ITEM 1. BUSINESS
Overview
Founded in 2004, White River Capital, Inc. (“White River”) is a financial services holding company headquartered in Indianapolis, Indiana with two principal operating subsidiaries.
Coastal Credit LLC (“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 21 states through 17 offices.
Union Acceptance Company LLC (“UAC”), based in Indianapolis, Indiana, is a specialized auto finance company which holds and oversees its portfolio of non-prime auto receivables. 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. UAC remains contractually obligated to distribute its remaining assets in compliance with its Second Amended and Restated Plan of Reorganization (the “Plan” or the “Plan of Reorganization”) approved in connection with the bankruptcy case. Under the Plan, UAC must pay net proceeds from its residual interest in its receivables portfolios and other estate assets to creditors holding notes and claims under the Plan. White River owns all of UAC’s general unsecured claims, 89.1% of UAC’s restructured subordinated notes (“Subordinated Notes”) and 94.7% of UAC's accrual notes (“Accrual Notes”) issued under the Plan. UAC was designated the Creditor Representative to oversee the distribution of its remaining assets as contractually required under the Plan.
White River’s net interest margin after provision for estimated losses was $35.5 million for the year ended December 31, 2007. Net income for this same period was $11.8 million. At December 31, 2007, total assets were $166.6 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 21 states - Alaska, Arizona, California, Colorado, Delaware, Florida, Georgia, Hawaii, Kansas, Louisiana, Maryland, Mississippi, Nevada, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Virginia and Washington - through its 17 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 2007, 28.5% 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 substantially less time, allowing Coastal Credit’s collection staff to focus on an increased number of civilian sector contracts.
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 21 states through a total of 17 branches, with two branches in each of Florida, Georgia, Mississippi, and Virginia, and one branch in each of California, Colorado, Delaware, Louisiana, Nevada, Ohio, Oklahoma, Pennsylvania and Texas. Each branch acquires, processes, and services contracts in its geographic area.
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, 2007, Coastal Credit had non-exclusive agreements with approximately 1,500 dealers, of which approximately 556 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 32 to 48 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 variance 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, 2007, 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.
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:
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Extended warranty protection - covers the cost of certain repairs after the vehicle’s warranty expires;
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Gap insurance - 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
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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:
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the applicant’s length of residence;
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the applicant’s current and prior job status;
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the applicant’s history in making other installment loan payments;
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the applicant’s payment record on previous automobile loans;
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the applicant’s current income and discretionary spending ability;
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the applicant’s credit history;
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the value of the automobile in relation to the purchase price;
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the term of the contract;
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the automobile make and mileage; and
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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.
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 17 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:
Region #1 - Florida, Georgia, North Carolina, Tennessee and Virginia.
Region #2 - Delaware, Maryland, Ohio and Pennsylvania.
Region #3 - Louisiana, Kansas, Mississippi, Nevada, Oklahoma and Texas.
Region #4 - Alaska, Arizona, California, Colorado, Hawaii and Washington.
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 must have a deductible typically 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. 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 lapse 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.
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. 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: California, Colorado, Delaware, Florida, Georgia, Louisiana, Mississippi, Nevada, Ohio, Oklahoma, Pennsylvania, 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:
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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.
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State licensing requirements. Coastal Credit maintains the following licenses:
State
License
Arizona
Sales Finance Company License
Delaware
Motor Vehicle Sales Finance License
Florida
Sales Finance Company License
Louisiana
Sales Finance Company License
Maryland
Sales Finance License
Mississippi
Motor Vehicle Sales Finance License
Oklahoma
Supervised Lender License
Pennsylvania
Sales Finance Company License
Texas
Motor Vehicle Sales Finance License
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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.
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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.
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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.
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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.
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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.
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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.
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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, 2007, Coastal Credit employed approximately 122 persons. None of Coastal Credit’s employees is subject to a collective bargaining agreement, and Coastal Credit considers its relations with its employees generally to be satisfactory.
UNION ACCEPTANCE COMPANY LLC
Historical Business of UAC
UAC is 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. UAC’s receivables acquisition strategy focused on acquiring receivables from automobile purchasers who exhibited a favorable credit profile purchasing late model used and, to a lesser extent, new automobiles. Generally, after acquiring receivables, UAC would temporarily hold the receivables in short-term “warehouse” financing arrangements through its subsidiaries. Periodically, UAC would pool the receivables and sell interests in the pooled portfolio as asset-backed securities through securitization transactions.
In December 2007, UAC redeemed all of its outstanding securitizations. Until that date, UAC, through its wholly owned special purpose subsidiary, UAC Securitization Corporation (“UACSC”), continued to hold the rights to the retained interest in the securitizations that it had sponsored prior to the UAC bankruptcy petition date and subsequent non-recourse financings of previously securitized receivables. The “retained interest” refers to the net cash flows that became available from securitizations after obligations required to be satisfied by these securitizations and non-recourse financings were paid. The retained interest is discussed in more detail under the heading “The Retained Interest-Cash Flows from Securitizations” below.
The UAC Bankruptcy Case
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 is obligated to continue to collect cash as it became available from prescribed assets of the bankruptcy estate (see “The Retained Interest-Cash Flows from Securitizations” below) 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 and now holds all unsecured claims, 89.1% of Subordinated Notes and 94.7% of the Accrual Notes. Accordingly, the large majority of distributions from the bankruptcy estate assets inure to White River.
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) are as follows at:
The Retained Interest - Cash Flows from Securitizations
In connection with the transfer of servicing of its securitized receivables in the bankruptcy, UAC and its subsidiaries entered into agreements with Systems and Services Technologies, Inc. (“SST”), MBIA Insurance Corporation (the surety provider which has issued policies that ensure timely payments on the notes issued by the securitization trusts) (“MBIA”) and other interested parties. Under these agreements, SST was appointed as servicer of the UAC receivables portfolio. In addition, a Master Trust Account was created pursuant to a Master Trust Account Agreement. The Master Trust Account served effectively to cross-collateralize the securitization trusts and non-recourse financings of UAC receivables. The residual cash flows from the securitizations were paid through the Master Trust Account.
On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated and the receivable collateral is now owned outright by UAC and continues to be serviced by SST.
UAC Continuing Operations
UAC continues to oversee the receipt and distribution of the cash flows from its remaining assets and to carry out the Plan. UAC currently has a staff of two employees, while UAC’s President, Mark R. Ruh, is employed by Castle Creek Capital LLC (“Castle Creek”), and its Chief Financial Officer, Martin J. Szumski, is employed by White River. UAC’s current principal activities are the following:
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overseeing collection and distribution of cash flows from receivable portfolios and other assets in accordance with the Plan of Reorganization;
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collecting automobile dealer premium rebates contractually due;
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supporting deficiency account collections by third party collection agencies;
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managing deficiency account collections requiring legal action; and
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holding portfolios of automobile receivables that it had initially acquired prior to the Bankruptcy Case.
UAC’s consolidated receivable portfolios were as set forth below (in thousands):
(1)
Receivables that are owned directly by UAC and are not leveraged.
(2)
On June 8, 2007 the 2004-A1, 2004-A2 and 2004-B notes were paid in full. On December 10, 2007 the remaining notes for the securitized finance receivables and off-balance sheet securitizations were paid in full. The receivable portfolios are now owned outright by UACSC.
(3)
On-balance sheet portfolios formerly held by UACSC as collateral for non-recourse asset-backed notes.
(4)
The 2001-B transaction represented a separate issuance of notes, or a separate tranche, under the UACSC 1999 Master Owner Trust.
ITEM 2.
ITEM 2. PROPERTIES
White River and its subsidiaries lease our headquarters and branch office facilities. White River’s corporate headquarters, located at 1445 Brookville Way, Suite I, in Indianapolis, Indiana, consists of approximately 1,800 square feet of office space. UAC and its subsidiaries share this space with White River. The current lease relating to this space expires August 31, 2008.
Coastal Credit leases its corporate headquarters and branch office facilities. Its headquarters, located at 3852 Virginia Beach Boulevard, in Virginia Beach, Virginia, consist of approximately 9,340 square feet of office space. The current lease relating to this space expires in September 2009.
Coastal Credit’s 17 branch offices located in California, Colorado, Delaware, Florida, Georgia, Louisiana, Mississippi, Nevada, Ohio, Oklahoma, Pennsylvania, 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.
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.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information and Holders
On January 19, 2007, White River’s common stock began trading on the American Stock Exchange under the symbol RVR. Prior to that date, White River’s common stock traded “over-the-counter” on the Pink Sheets under the symbol WRVC. As of March 10, 2008, there were 3,869,333 shares of common stock outstanding and approximately 124 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 624 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 American Stock Exchange beginning January 19, 2007 and on the Pink Sheets prior to that date:
Dividends
White River has never paid cash dividends on its common stock. White River presently intends to retain future earnings, if any, for use in the operation and expansion of the business and does not anticipate paying any cash dividends in the foreseeable future.
While Coastal Credit is not restricted by its charter from making distributions, its line of credit restricts the payment of cash distributions without written approval from its lender. 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:
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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
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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:
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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;
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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.
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:
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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;
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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
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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.
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:
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to preserve important characteristics of White River for federal income tax purposes and, in particular, the NOLs;
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to protect White River and its shareholders against undisclosed efforts to assume or influence control of White River, its operations and policies; and
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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.
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:
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may have the effect of impeding the attempt of a person or entity to acquire a significant or controlling interest in White River;
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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
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may serve to entrench management.
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.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Founded in 2004, White River Capital, Inc. (“White River”) is a financial services holding company headquartered in Indianapolis, Indiana with two principal operating subsidiaries.
Coastal Credit LLC (“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 21 states through 17 offices.
Union Acceptance Company LLC (“UAC”), based in Indianapolis, Indiana, is a specialized auto finance company which holds and oversees its portfolio of non-prime auto receivables. 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. UAC remains contractually obligated to distribute its remaining assets in compliance with its Second Amended and Restated Plan of Reorganization (the “Plan” or the “Plan of Reorganization”) approved in connection with the bankruptcy case. Under the Plan, UAC must pay net proceeds from its residual interest in its receivables portfolios and other estate assets to creditors holding notes and claims under the Plan. White River owns all of UAC’s general unsecured claims, 89.1% of UAC’s restructured subordinated notes and 94.7% of UAC's accrual notes issued under the Plan. UAC was designated the Creditor Representative to oversee the distribution of is remaining assets as contractually required under the Plan.
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.
New Accounting Pronouncements
During July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48 establishes standards for measurement and recognition in financial statements of positions taken by an entity in its income tax returns. In addition, FIN No. 48 requires new disclosures about positions taken by an entity in its tax returns that are not recognized in its financial statements, information about potential significant changes in estimates related to tax positions and descriptions of open tax years by major jurisdiction. We have adopted FIN No. 48 on January 1, 2007. See Note 16 for further details.
