10-Q/A: Primis Financial Corp. Restates Q3 2023 Financials Due to Accounting Errors and Fraud

Primis Financial Corp. has filed an amended quarterly report to restate its financial statements for Q3 2023 and 2022, correcting loan transfer accounting and recognizing fraud losses.

Summary

• Primis Financial Corp. has amended its Q3 2023 report to reflect a restatement of financial statements due to incorrect accounting for loan transfers and the recognition of employee loan fraud losses.
• The restatement reclassified certain loan transfers as secured borrowings instead of sales, impacting financial results for the three and nine months ended September 30, 2023 and 2022.
• The company also adjusted for employee loan fraud discovered in June 2023, recognizing losses in the appropriate periods, including an adjustment to opening equity in the earliest period presented.
• The original Q3 2023 report reflected the fraud losses in each period presented, and this amended report reflects final adjustments to those amounts.
• The company's goodwill was also impaired by $11.2 million due to a decline in the fair value of the Primis Bank reporting unit.

Sentiment

Score: 4

Explanation: The document reveals significant issues including accounting errors, fraud, and a goodwill impairment, leading to a net loss. While there are some positives like deposit growth and improved asset quality, the overall tone is negative due to the material weaknesses and financial restatements.

Positives

• Total deposits increased by 21% to $3.3 billion as of September 30, 2023, compared to December 31, 2022.
• Nonperforming assets, excluding SBA guarantees, decreased to 0.51% of total assets as of September 30, 2023, from 0.98% at year-end 2022.
• The company began to realize cost savings from administrative reductions and other cost controls with noninterest expense, excluding the goodwill impairment charge, of $25.8 million in the third quarter of 2023 versus $30.4 million in the second quarter of 2023.

Negatives

• The company recorded a net loss of $6.0 million for Q3 2023, compared to a net income of $2.9 million in Q3 2022.
• Net interest margin decreased to 2.70% in Q3 2023 from 3.53% in Q3 2022.
• A goodwill impairment charge of $11.2 million was recorded due to a decline in the fair value of the Primis Bank reporting unit.
• The company experienced a $2.3 million increase in fraud losses during the nine months ended September 30, 2023.

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 over financial reporting.
• The company is exposed to interest rate risk, which could impact net interest income.
• The company is subject to credit risk, particularly in its loan portfolio.
• The company is exposed to cybersecurity risks that could disrupt business and result in data breaches.

Future Outlook

The company is focused on managing its interest rate risk and improving its internal controls. The company anticipates that funding requirements for commitments can be met in the normal course of operations.

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 Companys insurance policies and is working through the claims process.
• Management monitors and continually reassess these at each reporting period.
• Management anticipates that funding requirements for these commitments can be met in the normal course.

Industry Context

The banking industry is facing challenges due to rising interest rates, increased competition for deposits, and economic uncertainty. The company's results reflect these industry-wide trends, particularly the pressure on net interest margins and the need to manage credit risk effectively.

Comparison to Industry Standards

• The company's net interest margin of 2.70% in Q3 2023 is below the industry average for regional banks, which have seen margins compress due to rising deposit costs.
• The company's loan growth of 8% is in line with some regional banks, but below the growth rates of some larger national banks.
• The company's nonperforming asset ratio of 0.51% is better than the average for regional banks, indicating strong asset quality.
• The company's deposit growth of 21% is significantly higher than the industry average, reflecting the success of its digital deposit platform.
• The company's goodwill impairment charge of $11.2 million is a significant event, and is not typical for most banks, indicating a specific issue with the valuation of the Primis Bank reporting unit.

Stakeholder Impact

• Shareholders will be negatively impacted by the restatement, net loss, and goodwill impairment.
• Employees may be affected by the cost-saving initiatives and branch consolidations.
• Customers may be impacted by changes in deposit rates and branch locations.
• Creditors may be concerned about the company's financial performance and internal control weaknesses.

Next Steps

• The company will continue to remediate material weaknesses in internal controls.
• The company will continue to monitor and manage its interest rate risk.
• The company will continue to work through the insurance claims process related to the employee loan fraud.

Key Dates

Keywords

restatement, loan transfers, fraud losses, goodwill impairment, net interest margin, deposits, nonperforming assets, internal controls, financial reporting, secured borrowings