10-K 1 wrc_10k2011.htm FYE 12/31/2011 wrc_10k2011.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-K
 
x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2011
 
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission file number: 001-33257
 
White River Capital, Inc.
(Exact name of registrant as specified in its charter)
 
Indiana
 
35-1908796
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
6051 El Tordo, PO Box 9876
Rancho Santa Fe, CA  92067
(Address of principal executive offices/zip code)
 
Registrant’s telephone number, including area code: (858) 997-6740

Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on which registered:
Common Stock, without par value
NYSE Amex
 
Securities registered pursuant to Section 12(g) of the Act:   None.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   o Yes   x No
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   o Yes   x No
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes   o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x Yes   o No
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K   x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large Accelerated Filer o
Accelerated Filer o
     
 
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
Smaller Reporting Company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes   x No
 
The aggregate market value of the registrant’s voting common stock held by non-affiliates, computed by reference to the price at which the common stock was last sold as of June 30, 2011 was $56.1 million.  The registrant does not have any non-voting common equity securities.
 
As of March 1, 2012, there were 3,544,825 shares outstanding of the issuer’s Common Stock, without par value.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Certain information in the registrant’s definitive proxy statement for its 2012 Annual Meeting of Shareholders, which the registrant will file with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year, is incorporated by reference in Part III of this Form 10-K.
 

 

- INDEX -
 
   
PAGE
PART I
 
     
Item 1.
Business
1
     
Item 1A.
Risk Factors
11
     
Item 1B.
Unresolved Staff Comments
11
     
Item 2.
Properties
11
     
Item 3.
Legal Proceedings
11
     
Item 4.
Mine Safety Disclosures
11
     
PART II
 
     
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
12
     
Item 6.
Selected Financial Data
19
     
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
19
     
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
27
     
Item 8.
Financial Statements and Supplementary Data
28
     
 
Report of Independent Registered Public Accounting Firm – McGladrey & Pullen LLP
28
     
 
Consolidated Balance Sheets as of December 31, 2011 and 2010
29
     
 
Consolidated Statements of Operations for the Years Ended December 31, 2011 and 2010
30
     
 
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2011 and 2010
31
     
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and 2010
 32
     
 
Notes to Consolidated Financial Statements
33


 
i

 


Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
51
     
Item 9A.
Controls and Procedures
51
     
Item 9B.
Other Information
51
     
PART III
 
     
Item 10.
Directors, Executive Officers and Corporate Governance
52
     
Item 11.
Executive Compensation
52
     
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
52
     
Item 13.
Certain Relationships and Related Transactions, and Director Independence
53
     
Item 14.
Principal Accounting Fees and Services
53
     
PART IV
 
     
Item 15.
Exhibits
54
     
SIGNATURES
57

 
ii

 

PART I

 
ITEM 1. BUSINESS
 
Overview
 
Founded in 2004, White River Capital, Inc. (“White River”) is a financial services holding company headquartered in Rancho Santa Fe, California. White River’s principal operating subsidiary is Coastal Credit LLC (“Coastal Credit”), based in Virginia Beach, Virginia. Coastal Credit is a specialized subprime auto finance company engaged in acquiring subprime auto receivables from both franchised and independent automobile dealers which have entered into contracts with purchasers of typically used, but some new, cars and light trucks.  Coastal Credit then services the receivables it acquires. Coastal Credit operates in 27 states through 15 offices.
 
Union Acceptance Company LLC (“UAC”), a now inactive subsidiary of White River, was a specialized auto finance company operating under a bankruptcy plan of reorganization. UAC’s bankruptcy case was closed in January 2007. On September 1, 2010, UAC voluntarily dissolved by filing a certificate of dissolution with the Indiana Secretary of State. UAC no longer materially contributes to the assets, liabilities, or results of operations of White River on a consolidated basis.  As of January 1, 2011, UAC was no longer a reportable business segment of White River.  Beginning as of that date, all financial information for UAC is reported in the “Corporate and Other” segment.
 
White River’s net interest margin after provision for estimated losses was $29.3 million for the year ended December 31, 2011.  Net income for this same period was $9.5 million.  At December 31, 2011, total assets were $155.3 million.
 
 
COASTAL CREDIT LLC
 
General
 
Coastal Credit is a subprime finance company engaged in acquiring sub-prime auto receivables from both franchised and independent automobile dealers which have entered into contracts with purchasers of typically used, but some new, cars and light trucks.  Coastal Credit then services the receivables it acquires. Coastal Credit commenced operations in Virginia in 1987. It conducts business in 27 states –Arizona, California, Colorado, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia and Washington – through its 15 branch locations.
 
Coastal Credit provides financing programs to customers of automobile dealers who meet Coastal Credit’s credit standards, but who may not meet the credit standards of traditional lenders, such as banks and credit unions. Unlike these traditional lenders, Coastal Credit acquires contracts from dealers for vehicle purchases made by borrowers who typically have limited or impaired credit histories or who are purchasing older model and higher mileage automobiles. This is typically referred to as the subprime automobile finance market.
 
A significant number of contracts acquired by Coastal Credit are contracts made with borrowers who are in the United States military. During 2011, 60.1% of new originations were made with these borrowers. Coastal Credit believes that having in its portfolio a significant percentage of contracts for which the borrowers are United States military personnel contributes to lower payment delinquency and higher collection personnel efficiencies. Coastal Credit requests all borrowers who are in the military to use the military allotment system to make payments on their contracts. Under this allotment system, the borrower authorizes the military to make a payroll deduction for the amount of the borrower’s monthly contract payment and to direct this deduction payment to Coastal Credit on behalf of the borrower. Delinquency of payments on contracts paid by allotment historically has been less than delinquency of payments on contracts not paid by allotment. As a result, the collection effort associated with the military contracts requires less time, allowing Coastal Credit’s collection staff to focus on an increased number of civilian sector contracts.
 

 
1

 
 
Coastal Credit’s executive offices are located at 3852 Virginia Beach Boulevard, Virginia Beach, Virginia 23452.
 
 
Acquisition of Automobile Finance Contracts
 
Coastal Credit currently conducts its automobile finance programs in 27 states through a total of 15 branches, with two branches in each of Florida and Georgia and one branch in each of Colorado, Delaware, Louisiana, Mississippi, Nevada, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, and Virginia. Each branch acquires, processes, and services contracts in its geographic area. Coastal Credit regularly evaluates potential expansion into other markets.
 
Coastal Credit’s branch managers develop and maintain relationships with automobile dealers in the branches’ geographic areas. Coastal Credit enters into non-exclusive dealer agreements with these dealers for the acquisition of individual contracts. The dealer agreement provides Coastal Credit with recourse to the dealer in cases of dealer fraud or breach of the dealer’s representations and warranties. As of December 31, 2011, Coastal Credit had non-exclusive agreements with approximately 4,800 dealers, of which approximately 659 are active. Coastal Credit considers a dealer agreement to be active if Coastal Credit has acquired a contract under the dealer agreement in the last nine months. After Coastal Credit acquires a contract from a dealer, the dealer is no longer involved in the relationship between Coastal Credit and the borrower, other than through the existence of limited representations and warranties of the dealer.
 
Borrowers under the contracts typically make down payments, in the form of cash or trade-in, ranging from 5% to 20% of the sale price of the vehicle financed. The balance of the purchase price of the vehicle plus taxes, title fees and, if applicable, premiums for “add-on” products (described below), are generally financed over a period of 36 to 54 months.
 
Coastal Credit acquires each contract from the automobile dealer at a negotiated price that is less than the original principal amount being financed by the purchaser of the automobile. The amount of the discount depends upon factors such as the creditworthiness of the borrower and the age and value of the automobile. Coastal Credit will pay more for contracts as the credit risk of the borrower improves. Coastal Credit typically acquires contracts at purchase prices that range from 80% to 90% of the original principal amount of the contract. In addition, Coastal Credit typically charges dealers a processing fee ranging from $50 to $295 per contract acquired. See “Pricing of Contracts” below.
 
As of December 31, 2011, Coastal Credit’s contract portfolio consisted exclusively of contracts acquired by Coastal Credit without credit recourse to the dealer. Although all the contracts in Coastal Credit’s contract portfolio were acquired without credit recourse, each dealer remains liable to Coastal Credit for liabilities arising from any breach of certain representations and warranties made by the dealer with respect to compliance with applicable federal and state laws and valid title to the vehicle.
 
Coastal Credit’s policy is to acquire a contract only after the dealer has provided Coastal Credit with the requisite proof that Coastal Credit will have a first priority lien on the financed vehicle, that the borrower has obtained the required collision insurance naming Coastal Credit as loss payee and that the contract has been fully and accurately completed and validly executed. Once Coastal Credit has received and approved all required documents, Coastal Credit purchases the contract and begins servicing the contract.
 

 
2

 
 
Both Coastal Credit and the dealers with which it does business offer purchasers of vehicles certain other “add-on” products. These products are offered by the dealer on Coastal Credit’s behalf or by the dealer on behalf of the automobile dealership at the time of sale. The add-on products consist of the following:
 
·  
Extended warranty protection – covers the cost of certain repairs after the vehicle’s warranty expires;
·  
Gap protection – pays an amount between what the borrower owes and the primary insurance cash value of a vehicle if the vehicle is stolen or destroyed; and
·  
Collateral protection insurance – pays the cost to repair or the value of the vehicle if the vehicle is stolen, damaged or destroyed.
 
At the borrower’s option, the cost of these products may be included in the amount financed under the contract.
 
 
Underwriting Guidelines
 
Coastal Credit’s typical borrower has a credit history that may fail to meet the lending standards of most banks, credit unions and captive automobile finance companies. Substantially all of Coastal Credit’s automobile contracts involve loans made to individuals with limited or impaired credit histories. Coastal Credit believes that its borrower credit profile is similar to that of its direct competitors in the subprime automobile finance business. Coastal Credit also believes that its underwriting criteria and branch network management system coupled with close senior management supervision enhances its risk management and collection functions.
 
In deciding whether to acquire a particular contract, Coastal Credit considers various factors, including:
 
·  
the applicant’s length of residence;
·  
the applicant’s current and prior job status;
·  
the applicant’s history in making other installment loan payments;
·  
the applicant’s payment record on previous automobile loans;
·  
the applicant’s current income and discretionary spending ability;
·  
the applicant’s credit history;
·  
the value of the automobile in relation to the purchase price;
·  
the term of the contract;
·  
the automobile make and mileage; and
·  
Coastal Credit’s prior experience with contracts acquired from the dealer.
 
For applicants who are military personnel, Coastal Credit also considers the applicant’s rank and the time remaining on his or her enlistment contract. These factors affect not only whether Coastal Credit will acquire the contract, but also the purchase price Coastal Credit will be willing to pay the dealer to acquire the contract.
 
As part of the approval process, Coastal Credit receives a credit application completed by the prospective borrower. The application contains information relating to the applicant’s background, employment and credit history. Coastal Credit also obtains a credit report from an independent credit reporting service and verifies the applicant’s employment history, income and residence. In certain cases, a Coastal Credit application processor interviews the applicant by telephone. After reviewing the information submitted in the credit application (which includes years at employer, years at residence and income), any telephone interview and the credit report, a Coastal Credit representative approves or rejects the application according to company guidelines.

 
3

 
 
The branch manager of each branch is responsible for underwriting and purchasing automobile contracts and providing servicing and collections. However, the branch network is closely managed and supervised by Coastal Credit’s senior management. Coastal Credit believes that its branch network operations enable branch managers to develop strong relationships with its automobile dealers. Coastal Credit, through its branches, provides a high level of service to its dealers by providing consistent credit decisions and frequent management contact. Coastal Credit has established internal buying guidelines to be used by its underwriters when acquiring contracts. Although the buying guidelines vary from branch to branch, Coastal Credit’s branch managers or senior management must approve any contract that does not meet a branch’s guidelines in advance of purchasing any such contract. Coastal Credit has 15 branch managers, each charged with managing the specific branches in a defined geographic area. In addition to a variety of administrative duties, the branch managers are responsible for monitoring their assigned branches’ compliance with Coastal Credit’s underwriting standards. On a regular basis, either a branch manager or senior management reviews every newly purchased contract.
 
