PRA Group Reports Q1 Results, Discusses Supply, Pricing, TCPA and Regulatory Environment

Yesterday PRA Group (PRAA) released its Q1 2017 financial results and hosted a conference call for investors. The company reported net income of $48.2 million (diluted earnings per share of $1.03 versus $0.69 in the first quarter of 2016), including the gain from the sale of the Company’s Government Services business in the first quarter of 2017. 

PRAA is one of the largest purchasers of defaulted receivables worldwide.

First Quarter 2017 Highlights

• Cash collections of $379.8 million versus $384.3 million in the year-ago quarter.
• Total revenues of $206.6 million versus $224.9 million in the year-ago quarter.
• Income from operations of $53.3 million compared with $70.9 million in the year-ago quarter
• Net income of $48.2 million compared with net income of $32.0 million in the prior year period
• Portfolio acquisitions of $227.8 million.
• Gain on sale of the Government Services business was $46.8 million pre-tax and excludes an additional $2.1 million in expenses associated with the sale in operating expenses. 
• Estimated remaining collections of $5.1 billion

Per the press release that accompanied the earnings announcement:

“PRA’s cash collections in the first quarter exceeded our expectations while cash operating expenses remained controlled.  We are pleased with the progress made in increasing our collector workforce in the U.S. to the appropriate level.  Both our existing collector workforce and our new hires continue to impress us with their work ethic and commitment to compliance,” said Steve Fredrickson, chairman and chief executive officer, PRA Group.  “Our cash efficiency ratio, measured as cash receipts less operating expenses divided by cash receipts, of 61% continues to compare well with previous years even with the impact of our current regulatory environment with its greater costs and negative impact on revenue.  We are also pleased with our first quarter investment, particularly in the U.S., where we see gradually improving volumes and pricing.” 

insideARM Perspective

insideARM suggests that parties interested in PRAA also review the quarterly earnings announcement for Encore Capital Group (ECPG) to get a broader picture of the debt buying industry. ECPG reported earnings last week; insideARM wrote about the report yesterday.

PRAA management provided a little less detail during the investor Q&A than their counterparts at ECPG.

Supply and Pricing

Kevin P. Stevenson, PRAA - Co-Founder, President, Chief Administrative Officer and Director discussed supply and pricing:

“We've seen indications in the market that supply in core Americas is increasing. Many articles have been written recently, discussing the post-crisis build in consumer credit in United States, and the predictable result of increased charge-off volumes that are now showing. Federal Reserve data shows charge-off rates increased in the fourth quarter of 2016 by 50 basis points to 3.56% versus 3.03% in Q3 of 2016 and 2.94% in Q1 of 2016.

Charge-off rates for some credit issuers are higher and expanding faster than this since these lenders also serve the mid-prime customer markets. Additionally, outstanding credit volumes continue to increase and we expect this combination of issuance and charge-off rate growth to provide increased supply into the sales market. Importantly, this supply increase is propelled by the increase in lending as well as normal, historical charge-off patterns and not an economic downturn like we've experienced during the global financial crisis.”

Later in the call, another analyst pushed management for more specific detail on pricing.  Steven D. Fredrickson, PRAA - Co-Founder, Chairman and CEO responded:

“I think, other than Kevin's points that we believe we're buying the higher IRRs than we were a quarter ago or a year ago, we're buying a wide variety of quality of paper and we also win deals at a fairly large range of IRR. And so it's very difficult. I'd say it's impossible to say that pricing has moved by X percent. This is not an efficient market. This is not a commodity market. And we believe that there's a fair amount of inefficiency in pricing. And so other than to say we think the pricing has moved in a meaningful way, I'm not going to make a guess as to what percentage it might be.”

TCPA and Regulatory Environment 

Frederickson also discussed the TCPA and current regulatory environment. He said:

“We've seen very little concrete movement in Washington as it relates to regulation. However, there has been some recent commentary on the TCPA by a Commissioner of the FCC which gives us hope that they'll overturn the past misguided ruling and allow businesses to appropriately utilize today's technology to contact customers. We're awaiting a ruling from the D.C. circuit on the industry appeal that was filed and argued in 2016, but are hopeful that regardless of that outcome, the FCC will revisit the current interpretation of the TCPA.

There's been no further definitive communication on debt collection rule making from the CFPB, but we anticipate that they'll continue to work with the industry in crafting rules that are fair to both consumers and business. As we mentioned last quarter, with almost a year having passed since we implemented new operating rules related to our consent order, we now feel our operations have stabilized and we're beginning once again to be able to fine-tune processes to improve efficiency.”

Later in the earnings call one of the analysts pressed management on what impact any change in the TCPA might have on production. Stevenson responded:

“It would be an impact that we would certainly talk to you about. Assuming that happens tomorrow, we would have our dialers turned on within a couple days. But I think it would be a fairly meaningful impact. And we've been talking about this for years and it would allow us not only to be more efficient with our reps but also continue to penetrate our portfolios more deeply because, to your point, we don't use dialing equipment for calling cellphones at all.”

Finally, at the very end of the earnings call, one of the analysts asked a question about the delayed CFPB debt collection rulemaking and whether the change in administration might lead to some modification or reversal of the consent order PRRA signed with the CFPB in September of 2015. The analyst felt that PRAA and ECPG were being forced to a higher standard than others in the industry. See insideARM story on the consent order here.

Frederickson responded:

“I mean, we would love to see uniform industry-wide rules be promulgated that are, as I've said, fair to consumer and businesses. And that's our hope. We're doing what we can do with our conversations with lawmakers and regulators to try to make that result come about. But I think it's a fool's error to make a guess on what's going to happen on the regulatory front, other than saying we're hard at work to try to influence what we can. Ultimately, what comes out of it, we can only try to influence and then wait and watch.”

The gain from the sale of its government services business in Q1 provided a significant boost to PRAA’s numbers for the quarter. Without that boost the number would be quite different. It will be interesting to watch the company performance over the next 12-24 months as they are buying more paper, and buying the paper at more attractive prices. 

One consistent item from both the ECPG and PRAA reports was the fact that while volume is increasing for both, the average balance per account is decreasing. Lower balances may impact legal collections in the future as the cost of litigation often precludes legal involvement on smaller balances.