SEC Company Response from LINCOLN BANCORP — Oct 26, 2005
LINCOLN BANCORP /IN/ (CIK 0001070259)
Date: Oct. 26, 2005 · CIK: 0001070259 · Accession: 0000908834-05-000659
AI Filing Summary & Sentiment
File numbers found in text: 000-25219
Referenced dates: September 29, 2005
Letter
Via EDGAR Division of Corporation Finance Securities and Exchange Commission Form 10-K for Fiscal Year Ended December 31, 2004 Form 10-Q for the Fiscal Quarter Ended March 31, 2005 Form 10-Q for the Fiscal Quarter Ended June 30, 2005 File No. 000-25219
Dear Mr. Wilson:
This letter is in response to the Staff’s comments in the letter dated September 29, 2005 regarding the above-referenced filings, which was received by the Company on October 14, 2005. The Staff’s comments are reproduced below and followed by the Company’s responses.
Form 10-K for the Fiscal Year Ended December 31, 2004
Item 9A. Controls and Procedures, page 36
Comment:
1. We note that your Chief Executive Officer and Treasurer have concluded your disclosure controls and procedures are effective “to the best of their knowledge” and “except as provided below”. Given the exceptions noted, it remains unclear whether your Chief Executive Officer and Treasurer have concluded that your disclosure controls and procedures are effective as of December 31, 2004. Please revise your disclosure to state, in clear and unqualified language, the conclusions reached by your Chief Executive Officer and Treasurer on the effectiveness of your disclosure controls and procedures. You should not qualify your statement that your disclosure controls and procedures are effective by the additional statement, “except as provided in the next paragraph.” That is to say they are effective except to the extent they are not effective. We refer you to Exchange Act Rule 13a-15, Item 307 of Regulation S-K and SEC Release No. 33-8238.
Response:
After further evaluation in light of your comment, we propose to revise the disclosures in Item 9A of the Form 10-K to state that the Company’s disclosure controls and procedures were ineffective as of December 31, 2004. We intend to file an amendment to the Form 10-K to amend Item 9A as set forth in Exhibit A to this letter (Exhibit A includes revisions made to Item 9A in response to this Comment 1 and Comments 3, 4 and 5 below).
Comment:
2. In light of the fact that a material weakness existed with respect to the lack of timely reconciliation of your primary correspondent account, disclose in reasonable detail the basis for your officers’ conclusions that your disclosure controls and procedures were nonetheless effective as of the end of the period covered by the report. Further, disclose in greater detail the nature of the material weakness identified in your disclosure. In this regard, also revise to disclose the specific steps that you have taken to remediate the material weakness.
Response:
As addressed in our response to Comment 1 above, we have concluded that our disclosure controls and procedures were ineffective as of December 31, 2004. The material weakness identified by management and the Company’s independent auditors was the lack of timely reconciliation of the primary correspondent checking account of Lincoln Bank, a wholly owned subsidiary of the Company (the “Bank”). An items processing conversion took place on November 1, 2004, that resulted in cash letter differences that could not be reconciled by December 31, 2004. This resulted in other reconciling items in the primary correspondent checking account not being cleared timely by December 31, 2004. Compounding the situation was the system conversion on November 13, 2004, in connection with the Company’s recent acquisition of First Shares Bancorp, Inc. (“First Shares”) and the departure of First Shares’ Chief Financial Officer. Management reviewed the correspondent account reconciliation problem with the Audit Committee and implemented procedures and plans to timely reconcile the account. The Bank’s staff members received additional training and staffing levels were adjusted. We added edit checks to our processing system, we made changes to specifications of items being processed and we added processing procedure changes that dramatically reduced the number of exceptions being researched. As of the filing date of Form 10-K, material account reconciliations were current as of December 31, 2004. Therefore, we believe that our disclosure controls and procedures were effective as of the filing of the Form 10-K on March 31, 2005. In addition, on April 11, 2005 we hired a Director of Accounting and Reporting to strengthen and oversee our accounting controls and disclosures as well as our internal and external reporting.
