PRA Group Inc (PRAA) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2006 Portfolio Recovery Associates, Inc. earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating the question-and-answer session towards the end of the conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes.

I would like now like to turn our presentation over to our host for today's call, Mr. Jim Fike, Vice President of Finance and Accounting. Please proceed, sir.

Good afternoon, and thank you for joining Portfolio Recovery Associates' second-quarter 2006 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 the follow up with a question-and-answer period. Afterward, 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 portfolios 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, it's 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 website, which contain a more detailed discussion of the Company's business, including risks and uncertainties 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 changes in events, conditions or circumstances on which any such forward-looking statements are based, in whole or in part.

Now, here is Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim, and thank you all for attending Portfolio Recovery Associates' second-quarter 2006 earnings call. On today's call, I will cover the Company's results broadly, and then Kevin will take you through the financial results in detail. After our prepared comments, we will open up the call to Q&A.

Before I talk about specific results, let me discuss our strategy in general. I want to reiterate that while we continue to face high pricing for new portfolios of debt, we remain very excited about the prospects for our business. We believe our core competencies of execution excellence, pricing and strategy expertise and intelligent cost control will continue to make us a formidable competitor in this industry, regardless of where pricing goes. Further, I believe we have significant opportunities to improve in each of these critical areas. Our ability to collect more for less, our ability to accurately price every portfolio we acquire and our ability to grow our fee-for-service businesses are all entirely within our control.

Over the past year or so, we have been hiring aggressively, both collectors and our professional staff, to add the kind of talent necessary to take this company to the next level of performance. We intend to continue investing in people, information and technology. We're serious about continued growth in this pricing environment, and we have the talent and resources to achieve it.

Our second-quarter performance demonstrates just the kind of execution excellence that will carry us into the future. In the second quarter, we made significant acquisitions of charged-off debt, investing $27.9 million. This was accompanied by record cash production and continued strong owned portfolio collection productivity, despite further workforce expansion from the first quarter. We achieved impressive fee-for-service business revenue of $5.8 million, coming in just short of the $6 million revenue record we set in Q1.

Our financial highlights are as follows. Net income grew substantially in the quarter, increasing by 23% to $11.1 million. Per-share earnings rose to $0.69 on a diluted basis. Cash collections on owned portfolios increased 22% to $59.4 million in Q2, with a 28% increase in cash received to $65.2 million. Cash receipts comprised cash collections on our portfolios, plus commissions generated by our fee-for-service businesses -- Anchor, IGS and RDS. Our Q2 cash receipts drove a 29% increase in revenue to $46.2 million.

I will begin my detailed discussion of Q2 by looking at our $27.9 million in portfolio acquisitions in the quarter. Overall, we acquired 40 pools from 12 different sellers, including one new relationship for us. Approximately 93% of our second-quarter purchase volume, in terms of dollars invested, was in a combination of Visa/MasterCard and private-label credit card asset classes. We also purchased pools of consumer installment loans, audit efficiency and other accounts.

While we reviewed many portfolios across a wide variety of asset classes, we found the most compelling purchase opportunities in the Visa/MasterCard and private label credit card sectors. We continued to make further investments in bankrupt debt during the quarter. The vast majority of these bankrupt accounts are included in the Visa/MasterCard category I mentioned previously.

We operated in a market that remains very competitive, from a pricing perspective. We do continue to see what we perceive as occasional pricing inefficiencies in the market, and we're attempting to take advantage of appropriately priced pools whenever we can find them. Between our new forward flow, which accounted for about 40% of our purchasing; solid bankruptcy buying, which accounted for almost 20% of purchases; and the usual stock market transactions, we were able to put together a very solid period of portfolio investing.

We have now invested just over $44 million in the first half of 2006, purchasing approximately $5.5 billion of face-value accounts. We feel our ability to buy and collect effectively across asset types and age of paper is permitting us to invest wisely, even in a period of competitive pricing.

We continued to experience very low levels of accounts we own filing for bankruptcy in the second quarter. Previously, we have commented that our filing rates spiked in September and October 2005 in response to changes in the bankruptcy law, but from November 2005 through March 2006, we reported Chapter 7 filings among our accounts dropped dramatically. This trend has continued throughout the second quarter of 2006, with a total of 6,300 accounts filing under Chapter 7 during that period. This compares with filings almost four times higher during Q2 2005 on a smaller portfolio base.

