PRA Group Inc (PRAA) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q4 2005 Portfolio Recovery Associates, Inc. earnings conference call. My name is Shanita and I will be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session toward the end of this conference. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to Mr. Jim Fike. Please proceed, sir.

Good afternoon. Thank you for joining Portfolio Recovery Associates fourth-quarter and full-year 2005 earnings call. Speaking to you as usual will be Steve Fredrickson, our Chairman, President and CEO and Kevin Stevenson, our Chief Financial and Administrative Officer. Steve and Kevin will begin with prepared comments and follow up with a question and answer period. Afterwards, Steve will wrap up the call with some final thoughts.

Before we begin, I would like everyone to please take note of our Safe Harbor language. Statements on this call which are not historical, including Portfolio Recovery Associates, or management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future, including with respect to the future portfolio's performance opportunities, future space and staffing requirements, future productivity of collectors, expansion of the RDS, IGS and Anchor Receivables Management businesses and future contribution of the RDS, IGS and Anchor businesses to earnings are forward-looking statements. These forward-looking statements are based upon management's beliefs, assumptions and expectations of the Company's future operations and economic performance taking into account currently available information. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ from those expressed or implied in any such forward-looking statements as a result of various factors, including the risk factors and other risks that are described from time to time in the Company's filings with the Securities and Exchange Commission, including but not limited to its annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K filed with the Securities and Exchange Commission and available through the Company's Web site, which contain a more detailed discussion of the Company's business, including risks and uncertainty that may affect future results. Due to such uncertainties and risks, you are cautioned not to place undue reliance on any forward-looking statements which speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or to reflect any change in events, conditions or circumstances on which any such forward-looking statements are based in whole or in part.

Now, here's Steve Fredrickson, our Chief Executive Officer.

Thank you, Jim and thank you all for attending Portfolio Recovery Associates fourth-quarter and full-year 2005 earnings call. On today's call, I will cover the Company's results broadly and discuss the strategy behind the numbers. Kevin will then take you through the financial results in detail. After our prepared comments, we will open up the call to Q&A.

Q4 was an exciting quarter for PRA, completing a noteworthy year in which we continued to grow earnings, revenue and cash collections; purchased RDS, our second corporate acquisition in two years; and enjoyed the benefits of our disciplined approach to growth and portfolio acquisition.

During the quarter, specifically, we made very significant acquisitions of charged off debt, investing more in charged off portfolios during Q4 than in any prior year of activity. This remarkable level of debt purchasing was accompanied by strong cash production and solid productivity even given a significant level of workforce expansion. We experienced nice growth from Q3 in each of our fee-for-service businesses.

Our financial highlights are as follows. Net income grew substantially in the quarter, increasing by 22% to $9.4 million. Per-share earnings rose to $0.58 on a diluted basis. Cash collections on owned portfolios increased 16% to $47.2 million in Q4 with an 18% increase in cash receipts to $52 million. Cash receipts comprise cash collections on our portfolios plus commissions generated by our fee-for-service businesses -- Anchor, IGS and RDS. Our Q4 cash receipts drove a 24% increase in revenue to $39.3 million. Our full-year 2005 results showed strength across the board.

I will begin my detailed discussions of our results by looking at portfolio acquisitions in the quarter, which totaled $92.3 million. Despite strong deal flow, we continue to operate in a market that remains competitive from a pricing perspective. While some deals are beginning to look better, we continue to see evidence of buyers overpaying for portfolios since probable liquidity does not support such aggressive pricing.

We acquired 58 pools in the fourth quarter from 19 different sellers, including several new relationships for us. Approximately 98% of our fourth-quarter purchase volume in terms of dollars invested was indeed the MasterCard and private label credit card asset classes. We also purchased pools of consumer installment loans, telecom, auto deficiency and other accounts. We continued to find relatively few compelling purchase opportunities in the non credit card arena despite a great deal volume in the non credit card asset classes. Importantly, we acquired more bankrupt debt in Q4 than in any prior quarter. These bankrupt accounts are included in the Visa MasterCard category I just discussed.

Our bankruptcy portfolio continues to perform as anticipated. As we have stated, we believe the recent changes in bankruptcy legislation will at least temporarily disrupt historical bankruptcy collection curves. This will make it more difficult to accurately price bankrupt accounts created after the bankruptcy law changes that took place on October 17, 2005. We will take this into consideration as we make future investments in the sector.

