Nov 8, 2016
Executives
Darby Schoenfeld - Director, IR Steve Fredrickson - Chairman and CEO Pete Graham - EVP and CFO Kevin Stevenson - President, CAO and Interim CFO Tiku Patel - CEO, PRA Group Europe
Analysts
Hugh Miller - Macquarie Mark Hughes - SunTrust Bob Napoli - William Blair Robert Dodd - Raymond James Manu Srivarira - Janney
Operator
Good afternoon and welcome to the PRA Group Earnings Conference Call. At this time all participants are in a listen only mode.
[Operator Instruction] As a reminder this conference call is being recorded. I would now like to turn the conference over to Ms.
Darby Schoenfeld, Director of Investor Relations for PRA Group.
Darby Schoenfeld
Thank you. Good afternoon everyone and thank you for joining us.
With me today are Steve Fredrickson, Chairman and CEO; Kevin Stevenson, President; Pete Graham, Executive Vice President and CFO; and Tiku Patel, Chief Executive Officer of PRA Group Europe, will also be available to answer questions during Q&A. During our call we will reference certain non-GAAP financial measures.
Reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measures are included in the earnings press release we issued earlier today and the related Form 8-K filed with the SEC. Both the press release and 8-K can be found on the Investor Relations section of our website at www.PRAGroup.com.
A replay of this call will be available shortly after its conclusion. The information needed to listen to the replay is contained in the earnings press release.
We will also make forward-looking statements during the call, which are based on management's current expectations. We caution listeners that these forward-looking statements are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from our expectations.
Please refer to the earnings press release and our SEC filings for a detailed discussion of these factors. All comparisons mentioned today will be between Q3 of 2016 and Q3 of 2015 unless otherwise noted.
I would now like to turn the call over to Steve Fredrickson, our Chairman and CEO.
Steve Fredrickson
Thank you, Darby. Today I will be leading off the call with some macro observations on our performance and strategy and then provide some thoughts on our performance in Europe.
Kevin will be covering operational performance in the Americas and global insolvency. Finally, we would like to welcome, Pete Graham, to his first earnings call with PRA and he will be covering our financial results.
In Q3 we continued to produce solid GAAP results with strong profitability and modest leverage. We are holding to our philosophy of being a disciplined long-term focus purchaser of nonperforming loans that aims to maintain high profit margins while seeking to responsibly grow the top and bottom line.
We believe we are making the kinds of investments in NPL portfolios, our people and processes, and our capabilities to drive reaccelerated growth in the future. Globally we continue to operate well and make strides in the areas where we have had a few challenges.
The regulatory environment in the U.S. has been an operational headwind especially over the last few years but it has helped drive the substantial consolidation we've seen in the U.S.
market, creating what we believe is now a significant competitive advantage for PRA. It has been fulfilling to see our diversification strategy that included a number of significant strategic moves over the past few years or so, allow us to deploy capital globally directing it to opportunities where we see the most attractive returns.
Now more than ever we feel geographic and product diversification are absolutely necessary for our long-term success. As demonstration of the success of the strategy our third-quarter results show the increasing importance our non U.S.
investments. Today we report good growth in Europe and global insolvency and substantial growth in Brazil.
But it has been the case over the last year or so results were negatively impacted by elevated levels of non-cash allowance charges predominantly in the U.S. delays to U.S.
core cash collections due to regulatory complexity in both the legal and call center environments, increased expenses from the continued build of our compliance regime and the continued decline in cash collections from our U.S. insolvency portfolio.
We will provide added color on all these items during the remainder of our script. Investment in the seasonally slower Q3 was $161 million with $95 million in America's core, $34 million in Europe core, and $32 million in insolvency globally.
Estimated remaining collections finished at $5.25 billion. Estimated remaining collections declined slightly on a sequential basis due to cash collections exceeding investment in the quarter.
This year's investment in Europe is the result of a normalized third quarter versus last year when we acquired a large single portfolio that skewed our buying results upward. The supply of NPL portfolios is good in general and there have been a recent number of large individual portfolio investment opportunities throughout Europe.
