World Acceptance Has the Goods; Citron Doesn't

Citron Research's latest screed is packed with even more false statements than its 3-part smear on World Acceptance Corp (WRLD) from earlier this summer. Citron has proven to this writer that it is deliberately spreading false information with intent to profit via shortselling.

Let's get into its September 17th report and take it apart.

World has built its entire business on loopholes... where its been able to curry the favor of state legislatures to open the loopholes in state usury laws so it can make sub-sub-sub-prime loans at super-high rates.

False. State laws regarding consumer installment loans (CILs) do not contain loopholes. Each state in which World operates has carefully crafted, specific enabling legislation regarding CILs. World operates legally in every state, strictly according to these specific statutes.

Truth 1, Citron 0.

Readers should note how Citron uses inflammatory language to attack the quality of the loans and the rates charged. As anyone in the lending business knows, the rates that are charged are reflective of the risk assumed by the lender. World's loans are extremely risky, since the borrower offers nothing tangible as collateral. Hence, the rates that reflect that risk and are specifically permitted under state law.

Truth 2, Citron 0.

Any form of federal law, which has never existed, would supersede the many loopholes enabling WRLD to operate in their niche states... uniform Federal regulation by the CFPA would threaten World’s entire business model.

False. Who says Federal law would threaten World's business model? We haven't seen any such regulatory language. Third, and most importantly, the proposal from the Obama Administration regarding the CFPA clearly states that it will not have any rate-setting authority!

And here's the proof from the CFPA proposal, page 25, Section 1022:

(g) NO AUTHORITY TO IMPOSE USURY LIMIT.—Nothing in this title shall be construed as conferring authority on the Agency to establish a usury limit applicable to an extension of credit offered or made by a covered person to a consumer, unless explicitly authorized by law.

Truth 3, Citron 0.

Citron cites an op-ed by Elizabeth Warren to support its claims about regulation, an op-ed which I have previously torn to pieces. And this is an op-ed, folks. It is not a statement of policy. It is not a piece of legislation. It is not a piece of regulation. It is vapor because the CFPA does not exist, and because Elizabeth Warren has no credibility.

Truth 4, Citron 0

Citron goes on to say,

The only remaining question is not whether World will come under uniform Federal regulation, but only the inevitable: how soon, and by whom?"

The author then quotes from a Washington Post article on the Fed's extension of its regulatory umbrella to cover other non-bank financial products.

If you actually read the article and have been following the issue, what you discover is that the Fed is primarily concerned with bank subsidiaries operating in the sub-prime mortgage and home equity lending business -- not CILs. And the last sentence makes it clear,

Lenders that are neither banks nor owned by holding companies remain beyond the reach of federal oversight.

Truth 5, Citron 0

Citron continues,

Everyone now realizes the need for uniform Federal regulation of consumer lending, and it has become inevitable.

Everyone? Says who? Inevitable? Says who? More unsubstantiated statements lacking supporting evidence of any kind.

Truth 6, Citron 0

That step aligns all the parties — Congress, the Obama Administration and the Fed — in their intent: to protect the sub-prime consumer from predatory lending practices.

Nope. Again, if you are at all familiar with the issue, CILs are not anywhere near a priority.

Truth 7, Citron 0

Citron asserts,

And it won’t take a fixed interest rate cap to seriously impair World’s business. A more likely outcome is prohibition of the most abusive practices of “flipping” and “packing” — which is more than enough to devastate World’s cash flow and viability.

What Citron fails to mention is that I, as well as the company in its conference calls, have repeatedly debunked the notion of "flipping". You can read about it here.

As for "packing", credit insurance is voluntary and is expressly authorized by the customer in World's truth and lending disclosures, and insurance authorization forms. It is illegal to package insurance products for sale, or make them in any way a condition for loan approval. This is enforced by the Federal Trade Commission. World does not engage in packing.

Furthermore, unearned portions of credit insurance charges are rebated to the customer upon prepayment in full of their loan obligations.

Since there is no flipping or packing, there is no threat from regulation.

Truth 8, Citron 0

Citron concludes this portion of its rant by insisting that all of its assertions will kill World. Of course, since these assertions consist of eight lies and no truth, we dismiss this conclusion as faulty at best, and of dubious motive at worst.