We continue to see no material impact on anticipated collections as a result of last year's surge in bankruptcy filings. In fact, the collectibility of our portfolios may actually have been enhanced through fewer lifetime bankruptcies as a result of last year's change in the bankruptcy law.

On the collection front, Portfolio Recovery Associates collected a record $59.4 million in the second quarter, up from $48.8 million a year earlier. Collections were very consistent throughout the quarter. 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 $148.74 for the first six months of 2006. This compares with $133.39 for all of 2005. Excluding the effect of trustee-administered purchased bankruptcy collections, 2006 productivity through the end of Q2 was $136.14. This compares with $131.61 in Q2 2005 and $128.02 for all of 2005.

Our strong productivity results came as we continue to add staff. At quarter's end, our owned portfolio collector headcount was 761, up 4% from staffing of 735 at the end of Q1 and up 7% from staffing of 710 at year end 2005. We have continued to build staff into the third quarter, standing at 783 as of July 31st. Turnover remained at historically normal novels during Q2.

Let's turn now to our fee-for-service businesses -- IGS, Anchor and RDS. During the second quarter, our fee-for-service businesses saw revenue increase 177% from Q2 2005 to $5.8 million. Compared with our record Q1 2006, performance was roughly flat at IGS and RDS and down slightly at Anchor, consistent with normal seasonality.

IGS continued to benefit from its strategy of client diversification. Placements from our larger legacy clients remained at historically reduced levels, but new clients have done a nice job of replacing that volume. We continue to slowly expand our workforce at IGS to enable us to provide exceptional service to existing and new clients over time.

Anchor has continued to perform impressively. We are very focused on client relationships that provide us not just with revenue but appropriate profitability. Our focus remains on bottom, not topline growth.

RDS also posted solid results for Q2. Our new call center location for RDS is currently being renovated to our specifications, and we expect it to be ready in late Q3 or early Q4. This new 15,000 square foot center in Birmingham, Alabama will give us the capacity for approximately 125 employees. It will also permit the addition of state-of-the-art systems, phone technology and training areas.

Finally, we're searching for a new call center location for our owned portfolio business, as our current call centers approach capacity. We expect it will bring online a new 150 to 250-person call center sometime prior to March 2007.

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

Thank you, Steve. As Steve said, the second quarter of 2006 was another strong one for Portfolio Recovery Associates. Let me run through the financial results. Net income in the quarter grew 23% to $11.1 million, up from $9.1 million in the year-ago period. Total revenue for the quarter was $46.2 million, which represents growth of 29% from the same period a year ago.

Breaking our revenue down into its three components, in the second quarter, once again, the majority of total revenue of $40.4 million came from income recognized on finance receivables. This is revenue generated by our owned debt portfolios. Income under finance receivables is derived from the $59.4 million in cash collections recorded during the quarter, which represents a 22% increase over Q2 of 2005. These cash collections were reduced by an amortization rate, including an allowance charge of 32.0%. This amortization rate compares with our full-year 2005 rate of 29.6%, and 30.7% in Q2 of 2005.

As you saw in the press release, we incurred a total of $200,000 in allowance charges during the quarter. These charges are associated with two different pools, one purchased in 2005 and the other from 2001, both of which have had allowance charges in the past. The first pool, representing $125,000 of the allowance, is made up mostly of paying accounts. Although we saw significantly improved performance versus expectations in the second quarter for this pool, the pickup did not really kick in until June. Until we can be sure the performance is in line with future expectations, we feel the prudent course is to take a further modest allowance now.

The other pool is from the third quarter of 2001. We have discussed this pool in the past. It has significantly exceeded expectations, and as a result, has an extremely high yield on it. In order to better match future expectations with recent results, we have applied an additional $75,000 allowance on this pool. Quarterly collections continued to significantly surpass remaining [NFR] on the balance sheet for this particular transaction.

During the second quarter, cash collected on fully-amortized pools was $7.8 million, up from $7.5 million in Q1 of 2006 and $6.7 million in Q2 2005. 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 Q2 of 36.9% versus 35.6% in the second quarter of 2005 and 34.4% for all of 2005.