Please note that a significant number of preamendment bankrupt accounts do remain even after the October regulatory changes. During full year 2005, 23% of our buying as measured by purchase dollars came from bankruptcy accounts versus 14% in 2004. The 2004 bankruptcy purchases were weighted towards the end of the year.

Before leaving our discussion of portfolio acquisitions, I would like to say a word about the impact of the bankruptcy filing increase on our own portfolios. We continue to expect no material impact on our anticipated liquidation of any pools as a result of last year's spike in bankruptcy filings. We mentioned this on our last call but now we have more data and remain very comfortable with this statement. In the first eight months of 2005, we experienced chapter 7 bankruptcy filings that averaged about 6500 accounts per month. This filing rate spiked to about 14,000 in September and then 45,000 filings in October. However, during November, December and January, chapter 7 filings among our accounts dropped to 375 to 650 per month. Should chapter 7 filings continue at those very low levels, the net effect of the bankruptcy spike will be completely offset by the lowered filings post amendment.

Now onto collections. Much like our buying, owned portfolio cash collection results were also strong during the quarter. Portfolio Recovery Associates collected $47.2 million in the fourth quarter, up from $40.7 million a year earlier. Recoveries were generally strong across our portfolios and they came without regard to date of purchase. As you know, we track productivity in terms of recoveries per hour paid, the core metric that measures the average amount of cash each collector brings in. This metric finished at a new full-year record of $133.39. This compares with $117.59 for all of 2004. Though strong, our productivity in Q4 was at its lowest point during the year, reflecting the normal seasonal slowdown combined with substantial collector hiring. As we've mentioned in the past, newer employees tend to be much less productive for us than more experienced personnel. Nevertheless, Q4 productivity was still higher than any quarterly period prior to 2005. At quarter's end, our owned portfolio collector headcount was 710, up 13% from staffing of 630 at the end of Q3. We have continued to build staff into Q1 and stood at 736 as of February 10. Turnover returned to normal levels during Q4.

Let's now turn to our fee-for-service businesses, IGS, Anchor and our newest addition, RDS. During the fourth quarter, all three fee-for-service businesses made sequential progress on the top line with fee revenue increasing 34% from Q3 2005. It was also up 42% from Q4 2004. We look to continue this trend of improving revenue in the first quarter of 2006.

IGS continued to make progress with its strategy of client diversification, signing numerous new clients and seeing increased placements from many clients, both existing and new. Placements from our larger legacy clients remain at historically reduced levels, but we are slowly and surely making up that volume with our new clients. We look forward to further progress in 2006.

Anchor has continued to attract new clients and has seen increased placements levels. Our intensified marketing efforts at Anchor continue to pay dividends through new business.

During Q4, we also made good progress with the integration of RDS. We're using our contacts in Virginia to attempt to win business in our own backyard and our marketing efforts in Alabama, Georgia and Tennessee continue.

Now let me turn the call over to PRA's Chief Financial and Administrative Officer to take you through the financials. Kevin?

Thank you, Steve. As Steve said, the fourth quarter of 2005 was another strong one for Portfolio Recovery Associates. Let me run through the financial results quickly.

Net income in the fourth quarter grew 22% to $9.4 million, up from $7.7 million in the year-ago period. Total revenue for the quarter was $39.3 million. This represents growth of 24% in the same period a year ago. On an annual basis, net income grew 34% during 2005 to $36.8 million. Revenue grew 31% during the year to $148.5 million.

Breaking down our revenue into three components in the fourth quarter, once again, the majority of total revenue or $34.6 million came from income recognized on finance receivables. This is revenue generated by our owned debt portfolios.

Income recognized on finance receivables is derived from the $47.2 million in cash collections we recorded during the quarter, which represents a 16% increase over Q4 2004. These cash collections were reduced by an amortization rate of 26.7%. Our amortization rate now stands at 29.6% for full year 2005 as compared with 30.7% for full year 2004.

