Item 4. Controls and Procedures
Item 4
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were not effective as of such date due to the material weakness in internal control over financial reporting, described below.
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 Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Disclosure controls and procedures are the controls and other procedures that are designed to ensure that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its Chief Executive and Chief Financial Officers, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management was required to apply judgment in evaluating its controls and procedures.
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Following the close of the quarter ended September 30, 2023, Senior Management of the Company self-identified certain errors relating to the miscoding of certain real estate loans for Call report purposes, a report that our banking subsidiary is required to file on a quarterly basis. Within the sub-categories of loans, 21 loans were coded incorrectly for Call report purposes and are currently on the balance sheet at 9/30/2023 for $58.8 million (out of $2.1 billion) in gross loans, some of which offset one another; 19 loans for $56.1 million were all reclassified within partially offsetting real estate secured categories and two loans for $2.7 million were originally coded inadvertently by purpose code instead of collateral code causing a reclassification from the commercial and industrial loan category to commercial real estate. The coding errors were considered by Management to be quantitatively material to loan classification detail provided in our Notes to previously filed Financial Statements. Although there was a control for verifying sub-categorization of Call report loan categories, the control in place did not detect the miscoding. Management determined that a key lending control was not operating effectively due to training issues of loan operations personnel, and thus was an operating deficiency rather than a design deficiency.
Management’s Plan to Remediate the Material Weakness
As a result of this material weakness, we have initiated and will continue to implement remediation measures, including, but not limited to, correcting the discovered errors in Call report sub-categorization of loans, increasing training on our existing internal controls that should have prevented the incorrect coding, and enhancing those internal controls. The Company completed a review of Call report categorization to discover any other improperly coded loans. As of this filing, Management believes that materially all previously incorrectly coded loans are now correctly coded. The Company has reassigned the responsibility for oversight of this control and added a compensating control of a monthly review for proper coding of all loans over $250,000 by someone independent of both the person assigning the coding of the loan and the person reviewing the loan during the boarding process. Notwithstanding the material weakness, management has concluded that the financial statements included elsewhere in this Quarterly Report on Form 10-Q present fairly, in all material respects, our financial position, results of operations and cash flows in conformity with GAAP. The material weakness will not be considered fully remediated, however, until the applicable enhanced controls operate for a sufficient period of time and management has concluded, through testing, that the Company’s controls are operating effectively.
Changes in Internal Controls
Except for the material weakness noted above, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.