White River Capital negotiating new terms for its First Chicago Bancorp merger

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Last June, Itasca, Ill.-based First Chicago Bancorp announced it was acquiring locally based subprime auto lender White River Capital Inc. In the 10 months since, the financial world has transformed around the two parties.

In a March 13 filing with the Securities and Exchange Commission, publicly traded White River revealed it’s postponed the merger, and now is negotiating new terms.

There’s a simple reason. The economic downturn has significantly weakened both firms. But ironically, White River’s position versus First Chicago’s actually has strengthened.

Because White River has a stock-market value of $27.4 million, it’s not likely to acquire First Chicago, the privately held parent of First Chicago Bank and Trust, which has seven branches and assets of $1.3 billion. But White River may be able to command a higher premium for its shares.

"We signed up for this transaction in June 2008," said White River President Mark Ruh. "We’re sort of on a different planet from there."

Under the original deal, First Chicago offered two of its shares for each share of White River. First Chicago would have become a public company and likely wiped out White River’s local headquarters, which has just a handful of employees.

White River’s shares briefly approached $17 after the deal was announced, but dropped under $4 in the following months before rebounding to around $6.75.

At the height of the financial crisis last fall, White River recorded a $34.5 million charge to goodwill, a setback that left the company with a $14.4 million loss for the year. Meanwhile, First Chicago had its own challenges and lost $34.4 million in 2008.

Despite the firms’ weakened states, the deal probably still makes sense for both of them, which is why they’re continuing to haggle over terms. The fact that Mark Ruh is the younger brother of First Chicago CEO Bill Ruh also might be helping to keep discussions alive.

Repeated calls to First Chicago were not returned.

The suburban Chicago market where First Chicago operates is crowded with competitors, and as a result the firm needs to specialize to spark growth, said Jim Kleinfelter, president of the Kent, Ohio-based bank consulting firm Young and Associates.

The question now is what ratio of shares both sides can agree on.

White River, which trades under the symbol RVR, formed in 2005 from the ashes of Union Acceptance Corp. Founded in 1986 as a division of Union Federal Bank of Indianapolis, Union Acceptance had 600 employees at its peak, but waves of loan losses forced it into bankruptcy in 2003.

Today, White River still holds securities created from Union Acceptance loans, but the end of the company’s liquidation is near. Its other subsidiary, Virginia Beach, Va.-based Coastal Credit, buys subprime loans from auto dealers. It has 130 employees.

Ruh said White River originally pursued the deal largely so it could make its loans off of a sizable base of deposits, rather than rely on a Wells Fargo credit line, whose size and terms could change along with the economy.

Subprime is a space lenders considered risky even before the recession. And these days, loans to consumers with checkered credit are the last thing many big banks want on their books.

But the business has been surprisingly resilient, Ruh said, because competition has lessened and cash-strapped consumers tend to consider making their car payments a top priority.

"People with too many loans, the last thing they default on is their car," Ruh said. "People need their cars. They’ve got to get to work and to the grocery store and to pick up their kids."

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