Comment:
3. We note your disclosure that, “there have been no significant changes in the Holding Company’s internal controls or in other factors that could significantly affect the internal controls, including any corrective action with regard to material weakness, other than the matter disclosed in the paragraph above.” Revise to state clearly, if correct, that there were changes in your internal control over financial reporting that occurred during this quarter that have materially affected, or are reasonably likely to materially affect, your internal control over financial reporting.
Response:
We have revised the response as suggested and the revised disclosure is included in Exhibit A.
Comment:
4. We note the effectiveness of your disclosure controls and procedures were evaluated by your Treasurer instead of a Chief Financial Officer. Tell us whether your Treasurer would be considered a principal financial officer or person performing similar functions and evaluated your disclosure controls and procedures in absence such persons. If this is correct, revise your disclosure to clarify. If not, explain why your Chief Financial Officer did not evaluate the effectiveness of your disclosure controls and procedures. We refer you to Exchange Act Rule 13a-15(b)(2)(c).
Response:
The Company’s officer with the title “Treasurer” is the Company’s principal financial officer and we will revise the disclosures in the amendment to the Form 10-K to clarify this as set forth in Exhibit A.
Comment:
5. Your disclosure states that the evaluation of the effectiveness of the disclosure controls and procedures was performed on the holding company. Tell us whether this evaluation included determining the effectiveness of the disclosure controls and procedures for the consolidated company, including any subsidiaries of the holding company.
Response:
The reference to the Holding Company was intended to refer to Lincoln Bancorp and its subsidiaries on a consolidated basis, and we have revised the disclosures in Exhibit A to make that clearer.
Exhibit 13: 2004 Annual Report
Note 4: Investment Securities, pages 30-31
Comment:
6. We note that you have recognized $868,000 and $974,000 of unrealized losses on your investment securities as of December 31, 2004 and 2003, respectively. We further note that $663,000 and $821,000 of these unrealized losses have been in a loss position for greater than 12 months at December 31, 2004 and 2003, respectively. Considering these securities have been in a loss position for greater than months at each period end, tell us how you considered SFAS 115, paragraph 16, EITF 03-1 and SAB 59 in determining that these unrealized losses were temporary. Please provide the requested analysis on all significant components of your federal agencies and corporate obligations securities on an individual basis. Further, based on your disclosures in your June 30, 2005 Form 10-Q, we note you recognized $292,420 of losses on investment securities during the quarter. Explain how you determined that these losses were other-than-temporary in this period. Also, tell us the amount of unrealized losses that have been in a loss position for greater than 12 months as of June 30, 2005.
Response:
The Company evaluates all securities quarterly to determine if any unrealized losses are deemed to be other than temporary. In completing these evaluations the Company follows the requirements of paragraph 16 of SFAS No. 115, EITF 03-1 and Staff Accounting Bulletin 59. Additionally, for the quarter ended June 30, the Company considered the proposed FASB Staff Position FAS 115-1.
Factors considered in our determination of impairment include the duration and severity of a security’s unrealized loss, the underlying cause of the unrealized loss (interest rate environment, credit rating changes, regulatory or other difficulties of the issuer, etc.), as well as the prospect for a change in market value within a reasonable period of time and our assessment as to whether we will be able to collect all amounts due according to the contractual terms of a debt security.
The investment security losses realized during the first six months of 2005 were offset by gains totaling $204,302 for a net loss of $292,420. The losses resulted from the sales of the following securities.
Security Description
Interest or Coupon Rate
Maturity Date
Principal Amount Sold
Loss on Sale
FHLMC
2.00
6/09/06
2,952,030
47,970
FHLMC
2.00
6/30/06
1,473,675
26,325
Fed Farm Cred
1.88
6/16/06
981,930
18,070
Fed Home Ln
2.24
1/23/07
,952,820
47,180
Fed Home Ln
2.58
1/24/07
979,590
20,410
Fed Home Ln
2.50
8/11/06
1,380,624
19,376
Fed Home Ln
4.00
11/17/09
1,886,149
12,782
Fed Natl Mtg.