We anticipate a strong pipeline in Q4 in Europe. However, prices are aggressive and a number of cases at levels which we believe may well be unprofitable.
A number of our European competitors are rapidly building their own pan-European buying capability, driving what we view to be a bit of a land grab. We will continue to price with discipline based on data and experience and leverage our ability to invest in a broad base across a number of markets.
We watched the destructive side of aggressive growth in the U.S. over the past couple of decades and believe a day of reckoning also awaits the European market.
Debt buyers and capital providers alike seem to get caught up in the process of deploying capital driving big investment numbers in the EBITDA. However, in the end businesses are not ultimately rewarded with profits for writing checks or even getting their investment capital back.
It is all about the profits that the company keeps. For our part one of the most attractive aspects of the Aktiv Kapital business we acquired several years ago, was its broad investment and operational footprint across Europe that required very little additional build out.
In fact, the only new country we have entered post acquisition is Poland. In our experience each new market entered offers significant underwriting and operational risk and cost.
Although we continue to look at new geographies in Europe we plan to continue doing so slowly, carefully, and advantageously not in order to add another flag to our map. Our performance in Europe continues to be good.
During the quarter we announced that our UK business received full authorization from the Financial Conduct Authority or FCA, which covers all lending and credit operations and governs debt collection and debt administration in the UK. This was another testament to our ongoing commitment to standards of conduct and customer treatment.
Delivering fair customer outcomes and improving customer engagement are primary objectives for us globally. Cash collections in Europe-core were $96 million up 12% from last year, driven largely by new portfolio purchases.
The decline in the British pound negatively impacted our reported performance as cash collections increased 20% in constant currency terms. Most of our legacy markets are performing well increasing cash collections year over year on a constant currency basis by 11%.
The UK and Spain markets are both benefiting from scoring initiatives and we have recently implemented enhanced operational scoring in Germany and the Nordics and expect to see the benefits in future performance. In addition to operational improvements in the call center in the UK we have also made good progress investing in the legal collection channel.
While suing customers is our last resort and has not been a large part of our collection effort in the past, just like in the U.S. there are situations where it is the best avenue to pursue generally when we believe someone has the ability to resolve their debt but won't.
We've been building this channel over the last few quarters and are now starting to see some return on that investment. We will continue to examine our results from this channel and utilize it accordingly.
Italy remains a challenge but we continue to make progress toward our goals and have further strengthened our leadership team there. We have continued making progress on legal collections however due to the large number of accounts we are moving through this strategy, some of the legal spend we planned in Q3 shifted to Q4.
We are starting to see return on the legal investment there and are optimistic we can continue to make the kind of progress we have seen recently. On the call center side we continue to build out our capabilities and are focused on bringing our analytics and processes to our team there and the agencies we partner with.
We continue to believe the Italian market is a very compelling place to do business over the long run. With that, let me turn things over to Kevin to go through operations in the Americas and global insolvency.
Kevin Stevenson
Thank you, Steve. Core investment was 5% ahead of third quarter of last year.
And while we feel good about the loss rate indicators we are seeing on the supply side from existing sellers we have seen relatively little movement from the sellers who are currently on the sidelines. We continue to be selective with our portfolio acquisitions and are buying to model the IRRs that are up from a year ago.
For competitive reasons were not offering any further details on IRR levels. Not much has changed with the bankruptcy supply in the U.S.
as filings are still low, competition is still high and there are still sellers out of the market. However, in the broader geography of North America we have been able to invest $73 million in the insolvency asset class thus far in 2016 beyond our full year 2015 investment amount of $65 million.
Globally our insolvency asset class investment year to date is $111 million compared to $85 million in the full year 2015. As Steve said, diversifying across geographies has been a significant focus of ours for years.
The results you see in insolvency are the direct product of that effort and more specifically related to the acquisition of Aktiv Kapital and Pamplona coupled with our subsequent investment and growth of each of these platforms. We continue to look for ways to successfully grow the segment globally.