In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements (“SFAS No. 157”), which provides guidance on how to measure assets and liabilities using fair value methods. SFAS No. 157 will apply whenever another United States Generally Accepted Accounting Principle standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also requires additional disclosures in both annual and quarterly reports. SFAS No. 157 was to be effective for financial statements issued for fiscal years beginning after November 15, 2007. We have elected an early adoption of SFAS No. 157 beginning January 1, 2007. There was no effect on the consolidated financial statements as a result of the adoption of SFAS No. 157 (See Note 5 and Note 9).
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits all entities to choose, at specified election dates, to measure eligible assets and liabilities at fair value. SFAS No. 159 was to be effective for financial statements issued for fiscal years beginning after November 15, 2007. We have elected an early adoption of SFAS No. 159 beginning January 1, 2007 solely related to creditor notes payable. See Note 9 for further details.
Net Assets of Collateralized Financings
During 2003 through 2005, UAC Securitization Corporation (“UACSC”), a wholly owned special purpose subsidiary of UAC, purchased receivables from off-balance sheet securitizations that were eligible for clean-up calls. These receivables were re-securitized through non-recourse collateralized financing issuances. The associated future cash flows from these receivables were subject to the same Master Trust Account provisions as the securitizations called.
To finance the securitized receivable acquisitions, collateralized financings were used, secured by the respective portfolios of the acquired receivables and related restricted cash accounts. Timely payments of principal and interest on the non-recourse collateralized financings were insured by surety policies. Such obligations were also cross-collateralized through the Master Trust Agreement. Net interest cash flows in excess of expense were payable to the Master Trust Account and expensed as charge to Master Trust, net.
On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated and the receivable collateral is now owned outright by UACSC.
Valuation of Beneficial Interest in Master Trust
The Master Trust Agreement established that all excess cash from securitizations was to be deposited in the Master Trust Account. Once prescribed cash reserve levels were met, cash would be released to UAC from the Master Trust Account. This future cash flow was reported as beneficial interest in Master Trust. In determining the fair value of the beneficial interest in Master Trust, estimates were made for the future prepayments, rates of gross credit losses and credit loss severity, and delinquencies as they impacted the amount and timing of the estimated cash flows from the Master Trust. The average of the interest rates on the receivables exceeded the interest rates on the securities issued in the securitization. This excess cash was held by the Master Trust Account and released based on reserve requirements of the Master Trust. These estimated cash flows from the Master Trust were then discounted to reflect the present value.
With the prepayment of the collateralized financing debt and the subsequent termination of the securitization agreements and the Master Trust Account Agreement, these cash restrictions are no longer in effect.
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 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 inherent finance receivable losses.
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 and their respective tax basis. 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 their ability to not allow an ownership change to occur for tax purposes. The valuation allowance has been derived pursuant to the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, and reduces the total deferred tax asset to an amount that will “more likely than not” be realized (see Note 16).
On August 31, 2005, White River acquired Coastal Credit, an established, profitable operating business within UAC’s historical line of business. With this acquisition, it is now likely that some of the deferred tax assts will be realized by White River. As part of the acquisition purchase accounting, the taxable income of Coastal Credit was estimated and partially offset by the taxable loss of UAC and corporate expenses of White River for the remainder of tax year 2005 and the following five years. The results of these estimates were a reduction in the valuation allowance of $4.7 million at August 31, 2005. This adjustment to the valuation allowance was offset by a reduction to goodwill as part of the purchase of Coastal Credit.
During 2006 White River continued to evaluate its future taxable income based on the successful integration of Coastal Credit and various other events that occurred during 2006. As a result of this evaluation, White River determined that it is “more likely than not” that the federal deferred tax assets will be realized resulting in the reversal of the corresponding valuation allowance. The reversal of the valuation allowance for the federal and state net operating loss carryforward contributed to the income tax benefit of $39.0 million for the twelve months ended December 31, 2006.
White River reviews the valuation allowance based on the estimated taxable income and will make adjustments as required. These future adjustments will be recorded as a component of income tax expense (benefit).
Results of Operations
The Year Ended December 31, 2007 Compared to the Year Ended December 31,
Net income was $11.8 million, or $2.99 per diluted share, for the year ended December 31, 2007, compared to $56.3 million, or $14.51 per diluted share, for the year ended December 31, 2006. The decrease in income from the prior year is primarily due to the following:
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an income tax expense of $6.8 million for 2007 compared to and income tax benefit of $39.0 million for 2006. The income tax benefit for 2006 was primarily a result of the reversal of the majority of the deferred tax asset valuation allowance;
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a decrease in accretion income from beneficial interest in Master Trust during 2007;
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the near elimination of gain from deficiency sale and litigation settlement as a result of a lack of such transactions occurring during 2007 as compared to 2006;
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a $6.2 million increase in provision for estimated credit losses during 2007.
Discussion of Results
The following table presents consolidating financial information for White River for the periods indicated:
The Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006 - Consolidated
Interest on receivables decreased 14.0% to $32.3 million compared to $37.5 million for the years ended December 31, 2007 and 2006, respectively. Coastal Credit interest on receivables increased $1.2 million due to a larger average finance receivable balance of $86.4 million during the year ended December 31, 2007 as compared to $82.2 million during the year ended December 31, 2006. Interest on receivables from UAC declined $6.4 million due to a 78.5% decline in the average receivable balance to $13.9 million during the year ended December 31, 2007 from $64.7 million during the year ended December 31, 2006 from the liquidation of securitization receivables.
Accretion and other interest decreased 5.1% to $15.6 million compared to $16.4 million for the years ended December 31, 2007 and 2006, respectively. This decrease is a result from a decrease in accretion from accumulated other comprehensive income. The balance of other comprehensive income has continued to decline as income is accreted. This will result in the continued decline in future accretion income. The individual components of accretion and other interest income are shown in the following table (in thousands):
Interest expense decreased 48.3% to $6.1 million compared to $11.8 million for the years ended December 31, 2007 and 2006, respectively. Coastal Credit interest expense was $4.1 million for the year ended December 31, 2007 as compared to $5.3 million for the year ended December 31, 2006 as a result of the decrease in average line of credit and subordinated debentures of $49.5 million from $61.5 million for the years ended December 31, 2007 and 2006, respectively. UAC interest expense decreased by $3.8 million due to the decrease in interest expense and accretion expense from the UAC creditor notes payable that were acquired by White River and, to a greater extent, the decrease in the average collateralized financings of 79.0% to $14.7 million during the year ended December 31, 2007 from $70.0 million during the same period ended December 31, 2006. Interest expense of Corporate and Other was $1.0 million and $1.7 million for the years ended December 31, 2007 and 2006, respectively. This decrease is primarily a result of a reduction in interest expense from the secured note payable that was paid in full on October 15, 2007.
Provision for estimated credit losses was $6.2 million compared to $36,000 for the years ended December 31, 2007 and 2006, respectively. Provision for estimated credit losses is charged to income to bring Coastal Credit’s allowance for estimated credit losses to a level which management considers adequate to absorb probable credit losses inherent in the portfolio of finance receivables. For Coastal Credit, the provision for estimated credit losses was $8.3 million for the year ended December 31, 2007 as compared to $4.7 million for the year ended December 31, 2006. Coastal Credit has seen increases in delinquency rates in the latter half of 2007. As a result of this delinquency, Coastal Credit’s net charge-offs increased during the fourth quarter, but 30+ day delinquency decreased to 4.11% at December 31, 2007 compared to 4.33% at September 30, 2007. In addition, Coastal Credit increased its allowance reserves to 7.0% of receivables, net of unearned income, during the forth quarter 2007. This activity resulted in the increase of Coastal Credit’s provision for estimated credit losses. UAC recorded recovery for estimated credit losses of $2.1 million compared to $4.6 million for the years ended December 31, 2007 and 2006, respectively. This change in recovery for estimated credit losses is a result of declining defaulted receivables during 2007.
The charge to Master Trust, net was a $2.1 million charge for the year ended December 31, 2007 compared to a $14.9 million credit for the year ended December 31, 2006. Charge to Master Trust is expense related to future transfers of funds to the Master Trust from securitized finance receivables of UAC. The $12.8 million decrease in charge to Master Trust is related to the sale of deficiency receivables, the sale of receivables that filed for Chapter 13 bankrupt protection, and settlement proceeds recorded as other income during 2006 compared to only a small sale of deficiency receivables during 2007. With the “clean-up” call of all securitizations on December 10, 2007 and termination of the Master Trust Agreement, there will be no future charge to Master Trust, net activity.
Loss from extinguishment of debt was $1.5 million for the year ended December 31, 2006. The loss during 2006 is related to the settlement distribution White River paid to UAC creditors who sold their general unsecured claims and Subordinated Notes during 2005. There was no activity during 2007.
Gain from deficiency sale and litigation settlement was $22,000 for the year ended December 31, 2007 compared to $7.9 million for the year ended December 31, 2006. This gain is the result of the sale of receivables that filed Chapter 13 bankruptcy protection, and the funds received from a legal settlement during 2006 and the UAC sale of deficiency receivables during 2006 and 2007.
Other income (expense) was an expense of $(0.1) million compared to an income of $0.1 million for the years ended December 31, 2007 and 2006, respectively. Other income is primarily the result of refunds of dealer rebates from charged-off and prepaid finance contracts and collections of previously charged-off balances net of expenses.
Salaries and benefits decreased to $8.3 million for the year ended December 31, 2007 compared to $8.5 million for the year ended December 31, 2006. Coastal Credit contributed $0.2 million to this decrease. There was no significant change in salaries and benefits for UAC and Corporate and Other during these periods.
Operating expenses decreased to $5.6 million for the year ended December 31, 2007 compared to $5.9 million for the year ended December 31, 2006. Coastal Credit operating expenses remained relatively unchanged between these periods. UAC operating expenses decreased $0.4 million as a result of the continued liquidation of its assets. Corporate and Other operating expenses increased $0.1 million between these periods. These Corporate and Other expenses were primarily professional fees.
Third party servicing expenses decreased 70.1% to $0.5 million for the year ended December 31, 2007 compared to $1.8 million for the year ended December 31, 2006. UAC is the only segment that incurs this expense. This decrease is the result of the ongoing liquidation of the UAC receivable portfolio during 2007. UAC pays a monthly servicing fee per active receivable. As the number of receivables decreased as the result of the liquidation of receivables, the third party servicing expenses decreased.
Bankruptcy costs are professional fees and expenses associated with the bankruptcy proceedings of UAC. These costs were $6,000 and $0.2 million for the years ended December 31, 2007 and 2006, respectively. UAC is the only segment that incurs these costs which were for the purpose of assisting the reorganized company in complying with its bankruptcy plan. Future bankruptcy costs were eliminated with the closure of the bankruptcy case on January 5, 2007.
