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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2012
 
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission file number: 001-33257
 
White River Capital, Inc.
(Exact name of registrant as specified in its charter)
 
Indiana
35-1908796
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
6051 El Tordo, PO Box 9876
Rancho Santa Fe, California  92067
 (Address of principal executive offices/zip code)
 
Registrant’s telephone number, including area code: (858) 997-6740
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 
Large Accelerated Filer o
Accelerated Filer o
     
 
Non-Accelerated Filer o
(Do not check if a smaller reporting company)
 
Smaller Reporting Company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes x No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 6, 2012, there were 3,544,825 shares outstanding of the issuer’s Common Stock, without par value.

 
 

 

White River Capital, Inc.
Form 10-Q for the Quarter Ended September 30, 2012 


 
- INDEX -
 

 
   
PAGE
PART I.
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011
1
     
 
Unaudited Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended September 30, 2012 and 2011
2
     
 
Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011
  3
     
 
Notes to Unaudited Condensed Consolidated Financial Statements
4
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
15
     
Item 4.
Controls and Procedures
25
     
PART II.
OTHER INFORMATION
 
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
26
     
Item 6.
Exhibits
26
     
SIGNATURES
27
   
EXHIBIT INDEX
28

 

 

ii 
 

 

Part I   Financial Information

 
ITEM 1.  FINANCIAL STATEMENTS.
 
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 

   
September 30, 2012
   
December 31, 2011
 
ASSETS
 
(Unaudited)
       
             
Cash and cash equivalents
  $ 4,397     $ 3,244  
Finance receivables—net
    124,084       114,716  
Deferred tax assets—net
    33,153       36,489  
Other assets
    847       861  
                 
TOTAL
  $ 162,481     $ 155,310  
                 
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
LIABILITIES:
               
Line of credit
  $ 84,000     $ 81,000  
Accrued interest
    202       183  
Other payables and accrued expenses
    2,094       2,398  
                 
Total liabilities
    86,296       83,581  
                 
COMMITMENTS AND CONTINGENCIES
               
                 
SHAREHOLDERS’ EQUITY:
               
Preferred Stock, without par value, authorized 3,000,000 shares; none issued and outstanding
           
Common Stock, without par value, authorized 20,000,000 shares; 3,544,825 and 3,534,480 issued and outstanding at September 30, 2012 and December 31, 2011, respectively
    174,588       174,328  
Accumulated deficit
    (98,403 )     (102,599 )
                 
Total shareholders’ equity
    76,185       71,729  
                 
TOTAL
  $ 162,481     $ 155,310  

See notes to condensed consolidated financial statements.

 

 
1

 

Part I   Financial Information
 
 
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands except per share amounts)

   
Quarters Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
INTEREST:
                       
Interest on receivables
  $ 9,229     $ 9,038     $ 27,448     $ 26,084  
                                 
Interest expense
    (619 )     (471 )     (1,834 )     (1,385 )
                                 
Net interest margin
    8,610       8,567       25,614       24,699  
                                 
Provision for loan losses
    (985 )     (928 )     (3,566 )     (2,683 )
                                 
Net interest margin after provision for loan losses
    7,625       7,639       22,048       22,016  
                                 
OTHER REVENUES (EXPENSES):
                               
Salaries and benefits
    (2,654 )     (2,312 )     (7,710 )     (6,947 )
Other operating expenses
    (1,162 )     (1,005 )     (3,690 )     (3,427 )
Change in fair market valuation of creditor notes payable
                      43  
Other expense
    (73 )     (88 )     (375 )     (313 )
                                 
Total other expenses
    (3,889 )     (3,405 )     (11,775 )     (10,644 )
                                 
INCOMEBEFORE INCOME TAXES
    3,736       4,234       10,273       11,372  
                                 
INCOME TAX EXPENSE
    (1,217 )     (1,383 )     (3,420 )     (3,888 )
                                 
NET INCOME
  $ 2,519     $ 2,851     $ 6,853     $ 7,484  
                                 
NET INCOME PER COMMON SHARE (BASIC)
  $ 0.71     $ 0.79     $ 1.93     $ 2.06  
                                 
NET INCOME PER COMMON SHARE (DILUTED)
  $ 0.71     $ 0.79     $ 1.93     $ 2.06  
                                 
BASIC WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    3,544,825       3,588,898       3,543,811       3,630,041  
                                 
DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    3,549,447       3,592,497       3,546,248       3,635,438  

See notes to condensed consolidated financial statements.

 
2

 

Part I   Financial Information
 
 
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

   
Nine Months Ended September 30,
 
   
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 6,853     $ 7,484  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    3,566       2,683  
Amortization and depreciation
    268       255  
Amortization of discount and interest accrued on creditor notes payable
          43  
Gain from disposition of equipment
          (3 )
Deferred income taxes
    3,336       3,338  
Change in fair value of creditor notes payable
          (43 )
Stock based compensation expense
    260       170  
Changes in assets and liabilities:
               
Accrued interest receivable and other assets
    (193 )     (278 )
Other payables and accrued expenses
    (285 )     (127 )
Net cash provided by operating activities
    13,805       13,522  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchase of finance receivables
    (65,867 )     (63,242 )
Collections on finance receivables
    52,933       46,323  
Principal collections and recoveries on receivables held for investment
          (6 )
Capital expenditures
    (61 )     (241 )
Net cash used in investing activities
    (12,995 )     (17,166 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Common stock repurchased
          (3,410 )
Common stock cash dividend
    (2,657 )     (2,733 )
Net borrowing on line of credit
    3,000       9,000  
Net cash provided by financing activities
    343       2,857  
                 
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    1,153       (787 )
CASH AND CASH EQUIVALENTS—Beginning of year
    3,244       3,287  
CASH AND CASH EQUIVALENTS—End of period
  $ 4,397     $ 2,500  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
               
Income tax paid
  $ 339     $ 348  
Interest paid
  $ 1,815     $ 1,313  

See notes to condensed consolidated financial statements.
 
 
3

 

Part I   Financial Information
 
 
WHITE RIVER CAPITAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) QUARTERS AND NINE MONTHS ENDED
SEPTEMEBER 30, 2012 AND 2011
 
1.  BASIS OF PRESENTATION
 
The foregoing condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments necessary for a fair presentation of the results of the interim periods presented have been included, consisting only of normal recurring adjustments. Results for any interim period are not necessarily indicative of results to be expected for the year ending December 31, 2012.
 
