PRA Group Inc (PRAA) 2006 Q3 法說會逐字稿

Welcome due to third quarter 2006 Portfolio Recovery Associates Incorporated earnings call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Jim Fike, Vice President. Please proceed, sir.

Good afternoon, and thank you for joining Portfolio Recovery Associates' third 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 then 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, believes, 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 on management's beliefs, assumptions and expectations of the Company's future opposite 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 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 caution 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 is Steve Fredrickson, our Chief Executive Officer.

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

This third quarter was a very good one for PRA. We executed well across the board. I'm very proud of all the employees of PRA for their performance this quarter. There are three areas I would like to highlight during the course of my comments today. First, we made significant acquisitions and charged off debt in the third quarter, investing $35.6 million. This was accompanied by record cash production, despite the seasonal weakness we typically see in Q3.

Second, we continued to achieve strong owned portfolio collection productivity, despite further workforce expansion from the first and second quarters. Third, we produced record fee-for-service revenue of $6.1 million, again bucking the seasonal trend. Our financial highlights are as follows.

Net income grew strongly in the quarter, increasing by 20% to $11.2 million. Per-share earnings rose to $0.70 on a diluted basis. Cash collections on owned portfolios increased 26% to a record $59.7 million in Q3, with a 29% increase in cash receipts to $65.8 million.

Cash receipts comprised cash collections on our portfolios, plus commissions generated by our three fee-for-service businesses, Anchor, IGS and RDS. Our Q3 cash receipts drove a 28% increase in revenue to $47.8 million.

I will begin my detailed discussion of the quarter by looking at our $35.6 million in portfolio acquisitions. Overall, we acquired 35 pools from 15 different sellers, including several new relationships for us. The vast majority of our third 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, auto deficiency, telecom and other accounts.

While we reviewed many portfolios across a wide variety of asset classes, once again 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.

In terms of market conditions the story remains much the same as we have seen for some time now. This market remains very competitive from a pricing perspective. Although we saw instances of reasonable pricing during the quarter, we saw other instances of record high pricing for certain products. In summary, our view of the market is one of reasonable supply, accompanied by strong demand.

In spite of this, we were able to turn in a strong portfolio investment performance in Q3. We accomplished this with a combination of, one, our larger forward flow, which accounted for about half of our purchasing. Two, solid bankruptcy buying, which accounted for about 10% of purchases. And, three, the usual spot market transactions. We have now invested approximately $80 million in the first nine months of 2006, purchasing approximately $6.7 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 this period of competitive pricing.

On the collection front, Portfolio Recovery Associates recovered a record $59.7 million for the third quarter, up 26% from $47.5 million a year earlier. This is particularly noteworthy as it bucks the typical seasonal trend, which we experienced last year with cash collections declining from Q2 to Q3.

During this year's third quarter, collections were very consistent throughout each month, which incidentally was the shortest quarter of the year thus far in terms of workdays. 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 $147.54 for the first nine months of 2006. This compares with $133.39 for all of 2005. Excluding the effect of trustee administered purchase bankruptcy collections, 2006 productivity through the end of Q3 was $133.83. This compares with $128.02 for all of 2005.

Our strong productivity results came as we made substantial staff additions. At quarter's and our owned portfolio collector headcount was 801, up more than 5% from staffing of 761 at the end of Q2, and up 13% from staffing of 710 at year-end 2005. We have continued to build staff into the fourth quarter, standing at 805 as of October 30. Turnover remains at historically normal levels during Q3. Please note that staff additions tend to push our productivity statistics down considerably, so we're particularly pleased with our performance.

Now let's turn to our three fee-for-service businesses, IGS, Anchor and RDS. During the third quarter our fee-for-service businesses saw revenue increased 73% to a record $6.1 million from the same period a year earlier. This represents a sequential increase from fee-for-service revenue of $5.8 million in the second quarter of 2006. IGS continues to grow placements as we deliver strong results and expert service to our clients. Placements from our larger legacy clients moved up somewhat during Q3, with additional new clients leading to further increases in volume. Our challenge for the next few quarters is to build the productivity at IGS as we integrate the many new hires we have made there over the past several months.