To further ensure compliance with its underwriting guidelines, Coastal Credit performs on-site reviews of its branches. The branch reviews are performed on a schedule that varies from branch to branch, depending on the size of the branch, the length of time the branch has been open, the current tenure of the branch manager and the branch’s current and historical profitability. Coastal Credit believes that the branch review is critical to ensuring that credit quality is not sacrificed for asset growth.
 
 
Pricing of Contracts
 
Coastal Credit’s management believes that a key to its consistent profitability has been its ability to effectively price the contracts it acquires to fully cover all future losses on the contracts. Pricing has two components: (1) the interest rate the borrower pays on the amount financed and (2) the purchase price paid to the dealer. To determine the pricing for a particular contract, Coastal Credit considers the same factors it considers in determining whether to acquire the contract. As a result of its disciplined underwriting guidelines, Coastal Credit generally only purchases approximately 12 contracts for every 100 automobile loan applications reviewed. These factors are discussed above under “Underwriting Guidelines.”
 
To ensure its ability to continue to effectively price the contracts it acquires, Coastal Credit’s branch managers and senior management analyze various reports on a monthly and quarterly basis to identify any trends that will influence pricing. These reports help management compare the performance of contracts by branch, by dealer, by contract age, by borrower’s income and by borrower’s credit history.
 
 
Geographic Concentration
 
Coastal Credit operates its business and acquires its contracts in various regions as follows for the years 2011 and 2010:
 
     Region #1 – Georgia, North Carolina, South Carolina, Tennessee and Virginia.
     Region #2 – Delaware, Illinois, Indiana, Kentucky, Maryland, Ohio and Pennsylvania.
     Region #3 – Florida, Kansas, Louisiana, Mississippi, Missouri, Nevada, Oklahoma and Texas.
     Region #4 – Alaska, California, Colorado, Hawaii, New Mexico, Utah and Washington.
 
 
4

 
 
The following table represents Coastal Credit regional finance receivables, net of unearned finance charges acquired ($ in thousands) during the years ended:
 
     
December 31, 2011
   
December 31, 2010
 
     
Units
   
%
   
$
   
%
   
Units
   
%
   
$
   
%
 
                                                                   
 
Region #1
    2,635       40.5 %   $ 38,117       45.2 %     2,450       40.5 %   $ 31,884       46.0 %
 
Region #2
    1,261       19.4 %     12,809       15.2 %     1,162       19.2 %     11,115       16.0 %
 
Region #3
    1,688       25.9 %     21,546       25.6 %     1,377       22.8 %     14,616       21.1 %
 
Region #4
    924       14.2 %     11,829       14.0 %     1,060       17.5 %     11,738       16.9 %
        6,508       100.0 %   $ 84,301       100.0 %     6,049       100.0 %   $ 69,353       100.0 %

 
Coastal Credit’s level of contract acquisitions in each state may fluctuate significantly over time depending on competitive conditions and other factors in those areas. In considering potential areas for expansion, Coastal Credit carefully reviews the regulatory and competitive environment and economic and demographic factors, including the availability of qualified underwriters and managers and the number of dealerships in the potential expansion area. Because a significant number of Coastal Credit’s contracts have been with borrowers who are in the military, Coastal Credit also considers the proximity of military bases. To ensure successful branch expansion, Coastal Credit focuses on hiring and developing local, experienced branch-level management.
 
 
Servicing, Monitoring and Enforcement of Contracts
 
Coastal Credit acts as servicer for the contracts it acquires. As servicer, Coastal Credit collects payments due from borrowers, monitors collections and pursues the collection of delinquent accounts, including the liquidation of collateral securing defaulted contracts. Coastal Credit uses integrated computer systems to enhance its ability to respond to borrower inquiries and to monitor the performance of its contract portfolio and the performance of individual borrowers under contracts. All of Coastal Credit’s personnel, including personnel at its branch offices, have instant, simultaneous access to information from a single shared database.
 
To protect its collateral in financed vehicles, Coastal Credit requires all borrowers to obtain and maintain collision insurance covering damage to the vehicle and naming Coastal Credit as the loss payee. The insurance typically must have a deductible of not more than $500. Failure to maintain insurance constitutes a default under the contract, and Coastal Credit may, at its discretion, repossess the vehicle. Coastal Credit does not “force-place” insurance (that is, purchase insurance on behalf of borrowers whose policies have lapsed and add the cost and applicable finance charges to the balance of the contract).
 
Coastal Credit uses a number of methods to monitor compliance by borrowers with their obligations under contracts and to pursue collections of delinquent accounts. In addition to Coastal Credit’s collections staff, branch managers and senior management receive a daily delinquency report. The delinquency report is an aging report that provides basic information regarding each account and indicates accounts that are past due. The report includes information that enables the senior management, branch managers and collection staff to identify and access delinquent accounts. The report includes such information as the borrower’s name, account number, outstanding balance, date of last payment, next due date, past due days by recency and contractually, and the delinquency status by aging category.
 
In most cases, a collection representative begins the process of contacting the borrower by telephone or mail on the first day that the account is past due. The collection representative also mails future reminders and late notices. If the collection representative is able to make contact with the borrower and the borrower is able to provide Coastal Credit with an acceptable explanation for the delinquency, to display the willingness and the ability to make payment, and to commit to a plan to return the account to current status, the information is entered in Coastal Credit’s database and is used to generate a “promises report.” Coastal Credit’s collection staff uses the promises report for further account monitoring.

 
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Generally, the same collection representative will pursue the account until it is brought current or charged off.
 
If the collection representative is not able to make contact with the borrower or if the borrower is unable to make payment arrangements acceptable to Coastal Credit, the collection representative will refer the account to the collection manager or the branch manager to determine whether to repossess the financed vehicle. Coastal Credit’s branch managers and senior management review all repossession determinations and have the authority to override such determinations.
 
Coastal Credit prepares a repossession report that provides information regarding repossessed vehicles and aids Coastal Credit in disposing of repossessed vehicles. In addition to information regarding the borrower, this report provides information regarding the date of repossession, the date the vehicle was sold, the number of days it was held in inventory prior to sale, the year, make and model of the vehicle, the vehicle’s mileage, the payoff amount on the contract, the value of the vehicle indicated in standard industry publications, the suggested sale price, the location of the vehicle, the original dealer, the condition of the vehicle, and notes and other information. This data provides Coastal Credit with relevant information that may affect future credit decisions.
 
Once a branch manager or senior management has approved a repossession request, a repossession firm repossesses the vehicle and delivers it to a secure location specified by Coastal Credit. Coastal Credit maintains relationships with several licensed repossession firms that repossess vehicles for fees that typically range from $225 to $375 for each vehicle repossessed. As required by applicable state law, Coastal Credit notifies the borrower by certified letter that the vehicle has been repossessed and that, to regain the vehicle, he or she must make arrangements satisfactory to Coastal Credit and pay the amount owed under the contract within the statutory redemption period allowed by the applicable state law after delivery of the letter. If satisfactory arrangements for return of the vehicle are not made within the statutory period, Coastal Credit then sends title to the vehicle to the applicable state title transfer department, which then registers the vehicle in Coastal Credit’s name. Coastal Credit then sells the vehicle by public auction. On average, approximately 45 days elapse from the time Coastal Credit takes possession of a vehicle and the time it is sold at auction.
 
When a repossessed vehicle has been sold and/or a contract has been charged off, if Coastal Credit determines that there is a reasonable likelihood of recovering part or all of any deficiency against the borrower under the contract, Coastal Credit will pursue all legal remedies available to it. States have different collection laws, but legal remedies may include lawsuits, judgment liens and wage garnishments.
 
In addition, the branch managers and Coastal Credit’s senior management review each account that is 60 days past due to determine whether the contract should be charged off. Coastal Credit requires mandatory charge off of all contracts when 60 days have passed since the most recent payment and/or the contract is 180 days delinquent per the contract terms. All charged off loans are transferred to a Profit and Loss (P&L) Department. The P&L Department attempts to collect the contract until the borrower has paid the contract or all legal remedies have been exhausted. Historically, Coastal Credit has recovered approximately 25% of deficiencies from such borrowers. Proceeds from the disposition of the vehicles are not included in calculating the foregoing percentage range.
 
 
Marketing and Advertising
 
Coastal Credit’s marketing efforts are directed toward automobile dealers. Coastal Credit attempts to meet dealers’ needs by offering highly-responsive, cost-competitive, locally-based and service-oriented financing programs. Coastal Credit relies on its marketing and branch managers to solicit agreements for the acquisition of contracts with automobile dealers located within each branch’s geographic area. The branch manager provides dealers with information regarding Coastal Credit and the general terms upon which Coastal Credit is willing to acquire contracts.
 

 
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Competition
 
The subprime automobile finance industry is highly fragmented and highly competitive. There are numerous financial service companies that provide subprime credit in the markets served by Coastal Credit, including credit unions, other consumer finance companies and captive finance companies owned by automobile manufacturers and retailers. Many of these companies have significantly greater resources and market presence than Coastal Credit. Moreover, Coastal Credit has experienced increased competition from new finance companies that have gained entry into the market since the end of the recession in 2009, a current trend which Coastal Credit expects to continue for the foreseeable future as the overall economy recovers. Coastal Credit does not believe that increased competition for the acquisition of contracts will cause a material reduction in the interest rate payable by the purchaser of the automobile. However, increased competition for the acquisition of contracts will enable automobile dealers to shop for the best price. Coastal Credit’s management believes that its effective pricing has been a key factor in its consistent, historical profitability, and, therefore, Coastal Credit will forego acquisition of a contract if it believes that meeting the competitor’s pricing would compromise its underwriting guidelines.
 
Coastal Credit’s target market consists of persons who are generally unable to obtain traditional used car financing because of their credit history or the vehicle’s mileage or age. Coastal Credit has been able to expand its automobile finance business in the subprime credit market by offering to acquire contracts on terms that are competitive with those of other companies that acquire automobile receivables in that market segment. As a result of the daily contact that many of Coastal Credit’s employees have with automobile dealers located throughout the market areas Coastal Credit serves, Coastal Credit is generally aware of the terms upon which its competitors are offering to acquire contracts. Coastal Credit’s policy is to modify its terms, if necessary, to remain competitive. However, Coastal Credit will not sacrifice credit quality, its purchasing criteria or prudent business practices to meet the terms offered by its competitors.
 
Coastal Credit’s ability to compete effectively with other companies offering similar financing arrangements depends upon its maintaining current and developing new business relationships with auto dealers in each branch’s geographic area.
 
 
Regulation
 
Coastal Credit’s financing and collection operations are subject to regulation, supervision and licensing under various federal, state and local statutes and ordinances. Additionally, the procedures that Coastal Credit must follow in connection with the repossession of vehicles securing contracts are regulated by each of the states in which Coastal Credit does business. In addition to applicable federal law, the laws of the following states where Coastal Credit currently has branches govern Coastal Credit’s operations: Colorado, Delaware, Florida, Georgia, Louisiana, Mississippi, Nevada, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, and Virginia.
 
Compliance with existing laws and regulations has not had a material adverse effect on Coastal Credit’s operations to date. Coastal Credit’s management believes that Coastal Credit maintains all requisite licenses and permits and is in compliance with all applicable local, state and federal laws and regulations. Coastal Credit periodically reviews its branch office practices in an effort to ensure such compliance. The following constitute certain of the federal, state and local statutes and ordinances with which Coastal Credit must comply:
 
 
·
State consumer regulatory agency requirements. Pursuant to the regulations of various states, the appropriate state regulatory agency may periodically conduct on-site audits of Coastal Credit’s branches in Florida, Delaware, Louisiana, Mississippi and Oklahoma. These regulations govern, among other matters, licensure requirements, requirements for maintenance of proper records, payment of required fees, maximum interest rates that may be charged on loans to finance used vehicles and proper disclosure to customers regarding financing terms.
 