Income tax expense was $(6.8) million for the year ended December 31, 2007 compared to an income tax benefit of $39.0 million for the year ended December 31, 2006. Prior to 2006, any income tax provision (benefit) in the year was offset by an increase (decrease) in the valuation allowance against deferred tax assets. As of December 31, 2007, White River had federal net operating loss carryforwards for income tax purposes of $100.1 million. Net operating losses may be carried forward up to 20 years for federal income tax purposes. White River’s earliest net operating losses available for carryforward were generated in the tax year ended June 30, 2003, and will expire if not used prior to the tax year ending December 31, 2022. With the acquisition of Coastal Credit on August 31, 2005, White River acquired a historically profitable subsidiary that enabled White River to recognize a portion of the net operating loss (“NOL”) carryforwards.
During 2006 White River continued to evaluate its future taxable income based on the successful integration of Coastal Credit and various other items that occurred during 2006. This evaluation determined that it is “more likely than not” that the federal deferred tax assets will be realized resulting in the reversal of the corresponding valuation allowance. The reversal of the valuation allowance for the federal and state net operating loss carryforward contributed to the income tax benefit of $39.0 million for the year ended December 31, 2006.
The availability of these tax benefits would be jeopardized if an ownership change (as defined in IRS regulations governing NOL carryforward limitations) were to occur in the future with respect to White River. In general, an ownership change occurs when, as of any testing date, the aggregate of the increase in percentage points of the total amount of a corporation's stock owned by each 5-percent shareholder within the meaning of the NOL carryforward limitations whose percentage ownership of the stock has increased as of such date over the lowest percentage of the stock owned by each such 5-percent shareholder at any time during the three-year period preceding such date, is more than 50 percentage points. In general, persons who own 5% or more of a corporation's stock are 5-percent shareholders, and all other persons who own less than 5% of a corporation's stock are treated together, as a single, public group 5-percent shareholder, regardless of whether they own an aggregate of 5% of a corporation's stock. Calculating whether an ownership change has occurred is subject to inherent uncertainty. This uncertainty results from the complexity and ambiguity of the NOL carryforward limitations as well as the limitations on the knowledge of a publicly-traded corporation concerning the ownership of, and transactions in, its securities. White River is not aware of any facts indicating that an ownership change has occurred with respect to White River.
Financial Condition as of December 31, 2007 and 2006
Securitized Finance Receivables, Net
Securitized finance receivables, net were $27.4 million at December 31, 2006. On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated and the receivable collateral is now owned, outright, by UAC. All UAC receivables will now be reported as finance receivables, net. The principal balances of the securitized finance receivables, net and the off-balance sheet securitization portfolios are summarized in the following table (in thousands):
(1) On-balance sheet portfolios held by UACSC as collateral for non-recourse asset-backed notes.
Finance Receivables, Net
Finance receivables, net increased to $90.7 million at December 31, 2007 as compared to $79.1 million at December 31, 2006. On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated and the receivable collateral is now owned, outright, by UAC. All receivables for UAC are now reported as finance receivables, net. UAC finance receivables, net increased to $11.5 million at December 31, 2007 as compared to $0.5 million at December 31, 2006. Coastal Credit finance receivables, net increased to $79.2 million compared to $78.7 million for the years ended December 31, 2007 and 2006, respectively.
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, 2007, 31.2% of the Coastal Credit Receivables were with borrowers who are in the United State military as compared to 32.6% as of December 31, 2006. 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 an increasing number of non-military contracts. Throughout 2007, the percentage of contracts made with borrowers who are in the United States military has declined due to the deployment of troops abroad. Until these deployments are reduced, it is likely that Coastal Credit will continue to see a decline in contracts with military personnel.
As of December 31, 2007, Coastal Credit’s finance receivables consisted exclusively of contracts acquired by Coastal Credit without credit recourse to the dealer. Although all the contracts in Coastal Credit’s portfolio were acquired without credit recourse, each dealer remains liable to Coastal Credit for liabilities arising from 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 only acquire a contract 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. Coastal Credit typically buys contracts on an individual basis and occasionally considers portfolio acquisitions as part of its growth strategy.
Beneficial Interest in Master Trust
Beneficial interest in Master Trust was $23.6 million at December 31, 2006. UAC used a 15% discount rate to value the beneficial interest in Master Trust as of December 31, 2006. On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated and the receivable collateral is now owned, outright, by UAC and the beneficial interest in Master Trust was eliminated.
Collateralized Financings
On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated. Collateralized financings were $32.4 million at December 31, 2006.
Accrued Interest Payable
Accrued interest payable was $0.4 million at December 31, 2007, compared to $1.2 million at December 31, 2006. The decrease was primarily the result of (i) the prepayment in full of the secured note payable on October 15, 2007, (ii) the prepayment in full the collateralized financing debt of the securitized finance receivables on December 31, 2007 and (iii) the elimination of accrued interest payable for creditor notes payable as a result of the early adoption of SFAS No. 157, Fair Value Measurements, (“SFAS No. 157”) and SFAS No. 159, The Fair Value Opinion for Financial Assets and Financial Liabilities (“SFAS No. 159”). Any accrued interest as a result of interest expense from creditor notes payable is included in the fair market valuation of creditor notes payable.
Creditor Notes Payable
Creditor notes payable was $1.3 million at December 31, 2007, compared to $1.4 million at December 31, 2006. The decrease was the result of continued repayment of principal in accordance with the UAC bankruptcy plan. Beginning January 1, 2007, creditor notes payable was recorded at fair market value in accordance with White River’s early adoption of SFAS No. 157 and SFAS No. 159.
Liquidity and Capital Resources for the Years Ended December 31, 2007 and
Net cash provided by operating activities was $4.2 million for the year ended December 31, 2007 compared to $6.0 million for the year ended December 31, 2006. The change in net cash provided by operating activities was primarily a result of the cash sent to the Master Trust Account in accordance with the Master Trust Agreement of UAC partially offset by a reduction of interest expense as a result of a lower average line of credit balance for 2007 as compared to 2006 and the prepayment of the secured note payable and subordinated debentures during 2007.
Net cash provided by investing activities was $47.0 million for the year ended December 31, 2007 compared to $88.2 million for the year ended December 31, 2006. This change was primarily the result of a reduction in the principal collection and recoveries on securitized finance receivables. In addition, the purchases of finance receivables declined during 2007 as a result in a reduction of the number of loans acquired by Coastal Credit during 2007, 6,001, as compared to 2006, 6,235. This activity was partially offset by the collection on beneficial interest in Master Trust.
Net cash used in financing activities was $54.4 million for the year ended December 31, 2007 compared to $94.2 million for the year ended December 31, 2006. This change is primarily the result of a decline in the principal payments on collateralized financings as they continued to liquidate during 2007 compared to 2006 partially offset by the prepayment of the secured note payable and subordinated debentures during 2007.
At December 31, 2007, White River and its subsidiaries had cash and cash equivalents of $3.8 million compared to $7.0 million at December 31, 2006.
Coastal Credit has a revolving credit facility from a lending institution with a maximum borrowing limit of $100 million. This facility increased from $80 million during July 2006. The maturity date on the line of credit was extended to December 31, 2011 effective January 1, 2007 and the interest rate was reduced to the London Interbank Offered Rate (“LIBOR”) plus 2.60 from LIBOR plus 2.85%. As of December 31, 2007, Coastal Credit had $50.0 million of indebtedness outstanding under this facility as compared to $49.5 million as of December 31, 2006. There was $20.8 million and $20.5 million available in excess of the amount utilized at December 31, 2007 and 2006, respectively. 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 the month of December, 2007 was LIBOR plus 2.60% which equated to 7.84%. The average rate during the month of December, 2006 was LIBOR plus 2.85% which equated to 8.20% at December 31, 2006. There is an annual commitment fee of 1/8 of 1% on the average daily unused 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 50% of Coastal Credit’s net income in addition to permitted payments on subordinated debt (including White River debt guaranteed by Coastal Credit.)
Coastal Credit prepaid in full its subordinated debentures during April and May 2007. Coastal Credit had $7.7 million of subordinated debentures outstanding at December 31, 2006. Interest on the debentures was payable quarterly at a fixed rate of interest of 12% per annum. At December 31, 2006, approximately 43% of the holders of subordinated debentures were related parties.
UAC’s sources of liquidity are limited and consist of cash on hand, escrowed cash for operations, funds from consolidated operations and cash collections of the liquidating finance receivables. White River, as owner of the substantial majority of UAC's notes and claims outstanding under the Plan of Reorganization, is entitled to distribution of the substantial majority of these cash flows as they are realized by UAC. However, the realization of such projected cash flows is dependent upon the performance of the underlying auto receivable portfolios and the effective servicing of such receivables. In particular, if gross defaults, recoveries on defaulted receivables or prepayments on such receivables are less favorable than the rates projected by management, UAC's realization of such cash flows will be reduced or delayed relative to such projections. Such reduction may be material.
White River had outstanding $13.1 million in a secured note at December 31, 2006. The secured note payable was paid in full on October 15, 2007. Coastal Credit used its line of credit to distribute the necessary funds to the parent company. The scheduled prepayment fee of 2% was negotiated down to 1%. Interest on the note was payable quarterly in arrears at a fixed rate of 10.75% per annum. The secured note payable was secured by White River’s ownership interest in Coastal Credit and was guaranteed by Coastal Credit, but subordinate to the revolving credit facility of Coastal Credit. Principal was payable in quarterly installments of $937,500 which began July 1, 2006.
White River’s sources of liquidity, as the parent company, are limited and consist of cash on hand, payments by UAC on the UAC creditor notes payable owned by White River and distributions by Coastal Credit (subject to restrictions under Coastal Credit’s credit facility).
White River currently intends to retain its earnings to finance the growth and development of its businesses and has no present intention of paying cash dividends in the foreseeable future.
Asset Quality
Set forth below is certain information concerning the credit loss experiences on the fixed rate retail automobile receivables of White River. There can be no assurance that future net credit loss experience on the receivables will be comparable to that set forth below. See “Discussion of Forward-Looking Statements.”
Securitized Finance Receivables
On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated and the receivable collateral is now owned, outright, by UAC. All receivables for UAC will now be reported as finance receivables, net.
Finance Receivables - Coastal Credit
Delinquency experience of finance receivables at Coastal Credit, including unearned interest ($ in thousands):
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 continued profitability. 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, will default. These historical rates are evaluated and revised on a quarterly basis. See “Discussion of Forward-Looking Statements.”
Allowance for loan losses of finance receivables ($ in thousands):
Finance Receivables - UAC
On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated and the receivable collateral is now owned, outright, by UACSC. All receivables for UAC will now be reported as finance receivables, net.
