Portfolio Recovery Notches Transitional Quarter with Modest Income Rise

Leading debt-purchaser Portfolio Recovery Associates (NASDAQ: PRAA) reported yesterday its third quarter net income rose 4 percent to $11.7 million on revenues of $54.6 million, an increase of 14 percent compared with $47.8 million in the third quarter of 2006.

The Norfolk, Va.-based firm said it completed its previously announced plan to buy back 1 million shares, repurchasing 900,000 shares at an average price of $50.41 per share during the quarter.

Interest expense rose sharply to $1.1 million, up from $66,000 a year ago, due to spending on a stock purchase program and debt portfolio buying, Steve Fredrickson, chairman, president, and CEO, said in a conference call with analysts yesterday.

The company also took an allowance charge of $1.2 million against certain pools of debt, and increased staffing as it bulked up new call centers in Jackson, Tenn., and another in Kansas, Fredrickson reported. The allowance was partly due to lower productivity per agent, according to Fredrickson, who said the firm is looking at improving those returns.  

Investors found the news disappointing, sending Portfolio Recovery’s stock down more than 2.5 percent to $46.01 in midday trading today.

The company spent $57.4 million during the quarter on debt with a face-value of $2.6 billion, packaged in 59 portfolios from 23 different sellers. Credit cards made up 76 percent of the purchased debt with the rest made up of auto, medical, utility and installment loan accounts, Fredrickson said. Portfolio Recovery has spent $160 million on debt in the first nine months of the year, a company record.

“We felt that the environment continues to move slightly in a debt purchaser’s favor. We continued to see good flow of portfolios; we also felt that pricing was steady to slightly softer,” said Fredrickson. “We continued to believe we’re buying at slightly better long-term yields than we had been previously.”

Cash collections in the quarter totaled $65.2 million, including $37.5 million from call center operations, up nearly 15 percent from the same period a year ago; legal collections rose 9 percent to nearly $21.4 million; and purchased bankruptcy debt generated revenues of $6.3 million, down more than 14 percent from $7.4 million.  

Fee-for-service revenues totaled $8.5 million, up 39 percent, according to Fredrickson.  

Productivity per agent declined in the first nine months of 2007 to a metric of $142.26 in recoveries-per-hour, compared with $146.03 for all of 2006. Experienced agents generally provide greater recoveries but some have fallen down when working fresher debt, Fredrickson said. The company is in the process of reviewing the productivity of these agents. “We don’t want to get into a situation where we are simply paying people for what they did yesterday. We need people driving in cash collections from portfolios today,” Fredrickson said. 

In addition, the call center at Norfolk headquarters initiated an inbound calling group with about 70 staff. At quarter’s end the company had 973 agents, up 21 percent since the beginning of the year.  

The company also announced yesterday it had increased its credit line to $270 million from $150 million, according to a filing with U.S. Securities and Exchange Commission. Lenders include Bank of America, RBC Centura Bank, and Wachovia Bank.