Truth 9, Citron 0

We'll pass over the first paragraph of his next section about something smelling funky (and it isn't World's books, by the way) as it's a rehash of what I've already tackled.

Citron then discusses how credit quality is deteriorating, and raises skepticism about World's loan loss reserves. The thesis appears to be that World's business model can't possibly survive given the unemployment situation, and accuses World of cooking the books to show lower loan losses than reality.

I must call this out as a flagrant lie. Even worse, Citron is now accusing the company of malfeasance. I'm surprised that World doesn't sue for libel -- because discovery would likely show that Citron is short the stock and has intent to defame World so that it may profit.

Here are the facts. Actual loan losses cannot be controlled by the company. But the P&L clearly indicates that actual loan losses have remained relatively consistent. Loan loss is different from loan loss reserves -- the amount the company sets aside against income. The company has stated on numerous occasions that the loan loss reserve is their most important estimate and that they, and their external auditors, analyze it on an ongoing basis using several models to determine the adequacy of the estimate. Historically, as long as charge-off ratios remain within a certain band, the company has stated that they believe this current approach is reasonable.

Citron's allegations that World has been lowering reserves as a percent of net loans in a material way is also an outright lie. Yes, there will be fluctuations on a quarterly basis, but World's methodology has been consistent for a long time.

Citron then has the audacity to proclaim that World's methods are creative and ridiculous.

Pot, meet kettle.

Truth 10, Citron 0

Citron tries to draw parallels between HFC and World, but there is no comparison between the two entities. HFC opened in the 1970s, primarily offering secured consumer loans of $500 - $5000. Over time their model changed, where small loans became feeders for their mortgage operations. After being acquired by HSB, the real estate market went bad, and their adjustable mortgages defaulted. HFC was out of business -- not because of CIL's, but because they had become a mortgage lender.

World is not in the mortgage business at all.

Citi Finance, also known as CIT, is primarily a lender to small businesses.

World is not in the small business loan arena at all.

Truth 11, Citron 0

At this point, Citron has thrown out any pretense. It is one thing to express an opinion. It is another to continue to press it when it has been proven to be false, which I have done here and in other articles.

It is the opinion of Citron Research that by serially flipping and re-writing loans 45 days delinquent, (a “service” which World discloses it “actively markets to its customers”) the company masks the true low quality of its receivables. Further, by its own admission, it also rewrote over $40 million in loans from its own “delinquent” status (beyond 45 days overdue).

False. As stated in SEC Filings, these loans totaled less than 2% of all origination volume last year. This number has remained consistent for years. Loans that are renewed more than 45 days contractually delinquent are never increased to any larger size.

In addition, most of that tiny 2% are for customers who have paid monthly payments recently, but are contractually past due from prior missed payments resulting from job loss or unexpected expenses. They can make the monthly payments, they just can't catch up contractually. World will renew those loans, but do so using a new application, credit bureau report and evaluation of the customer's ability to pay.

How responsible is this? Very. And it's the same tactic the Obama Administration asked mortgage lenders to do for their delinquent loans.

Truth 12, Citron 0

Citron continues,

Even states that aren’t actively rewriting laws to curb the abusive practices of WRLD and other installment lenders are actively establishing alternatives to extend credit to WRLD’s type of customer.

Citron cites an article describing a plan in Dallas.

Except this plan 1) is intended for payday lending and check-cashing customers, neither of which are World's clientele, and 2) even if they were, these types of plans are simply being tested, and so far have been utilized infrequently.

Neither the payday loan or check cashing industry has been affected by any of these small alternative programs because they are too tiny to make any impact.

Truth 13, Citron 0

Citront hen accuses World is lending to the military at rates exceeding the 36% APR rate cap.

Except CIL's are not subject to this rate cap.

Only payday loans, tax refund anticipation loans, and auto title loans are subject to the cap. In fact, the department of defense, when setting the cap rules, made specific reference for the need of "legitimate, safe, regulated small loan consumer credit" when they prohibited the other practices, which were defined specifically by the DoD as being non-beneficial forms of credit.

