Excerpts from the document 9: EX-99.1 of the 10-k. This appears to be the attempt to explain the why the numbers in the press release and the actual year-end numbers were inconsistent, how those problems were discovered, and what management is doing about it to make sure it doesn’t happen again. I think everyone’s question is, “Why was this allowed to happen in the first place?” Answer: More bad decisions? The material weakness.
During the audit of the financial statements as of December 31, 2011, BKD, LLP, the Corporation’s external public accounting firm identified a control deficiency related to the documentation and process in support of the adequacy of the qualitative factors related to the allowance for loan loss calculation which was determined to be a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Corporation’s annual or interim financial statements will not be prevented or detected on a timely basis. During the first quarter of 2012 management has taken significant action to address this internal control matter. A detailed explanation of this material weakness and the steps which have been taken and are in process follows.The nature of the material weakness and how it was identified. The material weakness was identified by our external auditors through their year-end audit procedures and as a result of the annual examination by the bank’s primary regulator, the OCC. The material weakness determination was reached based on not having sufficient documentation to support the qualitative factors related to the allowance for loan loss calculation and inadequate controls related to the timely communication of in-process appraisals requiring additional specific reserve as of December 31, 2011. The Corporation’s initial calculation which was filed with the December 31, 2011 regulatory call report was insufficient by $11,532,000. This adjustment was due to the continued fourth quarter charge-off activities.How the weakness was overcome to ensure proper year-end financial statements. The Corporation utilized a migration analysis to support the qualitative factor adjustments. A review of the December 31, 2011 allowance for loan losses calculation was performed including a thorough review of the migration analysis, qualitative factors, and all appraisals on impaired loans received subsequent to December 31, 2011. Management determined the appropriate allowance for loan losses amount necessary based on generally accepted accounting principles which resulted in the balance of the allowance for loan losses as of December 31, 2011.The extent which the material weakness impacted prior interim periods. Despite the existence of the above noted item which resulted in the identification of a material weakness as of December 31, 2011, the majority of the impact on the recorded balance of the allowance for loan losses is deemed to be due to deterioration in the values of collateral supporting commercial real estate and commercial real estate development loans that occurred in the fourth quarter of 2011 and not in prior interim periods. Therefore, the identified material weakness is not considered to have a material impact on prior interim periods in 2011.
Management is developing a process to ensure timely communication of in-process appraisals scheduled to be performed between the date of the financial statements and the date of related filings with the SEC. Furthermore, management is enhancing its support for the allowance for loan losses to incorporate identified trends related to valuations in recent appraisals to support the qualitative factors applied to classified and impaired loans.
And this “footnote”:
Note: This annual report does not include an attestation report of the Corporation’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s independent registered public accounting firm pursuant to SEC rules that permit companies to provide only management’s report in this annual report.