The condensed consolidated unaudited interim financial statements have been prepared in accordance with Form 10-Q specifications and therefore do not include all information and footnotes normally shown in annual financial statements. The accompanying condensed consolidated balance sheet as of December 31, 2011 is derived from audited financial statements. These interim period financial statements should be read in conjunction with the consolidated financial statements that are included in the Annual Report on Form 10-K for the year ended December 31, 2011 of White River Capital, Inc., which is available online at www.WhiteRiverCap.com or www.sec.gov.
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
 
 
New Accounting Pronouncements
 
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 superseded some of the guidance in Accounting Standards Codification Topic 220. The main provisions of this ASU provide that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements: (i) a single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income; (ii) in a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The option in GAAP that permits the presentation of other comprehensive income in the statement of changes in equity has been eliminated. This ASU is effective beginning with the first quarter of 2012 and had no material impact on the White River consolidated financial statements.
 
In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No 2011-05”. ASU 2011-12 delayed the effective date of certain requirements of ASU 2011-05 related to the presentation of reclassifications of items out of accumulated other comprehensive income. This ASU is effective beginning with the first quarter of 2012 and had no material impact on the White River consolidated financial statements.
 

 
4

 

PART I   FINANCIAL INFORMATION
 
 
2.       GENERAL DISCUSSION
 
White River Capital, Inc. (“White River” or the “Company”) is a holding company for specialized indirect auto finance businesses, with one principal operating subsidiary, Coastal Credit LLC (“Coastal Credit”). Coastal Credit, based in Virginia Beach, Virginia, is a specialized subprime auto finance company engaged in acquiring subprime auto receivables from both franchised and independent automobile dealers which have entered into contracts with purchasers of typically used, but some new, cars and light trucks.  Coastal Credit then services the receivables it acquires. Coastal Credit operates in 27 states through 14 offices.
 
Union Acceptance Company LLC (“UAC”), a now inactive subsidiary of White River, was a specialized auto finance company operating under a bankruptcy plan of reorganization. UAC’s bankruptcy case was closed in January 2007. As of September 1, 2010, UAC no longer materially contributes to the assets, liabilities, or results of operations of White River on a consolidated basis. As a result UAC is no longer a reportable business segment.  All financial information for UAC is reported in the “Corporate and Other” business segment.
 
 
3.       FINANCE RECEIVABLES – NET
 
Coastal Credit’s typical borrower has a credit history that may fail to meet the lending standards of most banks, credit unions and captive automobile finance companies. Substantially all of Coastal Credit’s automobile contracts involve loans made to individuals with limited or impaired credit histories. Coastal Credit believes that its borrower credit profile is similar to that of its direct competitors in the subprime automobile finance business. Coastal Credit also believes that its underwriting criteria and branch network management system coupled with close senior management supervision enhances its risk management and collection functions.
 
In deciding whether to acquire a particular contract, Coastal Credit considers various factors, including:
 
·  
the applicant’s length of residence;
·  
the applicant’s current and prior job status;
·  
the applicant’s history in making other installment loan payments;
·  
the applicant’s payment record on previous automobile loans;
·  
the applicant’s current income and discretionary spending ability;
·  
the applicant’s credit history;
·  
the value of the automobile in relation to the purchase price;
·  
the term of the contract;
·  
the automobile make and mileage; and
·  
Coastal Credit’s prior experience with contracts acquired from the dealer.

Borrowers under the contracts typically make down payments, in the form of cash or trade-in, ranging from 5% to 20% of the sale price of the vehicle financed. The balance of the purchase price of the vehicle plus taxes, title fees and, if applicable, premiums are generally financed over a period of 36 to 54 months.
 
Finance receivables are recorded at cost, net of unearned finance charges, discounts and an allowance for loan losses. Coastal Credit purchases finance contracts from auto dealers without recourse, and accordingly, the dealer usually has no liability to Coastal Credit if the consumer defaults on the contract. This is the sole class of finance receivables and there is no off-balance sheet credit exposure related to these receivables.
 

 
5

 

Part I   Financial Information
 
 
Provisions for loan losses are charged to operations in amounts sufficient to maintain the allowance for loan losses at a level considered adequate to cover credit losses inherent in finance receivables.
 
The allowance for loan losses is established systematically by management based on the determination of the amount of credit losses inherent in the finance receivables as of the reporting date. All finance receivables of the Company are collectively evaluated for impairment. The Company reviews charge off experience factors, delinquency reports, historical collection rates and other information in order to make the necessary judgments as to credit losses inherent in the portfolio as of the reporting date. The Company measures its credit exposure by determining credit risk profiles based on payment activity and contractual delinquency. In addition to contractually delinquent accounts, the Company also evaluates historical loss performance of other accounts in their final stages of collection, in the aggregate, in determining the allowance for loan losses.  These other accounts amounted to $1.2 million and $0.9 million as of September 30, 2012 and December 31, 2011, respectively. Assumptions regarding probable credit losses are reviewed quarterly and may be impacted by actual performance of finance receivables and changes in any of the factors discussed above. Should the credit loss assumptions increase, there could be an increase in the amount of allowance for loan losses required, which could decrease the net carrying value of finance receivables and increase the provision for loan losses recorded on the consolidated statements of operations. The Company believes that the existing allowance for loan losses is sufficient to absorb probable finance receivable losses.
 
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.
 
Interest on receivables is recognized for financial reporting purposes using the interest method. Initial fees earned on add-on products such as collateral protection insurance, credit life insurance, road service plans and warranty products are recorded in income using the interest method. Late charges and deferment charges on contracts are recorded in income as collected. Cash received from loans that have previously been charged off is applied directly to the allowance for loan losses in the consolidated balance sheets. Discounts and fees, which consist primarily of non-refundable dealer acquisition discounts, are amortized over the term of the related finance receivables using the interest method and are removed from the consolidated balance sheets when the related finance receivables are charged off or paid in full. As a result of this charge-off policy, most accounts are charged off rather than being placed in nonaccrual status and thus any impact to the consolidated financial statements is immaterial.
 