Even though this quarter's collections on fully-amortized pools was another record for PRA, we believe it is a byproduct of SOP 03-3, in effect now since January 1, 2005. The quantity of zero-based assets should gradually decline over time.

During the quarter, commissions and fees generated by our fee-for-service businesses -- Anchor, IGS and RDS -- totaled $5.8 million, a strong performance. This compares with $2.1 million in the year-ago quarter. Please note that this quarter's three-month results include the RDS operations, while last year's comparable period did not include any RDS results.

The third component of total revenue, cash sales of finance receivables, was once again zero for the quarter. During the quarter, we retained all of our purchases for our internal collection efforts, as we have in every quarter since our IPO in late 2002.

As Steve discussed, recoveries per hour paid through the first six months of 2006 was a solid $148.74. Recoveries per hour paid for the first six months of 2006 compares with $133.39 for all of 2005. As mentioned, the inclusion of our growing bankruptcy portfolio is beginning to affect our productivity statistics. If you back out any recoveries from bankruptcy trustee-administered accounts, we see productivity of $136.14 for the first six months of 2006 versus a comparable $128.02 for all of 2005.

We feel this continued growth in productivity is a good example of Portfolio Recovery Associates' attention to call center efficiency and keen portfolio management, all aimed at maximizing long-term collection results. I'm extremely proud of our collector workforce for yet another outstanding performance. We are determined to focus on continued improvements in our ability to efficiently collect and deliver performance without regard to external forces.

On the expense side, we saw slightly lower margins due to our growing fee business, ongoing amortization charges from our acquisitions and increased hiring and compensation expense, consistent with the growth in both our professional and collections staff. As a result, our operating margin was 39% in Q2, level with Q1 2006 and Q4 2005, but down from 41% in the year-ago period. We look to make further investment in professional and collector staff throughout 2006, as we position the Company to have the talent on hand to best exploit long-term opportunities we see.

Operating expense to cash receipt is another important ratio we discuss, because variations in purchase price amortization rate cause our revenue ratios to fluctuate, regardless of true operating efficiency levels. Operating expenses, as a function of cash receipt excluding sales, has shown solid improvement over time, narrowing steadily from 54% in 1999, 43% in 2004 and 2005. This ratio was 44% for Q2 versus 43% for Q1 2006 and 42% in Q2 of 2005, and was driven by the same factors previously mentioned when discussing operating margin.

Our legal collections were 32.1% of total cash collections in Q2 2006, down from 33.6% in Q2 of 2005. This decline is due to seasonal trends as well as our growing bankruptcy portfolio, from which we see very low levels of legal collections.

Our balance sheet remains strong for the quarter, despite solid purchases of new portfolios. Cash balances grew to $25 million at the end of the quarter, up slightly from the end of Q1.

Rounding out the balance sheet, we had $197.4 million in finance receivables, $10.3 million in property, equipment and other assets, $18.3 million in goodwill and $7.9 million in intangible assets, all related to the IGS and RDS acquisitions. Please recall that during 2006, we are amortizing approximately $500,000 per quarter in intangibles.

We have about $1.2 million of long-term debt and obligations in our capital leases, with total liabilities, both long and short-term, of $37.3 million. At quarter end, shareholders' equity totaled $221.8 million.

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

(OPERATOR INSTRUCTIONS). Bob Napoli, Piper Jaffray.

The amount of purchases were a bit stronger, quite a bit stronger, than what we anticipated in getting. I don't think you go over the statistics. You said 40% from the flow agreement?

That's correct. Right, that's right.

20% from bankruptcies? 20% of bankruptcies?

Approximately, right.

What was the rest, 20% from (multiple speakers)?

Spot market regular buying.

Now, is what you're seeing out of the flow agreement -- is that trend that you saw -- was that kind of a much stronger quarter than you expected, just kind of maybe getting started? Or is that a level that you would anticipate, from what you can see, is something you might be consistent at least over the near term?

I would be guessing as to what is happening in somebody else's shop, so --

That's a lot more than you thought you'd get initially, I think?