In the Americas cash collections were $271 million down 7% year over year. The decline was largely driven by a 31% decline in U.S.
insolvency collections and a 21% decline in U.S. legal collections.
This was partially offset by strong collection growth in Brazil and Canadian insolvency. As you can see by the minority interest adjustment in our income statement which increased more than five times this quarter from last quarter operations are going very well in Brazil.
The team there has ramped up their operations significantly and we continue to be impressed with their capabilities in sourcing, underwriting, and liquidating NPLs from a number of asset classes. The total number of payments in the U.S.
decreased 5% and average payment size decreased 6% due in part to fewer payments coming through the legal channel which typically yield larger payment sizes. The number of payments received solely in the U.S.
call centers was up slightly from last year with the average payment size from that channel was down 3%. This was in part driven by the maturation of our inventory of payment plans.
First payments tend to be larger than recurring payments so even though the number of call center payments grew the ration of first time payments to total payments decreased and that created some downward pressure on average payment size. As we discussed during last quarter's conference call we made the determination that our U.S.
operational strategy initiatives that have increased productivity may have come at the expense of maximizing profitable collections. As a result during Q3 we began to expand our collector head count to optimize our capacity.
This process will continue at least for the next couple of quarters. During Q3 we added approximately 80 new collectors to our work force in the U.S.
and we plan to add between 100 to 125 additional collectors during Q4 of 2016 and Q1 of 2017. Those who have followed PRA for years are aware that it takes time to ramp up collector headcount and make them productive.
Training and experience take time and largely cannot be rushed. This is simply the nature of our business and it's good to be aware of especially if we need to ramp up to even greater degrees should larger than expected purchase volumes come our way.
We currently have ample space capacity in our existing call centers to accommodate our existing growth plans. Operationally in the U.S.
over the last few quarters we have described some regulatory impacts namely; number one, a slowdown of our legal process; number two, our adaptation to new requirements when treating verbal disputes in the same fashion as written disputes; and number three, increase dispute volumes coming out of the credit bureau process which are due, we believe, to regulatory actions taken against them last year. As we continue to build experience with these volumes, part of which was driven by our consent order with the CFPB which became effective March, 2016.
We are sharing our observations and business impacted with you. As with other regulatory changes we need time to evaluate the impact, adjust, create new processes if necessary and optimize operational efficiencies.
I will start with an update on disputes. We mentioned on the first quarter call that the increase in our dispute rate was impacting productivity and generating a cash delay.
Wanted to share with you some more color on the impact since we have more experience now and a better understanding of the process on a go forward basis. So first, dispute volumes have grown given the new requirement to treat verbal disputes the same way as written disputes, along with the higher volumes of disputes coming through the credit bureau process.
As such, our costs to investigate and process them have increased compared to prior years. We do expect the excess cost to taper off in the longer term as we implement and refine systems and processes, which for at least the next few quarters we will be operating in this fashion as we smooth out the process.
Second, the dispute process is causing delays that have impacted value. Coding an account as a dispute causes all proactive collection efforts until the dispute is resolved.
The increased volume of disputes combined with a new process meant that disputes resolved in PRA favor have not been returned to the collection floor as quickly as we had hoped. As we said before this is causing cash collection delays but now that we've had some time and some experience with this data we believe it is also causing some loss in value as well.
The delay and loss of value have very likely contributed to our allowance charges. The good news is that we have made progress eliminating obstacles and gaining efficiencies but we still have work to do and we will keep you updated as time goes on.
On to the legal process. We have been able to make significant headway on the backlog of legal accounts but we are not completely caught up.
Sellers are now in a better position to comply with the requirements of providing account documentation upfront and are generally delivering in a very timely fashion. Just like disputes it is now a matter of us normalizing this process and streamlining operations.
The number of documents that we are receiving has significantly increased when compared to the past. We have invested very heavily in implementation of new document systems and processes over the past four quarters.