A simple glance at Page 50585 of The August 31, 2007 Federal Register, "Limitations on Terms of Consumer Credit Extended to Service Members and Dependents: Final Rule" clearly states:

...the final rule focuses on three problematic credit products that the Department identified in its August 2006 Report to Congress on the Impact of Predatory Lending Practices on Members of the Armed Forces and Their Dependents: payday loans, vehicle title loans, and refund anticipation loans. The Department’s definition of the term ‘‘consumer credit" in the proposed rule was intended to narrow the regulation’s impact to consumer credit products and services that are potentially detrimental and for which there are DoD-recommended, alternative products or services available to Service members and their dependents. DoD believes that a narrow definition will prevent unintended consequences while affording the protections granted by the statute.

World is operating within the law.

Truth 14, Citron 0

"It is Citron’s opinion that WRLD has intentionally grown its business of usury-rate lending to members of the US military. As soon as this loophole is closed, so go those “best offices”.

There is no loophole since World is operating legally.

Approximately 1.5% of World's loans are made to military personnel.

Nowhere does World claim these are their best offices.

That's a 3-for-1 lie.

Truth 17, Citron 0

And to wrap things up, "

World’s business window is narrowing in both time and geography. While it waits for Federal regulation, it can’t meaningfully expand its eleven-state operations to any new states if it loses one or two.

World doesn't seem concerned. It is expanding domestic operations.

Truth 18, Citron 0

As a source of growth, its Mexico initiative is obviously failing to generate profits or growth.

World's most recent quarterly reports that they had a total of 63 offices in Mexico with the stated goal of adding 15+ the remainder of the year. They service over 70,000 customers and have $366 million pesos in loan balances outstanding. That would be growth that began from zero stores and zero loan balance. Looks pretty good to me.

Truth 19, Citron 0

The only question that remains -- and frankly, I don't think it's even a question anymore -- is whether Citron is just being lazy to miss simple facts that I have been so easily able to root out -- or if Citron is making deliberately misleading statements.

My three previous articles completely exposed Citron's attacks on World as being filled with misstatements of fact, insidious innuendo, and outright lies. Rather than rebut those articles directly and defend his position, Citron continues to press a case built on a house of cards. It is obviously not interested in the truth.

As my old math teacher once said, "Take a moment to think before following the White Rabbit down that hole".

So just as Citron claims to put out his information and let the reader decide, I'll do the same.

How is this actionable?

Last time, Left's articles were arguably a reason why the stock sold off from $28 down to $17. After I published my rebuttals, the stock recovered, eventually returning to $28. Since his latest missive was released on Sept. 17, the stock is off 10%.

Right now, you have WRLD trading at about 7 times current earnings and less than 6 times earnings on forward earnings of $4.24 for its year ending March, 2011. At 11% projected growth for next year, I see a stock trading at a 40% discount to intrinsic value.

The company has strong cash flow, and more importantly, if the company had to liquidate its portfolio at the current loan loss rate of 16%, the company would still have $13.50 in net cash on its books. Not only is such an event ridiculous unlikely, it won't result in the claim that the stock would "go to zero".

In addition, October 25 calls are going for a nice 6% premium. That's a nice return to buy the underlying and sell the calls.

Full Disclosure: No position in WRLD.

Comments

[maybe4less2:]

It's a shame. Citron used to write quality reports.

Sep 24 12:26 PM

[Craigla1:]

Do you work for the company? Clearly, you do, or are LONG the stock (despite your "disclosure). Why else would you have such intimate knowledge of WRLD's operations?

He doth protest too much ...

Please tell me why you believe the claim WRLD is rolling over very little of their bad debts. HOW could this be logical? Their borrowers are the bottom of the barrel in terms of credit quality. Look at unemployment (nearing 10%), and U6 (nearing 17%; if you need a definition, I'll provide it).

WHY would the market value this puppy at such a low PE multiple? BECAUSE the MARKET does not trust the quality of their earnings. This is classic.

Don't be fooled by a low PE (it's called a value trap).

In other words, the market feels their loan loss provision should be MUCH higher, which would depress stated earnings and result in a much higher PE ratio.