We incurred a $200,000 allowance charge during the quarter. This single charge is associated with a pool of accounts we purchased in 2001 that has dramatically exceeded our original expectations over its life, with projected results being just over five times purchase price, and a yield on the pool of approximately 590%. On track right up through the end of Q3, this pool performed under expectations in Q4 so we deemed it appropriate to move quickly and take the 200,000 charge at this time. It should be remembered that SOP 03-3 adopted in January of 2005 prohibits moving yield downward once set regardless of whether the yield was moved up from its original level or not. It should also be noted that this pool did exceed our expectations in January of 2006. Currently with an unnamortized NFR or net financed receivable of $1.2 million, this pool has generated average monthly cash collections of more than $600,000 for the last six months. We have paid approximately $11 million for the accounts in this pool and through December 31 of 2005, have collected $43.6 million. In aggregate for all pools, our cash collection results for Q4 were well ahead of our accounting projections.

During the fourth quarter, cash collected on fully amortized pools was $6.8 million, flat to Q4 of 2004. In referring to fully amortized pools, I mean purchased pools with no remaining basis on our balance sheet, zero-basis assets. Eliminating those pools from our amortization calculation gives us a core amortization rate for Q4 of 31.2% versus 36.3% in the fourth quarter of 2004. For the full year, core amortization was 34.3% versus 36.3% for all of 2004.

As a result of SOP 03-3, in effect now since January 1, 2005, we anticipate the quantity of zero-based assets to gradually decline over time as our amortization becomes more accurate due to aggregation.

During the quarter, commissions and fees generated by our fee-for-service businesses, Anchor, IGS and RDS, totaled $4.7 million. This compares to $3.3 million in the year-ago period. Please note that this quarter's results include three months of RDS operations while last year's comparable period did not include any RDS results. Each of the three businesses experienced increased revenue compared with Q3 of 2005.

The fourth component of total revenue, cash sales of finance receivables, was zero for the quarter. During the quarter, we retained all of our purchases for internal collection efforts, as we have in every quarter since our IPO in late 2002. As Steve discussed, recoveries per hour paid for calendar year 2005 was a strong $133.39, a full-year record. Recoveries per hour paid in 2005 compares with $117.59 for all of 2004. If you back out legal cash collections, the comparison is $89.25 for full year 2005 versus $82.06 for all of 2004. This great performance was driven by our excellent collection staff, our state-of-the-art systems and engaged portfolio management as well as portfolio mix.

We continued to focus considerable energy on expense control during the quarter. In Q4, operating expenses totaled 61% of revenue, up slightly from Q3. For full year 2005, operating expenses were 60% of revenue, identical with 2004. Operating expense to cash receipts is another important ratio we discuss because variations in purchase price amortization rates tend to move around our revenue ratios somewhat. Operating expenses as a function of cash receipts, excluding sales, has shown solid improvement over time, narrowing steadily from 54% in 1999 to 43% in 2004. This ratio was 46% for Q4 and finished full year 2005 at 43%.

Our legal collections decreased slightly to 34.6% of total cash collections in Q4 of 2005 from 34.8% in Q3 of 2005 and 32.8% in the fourth quarter of 2004. This is due to our maturing pipeline of legal accounts, a slightly expanded legal collection strategy and seasonal trends. For the full year, legal collections stand at 33.1% of cash collections versus 30.2% for full year 2004.

Our balance sheet remains extremely solid although we did use a significant amount of cash this past quarter purchasing new portfolios -- in fact, supplemented our own cash by borrowing $15 million under our new line of credit in late December. This $15 million remained outstanding as of December 31. Cash balances were $16 million at the end of the fourth quarter, down from 67.4 million at the end of Q3.

Rounding out the balance sheet, we had $193.6 million in finance receivables, $10.8 million in property, equipment and other assets, $18.3 million in goodwill and $9 million in intangible assets all related to the IGS and RDS acquisitions. As a reminder, we are amortizing approximately $250,000 per month in intangibles.

In addition to our bank line, we have about $1.5 million of long-term debt and obligations under capital leases, with total liabilities both long and short-term of $52.5 million. At year-end, shareholders' equity totaled $195.3 million.

A couple of notes before I wrap up. First, I continue to be pleased with the progress we are making with our fees for service businesses. We're focusing on doing the right things to build this revenue stream up over the long term. If that causes short-term results to bounce around a bit, so be it. We're marketing aggressively at each of our businesses and we're working to cross-sell and work cooperatively at every opportunity.

