looking statements made in the original 10-Q to reflect events after the original filing date, other than with respect to the restatement.

Management Comments

• Management believes the losses from the employee loan fraud are recoverable under the company's insurance policies.
• Management believes that Primis meets all capital adequacy requirements to which it is subject.
• Management anticipates that funding requirements for commitments can be met in the normal course.

Industry Context

The document highlights the impact of recent bank failures and related negative media attention on regional and community banks, which has increased competition for deposits and funding costs. The document also mentions the Federal Reserve's rate hikes and their impact on the cost of deposits.

Comparison to Industry Standards

• The document does not provide specific comparisons to industry standards or competitors.
• However, it does mention that the company is subject to various regulatory capital requirements administered by federal banking agencies.
• The document also notes that the company's capital position is consistent with being well-capitalized under the regulatory framework for PCA.

Stakeholder Impact

• Shareholders are impacted by the restatement of financials and the identified material weaknesses.
• Employees are impacted by the employee loan fraud and the ongoing remediation efforts.
• Customers are impacted by the increased competition for deposits and potential changes in interest rates.
• Creditors are impacted by the company's liquidity and capital management.

Next Steps

• The company will continue to remediate material weaknesses in internal controls.
• The company will seek appropriate third-party accounting expertise when needed.
• The company will continue to monitor and manage its liquidity and capital resources.

Key Dates

Keywords

financial restatement, loan transfers, employee fraud, accounting errors, internal controls, net interest margin, deposit growth, asset quality, credit losses, mortgage banking, digital banking