Sep 24 12:26 PM

[Larry Meyers:]

I do not work for the company.
I am not long the stock.
I did what Citron did not -- actual research. You can do this research, too. All you have to do is read the 10-K and 10-Q and read conference call transcripts. Everything I have written about in all 4 of my articles is all right there. That you are mystified as how I came to this knowledge demonstrates to me that you have little interest in the truth, either.

You are underinformed if you believe that the reasons you gave for the current market valuation are correct.

Sep 24 01:00 PM

[Craigla1:]

Under-informed? That's laughable. I was a banker for 20 years.

What is their ratio of LLR/NPA?

And (again), how do you have any faith they are reporting non-performers accurately? If you look at EVERY bank or financial institution (on down to BSC and LEH) that runs into trouble, they ALWAYS are very liberal in their accounting for things like bad assets.

Note I am not saying this is a short due to pending federal legislation or regs which will limit their rate setting ability.

Sep 24 01:28 PM

[Craigla1:]

And AGAIN, if you're not an employee or LONG THE STOCK, then WHY are you combing their K and Qs to make a 15 point rebuttal of Citron?

Very curious ....

Sep 24 01:29 PM

[Larry Meyers:]

Craigla1:
You may have been a banker, but that you ascribe the reasons you do for the stock's current valuation shows you know little about the stock market.

There are many reasons why a stock is valued the way it is. For every joker who points to a low PE as being a value trap, there are plenty of people who have made ten-baggers.

THe Loan Loss Reserve to Non Performing Asset ratio is right there in the 10-Q's. I'm not your research assistant. Look it up for yourself.

You ask " how do you have any faith they are reporting non-performers accurately? If you look at EVERY bank or financial institution (on down to BSC and LEH) that runs into trouble, they ALWAYS are very liberal in their accounting for things like bad assets."

As I am actually IN the short-term and installment loan business, I see that their numbers are in line with those of all other public and private companies that operate in this space.

In addition, you have provided no evidence that shows the WRLD is like "every other financial institution". Just because you say the others are "liberal" does not mean that WRLD is. Until you can provide more than speculation, I prefer to deal with facts.

"Note I am not saying this is a short due to pending federal legislation or regs which will limit their rate setting ability."

Good. Because today's big headline is that the CFPA will not have oversight over non-banks. So half of Citron's report just went bust without my help.

"And AGAIN, if you're not an employee or LONG THE STOCK, then WHY are you combing their K and Qs to make a 15 point rebuttal of Citron?"

Ah, yes, the last resort of the debate loser. Attack the messenger.

The obvious answer is that I'm in the industry, but not associated with WRLD. An attack on WRLD is an attack on the industry.

But here's a little lesson in logical debate. What if I actually did work for the company -- which I don't -- or that I am the long the stock -- which I am not ?

Does it change any of the ARGUMENTS?

Look at the MESSAGE, Craig, not the messenger.

Attacking the messenger only works if the messenger is lying.

I'm not lying. All the information is right there for anyone to find.

You have attacked exactly one aspect of my argument. I've provided a rebuttal.

If you are truly concerned about the points I've raised, or take issue with them, then why even listen to me?

Call the company. I'm amazed at how many people challenge various assertions of mine and expect me to be the final arbiter.

If you question the company's practices, call them. Get it from the horse's mouth. Why listen to a blogger?

Sep 24 04:03 PM

[Craigla1:]

Oh, Larry, I am not listening to a blogger (well, some of what you say is worth listening to, but not all of it). Let's see how their vaunted customers can generate the cash flows to repay these loans.

Happy you're in the industry, and hopefully doing well, as you come up with blanks on IMDB.