 
6

 

Part I   Financial Information
 
Coastal Credit Finance receivables – net outstanding were as follows ($ in thousands):
 
     
September 30, 2012
   
December 31, 2011
 
               
 
Finance receivables, gross
  $ 145,788     $ 137,277  
 
Unearned finance charge income
    (1,766 )     (1,763 )
 
Finance receivables, net of unearned finance charge income
    144,022       135,514  
                   
 
Accretable unearned acquisition discounts and fees
    (12,535 )     (13,095 )
 
Finance receivables, net of unearned finance charge income and discounts and fees
    131,487       122,419  
                   
 
Allowance for loan losses
    (7,403 )     (7,703 )
                   
 
Finance receivables - net
  $ 124,084     $ 114,716  

 
Activity in the Coastal Credit allowance for loan losses on finance receivables is as follows ($ in thousands):
 
     
Quarters Ended
September 30,
   
Nine Months Ended
September 30,
 
     
2012
   
2011
   
2012
   
2011
 
                           
 
Balance at beginning of period
  $ 7,703     $ 7,703     $ 7,703     $ 8,153  
 
Charge-offs
    (1,932 )     (1,614 )     (5,782 )     (5,051 )
 
Recoveries
    647       686       1,916       1,924  
 
Provision for loan losses
    985       928       3,566       2,677  
                                   
 
Balance at the end of the period
  $ 7,403     $ 7,703     $ 7,403     $ 7,703  
                                   
 
Finance receivables, net of unearned finance charges
  $ 144,022     $ 132,070     $ 144,022     $ 132,070  
                                   
 
Allowance for loan losses as a percent of finance receivables, net of unearned finance charges
    5.14 %     5.83 %     5.14 %     5.83 %
                                   
 
Annualized net charge-offs as a percent of finance receivables, net of unearned finance charges
    3.57 %     2.81 %     3.58 %     3.16 %
                                   
 
Allowance for loan losses as a percent of annualized net charge-offs
    144.03 %     207.52 %     143.62 %     184.75 %

 

 
7

 

Part I   Financial Information
 
The following is an assessment of the credit quality of the finance receivables as of September 30, 2012 and December 31, 2011. Delinquency status of finance receivables at Coastal Credit under their contractual terms are as follows ($ in thousands):
 
     
September 30, 2012
   
December 31, 2011
 
                           
 
Finance receivables - gross balance
  $ 145,788           $ 137,277        
                               
 
Delinquencies:
                           
 
30-59 days
  $ 1,607       1.1 %   $ 1,317       1.0 %
 
60-89 days
    1,357       0.9 %     689       0.5 %
 
90+ days
    1,698       1.2 %     697       0.5 %
 
Total delinquencies
  $ 4,662       3.2 %   $ 2,703       2.0 %

 
4.  OTHER ASSETS
 
Other assets are as follows ($ in thousands):
 
     
September 30, 2012
   
December 31, 2011
 
               
 
Prepaid expenses
  $ 247     $ 358  
 
Property, equipment and leasehold improvements, net
    422       456  
 
Other
    178       47  
 
Total other assets
  $ 847     $ 861  

 
5.  INCOME TAXES
 
White River had no liability recorded for unrecognized tax benefits at September 30, 2012 or December 31, 2011.
 
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.
 
A major component of White River’s net deferred tax asset is a net operating loss carry forward incurred by UAC for the tax years ended June 30, 2004 and 2005.  If not fully realized, these tax losses will expire during 2023 and 2024.
 
White River and its subsidiary are subject to taxation by the United States and by various state jurisdictions.  With some exceptions, White River’s consolidated tax returns for its 2008 tax year and forward remain open to examination by tax authorities.  Also, net operating losses carried forward from prior years remain open to examination by tax authorities.
 

 
8

 

Part I   Financial Information
 
 
6.
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 include the reservation of 100,000 shares of White River common stock for issuance under the plan. As of September 30, 2012, 60,846 shares of White River common stock were issued under this plan.
 
On May 18, 2009, White River entered into a new employment agreement with William McKnight, President and Chief Executive Officer of Coastal Credit. Mr. McKnight’s employment agreement was amended on May 10, 2011, pursuant to which the term of his employment was extended by two years to January 1, 2014, and his annual base salary was increased to $450,000 effective January 1, 2012. This employment agreement includes a long-term incentive award providing for the payment, in cash, of the value of 100,000 shares of White River stock, which vested in three annual increments of 33,333.33 shares on January 1, 2010, 2011 and 2012. This long-term incentive award was extended pursuant to the May 10, 2011 amendment in that an additional 33,333.33 shares will vest annually and become payable only in cash on January 1, 2013 and 2014. This award is accounted for as a liability award. The payment amount is 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 $175,000 and $165,000 for the quarters ended September 30, 2012 and 2011, respectively and approximated $553,000 and $483,000 for the nine months ended September 30, 2012 and 2011, respectively. The compensation expense related to this award is included in salaries and benefits expenses in the accompanying consolidated statements of operations. The total income tax benefit recognized in the income statement for this share-based compensation arrangement was approximately $67,000 and $64,000 for the quarters ended September 30, 2012 and 2011, respectively and approximately $213,000 and $186,000 for the nine months ended September 30, 2012 and 2011, respectively.
 
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 September 30, 2012, White River had awarded restricted stock awards totaling 197,545 shares and 86,653 of these shares have vested and have been issued and 35,280 shares have been forfeited. Forfeited shares are available for the purposes of the plan. White River has not issued stock options as of September 30, 2012. The following is a summary of the status of White River’s non-vested restricted stock awards and changes during the respective periods:
 
     
Nine Months Ended September 30,
 
     
2012
   
2011
 
 
Restricted Stock Awards
 
Shares
   
Weighted Average
Grant Date
Fair Value
   
Shares
   
Weighted Average
Grant Date
Fair Value
 
                           
 
Beginning nonvested awards
    80,445     $ 19.71       2,000     $ 6.45  
 
Granted
                10,000       17.25  
 
Vested
    (4,633 )     17.74              
 
Forfeited
    (200 )     19.01              
 
Ending nonvested awards
    75,612     $ 19.83       12,000     $ 15.45  

 

 
9

 

Part I   Financial Information
 
The value of restricted awards is determined based on the trading value of White River shares on the grant date. Compensation expense related to these awards approximated $45,000 and $20,000 for the quarters ended September 30, 2012 and 2011, respectively and approximated $134,000 and $50,000 for the nine months ended September 30, 2012 and 2011, respectively. The compensation expense related to these awards is included in salaries and benefits expense in the accompanying consolidated statements of operations. The total income tax benefit recognized in the income statement for this share-based compensation arrangement was approximately $17,000 and $8,000 for the quarters ended September 30, 2012 and 2011, respectively and approximately $52,000 and $19,000 for the nine months ended September 30, 2012 and 2011, respectively. There was $1.2 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements and liability awards granted as of September 30, 2012. That cost is expected to be recognized over a weighted-average period of 1.3 years as of September 30, 2012.
 