Delinquency experience of finance receivables at UAC ($ in thousands):
(1) Finance receivables as of December 31, 2006 represents securitized finance receivables and off-balance sheet securitized finance receivables for comparison purposes.
Allowance for loan losses of finance receivables ($ in thousands):
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;
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general economic, market, or business conditions;
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changes in interest rates, the cost of funds, and demand for White River’s financial services;
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changes in White River’s competitive position;
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White River’s ability to manage growth;
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the opportunities that may be presented to and pursued by White River;
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competitive actions by other companies;
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changes in laws or regulations;
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changes in the policies of federal or state regulators and agencies; and
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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 8.
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 consolidated balance sheet of White River Capital, Inc. and subsidiaries as of December 31, 2007, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year 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 audit 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 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, 2007 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
As described in Note 1 to the consolidated financial statements, the Company elected to adopt statements of Financial Accounting Standards 159 and 157 solely related to its creditor notes payable in 2007.
We were not engaged to examine management’s assertion about the effectiveness of White River Capital, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2007 included in the accompanying Management’s Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.
/s/ McGladrey & Pullen LLP
Raleigh, North Carolina
March 14,
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
White River Capital, Inc.
Indianapolis, Indiana
We have audited the accompanying consolidated balance sheet of White River Capital, Inc. and subsidiaries (the “Company”) as of December 31, 2006, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the year 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 audit.
We conducted our audit 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 circumstances, 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of White River Capital, Inc. and subsidiaries as of December 31, 2006, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Columbus, Ohio
March 15,
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
See notes to consolidated financial statements.
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
See notes to consolidated financial statements.
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2007AND 2006
(Dollars in thousands)
See notes to consolidated financial statements.
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007 AND 2006
1.
GENERAL DISCUSSION
White River Capital, Inc. (“White River” or the “Company”) is a holding company for specialized indirect auto finance businesses, with two principal operating subsidiaries, Coastal Credit LLC (“Coastal Credit”) and Union Acceptance Company LLC (“UAC”). 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 21 states through 17 offices. UAC, based in Indianapolis, Indiana, holds and oversees its portfolio of approximately $12.6 million in non-prime auto receivables, as of December 31, 2007. On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated and the receivable collateral is now owned, outright, by UAC Securitization Corporation (“UACSC”), a wholly owned special purpose subsidiary of UAC. All receivables for UAC will now be reported as finance receivables, net. UAC operates under a confirmed Second Amended and Restated Plan of Reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Plan”) under which net proceeds from its beneficial interest in Master Trust and other bankruptcy estate assets must be paid to creditors holding notes and claims under the plan. During 2005 and 2006, White River purchased and now owns directly approximately 90% of such notes and claims. 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.
On February 15, 2005, UAC, White River, and the Plan Committee representing the UAC creditors under the Plan of Reorganization entered into a memorandum of understanding providing for the proposed buyout of the remaining outstanding UAC Senior Notes, Subordinated Notes and Accrual Notes payable. This agreement stipulated that White River, as the proposed parent of UAC, would offer to pay 100% of the principal value of the Senior Notes and 13% of the face value of the Subordinated Notes for the tender of these notes and their accompanying Accrual Notes to White River. Additional amounts were required to be paid by White River to the former Subordinated Note holders in the future if certain prescribed events occurred including but not limited to recovery by UAC on a particular unresolved pending claim. (The pending claim was resolved during September 2006 and additional amounts were paid to holders that had sold their notes to White River during 2005.) This purchase offer was accepted by 100% of the Senior Note holders and holders of 89.1% of the Subordinated Notes in February 2005. During June 2005, the Senior Notes of UAC were purchased by White River and simultaneously paid in full and White River completed the buyout of 89.1% of the Subordinated Notes of UAC using bridge funding provided by Castle Creek Capital Partners Fund IIa, LP and Castle Creek Capital Partners Fund IIb, LP (collectively the “Funds”). During September 2005, White River concluded its offer to purchase claims from the general unsecured creditors of UAC. White River acquired approximately 57.3% of the general unsecured claims of UAC as a result of this offer. During 2006, White River acquired the remaining general unsecured claims of UAC.
In connection with UAC’s Plan of Reorganization and distributions and as a result of White River’s purchase of the majority of UAC’s general unsecured claims and subordinated notes, UAC’s creditor notes payable principal amounts (in thousands) are as follows at:
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”).
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.
In connection with the sale of the servicing platform and related assets to Systems & Services Technologies, Inc. (“SST”), UAC and its subsidiaries entered into various amendments to the trust and servicing agreements, indentures and various other agreements related to UAC’s outstanding securitizations. In addition, UAC entered into an agreement with its surety provider, MBIA, Inc. (“MBIA”) to establish a Master Trust Account and to effectively cross collateralize the outstanding securitizations (“Master Trust Account Agreement”). These agreements generally provided for the following:
·
UAC resigned, and SST was appointed, as servicer, and standards for SST’s performance and provisions for SST’s compensation were established.
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UAC was released from performance trigger obligations related to the securitizations, including the release of claims against UAC by the securitization trusts and MBIA.
·
A Master Trust Account was created pursuant to the Master Trust Agreement. The Master Trust Account served effectively to cross-collateralize the securitization trusts, as more specifically described below (“Master Trust Account”). The residual cash flows from the securitizations were paid through the Master Trust Account.
·
Funds in excess of the cash collateral requirements of specific securitizations were remitted to the Master Trust Account.
·
Funds in a particular securitization’s spread account in excess of the amount required for the immediately following distribution date could be drawn by the master trust to the Master Trust Account to make distributions to other securitization trusts or otherwise as provided in the Master Trust Agreement.
·
Amounts held in the Master Trust Account were available to pay certain fees and expenses of the servicer, the securitization trustees, MBIA, and the master trustee, and to make distributions to securitization trusts to meet cash distribution obligations of those trusts to security holders of a securitization trust, to the extent cash otherwise available to that trust was insufficient for such purpose.
·
Cash deposited to the Master Trust Account, to the extent not used for the foregoing purposes, did accumulate and, to the extent it exceeds prescribed levels, was available for distribution to UAC.
With the establishment of the Master Trust Agreement in 2003, all excess cash from securitizations was required to be deposited in the Master Trust Account. Cash was released to UAC from the Master Trust Account once prescribed cash reserve levels were met. This future cash flow was reported as beneficial interest in Master Trust. Based upon this agreement, UAC’s retained interest was exchanged for the beneficial interest in Master Trust for financial reporting purposes.
UACSC had finance receivables that were collateral for seven asset backed securitizations. Four of the securitizations were reported on the balance sheet of UACSC and three securitizations were held by Special Purpose Entities (“SPE”) off-balance sheet. The trust agreements and indentures for each securitization had cleanup call provisions that allowed UACSC to repurchase the assets once the note balances were below certain levels.
In accordance with paragraph 14 of SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, UACSC accounted for its beneficial in Master Trust residual interest as an available-for-sale security under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. As associated unrealized gains and losses attributable to changes in fair value, net of income taxes, were recorded as accumulated other comprehensive income (“AOCI”), net of taxes.
UACSC executed the cleanup call of all its remaining securitizations on December 10, 2007 effective as of December 1, 2007 and the SPEs were dissolved. As discussed in SFAS 140, paragraph 88, and in EITF 02-9, Accounting for Changes That Result in a Transferor Regaining Control of Financial Assets Sold, when all the assets of a SPE are reclaimed, the retained interest and underlying assets are recombined.
AOCI will continue to be reported as a separate component of shareholders’ equity and amortized using the interest method into the income statement. This would allow the accounting for AOCI to be relatively unchanged from the prior accounting of AOCI.
Acquisition of Coastal Credit, LLC
On August 31, 2005, White River completed the acquisition of 100% of the interests in Coastal Credit with an aggregate purchase price of $50.8 million, including direct costs of acquisition. $45.0 million was paid to the sellers at closing and $3.8 million, net of a $1.2 million receivable from the previous owners, was held back until March 31, 2006 and paid with interest at the rate of 10% per annum.
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 21 states - Alaska, Arizona, California, Colorado, Delaware, Florida, Georgia, Hawaii, Kansas, Louisiana, Maryland, Mississippi, Nevada, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Virginia and Washington - through its 17 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 goodwill, the valuation of deferred tax assets, and the allowance for credit losses.
New Accounting Pronouncements- During July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48 establishes standards for measurement and recognition in financial statements of positions taken by an entity in its income tax returns. In addition, FIN No. 48 requires new disclosures about positions taken by an entity in its tax returns that are not recognized in its financial statements, information about potential significant changes in estimates related to tax positions and descriptions of open tax years by major jurisdiction. We have adopted FIN No. 48 on January 1, 2007. See Note 16 for further details.
In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements (“SFAS No. 157”), which provides guidance on how to measure assets and liabilities using fair value methods. SFAS No. 157 will apply whenever another United States Generally Accepted Accounting Principle standard requires (or permits) assets or liabilities to be measured at fair value but does not expand the use of fair value to any new circumstances. This standard also requires additional disclosures in both annual and quarterly reports. SFAS No. 157 was to be effective for financial statements issued for fiscal years beginning after November 15, 2007. We have elected an early adoption of SFAS No. 157 beginning January 1, 2007. There was no effect on the consolidated financial statements as a result of the adoption of SFAS No. 157 (See Note 5 and Note 9).
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits all entities to choose, at specified election dates, to measure eligible assets and liabilities at fair value. SFAS No. 159 was to be effective for financial statements issued for fiscal years beginning after November 15, 2007. We have elected an early adoption of SFAS No. 159 beginning January 1, 2007 solely related to creditor notes payable. See Note 9 for further details.
Cash and Cash Equivalents-White River considers all investments with maturity of three months or less when purchased to be cash equivalents.
Restricted Cash-Restricted cash consisted of funds held in reserve accounts in compliance with the terms of the collateralized financing agreements which were terminated on December 10, 2007.
Net Assets of Collateralized Financings-UACSC had purchased receivables from off-balance sheet securitizations that were eligible for clean-up calls. These receivables were re-securitized through non-recourse asset backed note issuances. The associated future cash flows from these receivables were subject to the same Master Trust Account provisions as the securitizations called.
To finance the securitized receivable acquisitions, collateralized financings are used, secured by the respective portfolios of the acquired receivables and related restricted cash accounts. Timely payments of principal and interest on the non-recourse collateralized financings are insured by surety policies. Such obligations are also cross-collateralized through the Master Trust Agreement. Net interest cash flows in excess of expense are payable to the Master Trust Account and expensed as charge to Master Trust, net.
On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated and the receivable collateral is now owned, outright, by UACSC.