Ostensible is the wrong word


On Sep 24 04:03 PM Larry Meyers wrote:

> Craigla1:
> You may have been a banker, but that you ascribe the reasons you
> do for the stock's current valuation shows you know little about
> the stock market.
>
> There are many reasons why a stock is valued the way it is. For
> every joker who points to a low PE as being a value trap, there are
> plenty of people who have made ten-baggers.
>
> THe Loan Loss Reserve to Non Performing Asset ratio is right there
> in the 10-Q's. I'm not your research assistant. Look it up for
> yourself.
>
> You ask " how do you have any faith they are reporting non-performers
> accurately? If you look at EVERY bank or financial institution (on
> down to BSC and LEH) that runs into trouble, they ALWAYS are very
> liberal in their accounting for things like bad assets."
>
> As I am actually IN the short-term and installment loan business,
> I see that their numbers are in line with those of all other public
> and private companies that operate in this space.
>
> In addition, you have provided no evidence that shows the WRLD is
> like "every other financial institution". Just because you say the
> others are "liberal" does not mean that WRLD is. Until you can provide
> more than speculation, I prefer to deal with facts.
>
> "Note I am not saying this is a short due to pending federal legislation
> or regs which will limit their rate setting ability."
>
> Good. Because today's big headline is that the CFPA will not have
> oversight over non-banks. So half of Citron's report just went bust
> without my help.
>
> "And AGAIN, if you're not an employee or LONG THE STOCK, then WHY
> are you combing their K and Qs to make a 15 point rebuttal of Citron?"
>
>
> Ah, yes, the last resort of the debate loser. Attack the messenger.
>
>
> The obvious answer is that I'm in the industry, but not associated
> with WRLD. An attack on WRLD is an attack on the industry.
>
> But here's a little lesson in logical debate. What if I actually
> did work for the company -- which I don't -- or that I am the long
> the stock -- which I am not ?
>
> Does it change any of the ARGUMENTS?
>
> Look at the MESSAGE, Craig, not the messenger.
>
> Attacking the messenger only works if the messenger is lying. <br/>
>
> I'm not lying. All the information is right there for anyone to
> find.
>
> You have attacked exactly one aspect of my argument. I've provided
> a rebuttal.
>
> If you are truly concerned about the points I've raised, or take
> issue with them, then why even listen to me?
>
> Call the company. I'm amazed at how many people challenge various
> assertions of mine and expect me to be the final arbiter.
>
> If you question the company's practices, call them. Get it from
> the horse's mouth. Why listen to a blogger?

Sep 24 05:55 PM

[Volman:]

Seek and ye shall find

Very good read and plain truths, unlike Citron.

Thank you

Sep 24 06:14 PM

[Larry Meyers:]

Craig:
Their customers are doing just fine, and the business has been around for 45 years. Their loan losses are 16.5%, which is not significantly more than it has been historically.

And, given that you seem more interested in my entertainment career than actually addressing specific points to my rebuttal, I think it's rather clear that you actually have nothing to counter said rebuttal.

And for the record, try looking under "Lawrence" -- not to mention that IMBD only publishes produced credits, not feature film sales or rewrites.

Anything else, or have you exhausted your arsenal?

Sep 24 10:01 PM

[Larry Meyers:]

You're welcome.


On Sep 24 06:14 PM Volman wrote:

> Seek and ye shall find
>
> Very good read and plain truths, unlike Citron.
>
> Thank you

Sep 24 10:02 PM

[Larry Meyers:]

Let me also add, Craig, that I have the courage of conviction to post opinions under my real name. Unlike you.

Sep 24 10:04 PM

[Stockmaven:]

Great Article. Citron is the old Stocklemon and totally a crooked operation.
World has a good business and makes good money year after year.
Few companies do as well.

Sep 27 02:08 PM

[danconia17:]

I have one question. Why do they not disclose the # and amount of loans that are "refinanced" from day 30 to day 45?? They will tell you the "delinquent" renewals after 45 days, but last I checked, delinquency starts at 30 days.... So I want to know what happens in those 15 days. I've asked the company and they won't tell me. It seems to me that if there is a high % of their renewals happening at that time that is a cause for concern.

Also, explain why their average loan balance has grown faster than the rate of inflation? Have these borrowers become better credits over time? I think not. I would submit the most probable explanation is that they keep rolling customers into higher loan balances to cover up bad loans.

I think the best way to determine if WRLD has a sustainable business is to look at how the RUN-OFF portfolio would perform. Any guess there??? Do you think their reserves are adequate for a run-off portfolio of loans??
(As an aside, the subprime mortgage business looked great for a long time because of all the re-financing that was done. However, when that music stopped, the run-off book of subprime loans was a disaster as we know). This is the same concept to use when thinking about WRLD.