2.00
6/09/06
4,428,045
69,650
US Treas Note
1.625
9/30/05
3,984,531
12,465
FHLMC Gold
4.00
3/01/08
1,548,229
23,518
FHLMC Gold
4.00
3/01/08
442,351
6,017
FHLMC Gold
4.50
1/01/08
651,122
5,867
FNMA Arms
3.62
1/01/34
1,246,701
13,301
FNMA Arms
3.422
2/01/34
1,401,106
22,905
GMAC
5.625
5/15/09
459,735
50,282
FHLB Step
3.30
5/24/06
2,994,600
5,400
FNMA Arms
4.155
9/01/33
4,942,142
64,519
FNMA Arms
3.936
8/01/28
2,890,911
30,685
Total
36,596,291
496,722
All of the above debt securities were evaluated in previous quarters for other-than-temporary impairment. No impairment charges were taken on the above securities because our assessment indicated that the cause of the market depreciation was primarily the change in interest rates and that we would have been able to hold such securities until maturity. Our decision to subsequently sell these securities prior to maturity was based on our need for liquidity to reduce debt levels although we had the financial ability to hold these securities with losses. These securities were selected for sale based on their low yield versus other securities we owned. The decision to sell these securities was made and approved by the board of directors on June 21, 2005.
At June 30, 2005 the following securities had been in a continuous loss position for 12 months or more.
Security Description
Interest or Coupon Rate
Maturity Date
Principal Amount
Unrealized Loss
12-31-04
Unrealized Loss
6-30-05
WAMU
4.0744
10/25/33
2,000,000
17,623
11,383
BankBoston
3.97
6/08/28
4,000,000
85,520
89,963
Chase Cap
3.835
8/01/28
3,000,000
122,377
142,829
Countrywide
6.875
9/15/05
1,000,000
4,665
1,194
Huntington
3.89
2/01/27
3,000,000
171,689
213,255
KeyCorp
3.84
7/01/28
Show Raw Text
CORRESP
1
filename1.htm
Letter to Craig Wilson
October
26, 2005
Via
EDGAR
Craig
Wilson
Senior
Assistant Chief Accountant
Division
of Corporation Finance
Securities
and Exchange Commission
Washington,
D.C. 20549
Re:
Lincoln
Bancorp (the “Company”)
Form
10-K for Fiscal Year Ended December 31, 2004
Form
10-Q for the Fiscal Quarter Ended March 31, 2005
Form
10-Q for the Fiscal Quarter Ended June 30, 2005
File
No. 000-25219
Dear
Mr.
Wilson:
This
letter is in response to the Staff’s comments in the letter dated September 29,
2005 regarding the above-referenced filings, which was received by the Company
on October 14, 2005. The Staff’s comments are reproduced below and followed by
the Company’s responses.
Form
10-K for the Fiscal Year Ended December 31, 2004
Item
9A. Controls and Procedures, page 36
Comment:
1. We
note
that your Chief Executive Officer and Treasurer have concluded your disclosure
controls and procedures are effective “to the best of their knowledge” and
“except as provided below”. Given the exceptions noted, it remains unclear
whether your Chief Executive Officer and Treasurer have concluded that your
disclosure controls and procedures are effective as of December 31, 2004.
Please
revise your disclosure to state, in clear and unqualified language, the
conclusions reached by your Chief Executive Officer and Treasurer on the
effectiveness of your disclosure controls and procedures. You should not
qualify
your statement that your disclosure controls and procedures are effective
by the
additional statement, “except as provided in the next paragraph.” That is to say
they are effective except to the extent they are not effective. We refer
you to
Exchange Act Rule 13a-15, Item 307 of Regulation S-K and SEC Release No.
33-8238.
Response:
After
further evaluation in light of your comment, we propose to revise the
disclosures in Item 9A of the Form 10-K to state that the Company’s disclosure
controls and procedures were ineffective as of December 31, 2004. We intend
to
file an amendment to the Form 10-K to amend Item 9A as set forth in Exhibit
A
to this
letter (Exhibit
A
includes
revisions made to Item 9A in response to this Comment 1 and Comments 3, 4
and 5
below).