Beyond the brute force applied to the high volume of documents and systems there's a great deal of nuance that goes into this process and we're adjusting accordingly. We continue to deal with the regulatory environment that is constantly changing in regards to legal collections.
For example during the quarter we had two states change the requirements around lawsuits and another implement an e-file process. It takes time to adapt and comply with each of these requirements and it slows the process and our current quarter, as we and our external firms, change accordingly.
On the second quarter call we said we expected Q3 legal collection costs and fees combined to be in the $40 million range globally. However, during Q3 these combined expenses came in at only $33 million.
This was driven by the environment in the U.S. as I described to you, as well as some shifting of cost in Italy from Q3 to Q4 as Steve mentioned.
Additionally our document costs which show up in legal collection costs line item declined sequentially by $1 million. While we're disappointed we did not spend to our projection.
This shortfall does demonstrate how quickly plans can change given the new processes globally and the regulatory environment domestically. At the moment we anticipate Q4 global legal collection costs and fees of about $36 million.
Our preferred channel of collection is working with our customers via call centers and going forward as appropriate with electronic methods. By communicating with our customers more freely we are able to reach a solution that works well for both of us.
We urge lawmaking and regulatory bodies to appreciate this and understand that it is in everyone's best interest to stay out of court. We encourage them to be receptive to new and improved ways of opening channels of communication and that should lead to an improved customer experience.
I want to reiterate Steve's sentiment on how pleased we are that our diversification strategy has been as successful as we had hoped. Our ability to invest and grow outside of the U.S.
and not be dependent on a single economy has been integral to our continued solid financial results. Now, I would like introduce Pete Graham who is going to cover financial results for you.
Pete Graham
Thanks, Kevin. To better analyze our ongoing operations we have adjusted our reported results for a few items that are nonrecurring which do not relate to our normal operations.
For the quarter these adjustments included expenses of $200,000 related to the acquisition of DTP and eGov, legal costs not associated with normal operations of about $1.5 million, and a onetime tax item related to a unique foreign intercompany transaction that resulted in current period tax expense with almost no corresponding income. We do not anticipate any other transactions like this one so we have included it in our non-GAAP adjustments.
Lastly, we have adjusted to reflect constant currency with the third quarter of 2015. I will specifically refer to non-GAAP re-currency adjusted when discussing these results otherwise all metrics will be GAAP.
Total cash collections for the quarter were $372 million a decrease of 2%. Currency adjusted cash collections were $377 million a decrease of about 1%.
Core collections in the Americas were $211 million, flat to last year. Collections outside legal of recovery grew 15% largely due to performance in Brazil.
On a currency adjusted basis America's core collections were $209 million. Global insolvency collections were $65 million, a decline of 23%.
While this expected decline continues collections in the quarter were better than anticipated. Currency adjusted global insolvency collections were $66 million.
European core collections were $96 million an increase of 12%. This is attributable to the increased buying we have done in Europe over the past year or so.
Currency adjusted core collections in Europe were $103 million growth of 20%. Portfolio amortization including allowance charges was 45.5% for cash collections in the quarter.
We continue to have the same two pools in Italy on nonaccrual, meaning the total cash collections of $6 million on these pools were applied to amortization. Net allowance charges for the quarter were $13 million which was essentially the same as second quarter.
The primary driver of allowances continues to be the Americas where we incurred a net allowance charge of $12 million. Consistent with prior quarters the U.S.
core 2012 and 2013 vintages continue to be a significant source of allowance charges with $3 million and $8 million respectively. Interestingly, we have experienced reversal of allowances on 2010 and 2011 vintages which were sources of allowance charges as recently as the fourth quarter of 2015.
While too early to call this a trend it highlights the imprecision inherent in determining on a quarterly basis whether variances in cash collections are due to timing or performance of the pool. This generated net finance receivable or NFR revenue of $203 million, a decrease of 3% from the third quarter of 2015.
The income was essentially flat at $18 million. The third quarter of 2015 was an outsized quarter for CCB so we had a tough comparison there but good results in the other businesses where we have servicing operations such as PLS and Domestic Bankruptcy Servicing were able to offset the decline from CCB.