Anchor is delivering solid year-over-year growth as we remain focused on productivity and profitability. We continue to build our client and placement base. RDS continues to add new business while doing a great job of retaining existing clients. Our new call center location for RDS is expected to open in the next several weeks. This new 15,000 square foot center in Birmingham, Alabama will give us capacity for approximately 125 employees. It will also permit the addition of state-of-the-art systems, phone technology, and training areas.

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

As Steve said, the third quarter of 2006 is one we feel great about. We ended up driving strong financial results despite the seasonal headwind we typically face in Q3. Let me run through the financial results.

Net income in the quarter grew 20% to $11.2 million, up from $9.3 million in the year ago period. Total revenue for the quarter was $47.8 million, which represents growth of 28% from the same period a year ago.

Breaking our revenue down into three components, in the third quarter once again the majority of total revenue, or about $41.8 million, came from income recognized on financial receivables. This is revenue generated by our owned debt portfolios.

Income and financial receivables is derived from the $59.7 million in cash collections reported during the quarter, which represents a 26% increase over Q3 of 2005. These cash collection were reduced by an amortization rate, including an allowance charge of 30.0%. This amortization rate compares with our full year 2005 rate of 29.6%, and 28.4% in Q3 of 2005. Our year-to-date amortization rate for 2006 is 31.6%.

As you saw in the press release, we incurred a total of $275,000 in allowance charges during the quarter. These charges are associated with several different pools and represents small adjustments to better reflect actual versus previously forecasted future collections.

During the third quarter cash collected on fully amortized pools was $7.4 million, up strongly from the $6.3 million in Q3 2005, and down only slightly from a record $7.8 million in Q2 of 2006. In referring to fully amortized pools, I mean purchased pools with no remaining basis on our balance sheet, zero-based assets. Eliminating those pools from our amortization calculation, gives us a core amortization rate for Q3 of 34.3% versus 32.8% in the third quarter of 2005, and 34.4% for all of 2005. For the year-to-date 2006 core amortization rate stands at 36.2% versus full year 2005 core amortization rate of 34.4%.

Even though this quarter's collections on fully amortized pools were near record levels, we continue to believe that as a byproduct of [SOPO 3-3] in effect now since January 1 of 2005, the quantity of zero-based assets should gradually decline over time.

During the quarter commissions and fees generated by fee-for-service businesses, Anchor, IGS and RDS, totaled $6.1 million, a record performance. This compares with $3.5 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 included only two months of RDS results.

The third component of total revenue, or cash sales of finance receivables was once again 0 for the quarter. During the quarter we retained all of our purchases for our internal collections efforts, as we have in every quarter since our IPO in late 2002.

As Steve discussed, recoveries per hour paid through the first nine months of 2006 were strong, $147.54 compared with $133.39 for all of 2005. As mentioned, the inclusion of our growing bankruptcy portfolio does have an impact on our productivity statistics. If you back out any recoveries from bankruptcies, trustee administered accounts, we see productivity of $133.83 for the first nine months 2006 versus a comparable $128.02 for all of 2005.

This continued growth in productivity is a good example of Portfolio Recovery Associates' focus on collector efficiencies, as well as expert portfolio management, all aimed at maximizing long-term collection results. We're determined to focus on continued improvements in our ability to efficiently collect and deliver performance without regard to external factors.

In terms of capacity, we are leasing approximately 20,000 square feet of space in a new building that is being constructed adjacent to our existing Norfolk campus. By taking space in this new building, we will be able to give Anchor more room to grow in its current building, as we move a number of administrative functions, as well as our growing bankruptcy unit, into the new building. We anticipate occupying this space sometime in late Q2 2007.

During the third quarter we built impressive additional capabilities within our IT staff largely through strategic new hires and staff organization. Over the pass several months we have brought on experienced software development managers, architects, and programmers, as we seek to convert our many process improvement concepts into reality.

