Portfolio Recovery Associates, Inc. (PRA), a financial and business services company, reported its fourth quarter and full year 2012 results last week.
Fourth Quarter Highlights
- Cash collections of $229.2 million, up 27% from the fourth quarter of 2011.
- Revenues of $154.3 million, up 31%.
- Net income of $35.8 million, up 35%.
- Diluted EPS of $2.10, compared with $1.54 a year ago.
- Annualized return on average equity of 20.6%.
- $199.1 million of portfolio purchases, up from $88.9 million in the fourth quarter of 2011.
Finance receivables income, driven by cash collections from finance receivables, increased 34% to $138.1 million in Q4 2012 from $102.7 million in the year-ago period.
On the surface the numbers look good but this is what interested me:
Cash collections from finance receivables advanced 27% over Q4 2011, led by increases in core portfolio legal collections. These legal collections increased 49% in Q4 2012 from a year ago.
Take a look at this chart from their earnings release:
If we focus on the the collections from financial receivables (which simply excludes Purchased Bankruptcy Collections) we see that Portfolio Recovery Associates had $138.1 million in the forth quarter of 2012 of which $65.2 million was directly related to legal collections.
In essence, roughly half of their collection model (47%) for the forth quarter was based on suing people. And if you run the numbers for the entire year, it’s roughly the same (46%). As I break down the other major publicly traded debt buying and collecting firms on Wall Street in the coming weeks I have no doubt the same theme will run through all of them…a collection model based on suing people.
As the Consumer Financial Protection Bureau’s regulations begin to come into play in 2013 and beyond, it will become increasing difficult for legal collection models to work because of the enormous increase in documentation requirements and corresponding expense that will be needed BEFORE you can begin legal proceedings.
Companies that had the forethought to build models that enable them to collect without the need to sue will reap huge profits in the changing landscape.
Do Good and Make Money!