On October 26, 2011, White River entered into a Stock Award Agreement under the 2005 Stock Incentive Plan with John M. Eggemeyer, III, White River’s Chairman of the Board and Chief Executive Officer.  Under the agreement, White River granted to Mr. Eggemeyer 50,000 shares of common stock as a performance stock award.  The shares vest in one installment, in full, upon the occurrence of a “Vesting Event,” as defined in the 2005 Stock Incentive Plan, subject to possible earlier forfeiture as provided in the agreement.
 
 
7.       BUSINESS SEGMENT INFORMATION
 
Set forth in the table below is certain financial information with respect to White River’s reportable segments ($ in thousands):
 
 
For The Quarter Ended September 30, 2012
 
Coastal Credit
   
Corporate and Other
   
Consolidated
 
                     
 
Interest on receivables
  $ 9,229     $     $ 9,229  
                           
 
Interest expense
    (619 )           (619 )
                           
 
Net interest margin
    8,610             8,610  
                           
 
Provision for loan losses
    (985 )           (985 )
                           
 
Net interest margin after provision for loan losses
    7,625             7,625  
                           
 
Total other expenses
    (3,426 )     (463 )     (3,889 )
                           
 
Income (loss) before income taxes
    4,199       (463 )     3,736  
                           
 
Income tax expense
          (1,217 )     (1,217 )
                           
 
Net income (loss)
  $ 4,199     $ (1,680 )   $ 2,519  
                           
                           
 
For The Quarter Ended September 30, 2011
 
Coastal Credit
   
Corporate and Other
   
Consolidated
 
                           
 
Interest on receivables
  $ 9,037     $ 1     $ 9,038  
                           
 
Interest expense
    (471 )           (471 )
                           
 
Net interest margin
    8,566       1       8,567  
                           
 
Provision for loan losses
    (928 )           (928 )
                           
 
Net interest margin after provision for loan losses
    7,638       1       7,639  
                           
 
Total other expenses
    (3,063 )     (342 )     (3,405 )
                           
 
Income (loss) before income taxes
    4,575       (341 )     4,234  
                           
 
Income tax expense
          (1,383 )     (1,383 )
                           
 
Net income (loss)
  $ 4,575     $ (1,724 )   $ 2,851  

 

 
10

 

Part I   Financial Information
 

 
 
For The Nine Months Ended September 30, 2012
 
Coastal Credit
   
Corporate and Other
   
Consolidated
 
                     
 
Interest on receivables
  $ 27,448     $     $ 27,448  
                           
 
Interest expense
    (1,834 )           (1,834 )
                           
 
Net interest margin
    25,614             25,614  
                           
 
Provision for loan losses
    (3,566 )           (3,566 )
                           
 
Net interest margin after provision for loan losses
    22,048             22,048  
                           
 
Total other expenses
    (10,087 )     (1,688 )     (11,775 )
                           
 
Income (loss) before income taxes
    11,961       (1,688 )     10,273  
                           
 
Income tax expense
          (3,420 )     (3,420 )
                           
 
Net income (loss)
  $ 11,961     $ (5,108 )   $ 6,853  
                           
                           
 
For The Nine Months Ended September 30, 2011
 
Coastal Credit
   
Corporate and Other
   
Consolidated
 
                           
 
Interest on receivables
  $ 26,082     $ 2     $ 26,084  
                           
 
Interest expense
    (1,342 )     (43 )     (1,385 )
                           
 
Net interest margin
    24,740       (41 )     24,699  
                           
 
Provision for loan losses
    (2,677 )     (6 )     (2,683 )
                           
 
Net interest margin after provision for loan losses
    22,063       (47 )     22,016  
                           
 
Total other expenses
    (9,341 )     (1,303 )     (10,644 )
                           
 
Income (loss) before income taxes
    12,722       (1,350 )     11,372  
                           
 
Income tax expense
          (3,888 )     (3,888 )
                           
 
Net income (loss)
  $ 12,722     $ (5,238 )   $ 7,484  

 
 
The following table presents assets with respect to White River’s reportable segments ($ in thousands) at:
 
     
September 30, 2012
   
December 31, 2011
 
               
 
Corporate and other
  $ 33,639     $ 37,253  
 
Coastal Credit
    128,842       118,057  
                   
      $ 162,481     $ 155,310  
 
 
11

 

Part I   Financial Information
 
 
8.       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 stock awards. Basic and diluted earnings per share have been computed as follows ($ in thousands except per share data):
 
     
Quarters Ended
September 30,
   
Nine Months Ended
September 30,
 
     
2012
   
2011
   
2012
   
2011
 
                           
 
Net income in thousands
  $ 2,519     $ 2,851     $ 6,853     $ 7,484  
                                   
 
Weighted average shares outstanding
    3,544,825       3,588,898       3,543,811       3,630,041  
                                   
 
Incremental shares from assumed conversions:
                               
 
Stock award plans
    4,622       3,599       2,437       5,397  
                                   
 
Weighted average shares and assumed incremental shares
    3,549,447       3,592,497       3,546,248       3,635,438  
                                   
 
Earnings per share:
                               
                                   
 
Basic
  $ 0.71     $ 0.79     $ 1.93     $ 2.06  
                                   
 
Diluted
  $ 0.71     $ 0.79     $ 1.93     $ 2.06  
 
 
9.        ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
 
Fair value is the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair value hierarchy describes three levels of inputs that may be used to measure fair value:
 
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
 
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active and other inputs that are observable or can be corroborated by observable market data.
 
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
 
The carrying value of cash and cash equivalents approximates the fair value due to the nature of these accounts. The fair value of cash and cash equivalents are measured using level 1 inputs.
 
 
 
12

 
 
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. The fair values of finance receivables are measured using level 2 inputs.
 