We see significant competitive advantages that can be achieved through the effective management of these impressive IT assets in the near future in everything from improved client service to increased collector productivity, to more efficient information delivery.

On the expense side, we saw slightly lower margins. This was due not only to seasonal weakness in Q3, but also to the growth of our fee businesses, especially the increased staff, ongoing non-cash amortization charges from our acquisitions, increased hiring and compensation expense consistent with the growth in both our professional and collections staff, professional expenses related to the 404 environment, and increased amortization rates on our owned portfolio cash collections.

As a result our operating margin is 38% in Q3, down just over 50 basis points from Q2, and down about 225 basis points from Q3 2005. We will make further investments in professional and collector staff throughout 2006 to assure that we have the talent on hand to best exploit the many long-term opportunities we see.

Operating expense to cash receipts is perhaps a more insightful efficiency ratio that we regularly discuss, as variations in purchase price amortization rates cause our revenue ratios to fluctuate regardless of true operating efficiency levels. Operating expenses as a function of cash receipts, excluding sales, have shown solid improvement over time, narrowing steadily from 54% in 1999, 43% in 2004 and 2005. This ratio was 45% for Q3, up from 44% in both Q2 2006 and Q3 2005. This was driven by the same factors previously mentioned when discussing operating margins, with the obvious exception of amortization rates on owned portfolio collections. This ratio stands at just under 44% for the first nine months of 2006.

Our legal collections were 32.9% of total cash collections in Q3 2006, down from 34.8% in Q3 of 2005. This decline is modest, but due to our growing bankruptcy portfolio from which we see very little levels of legal collections, and partially offset by our growing internal legal collection efforts.

Our balance sheet remained strong during the quarter despite solid purchases of new portfolios. Cash balances grew to $26.7 million at the end of the third quarter, up slightly from the end of Q2.

Rounding out the balance sheet, we had $211.8 million in finance receivables; $11.2 million in property, equipment and other assets; $18.3 million in goodwill; and $7.3 million in intangible assets all related to the IGS and RDS acquisitions.

Please recall that during 2006 we're amortizing approximately $600,000 per quarter in intangibles. In fact during the first nine months of 2006, we have amortized $1.7 million in these intangibles, which obviously depresses operating margins.

We have about $1.1 million of long-term debt and obligations under capital leases, with total liabilities, both long and short term, of $41.5 million. At quarter end shareholders equity totaled $233.7 million.

With that, I have completed my prepared comments. I 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.

Congratulations on a very nice quarter. I'm sorry, I missed the number. What percentage of your purchases were under flow agreements in the quarter?

Approximately 50.

Were there any new -- I mean is this just some of the one flow agreement, or is there still one, or is there more than one flow agreement at this point?

There are some others, but the others are not nearly as significant as the larger ones.

Do you expect that kind of mix, I guess, or do you see that mixes changing as far as the percentage you're getting from flow?

We will just have to see as flows are bid or lost. It is -- as we have mentioned in the past, it is certainly nice when you have some flow agreements and you know going into every quarter that you've got some purchase volume that is going to be accounted for at a reasonable price in a predictable manner.

Again, we're not going to pay up for those flow opportunities. If we see reasonable opportunities come along and they happen to be flows, we will go ahead and move on those. If we don't, we will be looking to do more in the spot market.

Looking at your 10-Q, your ERCs have gone up, I guess. It looks like for every full quarter-over-quarter. What is the philosophy that drives up the ERCs? I just is wondered if you could touch, Kevin, maybe just on the $275,000? I know it is small number, but just a little more color on that, if you could.

On the ERCs, well, first of all as we have always done, as we look through these deals, obviously just looking at actual cash collection results, that tends to drive up ERC or total estimated collections. But the further along the road you go, the better vision you've got.

We spend a lot of time on level yield accounting and looking at these ERCs and trying to gleam from the data we've got where these deals are going. Really, with the premise, however, that these numbers dictate revenue, so we have to feel pretty good about these numbers, and I think it is the same premise we have had for ten years now.