1
Comment:
2. In
light
of the fact that a material weakness existed with respect to the lack of
timely
reconciliation of your primary correspondent account, disclose in reasonable
detail the basis for your officers’ conclusions that your disclosure controls
and procedures were nonetheless effective as of the end of the period covered
by
the report. Further, disclose in greater detail the nature of the material
weakness identified in your disclosure. In this regard, also revise to disclose
the specific steps that you have taken to remediate the material weakness.
Response:
As
addressed in our response to Comment 1 above, we have concluded that our
disclosure controls and procedures were ineffective as of December 31, 2004.
The
material weakness identified by management and the Company’s independent
auditors was the lack of timely reconciliation of the primary correspondent
checking account of Lincoln Bank, a wholly owned subsidiary of the Company
(the
“Bank”). An items processing conversion took place on November 1, 2004, that
resulted in cash letter differences that could not be reconciled by December
31,
2004. This resulted in other reconciling items in the primary correspondent
checking account not being cleared timely by December 31, 2004. Compounding
the
situation was the system conversion on November 13, 2004, in connection with
the
Company’s recent acquisition of First Shares Bancorp, Inc. (“First Shares”) and
the departure of First Shares’ Chief Financial Officer. Management reviewed the
correspondent account reconciliation problem with the Audit Committee and
implemented procedures and plans to timely reconcile the account. The Bank’s
staff members received additional training and staffing levels were adjusted.
We
added edit checks to our processing system, we made changes to specifications
of
items being processed and we added processing procedure changes that
dramatically reduced the number of exceptions being researched. As of the
filing
date of Form 10-K, material account reconciliations were current as of December
31, 2004. Therefore, we believe that our disclosure controls and procedures
were
effective as of the filing of the Form 10-K on March 31, 2005. In addition,
on
April 11, 2005 we hired a Director of Accounting and Reporting to strengthen
and
oversee our accounting controls and disclosures as well as our internal and
external reporting.
Comment:
3. We
note
your disclosure that, “there have been no significant changes in the Holding
Company’s internal controls or in other factors that could significantly affect
the internal controls, including any corrective action with regard to material
weakness, other than the matter disclosed in the paragraph above.” Revise to
state clearly, if correct, that there were changes in your internal control
over
financial reporting that occurred during this quarter that have materially
affected, or are reasonably likely to materially affect, your internal control
over financial reporting.
2
Response:
We
have
revised the response as suggested and the revised disclosure is included
in
Exhibit
A.
Comment:
4. We
note
the effectiveness of your disclosure controls and procedures were evaluated
by
your Treasurer instead of a Chief Financial Officer. Tell us whether your
Treasurer would be considered a principal financial officer or person performing
similar functions and evaluated your disclosure controls and procedures in
absence such persons. If this is correct, revise your disclosure to clarify.
If
not, explain why your Chief Financial Officer did not evaluate the effectiveness
of your disclosure controls and procedures. We refer you to Exchange Act
Rule
13a-15(b)(2)(c).
Response:
The
Company’s officer with the title “Treasurer” is the Company’s principal
financial officer and we will revise the disclosures in the amendment to
the
Form 10-K to clarify this as set forth in Exhibit
A.
Comment:
5. Your
disclosure states that the evaluation of the effectiveness of the disclosure
controls and procedures was performed on the holding company. Tell us whether
this evaluation included determining the effectiveness of the disclosure
controls and procedures for the consolidated company, including any subsidiaries
of the holding company.
Response:
The
reference to the Holding Company was intended to refer to Lincoln Bancorp
and
its subsidiaries on a consolidated basis, and we have revised the disclosures
in
Exhibit
A
to make
that clearer.
Exhibit
13: 2004 Annual Report
Note
4: Investment Securities, pages 30-31
Comment:
6. We
note
that you have recognized $868,000 and $974,000 of unrealized losses on your
investment securities as of December 31, 2004 and 2003, respectively. We
further
note that $663,000 and $821,000 of these unrealized losses have been in a
loss
position for greater than 12 months at December 31, 2004 and 2003, respectively.
Considering these securities have been in a loss position for greater than
12
months at each period end, tell us how you considered SFAS 115, paragraph
16,
EITF 03-1 and SAB 59 in determining that these unrealized losses were temporary.