Second, I want to take a moment and talk in more detail about some of the shifts that have been occurring and will likely continue to occur in our debt buying business. As we've stated in the past, we are big believers in disclosure and have attempted to provide a variety of portfolio statistics that give investors the ability to get behind the short and long-term performance of our portfolios. The introduction of our bankruptcy buying business in early 2004 has begun to cloud some of the liquidation results we publish each quarter. The reason it is straightforward -- although our charged-off accounts tend to liquidate in fairly predictable homogenous curves, the bankruptcy accounts we have been buying have different liquidation attributes. As we have long stated, we buy to meet or exceed targeted IRR hurdles whenever we acquire portfolios regardless of what type of pools we may be buying. However, bankruptcy accounts differ from our standard charge-off pools in several ways. First, our direct labor costs of bankruptcy paper are much, much less than with standard charge-offs. Rather than rely on call centers full of collectors or contingent fee collection attorneys, we use small numbers of clerks to file and manage the paperwork for these accounts. The U.S. bankruptcy trustees actually do the collection work and make remittances to us. As a result, our bankruptcy-related labor costs are fraction of what we see with standard of accounts. This permits us to realize similar IRRs with recovery to purchase price multiples well below that of normal charged off deals.

Complicating this issue further, the timing of bankruptcy cash flows can vary dramatically from the fairly standard charge-off curves. They can also vary depending on the age of the bankruptcy account. For instance, although essentially all charge-off portfolios begin to pay us immediately with cash flows being very strong in the early years of a life of the portfolio, the opposite can be true for bankrupt pools. Newly filed chapter 13 accounts, for instance, may not begin liquidating with any significant cash flow for a year or more after purchase. These differences make pricing bankrupt portfolios a much different and very complicated process. This is one of the reasons we studied the market for so long before finally beginning to acquire these pools in early 2004.

Obviously, the introduction of more bankruptcy pools into our liquidation table is causing the 2004 and 2005 results to become increasingly influenced by the variant bankruptcy liquidation results. In order to provide more granularity on portfolio performance, for the purposes of our 10-K disclosure only, we will provide a separate cash collection table showing just our purchased bankrupt portfolio as well as just our standard portfolio. For now, we will not provide this breakout in quarterly filings due to concerns over providing too much competitive data.

With that, I've completed my prepared comments and would like to open the call up to Q&A. Steve and I will both be available to answer your questions. Operator?

(OPERATOR INSTRUCTIONS). Bob Napoli, Piper Jaffray.

Good afternoon. The receivable portfolio has essentially increased 65% quarter over quarter. The hard part from my perspective for a quarter or two will be gauging the performance and trying to get a trend on the performance of those new pools. And the number of collectors that you have hired are up 16% I guess through today, the numbers you gave us today from the end of the third quarter. It seems to me like we should expect the cash collection rate off of those portfolios, given I think you have to hire a lot more collectors yet, it seems. But it seems like we should expect the cash collection rates initially out of those pools to be much lower than we had seen out of previous pools. Is that -- can you help me think about that and think about what we should see going into the first quarter of 2006?

Bob, I would hope that over the long run, the liquidation of those pools would look very similar to the liquidation of pools that have been acquired historically. The thing that you need to take into consideration I think when you are looking at staffing levels and certainly our ability to generate cash collection is that area that Kevin spent some time talking that the whole impact of bankruptcy collections.

Remember in terms of staffing on the bankruptcy purchasing, it has a very modest impact on our ability or on our need to ramp up collectors. And so you have got some cushion really off of both 2004 and 2005 buying that that bankruptcy piece buys us.

We would also hope to continue to work on productivity. We should help keep our headcounts down and although we're probably going to continue to push on staffing to some degree, we feel like we are pretty close to where we need to be at current levels. And again, we don't anticipate that we are going to be deferring recoveries because of our staffing levels. We think we're going to be able to get to the [paper].

What percentage of the 92 million, Steve, was bankrupt accounts in the fourth quarter? Maybe that would help. I know you said it was more than ever before.

I will tell you this, Bob, of the buying that we did during the year, we had an inordinate amount of the bankruptcy buying that did occur in Q4. We're not going to break it out though.