 
7

 
 
 
·
State licensing requirements. Coastal Credit maintains the following licenses:
 
 
State
 
License
 
 
Delaware
 
Motor Vehicle Sales Finance License
 
 
Florida
 
Sales Finance Company License
 
 
Illinois
 
Sales Finance Company License
 
 
Louisiana
 
Sales Finance Company License
 
 
Maryland
 
Sales Finance License
 
 
Mississippi
 
Motor Vehicle Sales Finance License
 
 
Missouri
 
Motor Vehicle Time Sales License
 
 
New Mexico
 
Motor Vehicle Sales Finance Company License
 
 
Oklahoma
 
Supervised Lender License
 
 
Pennsylvania
 
Sales Finance Company License
 
 
Texas
 
Motor Vehicle Sales Finance License
 

·  
Fair Debt Collection Act. The Fair Debt Collection Act and applicable state law counterparts prohibit Coastal Credit from contacting customers during certain times and at certain places, from using certain threatening practices and from making false implications when attempting to collect a debt.
 
·  
Truth in Lending Act. The Truth in Lending Act requires Coastal Credit and the dealers with whom Coastal Credit does business to make certain disclosures to customers, including the terms of repayment, the total finance charge and the annual percentage rate charged on each contract.
 
·  
Equal Credit Opportunity Act. The Equal Credit Opportunity Act prohibits Coastal Credit from discriminating against loan applicants on the basis of race, color, sex, age or marital status. Pursuant to Regulation B promulgated under the Equal Credit Opportunity Act, Coastal Credit is required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection.
 
·  
Fair Credit Reporting Act. The Fair Credit Reporting Act requires Coastal Credit to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency.
 
·  
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act requires Coastal Credit to maintain privacy with respect to certain consumer data in its possession and to periodically communicate with consumers on privacy matters.

 
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·  
Servicemembers' Civil Relief Act. Formerly called the Soldiers’ and Sailors’ Civil Relief Act, the Servicemembers’ Civil Relief Act provides certain protections to borrowers who, subsequent to entering into a contract, have joined or enlisted, or been called to active duty with, the military. Coastal Credit is prohibited from repossessing the vehicles of such borrowers and from terminating the contracts with such borrowers for breach. In addition, Coastal Credit is required to reduce the interest rate charged on each loan to such borrowers to 6% if the borrower’s military duty affects the borrower’s ability to pay his or her contract.
 
·  
Electronic Funds Transfer Act. The Electronic Funds Transfer Act prohibits Coastal Credit from requiring its customers to repay a loan or other credit by electronic funds transfer, except in limited situations, which do not apply to Coastal Credit. Coastal Credit is also required to provide certain documentation to its customers when an electronic funds transfer is initiated and to provide certain notifications to its customers with regard to preauthorized payments.
 
·  
Consumer Financial Protection Bureau. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) which significantly changed the regulation of financial institutions and the financial services industry.  Among other provisions, the Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”) within the Federal Reserve, which has broad authority to regulate consumer financial products and services.  In July 2011, many of the consumer financial protection functions formerly assigned to the federal banking and other designated agencies were transferred to the CFPB.  The CFPB has a large budget and staff, and has broad rulemaking authority over providers of credit, savings, and payment services and products.  In this regard, the CFPB has the authority to implement regulations under federal consumer protection laws and enforce those laws against, and examine, financial institutions and consumer finance companies.  State officials also will be authorized to enforce consumer protection rules issued by the CFPB.  This bureau also is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities.  The CFPB also is directed to prevent “unfair, deceptive or abusive practices” and ensure that all consumers have access to markets for consumer financial products and services, and that such markets are fair, transparent, and competitive.  Because the CFPB was only recently established and its director has been only recently appointed, there is significant uncertainty as to how the CFPB actually will exercise its regulatory, supervisory, examination, and enforcement authority.  However, the CFPB’s authority to change regulations adopted in the past by other regulators (i.e., regulations issued under the Truth in Lending Act, for example), or to rescind or ignore past regulatory guidance, could increase Coastal Credit’s compliance costs and litigation exposure.  In sum, depending on how the CFPB functions and its areas of focus, this bureau and the regulations it issues in the future may have a material impact on Coastal Credit’s, and correspondingly White River’s, business.
 
·  
Bankruptcy. Federal bankruptcy and related state laws may interfere with or affect Coastal Credit’s ability to recover collateral or enforce a deficiency judgment.
 
 
Employees
 
Coastal Credit’s executive management and various support functions are centralized at its corporate headquarters in Virginia Beach, Virginia. As of December 31, 2011, Coastal Credit employed approximately 135 persons.

 
9

 

UNION ACCEPTANCE COMPANY LLC
 
Historical Business of UAC
 
UAC was a specialized finance company that, prior to the Bankruptcy Case, as defined below, was engaged in the business of acquiring and servicing automobile retail installment sales contracts and installment loan agreements.
 
In October 2002, UAC filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Indiana (the “Bankruptcy Case”). In August 2003, the Bankruptcy Court confirmed UAC’s Second Amended and Restated Plan of Reorganization. On January 5, 2007, the U.S. Bankruptcy Court for the Southern District of Indiana issued a final decree and closed UAC’s Chapter 11 Bankruptcy Case.   Although the Bankruptcy Case is closed, UAC remains contractually obligated to distribute its remaining assets in compliance with the Plan.  UAC was designated the Creditor Representative to oversee the distribution of its remaining assets as contractually required under the Plan.
 
Generally, UAC was obligated to continue to collect cash as it became available from prescribed assets of the bankruptcy estate and to distribute such cash to the creditors of the bankruptcy estate who made claims in the Bankruptcy Case and whose claims were allowed by the bankruptcy court. White River purchased substantially all of the allowed claims from UAC’s bankruptcy creditors in 2005.  Accordingly, the large majority of distributions from the bankruptcy estate assets inured to White River.  In April 2011, as a result of the marshalling of UAC’s remaining assets pursuant to its dissolution and winding-up (see “UAC’s Dissolution” below), White River, UAC, and the remaining unsecured creditor of UAC entered into an agreement in which the parties acknowledged and agreed there were no further assets of UAC available to satisfy the remaining unpaid principal and accrued interest on the notes held by such creditor.  Pursuant to this agreement, the creditor further acknowledged and agreed that it received all payments from UAC under the notes to which it was entitled, and the notes held by the creditor were thereby cancelled.
 
In connection with UAC’s Plan of Reorganization and distributions and as a result of White River’s acquisition of UAC’s general unsecured claims and Subordinated Notes, UAC’s creditor notes payable ($ in thousands) were as follows at December 31, 2010:
 
     
December 31, 2010
 
     
Carrying Value
   
Contractual Remaining Debt Not Owned by White River
   
Total Contractual Remaining Debt
 
 
Restructured debt:
                 
 
Class 2A general unsecured claims
  $     $     $ 10  
 
Restructured senior notes
                 
 
Restructured subordinated notes
          1,541       14,176  
 
Senior accrual notes
                4,106  
 
Subordinated accrual notes
          431       3,964  
                           
 
Total creditor notes payable
  $     $ 1,972     $ 22,256  
 
 
10

 

UAC’s Dissolution
 
On September 1, 2010, UAC voluntarily dissolved by filing a certificate of dissolution with the Indiana Secretary of State, and continues to only carry on business appropriate to wind up and liquidate its business and affairs in accordance with Indiana law.  UAC expects to conclude its winding-up process by the third quarter of 2012, at which time UAC’s existence as a business entity will cease.  UAC no longer materially contributes to the assets, liabilities, or results of operations of White River on a consolidated basis. UAC did not have finance receivables at December 31, 2011 and 2010.
 
 
ITEM 1A. RISK FACTORS
 
Not applicable.
 
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
 
ITEM 2. PROPERTIES
 
White River and its subsidiaries lease our headquarters and branch office facilities. White River has an expense sharing agreement that includes office space for its corporate headquarters, located at 6051 El Tordo, Rancho Santa Fe, California. This space is adequate for the functions provided at the headquarters.
 
Coastal Credit leases its corporate headquarters and branch office facilities. Its headquarters, located at 3852 Virginia Beach Boulevard, in Virginia Beach, Virginia, consists of approximately 9,340 square feet of office space. The current lease relating to this space expires in September 2012.
 
Coastal Credit’s 15 branch offices located in Colorado, Delaware, Florida, Georgia, Louisiana, Mississippi, Nevada, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, and Virginia range in size from approximately 885 square feet to 6,700 square feet, with a typical size of 1,600 to 2,000 square feet. These offices are located in office parks, shopping centers or strip malls and are occupied pursuant to leases with an initial term of from one to five years. Coastal Credit believes that these facilities and additional or alternate space available to it are adequate to meet its needs for the foreseeable future.
 
 
ITEM 3. LEGAL PROCEEDINGS
 
White River and its subsidiaries, as consumer finance companies, are subject to various consumer claims and litigation seeking damages and statutory penalties, based upon, among other things, usury, disclosure inaccuracies, wrongful repossession, violations of bankruptcy stay provisions, certificate of title disputes, fraud, breach of contract and discriminatory treatment of credit applicants. Some litigation against White River and its subsidiaries could take the form of class action complaints by consumers. As the assignees of finance contracts originated by dealers, White River and its subsidiaries may also be named as co-defendants in lawsuits filed by consumers principally against dealers. The damages and penalties claimed by consumers in these types of matters can be substantial. The relief requested by the plaintiffs varies but can include requests for compensatory, statutory and punitive damages. White River and its subsidiaries believe that they have taken prudent steps to address and mitigate the litigation risks associated with their business activities.
 
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable.
 
 
 
11

 
 
PART II 

 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information and Holders
 
White River’s common stock trades on the NYSE Amex under the symbol RVR. As of March 1, 2012, there were 3,544,825 shares of common stock outstanding and approximately 75 shareholders of record (assuming all remaining unexchanged certificates for shares of UAC common stock are exchanged for certificates representing White River shares). White River’s common stock was held by approximately 940 beneficial owners as of such date.
 
The following table sets forth the range of the high, low and closing sale prices for White River’s common stock as reported on the NYSE Amex and the quarterly cash dividends per share declared, in each case for the periods indicated:
 
     
High
   
Low
   
Close
   
Dividends
 
                           
 
Fiscal year ended December 31, 2010
                       
 
First Quarter
  $ 14.27     $ 10.99     $ 13.70     $ 0.25  
 
Second Quarter
    15.88       12.40       13.64       0.25  
 
Third Quarter
    18.28       13.36       16.49       0.25  
 
Fourth Quarter
    22.80       15.75       16.32       4.25  
 
Fiscal year ended December 31, 2011
                               
 
First Quarter
  $ 19.65     $ 16.32     $ 17.17     $ 0.25  
 
Second Quarter
    19.60       17.04       19.25       0.25  
 
Third Quarter
    20.92       16.90       19.37       0.25  
 
Fourth Quarter
    27.80       18.51       20.25       4.25  

 
Dividends
 
The following table summarizes the dividends declared during 2010 and 2011 by White River’s Board of Directors:
 
 
Date Dividend Declared
 
Record Date
 
Payment Date
 
Dividend Type
 
Cash Dividend Per Share
 
Total Divided Paid (in thousands)
                         
 
February 22, 2010
 
March 3, 2010
 
March 12, 2010
 
Quarterly Cash
 
$  0.25
 
$      995.6
 
 
May 6, 2010
 
May 17, 2010
 
May 28, 2010
 
Quarterly Cash
 
$  0.25
 
$      980.7
 
 
August 2, 2010
 
August 12, 2010
 
August 26, 2010
 
Quarterly Cash
 
$  0.25
 
$      938.7
 
 
November 2, 2010
 
November 12, 2010
 
November 22, 2010
 
Quarterly Cash
 
$  0.25
 
$      938.7
 
 
November 30, 2010
 
December 9, 2010
 
December 21, 2010
 
Special Cash
 
$  4.00
 
$ 14,967.0
 
 
February 16, 2011
 
February 25, 2011
 
March 2, 2011
 
Quarterly Cash
 
$  0.25
 
$      926.7
 
 
May 5, 2011
 
May 16, 2011
 
May 31, 2011
 
Quarterly Cash
 
$  0.25
 
$      903.2
 
 
August 1, 2011
 
August 11, 2011
 
August 25, 2011
 
Quarterly Cash
 
$  0.25
 
$      903.2
 
 
October 28, 2011
 
November 7, 2011
 
November 21, 2011
 
Quarterly Cash
 
$  0.25
 
$      883.1
 
 
November 28, 2011
 
December 8, 2011
 
December 22, 2011
 
Special Cash
 
$  4.00
 
$ 14,137.9
 
 
 
12

 

On February 3, 2012, White River announced that its Board of Directors declared a quarterly cash dividend of 25 cents per share on its common stock to shareholders of record on February 13, 2012.  This quarterly dividend was paid on February 24, 2012.
 