The interest rate for the line of credit is a variable rate based on LIBOR.  As a result, the carrying value of the line of credit approximates fair value and is measured using level 2 inputs.
 
Accrued interest is paid monthly.  As a result of the short term nature of this activity, the carrying value of the accrued interest approximates fair value.
 
 
10.      COMMITMENTS AND CONTINGENCIES
 
White River and its subsidiary, 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 subsidiary could take the form of class action complaints by consumers. As the assignee of finance contracts originated by dealers, White River and its subsidiary 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 subsidiary believe that it has taken prudent steps to address and mitigate the litigation risks associated with its business activities.
 
In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), includes provisions affecting large and small financial industry participants alike, including several provisions that  profoundly affect the regulation of certain companies providing consumer financial products and services, such as Coastal Credit. The ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Company in particular, continues to be uncertain.
 
 

 
13

 

Part I   Financial Information
 
 
11.       DIVIDENDS AND SHARE REPURCHASE PROGRAM
 
On August 11, 2011, White River announced that its Board of Directors approved a program to repurchase, from time to time and subject to market conditions, up to 250,000 shares of White River’s outstanding common stock, on the open market or in privately negotiated transactions. As of September 30, 2012, White River has repurchased 62,829 shares of its outstanding common stock under the program for $1.2 million. For the quarter ended September 30, 2012, White River did not repurchase any shares under this program. Information regarding the repurchase program for the quarter ended September 30, 2012 is as follows:
 
 
Period
 
Total Number
of Shares Purchased
   
Average Price
Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Number of Shares that May Yet be Purchased Under the Program
 
                           
 
July 1, 2012 - July 31, 2012
      $         187,171  
 
August 1, 2012 - August 31, 2012
      $         187,171  
 
September 1, 2012 - September 30, 2012
      $         187,171  
          $            

 
On July 30, 2012, White River announced that its Board of Directors declared a quarterly cash dividend of 25 cents per share on its common stock to shareholders of record on August 8, 2012.  This quarterly dividend was paid on August 22, 2012.
 

 
14

 

Part I   Financial Information
 
 
ITEM 2.
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 Rancho Santa Fe, California with one principal operating subsidiary.
 
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 27 states through 14 offices.
 
 
Critical Accounting Policies
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make significant estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. White River believes that the following represents the material critical accounting policies used in the preparation of its consolidated financial statements. Actual results could differ significantly from estimates.
 
 
Allowance for Loan Losses – Finance Receivables
 
Provisions for loan losses are charged to operations in amounts sufficient to maintain the allowance for loan losses at a level considered adequate to cover probable credit losses inherent in finance receivables.
 
The allowance for loan losses is established systematically by management based on the determination of the amount of probable credit losses inherent in the finance receivables as of the reporting date. Coastal Credit reviews charge off experience factors, delinquency reports, historical collection rates and other information in order to make the necessary judgments as to credit losses inherent in the portfolio as of the reporting date. Assumptions regarding probable credit losses are reviewed quarterly and may be impacted by actual performance of finance receivables and changes in any of the factors discussed above. Should the credit loss assumptions increase, there could be an increase in the amount of allowance for loan losses required, which could decrease the net carrying value of finance receivables and increase the provision for loan losses recorded on the consolidated statements of operations. Coastal Credit believes that the existing allowance for loan losses is sufficient to absorb probable finance receivable losses.
 
 
Income Taxes
 
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, their respective tax basis and net operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
 

 
15

 

Part I   Financial Information
 
 
The ultimate realization of the deferred tax asset depends on White River’s ability to generate sufficient taxable income in the future and its ability to avoid an ownership change for tax purposes. A valuation allowance has been derived pursuant to the provisions of ASC Topic No. 740, Income Taxes, which reduces the total deferred tax asset to an amount that will “more likely than not” be realized. As of September 30, 2012 and December 31, 2011, there was no liability recorded for unrecognized tax benefits.
 
 
New Accounting Pronouncements
 
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 will supersede some of the guidance in Accounting Standards Codification Topic 220. The main provisions of this ASU provide that an entity that reports items of other comprehensive income has the option to present comprehensive income in either one or two consecutive financial statements: (i) a single statement must present the components of net income and total net income, the components of other comprehensive income and total other comprehensive income, and a total for comprehensive income; (ii) in a two-statement approach, an entity must present the components of net income and total net income in the first statement. That statement must be immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The option in current GAAP that permits the presentation of other comprehensive income in the statement of changes in equity has been eliminated. This ASU is effective beginning with the first quarter of 2012 and had no material impact on the White River consolidated financial statements.
 
In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU No 2011-05”. ASU 2011-12 delayed the effective date of certain requirements of ASU 2011-05 related to the presentation of reclassifications of items out of accumulated other comprehensive income. This ASU is effective beginning with the first quarter of 2012 and had no material impact on the White River consolidated financial statements.
 
 
Results of Operations
 
The Quarter Ended September 30, 2012 Compared to the Quarter Ended September 30, 2011 – Overview
 
Net income was $2.5 million, or $0.71 per diluted share, for the quarter ended September 30, 2012, compared to $2.9 million, or $0.79 per diluted share, for the quarter ended September 30, 2011.
 
 
The Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011 – Overview
 
Net income was $6.9 million, or $1.93 per diluted share, for the nine months ended September 30, 2012, compared to $7.5 million, or $2.06 per diluted share, for the nine months ended September 30, 2011.
 