Last question. Your balance sheet is obviously grossly underleveraged, and you have always stated you're keeping dry powder for opportunities. But as the balance sheet grows, the equity section grows bigger and the cash -- you still have great growth and a lot of cash on the balance sheet. Do you have any thoughts on what might be the right type of balance sheet over the long-term? Are you against using leverage? Would you use leverage to return capital to shareholders, or how do you view the balance sheet? That is my last question.

Over the history of the Company, especially the years when we were private, we had the balance sheet levered at about 1 to 1 for much of that time period. And even at that type of leverage, we ran pretty fat debt service coverage, and it certainly was a comfortable way to operate the business.

Just philosophically, we would not have a problem finding our way back into a position where we carried some leverage. But even though we're ten years old, I think we're still thinking of ourselves as a young company with a lot of places to go and a lot of room to grow. I think we're going to see interesting investment opportunities that will take the balance sheet in the right direction, as opposed to pushing to engineer the balance sheet one way or the other. We're going to, at least for the time being, continue the course that we have been on and see if investment opportunities don't help shape what long-term might be a little bit more appropriate balance sheet in terms of leverage.

Dan Fannon, Jefferies.

Can you comment on supply in the quarter and how that worked in comparison to last year? And then maybe give a little context as you look into the fourth quarter if you're expecting to see any real seasonal increase, something like we've seen historically?

As I commented, we saw what was fairly reasonable supply during the quarter. And it was certainly a mix of both deals coming direct from issuers and also retraded paper. As to Q4, we will have to wait and see. I don't think anybody, or at least our crystal ball isn't saying that volume will be particularly strong or particularly weak. We will just have to sit back and watch and see what happens.

Then could you give us a little color on the competition in the bankruptcy market? This is something you guys have carved out as a niche. Have you seen more people come and the competitive environment change since you guys have stepped up your purchasing here in the last nine months?

I would say that the competitive arena remains fairly similar to the way it was twelve months ago, or 18 months ago in terms of the characters that we're competing against. And by and large they tended to be people that have been in the market for quite some time.

John Neff, William Blair.

A couple of questions for you. First, cash collections increased sequentially, obviously bucking the seasonal trend you might have otherwise have expected. A question really about the last year's buying. What inning, I guess, would you say we were in terms of deploying the fourth quarter '05's purchasing into the respective collection channels? In other words, is the sequential increase being helped in part by that deployment taking place more fully, or just sort of along a reasonable timeframe?

I think the answer is both. We feel like it is progressing along a reasonable timeframe. And, yes, the portfolios as you move over time are getting further distributed into their respective queues and work processes.

Paper that was bought last fall, some of it may just be getting its first glimpse of legal activity, although probably not much in terms of remittance there. It is starting to enter that channel as we are identifying appropriate accounts. It is -- certainly the paper that the bankrupt that was purchased by this time has been processed and proof of claims or notice of transfers have been handled, and that paper is set up and operating. And then depending on exactly what type of paper it is, the charge-off paper could be anywhere from in queue with a collector to being worked on the dialer, to perhaps being included in a letter campaign of some sort.

Kevin, you had given, I think, 801 collectors. Does that include the headquartering? Does that include the supervisor headcount as well?

It does not. So 801 is correct on number of collectors. 934 is the right number of the direct contact people.

Great. How close to operating at full capacity are you currently? There are reports of you guys apparently sniffing around pretty seriously -- Jackson, Tennessee is perhaps another call center location, any commentary on that?

Yes, we are close on the capacity front. And as we have been talking about for some time now, we are in the hunt for a center location and trying to find the right mix of employment market, real estate situation, state and local incentives, kind of the whole package. Where do we want to been next? And we don't have any anything definitive concluded at this point, otherwise we would be giving you more color on it. As soon as we've got something definitive to talk about, we will give you an update.

Then one more question and then a couple of housekeeping, if you don't mind. Just, Kevin, you gave some reasons for the slightly lower operating margins. One associated with the forward flow. I think you mentioned professional fees. Is this just sort of a staff of people looking at auditing the paper coming in through the door? What are the expenses associated with that? And also could you give us just a little bit more color on the IT initiatives that you're doing and what advantages or cost savings you expect? Thank you.

