PRAA Net Income Down 65% From Q3 2014 Due To CFPB Settlement

Last Friday, PRA Group (PRAA), a global leader in acquiring defaulted receivables, reported its financial results for the third quarter of 2015.

Third Quarter Highlights

• Cash collections of $380.8 million, up 2% from the third quarter of 2014.
• Revenues of $229.4 million, down 4% from the same period in 2014.
• Income from operations of $54.1 million.
• Net income of $17.4 million,  down 65% from the third quarter in 2014
• $344.6 million in investments, approximately 70% of that amount purchased in the U.K.

The dramatic decrease in net income for the quarter was primarily attributable to the company’s recent settlement with the CFPB.  Under the deal, PRA Group agreed to refund $19 million to customers, and pay penalties of $8 million (the penalty is not tax deductible), and stop collection activity on about $3 million in debt. That created a one-time charge to the company’s financials. Read the September 9, 2015 insideARM story on the settlement with the CFPB here.

insideARM Perspective 

As with all publicly traded companies, the earnings announcement is usually less interesting, and often less informative, than the conference call that accompanies the quarterly announcement.  This was especially true as it relates to the latest PRAA earnings call.

Among the call highlights:

1)      GAAP vs. non-GAAP accounting results

To provide a more transparent view of the company’s performance, Management chose to present the quarterly numbers using both GAAP and non-GAAP methodology. The dual reporting methodology led to a series of questions from Analysts regarding impairment (allowance) charges and future yields on portfolios. To the non-accountant, the alternative presentation was more confusing than helpful.

2)      U.S. Supply/Pricing/Competitors

Per PRAA management, supply of available product in the U.S. continues unchanged from prior quarters, as several larger financial institutions (potential sellers of debt) remain on the sideline. On the other hand, management commented that pricing remains “rational” and “the irrational competitors who relied on business models that were bad for consumers and not favored by regulators, continue to disappear from our industry.”

When asked for a prediction on when certain “sidelined” sellers might re-enter the market, PRAA Chairman and CEO, Steve Frederickson, responded, “It is a fool’s errand to try to predict when they’re going to return and I’m just going to stay away from it. They have us engaged, and they have other large participants in this market engaged in the qualification process. So that gives us hope that they will be returning at some point, but we have no reliable insight as to when that might be.”

3)      Legal Strategy

Management highlighted a decline in legal collections. This decline was attributed to the legal and regulatory challenges with suit documentation and litigation generally, combined with an increase in productivity in call center collections.  Reduced legal activity shows up in lower court costs and lower average payment size.

4)      TCPA

PRAA management provided strong opinions regarding the impact of TCPA litigation and the recent FCC Rulings; using terms such as “bizarre” and “outlandish” to describe the current TCPA environment. Frederickson commented further, “Last week, the federal budget deal was passed by both the House and the Senate and we saw the President sign it earlier this week. You can imagine our disgust when we saw this budget deal allows a carve out from the TCPA for those collecting on debts owned or guaranteed by the federal government, including student loans and mortgages. If collection efforts on behalf of the government can be exempted from this rule, why should collection efforts on behalf of American business suffer from what we believe is a poor interpretation of the rules to begin with.”

For a complete view of the debt buying business this article should be read in conjunction with our article on the ECPG quarterly earnings announcement.