When fast-growing World Acceptance reports earnings on July 26, keep an eye on anything the company says about the government's newly formed Consumer Financial Protection Bureau (CFPB).
For several quarters the consumer-finance company, whose operations are concentrated in 12 southern states, has warned repeatedly in its conference calls that the CFPB is its “primary focus and concern” on the national level.
Greenville, S.C.-based World hasn’t said exactly what its concerns are, beyond mentioning in its 10-K the possibility that the new regulator could exercise “its unprecedented powers.”
But it has plenty to be concerned about, starting with the very business it’s in: Consumer finance.
And not just any consumer finance.
World bills itself as “one of the largest small-loan consumer finance companies in the United States,” but it’s really little more than a last-resort subprime lender. As it notes itself, the company “seeks to provide short-term consumer installment loans to the segment of the population that has limited access to other sources of credit.”
Its average loan size is around $1,000, on which it says in its SEC filings that it charges 24 percent to 204 percent. The average, based on dividing reported interest income by average net loans, appears to be around 67 percent.
What’s more, for the last two years 75.9 percent of its loans were generated by refinancing existing loans, sometimes with a larger loan, which the company says in its 10-K “may increase fees and other income realized for a particular customer.”
No wonder one of its boilerplate warnings to investors is that it could be hurt by "media and public perception" that its loans are “predatory or abusive.”
Which is where the CFPB comes in: Installment lending among its areas of focus.
But even more worrisome to investors in World, where credit insurance is part of the story, should be the CFPB’s recent focus on credit insurance and other products sold by credit card companies.
Just yesterday, in its first enforcement action ever, the CFPB nailed Capital One Financial, requiring it to refund $140 million to customers and pay a $25 million penalty related to a number of products including “payment protection," which is a form credit insurance.
And earlier, the CFPB joined the FDIC in going after Discover Financial for marketing practices surrounding what it calls “payment protection.”
The CFPB, which did not respond to my requests for comment, went so far yesterday as to issue a compliance bulletin about deceptive marketing practices by credit card issuers on such things as “debt protection.”
While World is not a credit card issuer, commissions from credit insurance last year accounted for 14 percent of revenue and roughly an estimated 30 percent of profits. And it’s growing slightly faster than the company as a whole.
World says that commission on the insurance may help the overall returns on loans. In its SEC filings it says that it "encourages" customers in South Carolina, Louisiana, Alabama and Kentucky and on a limited basis in several other states to get insurance. And it appears to work, with the company adding: “Customers in those states typically obtain such credit insurance from the company.” And when they do, World says it charges “the maximum authorized rates.” (Related:States with Best Credit Scores)
World did not respond to several of my inquiries in recent weeks, including a voice mail earlier this week to Chief Financial Officer Kelly Malson (whose message said she was in the office.)
Investors, however, don’t appear concerned. World’s stock has been on a tear, rising 15 percent over the past month to all-time highs. The company has been an active acquirer of its own shares, with its board on June 11 approving a new $25 million new share repurchase authorization, six weeks after approving a $50 million share repurchase authorization which still had $25.4 million remaining.
And thanks largely to the share repurchases at these high prices, analysts expect this quarter to be a good one. So good, in fact, that in a recent report FBR analyst Bob Ramsey wrote that World is “one of the names within our coverage universe with the best chance to surprise to the upside...given strong share repurchase activity that does not appear to be fully in consensus numbers.”
Stephens analyst John Hecht agreed, saying he expects upside to earnings “due largely to increased share repurchase activity.”
As I wrote earlier this week, buybacks for the mere sake of reducing share count to boost earnings per share don’t always add shareholder value.
Time will tell whether World investors learn that lesson the hard way.
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