My last question and I will open it up for others. First quarter seasonally is typically first and second quarters and I think more so the first quarter typically the strongest quarter in cash collections. And I know March is a big month but I was wondering if you could give any visibility into if you're seeing similar seasonal trends this year or if you feel like anything different has happened with the consumer that may have cash collections maybe not as strong as they were seasonally in prior years?

I would say, again, we are not that far into the quarter and January typically isn't as a strong of a month as February, March, even April. But I would say that at this point nothing that we are seeing would suggest that the seasonality of Q1 '06 is that much different than what we have seen in past years.

Bob, you get the percentage of bankruptcy buying for full year, right, the 23%?

Twenty-three percent, yes.

Yes, okay.

And what was it through the three quarters?

Good try.

Dan Fannon, Jefferies.

Thanks for taking my question. Can you talk about the timing of the acquisitions in the period and if you were able to get any collections from those purchases in the fourth quarter in the numbers that you reported; in the 47.2 million, were there any collections from what you purchased in the fourth quarter?

The vast majority of the purchases came in the last 45 days. And although there were some collections that were realized, it was pretty modest.

Okay. And then it seems as if the growth rate for collections on a year-over-year basis has slowed in the last two quarters and last quarter you had reasons of collector turnover. This quarter we also see a slowdown on a year-over-year basis. Is this a trend that you expect to see kind of continue when you look into '06 or is there something over the last two quarters that will likely not continue when we look out into '06?

I think that the $92 million investment in new portfolios is definitely going to put pressure upward on cash collections. I guess what you have seen over the last 12 months or so has been a couple of things. Number one, the introduction of bankruptcy purchasing, which is just driving every dollar of investment there although it is responsible for we think an equal and appropriate amount of profit at the end of the day, it doesn't create the same amount of cash collections as our normal buying would do. So that is one piece of the puzzle that you're seeing.

The other piece is, especially when you factor out the bankruptcy buying, the normal call center work buying hadn't been growing substantially. Basically you had 2003, 2004 buying that was about level, really a function of the market. And obviously at the end of the day, we need to drop raw material in to keep cash collections growth moving along. I think everybody needs to step back and understand that we're not going to make those investments in a haphazard or an irrational manner simply to grow cash collections. We're looking at appropriate IRR. But we have been pretty careful over the last couple of years and as a result, you're going to crimp eventually your cash collection.

One of the reasons why we were particularly excited about what we thought was the real advantageous buying that occurred in Q4 was number one a big stockpile of cash but number two was a real nice opportunity we thought at good prices to replenish those finance receivables to drive collections for hopefully years to come.

Thanks. Just lastly, if you could just refresh us on the seasonality of your commission businesses, particularly IGS. I think when you originally bought these, you gave us little guidance there and we've seen some growth here in the fourth quarter and I just want to make sure I understand the seasonality of where that's going on a year-over-year basis?

I would say that Anchor seasonality looked very similar to the owned portfolio business. IGS we believe has some seasonality but less so than the other businesses and RDS doesn't appear to be that seasonal.

John Neff, William Blair.

Hey guys, could you comment on the buying environment in the first quarter? In other words, I'm just trying to get a sense of whether the environment was so extraordinary in the fourth quarter related call it solely to the surge in bankruptcy filings and then it's kind of slammed shut, so to speak.

I wouldn't characterize Q1 as carrying that extraordinary momentum that we saw in Q4. But it looks to us thus far and remember we're pretty early on like a fairly normal Q1, certainly not a door slamming as you suggest.

Okay, good. I was wondering if you could just give us some housekeeping numbers. If you could give us those collector headcount numbers again, Kev?

Sure can. I breathe for it. Looking at PRA headcount for reps only -- reps only again for PRA is 710 and for total direct collection employees is 809.

That's including the first line supervisors?

That's correct. Do you want Anchor's as well or do you just want the total? (multiple speakers)

(multiple speakers) for PRA, that's right.

Total. 861 then for total Company and 973 for total Company as far as direct supervisors as well.

Jeff Nevins, First Analysis Corp.

Good afternoon. Just in talking about the bankruptcy buying, could you provide a little bit of color on the curve? And maybe we're too early but is it -- obviously it's kind of fair to assume that some of the collections growth at least year-over-year in the past couple of quarters has slowed due to increased buying activity of the bankrupt paper. When do we start kind of transitioning out of that where collection growth may resume back to the normal levels? Is it a year lag or more like a two-year lag? How do you think about that?

