Yesterday PRA Group (PRAA) released it Q4 and full year financial results for 2016, and hosted a conference call for investors. The news was not good.  For the fourth quarter the company reported a net loss of $17.6 million (per share of $0.38) versus earnings per diluted share of $0.86 in the fourth quarter of 2015. For the full year, the company reported diluted earnings per share of $1.83 compared to $3.47 for the full year 2015. 

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

Fourth Quarter 2016 Highlights

  • Cash collections of $348. million, currency adjusted cash collections of $55.0 million, versus $369. million in the prior year period.
  • Total revenues for the quarter of $ 155.3.0 million, included finance receivables income net of principal amortization and net allowance charges versus $230.2 million in the prior year period.
  • Principal amortization included a net allowance charge of $62.5 million recorded against certain pools of finance receivables in the quarter, compared with a net allowance charge of $11.5 million recorded in the prior year period.
  • Net loss was $17.6 million in the fourth quarter, compared with net income of $41.0 million in the prior year period.
  • $199.8 million in investments.
  • Estimated remaining collections of $5.05 billion. 

Full Year 2016 Highlights

  • Cash collections of $1.5 billion. 
  • Total revenues of $830.6 million. 
  • Principal amortization of finance receivables for the full year of 2016 was $746.9, including a net allowance charge of $98.5 million compared with $674.4 million, including a net allowance charge of $29.4 million in 2015.
  • For the full year of 2016, net income was $85.1 million, compared with $167.9 million in 2015. 
  • $947.3 million in investments.

Per the press release that accompanied the earnings announcement:

While our fourth quarter GAAP earnings reflect a non-cash allowance charge, our economic performance remained solid and we made substantial progress resolving operational and regulatory challenges.  PRA Group spent much of 2016 preparing for, and to the extent possible, attempting to influence, a number of evolving forces that we believe could ultimately be beneficial to our shareholders,” said Steve Fredrickson, chairman and chief executive officer, PRA Group.  “Relief from the antiquated interpretation of the Telephone Consumer Protection Act (TCPA), potential increases in domestic supply of nonperforming loans, the prospect of consolidating competition in Europe, and possible clarification of collection regulations are several of these potential tailwinds.  We stand ready and waiting to capitalize on any of these events and are excited about what the future holds for PRA Group.” 

The announcement also mentions a lawsuit against PRAA that insideARM wrote about on May 15, 2015. In that article we noted:

“On May 11, 2015, an unfavorable jury verdict was delivered against Portfolio Recovery Associates, LLC a wholly owned subsidiary of PRA Group, Inc., in a matter pending in Jackson County, Missouri. The jury awarded Guadalupe Mejia $251,000 in compensatory damages and $82,999,000 in punitive damages for her counter-claim against the Company, alleging malicious prosecution and impermissible collection practices.” (Emphasis added)

Per yesterday’s press release:

“Operating expenses include an accrual to reflect the fact that the company has reached an agreement in principle with the opposing party in the Mejia case.”

The amount of the settlement was not disclosed in the earnings announcement, nor was the settlement discussed in the conference call. 

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 will write about the ECPG quarterly earnings report tomorrow.

As usual, the earnings conference call provided more interesting information and perspective than the press release and written reports.

One of the more notable discussion items involved staffing levels.  Kevin Stevenson, current President of PRAA, commented:

“In Q2 and Q3, we told you in our effort to optimize staff activity, we allowed attrition to reduce staffing levels too far. And the situation led to a detrimental impact on US core collections.

At the same time, adjusting for a few exceptional transactions, we've purchased a record or near record number of accounts in each 2014, 2015, and 2016. We're confident in our hiring plan and are executing on that plan every day.

As we said many times, it's more difficult and time-consuming to increase our staffing levels that it is to decrease them. So this effort may take us a few quarters to complete. We continue to strive for efficiency, but remember, are overall goal as it relates to hiring and expenses is profitability, not to drive to a targeted expense ratio or productivity ratio. We've made significant progress and have hired over 350 net new collectors in the US. We now have a little over 1700 FTE or full-time equivalent at the end of January.”

Rightsizing staff to inventory is always a challenge at any ARM company.  This was a candid admission that, for some period of time, the company did not have adequate staff to maximize recoveries on their inventory.

Management also provided their optimistic thoughts on potential regulatory changes. Fredrickson commented:

“With the appointment of the new Chairman of the SCC, we believe there's an increased likelihood that will be able to join Europe and the rest of the world to use technology to contact our customers cut with a large portion of the US portion being cell phone owners, our inability to use modern technology to aid productivity has been a headwind for years.

If we were able to contact customers more efficiently, we would expect to see an immediate increase in our collections since we would simply be able to contact more of our customers. It's our long-held belief that we need the ability to speak easily and efficiently to our customers in order to help them resolve their debt and the FCCs past interpretation of the TCPA hinders that opportunity. The impact of such a change to be significantly beneficial.”

(Also of note was that the company announced that Stevenson would become CEO in May of this year. Current CEO Steve Fredrickson will be transitioning to a new role as Executive Chairman of the Board.)

Certainly many hope that PRAA management’s outlook is correct. The industry needs either a positive decision in the ACA International v. FCC case or a “re-do” from the FCC of their July, 2015 Rulemaking.

PRAA management was also cautiously optimistic about domestic supply, but not counting on various larger issuers returning to the practice of selling. While the core business has been impacted by availability of debt to buy, the company’s insolvency business has been dramatically impacted by decreased supply in the space, as many issuers have suspended selling that segment.  Revenue from the domestic insolvency business in the fourth quarter of 2016 was approximately $53 million, compared to revenue of approximately $74 million for the same quarter in 2015.

This latest announcement and conference call had a very different tone from prior quarters. A $17.6 million loss and a $62 million impairment charge were both unchartered territory for PRAA.

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