They're extending credit

By Dick Hughes  

AUGUST 3, 2010 8:11 a.m. (0)

World Acceptance, which began as four offices in Greenville nearly half a century ago, has become one of the largest players – and the only publicly traded one -- in the business of issuing small installment loans to consumers denied credit elsewhere.

What’s more, when many financial institutions are burdened with toxic loans, eroding or disappearing profits, capital shortages and shareholder discontent, World Acceptance is enjoying healthy profits, steady growth, strong shareholder value and virtually no debt.

World Finance, as it known by brand, makes short-term installment loans at high interest rates to consumers whose credit histories limit access.

It has more than 1,000 offices in 11 states and Mexico. Its largest state is Texas with 230 offices. It has 97 offices in South Carolina. World employs 3,600 people, 70 in Greenville.

It has nearly 800,000 customers, 85 percent of whom are repeat or refinanced borrowers. In the fiscal year ended March 31, it made 2.1 million loans worth $2.3 billion.  World makes loans up to $4,000 with 36-month maturity, but the average loan is $1,000 with a payoff in 11 months.

The only company rivaling World in size is Security Finance, a privately held company in Spartanburg.  Security Finance does not disclose finances, and officers declined to be interviewed.

“I think we have been as successful as anybody in financial services,” A.A. “Sandy” McLean III, 59, World’s chief executive and chairman, said in an interview.

That is characteristic understatement by a company that adheres to a no-flash style, said Thomas W. Smith, the 80-year-old Connecticut financier who is World’s single largest shareholder.

Behind that low profile, he said, is “very sophisticated financial” acumen that, as The Street put it in picking six stocks for uncertain times, “wisely use(s) the money they generate . . . whether the economy is strong, marginal or weak.”

Smith put an exclamation point to his confidence by adding $9.3 million in shares in a series of purchases in April and May to increase his already sizeable ownership stake to 18 percent.

“They have grown this company quietly for a long, long time,” said Smith.  “We’ve been investing for 16 years. If you pick up their value line, you see what they have done with only one year in 16 years being down and that was one penny a share. It’s just extraordinary.”

Since 2000, earnings have increased on an 18 percent per year trajectory from $14 million to $74 million in fiscal 2010.  Annual growth of loans, its core asset, is 13-14 percent and has been as high as 20 percent.

“If you look at our earnings per share, we have had an increase every single year but one.  Most financial institutions don’t have that consistent growth in earnings year after year,” said McLean.

In three recession-racked years, World had net income of $73.6 million in 2010, $56.5 million in 2009 and $53 million in 2008, but it has not been untouched by the downturn.  In fiscal 2009, its loan-loss rate rose to a record high of 16.7 percent. It since has dropped to 15.5 percent, still above the company’s 14.5-percent average.

“For fiscal 2009, that was a pretty dramatic increase,” said McLean, adding that World’s typical borrowers were hard hit by the recession.

“We work with them, and we have a pretty good working relationship. They will pay us if they can, but in fiscal 2009 gas hit $4 a gallon and all kinds of prices went up substantially, and that has a direct impact on the availability of our customers’ excess funds.”

Because their customers are higher-risks, companies like World operate only in states that allow “rates that are obviously higher than banks charge,” McLean said.

Which is not to say the loan-approval process is less rigorous, he said.

“We go through a very thorough underwriting process, and we certainly believe that individual we’re giving the loan to is capable of repaying and has a history of showing that they will repay it.

“That said, our loss ratios are pretty high so the cost of doing a small dollar loan is pretty substantial. You go through the same kind of cost-structure underwriting for a small loan as you might for a larger loan, so the cost structure on a relative basis is pretty high.”

South Carolina does not limit allowable interest rates or loan sizes for supervised lenders such as World and Security Finance.  They can charge whatever they want as long as they annually file their maximum rate with the state, 90 percent for both, but McLean said World’s actual rates vary from 36 to 86 percent with smaller loans showing higher percentages against smaller dollar amounts.

World stays out of mortgage, auto, payday, title and rent-to-own markets, where most of the credit problems that plague the financing system occurred and where regulators are focused on abuses.

Using cash, World expanded through acquisitions and new locations from 410 offices in 2000 to more than a 1,000. This year, World plans to enter at least one more state, open 55 new offices in the United States and 15 in Mexico and “evaluate any acquisitions that may become available.”

The company’s boldest move was in 2005 when it entered the Mexico market.  While that segment has yet to turn a profit, the company sees “tremendous opportunities,” McLean said. “We’ve just scratched the surface there.”

To make use of employees in slow lending months of January and February and add a profit-making sideline, World began offering tax preparation 10 years ago.  In the last tax season, World completed 62,000 returns and reported revenue of $11 million.

ParaData Financial Systems, a company purchased in 1993, does World’s data processing and, as an independent subsidiary, has ”over 100 external customers that help defray the cost to World,” McLean said. “They have actually made substantial amounts of money in certain years.”

World was founded in 1962, acquired in 1973 by Southern Bank and became part of First Union, now Wachovia/Wells Fargo, in merger with Southern in 1986.  World became independent again in 1989 when Charles Walters led a management buyout. The company went public in 1991.

Walters held World’s senior positions until his retirement in 2007.  Now 71, he is chairman of Independence Bank.

Comments

Add New

Leave a Comment
Comments are moderated and may not be posted immediately.
Name:
Email:	do not notifynotify
Title:
	Please input the anti-spam code that you can read in the image.

3.26 Copyright (C) 2008 Compojoom.com / Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."