It's going to be a function on the bankruptcy side of where it is we find the best value in that market. For instance, if we end up buying a lot of fresh or just created, just filed chapter 13 accounts, those accounts can really sit and produce very little cash flow for a year or two before they kick in. If we are buying portfolios of chapter 13's that are kind of in the sweet spot of liquidation, we could see very substantial cash collections created and then have those portfolios wind down more quickly than you would typically see. Hopefully as we show you the numbers on where we are at with both the bankrupt and the non-bankrupt collections in the K, it will give you a little better feel for relatively where we are at there.

Okay, one other question and I will hop off. Did you mention how much revenue in the quarter came from acquisitions?

Came from acquisitions, I don't follow you.

From acquired companies, is there an organic revenue number or are we are already anniversaried? I didn't think we were.

We didn't specifically break it out.

I wasn't sure, I thought I heard it but I wasn't sure. The other question was, what operating cash flow and CapEx was in the quarter?

I will dig that one out.

I will hop off, thanks.

Property, plant and equipment -- I've got it for the year. For the year, it was $3.5 million in CapEx.

That's fine. How about Op cash flow?

For the year, again, remember how we do our cash flow statement; it does not include acquisition of finance receivables or amortization thereof. So it's 57,854,000.

Mark Hughes, SunTrust.

Thank you very much. When you buy the bankrupt accounts, how much more visibility do you have in terms of the individual debtor's ability to repay? Is there a little less risk when you are acquiring those accounts?

We tend to get to look at a lot more data for each bankrupt account than we do on a charge-off account. And so we feel as though we have got a pretty good view of how liquidations are going to fall out on those bankrupts. And I guess our performance over the last couple of years would bear that out. We feel pretty good about our ability to model.

Right. And then I think you might have answered this question before but how much contribution in the fourth quarter from the Q4 portfolio acquisitions? Did you say a modest amount?

Yes, a modest amount.

And then the Q4 productivity excluding the legal collections, I know you ramped up pretty quickly on the employee. Can you give a sense of that, just sort of back of the envelope in stable year-over-year?

Ex legal collections, it was $89.25 for the year. $82.06 for the last year.

Any comment on Q4 versus Q4?

We don't have it in front of us.

James O'Brien, Brean Murray.

Good afternoon, I think you said that pricing in general is obviously still somewhat difficult but it may have abated a little bit. I was wondering if you could maybe comment generally on what you are seeing on the pricing front? And then I know you bought most of your portfolio in the credit card arena but I was wondering if maybe you could talk to us a little bit about what you were seeing in other areas, specifically telecom and the pricing there and maybe what the collections and the curves look like for telecom? I was wondering if you can kind of speak generally to those questions?

Well I listened to part of a replay of a competitor's call today and I thought they very appropriately described the pricing environment at the high end of rational. I would say that is our view. Again, we're looking at good deal flow but we're looking at an awful lot of pools before we find those that we think are appropriately priced.

I guess as we commented for Q4 buying, although deal flow was enormous, we did almost no non credit card, Visa, MasterCard, private-label credit card buying because we just didn't see the value there. With telecom, we do buy telecom paper. We bought paper from telecom this year; I think it was about 3% of our purchase price. We bought telecom in '04 in a number of the prior years. I feel like we've got a pretty good handle on those accounts.

Because of balances there, when you compare the balance distributions overall, there just isn't as much kind of meat for the legal process there and so we tend to find collection curves that you know may be a little more muted on the back end than we would see with more normal Visa, MasterCard type pools.

Edward Hemmelgarn, Shaker Investments.

Yes I just had a question again regarding the '05 portfolios that you were purchasing. When I went back and looked at it, I think someone else has mentioned this, that collections on the '05 portfolio at least for the first three quarters seem to be fairly low relative to your historical numbers. And given that you commented that most of the bankruptcy purchases were in Q4. So a significant percentage of -- and a good-sized dollar amount in the first three quarters would've been non-bankruptcy. Did you see a return to -- I mean a pickup to more normalized levels in Q4? Because I mean you would've had -- Q4 for the first three quarters of purchases.