Other revenue decreased to $2 million from $3 million due primarily to varying levels of fund revenue from some of our European investments. These are legacy Aktiv Kapital investments that are not part of our ongoing strategies.
Operating expenses were $154 million down 12%. The third quarter of 2015 included our settlement from the CCB of almost $29 million.
Non-GAAP operating expenses in the third quarter were $154 million an increase of 7% from the third quarter of 2015. Operating expenses were 39.7% cash receipts in the quarter.
The increase in non-GAAP operating expenses is primarily driven by increased agency fees due to higher volumes in international markets where we utilized third-party agencies and an increase in outside fees and services from a multitude of items, none of which is individually significant. Operating income was $67 million and our operating margin was 30.4%.
Our effective tax rate was 31.3% for the quarter compared to 34.7% for full-year 2015. Our year to date effective tax rate was 32.1% compared to 36.9% in the first nine months of 2015.
The decrease in the rate is attributable to a variety of factors and our effective tax rate will vary from period to period due to these types of items in changes in the mix of our earnings. We expect our effective tax rate for the full-year 2016 to be similar to the rate through the first nine months of the year but subject as always to foreign currency and earnings and exchanges.
Net income was $34 million compared to $17 million in the same quarter last year and diluted earnings per share was $0.74 versus $0.36 and net income margin was 16.5% compared with 7.7% for the third quarter of 2015. Non-GAAP net income was $32 million compared to $41 million in the same quarter last year and non-GAAP diluted earnings per share was $0.68 versus $0.85.
Our non-GAAP net income margin was 15% compared with 18.1% for the third quarter of 2015. Moving to the balance sheet, cash balances ended the quarter at $92 million compared with $69 million a year ago.
The net finance receivable balance was $2.4 billion up from $2.2 billion at September 30, 2015. Estimated remaining collections were $5.25 billion at September 30, 2016.
Net deferred tax liabilities were $271 million at quarter end compared to $268 million a year ago. Our borrowings totaled $1.8 billion at quarter end.
Our debt to equity ratio at period end was 194%. If you include the deferred tax liability and interest-bearing deposits in debt and exclude the translation impact from affect on equity, the debt to equity ratio would be 191%.
Return on equity for the quarter was 15.1% and non-GAAP return on equity was 14%. Operator, we are now ready for questions.
Operator
[Operator Instruction] And our first question comes from the line of Hugh Miller with Macquarie. Your line is now open.
Hugh Miller
Wanted to maybe start with a couple over in Europe, you gave some really interesting color there about the competitive environment, your focus on returns or just growing for the sake of growth. First could you just give us a sense as to, are there certain jurisdictions where you are seeing more aggressive pricing competition than others?
Tiku Patel
Hello Hugh. This is Tiku Patel.
I think the whole of Europe is quite competitive. What we have seen is that there are a number of large competitors of ours who have been active in terms of consolidating the industry and buying up both platforms and portfolios in a number of markets.
So I do not think it is easy to single out a very particular market. What we do see is opportunity however through some of our geographic spread and by using that we are able to pick and choose opportunities for us to invest in at reasonable returns and that is what we're looking to do.
Hugh Miller
That's helpful, and maybe a more specific question or two on one or two areas. First in Italy we've certainly been hearing about an uptick in financial buyer interest in that area.
Is that a region where despite really strong growth and supply there could be risk of unprofitable net returns? And any color on Spain in terms of, we're hearing the opposite there where players are exiting the space in terms of financial players and reselling portfolios.
Are you seeing better returns there and better supply opportunities in 4Q?
Tiku Patel
Well we don't talk about returns specifically in these markets. Both Italy and Spain have been, as I said, competitive for a while, although there is, continues to be good supply in both of those markets.
We have certainly seen funds less active in Spain recently and indeed, some of the funds that came into the Spanish market a few years ago have been re-trading out and moving away. But what we continue do what we've always done, which is a price on our data and our experience and always look to be profitable on all these deals.
