April 18, 2005
FILED VIA EDGAR
Mr. John P. Nolan
Accounting Branch Chief
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Pocahontas Bancorp, Inc.
Form 10-K for the fiscal year ended September 30, 2004
Filed December 29, 2004
Form 10-Q for the period ended December 31, 2004
File Number: 000-23969
Dear Mr. Nolan:
We are in receipt of your letter dated March 18, 2005 providing comments on
the referenced filings for Pocahontas Bancorp, Inc. (the "Company").
For your convenience we have reproduced each of the staff's comments, with
the Company's responses following each comment as follows:
Form 10-K filed on December 29, 2004
- ------------------------------------
Notes to the Consolidated Financial Statements
- ----------------------------------------------
Note 1. Summary of Significant Accounting Policies
- --------------------------------------------------
1. We note that you amortize core deposit premiums over ten years, which
approximates the estimated life of the purchased deposits. We acknowledge
that you periodically evaluate the carrying value to estimate the remaining
periods of benefit. Further we note that your deposit balances decreased
from $586 million as of September 30, 2003 to $491 million as of September
30, 2004 and the accompanying discussions on page 10 of your Annual Report.
Please supplementally provide the following:
o An analysis of your most recent periodic review performed which has
enabled you to conclude no core deposit premium impairment exists.
Specifically state in your response when this analysis was performed
and provide all relevant details and schedules, as appropriate;
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Deposit balances acquired through acquisitions that comprise the basis
for our core deposit premium are analyzed annually and monitored
quarterly. The last such annual analysis was completed during the
quarter ended December 31, 2004. The Company's annual analysis is
conducted under the principles of SFAS 142, Goodwill and Other
Intangible Assets, paragraph 15. This guidance requires consideration
of SFAS 121, which has been superseded by SFAS 144, Accounting for the
Impairment of Disposal of Long-Lived Assets. No events or changes in
circumstances occurred that would require the core deposit premium to
be tested for recoverability as required in SFAS 144, paragraph 8.
Included in our annual analysis is a comparison of the projected
deposit balances on which the core deposit premium asset was
determined at the time of each acquisition with the actual deposit
balances at the annual reporting period. At September 30, 2004, the
deposit balances at all acquired operating branches were in excess of
the balances at the date of the related acquisition. Deposits acquired
totaled $244.3 million at acquisition and $306.5 million at September
30, 2004. You observed and asked about the decline in deposits during
the year ended September 30, 2004. The Company's management decided to
permit a decrease in deposits by not matching competitor rates during
the year ended September 30, 2004, due to the high cost of those
deposits and the alternative sources the Company had for funds.
However, as noted above, the results of this decision did not decrease
the balances of deposits at acquired locations to less than the
balances of those deposits at the dates of acquisition. During the
year ended September 30, 2004, the Company did sell a branch location
that had been a part of an acquisition in a prior year. In accounting
for this sale, the Company analyzed the amount of remaining core
deposit premium at the date of the sale of the branch location and
appropriately adjusted the carrying value of the core deposit premium.
This analysis was a result of our quarterly monitoring of deposit
balances for unusual or unexpected declines.
o Include within your analysis the portion of the decrease in deposit
balances specifically attributable to your current acquisitions for
which core deposit intangibles were recorded and are currently being
amortized;
The balance of deposits at the acquired branches associated with the
core deposit premiums decreased from $367.0 million at September 30,
2003, to $306.5 million at September 30, 2004. The $306.5 million
balance of deposits at acquired branches on September 30, 2004,
although down for the year, is still over $62.0 million higher than
the balance of deposits acquired. As noted above, during fiscal 2004,
the Company sold a branch resulting in a decrease in deposits of $13.0
million. The Company recorded an appropriate adjustment to core
deposit premiums associated with the transaction.
o Explain how you determined that a useful life of ten years for all
core deposit premiums is appropriate based on your analysis;
Following the guidance contained within SFAS 142, - Goodwill and Other
Intangible Assets, paragraph 11, for each acquisition the Company
analyzed the core deposit premium asset and calculated the number of
years that the asset was expected to contribute to the Company's
future cash flows. The Company estimated the number of years it would
take the acquired deposits to reach 5% of the original accounts
acquired. The Company applied a retention rate (determined
individually for each acquisition)
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based on historical retention rates. This analysis resulted in
estimated useful lives ranging between 15 to 29 years for the core
deposit premiums associated with the acquisitions.