Well, I think you look at both our written comments and comments we made on the call -- we did bracket the flow for you, in telling you as much as it could be or as little as it contractually was required to be. I think you've got that bracketed in there somewhere.

With regards to cash collections, did you see anything unusual in the trends or seasonally? Typically, in the back half of the year, we see a tapering off seasonally, I think, of collections in this industry. You guys have bucked that trend, more so than most. Given the purchases you made late last year, kind of ramping up the collections on those, do you think you can grow cash collections in the back half of the year? Would you expect to see a modest seasonal downtrend in cash collections?

I think there's going to be two things going on. Obviously, over time, we're going to be liquidating not only the Q4 buying, but all the buying that we have been done before and after that. But combined with it, as you pointed out, is the normal seasonality that we see. So you're going to have a push and a pull there, and we are trying hard to maximize cash collections in every quarter. But as to whether ultimately how that growth will end up in the next couple of quarters, we'll have to just wait and see.

How was the trend through the quarter? Was June higher than April, or was it relatively level?

I commented that it was very consistent throughout the quarter.

The competitive environment, which you have stated several times is very difficult -- have you seen any signs of a bit of a moderation in the competitive environment, given some of the challenges that your competitors have had?

If we have, it has been modest. I think it's more status quo than being able to tell you that we're seeing the market cooling.

Then just a numbers question -- the tax rate was 38% in the quarter. What do you expect for the full year? Was is a normal tax rate?

I think the tax rate was affected this quarter by a tax credit we received, so I guess I'd venture to say that a similar tax rate might be appropriate, pending anything else going on towards the rest of the year.

The 38% is the right tax rate?

Again, pending anything else, I think that it might be 38%, 39%. Without anything specific in front of me, I can't answer it exactly.

Ellyn Cutler, Avondale Partners.

Can you guys share the collection multiples on the new purchases?

Specifically on the new purchases? We don't have that. In the Q, you'll get the usual update.

What about the type of paper under the forward flow agreement? I know I have asked that and been told, but it's a good question for the call.

Type of paper in the flow?

Under the forward flow, right.

Hm?

I'm sorry, the type of paper? Is it fresh? How many times has it been worked?

Yes, the paper is on the fresh side.

It looks like productivity actually ticked down a little bit in Q2. Am I looking at that right? For the --

Compared to Q1?

Yes.

Yes.

Was that determined by the type of paper that you are buying, or is there any specific cause for that?

Oh, no. It would be a very typical quarterly downtrend, as we get further away from income tax refund season.

Dan Fannon, Jefferies.

Can you give us a sense on your outlook for the consumer? We obviously know what's going on with gas prices, but how you think the consumer is currently holding up, and maybe your views going forward as we look into the second half of the year.

I think probably everybody would be better served not paying attention to my view of the consumer, because I think I've felt for some time that the consumer was a bit more stressed than I think performance has shown. I guess we're looking at the same thing as everybody else -- increasing adjustable-rate mortgages, the increase in minimum payments, obviously the increase of rising energy prices on the consumer's pocketbook. So it would certainly appear that there's a fair amount of stress out there and forces are in place to create, ultimately, more charge-off type customers for us. But the consumers are seemingly very resilient at this point.

Can you comment on the supply side of the market? You obviously commented on the pricing, but what was the context of supply versus the first quarter or maybe a year ago?

I think supply was in keeping with the market dynamics that we have seen over the last few quarters. We didn't feel as though the market was flooded, by any means, but we saw fairly consistent flow throughout the quarter.

Jeff Nevins, First Analysis.

You had mentioned some of the headcount changes, and I missed them. So at some point, if you could repeat the headcounts for the agents, that would be helpful. One my questions is related to that, which is, where are you at in your ramp-up in starting up the new call centers that you have been searching out over the past few months, just given the significant buying from 2005? Are you almost complete with that or are you halfway there, in terms of ramp up?

Let me give you the headcount first, and Steve can address your other question. Usually, I read these numbers out. Total employees at PRA was about 1,210 employees. That includes all both owned and contingency operations. The reps themselves -- Steve mentioned that at 12/31 there were 710, at 3/31 there were 735, and at 6/30 there were 761. Looking at another number, if you look for PRA for all the direct line supervisors and so on, that number was 876 for June 30 of 2006.

