8-K: Primis Financial Corp. Provides Update on Delayed Financial Filings Following SEC Consultation

Primis Financial Corp. has received a non-objection from the SEC regarding its accounting treatment of a consumer loan program, allowing the company to proceed with delayed financial filings and restatements.

Summary

• Primis Financial Corp. has been in consultation with the SEC regarding the accounting for a consumer loan portfolio originated through a third-party.
• The SEC has provided a non-objection to the company's accounting conclusions, which will allow Primis to complete its delayed 2023 Annual Report and quarterly reports for 2024.
• The company will also restate its financial statements for the first three quarters of 2023.
• The accounting issue relates to whether the loan program should be treated as a single unit or multiple units for accounting purposes.
• Primis initially accounted for the program as a single unit but later switched to a multi-unit approach, which they now need to correct.
• The corrected multi-unit approach will result in more volatility in the income statement, affecting metrics like loan yields and net interest margins.
• The cumulative cash flows of the program are not affected, but the timing of recognition will change.
• The company estimates a $30 million reduction to net income over prior periods and through the second quarter of 2024 due to these changes.
• Approximately 42% of the loan portfolio was in a promotional period as of June 30, 2024, with $15 million of customer interest deferred.
• Primis expects to begin recognizing this deferred income as promotional periods expire over the next three quarters.
• The company is still pursuing a single-unit accounting approach with the SEC, but there is no guarantee of success.

Sentiment

Score: 3

Explanation: The document reveals significant accounting issues, a material reduction in net income, and delayed financial filings, which are all negative indicators for investors. The uncertainty around the single-unit accounting approach adds to the negative sentiment.

Positives

• The SEC's non-objection allows Primis to move forward with its delayed financial filings.
• The company expects to begin recognizing deferred income in the near future as promotional periods expire.
• The cumulative cash flows of the program are not affected by the accounting changes.

Negatives

• The accounting correction will result in a $30 million reduction to net income over prior periods and through the second quarter of 2024.
• The corrected multi-unit accounting approach will introduce more volatility in the income statement.
• There is no guarantee that the company will be successful in its pursuit of a single-unit accounting approach.
• The company has delayed its financial filings.

Risks

• The company may not be successful in its consultation with the SEC regarding the single-unit accounting approach.
• The timing of the SEC consultation process is uncertain.
• The accounting changes could have a material impact on the company's financial results.
• The company's financial statements are subject to change and have not been reviewed or audited by an independent auditor.
• The company faces risks related to the timely and correct completion of financial statements and related filings.
• There is a risk that the Nasdaq Stock Market may seek to delist the company's securities.
• The company may be subject to investigations or actions by governmental authorities or regulators.
• The company may face shareholder lawsuits or claims.
• There are risks related to the company's ability to maintain effective internal control over financial reporting.

Future Outlook

The company anticipates making its first filings around the end of August and is working to determine if a single-unit style of accounting can be supported. There is no assurance that the company will be successful in this consultation process and the timing of that process remains uncertain.

Management Comments

• The company, independently and through investor conversations, does not believe that the accounting methodology outlined above provides readers with the most useful picture of the Program.
• The company believes the request to utilize a single-unit style of accounting with substantial disclosure is necessary.

Industry Context

The accounting issues faced by Primis highlight the complexities of financial reporting for companies engaged in third-party loan origination programs. The need for SEC consultation and potential restatements underscores the importance of accurate and transparent accounting practices in the financial industry.

Comparison to Industry Standards

• The accounting treatment of third-party loan programs is a complex area, and different companies may adopt different approaches based on their specific circumstances.
• The move from single-unit to multi-unit accounting and the subsequent correction highlights the challenges in applying U.S. GAAP to these types of arrangements.
• Other financial institutions with similar third-party loan programs may face similar accounting challenges, and the outcome of Primis' consultation with the SEC could set a precedent for the industry.
• Companies like LendingClub and Upstart, which also operate in the fintech lending space, have faced scrutiny over their accounting practices, although their specific models and accounting treatments may differ from Primis.

Stakeholder Impact

• Shareholders will be impacted by the reduction in net income and the delayed financial filings.
• Employees may be affected by the uncertainty surrounding the company's financial situation.
• Customers may not be directly impacted by the accounting changes.
• Creditors may be concerned about the company's financial health.

Next Steps

• The company will implement the accounting changes and complete its delayed filings.
• The company will continue to pursue a single-unit accounting approach with the SEC.
• The company anticipates making its first filings around the end of August.

Key Dates

Keywords

accounting, SEC, financial reporting, loan portfolio, delayed filings, restatement, multi-unit accounting, single-unit accounting, net income, derivative, Primis Financial Corp, FRST