That is our approach in all these markets. So we hope that there's no prospects of us making a profitable investments.
We think that the right thing to do for the long-term.
Steve Fredrickson
Hugh, this is Steve. I would add that between the two businesses we see or between the two geographies we have a higher confidence level currently in Spain, and so we are buying there on a more active basis.
Although long-term, as I stated in my section of the script, we feel really good about the opportunities in Italy and there are many NPL portfolios for sale. I would say while we get our operating platform in exactly the situation that we want it to be on a go-forward basis, we are being very careful about layering on new investments, at least in this interim period.
Hugh Miller
Got it. That's helpful.
I will jump back in the queue.
Operator
Thank you. And our next question comes from the line of Mark Hughes with SunTrust.
Your line is now open.
Mark Hughes
Thank you very much. You had referred to the potential loss of value or actual loss of value in the U.S.
because of some of the delayed collections. Do you think you have seen the worst of that, is it fairly steady state now or is there potentially more to come?
Steve Fredrickson
That's a very good question. I would say that, if I could go out on a limb and say, I would say we have probably seen the worst of it.
We have improved our processes, we are working through old portfolio and we're doing of those things you might imagine. And so, at the risk of being wrong, I think we have seen the worst of it at this point.
I think our processes are in pretty decent chip right now. We are still spending a lot of money to do it though, we have a lot of people working those dispute accounts.
But yes.
Mark Hughes
[Indiscernible] figure you're still spending a lot of money. Has that peaked, of the run rate of expenses, did we get whole sense of that in the third quarter already?
Steve Fredrickson
I would think so. I would think that the opportunity now is going be to start paring that down.
That is going to be the effort. But it is going to hang it these levels for a while yet.
But that is the opportunity. So the answer is yes, I think that it probably peaked and again, the opportunity is to move them down.
Mark Hughes
Two questions, the supply in the U.S., I think you said you're putting money to work at higher IRRs. Any more details on supply of paper that's coming available?
And then you also suggested there was relatively little movement from the sellers on the sidelines. Is that suggesting there is some movement?
Steve Fredrickson
That's good question, Mark. Email, I would not read too much into that.
There's always dialogue between us and them, but I would not bring too much into it past that. Then on the supply side, we are seeing our share of deals.
Obviously the competitive environment remains limited, so to speak. I think the most interesting thing that we are looking at right now is the loss metrics, as I mentioned in my script, and lending amounts.
I think that bodes well for at some point in the future and again, that's going to put pressure on banks' bottom line. I think that's we are an excellent source for them to help mitigate that.
Operator
Thank you. And the next question comes from Bob Napoli with William Blair.
Your line is now open.
Bob Napoli
Thank you. On the dispute levels, the increased dispute volumes and the adjustments that you've made on collections.
It sounds like you have made some adjustments on collection curves for those dispute volumes. You talked about 2012 and 2013, but it sounds like, how you feel, how confident are you when you said some of this is not temporary, some of it is permanent.
Because you look at what you have booked for 2014, 2015, 2016, what you have been putting, the returns you have been booking. Is there some risk to those from this point or do you feel like you have been putting these on conservatively enough given the uncertainty in the market?
Had there been an incremental change based on the disputes volume from as you sit here today versus three months ago? Do you have a different view on how material the dispute volumes are to your business?
Steve Fredrickson
No. I would say that it is wonderful because Chris Graves is very intimately involved in both sides of this equation.
I know Chris is listening now, but he's involved in the pricing of it and involved in working through dispute matters with his department, as well as compliance department now. So, I would say that that would mean that he is very aware and from a pricing perspective we're thinking about those things.
Remember these disputes, especially as you talk about newer portfolios where sellers are so good at providing documents, it's really, again, Mark had asked the question, do you think you're past the peak? And I think the answer is yes.
The sellers have been really good as supplying documents. We're answering the dispute, we're giving the consumers a dispute package, we're giving them all their documents, but it is causing this delay and again, to some degree it is destroying value.