Right. Again, we are -- and I understand the data that you are looking at. You're looking at kind of a quarterly static pool analysis because that's the data that's provided. We are looking at a purchase pool by purchase pool, month by month analysis. And as Kevin commented, the operating results that we have seen throughout the year really are exceeding our expectations. But I think as we have also made clear with our purchase price multiple payables, etc., we have especially off of the '04/'05 purchases started those pools out at some lower multiples. And so indeed, assuming that there's some net impact from this higher pricing environment that we have been in, that has got to be a piece of what you are seeing. Hopefully when we provide this more detailed breakout between our bankrupt pools and our non-bankrupt pools, you will be able to get a little bit better feel for how much of that is due to the bankruptcy buying.

Okay. I guess I was just trying to focus on the issue. I mean even with -- if you look at the non-bankruptcy, as you bought about 115 million of non-bankruptcy paper during the year. About 52.7 million in '04 and about 61.5 million if you didn't buy any in bankruptcy in '03. But, it's just, I'm trying to get a little bit better feel because even though bankruptcy is a piece, you still bought a substantial amount more of non-bankruptcy paper?

Right, although --

Most of it was --

-- the majority of it was in the last 45 days of the year and let's assume that even we bought it all on that 45th day, which we didn't, that's not a lot of time to get the accounts in, get them processed, get the letters out, start dialing and lettering them and start getting cash collections in. So obviously, when you look at the buying of '05 relative to the buying patterns of other years, '05 is going to be much, much more weighted to the end of the year. And if you are doing the purchase price versus quarterly collection numbers off of those kind of stats, you are going to come up with lighter than historically indicated cash collection.

I tried to factor in that but it was still even though for the first three quarters you bought like 57.3 million in portfolios.

Right, and a portion of that was bankrupt.

Okay. That's all for me now.

Phil [Ducci], [Zebra Funds].

Hi, thanks for taking my call. Can you give us a sense based on the estimated remaining collections that you show in the latest Q filing, can you give us a sense of what the impact was of the surge in chapter 7's? How much of that would've gotten wiped out?

Did you say of the estimated remaining collections?

Yes, that you guys list on your quarterly filings? Can you give us a sense of how much the surge in the chapter 7 filings have wiped out?

I would say that it's a de minimis amount. First of all, I guess since we haven't published ERC for this quarter, you're talking about how much of last quarter.

Correct.

And we did comment during the call that based on our analysis of the filings that we don't think we see any material impact on the collections from our portfolio. And when we produce the quarterly numbers, obviously, you will see that in more detail. But I don't think you will see any impact.

Remember, we anticipate and experience bankruptcies as a normal matter of course with all of our portfolio acquisitions. It's just a matter of fact being a bad debt buyer that some amount of your accounts end up going bankrupt. And although we like everybody saw a spike in September or October, as we dig through those accounts and look at them relative to our overall pool, we just don't see a material impact.

Okay, and another quick question. As far as the cost of bankrupt receivables, can you give us a sense of how competitive that seems to be at this point? Are they pricey relatively speaking? Because it seems to me that the same easy process that you guys have, filing a proof of claim and just waiting for the trustee to collect on the plan, it seems to me like banks face the same process. And I'm not sure I understand why they would be willing at this point to unload those type of receivables at any meaningful discount since they can probably do basically the same analysis that you guys do.

Let me address your not only the philosophy of your question but also talk about the reality. The reality is many of the large banks have been selling their bankrupt accounts for many, many years, going back at least as far as kind of the normal significant growth in the bad debt sale market has existed. I believe they do it for a couple of reasons.

Number one, although it sounds like an easy and straightforward process to track the accounts, file your proof of claims timely, coordinate with the trustees, make sure that your claims have been confirmed, all the rest, many very good collection companies, and I would say it's bad debt buyers right on through to big financial institutions, aren't that adept at the administrative processes required for bankruptcy buying. So I think they see it as a way to effectively outsource something that isn't really a core competency for them.

Number two, it's another way for them to realize value at times when they determine that that's advantageous for them on accounts that otherwise are going to liquidate only over a very prolonged period. And so they're able to accelerate recoveries, albeit at a discount by selling those things upfront.

Robert Napoli, Piper Jeffery.