 
16

 

Part I   Financial Information
 
 
Discussion of Results
 
The following table presents consolidating financial information for White River for the periods indicated ($ in thousands):
 
 
For The Quarter Ended September 30, 2012
 
Coastal Credit
   
Corporate and Other
   
Consolidated
 
                     
 
Interest on receivables
  $ 9,229     $     $ 9,229  
                           
 
Interest expense
    (619 )           (619 )
                           
 
Net interest margin
    8,610             8,610  
                           
 
Provision for loan losses
    (985 )           (985 )
                           
 
Net interest margin after provision for loan losses
    7,625             7,625  
                           
 
Total other expenses
    (3,426 )     (463 )     (3,889 )
                           
 
Income (loss) before income taxes
    4,199       (463 )     3,736  
                           
 
Income tax expense
          (1,217 )     (1,217 )
                           
 
Net income (loss)
  $ 4,199     $ (1,680 )   $ 2,519  
                           
                           
 
For The Quarter Ended September 30, 2011
 
Coastal Credit
   
Corporate and Other
   
Consolidated
 
                           
 
Interest on receivables
  $ 9,037     $ 1     $ 9,038  
                           
 
Interest expense
    (471 )           (471 )
                           
 
Net interest margin
    8,566       1       8,567  
                           
 
Provision for loan losses
    (928 )           (928 )
                           
 
Net interest margin after provision for loan losses
    7,638       1       7,639  
                           
 
Total other expenses
    (3,063 )     (342 )     (3,405 )
                           
 
Income (loss) before income taxes
    4,575       (341 )     4,234  
                           
 
Income tax expense
          (1,383 )     (1,383 )
                           
 
Net income (loss)
  $ 4,575     $ (1,724 )   $ 2,851  

 

 
17

 

Part I   Financial Information
 
 
 
For The Nine Months Ended September 30, 2012
 
Coastal Credit
   
Corporate and Other
   
Consolidated
 
                     
 
Interest on receivables
  $ 27,448     $     $ 27,448  
                           
 
Interest expense
    (1,834 )           (1,834 )
                           
 
Net interest margin
    25,614             25,614  
                           
 
Provision for loan losses
    (3,566 )           (3,566 )
                           
 
Net interest margin after provision for loan losses
    22,048             22,048  
                           
 
Total other expenses
    (10,087 )     (1,688 )     (11,775 )
                           
 
Income (loss) before income taxes
    11,961       (1,688 )     10,273  
                           
 
Income tax expense
          (3,420 )     (3,420 )
                           
 
Net income (loss)
  $ 11,961     $ (5,108 )   $ 6,853  
                           
                           
 
For The Nine Months Ended September 30, 2011
 
Coastal Credit
   
Corporate and Other
   
Consolidated
 
                           
 
Interest on receivables
  $ 26,082     $ 2     $ 26,084  
                           
 
Interest expense
    (1,342 )     (43 )     (1,385 )
                           
 
Net interest margin
    24,740       (41 )     24,699  
                           
 
Provision for loan losses
    (2,677 )     (6 )     (2,683 )
                           
 
Net interest margin after provision for loan losses
    22,063       (47 )     22,016  
                           
 
Total other expenses
    (9,341 )     (1,303 )     (10,644 )
                           
 
Income (loss) before income taxes
    12,722       (1,350 )     11,372  
                           
 
Income tax expense
          (3,888 )     (3,888 )
                           
 
Net income (loss)
  $ 12,722     $ (5,238 )   $ 7,484  

 
The Quarter Ended September 30, 2012 Compared to the Quarter Ended September 30, 2011 - Consolidated
 
Interest on receivables increased $0.2 million to $9.2 million for the quarter ended September 30, 2012 compared to $9.0 million for the quarter ended September 30, 2011. This increase is a result of an increase in the Coastal Credit average finance receivable balance to $131.2 million during the quarter ended September 30, 2012 as compared to $116.4 million during the quarter ended September 30, 2011. The increase in the average finance receivable balance is a result of Coastal Credit’s growth initiatives and the exploitation of market opportunities. As a result of an increase in competition over the last year, Coastal Credit has experienced a decrease of its weighted average annual percentage rate (“APR”) for loans acquired during the nine months ended September 30, 2012 to 17.8% as compared to 18.8% for the same period ended September 30, 2011.  This decrease in weighted average APR partially offsets the increase of interest on receivables that the change in the average finance receivable balance may generate.
 
Interest expense was $0.6 million for the quarter ended September 30, 2012 as compared to $0.5 million for the quarter ended September 30, 2011. Costal Credit’s average line of credit was $83.5 million for the quarter ended September 30, 2012 compared to $63.1 million for the quarter ended September 30, 2011.
 

 
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Part I   Financial Information

 
Provision for loan losses was $1.0 million compared to $0.9 million for the quarters ended September 30, 2012 and 2011, respectively. Provision for loan losses is charged to income to bring Coastal Credit’s allowance for loan losses to a level which management considers adequate to absorb probable credit losses inherent in the portfolio of finance receivables.  This increase in provision for loan losses was a result of the significant increase in the finance receivables between the periods.
 
Salaries and benefits were $2.7 million for the quarter ended September 30, 2012 compared to $2.3 million for the quarter ended September 30, 2011.
 
Other operating expenses were $1.2 million and $1.0 million for the quarters ended September 30, 2012 and 2011, respectively.
 
Income tax expense was $1.2 million and $1.4 million for the quarters ended September 30, 2012 and 2011, respectively. The expense is based on the estimated effective tax rates for 2012 and 2011, respectively.
 
 
The Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011 - Consolidated
 
Interest on receivables increased $1.4 million to $27.5 million for the nine months ended September 30, 2012 compared to $26.1 million for the nine months ended September 30, 2011. This increase is a result of an increase in the Coastal Credit average finance receivable balance to $127.8 million during the nine months ended September 30, 2012 as compared to $110.9 million during the nine months ended September 30, 2011. The increase in the average finance receivable balance is a result of Coastal Credit’s growth initiatives and the exploitation of market opportunities.
 
Interest expense was $1.8 million for the nine months ended September 30, 2012 as compared to $1.4 million for the nine months ended September 30, 2011. Costal Credit’s average line of credit was $82.8 million for the nine months ended September 30, 2012 compared to $59.9 million for the nine months ended September 30, 2011.
 
Provision for loan losses was $3.6 million compared to $2.7 million for the nine months ended September 30, 2012 and 2011, respectively. Provision for loan losses is charged to income to bring Coastal Credit’s allowance for loan losses to a level which management considers adequate to absorb probable credit losses inherent in the portfolio of finance receivables.  This increase in provision for loan losses was a result of the significant increase in the finance receivables between the periods.
 
Salaries and benefits were $7.7 million for the nine months ended September 30, 2012 compared to $6.9 million for the nine months ended September 30, 2011.
 
Other operating expenses were $3.7 million compared to $3.4 million for the nine months ended September 30, 2012 and 2011, respectively. This increase is due primarily to an increase in professional fees.
 
Income tax expense was $3.4 million and $3.9 million for the nine months ended September 30, 2012 and 2011, respectively. The expense is based on the estimated effective tax rates for 2012 and 2011, respectively.
 