Certainly any delay does that. So I think every quarter goes by we're readjusting our curves on our older portfolios, and I think we're taking a pragmatic approach.
I don't like the word conservative, even though I'm not CFO any more. But a pragmatic approach to those projections.
But we will see. We're still building data.
This is interesting territory for us. We're building the data that we did not have before.
Bob Napoli
Okay. And then we are halfway through the, just about the current quarter, and on the purchase side, can you give us any color on what you may want to purchase to date?
It sounds like in the big pipeline but as we know that may or may not close. But if you can you give any color on how active you have been quarter to date?
Pete Graham
Well, Bob, I'd say that although we are a month into the new quarter, there is a lot more that is unbaked than baked. So we have fresh commentary out there and that we believe the European pipeline in particular is going to be very strong in Q4.
And as we have commented, really constantly since we acquired active capital, we tend to see large deals in Europe and whether we win a couple or lose a couple, it can really swing our buying numbers. So other than commenting that we do believe we're going to see robust pipeline there, I just do not know where buying will come in.
In the U.S., our buying has been a little bit more steady, and we would hope that we would win our fair share. And as Kevin commented, it is a fairly small competition set these days.
So there is just less places to lose that flow these days.
Bob Napoli
Then Brazil, Kevin, as you pointed out, the non-controlling interest shows pretty strong earnings. Can you give any color on cash collections or purchases out of the Brazilian market for the third quarter?
Kevin Stevenson
Yes, we don't break that data out, but at the end of the day we --it's pretty clear to look at those minority interest numbers and understand how well things are going. And let me just talk about why that is.
That's really a product of the returns that we're seeing down there, and I just have got to give credit where credit is due. The folks at RCB that are doing such a good job underwriting and managing those processes, so again I am so is ecstatic about that acquisition and I expect lots out of those guys going forward.
Bob Napoli
The legal collections in the U.S., I'm just trying to understand, the last question for me. The legal fees, the contingency payments were way down.
You did invest legal costs, new in line with what we were looking for. But then so the contingency fees would suggest that your external legal collections were down a lot more from the second quarter to the third quarter.
We do not have your 10-Q yet to be able to tell what the total legal collections. I think you had given a number of the level of decline of legal.
Can you give some color there, what were legal collections in the quarter that, it will be in the 10-Q?
Kevin Stevenson
I understand the question. First of all, and this may be some overlap on Pete's territory, but there was a re-class in Q3 between fees and legal costs.
So it is basically a little hard to describe. But it's how the fees are coming out of Europe and they have been historically, there's been costs embedded inside the fee line historically, and we fix that.
It's not nearly what you think when you look at the numbers. There's about $5 million re-class, Pete, right in that area?
Pete Graham
Yes, that's correct.
Kevin Stevenson
And so based on our $40 million estimate, just ballpark, our fee number was probably down $1 million. But it wasn't down what you think it was.
Bob Napoli
Okay. And then, I'm sorry, one last question.
On the adjusted EPS, the currency adjustment. How much of that is from, you had a $5 million foreign currency benefit that went through the P&L in the quarter.
That's tied to some hedging or was it also calculating constant currency movements?
Kevin Stevenson
The EPS adjustment would be to get, to non-GAAP would totally be related to retranslating the financial statements at the prior year's currency rates. The two are not related at all.
The current period foreign exchange gain was driven by non-functional currency items in our European balance sheet not by translation of reported results.
Bob Napoli
Okay. So then if exchange rates did not change from where they are today a year from today you not see that.
You'd see zero in that adjustment.
Kevin Stevenson
Yes that's correct. So if you adjust for foreign currency movement, if you hold it flat year over year you are not going to to your reported earnings related to currency, nor will you have any foreign exchange gain or loss flowing through your P&L.
But as you know currency rates do tend to change. So it is kind of a theoretical exercise.
Operator
Thank you. [Operator Instructions] And our next question comes from the line of Robert Dodd with Raymond James.
Your line is now open.
Robert Dodd
Hello, guys. First question, going back to your commentary about Europe where price is aggressive and in some cases unprofitable levels.