Oct 14 03:58 PM

[H.J. Huneycutt:]

Citron's record is not nearly as pristine as its ardent followers would like to believe. They've been outright wrong about some companies and some of their articles have been extremely questionable when it comes to the logic employed. It's hard to deny that Citron can be a tad bit on the sensationalistic and moralizing side, as well. All the same, Citron has brought up a lot of compelling points in their articles over the years and have brought a spotlight onto a lot of shady practices in corporate America.

I am rather skeptical of the author's rosy presentation of WRLD in this article. Citron might play fast and loose with some facts, but they are right on the basic gist of things --- WRLD is a predatory company operating in a sphere that most Americans probably believe should be illegal.

WRLD engages in usury, plain and simple. They are legal loan sharks. I'm familiar with a lot of the pay day loan companies operating in the South and most of them engage in shady practices, that are either borderline illegal or outright illegal (but people turn a blind eye to it). I realize WRLD is not a "pay day loan" company; but they are probably worse.

The author dodges a few of Citron's points. In "Truth #14", the author states that Citron is lying because WRLD exceeds the 36% rate cap for loans to military families.

Except, Citron never claims that what WRLD is doing is illegal --- rather, their claim is that WRLD manages to dodge the spirit of these lending laws by technically not being in one of the categories of lenders subject to it. In essence, the laws were probably *intended* to stop the very practices WRLD engages in, but WRLD is crafty enough to get around that. Citron's claim is that these practices have a significant chance of being cracked down on during the current Administration.

Danconia17 also raises very legitimate points above about delinquencies.

One thing I've noticed is that WRLD's loan receivables balances are always on the increase. Yes ... a growing lender would probably have growing receivables balances, but it's kind of difficult to believe that WRLD's receivables could legitimately increase at such an exorbitant rate during the current economic crisis if something shady were not going on.

Another interesting thing about this is that their receivables are tucked away in the "Cash Flows from Investing Activities" and in spite of completely stellar earnings and absolutely spectacular operating cash flows, their "Cash Flows from Investing Activities" are normally roughly equal to their operating cash flows precisely because of that constantly increasing receivables balances. In fact, quite often, if you add the two together, you end up with a negative figure. This suggests to me that WRLD isn't "earning" nearly as much money as their earnings statements might indicate.

Given the absurdly high interest rates they charge, it also strikes me as a tad difficult to believe that their provision for loan losses could only be about 5% of their total loan portfolio value. I'll admit, I haven't analyzed any other companies in WRLD's particular niche (are there any?), but after examining the balance sheets of many banks and financial institutions, that seems a little low to me given the type of risky lending they are engaged in.

Citron may not have gotten every fact correct, but it is correct on the basic premise --- WRLD engages in predatory lending practices, operates near the outskirts of legality, and there are some questionable items in their accounting.

Oct 30 11:07 AM

[H.J. Huneycutt:]

That should read that "Cash Flows from Investing Activities" are inversely equal to WRLD's operating cash flows. Or in other words, they offset one another.


On Oct 30 11:07 AM H.J. Huneycutt wrote:

> Another interesting thing about this is that their receivables are
> tucked away in the "Cash Flows from Investing Activities" and in
> spite of completely stellar earnings and absolutely spectacular operating
> cash flows, their "Cash Flows from Investing Activities" are normally
> roughly equal to their operating cash flows precisely because of
> that constantly increasing receivables balances. In fact, quite often,
> if you add the two together, you end up with a negative figure.
> This suggests to me that WRLD isn't "earning" nearly as much money
> as their earnings statements might indicate.
>
> Given the absurdly high interest rates they charge, it also strikes
> me as a tad difficult to believe that their provision for loan losses
> could only be about 5% of their total loan portfolio value. I'll
> admit, I haven't analyzed any other companies in WRLD's particular
> niche (are there any?), but after examining the balance sheets of
> many banks and financial institutions, that seems a little low to
> me given the type of risky lending they are engaged in.
>
> Citron may not have gotten every fact correct, but it is correct
> on the basic premise --- WRLD engages in predatory lending practices,
> operates near the outskirts of legality, and there are some questionable
> items in their accounting.

Oct 30 11:10 AM