 
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Part I   Financial Information
 
 
Financial Condition as of September 30, 2012 and December 31, 2011
 
Finance Receivables, Net
 
Finance receivables, net increased to $124.1 million at September 30, 2012 as compared to $114.7 million at December 31, 2011. A significant number of contracts acquired by Coastal Credit are contracts made with borrowers who are in the United States military. As of September 30, 2012, 58.1% of the Coastal Credit receivables were with borrowers who are in the United States military as compared to 55.4% as of December 31, 2011. Coastal Credit believes that having in the portfolio a significant percentage of contracts for which the borrowers are United States military personnel contributes to lower payment delinquency and greater collection personnel efficiencies. Coastal Credit requests that all borrowers who are in the military use the military allotment system to make payments on their contracts. Under this allotment system, the borrower authorizes the military to make a payroll deduction for the amount of the borrower’s monthly contract payment and to direct this deduction payment to Coastal Credit on behalf of the borrower. Delinquency of payments on contracts paid by allotment historically has been less than delinquency of payments on contracts not paid by allotment. As a result, the collection effort associated with the military contracts requires substantially less time, allowing Coastal Credit’s collection staff to focus on non-military contracts.
 
 
Other Payables and Accrued Expenses
 
Other payables and accrued expenses were $2.1 million at September 30, 2012, compared to $2.4 million at December 31, 2011.  This decrease is primarily attributable to the payments of accrued incentive compensation and annual director compensation.
 
 
Liquidity and Capital Resources for the Nine Months Ended September 30, 2012 and 2011
 
Net cash provided by operating activities was $13.8 million for the nine months ended September 30, 2012 compared to $13.5 million for the nine months ended September 30, 2011. This increase is primarily a result of the increase in interest on receivables from Coastal Credit partially offset by the reduction of other payables and accrued expenses.
 
Net cash used in investing activities was $13.0 million for the nine months ended September 30, 2012 compared to $17.2 million for the nine months ended September 30, 2011 and is a result of increased collections on finance receivables.
 
Net cash provided by financing activities was $0.3 million for the nine months ended September 30, 2012 compared to net cash provided by financing activities of $2.9 million for the nine months ended September 30, 2011. Net cash flows provided by financing activities for the nine months ended September 30, 2012 primarily resulted from the $3.0 million increase in the line of credit. This activity was partially offset by the $2.7 million cash dividends paid. Net cash flows provided by financing activities for the nine months ended September 30, 2011 primarily resulted from the $9.0 million increase in the line of credit partially offset by the $3.4 million repurchase of White River common stock and $2.7 million of cash dividends paid.
 
At September 30, 2012, White River and its subsidiary had cash and cash equivalents of $4.4 million compared to $3.2 million at December 31, 2011.
 

 
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Part I   Financial Information
 
Coastal Credit has a revolving credit facility from a lending institution with a maximum borrowing limit at September 30, 2012 of $100.0 million. The maturity date on the line of credit is December 31, 2014 and the interest rate is the 1 month London Interbank Offered Rate (“LIBOR”) plus 2.60%.  As of September 30, 2012, Coastal Credit had $84.0 million of indebtedness outstanding under this facility as compared to $81.0 million as of December 31, 2011. Total availability under the line of credit at September 30, 2012 was $100.0 million based upon the level of eligible collateral, with $16.0 million available in excess of the amount utilized at September 30, 2012. The credit facility is secured by substantially all of the assets of Coastal Credit. In addition, White River has provided an unconditional corporate guaranty. Coastal Credit must maintain specified financial ratios within guidelines established by the lender. Interest is paid monthly at a variable rate, based on meeting certain financial criteria. The average rate during each of the months of September, 2012 and December, 2011 was LIBOR plus 2.60% which equated to 2.8%. There is an annual commitment fee of 1/8 of 1% on the average daily unused commitment, but will increase to 1/2 of 1% if the average unused portion of the commitment for such calendar month is less than or equal to 50% of the commitment. In the event of a significant pay down or an earlier retirement of the revolver commitment, Coastal Credit would sustain certain prepayment penalties. This facility limits distributions Coastal Credit may make to White River to 80% of Coastal Credit’s pre-tax net income.
 
White River’s sources of liquidity, as the parent company, are limited and consist of cash on hand and distributions by Coastal Credit (subject to restrictions under Coastal Credit’s credit facility).
 
On August 11, 2011, White River announced that its Board of Directors approved a program to repurchase, from time to time and subject to market conditions, up to 250,000 shares of White River’s outstanding common stock, without par value, on the open market or in privately negotiated transactions. As of September 30, 2012, White River has repurchased 62,829 shares of its outstanding common stock under the program for $1.2 million.
 
 
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 loan loss experience on the receivables will be comparable to that set forth below. See “Discussion of Forward-Looking Statements.”
 
 
Finance Receivables – Coastal Credit
 
With recent personnel reductions by the U.S. military which are limiting reenlistments, individuals are being released into a civilian job market that, while improving, is still experiencing high unemployment.  These reductions by the U.S. military had been anticipated and the results of the reductions are now contributing to the recent increase in charge-offs and delinquencies. Once the U.S. military reaches its personnel targets, we expect delinquency and charge-offs to return to normalized levels.
 

 
21

 

Part I   Financial Information
 
 
Delinquency status of finance receivables at Coastal Credit under their contractual terms are as follows ($ in thousands):
 
     
September 30, 2012
   
December 31, 2011
 
                           
 
Finance receivables - gross balance
  $ 145,788           $ 137,277        
                               
 
Delinquencies:
                           
 
30-59 days
  $ 1,607       1.1 %   $ 1,317       1.0 %
 
60-89 days
    1,357       0.9 %     689       0.5 %
 
90+ days
    1,698       1.2 %     697       0.5 %
 
Total delinquencies
  $ 4,662       3.2 %   $ 2,703       2.0 %

 
During the challenging economic conditions of the past four years, we have worked diligently to operate at delinquency and charge-off levels that were well below normal sub-prime lenders.  We were successful in doing so while still generating strong growth. We have found that it is now increasingly difficult to meet both objectives as the economy improves and competition has intensified. As such, we have made the decision to allow charge-offs and delinquency to move toward levels consistent with this business sector.  This action is expected to improve our ability to grow more in line with that which was achieved over the past several years.  We have begun to reduce the allowance for loan losses to reflect the overall improvements in the U.S. economy as seen by the recent reductions in unemployment and the strengthening in the housing market.  Even with the reduction in the allowance for loan losses, these reserves continue to be in excess of the annualized net charge-offs incurred reflecting a cautious outlook on the economy and the increased competition in this sector.
 
