8-K: Primis Financial Corp. to Restate 2022 Financials Due to Accounting Errors

Primis Financial Corp. will restate its 2022 financial statements and related audit report due to errors in accounting for a third-party serviced consumer loan portfolio.

Summary

• Primis Financial Corp. has determined that its previously issued audited annual consolidated financial statements for the year ended December 31, 2022, should no longer be relied upon.
• This decision follows the identification of errors in the methodology used to account for a portfolio of consumer loans originated and serviced through a third party.
• The errors relate to the timing of interest income recognition, the treatment of credit enhancement income, and the accounting for an agreement with the third-party servicer as a derivative.
• The company will defer interest income on promotional loans until the end of the promotional period.
• Credit enhancement income will be reversed, and the associated asset will be derecognized.
• Certain items previously recorded in net interest income and noninterest expense will be discontinued.
• The agreement with the third-party servicer will be accounted for as a derivative under FASB ASC 815.
• The company's 2023 annual report will also reflect these changes.
• A material weakness in the company's internal control over financial reporting as of December 31, 2022, has been identified.

Sentiment

Score: 3

Explanation: The document reveals significant accounting errors and a material weakness in internal controls, which are negative indicators for investors. While the company is taking corrective action, the overall sentiment is negative due to the need for restatements and the potential for further issues.

Positives

• The company is taking corrective action by restating its financials and addressing the identified accounting errors.
• The company's auditor agrees with the disclosures made in the report.
• The company does not believe its timeline for completing its filings is materially impacted by this determination.

Negatives

• The company's 2022 financial statements and related audit report should no longer be relied upon.
• A material weakness in the company's internal control over financial reporting as of December 31, 2022, has been identified.
• The company will need to restate its 2022 financials and amend its 2022 Annual Report.

Risks

• The restatement of financial statements could negatively impact investor confidence.
• The identified material weakness in internal controls could lead to further issues.
• There is a risk of potential legal or regulatory scrutiny due to the accounting errors.
• The company's future financial performance could be affected by the changes in accounting practices.

Future Outlook

The company intends to file amended financial statements as soon as practicable and will provide further specifics on the material weakness and its remediation plan in its amendment to the 2022 Annual Report.

Management Comments

• The management team concluded that the previously issued financial statements should no longer be relied upon.
• Management has undertaken extensive discussions with the company's auditor regarding the effects of the accounting errors.
• Management has concluded that the company's internal control over financial reporting and its disclosure controls and procedures were not effective as of December 31, 2022.

Industry Context

This announcement highlights the importance of accurate accounting practices and internal controls in the financial services industry. It also underscores the potential risks associated with complex third-party servicing arrangements.

Comparison to Industry Standards

• Restatements due to accounting errors are not uncommon in the financial industry, but they can raise concerns about a company's internal controls and financial reporting processes.
• Other financial institutions, such as Wells Fargo and Citigroup, have faced similar issues in the past, leading to regulatory scrutiny and reputational damage.
• The specific accounting issues related to third-party loan servicing are complex and require careful attention to detail, as seen in cases involving companies like LendingClub.
• The use of derivative accounting for complex agreements is also a common area of scrutiny, with companies like Lehman Brothers facing issues in the past.
• The identification of a material weakness in internal controls is a serious matter that requires prompt remediation, similar to cases seen with companies like Enron and WorldCom.

Stakeholder Impact

• Shareholders will be impacted by the restatement of financial statements and the identified material weakness.
• Employees may be affected by the changes in accounting practices and internal controls.
• Customers and suppliers may experience indirect impacts due to the company's financial restatement.

Next Steps

• The company will file amended financial statements for 2022.
• The company will provide further specifics on the material weakness and its remediation plan in its amendment to the 2022 Annual Report.
• The company will file its 2023 annual report, which will also reflect the accounting changes.

Key Dates

Keywords

financial restatement, accounting errors, internal control weakness, consumer loans, third-party servicer, derivative accounting, financial reporting, audit report, Primis Financial Corp, Forvis Mazars