Primis Financial Corp. Navigates Accounting Complexities, Aims for Transparent Reporting

Primis Financial Corp. (NASDAQ: FRST), a leading financial institution, has provided an update on its consultation process with the Office of the Chief Accountant of the Securities and Exchange Commission (SEC) regarding the accounting for a consumer loan portfolio originated and serviced through a third-party. The company's diligent efforts to ensure accurate and transparent financial reporting have led to a series of accounting adjustments, which will allow for the completion of its previously delayed financial filings.

Primis Financial Corp. Tackles Accounting Complexities, Prioritizes Transparency

Navigating the SEC Consultation Process

Primis Financial Corp. has been working closely with the SEC to address the accounting treatment of its consumer loan portfolio originated and serviced through a third-party. After a thorough consultation process, the SEC has provided its non-objection to the company's accounting conclusions, allowing Primis to move forward with the completion of its delayed financial filings.The key focus of the consultation was the accounting for the loans and the various agreements with the third-party, including credit support, servicing, and interest reimbursement. The SEC has approved the company's approach to account for the loans and the supporting agreements as separate units of account, or a "multi-unit" approach, under U.S. GAAP.While the company has received the SEC's non-objection for the multi-unit approach, it continues to explore the possibility of a "single-unit" approach, which it believes would provide a more accurate and transparent representation of the program's economics. The company is engaged in further consultations with the SEC, its auditor, and external accounting experts to determine if the single-unit approach can be supported. The timing and outcome of this process remain uncertain.

Correcting the Accounting Methodology

In the course of its consultation with the SEC, Primis discovered that it had previously applied the multi-unit accounting incorrectly, and the correction of this methodology has resulted in more volatility in the company's income statement. The cumulative cash flows on the program remain unaffected, but the recognition of these cash flows has been altered, leading to material changes in the company's performance metrics, such as yields on loans, net interest margins, loan loss provisions, and net charge-offs.The key changes in the accounting treatment include:1. Deferral of interest income on consumer loans with promotional features: Interest income earned on these loans will be deferred until the end of the promotional period, with the third-party reimbursing the company for any interest that is forgiven to the borrower.2. Reversal of credit enhancement income: The credit enhancement income previously recorded as a gain or loss on the indemnification asset will be reversed, as it represented the credit enhancement provided by the third-party to offset credit losses.3. Discontinuation of certain income and expense items: The company will no longer record certain items within interest income and noninterest expense that were originally used to reflect the excess spread on the portfolio otherwise due to the third-party.4. Accounting for the third-party agreement as a derivative: The agreement between the company and the third-party governing the interest reimbursement feature and potential performance fees will be accounted for as a derivative, with a derivative asset or liability recorded on the balance sheet and changes in the value recognized in the income statement.

Assessing the Financial Impact

Primis' preliminary assessment indicates that the accounting changes will have a material impact on its financial results, particularly for the year ended December 31, 2023, and the quarters ended during that year and the first two quarters of 2024. The company estimates a cumulative reduction of approximately million in net income over these periods.The primary drivers of the net income reduction are the removal of the credit enhancement asset and related gains, as well as the deferral of interest recognition on loans in promotional periods. However, the company expects that as these loans approach the end of their promotional periods, it will be able to begin recognizing the deferred income, either through prepayments triggering third-party reimbursement or the transition of the loans to fully amortizing status.

Commitment to Transparency and Timely Reporting

Primis is working diligently with its independent auditor and external accounting advisors to implement the necessary accounting changes and complete its previously delayed financial filings. The company anticipates making its first filings around the end of August 2024.While the company believes the multi-unit accounting approach approved by the SEC does not provide the most useful picture of the program, it remains committed to working with the SEC, its auditor, and external experts to determine if the single-unit style of accounting can be supported. The company recognizes the importance of transparent and timely financial reporting and is dedicated to providing investors with a clear understanding of its financial performance.Primis Financial Corp. has demonstrated its commitment to addressing the complex accounting challenges head-on, prioritizing accuracy and transparency in its financial reporting. The company's diligent efforts to navigate the SEC consultation process and implement the necessary accounting changes will ensure that its stakeholders have access to reliable and informative financial information, laying the foundation for the company's continued growth and success.