As a result of the nature of the customers in Coastal Credit’s portfolio, Coastal Credit considers the establishment of an adequate allowance for loan losses to be critical to its financial results. Coastal Credit has an allowance for loan losses that is calculated independent of the aggregate acquisition discounts and fees on finance receivables. Coastal Credit’s allowance for loan losses is based upon the historical rate at which (1) current loans, (2) contracts in a 30, 60 and 90+ day delinquency state and (3) loans ineligible for its borrowing line, have defaulted. These historical rates are evaluated and revised on a quarterly basis for current conditions. See “Discussion of Forward-Looking Statements.”
 

 
22

 

Part I   Financial Information
 
 
Allowance for loan losses of finance receivables ($ in thousands):
 
     
Quarters Ended
September 30,
   
Nine Months Ended
September 30,
 
     
2012
   
2011
   
2012
   
2011
 
                           
 
Balance at beginning of period
  $ 7,703     $ 7,703     $ 7,703     $ 8,153  
 
Charge-offs
    (1,932 )     (1,614 )     (5,782 )     (5,051 )
 
Recoveries
    647       686       1,916       1,924  
 
Provision for loan losses
    985       928       3,566       2,677  
                                   
 
Balance at the end of the period
  $ 7,403     $ 7,703     $ 7,403     $ 7,703  
                                   
 
Finance receivables, net of unearned finance charges
  $ 144,022     $ 132,070     $ 144,022     $ 132,070  
                                   
 
Allowance for loan losses as a percent of finance receivables, net of unearned finance charges
    5.14 %     5.83 %     5.14 %     5.83 %
                                   
 
Annualized net charge-offs as a percent of finance receivables, net of unearned finance charges
    3.57 %     2.81 %     3.58 %     3.16 %
                                   
 
Allowance for loan losses as a percent of annualized net charge-offs
    144.03 %     207.52 %     143.62 %     184.75 %

 
 
Market Developments
 
Despite persisting economic challenges, we continue to believe White River is well positioned to continue operations and grow the company responsibly based on the following factors:
 
·  
Coastal Credit is not dependent on the securitization market for financing.
 
·  
At September 30, 2012, there was $16.0 million available, in excess of the amount utilized, from the line of credit which has a maturity date of December 31, 2014.
 
·  
White River is well capitalized with an equity to asset ratio of 46.9% as of September 30, 2012.
 
While there is never any guarantee White River will not be faced with the constrained financing scenarios seen by other auto finance companies during and since the recession of 2007-2009, we believe White River is well positioned in this uncertain economic environment, and we expect to be able to fund normal business operations and meet our general liquidity needs for the next 12 months through access to the current or a renewed line of credit, cash flows from operations, and our other funding sources.
 

 
23

 

Part I   Financial Information
 
 
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), includes provisions affecting large and small financial industry participants alike, including several provisions that  profoundly affect the regulation of certain companies providing consumer financial products and services, such as Coastal Credit. Among other things, the Dodd-Frank Act established the CFPB as an independent entity within the Federal Reserve, which has the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including non-bank commercial companies in the business of extending credit and servicing consumer loans. The Dodd-Frank Act contains numerous other provisions affecting financial industry participants of all types, many of which may have an impact on the operating environment of the Company in substantial and unpredictable ways. Consequently, the Dodd-Frank Act is likely to affect our cost of doing business, it may limit or expand our permissible activities, and it may affect the competitive balance within our industry and market areas. The nature and extent of future legislative and regulatory changes affecting financial institutions and non-bank commercial companies, including as a result of the Dodd-Frank Act, is very unpredictable at this time. The Company’s management continues to actively monitor the implementation of the Dodd-Frank Act and the regulations promulgated thereunder, including regulations issued by the CFPB, and assess their probable impact on the business, financial condition, and results of operations of the Company. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and the Company in particular, continues to be uncertain.
 
 
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 White River’s Annual Report on Form 10-K;
·  
general economic, market, or business conditions;
·  
changes in economic variables, such as the availability of business and consumer credit, conditions in the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment and the levels of consumer confidence and consumer debt;
·  
changes in interest rates, the cost of funds, and demand for White River’s financial services;
·  
the level and volatility of equity prices, commodity prices, currency values, investments, and other market fluctuations and other market indices;
·  
changes in White River’s competitive position;
·  
White River’s ability to manage growth;
·  
the opportunities that may be presented to and pursued by White River;
·  
competitive actions by other companies;
·  
changes in laws or regulations, including the impact of current, pending and future legislation and regulations, including the impact of the Dodd-Frank Act and legislation regarding U.S. fiscal policy;
·  
changes in the policies of federal or state regulators and agencies; and
·  
other circumstances, many of which are beyond White River’s control.
 

 
24

 

Part I   Financial Information
 
 
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 4. CONTROLS AND PROCEDURES
 
Evaluation of disclosure controls and procedures
 
White River's chief executive officer and chief financial officer, after evaluating the effectiveness of White River's disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) of the regulations promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the most recent fiscal quarter covered by this quarterly report (the "Evaluation Date"), have concluded that as of the Evaluation Date, White River's disclosure controls and procedures are effective in ensuring that information required to be disclosed by White River in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
 
 
Changes in Internal Control Over Financial Reporting
 
During White River’s fiscal quarter ended September 30, 2012, 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.
 

 
25

 

Part II   Other Information
 
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Information regarding White River’s share repurchase program for the quarter ended September 30, 2012 is set forth in Note 10, “Dividends and Share Repurchase Program,” to White River’s condensed consolidated financial statements contained in this quarterly report on Form 10-Q, and is incorporated by reference herein. For the quarter ended September 30, 2012, White River did not repurchase any shares under this program.
 
 
ITEM 6. EXHIBITS.
 
No.
 
Description
     
31.1
 
CEO Certification required by 17 C.F.R. Section 240.13a-14(a).
     
31.2
 
CFO Certification required by 17 C.F.R. Section 240.13a-14(a).
     
32
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.