How about the FTE ones, the FTE by tenure? I've got a 691 at the end of March. I know there's a lot of different ways to slice (multiple speakers).

Right. No, I've got those here, too. I think we can go ahead and put those out. Greater than one year, I've got at 342. Less than one year, I've got 372, for a total of 714.

Call center --

In terms of the call center, we're continuing our search for the right area, both in terms of real estate and workforce. We would expect that prior to the end of Q1, we'll have that new center online, and we believe until it comes online, we have enough existing capacity to handle any further required ramp-up in staffing.

But it's fair to say that it appears as if you haven't -- you ramped up about 100 people or so. And, again, this depends on which number you look at. But from all the purchases, and you're thinking in your head we have to hire a certain amount of people to support some of that growth, do you feel like you're half of the way there, in terms of your capacity expansion to support some of the liquidations you have been bringing on?

Well, you have got to take a lot of things into consideration. Remember, we have portfolios running off at the same time these are coming on. We have been able to build productivity, which lets us handle more with the same amount of people. A fair amount of the buying that has occurred also over the last couple of years has included bankruptcy, and so we don't have the same pressure on our collector workforce that we have historically. So that's altering some of those dynamics between cash collected and people on the floor. So I would say that our ramp-up is -- again, to deal with what we have got in-house is certainly significantly along the way. I'd be shooting from the hip to try to give you a precise number, but I think you would see continued kind of modest build from us, all things being equal, on the new buying front going forward -- nothing that you would sit back and say, wow, that's dramatic staffing.

Back of the envelope, trying to calculate the dollar amount of collections from the BK-related work, it looks like it may have been a little bit over $5 million in the June quarter, which is up a little bit, $500,000 or so sequentially. Kevin, does that jibe with your thinking of those collection dollars?

I'm not sure how you are arriving at bankruptcy collection dollars.

Well, just taking the differential between -- we don't have to go over it on this call. I'll talk off-line, I guess. But just looking at the differential between the year-to-date cash collections per hour paid dollar amount you give, and backing in to get to that number.

I'd say you are going to be directionally there, but it's far from a precise measurement. I'd be cautious backing into the number.

Mark Hughes, SunTrust.

Kevin, could you repeat the zero basis collections numbers, please?

Zero basis was $7.8 million, and last quarter was $7.5 million.

Can you talk about the influence of the commission business on the operating margin? Did you calculate how much that influenced it one way or another?

No, I didn't do that. I don't have that data with me.

Edward Hemmelgarn, Shaker Investments.

Regarding the bankruptcy collections, when would you expect that to start ramping, really, at a bigger pace from the 2005 purchases, especially the fourth-quarter purchases? I know you stated in the past it takes a while until you file all of the documents with the courts, but is that something that you would expect to see more of a ramp of in the second half, or is it going to be more of a 2007 type --

I guess I'll continue my theme for the call of "it depends." We really brought a wide variety of bankruptcy throughout the year, and we did buy some pools that were strongly cash flowing. So they have been contributing to the cash collection number in a meaningful way right from the get-go. We likewise have been buying other pools that are much closer to or right at the point of filing, so we have got that couple-year wait. Overall, we're looking at a fairly blended portfolio of investment.

If anything -- and again, this is just a quick impression. I don't have the exact numbers in front of me to completely back it up, but I would say we're probably weighted a little bit more toward portfolios that have some performance characteristics, as opposed to things that are just sitting doing nothing for a year or two while we wait for payment. It includes a mix, really, across the board.

But you're talking about for those that -- is that kind of the criteria that you generally use, is if either they are collecting or it's going to be a year or two before you start collecting?

No. We're looking at portfolios, really, at any point in their life, in a bankruptcy plan. So it could be literally from the time that they just filed to the point that we're looking at getting the last couple of monthly payments before the plan is extinguished, and everything in between. Generally, you are getting a large portfolio that includes accounts in every condition that you can imagine.

I'm curious. I've asked this question before, but do you have any stats as to what is the average time or period of time on collection on these? Is it a year, is it two years, three years or something for payment on these bankruptcy portfolios? Is that the schedule, the average schedule that people usually come up with? Is there a weighted average amount?

