World Acceptance Corporation is one of the largest small-loan consumer finance companies in the United States. It offers short-term small loans, medium-term larger loans, related credit insurance products, ancillary products and services to individuals who have limited access to other sources of consumer credit. The company's loans generally are under $3,000 and have maturities of less than 24 months. Loan charge off rates are high at around 15%, but they have shown stability over recent years and given interest income of $375 million in 2010 compared to loans of $770 million. The company has been able to easily absorb these costs in its margins.
In 2005, the company opened its first offices in Mexico and has built that presence up to 87 by December 2010, with plans to open a further 15 in 2011. Mexico offers the company huge potential with a population of 110 million, lower levels of competition and less regulatory oversight, but has increased risks due to increasing criminal activity. Currently, Mexico only accounts for a relatively small 4.7% of the total loan portfolio, compared to Texas (20.2%), Georgia (13.5%) and Tennessee (13.4%).
Earnings per share growth over the past 10 years has averaged 20%, reflecting strong earnings growth and the effect of the company’s stock buy-back program. In January, the company reported £13 million in net income to $57.0 million for the nine months ended Dec. 31, 2010, an increase of 29.6%. Total revenues rose $37.8 million to $354.5 million. This increase was primarily attributable to a $35.0 million increase in interest and fee income which in turn was driven by a $78.9 million, or 14.4%, increase in average net loans receivable.
Despite this strong growth in the loan book, provisions increased by only 4.9% to $3.6 million, accounts that were 61 days or more past due decreased from 3.0% to 2.8% and net charge-offs as a percentage of average net loans decreased from 17.8% to 16.3%. Other expenses were tightly controlled and increased by $14.2 million.
Such an excellent performance throughout the financial crises is truly remarkable. However, the increasing rate of loan growth is a concern as due diligence standards often drop as lenders seek growth and loan impairment is a lagging indicator which may take several quarters to feed through to the bottom line.
The company will announce its full year’s figures on Thursday, and there is no reason to expect any change in its upward trend, but management should address how they are maintaining such growth without compromising on standards. Wide interest margins will not help if World Acceptance Corporation cannot recover the principle.
Disclosure: The author has no long or short positions in World Acceptance Corp.