In addition to the analysis performed by the Company, the Company
retained an unaffiliated and widely respected business valuation firm
to assist with the valuation and analysis of the Company's core
deposit premiums and their related useful lives. The firm concurred
with the Company's analysis. Based on the Company's analysis and
subject to the ten-year limitations included in Staff Accounting
Bulletin 42A (the applicable guidance at the time of the
acquisitions), the Company determined that 10 years would be used for
the estimated useful lives and subsequent amortization period for core
deposit premiums. No events or circumstances have occurred that caused
the Company to change the useful lives of the intangible assets or
revise the remaining period of amortization as prescribed by SFAS 142,
paragraph 14, other than the branch sale noted above.
o Please provide to us a rollforward of your core deposit premium, net
balance as presented in your Consolidated Statements of Financial
Condition. Specifically, we note that your balance has decreased
approximately $1.58 million, but your expense as reported in your
Consolidated Statements of Cash Flows relating to your amortization of
core deposit premiums was $944,696;
Beginning Balance October 1, 2003 7,880,406
Amortization (944,696)
Adjustment for sale of Strawberry Branch (639,187)
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Ending Balance September 30, 2004 6,296,523
=============
o Please tell us what line item in the financial statements your
amortization of core deposit premiums is recorded and revise your
accounting policy footnote in future filings accordingly.
The amortization of core deposit premiums is reported in the "interest
expense on deposits" line item of the Company's Consolidated Statement
of Income. The Company considers the amortization of core deposit
premiums a cost associated with the deposits acquired and therefore
presents the expense associated with the amortization as interest
expense, a line item within continuing operations as prescribed by
SFAS 142, paragraph 42. The Company will revise future filings to
disclose that amortization of core deposit premiums is included in the
"interest expense" line item of the Company's Consolidated Statement
of Income.
Please refer to the authoritative guidance in paragraphs 11-15 of SFAS No.
142. Please specifically key your individual responses to the above
guidance when you explain how you determined your relevant accounting for
this issue.
As requested in the comment, we have referred to the guidance of SFAS
No. 142 in the above responses.
2. We note from your Critical Accounting Policy disclosure on page 6 that
goodwill is reviewed at least annually to ensure that there have been no
events of circumstances resulting in an impairment of the recorded amount
of excess purchase price. You also
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state that adverse changes in the economic environment, operations of
acquired business units, or other factors could result in a decline in
projected fair values. We also note that you have acquired numerous
institutions as evidenced on page 2 of your most recent 10-K filing. Please
supplementally provide to us the following:
o Explain how you have identified reporting unit(s) on which to review
your goodwill for potential impairment;
The Company has identified a single reporting unit to exist. In
determining the reporting unit, the Company referred to SFAS 142,
paragraph 30, EITF D-101, Clarification of Reporting Unit Guidance in
Paragraph 30 of FASB Statement No. 142, and SFAS 131, Disclosures
about Segments of an Enterprise and Related Information, which defines
a reporting unit as the same level as, or one level below, an
operating segment. The companies acquired by the Company have all been
banking or savings and loan holding companies exhibiting similar
economic characteristics and subject to similar economic conditions as
the Company. Neither the assets nor liabilities obtained in such
acquisitions were unique, and all of the acquired companies offered
similar products and services to customers. In these circumstances,
paragraph 17 of SFAS 131 indicates the existence and use of a single
reporting unit.
In addition, as noted above, the Company engaged an unaffiliated
appraisal firm to assist in the fair value computation that was used
in the analysis to determine whether impairment existed. As part of
that process, that firm independently reached the conclusion that only
one reporting unit exists.
o Explain how you have assigned acquired assets (including goodwill) and
liabilities for your reporting unit(s);
As required by SFAS 141, Business Combinations, the purchase method of
accounting was used in recording all assets and liabilities associated
with each acquisition. No assignment of acquired assets or liabilities
was necessary because only one reporting unit exists, as defined in
SFAS 131.