White River intends to continue paying quarterly dividends at a rate of 25 cents per share.  However, the continuance of such dividend payments will depend on a number of factors, including White River’s capital levels, financial condition, and results of operations. Our Board of Directors continually reviews and evaluates White River’s cash dividend policy and retains the discretion to declare and pay dividends, subject to applicable legal requirements.
 
While Coastal Credit is not restricted by its operating agreement from making distributions, its line of credit restricts the payment of cash distributions to 80% of Coastal Credit’s pre-tax income for the prior 12 months unless written approval from its lender is received to exceed such restriction. Coastal Credit’s ability to receive the necessary approval is largely dependent upon its portfolio performance, and Coastal Credit may not be able to obtain the necessary approvals in the future for distributions to White River that would enable White River to pay cash dividends to its shareholders.
 
 
Summary of Transfer Restrictions and Related Provisions
 
General
 
The following is a summary of the material transfer restrictions set forth in Article 10 of White River’s articles of incorporation. The following summary is not complete. The transfer restrictions apply to transfers of White River’s common stock and any other instrument that would be treated as “stock,” as determined under applicable Treasury Regulations. The transfer restrictions will apply until the earlier of:
 
·  
the repeal by the Internal Revenue Service of the NOL carryforward limitations in the Code if White River’s board of directors determines the transfer restrictions are no longer necessary for the preservation of the tax benefits; and

·  
the beginning of a taxable year of White River to which White River’s board determines that no tax benefits may be carried forward.

However, White River’s board of directors will have the power to extend the expiration date of the transfer restrictions if it determines in writing that such action is reasonably necessary or desirable to preserve the tax benefits or to accelerate the expiration date if it determines in writing that the continuation of the transfer restrictions is no longer reasonably necessary for the preservation of the tax benefits. This power is vested in White River’s board of directors to ensure that White River retains the power to make, in light of all relevant circumstances, including positions that might be taken by tax authorities and contested by White River, the complex determination whether the tax benefits have been fully used or are otherwise available.
 
 
Prohibited Transfers
 
The transfer restrictions generally prohibit any conveyance, from one person to another, by any means, of legal or beneficial ownership, directly or indirectly, of any class of White River stock including indirect transfers of White River stock, accomplished by transferring interests in other entities that own White River stock, to the extent that the transfer, if effective:
 
·  
would create a new “public group” of White River. For example, the transfer of stock by an existing 5-percent shareholder to the public would be deemed to result in the creation of a separate, segregated “public group” that would be a new 5-percent shareholder;

 
13

 

·  
would give rise to a “prohibited ownership percentage,” which is defined by reference to complex federal tax laws and regulations, but generally means any direct or indirect ownership that would cause any person, including a “public group” as defined in the NOL carryforward limitations, to be considered a 5-percent shareholder of White River. By way of example, if shareholder A owns 4% of White River’s outstanding shares of common stock, and shareholder B attempted to sell 2% of White River’s outstanding shares to shareholder A, the transfer restrictions would prohibit the sale of approximately 1.1% of the shares out of the 2% attempted to be sold; or

·  
would increase the ownership percentage of any person, including a public group that is already a 5-percent shareholder of White River. Therefore, no shareholder will be permitted to sell any shares to 5-percent holders or their affiliates without board approval.

White River will be entitled to require, as a condition to the registration of any transfer of stock, that the proposed transferee furnish to White River all information reasonably requested by it with respect to all the direct and indirect legal or beneficial ownership interest in, or options to acquire, stock of the proposed transferee and its affiliates. White River’s Articles and Code of By-laws provide for specific shareholder ownership disclosure procedures as an additional measure available to White River to protect against prohibited transfers.
 
 
Exemptive Power of White River’s Board
 
White River’s board of directors has the power to approve any otherwise prohibited transfer, conditionally or unconditionally, if it determines, in its discretion, that a specific proposed transaction will not jeopardize White River’s full use of the tax benefits. In addition, White River’s board of directors has the power to waive any of the transfer restrictions in any instance where it determines that a waiver would be in the best interests of White River despite the effect of the waiver on the tax benefits.
 
 
Consequences of Purported Prohibited Transfer
 
Unless approved by White River’s board of directors, any attempted transfer in excess of the shares of White River stock that could be transferred without restriction will be void and will not be effective to transfer ownership of such excess shares. Further, the purported acquiror of the excess shares will not be entitled to any rights as a shareholder of White River with respect to the excess shares.
 
In the case of an attempted transfer that creates a new 5-percent shareholder, increases the ownership of an existing 5-percent shareholder, or causes a person or public group to become a new 5-percent shareholder, White River will have the right to demand that the new 5-percent shareholder or existing 5-percent shareholder, as the case may be, transfer any certificate or other evidence of purported ownership of the prohibited shares within the party’s possession or control, along with any dividends or other distributions received on the prohibited shares from White River, to an agent designated by White River who will be required to sell the prohibited shares in an arm’s-length transaction, in the public market, if possible, but in any event consistent with applicable law. The agent will be required to pay the sale proceeds in excess of the sum of the agent’s expenses plus the purchase price paid by the purported acquiror for the prohibited shares (or the fair market value of the prohibited shares if they were the subject of a gift or inheritance in favor of the purported acquiror), as well as all prohibited distributions, to a tax-exempt charitable organization designated by White River. If the purported acquiror has sold the prohibited shares to an unrelated party in an arm’s-length transaction, the purported acquiror will be deemed to have done so for the agent, who will have the right to allow the purported acquiror to retain a portion of the resale proceeds not exceeding the amount that the agent would have been required to remit to the purported acquiror out of the proceeds of a resale by the agent. Any purported transfer of the prohibited shares by the purported acquiror, other than a transfer that is described in the preceding sentences of this paragraph and that does not itself violate the transfer restrictions, will not be effective to transfer any ownership of the prohibited shares.

 
14

 
 
In addition to the powers of White River’s board of directors described above, if the board determines that a purported prohibited transfer or other action in violation of the transfer restrictions has occurred or is proposed, it may take such action as it deems advisable to prevent or refuse to give effect to such purported transfer or other action, including refusing to give effect to the purported transfer or other action on White River’s books or instituting injunctive proceedings.
 
If any person knowingly violates the transfer restrictions or knowingly causes any entity under such person’s control to do so, such person and, if applicable, the controlled entity will be jointly and severally liable to White River in such amount as will put White River in the same financial position, on an after-tax basis, as it would have been had such violation not occurred.
 
With respect to any conveyance of White River common stock that does not involve a transfer of “securities” of White River within the meaning of the Indiana Business Corporation Law, but that would create a new 5-percent shareholder, increase the ownership of an existing 5-percent shareholder or create a new public group, the following procedure will apply. The person or group will not be required to dispose of any interest that is not a security of White River, but will be deemed to have disposed of, and will be required to dispose of, sufficient shares, simultaneously with the transfer, to cause the person or group not to be in violation of the transfer restrictions. The shares will be disposed of through the agent under the provisions summarized above, with the maximum amount payable to the prohibited party from the proceeds of sale by the agent being the fair market value of the prohibited shares at the time of the prohibited transfer.
 
 
Other Powers of White River’s Board
 
White River’s board of directors has the power:
 
·  
to accelerate or extend the expiration date of the transfer restrictions, modify the definitions of any terms set forth in White River’s articles of incorporation with respect to the transfer restrictions or conform certain provisions to make them consistent with any future changes in federal tax law, in the event of a change in law or regulation or if it otherwise believes such action is in the best interests of White River, provided White River’s board of directors determines in writing that such action is reasonably necessary or desirable to preserve the tax benefits or that continuation of the transfer restrictions is no longer reasonably necessary for the preservation of the tax benefits;

·  
to adopt by-laws, regulations and procedures, not inconsistent with the transfer restrictions, for purposes of determining whether any acquisition of White River common stock would jeopardize the ability of White River to preserve and use the tax benefits and for the orderly application, administration and implementation of the transfer restrictions; and

·  
to administer, interpret and make calculations under the transfer restrictions, which power it may delegate in whole or in part to a committee of White River’s board of directors, and which actions shall be final and binding on all parties if made in good faith.

 
15

 

Disclosure Procedures
 
The following is a summary of the shareholder disclosure and ownership procedures adopted by White River’s board of directors and set forth in Article III, Section 14 of White River’s Code of By-laws, in accordance with authority and direction granted in Section 6.08 of White River’s Articles of Incorporation. The following is a summary and does not completely restate the provisions of Article III, Section 14 of the Code of By-laws. You should read Article III, Section 14 of the Code of By-laws in its entirety.
 
The shareholder disclosure and ownership procedures have the following purposes:
 
·  
to preserve important characteristics of White River for federal income tax purposes and, in particular, the NOLs;

·  
to protect White River and its shareholders against undisclosed efforts to assume or influence control of White River, its operations and policies; and

·  
to facilitate communication among White River and its shareholders.

The disclosure and ownership procedures apply to all holders and beneficial owners of White River’s outstanding shares of common stock. “Beneficial owner” generally refers to a person to whom the economic value of the shares of common stock ultimately inures and who has the power directly or indirectly to dispose of the shares of common stock.
 
From the date shares of common stock were first issued by White River until December 31, 2015, every beneficial owner of more than 4.5% of the outstanding shares of common stock within thirty (30) days after the end of each fiscal quarter, shall give written notice to White River stating the name and address of such owner, the number of shares beneficially owned and a description of the manner in which such shares are held. In addition, each such beneficial owner must provide additional ownership information reasonably requested by White River in order to determine the effect, if any, of such beneficial ownership on White River’s federal income tax characteristics (including ownership changes that have occurred or may occur for purposes of Section 382 of the Code), or on control of White River’s outstanding shares, or to ensure compliance with the Code of By-laws.
 
The disclosure procedures also require each person who is a beneficial owner of shares and, to the extent permitted by law, each person (including the shareholder of record) holding shares for a beneficial owner or as nominee to provide or confirm to White River such information relating to a beneficial owner’s present and past beneficial ownership of shares or changes in that ownership to the extent the information is in the person’s possession or can be acquired without unreasonable expense. White River may request this information, in good faith, in order to determine the effect, if any, on White River’s federal income tax characteristics (including ownership changes that have occurred or may occur for purposes of Section 382 of the Code) or on control of White River’s outstanding shares, or to determine compliance with requirements of any taxing authority or governmental authority, or to determine compliance with White River’s Articles of Incorporation or Code of By-laws.
 
The procedures do not require information to be reported that a beneficial owner has previously reported to White River or that has been previously reported on the beneficial owner’s behalf. If there has been no change in information previously reported, a person does not need to report it again unless White River requests confirmation. The procedures also will not require the disclosure of the names of the beneficial owners of a private trust created in good faith and not for the purpose of circumventing the White River Articles of Incorporation or Code of By-laws.