Sounds reminiscent of what you were saying about the U.S. two or three years ago, really, though technically you were saying irrational pricing back then rather than unprofitable levels.
That in the U.S. obviously has taken a long time to play out in terms of starting to rationalize with your IRRs on new purchase receivables starting to tick up the last couple of quarters.
Can you give us more color? Does the environment in Europe feel kind of like the environment in the US that we were seeing three years ago?
Or is there something different where you would expect it to resolve much faster to more rational competition?
Steve Fredrickson
I think a great deal that drives how things would play out is really related to the sources of funding, both debt and equity in the two different situations. Right?
So, to the extent more debt is being used to finance some of the build that we have seen in European competitors and things go off the rails there, potentially we could see players impacted there very quickly. Again, this is coming with fairly robust pipelines so the extent the demand side get crimped at all, I think we're going to see a positive impact on the market.
If not for I think an awful lot of capital chasing deals in Europe right now it would be a different pricing situation.
Robert Dodd
Okay. Got it, thank you for that.
On the legal, we get back to Q1 and you have given commentary about that there were some disruption in world changes, etcetera. In your commentary said that there were two states that have shifted the walls around on lawsuits.
It seems like there are some regulatory shifts in the state level, CFPB, etcetera, that are potentially going to contribute to additional difficulties in that area and perhaps drag out the time line where as you can say you can catch back up with where you think the legal channel is. So the question is any color on that?
Secondly, on two states have already changed, are there any other bills on a dockets in other states that you are aware of to do the same kind of thing and change those rules?
Steve Fredrickson
Thanks. Two of the states that changed some requirements were documentation requirements.
That is the process of getting the docs and conforming all of your suit packages to include what they want. I am not aware, and I am just not aware of any states right now that are talking about more of that stuff, but I am not following it that closely.
But again, these two states, we're adapting to it, and it's going to take some time, to your point. The other state which moved to an e-file process is actually slowing us shockingly from a production standpoint.
We used to be able to batch upload the stuff and now we have to send them up one by one. There's a lot of that stuff going on in this legal process, things that were a little more productionalized in the past has gotten a little more manual.
It is our task over time to figure that out and see if we can reproductionalize that. Does that answer your question?
Robert Dodd
It does. Thank you.
Operator
Thank you. The next question comes from the line of Manu Srivarira with Janney.
Your line is now open.
Manu Srivarira
Good afternoon guys. Just one question here.
Can you remind us what your excess borrowing capacity looks like? For example how much room do you have on your revolvers?
Kevin Stevenson
Yes. I think you have to look at that separately in the Americas versus Europe.
We recently last quarter did some refinancing within Europe and so we have got a significant buffer on capital availability in Europe. And in the U.S.
at the period end we had available U.S. cash of about $16 million and borrowing capacity in the U.S.
revolver of 63 million. So call it $80 million in total at the end of the quarter.
Manu Srivarira
Okay. Do you see any liquidity constraints in terms of your ability to purchase new portfolio, anything like that?
Kevin Stevenson
No. I think in terms of our current forecasts for the fourth quarter and going into first quarter we don't see any issues with that.
We've started dialogue around lining up sources of capital for the eventuality when maybe some of the big sellers that have been out of the market return. But if they do return it's not going to be it two-week turnaround time, we'll have some advance notice of that.
Manu Srivarira
Okay. Great, thank you very much.
Steve Fredrickson
And I would add to that just, I know most people are aware of it, but we generate pretty significant cash flow every quarter. So on top of the dollars that Pete's hopefully going to raise and the ones we have currently available, we'll generate a bunch of cash flow as well.
Operator
I am not showing any further questions at this now. I would now like to turn the call over to Mr.
Steve Fredrickson Chairman and CEO for any closing remarks.
Steve Fredrickson
Thank you, operator. Thank you all for joining us for PRA Group's Q3 2016 earnings call.
We look forward to speaking with you again next quarter. Good evening.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect.
Everyone have a great day.