o Explain the method(s) by which you have measured the fair value of
your reporting unit(s) during your most recent analysis;
As noted above, the Company engaged an unaffiliated appraisal firm to
assist in the valuation computation that was used to determine that no
impairment existed. Fair value is defined in SFAS 142 as "the amount
at which that asset (or liability) could be bought (or incurred) or
sold (or settled) in a current transaction between willing parties,
that is, other than in a forced or liquidation sale." The following is
noted in respect to this definition of value:
o An active market was simulated, assuming that it exists and
functions properly.
o Fair value is expressed in cash-equivalent terms.
o While the definition above is silent with regard to the "level"
of value (i.e., marketable or nonmarketable minority control),
paragraph 23 of SFAS 142 clarifies that fair value is applicable
to the unit "as a whole," or at the controlling interest level of
value. Further comments regarding the consideration of
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synergies in the valuation of the reporting unit lead the Company
to conclude that fair value is consistent with the traditional
notation of investment value to the current owner (in other
words, considering all synergies and other benefits expected to
accrue to the reporting unit).
The fair value is a correlated indication of value computed by
weighting various valuations as prescribed by SFAS 142, paragraphs 23
- 25. The discounted future benefits approach and single period
capitalization of earnings were each accorded a one-third weight. This
reflects the primary importance that the market places on the earnings
capacity and expected growth therein as the primary determinants of
financial institution value. The stated and tangible capitalized book
value were combined and accorded a one-third weight.
o Include in your response how the significant decrease experienced in
your deposit balances in the current year has impacted your most
recent fair value determination;
The decreases in the Company's deposit balances during the year ended
September 30, 2004, caused management to analyze whether the decrease
in total deposits was also reflected in those deposits used in the
initial determination of the core deposit premiums and whether such
decrease, if it existed, indicated a decrease beyond that anticipated
at the date of initial determination of the core deposit premiums for
each acquisition. Management included in its analysis the
reasonableness of the decreases actually experienced compared to what
management believed, based on the markets the Company serve, should
have been decreases that should be expected given management's
strategy of not meeting market rates on certain deposits, as discussed
above. The purpose of this analysis was to determine whether
unexplained decreases in those deposits used in the initial
determination of the core deposit premiums had occurred. The decreases
in deposits also caused management to focus on whether the
amortization period utilized based on the initial analysis of the core
deposit premiums remained an appropriate amortization period at
September 30, 2004. Management determined that there were decreases in
those deposits used in the initial determination of the core deposit
premiums but that the decreases were in line with management's
expectations as a result of its strategy and were not unexplained.
Given these findings, management determined that the amortization
period remained appropriate. Accordingly, management determined that
there was no indication of impairment of core deposit premiums or
goodwill during fiscal 2004.
o Explain how recently acquired operations of business units have
impacted your most recent goodwill impairment analysis.
The Company's last acquisition was in April 2003. The goodwill
impairment analysis performed annually is for the one reporting unit,
which is at the consolidated level of the Company. Consequently, the
determination of whether goodwill impairment exists is affected by the
performance of every financial activity of the Company. Acquired
operations are a part of the consolidated operations and have a direct
impact. As noted above, the acquired operations have been
substantially banking-regulated companies with operations economically
similar to the historical operations of the Company before its
acquisitions.
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Please include the authoritative guidance in SFAS No. 142 in your response.
As requested in the comment, the above responses include references to the
authoritative guidance in SFAS No. 142.
After reviewing the staff's comments and in developing the above responses,
we have concluded that no amendment to the Company's Form 10-K for the fiscal
year ended September 30, 2004 or the Company's Form 10-Q for the period ended
December 31, 2004 is necessary. Further, we note that the staff's comments
request only "supplemental" responses.
Finally, as requested by the staff, the Company hereby acknowledges that:
o the Company is responsible for the adequacy and accuracy of the
disclosure in this letter;
o staff comments or changes to the Company's disclosure in response to
staff comments do not foreclose the Commission from taking any action
with respect to this letter; and
o the Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
We trust the foregoing is responsive to the staff's comments. Any questions
with regard to the foregoing should be directed to the undersigned at (870)
802-1700.
Respectfully,
/s/ Dwayne Powell
Dwayne Powell
Chief Executive Officer
cc: Terry Prichard, Chief Financial Officer
Robert B. Pomerenk, Esq.- Luse Gorman Pomerenk & Schick
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