 
16

 

Disclosure Compliance
 
To ensure compliance with the disclosure procedures, the following sanctions are available to White River:
 
Distributions Withheld. White River shall withhold payment of any dividend or distribution otherwise payable in respect of shares (or property or securities into which such shares may be converted or for which they may be exchanged in a merger or share exchange transaction) if the beneficial owner of the shares has failed, or White River reasonably believes it has failed, to comply with these disclosure procedures. Such distributions or property shall be payable only at such time as the subject beneficial owner has complied with the disclosure procedures. However, if the distribution is to be made with respect to subscription rights or similar time-sensitive rights that required action or exercise by the beneficial owner before a time that has passed or elapsed, such rights shall be deemed expired and the beneficial owner shall be deemed to have elected to forfeit such rights.
 
Vote Disregarded. White River shall disregard the affirmative vote on any action by shareholders on any matter, whether at a meeting or by written consent, purported to be cast in respect of shares if the holder or beneficial owner of the shares has failed, or White River reasonably believes it has failed, to comply with these disclosure procedures, unless such vote is cast in a manner consistent with a recommendation of the board of directors in respect of such matter. These shares will still be counted, however, in determining the presence of a quorum if the shares are represented in person or by proxy at a meeting of shareholders.
 
Remedial Transfer. If a beneficial owner fails to comply with the disclosure procedures, and White River delivers a compliance demand notice to the nominee or holder of record of the shares, then at or before the close of business on the date ten (10) business days following delivery of the notice, the nominee or holder of record shall effect the disposition of beneficial ownership by the non-compliant beneficial owner of the shares and deliver a “Disposition Certificate” to White River. The Disposition Certificate certifies to White River that the interest of the non-compliant beneficial owner has been effectively transferred and that everything required to be disclosed has been disclosed. If the disposition of shares is not effected or a Disposition Certificate is not timely delivered, then White River may require the nominee or record holder of such shares to whom the compliance demand notice was delivered to effect a remedial transfer whereby the affected shares would be sold by an independent agent.
 
Additional Remedies. The board of directors of White River is also authorized to take any other action it deems necessary or advisable to protect White River and the interests of its shareholders, including actions to protect and preserve White River’s status under Section 382 of the Code. This action may include a decision to exclude any shareholder the board reasonably believes has failed to comply with the disclosure procedures from any offering of White River securities that is otherwise made available to shareholders.
 
 
Anti-Takeover Effect of Transfer Restrictions and Disclosure Procedures
 
The transfer restrictions:
 
·  
may have the effect of impeding the attempt of a person or entity to acquire a significant or controlling interest in White River;

·  
may render it more difficult to effect a merger or similar transaction even if such transaction is favored by a majority of the independent shareholders of White River; and

·  
may serve to entrench management.

 
17

 

In addition to the transfer restrictions and disclosure procedures, White River will be subject to certain other provisions of White River’s articles of incorporation, to which we are currently subject, that may have the effect of discouraging a takeover or similar transaction, including the authority, vested in White River’s board of directors, to issue up to three million shares of preferred stock and to fix the preferences and rights thereof.
 
The purpose of the transfer restrictions and disclosure procedures is to help preserve the tax benefits rather than to have an anti-takeover effect, which is an incidental result.
 

Purchase of Equity Securities by White River and Affiliated Purchasers

On November 11, 2009, the Board of Directors reauthorized White River’s previously announced share repurchase program. Under this program, White River was authorized to repurchase up to 500,000 shares of its outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions.  White River has repurchased all 500,000 shares of its outstanding common stock under the program for $7.7 million. Information pertaining to the shares repurchased during 2011 under this program is as follows:
 
 
Period
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares that May Yet be Purchased Under the Program
 
                           
 
January 1, 2011 - March 31, 2011
    100,479     $ 18.50       100,479       17,571  
 
April 1, 2011 - June 30, 2011
        $             17,571  
 
July 1, 2011 - September 30, 2011
    17,571     $ 18.73       17,571        
 
October 1, 2011 - December 31, 2011
        $              
        118,050     $ 18.53       118,050          

 
On August 11, 2011, White River announced that its Board of Directors approved a new program to repurchase, from time to time and subject to market conditions, up to 250,000 shares of White River’s outstanding common stock, on the open market or in privately negotiated transactions.  As of December 31, 2011, White River has repurchased 62,829 shares of its outstanding common stock under the program for $1.2 million. Information pertaining to the shares repurchased during 2011 under this program is as follows:
 
 
Period
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares that May Yet be Purchased Under the Program
 
                           
 
January 1, 2011 - March 31, 2011
        $              
 
April 1, 2011 - June 30, 2011
        $              
 
July 1, 2011 - September 30, 2011
    62,829     $ 19.40       62,829       187,171  
 
October 1, 2011 - December 31, 2011
        $             187,171  
        62,829     $ 19.40       62,829          
 
 
18

 

White River did not repurchase any shares under this program during any month in the fourth quarter of 2011.
 
 
ITEM 6. SELECTED FINANCIAL DATA
 
Not applicable
 
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
General
 
This section is intended to provide an understanding of the financial performance of White River through a discussion of the factors affecting White River’s financial condition at December 31, 2011 and 2010, and White River’s consolidated results of operations for the years ended December 31, 2011 and 2010. This section should be read in conjunction with White River’s consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this document. In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. See “Discussion of Forward-Looking Statements.”
 
 
Critical Accounting Policies
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. White River believes that the following represents the material critical accounting policies used in the preparation of its consolidated financial statements. Actual results could differ significantly from estimates.
 
 
Allowance for Loan Losses – Finance Receivables
 
Provisions for loan losses are charged to operations in amounts sufficient to maintain the allowance for loan losses at a level considered adequate to cover probable credit losses inherent in finance receivables.
 
The allowance for loan losses is established systematically by management based on the determination of the amount of probable credit losses inherent in the finance receivables as of the reporting date. Coastal Credit reviews charge off experience factors, delinquency reports, historical collection rates and other information in order to make the necessary judgments as to credit losses inherent in the portfolio as of the reporting date. Assumptions regarding probable credit losses are reviewed quarterly and may be impacted by actual performance of finance receivables and changes in any of the factors discussed above. Should the credit loss assumptions increase, there could be an increase in the amount of allowance for loan losses required, which could decrease the net carrying value of finance receivables and increase the provision for loan losses recorded on the consolidated statements of operations. Coastal Credit believes that the existing allowance for loan losses is sufficient to absorb probable finance receivable losses.

 
19

 

Income Taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, their respective tax basis and net operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
The ultimate realization of the deferred tax asset depends on White River’s ability to generate sufficient taxable income in the future and its ability to avoid an ownership change for tax purposes. The valuation allowance has been derived pursuant to the provisions of ASC Topic No. 740, Income Taxes, and reduces the total deferred tax asset to an amount that will “more likely than not” be realized (see Note 8 to the consolidated financial statements). As of December 31, 2011, there was no liability recorded for unrecognized tax benefits.
 
 
New Accounting Pronouncements
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 will supersede some of the guidance in Accounting Standards Codification Topic 220. The main provisions of this ASU provide that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements: (i) a single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income; (ii) in a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The option in current GAAP that permits the presentation of other comprehensive income in the statement of changes in equity has been eliminated. This ASU is effective beginning with the first quarter of 2012 and will have no material impact on the White River consolidated financial statements.
 
In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No 2011-05”.  ASU 2011-12 delayed the effective date of certain requirements of ASU 2011-05 related to the presentation of reclassifications of items out of accumulated other comprehensive income.
 
 
Results of Operations
 
The Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
 
Net income was $9.5 million, or $2.64 per diluted share, for the year ended December 31, 2011, compared to $7.1 million, or $1.84 per diluted share, for the year ended December 31, 2010. The increase in net income from the prior year is primarily due to an increase in interest on receivables of $2.4 million and a decrease of $2.4 million in provision for loan losses during 2011. This increase in net income was partially offset by an increase in total other expenses and income tax expense of $1.1 million and $0.8 million, respectively.
 
 
 
20

 
 
Discussion of Results
 
The following table presents consolidating financial information for White River for the periods indicated ($ in thousands):
 
 
For The Year Ended December 31, 2011
 
Coastal Credit
   
Corporate
and Other
   
Consolidated
 
                     
 
Interest on receivables
  $ 35,189     $ 2     $ 35,191  
                           
 
Interest expense
    (1,852 )     (43 )     (1,895 )
                           
 
Net interest margin
    33,337       (41 )     33,296  
                           
 
Provision for loan losses
    (3,988 )     (6 )     (3,994 )
                           
 
Net interest margin (deficit) after provision for loan losses
    29,349       (47 )     29,302  
                           
 
OTHER REVENUES (EXPENSES):
                       
 
Salaries and benefits
    (8,648 )     (748 )     (9,396 )
 
Operating expenses
    (3,257 )     (1,632 )     (4,889 )
 
Change in fair market valuation of creditor liabilities
          43       43  
 
Other income (expense)
    (383 )     1       (382 )
                           
 
Total other expenses
    (12,288 )     (2,336 )     (14,624 )
                           
 
Income (loss) before income taxes
  $ 17,061     $ (2,383 )   $ 14,678  
                           
                           
 
For The Year Ended December 31, 2010
 
Coastal Credit
   
Corporate
and Other
   
Consolidated
 
                           
 
Interest on receivables
  $ 32,808     $ 17     $ 32,825  
                           
 
Interest expense
    (1,318 )     (174 )     (1,492 )
                           
 
Net interest margin
    31,490       (157 )     31,333  
                           
 
Recovery (provision) for loan losses
    (6,426 )     72       (6,354 )
                           
 
Net interest margin (deficit) after recovery (provision) for loan losses
    25,064       (85 )     24,979  
                           
 
OTHER REVENUES (EXPENSES):
                       
 
Salaries and benefits
    (8,290 )     (707 )     (8,997 )
 
Operating expenses
    (3,164 )     (1,443 )     (4,607 )
 
Change in fair market valuation of creditor liabilities
          179       179  
 
Gain from deficiency account sale
          37       37  
 
Other income (expense)
    (200 )     23       (177 )
                           
 
Total other expenses
    (11,654 )     (1,911 )     (13,565 )
                           
 
Income (loss) before income taxes
  $ 13,410     $ (1,996 )   $ 11,414  

 
The Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010 - Consolidated
 
Interest on receivables increased 7.2% to $35.2 million compared to $32.8 million for the years ended December 31, 2011 and 2010, respectively. This increase is a result of an increase in the Coastal Credit average finance receivable, net of unearned finance charge income and discounts and fees to $113.3 million during the year ended December 31, 2011 as compared to $100.9 million during the year ended December 31, 2010.
 
Interest expense was $1.9 million for the year ended December 31, 2011 compared to $1.5 million for the year ended December 31, 2010. The average line of credit was $62.3 million and $42.2 million for the years ended December 31, 2011 and 2010, respectively.
 
Provision for loan losses was $4.0 million compared to $6.4 million for the years ended December 31, 2011 and 2010, respectively. Provision for loan losses is charged to income to bring Coastal Credit’s allowance for loan losses to a level which management considers adequate to absorb probable credit losses inherent in the portfolio of finance receivables.

 
21

 

Salaries and benefits increased to $9.4 million for the year ended December 31, 2011 compared to $9.0 million for the year ended December 31, 2010. This increase was primarily a result of performance based awards in addition to an increase in the number of employees at Coastal Credit during 2011.
 
Other operating expenses increased to $4.9 million for the year ended December 31, 2011 compared to $4.6 million for the year ended December 31, 2010. Coastal Credit operating expenses remained relatively unchanged between these periods. Corporate and Other operating expenses increased $0.2 million between these periods.
 