Couple of questions. First of all, you guys [boxed] from 19 different sellers, a whole bunch of pools, 58 pools I think in the quarter. Are you cracking new sellers? Is there -- I mean the credit card industry has consolidated pretty dramatically so I don't know how many big players you don't already work with. But is there some other area you're generating portfolios from that you were not in the past?

During Q4 -- and actually, Bob, just as a matter of course, in terms of cracking new sellers, we are seeing deals and have seen deals from everybody on a regular basis. So it's really a question of where do we see value and who are we buying from rather than did we get XYZ Bank to actually show us a deal. For the most part, we are seeing the deals; it's a question of where do we find value. There were just a lot more people selling a lot more accounts and so we bid on additional sellers.

We have been working very hard though on some of the emerging asset classes, including healthcare and hopefully we'll have some more interesting things to talk to you about on that as '06 goes on.

Was there some more of the emerging asset classes including healthcare in the fourth quarter? Is it becoming a meaningful amount?

No, 98% of what we bought was Visa, MasterCard and private-label credit card. So there was just about -- in fact, there was much less than you would see in a normal quarter.

As you're looking at the emerging asset classes, are there -- I mean you have been looking at a number of these classes for a while. Is the reason that you haven't really bought that much because people have been aggressive in pricing and you're seeing that pricing change? Or is it just that you're becoming more comfortable in the healthcare sector or in some other sectors with the assets and how they perform themselves?

Well I think in the vast majority of the asset classes that we have been looking at certainly during '05, we feel pretty comfortable that we know what pricing and liquidation behavior for us is going to be and we simply haven't been that excited about the value proposition that we see in those emerging asset classes. And when we see that equation flip, we will be there.

What about on healthcare? I mean you seem to be a bit more positive on healthcare? Has pricing adjusted in that sector?

Well healthcare is more of a, are you seeing any of it for sale situation as opposed to talking about pricing being up or being down. So I think ourselves and a number of good, smart debt buyers have been working on the health-care market for some time now and I believe that it's just a matter of time before as an industry we're able to advance debt selling as a normal way to deal with those health-care receivables at least for a segment of the portfolios they have.

Last question, on your collection strategy, and I very much like your internal collection strategy. But at times when you see these opportunistic purchases, it makes me wonder whether or not it makes some sense to have not only your own internal collections capability but have some portion of the collections possibly on an outsourced basis. And I don't know -- just wondered what your thoughts were on that if it makes any sense to have a majority in-source collections and then at the margin have some outsourcing capability for periods when you see dramatic opportunities in the market? Or when you have unusual runoff internally like you might have had in the third quarter or things like that?

We have long had the capability I guess to manage outsourced collections. We have used collection agencies really throughout the life of our Company. However, we just choose to use them in a very, very insubstantial way. You know so I don't feel like we don't have that competency. I don't personally see it as a huge hurdle to be able to outsource accounts to collection agencies.

Certainly, should we see buying opportunities that we felt were so compelling that we couldn't handle them internally and that we could make appropriate returns by outsourcing them, I think we could put those pieces together and go after work like that. But for now, we feel very confident that we've got everything handled.

Mark Hughes, SunTrust.

My question has been answered. Thank you.

I would now like to turn the conference over to Mr. Steven Fredrickson. Please proceed, sir.

Thank you, operator. First, I'd like to thank all of you for participating in our conference call. Before we go, I'd like to reiterate a few key points about our strong-fourth quarter and full-year 2005 performance.

Net income grew substantially in the quarter, increasing by 22% to $9.4 million. For the year, we grew net income by 34%. Per share earnings grew to $0.58 on a diluted basis in the fourth quarter. For the year, EPS grew to $2.28, up 32% from 2004. Total revenue rose 24% in the quarter to $39.3 million. This was driven by an 18% increase in cash receipts.

For the year, revenue grew 31% to $148.5 million while cash receipts grew 28%. Portfolio purchases were a record $92.3 million in the fourth quarter.

Our cash balances finished at $16 million. With our new $75 million line of credit and $60 million of borrowing availability at year end, we stand positioned well to react to further market opportunities as they present themselves. Our performance in Q4 2005, highlighted by advantageous buying, solid productivity and strong cash collections, was made possible by our long-established strategy of disciplined buying and consistent attention to the efficiency of our operations.

Thanks again for your time and attention. We look forward to speaking with you again next quarter.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.