I'm not a reliable guy to give you that number, so I'd rather defer and do my homework and get the right answer for you.

John Neff, William Blair & Co.

The investment projects and the investments in professional staff, collection staff and infrastructure -- you are doing this with what kind of view on a macro on the competitive environment, looking out over the next few years?

We are assuming that, to be optimally competitive in this market, you are going to need a shop full of the best people and the smartest people. We feel as though we've got a lot of very good competitors who, with us, have been investing in that type of person. We feel, to, again, be optimally competitive over the long run, that's the type of investment that we need to continue to do. So at the end of the day, we think the people with the best operators, the best IT people, the best underwriters are going to be the ones that are able to maintain good, wide, interesting margins and profitability over time. But we're not assuming that our competitors are going to roll up and go away. Hoping, but not assuming.

Kevin, I don't know if you have this number. But can you explain the tax credit, and can you give us what the tax rate would have been without it?

Well, I can explain the tax credit. It was just simply an enterprise zone credit we received for one our sites that came through, and I think I'll kind of stick by my comment. I pulled some notes while off-line a little bit, and I think that 38% to 39% for the year is an appropriate number for you. So hopefully that helps.

David West, Davenport & Co.

All my questions have really been asked and answered, but just one numbers question, Kevin. You sometimes give the nonlegal collections. Do you happen to have that number?

Let me see if I can dig that up. I didn't have that in my script, though. Do you have another question?

No, everything else has been answered. So if you want to go to somebody else and come back with that, that will be fine.

Audrey Snell, ThinkEquity.

Was there any utility or medical paper purchased in the quarter?

No. We just commented that there was some other. I don't believe there was anything of size in either one of those categories.

The forward flow that you mentioned is predominantly credit card paper?

Yes.

David, that number was $102.50 for nonlegal cash collections (inaudible).

Jeff Nevins, First Analysis.

Just to make sure I'm clear, when you say 40% of your purchases were related to the forward flow in the June quarter, that's 40% of the purchase price paid, not the face value, correct?

That's right. We're talking about investment.

On that rationale, it would seem as if, if you try and apply some face values to these things, that the average price paid for the other components aside from the forward flow is dramatically lower, obviously because they're not forward flows. But I guess the question I'm getting it is, when you're buying bankrupt paper, it's generally BK 13 paper, if I'm not mistaken, and its generally paper that could be in the double digits in terms of the price relative to the face. Am I not thinking about that correctly?

No, that's generally where most of our activity has been. However, depending on the particular portfolio we're looking at, we could have a bankrupt seller say, here's what I've got. We would price on everything from active 13's right on through to contingency pricing, things that don't qualify, which could include much lower-rate paper. So if we're talking about kind of a grab bag type purchase like that, you could end up with prices that would be a long way away from the double-digit stuff that you mentioned.

That helps. The amortization rate -- I know at some point, the zero basis portfolios will come down a little bit, and the reported amortization rate will creep up, as it has been. Do you have any sort of timeframe in your head where that -- I guess the question is, do you expect the amortization rate to just gradually continue its creep-up over time here, as some of the zero bases start to subside?

Well, it's going to be a function of how ERC is moving at the same time. So if the pools that are on the books don't see any kind of upward pressure on ERC due to better-than-anticipated results, over time you are going to see higher amortization rates. To the extent we can keep the pressure up, we will be able to have, again, some pressure on amortization rates, keeping them lower. So that can really move things one way or the other, depending on, especially with a big 2005 of buying and fairly strong 2006, it depends on how these pools play out. Definitely, it's going to have an impact on lifetime amortization rates.

Yes, and it can really make or break the quarter, to some extent. So your focus is more on, though, the older ones that are the zero basis, to the extent that they continue to perform, correct?

(Multiple speakers) our focus. You mean for the downward pressure?

Well, when you say upward and downward pressure, you're confusing me a little bit.

I'm sorry, so downward pressure on amortization rate -- amortization rate trying, pushing it down versus upward pressure pushing it up. I think your premise would be that it's strictly zero-based assets that's pushing it down. I think the issue is more, even for those deals that aren't, or those tranches of years you see that aren't fully amortized, their future remaining amortization rates are dramatically lower than you have seen historically.