Income tax expense was $5.1 million for the year ended December 31, 2011 compared to $4.3 million for the year ended December 31, 2010. The expense is based on the estimated effective tax rates for 2011 and 2010, respectively. Upon completion of its 2010 federal and state income tax returns in September 2011, White River determined that its estimated statutory tax rate, used to tax effect its temporary differences, had changed based on the 2010 state apportionment results.  Such new apportionments were the result of changes in volumes of business in various states which resulted in an increase in the estimated state tax effective rate which increased the overall statutory rates applied to White River’s temporary differences. This change in the effective rate resulted in an increase to the net deferred tax asset of approximately $176,000 which reduced income tax expense for the year ended December 31, 2011.
 
 
Financial Condition as of December 31, 2011 and 2010
 
Finance Receivables, Net
 
Finance receivables, net increased 18.6% to $114.7 million at December 31, 2011 as compared to $96.7 million at December 31, 2010. The finance receivables, net reflect the balances at Coastal Credit.  The increase is a result of Coastal Credit’s growth initiatives and the exploitation of market opportunities.  In this regard, White River and Coastal Credit, in connection with their managements’ periodic analysis of strategic options, from time to time review opportunities to purchase larger finance receivable portfolios from other financial institutions and finance companies, in addition to Coastal Credit’s ordinary course purchases of receivable contracts from franchised and independent dealers.
 
A significant number of contracts acquired by Coastal Credit are contracts made with borrowers who are in the United States military. As of December 31, 2011, 55.4% of the Coastal Credit receivables were with borrowers who are in the United States military as compared to 47.7% as of December 31, 2010. Coastal Credit believes that having in the portfolio a significant percentage of contracts for which the borrowers are United States military personnel contributes to lower payment delinquency and greater collection personnel efficiencies. Coastal Credit requests that all borrowers who are in the military use the military allotment system to make payments on their contracts. Under this allotment system, the borrower authorizes the military to make a payroll deduction for the amount of the borrower’s monthly contract payment and to direct this deduction payment to Coastal Credit on behalf of the borrower. Delinquency of payments on contracts paid by allotment historically has been less than delinquency of payments on contracts not paid by allotment. As a result, the collection effort associated with the military contracts requires substantially less time, allowing Coastal Credit’s collection staff to focus on non-military contracts.
 
 
Accrued Interest Payable
 
Accrued interest payable was $0.2 million at December 31, 2011 compared to $0.1 million at December 31, 2010.

 
22

 

Liquidity and Capital Resources for the Years Ended December 31, 2011 and 2010
 
Net cash provided by operating activities was $18.4 million for the year ended December 31, 2011 compared to $18.5 million for the year ended December 31, 2010.
 
Net cash used in investing activities was $22.2 million for the year ended December 31, 2011 compared to $14.5 million for the year ended December 31, 2010. This change was primarily the result of the increase in finance receivables acquired by Coastal Credit during 2011 compared to 2010.
 
Net cash provided by financing activities was $3.8 million for the year ended December 31, 2011 compared to net cash used in financing activities of $7.5 million for the year ended December 31, 2010. Net cash flows provided by financing activities for the year ended December 31, 2011 primarily resulted from the $25.0 million net increase in the line of credit. This activity was partially offset by the $3.4 million repurchase of White River common stock and $17.8 million of cash dividends paid. Net cash flows used in financing activities for the year ended December 31, 2010 primarily resulted from the $4.8 million repurchase of White River common stock and $18.7 million of cash dividends paid. This 2010 activity was partially offset by the net increase in the line of credit of $16.0 million.
 
At December 31, 2011, White River and its subsidiaries had cash and cash equivalents of $3.2 million compared to $3.3 million at December 31, 2010.
 
Coastal Credit has a revolving credit facility from a lending institution with a maximum borrowing limit at December 31, 2011 of $100.0 million. The original maturity date on the line of credit was December 31, 2011, but pursuant to a Fourth Amendment to Finance Agreement executed on November 9, 2011 between Coastal Credit and its line of credit lender, which became effective January 1, 2012, the maturity date has been extended for three years to December 31, 2014. The interest rate is the 1 month London Interbank Offered Rate (“LIBOR”) plus 2.60%.  As of December 31, 2011, Coastal Credit had $81.0 million of indebtedness outstanding under this facility as compared to $56.0 million as of December 31, 2010. Coastal Credit increased its draws on the line of credit to purchase finance receivables and to fund White River’s stock repurchase programs and dividend payments during 2011. Total availability under the line of credit at December 31, 2011 was $100.0 million based upon the level of eligible collateral, with $19.0 million available in excess of the amount utilized at December 31, 2011. The credit facility is secured by substantially all of the assets of Coastal Credit. In addition, White River has provided an unconditional corporate guaranty. Coastal Credit must maintain specified financial ratios within guidelines established by the lender. Interest is paid monthly at a variable rate, based on meeting certain financial criteria. The average rate during each of the months of December, 2011 and 2010 was LIBOR plus 2.60% which equated to 2.87% and 2.86%, respectively. There is an annual commitment fee of 1/8 of 1% on the average daily unused commitment. Pursuant to the Fourth Amendment, effective January 1, 2012, this annual commitment fee remained at 1/8 of 1% but will increase to 1/2 of 1% if the average unused portion of the commitment for such calendar month is less than or equal to 50% of the commitment. In the event of a significant pay down or an earlier retirement of the revolver commitment, Coastal Credit would sustain certain prepayment penalties. This facility limits distributions Coastal Credit may make to White River to 80% of Coastal Credit’s pre-tax net income.
 
White River’s sources of liquidity, as the parent company, are limited and consist of cash on hand and distributions by Coastal Credit (subject to restrictions under Coastal Credit’s credit facility).
 
On November 11, 2009, the Board of Directors reauthorized White River’s previously announced share repurchase program. Under this program, White River was authorized to repurchase up to 500,000 shares of its outstanding common stock, from time to time and subject to market conditions, on the open market or in privately negotiated transactions.  As of December 31, 2011, White River has repurchased all 500,000 shares of its outstanding common stock under the program for $7.7 million.
 

 
23

 

On August 11, 2011, White River announced that its Board of Directors approved a new program to repurchase, from time to time and subject to market conditions, up to 250,000 shares of White River’s outstanding common stock, on the open market or in privately negotiated transactions. As of December 31, 2011, White River has repurchased 62,829 shares of its outstanding common stock under the program for $1.2 million.
 
The following table summarizes the dividends declared during 2010 and 2011 by White River’s Board of Directors:
 
 
Date Dividend Declared
 
Record Date
 
Payment Date
 
Dividend Type
 
Cash Dividend Per Share
 
Total Divided Paid (in thousands)
                         
 
February 22, 2010
 
March 3, 2010
 
March 12, 2010
 
Quarterly Cash
 
$  0.25
 
$      995.6
 
 
May 6, 2010
 
May 17, 2010
 
May 28, 2010
 
Quarterly Cash
 
$  0.25
 
$      980.7
 
 
August 2, 2010
 
August 12, 2010
 
August 26, 2010
 
Quarterly Cash
 
$  0.25
 
$      938.7
 
 
November 2, 2010
 
November 12, 2010
 
November 22, 2010
 
Quarterly Cash
 
$  0.25
 
$      938.7
 
 
November 30, 2010
 
December 9, 2010
 
December 21, 2010
 
Special Cash
 
$  4.00
 
$ 14,967.0
 
 
February 16, 2011
 
February 25, 2011
 
March 2, 2011
 
Quarterly Cash
 
$  0.25
 
$      926.7
 
 
May 5, 2011
 
May 16, 2011
 
May 31, 2011
 
Quarterly Cash
 
$  0.25
 
$      903.2
 
 
August 1, 2011
 
August 11, 2011
 
August 25, 2011
 
Quarterly Cash
 
$  0.25
 
$      903.2
 
 
October 28, 2011
 
November 7, 2011
 
November 21, 2011
 
Quarterly Cash
 
$  0.25
 
$      883.1
 
 
November 28, 2011
 
December 8, 2011
 
December 22, 2011
 
Special Cash
 
$  4.00
 
$ 14,137.9
 

 
On February 3, 2012, White River announced that its Board of Directors declared a quarterly cash dividend of 25 cents per share on its common stock to shareholders of record on February 13, 2012.  This quarterly dividend was paid on February 24, 2012.
 
 
Asset Quality
 
Set forth below is certain information concerning the credit loss experiences on the fixed rate retail automobile receivables of White River. There can be no assurance that future net credit loss experience on the receivables will be comparable to that set forth below. See “Discussion of Forward-Looking Statements.”
 
 
 
24

 
 
Finance Receivables – Coastal Credit
 
Delinquency experience of finance receivables at Coastal Credit, including unearned interest ($ in thousands):
 
     
December 31,
 
     
2011
   
2010
 
                           
 
Finance receivables - gross balance
  $ 137,277           $ 119,788        
                               
 
Delinquencies:
                           
 
30-59 days
  $ 1,317       1.0 %   $ 1,209       1.0 %
 
60-89 days
    689       0.5 %     538       0.4 %
 
90+ days
    697       0.5 %     354       0.3 %
 
Total delinquencies
  $ 2,703       2.0 %   $ 2,101       1.8 %

 
As a result of the nature of the customers in Coastal Credit’s portfolio, Coastal Credit considers the establishment of an adequate allowance for loan losses to be critical to its financial results. Coastal Credit has an allowance for loan losses that is calculated independent of the aggregate acquisition discounts and fees on finance receivables. Coastal Credit’s allowance for loan losses is based upon the historical rate at which (1) current loans, (2) contracts in a 30, 60 and 90+ day delinquency state and (3) loans ineligible for its borrowing line, have defaulted. These historical rates are evaluated and revised on a quarterly basis for current conditions. See “Discussion of Forward-Looking Statements.”
 
Allowance for loan losses of finance receivables ($ in thousands):
 
     
Years Ended December 31,
 
     
2011
   
2010
 
                   
 
Balance at beginning of period
  $ 8,153     $ 8,085  
 
Charge-offs
    (6,964 )     (8,488 )
 
Recoveries
    2,526       2,130  
 
Provision for loan losses
    3,988       6,426  
                   
 
Balance at the end of the period
  $ 7,703     $ 8,153  
                   
 
Finance receivables, net of unearned finance charges
  $ 135,514     $ 117,837  
                   
 
Allowance for loan losses as a percent of finance receivables, net of unearned finance charges
    5.68 %     6.92 %
                   
 
Net charge-offs as a percent of finance receivables, net of unearned finance charges
    3.27 %     5.40 %
                   
 
Allowance for loan losses as a percent of net charge-offs
    173.57 %     128.23 %
 
 
25

 
 
Market Developments
 
As the financial and credit markets continue to struggle to recover from the 2007-2009 recession and financial crisis, some auto finance companies have experienced improved funding opportunities and increased originations, while others continue to experience limited sources of liquidity.  We believe White River is well positioned to continue operations and grow the company responsibly based on the following factors:
 
·  
Coastal Credit is not dependent on the securitization market for financing.

·  
At December 31, 2011, there was $19.0 million available, in excess of the amount utilized, from the line of credit.

·  
A Fourth Amendment to Finance Agreement executed on November 9, 2011 between Coastal Credit and its line of credit lender, which became effective January 1, 2012, extended the maturity date of Coastal Credit’s line of credit three years to December 31, 2014.

·  
White River is well capitalized with an equity to asset ratio of 46.2% as of December 31, 2011.

While there is never any guarantee White River will not be faced with the constrained financing scenarios seen by other auto finance companies during and since the recession, we believe White River is well positioned in this uncertain economic environment, and we expect to be able to fund normal business operations and meet our general liquidity needs for the next 12 months through access to the line of credit, cash flows from operations, and our other funding sources.
 