Securitized Finance Receivables-net-UAC had repurchased receivables from outstanding securitizations and used these receivables as collateral for new securitization debt that was recorded on White River’s consolidated balance sheet as collateralized financings. The receivables were carried at their principal amount plus interest receivable, less an allowance for credit losses.
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. 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. 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. Assumptions regarding 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 inherent 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 credit 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.
Beneficial Interest in Master Trust-UAC recorded beneficial interest in Master Trust as an “available for sale” security at fair value. Any associated unrealized gains and losses attributable to changes in fair value, net of income taxes, were recorded as a separate component of shareholders’ equity (“accumulated other comprehensive income”), net of taxes. Accumulated other comprehensive income was accreted to income based on projected cash releases from the Master Trust Account.
On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated and the receivable collateral is now owned, outright, by UACSC. With this change accumulated other comprehensive income is accreted to income over the estimated life of the UAC finance receivables using the interest method.
Goodwill-White River has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”) for the accounting of goodwill related to the acquisition of Coastal Credit during 2005. As a result, goodwill is not amortized; rather, White River annually tests the goodwill for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. The amount of goodwill impairment, if any, is measured as the excess of the carrying value over the fair value. Goodwill will be adjusted for adjustments related to excess tax deductibility of goodwill.
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.
Collateralized Financing-Collateralized financings were non-recourse debt obligations that were used to purchase finance receivables from previous securitization trusts. This debt was secured by the securitized finance receivables that were purchased by UAC in addition to cash collateral “Spread Accounts” that was recorded as restricted cash and the Master Trust Account. Principal payments were required to correspond to the principal reduction of the finance receivables on a monthly basis. On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account.
Amounts Due to Master Trust-Amounts due to Master Trust represented excess cash from finance receivables and restricted cash that were to be deposited in the Master Trust Account in accordance with the Master Trust Agreement that was established during April 2003. On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated.
Creditor Notes Payable-Creditor notes payable represents the liability to creditors upon UAC’s emergence from bankruptcy in 2003. In accordance with SOP 90-7, UAC recorded the liabilities at fair value at the confirmation date. As a result, the restructured principal amount of the debt exceeded the recorded fair value of the debt by $51.6 million. This difference or discount was recorded as gain on fair valuation of creditor liabilities and was to be amortized over the expected life of the liabilities. Although there was no stated maturity for the creditor notes payable, the discount was being accreted, using the effective interest method, over the period ending on the date on which the last contractual payment on the receivables underlying the beneficial interest in Master Trust was expected. The following table contains the contractual interest rates for the individual classes of creditor notes payable:
During 2005, White River purchased a significant percentage of the UAC creditor notes payable. Creditor notes payable were reduced for the portion owned by White River and a gain from extinguishment of debt of $11.4 million was recorded. During September 2006, UAC settled litigation and in accordance with White River’s agreement to acquire the UAC creditor notes payable, White River paid a portion of the settlement distribution to the claim holders resulting in a contribution to the loss from extinguishment of debt of $1.3 million for the year ended December 31, 2006.
With the adoption of SFAS No. 159, creditor notes payable is recorded at fair value which represents the present value of the amount that UAC anticipates to pay to the creditors from the residual assets of UAC.
Other Income-Other income represents refunds of dealer rebates, monies collected on previously charged-off balances in the securitization trusts, 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 and their respective tax basis. 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 not allow an ownership change to occur for tax purposes. The valuation allowance has been determined pursuant to the provisions of SFAS No. 109, Accounting for Income Taxes (“SFAS No. 109”), including White River’s estimation of future taxable income, and reduces the total deferred tax asset to an amount that will more likely than not be realized (see Note 16).
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.
Stock-Based Compensation-In December 2004, SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), was issued, which eliminates the intrinsic value method under APB 25 as an alternative method of accounting for stock-based awards. SFAS No. 123R also revises the fair-value-based method of accounting for share-based payment liabilities, forfeitures, and modifications of stock-based awards and clarifies SFAS No. 123’s guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods. In addition, SFAS No. 123R amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid, which is included within operating cash flows. White River adopted the modified prospective application of SFAS No. 123R as of January 1, 2006. The adoption of SFAS No. 123R had no impact on White River as there were no share based payment awards outstanding at December 31, 2005. 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 theses areas. The Company has access to any collateral supporting these receivables through repossession. The Company’s finance receivables are collateralized by automobiles.
3.
NET ASSETS OF COLLATERALIZED FINANCINGS
UACSC, in conjunction with a conduit provider and its surety provider, purchased receivables from outstanding securitizations during 2005, 2004 and 2003. These receivables were re-securitized through non-recourse asset backed note issuances. The associated future cash flows from these receivables were subject to the same Master Trust Account provisions as the securitizations called.
To finance the receivable acquisitions, UACSC used collateralized financings, secured by the respective portfolio of the acquired receivables and related restricted cash accounts. Timely payments of principal and interest on the non-recourse collateralized financings were insured by surety policies. Such obligations were also cross-collateralized through the Master Trust Agreement. Net interest cash flows in excess of expenses were payable to the Master Trust Account and expensed as a charge to Master Trust, net.
The collateralized financing for 2003-A was paid in full during the first quarter of 2006. At that time, the remaining receivables were released from the related collateral arrangements and inured directly to UACSC. These receivables were recorded as finance receivables, net.
The following table represents the restricted net assets and liabilities related to non-recourse collateralized financings (in millions) as of December 31, 2006:
4.
COLLATERALIZED FINANCINGS
UACSC issued notes to complete $153.4 million, $136.7 million and $120.3 million of non-recourse collateralized financings consisting of asset backed note issuances during 2005, 2004 and 2003, respectively to purchase securitized finance receivables.
The note principal and interest was paid monthly with total cash received from the corresponding securitized finance receivables collateralizing the notes. If the cash received within the month was insufficient to pay the note principal and interest, funds are drawn from restricted cash accounts or the Master Trust Account in accordance with the Master Trust Agreement.
Interest expense related to these collateralized financings, including the amortization of debt issuance costs, was $0.7 million and $3.5 million for the years ended December 31, 2007 and 2006, respectively.
The following table summarizes the outstanding principal balance of the collateralized financings (in thousands) at December 31, 2006:
5.
BENEFICIAL INTEREST IN MASTER TRUST
With the establishment of the Master Trust Agreement in 2003, all excess cash flows, as defined, from retained interest in securitized assets, finance receivables, and restricted cash accounts were to be deposited in the Master Trust Account. Cash was released to UAC from the Master Trust Account once prescribed cash reserve levels were met. This estimated future discounted cash flow was reported as beneficial interest in Master Trust. In determining the fair value of the beneficial interest in Master Trust, estimates were made for the future prepayments, rates of gross credit losses and credit loss severity, and delinquencies as they impact the amount and timing of the estimated cash flows from the Master Trust. The average of the interest rates on the receivables exceeded the interest rates on the securities issued in the securitization and the servicing and surety fees. This excess cash was held by the Master Trust Account and released based on reserve requirements of the Master Trust. These estimated cash flows from the Master Trust were then discounted to reflect the present value.
The assumptions used to calculate the beneficial interest in Master Trust prior to the prepayment of collateralized financing debt were as follows:
Credit Loss Assumptions-the gross credit losses are calculated using the loss to liquidation factor methodology. However, recovery cash flows from gross credit losses are estimated independently as two different cash flow streams. These two recovery cash flow streams are:
o
Liquidation recovery - consisted of net auction proceeds, deficiency recoveries by the servicer, and scheduled payments from defaulted accounts. On a monthly basis for each pool, liquidation recovery cash dollars as a percentage of gross default dollars was calculated for the previous year (this is typically in the 50-60% range). This twelve month average for each pool was used to project monthly liquidation recovery by multiplying this value by the monthly estimated gross default dollars projected.
o
Bankruptcy recovery - consisted of cash recovered from accounts charged off and in bankruptcy status. Bankruptcy cash flows were somewhat independent of default rates due to bankruptcy court involvement and the latitude allowed debtors during the bankruptcy process. UAC had observed a reasonably predictable cash flow stream from bankruptcy payments in each securitized pool. This cash flow stream would, however, eventually expire as the bankruptcy cases are dismissed from the various courts with either a successful or non-successful outcome. A previous twelve month average of bankruptcy cash flows was calculated for each pool. This value was then reduced on a straight line basis over either a 18 or 30 month period.
Finally, gross credit losses were netted against the two recovery cash streams to estimate future net credit losses.
The weighted average net credit loss assumption as a percentage of the original principal balance over the life of the receivables to value beneficial interest in Master Trust was 8.61% at December 31, 2006.
Prepayment Assumptions-UAC estimated prepayments by evaluating the historical prepayment performance of each pool of receivables. UAC used annual prepayment rates ranging from 30.2% to 46.0% at December 31, 2006.
Discount Rate Assumptions-UAC determined the estimated fair value of its beneficial interest in Master Trust by discounting the expected cash flows released from the Master Trust Account (the cash out method) using a discount rate that UAC believed was commensurate with the risks involved. UAC used a discount rate of 15% to value the beneficial interest in Master Trust at December 31, 2006 to reflect then current market conditions and the reduction in the uncertainty of these future cash flows.
On December 10, 2007, UAC prepaid in full the collateralized financing debt of the securitized finance receivables using cash collateral of the individual securitizations and cash in the Master Trust Account. Upon completion of the prepayment of this debt, the securitization agreements and the Master Trust Account Agreement were terminated and the receivable collateral is now owned, outright, by UAC. Beneficial interest in Master Trust was eliminated with the consolidation of the securitized finance receivables to finance receivables, net.
The following table presents the beneficial interest in Master Trust (in thousands) on a recurring basis using significant unobservable inputs (Level 3) per SFAS No. 157 for the year ended December 31, 2007:
Total gains realized and unrealized included in earnings reported in accretion and other interest for the year ended December 31, 2007 was $15.1 million. There was no effect recorded in beneficial interest in Master Trust for the adoption of SFAS No. 157.
6.
FINANCE RECEIVABLES - NET
Coastal Credit
Finance receivables originated by Coastal Credit generally has original terms ranging from 32 to 48 months and are secured by the related vehicles.
Coastal Credit Finance receivables - net outstanding were as follows (in thousands):
Activity in the Coastal Credit allowance for credit losses on finance receivables is as follows (in thousands):
UAC
The securitized finance receivables along with the off-balance sheet receivables will now be reported as finance receivables, net. In addition, the beneficial interest in Master Trust and the due to Master Trust have been eliminated. An unearned discount resulted from the net effect of these transactions. This unearned discount will be recognized as interest income over the life of the UAC finance receivables using the interest method.
UAC Finance receivables - net outstanding were as follows (in thousands):
(1)
Finance receivables as of December 31, 2006 represents securitized finance receivables displayed on balance sheet for comparison purposes.
Activity in the UAC allowance for credit losses is as follows (in thousands):
7.
