10-Q/A: Primis Financial Corp. Restates Q2 2023 Financials Following Loan Sale and Accounting Errors

Primis Financial Corp. has filed an amended 10-Q report to restate its financial statements for the quarter ended June 30, 2023, due to a loan transfer misclassification and corrections to its Consumer Program accounting.

Summary

• Primis Financial Corp. is amending its Q2 2023 report to reflect a restatement of financial statements due to a misclassification of loan transfers as sales instead of secured borrowings.
• The restatement also includes corrections to the accounting for the company's Consumer Program loan portfolio.
• Additionally, the amended report recognizes fraud losses from an employee loan fraud discovered in June 2023, impacting the opening equity in the earliest period presented.
• The company transferred $5.7 million and $20.8 million in principal balance of loans to another financial institution during the three and six months ended June 30, 2023, respectively, that were incorrectly accounted for as sales.
• The correction to the Consumer Program accounting was deemed material for the three and six months ended June 30, 2023, but not for the same periods in 2022, although the 2022 figures were revised for comparison.
• The company discovered an employee loan fraud with total exposure of approximately $2.5 million, dating back to 2010.
• The company believes the fraud losses are recoverable under its insurance policies.

Sentiment

Score: 4

Explanation: The document reveals significant issues including a restatement, fraud, and declining profitability, which are major concerns for investors. While there are some positives, the overall tone is negative due to the material weaknesses and financial corrections.

Positives

• The company received a non-objection from the SEC to the company's accounting conclusions required to correct the prior accounting for the Consumer Program.
• Total deposits increased to $3.3 billion at June 30, 2023, up from $2.7 billion at December 31, 2022.
• Non-time deposits increased to $2.85 billion at June 30, 2023, up from $2.26 billion at December 31, 2022.
• The ratio of gross loans to deposits has declined to 95% as of June 30, 2023, from 108% at December 31, 2022.

Negatives

• The company is restating its Q2 2023 financials due to a loan transfer misclassification and corrections to its Consumer Program accounting.
• An employee loan fraud with a total exposure of approximately $2.5 million was discovered.
• The company transferred $20.8 million in loans that were incorrectly accounted for as sales.
• The company's net interest margin decreased to 2.36% in Q2 2023 from 3.32% in Q2 2022.
• The company recorded a net loss of $2.0 million for the three months ended June 30, 2023, compared to a net income of $4.6 million for the same period in 2022.
• The company recorded a net income of $6.4 million for the six months ended June 30, 2023, compared to $9.1 million for the same period in 2022.

Risks

• The company's financial statements were restated due to a loan transfer misclassification and corrections to its Consumer Program accounting, indicating potential weaknesses in internal controls.
• The discovery of an employee loan fraud with a total exposure of approximately $2.5 million poses a risk to the company's financial stability.
• The company's net interest margin decreased to 2.36% in Q2 2023 from 3.32% in Q2 2022, indicating potential pressure on profitability.
• The company's reliance on a third-party for credit support and reimbursement of lost interest on promotional loans creates a risk if the third-party fails to meet its obligations.
• The company's exposure to credit loss in the event of contractual non-performance by its trading counterparties in derivative instruments that the company uses in its rate risk management activities.

Future Outlook

The company expects to reduce costs by an estimated $9.4 million per year through a cost savings initiative and structural changes to branch and digital deposit gathering, expected to be fully implemented by October 2023.

Management Comments

• Management believes, on the advice of its counsel, its insurance broker and a third party forensic auditor, that the losses are recoverable under the Company's insurance policies and is working through the claims process.
• Management anticipates that funding requirements for these commitments can be met in the normal course.

Industry Context

The document highlights the challenges faced by regional and community banks, including increased competition for deposits, rising funding costs, and potential liquidity issues. The company's actions to bolster liquidity and manage interest rate risk are consistent with industry trends in response to recent bank failures and economic uncertainty.

Comparison to Industry Standards

• The company's net interest margin decreased to 2.36% in Q2 2023, which is below the industry average for regional banks, indicating potential challenges in profitability.
• The company's loan growth of 8% is in line with the industry average for regional banks, but the increase in deposits of 22% is significantly higher than the industry average, indicating a successful deposit gathering strategy.
• The company's allowance for credit losses to total loans of 1.21% is slightly above the industry average, indicating a conservative approach to risk management.
• The company's nonperforming assets to total assets ratio of 0.64% is below the industry average, indicating a strong asset quality.

Stakeholder Impact

• Shareholders will be impacted by the restatement of financial statements and the decrease in profitability.
• Employees may be affected by the branch consolidation and cost-saving initiatives.
• Customers may experience changes in service due to branch closures and the shift to digital banking.
• Creditors may be concerned about the company's financial stability due to the identified material weaknesses and fraud.

Next Steps

• The company plans to consolidate eight branch locations, reducing total branches from thirty-two to twenty-four, with an expected effective date of October 31, 2023.
• The company will continue to work through the claims process for the employee loan fraud.
• The company will continue to implement additional internal controls over financial reporting to remediate the identified material weaknesses.

Key Dates

Keywords

restatement, loan transfer, consumer program, employee fraud, financial statements, net interest margin, deposits, credit losses, secured borrowings, derivatives