In addition, on July 21, 2010, President Obama signed into law the Dodd-Frank Act, which significantly changed the regulation of financial institutions and the financial services industry. Many provisions of the Dodd-Frank Act went into effect on July 21, 2011.  The Dodd-Frank Act includes provisions affecting large and small financial industry participants alike, including several provisions that will profoundly affect how certain companies providing consumer financial products and services, such as Coastal Credit, will be regulated in the future. Among other things, the Dodd-Frank Act established the CFPB as an independent entity within the Federal Reserve, which has the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including non-bank commercial companies in the business of extending credit and servicing consumer loans. The Dodd-Frank Act contains numerous other provisions affecting financial industry participants of all types, many of which may have an impact on the operating environment of the Company in substantial and unpredictable ways. Consequently, the Dodd-Frank Act is likely to affect our cost of doing business, it may limit or expand our permissible activities, and it may affect the competitive balance within our industry and market areas. The nature and extent of future legislative and regulatory changes affecting financial institutions and non-bank commercial companies, including as a result of the Dodd-Frank Act, is very unpredictable at this time. The Company’s management continues to actively monitor the implementation of the Dodd-Frank Act and the regulations promulgated thereunder and assess its probable impact on the business, financial condition, and results of operations of the Company. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Company in particular, continues to be uncertain.
 

 
26

 

Discussion of Forward-Looking Statements
 
The preceding Management’s Discussion and Analysis contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Forward-looking statements are also made elsewhere in this report. White River publishes other forward-looking statements from time to time. Statements that are not historical in nature, including those containing words such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend,” and similar expressions, are intended to identify forward-looking statements. We caution you to be aware of the speculative nature of “forward-looking statements.” Although these statements reflect White River’s good faith belief based on current expectations, estimates and projections about (among other things) the industry and the markets in which White River operates, they are not guarantees of future performance. Whether actual results will conform to management’s expectations and predictions is subject to a number of known and unknown risks and uncertainties, including:
 
·  
the risks and uncertainties discussed in this Annual Report on Form 10-K;
 
·  
general economic, market, or business conditions;
 
·  
changes in economic variables, such as the availability of business and consumer credit, conditions in the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment and the levels of consumer confidence and consumer debt;
 
·  
changes in interest rates, the cost of funds, and demand for White River’s financial services;
 
·  
the level and volatility of equity prices, commodity prices, currency values, investments, and other market fluctuations and other market indices;
 
·  
changes in White River’s competitive position;
 
·  
White River’s ability to manage growth;
 
·  
the opportunities that may be presented to and pursued by White River;
 
·  
competitive actions by other companies;
 
·  
changes in laws or regulations, including the impact of current, pending and future legislation and regulations, including the impact of the Dodd-Frank Act and legislation regarding U.S. fiscal policy;
 
·  
changes in the policies of federal or state regulators and agencies; and
 
·  
other circumstances, many of which are beyond White River’s control.
 
Consequently, all of White River’s forward-looking statements are qualified by these cautionary statements. White River may not realize the results anticipated by management or, even if White River substantially realizes the results management anticipates, the results may not have the consequences to, or effects on, White River or its business or operations that management expects. Such differences may be material. Except as required by applicable laws, White River does not intend to publish updates or revisions of any forward-looking statements management makes to reflect new information, future events or otherwise.
 
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Not applicable.

 
27

 
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of
White River Capital, Inc.

We have audited the accompanying consolidated balance sheets of White River Capital, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of White River Capital, Inc. and subsidiaries as of December 31, 2011 and 2010 and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
 

/s/ McGladrey & Pullen LLP

Raleigh, North Carolina
March 9, 2012

 
28

 
 
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

   
December 31, 2011
   
December 31, 2010
 
ASSETS
           
             
Cash and cash equivalents
  $ 3,244     $ 3,287  
Finance receivables—net
    114,716       96,723  
Deferred tax assets—net
    36,489       40,914  
Other assets
    861       684  
                 
TOTAL
  $ 155,310     $ 141,608  
                 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
LIABILITIES:
               
Line of credit
  $ 81,000     $ 56,000  
Accrued interest
    183       130  
Other payables and accrued expenses
    2,398       2,449  
                 
Total liabilities
    83,581       58,579  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS’ EQUITY:
               
Preferred Stock, without par value, authorized 3,000,000 shares; none issued and outstanding
           
Common Stock, without par value, authorized 20,000,000 shares; 3,534,480 and 3,706,759 issued and outstanding at December 31, 2011 and December 31, 2010, respectively
    174,328       177,403  
Accumulated deficit
    (102,599 )     (94,374 )
                 
Total shareholders’ equity
    71,729       83,029  
                 
TOTAL
  $ 155,310     $ 141,608  
                 
See notes to consolidated financial statements.
               
 
 
29

 
 
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)

   
Years Ended December 31,
 
   
2011
   
2010
 
INTEREST:
           
Interest on receivables
  $ 35,191     $ 32,825  
                 
Interest expense
    (1,895 )     (1,492 )
                 
Net interest margin
    33,296       31,333  
                 
Provision for loan losses
    (3,994 )     (6,354 )
                 
Net interest margin after provision for loan losses
    29,302       24,979  
                 
OTHER REVENUES (EXPENSES):
               
Salaries and benefits
    (9,396 )     (8,997 )
Other operating expenses
    (4,889 )     (4,607 )
Change in fair market valuation of creditor notes payable
    43       179  
Gain from deficiency account sale
          37  
Other expense
    (382 )     (177 )
                 
Total other expenses
    (14,624 )     (13,565 )
                 
INCOME BEFORE INCOME TAXES
    14,678       11,414  
                 
INCOME TAX EXPENSE
    (5,149 )     (4,335 )
                 
NET INCOME
  $ 9,529     $ 7,079  
                 
NET INCOME PER COMMON SHARE (BASIC)
  $ 2.64     $ 1.84  
                 
NET INCOME PER COMMON SHARE (DILUTED)
  $ 2.64     $ 1.84  
                 
BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    3,605,675       3,838,894  
                 
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    3,611,322       3,839,218  
                 
                 
See notes to consolidated financial statements.
               
 
 
30

 
 
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2011 AND 2010
(Dollars in thousands)

   
Number of Common Shares Outstanding
   
Common Stock
   
Accumulated Other Comprehensive Income
   
Accumulated Deficit
   
Total Shareholders’ Equity
 
                               
BALANCE—January 1, 2010
    3,997,506     $ 181,845     $ 3     $ (82,732 )   $ 99,116  
                                         
Comprehensive income:
                                       
Net income
                            7,079       7,079  
Net unrealized loss on beneficial interest in Master Trust
                    (4 )             (4 )
Tax effect of other comprehensive income
                    1               1  
                                         
Total comprehensive income
                                    7,076  
                                         
Common stock cash dividends
                            (18,721 )     (18,721 )
Common stock repurchased
    (314,950 )     (4,750 )                     (4,750 )
                                         
Stock-based compensation expense
    24,203       308                             308  
                                         
BALANCE—December 31, 2010
    3,706,759       177,403             (94,374 )     83,029  
                                         
Net income
                            9,529       9,529  
                                         
Common stock cash dividends
                            (17,754 )     (17,754 )
Common stock repurchased
    (180,879 )     (3,410 )                     (3,410 )
                                         
Stock-based compensation expense
    8,600       335                             335  
                                         
                                         
BALANCE—December 31, 2011
    3,534,480     $ 174,328     $     $ (102,599 )   $ 71,729  
 
 
See notes to consolidated financial statements.

 
31

 
 
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

   
Years Ended December 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 9,529     $ 7,079  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Accretion of other comprehensive income
          (5 )
Accretion of securitization discount
          (1 )
Provision for loan losses
    3,994       6,354  
Amortization and depreciation
    348       379  
Amortization of discount and interest accrued on creditor notes payable
    43       172  
Gain (loss) from disposition of equipment
    (3 )     7  
Deferred income taxes
    4,425       3,800  
Change in fair value of creditor notes payable
    (43 )     (179 )
Stock based compensation expense
    335       308  
Changes in assets and liabilities:
               
Accrued interest receivable and other assets
    (263 )     (156 )
Other payables and accrued expenses
    2       745  
Net cash provided by operating activities
    18,367       18,503  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of finance receivables
    (82,967 )     (67,178 )
Collections on finance receivables
    60,986       52,581  
Principal collections and recoveries on receivables held for investment
    (6 )     133  
Capital expenditures
    (259 )     (78 )
Net cash used in investing activities
    (22,246 )     (14,542 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Common stock repurchased
    (3,410 )     (4,750 )
Common stock cash dividend
    (17,754 )     (18,721 )
Net borrowing on line of credit
    25,000       16,000  
Net cash provided by (used in) financing activities
    3,836       (7,471 )
                 
DECREASE IN CASH AND CASH EQUIVALENTS
    (43 )     (3,510 )
CASH AND CASH EQUIVALENTS—Beginning of year
    3,287       6,797  
CASH AND CASH EQUIVALENTS—End of period
  $ 3,244     $ 3,287  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Income tax paid
  $ 722     $ 394  
Interest paid
  $ 1,799     $ 1,297  
 
 
See notes to consolidated financial statements.

 
32

 

WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
 
1.  GENERAL DISCUSSION
 
White River Capital, Inc. (“White River” or the “Company”) is a holding company for specialized indirect auto finance businesses, with one principal operating subsidiary, Coastal Credit LLC (“Coastal Credit”). Coastal Credit based in Virginia Beach, Virginia, is a specialized subprime auto finance company engaged in acquiring subprime auto receivables from both franchised and independent automobile dealers which have entered into contracts with purchasers of typically used, but some new, cars and light trucks.  Coastal Credit then services the receivables it acquires. Coastal Credit operates in 27 states through 15 offices.
 
Union Acceptance Company LLC (“UAC”), a now inactive subsidiary of White River, was a specialized auto finance company operating under a confirmed Second Amended and Restated Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Plan”), under which UAC must pay net proceeds from its residual interest in its receivables portfolios and other bankruptcy estate assets to creditors holding notes and claims under the Plan.  On January 5, 2007, the U.S. Bankruptcy Court for the Southern District of Indiana issued a final decree and closed UAC’s Chapter 11 bankruptcy case.  In April 2011, as a result of the marshalling of UAC’s remaining assets pursuant to its dissolution and winding-up, White River, UAC, and the remaining unsecured creditor of UAC entered into an agreement in which the parties acknowledged and agreed there were no further assets of UAC available to satisfy the remaining unpaid principal and accrued interest on the notes held by such creditor.  Pursuant to this agreement, the creditor further acknowledged and agreed that it received all payments from UAC under the notes to which it was entitled, and the notes held by the creditor were thereby cancelled.
 
In connection with UAC’s Plan of Reorganization and distributions and as a result of White River’s acquisition of UAC’s general unsecured claims and Subordinated Notes, UAC’s creditor notes payable ($ in thousands) were as follows at December 31, 2010:
 
     
December 31, 2010
 
     
Carrying Value
   
Contractual Remaining Owned by Debt Not White River
   
Total Contractual Remaining Debt
 
 
Restructured debt:
                 
 
Class 2A general unsecured claims
  $     $     $ 10  
 
Restructured senior notes
                 
 
Restructured subordinated notes
          1,541       14,176  
 
Senior accrual notes
                4,106  
 
Subordinated accrual notes
          431       3,964  
                           
 
Total creditor notes payable
  $     $ 1,972     $ 22,256  

 
UAC History
 
UAC had historically operated as a specialized finance company, engaged in (1) acquiring receivables in the form of retail installment sales contracts and installment loan agreements for the purchase of automobiles primarily from automobile dealerships and used car superstores (the “Receivables Acquisitions”) and (2) the servicing of such receivables by collecting payments due, remitting those payments to appropriate entities and collecting delinquent and defaulted accounts (“Servicing”).

 
33

 
 
On October 31, 2002, UAC filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Indiana, Indianapolis Division (the “Court”). This proceeding did not include UAC’s wholly owned subsidiaries. On November 7, 2002, UAC announced it would discontinue receivable acquisitions because it was not able to establish timely arrangements for further acquisition funding. UAC continued to manage its business as a debtor-in-possession as it prepared for reorganization under bankruptcy law.
 