Please provide the requested analysis on all significant components of your
federal agencies and corporate obligations securities on an individual basis.
Further, based on your disclosures in your June 30, 2005 Form 10-Q, we note
you
recognized $292,420 of losses on investment securities during the quarter.
Explain how you determined that these losses were other-than-temporary in
this
period. Also, tell us the amount of unrealized losses that have been in a
loss
position for greater than 12 months as of June 30, 2005.
3
Response:
The
Company evaluates all securities quarterly to determine if any unrealized
losses
are deemed to be other than temporary. In completing these evaluations the
Company follows the requirements of paragraph 16 of SFAS No. 115, EITF 03-1
and
Staff Accounting Bulletin 59. Additionally, for the quarter ended June 30,
2005
the Company considered the proposed FASB Staff Position FAS 115-1.
Factors
considered in our determination of impairment include the duration and severity
of a security’s unrealized loss, the underlying cause of the unrealized loss
(interest rate environment, credit rating changes, regulatory or other
difficulties of the issuer, etc.),
as
well as the prospect for a change in market value within a reasonable period
of
time and our assessment as to whether we will be able to collect all amounts
due
according to the contractual terms of a debt security.
The
investment security losses realized during the first six months of 2005 were
offset by gains totaling $204,302 for a net loss of $292,420. The losses
resulted from the sales of the following securities.
Security
Description
Interest
or Coupon Rate
Maturity
Date
Principal
Amount Sold
Loss
on Sale
FHLMC
2.00
6/09/06
2,952,030
47,970
FHLMC
2.00
6/30/06
1,473,675
26,325
Fed
Farm Cred
1.88
6/16/06
981,930
18,070
Fed
Home Ln
2.24
1/23/07
1
,952,820
47,180
Fed
Home Ln
2.58
1/24/07
979,590
20,410
Fed
Home Ln
2.50
8/11/06
1,380,624
19,376
Fed
Home Ln
4.00
11/17/09
1,886,149
12,782
Fed
Natl Mtg.
2.00
6/09/06
4,428,045
69,650
US
Treas Note
1.625
9/30/05
3,984,531
12,465
FHLMC
Gold
4.00
3/01/08
1,548,229
23,518
FHLMC
Gold
4.00
3/01/08
442,351
6,017
FHLMC
Gold
4.50
1/01/08
651,122
5,867
FNMA
Arms
3.62
1/01/34
1,246,701
13,301
FNMA
Arms
3.422
2/01/34
1,401,106
22,905
GMAC
5.625
5/15/09
459,735
50,282
FHLB
Step
3.30
5/24/06
2,994,600
5,400
FNMA
Arms
4.155
9/01/33
4,942,142
64,519
FNMA
Arms
3.936
8/01/28
2,890,911
30,685
Total
36,596,291
496,722
4
All
of
the above debt securities were evaluated in previous quarters for
other-than-temporary impairment. No impairment charges were taken on the
above
securities because our assessment indicated that the cause of the market
depreciation was primarily the change in interest rates and that we would
have
been able to hold such securities until maturity. Our decision to subsequently
sell these securities prior to maturity was based on our need for liquidity
to
reduce debt levels although we had the financial ability to hold these
securities with losses. These securities were selected for sale based on
their
low yield versus other securities we owned. The decision to sell these
securities was made and approved by the board of directors on June 21, 2005.
At
June
30, 2005 the following securities had been in a continuous loss position
for 12
months or more.
Security
Description
Interest
or Coupon Rate
Maturity
Date
Principal
Amount
Unrealized
Loss
12-31-04
Unrealized
Loss
6-30-05
WAMU
4.0744
10/25/33
2,000,000
17,623
11,383
BankBoston
3.97
6/08/28
4,000,000
85,520
89,963
Chase
Cap
3.835
8/01/28
3,000,000
122,377
142,829
Countrywide
6.875
9/15/05
1,000,000
4,665
1,194
Huntington
3.89
2/01/27
3,000,000
171,689
213,255
KeyCorp
3.84
7/01/28