Debt Buyer Portfolio Recovery's Income Slips in Q3; Encore Capital's Falls

Although suffering through the same economy as the rest of the financial services industry, the first two accounts receivable management firms to report third quarter earnings fared well compared to their banking counterparts, even as earnings fell.

Norfolk, Va.-based Portfolio Recovery Associates (Nasdaq: PRAA), the largest of the publicly traded debt purchasers and collectors, reported net income of $11.5 million in the third quarter of 2008, down 2.1 percent from the $11.7 million in income reported in the same quarter a year ago. Earnings per share was flat at $0.75.

But revenue was up more than 25 percent in the quarter. PRA said that total revenues in the third quarter amounted to $68.6 million, a 26 percent increase from Q3 2007. The increase in revenue was attributed to record cash collections of $98.9 million in the quarter, up 34 percent from the same time in 2007.

Cash collections in all of the company’s liquidation channels increased year-over-year. Call center collections and other increased 22 percent, external legal collections grew 1 percent, internal legal collections grew 45 percent and purchased bankruptcy collections gained 143 percent when compared with the year-earlier period.

PRA also reported a significant increase in its fee-for-service, even after abandoning its contingency collections business (“Portfolio Recovery Drops Anchor, Shifts Staff,” May 16). The fee-for-service businesses — which include government services and skip-tracing units — generated revenue of $15.8 million in the third quarter of 2008, up 86 percent from the same period a year ago.  These businesses accounted for a record 23 percent of the company’s overall revenues in the third quarter.

The company said that it completed two fee-for-service acquisitions in the government services sector in the third quarter: MuniServices, LLC, a provider of revenue administration to local governments, and Broussard Partners and Associates, Inc., a provider of audit services to local governments.

In a conference call late Wednesday to discuss results, PRA CEO Steven Fredrickson said that the collection environment is challenging as consumers are pressed, but that the economy presented a opportunity for debt buyers to purchase portfolios at lower price points.

PRA invested $52.3 million to buy $857 million of face-value debt in the quarter. The purchases were made in 56 portfolios from 19 sellers, and the majority of the purchases – 92 percent – were comprised of credit card accounts. Bankrupt accounts made up about 50 percent of the purchase volume.

At the end of the quarter, PRA said it counted 1,267 owned-portfolio collectors in its four U.S. call centers and one facility in the Philippines.

San Diego-based Encore Capital Group (Nasdaq: ECPG) reported late Tuesday that net income fell 30 percent to $3.8 million in the third quarter of 2008.

But revenues were also up for Encore, spurred by a spike in collections. Total revenues for the third quarter were up 6 percent to $66.4 million. Gross collections were $97.8 million, a 14 percent increase over the $85.6 million in the same period of the prior year.

Encore said that it increased its debt buying activity in the quarter. Investments in receivable portfolios were $66.1 million, to purchase $1.8 billion in face value of debt, compared to $47.9 million, to purchase $1.3 billion in face value of debt in the same period of the prior year. The company said that $57.1 million of the amount invested went to purchase credit card portfolios with the remaining $9 million used for “Other” portfolios.

In the third quarter of 2008, Encore recorded a net impairment provision of $7.3 million, compared to a net impairment provision of $2.4 million and a write-down of its healthcare receivable portfolios of $1.4 million in the same period of the prior year.