OTHER ASSETS
Other assets are as follows (in thousands) at:
8.
GOODWILL
The changes in the carrying amount of the Coastal Credit goodwill are as follows (in thousands):
Goodwill was tested for impairment as of August 31, 2007 and 2006. There were no changes to the Coastal Credit segment goodwill for impairment.
9.
CREDITOR NOTES PAYABLE
White River’s adoption of SFAS No. 159 will apply solely to creditor notes payable. Creditor notes payable consists of debt owed to the one remaining third party creditor from the UAC bankruptcy. During September 2003, UAC recorded the bankruptcy debt at fair value in accordance with Statement of Position 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. This fair value adjustment resulted in a gain. Since that time, accretion interest expense has been recognized based on the original fair value calculation and the creditor notes payable increased based on this calculation. Since September 2003, no adjustments have been made to this accretion schedule for the increase or decrease in performance of the receivables of UAC. The only adjustments that have been made are for the creditor notes that were purchased by White River and were subsequently extinguished in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. Prior to the adoption of SFAS No. 159, creditor notes payable was being accreted to its full contractual value. Using this methodology, the creditor notes payable would have continued to accrete to their full contractual value. With the adoption of SFAS No. 159, creditor notes payable is recorded at fair value which represents the present value of the amount that UAC anticipates to pay to the creditors from the residual assets of the finance receivables. UAC’s finance receivables are in essence the only asset UAC has remaining to pay the creditor notes payable.
The following table presents the initial adoption of the fair value option for creditor notes payable (in thousands):
The following table presents the creditor notes payable (in thousands) on a recurring basis using significant unobservable inputs (Level 3) per SFAS No. 157 for the year ended December 31, 2007:
The contractual interest related to the creditor notes payable will continue to be accrued as interest expense and the interest payable will be included in the fair value calculation along with the creditor notes payable on a quarterly basis. The difference between the aggregate fair value and the unpaid principal balance of creditor notes payable was $1.8 million as of December 31, 2007. The ultimate amount paid on creditor notes payable could differ dependent on the actual cash flows from UAC’s finance receivables.
10.
LINE OF CREDIT
The line of credit is utilized by Coastal Credit to finance the purchase of finance receivables. $50.0 million and $49.5 million of the line of credit was utilized at December 31, 2007 and 2006, respectively. This line of credit was $100 million at December 31, 2007 and 2006. The maturity date on the line of credit was extended to December 31, 2011 effective January 1, 2007 and the interest rate was reduced to the London Interbank Offered Rate (“LIBOR”) plus 2.60 from LIBOR plus 2.85%. The availability of the line of credit allows Coastal Credit to borrow up to 84% of the aggregate balance of outstanding eligible receivables net of unearned interest, commissions and discounts. Eligible receivables exclude the following: (i) receivables for which a payment is 90 or more days past due on a contractual basis; (ii) receivables which have been deferred more than two times during the same calendar year, or more than six times over the contract term; (iii) receivables subject to foreclosure, repossession or bankruptcy proceedings or the account debtor with respect to which is a debtor under the Bankruptcy Code; (iv) receivables from officers, employees or shareholders of the borrower or any affiliate; (v) interest only accounts; (vi) receivables missing titles after 120 days from their origination date; and (vii) receivables which, in the lender’s reasonable discretion, do not constitute acceptable collateral. Total available under the line of credit was $70.8 million and $70.0 million based upon the level of eligible collateral with $20.8 million and $20.5 million available in excess of the amount utilized at December 31, 2007 and 2006, respectively.
The credit facility is secured by substantially all 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 and was in compliance with these ratios at December 31, 2007 and 2006. Interest is paid monthly at a variable rate, based on meeting certain financial criteria. The average rate for the month of December, 2007 was LIBOR plus 2.60% which equated to 7.84%. The average rate for the month of December 2006 was LIBOR plus 2.85% which equated to 8.20%. There is an annual commitment fee of 1/8 of 1% on the average daily unused 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 50% of Coastal Credit’s net income in addition to permitted payments on subordinated debt (including White River debt guaranteed by Coastal Credit.)
11.
SECURED NOTE PAYABLE
A $15 million secured note was issued on August 31, 2005 and bears interest at a fixed rate of 10.75%. Interest was payable in arrears quarterly beginning October 1, 2005. The secured note payable was collateralized by White River’s ownership interest in Coastal Credit and was guaranteed by Coastal Credit, but subordinate to the line of credit. Principal was payable in sixteen quarterly installments of $937,500 commencing July 1, 2006. Prepayment of the note was allowed beginning September 1, 2007. There was a 2% prepayment penalty if prepayment occurs between September 1, 2007 and August 31, 2008. This prepayment was 1% if prepayment occurs between September 1, 2008 and August 31, 2009. There was no penalty if the prepayment occurs after August 31, 2009. The secured note payable was paid in full on October 15, 2007. Coastal Credit used its line of credit to distribute the necessary funds to the parent company. The scheduled prepayment penalty of 2% was negotiated to 1%. The outstanding principal balance of the secured note was $13.1 million at December 31, 2006.
12.
SUBORDINATED DEBENTURES
Coastal Credit prepaid in full the subordinated debentures during April and May 2007. Coastal Credit had $7.7 million of subordinated debentures outstanding at December 31, 2006. Interest on the debentures was payable quarterly at a fixed rate of interest of 12% per annum.
13.
SELECT DEBT REPAYMENT SCHEDULES
The following table represents select debt principal repayment schedules (in thousands):
14.
ACCRETION AND OTHER INTEREST
The individual components of accretion and other interest income are shown in the following table (in thousands):
15.
RELATED PARTY TRANSACTIONS
UAC’s administration of the Plan is supervised by Castle Creek Capital LLC (“Castle Creek”), whose Funds are significant shareholders of White River. For these services, UAC compensates Castle Creek at a rate of $14,583 per month. Castle Creek was paid $175,000 during 2007 and 2006. While the bankruptcy case was closed on January 5, 2007, UAC must continue to operate in accordance with the Plan.
Investment funds managed by Castle Creek owned directly or indirectly 51.5% of the equity interest in Coastal Credit that was purchased by White River on August 31, 2005. Mr. Eggemeyer's personal interest in Castle Creek represented approximately a 5% indirect interest in Coastal Credit. William E. McKnight held approximately 22% of Coastal Credit and John W. Rose indirectly held approximately 6%. White River paid $45 million toward the purchase of Coastal Credit on August 31, 2005, and aggregate principal and interest of $4.1 million, net of a $1.2 million receivable from the previous owners, was paid to the former owners of Coastal Credit on March 31, 2006.
On August 31, 2005, warrants were issued by White River to the Funds to purchase 150,000 shares of White River common stock at an exercise price of $10 per share. The term of the warrant is three years and 90 days and will be exercisable three years after issuance. The warrants were recorded at fair value as of August 31, 2005. The fair value of the warrants was determined using the Black-Scholes option-pricing model with the following assumptions used for the warrants granted on August 31, 2005: expected volatility of 33.6%, risk free interest rate of 3.8% and expected life of three years and 90 days.
During August, 2005, Coastal Credit effected a private placement of $7.7 in subordinate debentures, due 2008, bearing interest at 12% per annum. Mr. John W. Rose and members of his family purchased $1.5 million, a family partnership of William E. McKnight purchased $1.5 million of such debentures and certain employees of Castle Creek purchased $0.3 million of such debentures. Coastal Credit prepaid in full the subordinated debentures during April and May 2007. Interest expense for the subordinated debentures owned by these related parties were approximately $0.2 million and $0.4 million for the years ended December 31, 2007 and 2006, respectively.
Coastal Credit leases its corporate offices in Virginia Beach, Virginia and one of its branch offices in Jacksonville (Orange Park), Florida, from the McKnight Family Partnerships, L.P., an entity controlled by Mr. McKnight, the President of Coastal Credit and a director of White River. The Virginia Beach lease has a three-year term, and provides for rent payments of $13,938 per month. The Virginia Beach lease will expire in September 2009. The Orange Park lease has a three-year term, and provides for rent payments of $9,559 per month. The Orange Park lease will expire in April 2010.
Coastal Credit and Mr. McKnight are parties to a letter agreement with respect to use of an aircraft owned by McKnight L.L.C., an entity controlled by Mr. McKnight. The aircraft is a Beechcraft King Air™ B200 twin engine turbo prop. The agreement provides that Coastal Credit will pay McKnight L.L.C. $14,000 per month to defray expenses associated with ownership of the aircraft in consideration for Mr. McKnight’s willingness to make the aircraft available for business use by key employees of Coastal Credit. Coastal Credit is required to pay additional amounts in any month in which its aircraft usage exceeds prescribed amounts. Six months prior written notice is required to withhold availability of the monthly payment or the plane. During 2007 and 2006, approximately $170,000 and 178,000, respectively, was paid for this purpose.
On November 8, 2005, White River entered into an expense sharing agreement with Castle Creek and Castle Creek Advisors LLC (collectively, “Castle Creek Entities”). The Castle Creek Entities will provide various facilities, equipment and services to White River for a fee that represents an allocation of actual Castle Creek Entities expenses proportionate to facilities, equipment and services provided to White River. This agreement was effective from September 1, 2005 and shall continue until terminated by either party upon 30 days’ prior written notice.
White River paid a management fee to Mark Ruh, an employee of Castle Creek, during 2007 for services rendered during 2006. This fee was approximately $182,000. During 2006, White River paid a management fee to Castle Creek for services rendered during 2005 of approximately $117,000.
16.
INCOME TAXES
UAC incurred net operating losses for federal income tax purposes for the years ended June 30, 2003, 2004, 2005. White River will carry forward these tax losses to future periods. Net operating loss carryforwards for federal income tax purposes were $100.1 million and $102.1 million as of December 31, 2007 and 2006, respectively. These tax losses will expire during 2022 through 2025.
On August 31, 2005, White River acquired Coastal Credit, an established, profitable operating business within UAC’s historical line of business. With this acquisition, it was considered more likely than not that a portion of the deferred tax assts were to be realized by White River. As part of the acquisition purchase accounting, the taxable income of White River was estimated for remainder of 2005 and the following five years. The result of these estimates was a reduction in the valuation allowance of $4.7 million at August 31, 2005. This adjustment to the valuation allowance was offset by a reduction to goodwill as part of the purchase of Coastal Credit.
During the fourth quarter 2006, White River continued to evaluate its future taxable income based on the successful integration of Coastal Credit and other activity at UAC during 2006 that increased current and expected future taxable income. This evaluation determined that it was more likely than not that the federal deferred tax assets will be realized resulting in the reversal of the corresponding valuation allowance. A valuation allowance of $1.6 million was retained related to state operating loss carryforwards as it is more likely than not that these carryforwards will not be realized. The reversal of the valuation allowance for the federal and state net operating loss carryforwards contributed to the income tax benefit of $39.0 million for the year ended December 31, 2006. In addition, a credit of $6.4 million was recorded to income tax benefit in 2006 related to recording the amount in accumulated other comprehensive income as of December 31, 2006 related to the beneficial interest in Master Trust net of tax.