On September 1, 2010, UAC voluntarily dissolved by filing a certificate of dissolution with the Indiana Secretary of State, and will continue to only carry on business appropriate to wind up and liquidate its business and affairs in accordance with Indiana law.  UAC expects to conclude its winding up process by the third quarter of 2012, at which time UAC’s existence as a business entity will cease.  UAC no longer materially contributes to the assets, liabilities, or results of operations of White River on a consolidated basis.
 
Acquisition of Coastal Credit, LLC
 
White River acquired 100% of the interests in Coastal Credit on August 31, 2005. Coastal Credit is a specialized subprime auto finance company engaged primarily in (1) acquiring retail installment sales contracts from both franchised and independent automobile dealers which have entered into contracts with purchasers of used and, to a much lesser extent, new cars and light trucks, and (2) servicing the contract portfolio. Coastal Credit commenced operations in Virginia in 1987 and was restructured as a limited liability company under the laws of the Commonwealth of Virginia in 1997. It conducts business in 27 states – Alaska, California, Colorado, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Nevada, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia and Washington – through its 15 branch locations.
 
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
The consolidated financial statements include the accounts of White River and its wholly owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and with the general practices of those in the consumer finance industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the valuation of deferred tax assets and the allowance for loan losses.
 
New Accounting Pronouncements— In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. The guidance requires new disclosures on the transfers of assets and liabilities between Level 1 (quoted prices in an active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers. Additionally, the guidance requires a roll forward of activities on purchases, sales, issuance, and settlements of the assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements). The guidance became effective with the reporting period beginning January 1, 2010, except for the disclosure on the roll forward activities for Level 3 fair value measurements, which became effective with fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on our consolidated financial statements.

 
34

 
 
In July 2010 new authoritative accounting guidance under ASC Topic No. 310, Receivables (“ASC 310”), amended prior guidance to provide a greater level of disaggregated information about the credit quality of loans and leases and the Allowance for Loan and Lease Losses (the “Allowance”).  The new authoritative guidance also requires additional disclosures related to credit quality indicators, past due information, and information related to loans modified in a troubled debt restructuring.  The new authoritative guidance amends only the disclosure requirements for loans and leases and the allowance.  White River adopted the period end disclosures provisions of the new authoritative guidance under ASC 310 in the reporting period ending December 31, 2010.  Adoption of the new guidance did not have an impact on the consolidated financial statements.  In January, 2011, the disclosures regarding Troubled Debt Restructuring activity was temporarily deferred and were effective for reporting periods after January 1, 2011, and will have no impact on the White River consolidated financial statements.
 
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 will supersede some of the guidance in Accounting Standards Codification Topic 220. The main provisions of this ASU provide that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements: (i) a single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income; (ii) in a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The option in current GAAP that permits the presentation of other comprehensive income in the statement of changes in equity has been eliminated. This ASU is effective beginning with the first quarter of 2012 and will have no material impact on the White River consolidated financial statements.
 
In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No 2011-05”.  ASU 2011-12 delayed the effective date of certain requirements of ASU 2011-05 related to the presentation of reclassifications of items out of accumulated other comprehensive income.
 
Cash and Cash Equivalents—White River considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
 
Finance Receivables—net—Finance receivables are recorded at cost, net of unearned finance charges, discounts and an allowance for credit losses. Coastal Credit purchases finance contracts from auto dealers without recourse, and accordingly, the dealer usually has no liability to Coastal Credit if the consumer defaults on the contract. This is the sole class of finance receivables and there is no off-balance sheet credit exposure related to these receivables.
 
Allowance for Loan Losses – Finance Receivables—Provisions for loan losses are charged to operations in amounts sufficient to maintain the allowance for loan losses at a level considered adequate to cover credit losses inherent in finance receivables.
 
The allowance for loan losses is established systematically by management based on the determination of the amount of credit losses inherent in the finance receivables as of the reporting date. All finance receivables of the Company are collectively evaluated for impairment. The Company reviews charge off experience factors, delinquency reports, historical collection rates and other information in order to make the necessary judgments as to credit losses inherent in the portfolio as of the reporting date.

 
35

 

The Company measures its credit exposure by determining credit risk profiles based on payment activity and contractual delinquency. In addition to contractually delinquent accounts, the Company also evaluates historical loss performance of other accounts in their final stages of collection, in the aggregate, in determining the allowance for loan losses. These accounts amounted to $0.9 million at both December 31, 2011 and 2010. Assumptions regarding probable credit losses are reviewed quarterly and may be impacted by actual performance of finance receivables and changes in any of the factors discussed above. Should the credit loss assumptions increase, there could be an increase in the amount of allowance for loan losses required, which could decrease the net carrying value of finance receivables and increase the provision for loan losses recorded on the consolidated statements of operations. The Company believes that the existing allowance for loan losses is sufficient to absorb probable finance receivable losses.
 
Charge off Policy – Finance Receivables—Coastal Credit’s policy is to charge off finance receivables against the allowance for loan losses in the month in which the installment contract becomes 60 days delinquent under recency terms and 180 days delinquent under contractual terms, if the vehicle has not been repossessed. If the vehicle has been repossessed, the receivable is charged off in the month the repossessed automobile is disposed of at public auction unless cash collections on the receivable are foreseeable in the near future. Receivables that are deemed uncollectible prior to the maximum charge off period are charged off immediately.
 
Income Recognition – Finance Receivables–Interest on receivables is recognized for financial reporting purposes using the interest method. Initial fees earned on add-on products such as collateral protection insurance, credit life insurance, road service plans and warranty products are recorded in income using the interest method. Late charges and deferment charges on contracts are recorded in income as collected. Cash received from loans that have previously been charged off is applied directly to the allowance for loan losses in the consolidated balance sheets. Discounts and fees, which consist primarily of non-refundable dealer acquisition discounts, are amortized over the term of the related finance receivables using the interest method and are removed from the consolidated balance sheets when the related finance receivables are charged off or paid in full. As a result of the Company’s charge-off policy, most accounts are charged off rather than being placed in nonaccrual status and thus any impact to the consolidated financial statements is immaterial.
 
Property, Equipment, and Leasehold Improvements—net—Property, equipment, and leasehold improvements are recorded at cost and included in other assets. Depreciation is determined primarily on straight-line methods over the estimated useful lives of the respective assets, ranging from 3 to 10 years.
 
Other Income—Other income represents refunds of dealer rebates, monies collected on previously charged-off receivables, and other miscellaneous income.
 
Income Taxes—Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, their respective tax basis and net operating loss and tax credit carryfowards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 
The ultimate realization of the deferred tax asset depends on White River’s ability to generate sufficient taxable income in the future and its ability to avoid an ownership change for tax purposes. The valuation allowance has been derived pursuant to the provisions of ASC Topic No. 740, Income Taxes, and reduces the total deferred tax asset to an amount that will “more likely than not” be realized.

 
36

 

Segment Information— White River is the holding company for Coastal Credit and UAC which are specialized auto finance companies. These subsidiaries are distinct legal entities and managed separately. Corporate and Other is the holding company and includes debt and interest expense related to the acquisition of Coastal Credit, professional fees related to holding activities of White River and the elimination of all inter-segment amounts, which generally relate to the holding activities of White River. UAC no longer materially contributes to the assets, liabilities, or results of operations of White River on a consolidated basis and is included in Corporate and Other.
 
Stock-Based Compensation—Stock-based compensation cost is based upon the grant-date fair value of share-based awards. White River recognizes compensation expense for awards with only service conditions on a straight-line basis over the requisite service period for the entire award.
 
Concentration of Credit Risk The Company maintains demand deposits with financial institutions, the balances of which from time to time exceed the federally insured amount.
 
The Company’s portfolio of finance receivables is with consumers living in various states across the United States as outlined above. Consequently, such consumers’ ability to honor their installment contracts may be affected by economic conditions in these areas. The Company has access to any collateral supporting these receivables through repossession. The Company’s finance receivables are collateralized by automobiles.
 
 
3.  FINANCE RECEIVABLES – NET
 
Coastal Credit
 
Coastal Credit’s typical borrower has a credit history that may fail to meet the lending standards of most banks, credit unions and captive automobile finance companies. Substantially all of Coastal Credit’s automobile contracts involve loans made to individuals with limited or impaired credit histories. Coastal Credit believes that its borrower credit profile is similar to that of its direct competitors in the subprime automobile finance business. Coastal Credit also believes that it’s underwriting criteria and branch network management system coupled with close senior management supervision enhances its risk management and collection functions.
 
In deciding whether to acquire a particular contract, Coastal Credit considers various factors, including:
 
·  
the applicant’s length of residence;
·  
the applicant’s current and prior job status;
·  
the applicant’s history in making other installment loan payments;
·  
the applicant’s payment record on previous automobile loans;
·  
the applicant’s current income and discretionary spending ability;
·  
the applicant’s credit history;
·  
the value of the automobile in relation to the purchase price;
·  
the term of the contract;
·  
the automobile make and mileage; and
·  
Coastal Credit’s prior experience with contracts acquired from the dealer.
 
Borrowers under the contracts typically make down payments, in the form of cash or trade-in, ranging from 5% to 20% of the sale price of the vehicle financed. The balance of the purchase price of the vehicle plus taxes, title fees and, if applicable, premiums are generally financed over a period of 36 to 54 months.
 
 
37

 
 
Coastal Credit Finance receivables – net outstanding were as follows ($ in thousands):
 
     
December 31,
 
     
2011
   
2010
 
               
 
Finance receivables, gross
  $ 137,277     $ 119,788  
 
Unearned finance charge income
    (1,763 )     (1,951 )
 
Finance receivables, net of unearned finance charge income
    135,514       117,837  
                   
 
Accretable unearned acquisition discounts and fees
    (13,095 )     (12,961 )
 
Finance receivables, net of unearned finance charge income and discounts and fees
    122,419       104,876  
                   
 
Allowance for loan losses
    (7,703 )     (8,153 )
                   
 
Finance receivables - net
  $ 114,716     $ 96,723  

 
Activity in the Coastal Credit allowance for loan losses on finance receivables is as follows ($ in thousands):
 
     
Years Ended December 31,
 
     
2011
   
2010
 
               
 
Balance at beginning of period
  $ 8,153     $ 8,085  
 
Charge-offs
    (6,964 )     (8,488 )
 
Recoveries
    2,526       2,130  
 
Provision for loan losses
    3,988       6,426  
                   
 
Balance at the end of the period
  $ 7,703     $ 8,153  
                   
 
Finance receivables, net of unearned finance charges
  $ 135,514     $ 117,837  
                   
 
Allowance for loan losses as a percent of finance receivables, net of unearned finance charges
    5.68 %     6.92 %
                   
 
Net charge-offs as a percent of finance receivables, net of unearned finance charges
    3.27 %     5.40 %
                   
 
Allowance for loan losses as a percent of net charge-offs
    173.57 %     128.23 %
 
 
38

 

The following is an assessment of the credit quality of the finance receivables.  Delinquency experience of finance receivables at Coastal Credit, including unearned interest under contractual terms ($ in thousands):
 
     
December 31,
 
     
2011
   
2010
 
                           
 
Finance receivables - gross balance
  $ 137,277           $ 119,788        
                               
 
Delinquencies:
                           
 
30-59 days
  $ 1,317       1.0 %   $ 1,209       1.0 %
 
60-89 days
    689       0.5 %     538       0.4 %
 
90+ days
    697       0.5 %     354       0.3 %
 
Total delinquencies
  $ 2,703       2.0 %   $ 2,101       1.8 %

 
4.  OTHER ASSETS
 
Other assets are as follows ($ in thousands):
 
     
December 31,
 
     
2011
   
2010
 
               
 
Prepaid expenses
  $ 358     $ 337  
 
Property, equipment and leasehold improvements, net
    456       335  
 
Other
    47       12  
 
Total other assets