So I think that, in essence, I guess in short, it is, indeed, the zero-based assets that tends to drive that stated rate down. But additionally, if collections remain strong on really, I guess, 2004 on back -- because those future amortization rates are tending to be lower than what you have seen so far. So that would also have some downward pressure on that rate.

So those are the ones I want to watch?

Yes. Then again, as Steve mentioned, he gave a great answer so I didn't even jump in. Again, you've also got to watch, then, 2005 to see how we crack that year of buying, and what happens to that ultimate multiple purchase price.

Kevin, I was just hoping you could give me the operating cash flow for either the quarter or the first six months, as well as the collections applied to principal.

Yes.

Bob Napoli, Piper Jaffray.

With regards to the bankruptcy business, the purchasing of that has ramped up over the last year. I just wondered, how aged are the 13's? Who do you buy them from? Because bankruptcies -- I understand the bankruptcy law was going to put more pressure on 7's. Bankruptcies year to date are way down for all types. You're buying a lot of bankrupt paper. Is it aged bankrupt paper?

There are an awful lot of pre-amendment Chapter 13 claims that are out there, and we're talking about really the majority of those pre-amendment claims still are not cash flowing in any significant way. So creditors, other debt buyers, whoever may be holding those has the option to either sit and wait for a time for cash flow to start, or they can sell it to somebody else and realize some cash and move on and do something else. So we're buying a variety of ages of claims, as I mentioned previously, and we are buying from a variety of participants. Certainly, that includes original creditors, as well as some other debt buyers.

Is this primarily from auto finance? Because they are more asset-based kind of initial loans.

Again, most of the 13's that we would buying are unsecured 13's.

From what you can see today, do you think that the IRRs on the bankruptcy paper will be equal to or greater than your traditional MasterCard/Visa purchases?

We have been operating the business really under the premise that we've got kind of a single-hurdle rate for our bad debt buying, and we have held the bankruptcy business to the same hurdle rate as our traditional business. From what we're seeing, we're going to be able to operate under that set of rules.

I know you have mentioned this before. But the cash flow curves of the bankrupt paper versus your traditional business -- what are the primary differences in those cash flow curves?

Well, the cash flow curves on the traditional business, although they vary in terms of a percentage magnitude, in terms of percentage of purchase price, there is some predictability there. I think that everybody that has followed our business over time can look at those collection curves and get that impression.

With the bankrupt assets, depending on where in their life you're buying them, you can have very different collection curves. So if you buy a portfolio that's heavily weighted toward older claims that's significantly cash flowing, or even on the downward side of the liquidation curve, you might have a very short duration there. Conversely, if you buy something where the claims have just been filed, you may have a dry spell of 12 to 24 months followed by heavier collections, and then that pool would dry up. So it really depends where you're buying the portfolio, as opposed to the more normal life that we see with the charge-off assets.

What you are telling us is that you're kind of buying across the spectrum, so -- of age for bankrupts?

We're buying some of just about every age, yes.

Allow me to answer Jeff's question from the last call. From the cash flow statement, cash provided by operating activities was $26,486,838, and collections applied to principal or amortization in dollars for the six months were $38,161,176.

Ladies and gentlemen, we have no more questions at this time. I would like to turn the call over to Steve Fredrickson. Please proceed.

Thank you, operator. First, I would like to thank you all for participating in our conference call. Before we go, I would like to reiterate a few key points about our second-quarter 2006 performance. Net income grew substantially in the quarter, increasing by 23% to $11.1 million. Per-share earnings grew to $0.69 on a diluted basis in the second quarter. Total revenue rose 29% in the quarter to $46.2 million. This was driven by a 28% increase in cash receipts. Portfolio purchases rose to $27.9 million in the second quarter. Our cash balances finished at $25.2 million. With our $75 million line of credit with no amount outstanding at quarter end, we stand well-positioned to react quickly to any market opportunity that may occur.

Our performance in Q2 2006 demonstrates just how our core competencies of execution excellence, pricing and strategy expertise and intelligent cost control have made us a formidable competitor in this industry. We have significant opportunities to improve in each of these areas, and we will work to do so in the quarters to come. 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 our presentation. You may now disconnect. Have a good day.