White River adopted FIN 48 on January 1, 2007. The implementation of FIN 48 did not impact White River’s financial statements. As of December 31, 2007, there were no unrecognized tax benefits.
White River recognizes interest and penalties, if any, on tax assessments or tax refunds in the financial statements as a component of income tax expense.
White River and its subsidiaries are subject to U.S. federal income tax and income tax of multiple state and local jurisdictions. The 2004 - 2006 U.S. federal income tax returns remain open to examination by the Internal Revenue Service. Various state jurisdictions remain open to examination for tax years 2002 and forward.
The composition of income tax expense (benefit) is as follows for the years ended December 31 (in thousands):
The effective income tax rate differs from the statutory federal corporate tax rate as follows for the years ended December 31:
The composition of deferred income taxes is as follows as of December 31 (in thousands):
17.
STOCK-BASED COMPENSATION
On October 26, 2005, the board of directors of White River adopted the White River Capital, Inc. Directors Stock Compensation Plan. The plan provides for the payment of a portion of regular fees to certain members of the board of directors in the form of shares of White River common stock. The terms of the plan includes the reservation of 50,000 shares of White River common stock for issuance under the plan.
Effective January 1, 2006, the restated employment agreement between Coastal Credit and William McKnight, President of Coastal Credit, includes a long-term incentive award. This award provides for the payment, in cash, of the value of 100,000 shares of White River stock, vesting in three annual increments of 33,333.33 shares on January 1, 2007, 2008 and 2009. In accordance with SFAS No. 123R, Share-Based Payment (“SFAS No. 123R”), this award is accounted for as a liability award. The value of payment is to be determined based on the mean of the trading value of White River shares for 20 trading days prior to the vesting date. Compensation expense related to this award approximated $613,000 and $582,500 for the year ended December 31, 2007 and 2006, respectively, and is included in salaries and benefits expense in the accompanying consolidated statements of operations. Additional compensation costs will be incurred based on the value of White River’s stock price through 2008.
On May 5, 2006, White River shareholders approved the White River Capital, Inc. 2005 Stock Incentive Plan. The purpose of this plan is to offer certain employees, non-employee directors, and consultants the opportunity to acquire a proprietary interest in White River. The plan provides for the grant of options, restricted stock awards and performance stock awards. The total number of options and stock awards that may be awarded under the plan may not exceed 250,000. As of December 31, 2007, White River awarded restricted stock awards totaling 98,100 shares and 29,800 of these shares have vested and have been issued and 14,000 shares have been forfeited. Forfeited shares are available for the purposes of the plan. White River has not issued stock options as of December 31, 2007. The following is a summary of the status of White River’s non-vested restricted stock awards and changes during the years then ended:
SFAS No. 123R is used for guidance in accounting for these awards. The value of restricted awards is determined based on the trading value of White River shares on the grant date. An estimated forfeiture rate of 3% was used during the year ended December 31, 2006. This forfeiture rate was increased to 7% during the year ended December 31, 2007. Compensation expense related to these awards approximated $352,600 and $391,500 for years ended December 31, 2007 and 2006, respectively, and is included in salaries and benefits expense in the accompanying consolidated statements of operations. There was $1.0 million and $2.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted as of December 31, 2007 and 2006, respectively. That cost is expected to be recognized over a weighted-average period of 1.1 years and 2.0 years as of December 31, 2007 and 2006, respectively.
18.
BUSINESS SEGMENT INFORMATION
Set forth in the table below is certain financial information with respect to White River’s operating segments as discussed in Note 1. All taxes are recorded at Corporate and Other. UAC and Coastal Credit are limited liability corporations and are consolidated with White River for tax purposes.
(1)
Depreciation and amortization is included in total other revenues (expenses) and was approximately $7,000, $193,000 and $277,000 for UAC, Coastal Credit and Corporate and Other for the year ended December 31, 2007.
(2)
Depreciation and amortization is included in total other revenues (expenses) and was approximately $14,000, $204,000 and $244,000 for UAC, Coastal Credit and Corporate and Other for the year ended December 31, 2006.
The following table presents assets with respect to White River’s operating segments (in thousands) at:
19.
EARNINGS PER SHARE
Basic earnings per share are calculated by dividing the reported net income for the period by the weighted average number of common shares outstanding. The weighted average number of common shares outstanding during a period is weighted for the portion of the period that the shares were outstanding. Diluted earnings per share include the dilutive effect of warrants that were granted on August 31, 2005 and stock award plans which were issued on August 1, 2007 and June 1, 2006. Basic and diluted earnings per share have been computed as follows (dollars in thousands except per share data):
20.
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly financial results (dollars in thousands, except per share data):
21.
ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents and restricted cash approximates the fair value due to the nature of these accounts.
White River began reporting creditor notes payable early adopted SFAS 159 beginning January 1, 2007, see Note 9. As a result of the early adoption of SFAF 159, White River reported creditor notes payable at fair value by discounting estimated future cash payments at appropriate discount rates. The following table represents the estimated fair value for creditor notes payable and related accrued interest at December 31, 2006 (in thousands) prior to the adoption of SFAF 159:
The fair value of securitized finance receivables-net, was estimated by discounting the future cash flows, which were reduced by estimated credit losses for the life of the receivables, using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities and was approximately $0.1 million greater than the carrying amount as of December 31, 2006. With the securitization “clean-up” during the year ended December 31, 2007, the securitized receivables were reclassed to finance receivables-net
The fair value of collateralized financings was determined by discounting estimated future cash payments at appropriate discount rates and was $0.3 million less than the carrying amount at December 31, 2006. Collateralized financings were prepaid in full with the securitization “clean-up” during the year ended December 31, 2007.
The fair value of beneficial interest in Master Trust as of December 31, 2006 was calculated by discounting the estimated cash flows released from the Master Trust Account using a discount rate that UAC believed was commensurate with the risks involved. An allowance for estimated credit losses was established and applied. Discount rates utilized were based upon current market conditions and prepayment assumptions were based on historical performance experience. See Notes 2 and 5 for a detailed discussion of each of the components of the fair value of beneficial interest in Master Trust. During 2007, beneficial interest in Master Trust was eliminated with the consolidation of the securitized finance receivables to finance receivables, net.
Finance receivables-net approximates fair value based on the price paid to acquire the loans. The price paid reflects competitive market interest rates and purchase discounts for the Company’s chosen credit grade in the economic environment. This market is highly liquid as the Company acquires individual loans on a daily basis from dealers. In addition, there have been minimal changes in interest rates and purchase discounts related to these types of loans.
Subordinated debentures approximate the fair value due to minimal change in interest rates related to these types of accounts at December 31, 2006. These debentures were paid in full during 2007.
22.
COMMITMENTS AND CONTINGENCIES
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 assignee of finance contracts originated by dealers, White River and its subsidiaries may also be named as a co-defendant 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 it has taken prudent steps to address and mitigate the litigation risks associated with its business activities.
White River and its subsidiaries’ obligations under operating lease agreements were $0.7 million for the year ended December 31, 2007. The following table represents obligations under current operating lease agreements (in thousands):
23.
SUBSEQUENT EVENTS
On January 2, 2008, White River issued 18,160 shares of common stock to certain employees as part of stock awards in accordance with agreements under the 2005 Stock Incentive Plan.
On January 24, 2008, UAC sold charged-off loans that have deficiency balances remaining to a third party (the “Buyer”) for $159,000.
On February 1, 2008, White River issued 400 shares of common stock to a certain employee as part of stock awards in accordance with an agreement under the 2005 Stock Incentive Plan.
On March 10, 2008 White River issued 7,686 shares to directors in accordance with the Directors Stock Compensation Plan for services rendered during 2007.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Management’s Report on Internal Control Over Financial Reporting
White River carried out an evaluation, under the supervision of its Chief Executive Officer, President and Chief Financial Officer, of the effectiveness of the design and operation of White River’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 and 15d-15 as of December 31, 2007. Based upon that evaluation, the Chief Executive Officer, President and Chief Financial Officer concluded that, at December 31, 2007, White River’s disclosure controls and procedures are effective in accumulating and communicating to management (including such officers) the information required to be included in White River’s periodic SEC filings.
Management of White River is responsible for establishing and maintaining adequate internal control over financial reporting. White River’s internal control over financial reporting includes policies and procedures pertaining to White River’s ability to record, process, and report reliable information. White River’s internal control system is designed to provide reasonable assurance to White River’s management and Board of Directors regarding the preparation and fair presentation of White River’s published financial statements.
White River’s management assessed the effectiveness of internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on this assessment, White River’s management concluded that, as of December 31, 2007, White River’s internal control over financial reporting is effective based on those criteria.
This annual report does not include an attestation report of White River’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by White River’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
During White River’s fiscal quarter ended December 31, 2007, there were no changes in White River’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect White River’s internal control over financial reporting.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Officers
Information contained under the captions “Proposal 1: Election of Directors,” “Executive Officers,” “Executive Compensation” and “Section 16(a) Beneficial Ownership Reporting Compliance” in White River’s proxy statement for the 2008 annual meeting of shareholders (“Proxy Statement”) is incorporated herein by reference.
Code of Ethics
White River has adopted the White River Capital, Inc. Code of Business Conduct and Ethics (“code of ethics”), a code of ethics that applies to the Chief Executive Officer, President and Chief Financial Officer.
Audit Committee and Audit Committee Financial Expert
The information with respect to White River’s audit committee and its audit committee financial expert contained under the caption ”Corporate Governance and Board Committees - Audit Committee” in White River’s Proxy Statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the captions “Executive Compensation” and “Compensation of Directors” in the Proxy Statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Security Ownership
Information contained under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
As of December 31, 2007, the following shares were authorized to be issued under White River’s equity compensation plans:
Includes 54,300 shares issuable pursuant to outstanding performance awards under the 2005 Stock Incentive Plan and 150,000 shares issuable upon exercise of outstanding warrants.
Based on the exercise price of the outstanding warrants only and does not take into account the shares issuable pursuant to outstanding performance awards.
Includes 165,900 shares issuable pursuant to the 2005 Stock Incentive Plan in the form of stock options, restricted stock awards, or performance stock awards, and 41,988 shares issuable pursuant to the 2005 Directors Stock Compensation Plan.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information contained under the captions “Certain Relationships and Related Party Transactions” and “Corporate Governance and Board Committees - Director Independence” in the Proxy Statement is incorporated herein by reference in response to this Item 13.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information contained under the caption “Independent Public Accountants” in the Proxy Statement is incorporated herein by reference in response to this Item 14.
PART IV
ITEM 15.
ITEM 15. EXHIBITS
1. Financial Statements
The consolidated financial statements of White River Capital, Inc. and its subsidiaries and independent auditors’ report are included in Part II (Item 8) of this Form 10-K.
2. Financial Statement Schedules
Not applicable.
3. Exhibits
The following documents are included or incorporated by reference in this Annual Report on Form 10K:
2.1
Agreement and Plan of Share Exchange dated March 9, 2005 between registrant and Union Acceptance Corporation (incorporated by reference to Exhibit 2.1 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
2.2
Limited Liability Company Interests Purchase Agreement dated March 9, 2005 among registrant, Coastal Credit, LLC and the members of Coastal Credit, LLC (incorporated by reference to Exhibit 2.2 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
3.1
Articles of Incorporation of registrant (incorporated by reference to Exhibit 3.1 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
3.2
Code of By-laws of registrant (incorporated by reference to Exhibit 3.2 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.1
Form of common stock certificate of registrant (incorporated by reference to Exhibit 4.1 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.2
Article 5 - “Number of Shares,” Article 6 - “Terms of Shares,” Article 10 - “Transfer and Ownership Restrictions” and Article 11 - “Miscellaneous Provisions” (concerning the applicability of the Indiana Control Share Acquisitions Chapter and the Indiana Business Combinations Chapter) of registrant’s Articles of Incorporation (contained in registrant’s Articles of Incorporation filed with this annual report as Exhibit 3.1)
4.3
Article III - “Shareholder Meetings,” Article VI - “Certificates for Shares” and Article VII, Section 3 - “Corporate Books and Records” of registrant’s Code of By-laws (contained in registrant’s Code of By-laws filed with this annual report as Exhibit 3.2)
4.4(a)
Note Purchase Agreement dated March 9, 2005, between registrant and the note purchaser named therein (incorporated by reference to Exhibit 4.4(a) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.4(b)
Form of Secured Note of registrant due April 1, 2010 (incorporated by reference to Exhibit 4.4(b) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.4(c)
Form of Subordinated Guaranty between Coastal Credit, LLC and the note purchaser (incorporated by reference to Exhibit 4.4(c) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.4(d)
Form of Pledge Agreement between the registrant and the note purchaser (incorporated by reference to Exhibit 4.4(d) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.5(a)
Revolving Note of registrant dated April 21, 2005 (incorporated by reference to Exhibit 4.5(a) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.5(b)
Revolving Note of registrant dated April 21, 2005 (incorporated by reference to Exhibit 4.5(b) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.6
Second Amended and Restated Plan of Reorganization of Union Acceptance Corporation dated August 8, 2003 (incorporated by reference to Exhibit 4.6 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.7(a)
Note Purchase Agreement dated October 7, 2003, among UAC Securitization Corporation, Wachovia Capital Markets, LLC, the note purchasers named therein, Wachovia Bank, National Association and Variable Funding Capital Corporation (incorporated by reference to Exhibit 4.7(a) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.7(b)
Indenture dated October 7, 2003 among UAC Securitization Corporation, Wilmington Trust Company and JPMorgan Chase Bank (related to UAC Securitization Corporation Asset-Backed Notes) (incorporated by reference to Exhibit 4.7(b) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.7(c)
UAC Securitization Corporation Series 2003-A Asset Backed Note (incorporated by reference to Exhibit 4.7(c) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.7(d)
UAC Securitization Corporation Series 2004-A, Class A-1 Asset Backed Note (incorporated by reference to Exhibit 4.7(d) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.7(e)
UAC Securitization Corporation Series 2004-A, Class A-2 Asset Backed Note (incorporated by reference to Exhibit 4.7(e) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.7(f)
UAC Securitization Corporation Series 2004-B Asset Backed Note (incorporated by reference to Exhibit 4.7(f) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.7(g)
UAC Securitization Corporation Series 2004-C Asset Backed Note (incorporated by reference to Exhibit 4.7(g) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.7(h)
UAC Securitization Corporation Series 2005-A Asset Backed Note (incorporated by reference to Exhibit 4.7(h) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.7(i)
UAC Securitization Corporation Series 2005-B Asset Backed Note (incorporated by reference to Exhibit 4.7(i) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.8(a)
Amended Finance Agreement dated April 16, 2001, between Coastal Credit, LLC and Wells Fargo Financial Preferred Capital, Inc. (incorporated by reference to Exhibit 4.8(a) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.8(b)
First Amendment to Finance Agreement dated March 22, 2004, between Coastal Credit, LLC and Wells Fargo Financial Preferred Capital, Inc. (incorporated by reference to Exhibit 4.8(b) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.8(c)
Second Amendment to Finance Agreement, dated August 24, 2005, between Coastal Credit LLC and Wells Fargo Financial Preferred Capital, Inc. (including replacement Promissory Note and White River Capital Inc. Guaranty) (incorporated by reference to Exhibit 4.1 of registrant’s Form 8-K filed September 2, 2005)
4.8(d)
Third Amendment to Finance Agreement, dated January 2, 2007, between Coastal Credit LLC and Wells Fargo Financial Preferred Capital, Inc.
4.9
Regulation S-K, Item 601(b)(4)(iii) undertaking to furnish debt instruments to the Commission upon request (incorporated by reference to Exhibit 4.9 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.10(a)
Secured Bridge Note of registrant, dated June 22, 2005, to Castle Creek Capital Partners Fund IIa (incorporated by reference to Exhibit 4.10(a) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.10(b)
Secured Bridge Note of registrant, dated June 22, 2005, to Castle Creek Capital Partners Fund IIb (incorporated by reference to Exhibit 4.10(b) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
4.10(c)
Pledge and Security Agreement, dated June 22, 2005, among registrant, Castle Creek Capital, LLC, Castle Creek Capital Partners Fund IIa and Castle Creek Capital Partners Fund IIb (incorporated by reference to Exhibit 4.10(c) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.1
Warrant Issuance Agreement dated March 9, 2005, between registrant, Union Acceptance Corporation, Castle Creek Capital, L.L.C., Castle Creek Capital Partners Fund IIa, LP and Castle Creek Capital Partners Fund IIb, LP, as amended (incorporated by reference to Exhibit 10.1 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.2
Memorandum of Understanding dated February 15, 2005, among registrant, Union Acceptance Corporation and the Plan Committee under Union Acceptance Corporation’s Second Amended and Restated Plan of Reorganization (incorporated by reference to Exhibit 10.2 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.3
Form of Tender Agreement for Restructured Senior Noteholders of Union Acceptance Corporation (incorporated by reference to Exhibit 10.3 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.4
Form of Tender Agreement for Restructured Subordinated Noteholders of Union Acceptance Corporation (incorporated by reference to Exhibit 10.4 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.5
Summary of arrangement between Union Acceptance Corporation and Castle Creek Capital, LLC (incorporated by reference to Exhibit 10.5 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.6(a)
Employment Agreement dated April 1, 1998, between Coastal Credit, LLC and William E. McKnight (incorporated by reference to Exhibit 10.6 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.6(b)
Restated Employment Agreement, as of December 28, 2005, between William E. McKnight and Coastal Credit LLC (incorporated by reference to Exhibit 10.1 of registrant’s Form 8-K filed January 10, 2006
10.7(a)
Master Trust Account Agreement dated April 17, 2003 among Union Acceptance Corporation, UAC Securitization Corporation, Performance Securitization Corporation, Official Committee of Unsecured Creditors of Union Acceptance Corporation, MBIA Insurance Corporation, BNY Midwest Trust Company, The Bank of New York, Systems & Services Technologies, Inc., JPMorgan Chase Bank and Wilmington Trust Company (incorporated by reference to Exhibit 10.7(1b) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.7(b)
Amendment No. 1 to Master Trust Account Agreement dated October 7, 2003 (incorporated by reference to Exhibit 10.7(b) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.7(c)
Amendment No. 2 to Master Trust Account Agreement dated May 21, 2004 (incorporated by reference to Exhibit 10.7(c) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.7(d)
Amendment No. 3 to Master Trust Account Agreement dated August 1, 2004 (incorporated by reference to Exhibit 10.7(d) of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.8
Servicing Transfer Agreement dated April 17, 2003, among Union Acceptance Corporation, UAC Securitization Corporation, Performance Securitization Corporation, Systems & Services Technologies, Inc., MBIA Insurance Corporation and the Official Committee of Unsecured Creditors of Union Acceptance Corporation (incorporated by reference to Exhibit 10.8 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.9
White River Capital, Inc. 2005 Stock Incentive Plan (incorporated by reference to Exhibit 4.4 of registrant’s Form S-8 (File No. 333-130187))
10.10
Letter Agreement between registrant and Martin J. Szumski dated April 8, 2005 (incorporated by reference to Exhibit 10.10 of registrant’s Registration Statement on Form S-1/S-4 (Reg. No. 333-123909))
10.11
Expense Sharing Agreement, dated November 8, 2005, between White River Capital, Inc. and Castle Creek Capital, LLC and Castle Creek Advisors LLC (incorporated by reference to Exhibit 10.1 of registrant’s Form 10-Q for the period ended September 30, 2005)
10.12
White River Capital Inc. Directors Stock Compensation Plan (incorporated by reference to Exhibit 10.2 of registrant’s Form 10-Q for the period ended September 30, 2005)
14.1
Code of Ethics (incorporated by reference to Exhibit 14.1 of registrant’s Form 10-K for the year ended December 31, 2005)
21.1
Subsidiaries of White River Capital, Inc. (incorporated by reference to Exhibit 21.1 of registrant’s Form 10-K for the year ended December 31, 2005)
23.1
Consent of Deloitte & Touche LLP
23.2
Consent of McGladrey & Pullen LLP
31.1
Certification by Chief Executive Officer required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act
31.2
Certification by Chief Financial Officer required by Rule 13a-14(a) or 15d-14(a) of the Exchange Act
32.1
Section 1350 Certifications
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ John M. Eggemeyer
Chairman and Chief Executive Officer, Director (Principal Executive Officer)
March 14, 2008
John M. Eggemeyer
/s/ Mark R. Ruh
President, Chief Operating Officer and Director
March 14, 2008
Mark R. Ruh
/s/ Martin J. Szumski
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
March 14, 2008
Martin J. Szumski
/s/ Thomas C. Heagy
Director
March 14, 2008
Thomas C. Heagy
/s/ William E. McKnight
Director
March 14, 2008
William E. McKnight
/s/ Daniel W. Porter
Director
March 14, 2008
Daniel W. Porter
/s/ John W. Rose
Director
March 14, 2008
John W. Rose
/s/ Richard D. Waterfield
Director
March 14, 2008
Richard D. Waterfield