Let me -- I read most of the variances that I had written down here on my script section. Again, let me hit the IT stuff while I will flip back to it. What we have done in IT is -- we have a bunch of strategic planning sessions and we come up with ideas, and have a change control process where people can submit ideas for productivity improvement. I think we all looked at each other and thought we really need to staff up this department, bring in some raw talent and that we did.

We started that probably back in, call it, the April timeframe. We started to bring in some different type of both software and hardware managers. You guys know that I received the department back in October of last year. Also bringing in development managers and people who design architecture for software, really trying to take all these ideas and put them into -- make them reality essentially.

These ideas can range from something as simple as one more data field on a screen all the way through saving one keystroke or 20 keystrokes. Just, again, things I think we may have been not addressing in the past.

The margin, literally we have talked a little bit about some of the subs. They are smaller entities. They're growing entities. We're adding staff there pretty readily. That is certainly having a depressing effect on the margins.

I also mentioned the non-cash charges for the amortization of the intangibles. We saw $1.7 million last year. We incurred some hiring and relocation expenses for some of these IT people. We did have some professional fees with regards to 404 groups coming in looking through our 404 control environment. And obviously amortization rate has shifted about 200 some basis points from last year.

Maybe I heard forward flow and (multiple speakers) he said 404.

No, 404.

Just two really quick data points. You mentioned the core amortization rate in the quarter. I just didn't catch it in time. How many portfolios do you own, -- you own currently have purchased to date. Thanks to much.

Amortization rate was 34.3% for the quarter. And number of portfolios -- I have to dig that one up. I've got a report here. I will be back for that one.

Thank you.

Edward Hemmelgarn, Baker Investments.

My question is regarding in the past when you have really stepped-up your purchases there has been more of an increase throughout the year in terms of cash collections. When you go back to '02, '03, '04. And I would contrast that with '05 where you hadn't had the big pick up. We're not seeing the same kind of a pick up in cash collections now. I guess my question is, is that due to a lack of sufficient collectors or the fact that there is a real lag on bankruptcy collections or what?

I would say that it is more a function of the mix of product that we are buying, which would lean toward the bankruptcy issue. When you go back to some of those out years there was no bankruptcy buying. And in many cases, we can be -- we can be waiting quite awhile, especially if you're buying a fairly recent bankruptcy filing before you see any cash flow. So you have got to take that mix into consideration. Then certainly another part of it is attributable to the pricing environment and the fact that there is probably a less multiple in what we have been buying recently as opposed to what has been bought say in '01, '02.

Would you -- I guess another way to look at it is, if your cash collections as a percentage of your balance, or let's say prior quarter's balance, of receivables has been dropping or has dropped quite a bit --.

Prior quarter's balance of what? (multiple speakers).

Of purchased receivables. Historically you had been running about anywhere from 35% to 45%. And all of a sudden this year it has dropped down to 30%. At what point -- at some point in time I guess one would expect to see more of an acceleration, at least in terms of cash collections.

I can kind of grab that one. We have kind of hit that topic before in the past. But what you're looking at -- you are comparing a balance sheet item, which is a an item that is being amortized based on the interest method of accounting and you are comparing that to cash collections that are stretching out from 10 years.

I always -- again, if you like to look that number it is fine, a lot of people do. But I guess I would discourage people from looking at that number, and I'm really focusing more on batch tracking, which I kind of thought we were going to in the first place. But again, I think the short answer is with big buying, especially in Q4 of last year, you've just got a big slug of NFR on the balance sheet and you've kind of got to work your way through it now for the next 10 years.

I'm aware of that. I guess that was my question about it it the fact that you've got more to collect now and you just don't have as many collectors as you have got to collect? And so it will just take this time longer to build up to the number of collectors you really need to be working the size of the portfolios that you have right now? That is my question.

We're certainly looking for new space. That is absolutely a given. But I think it has more to do with the timing. We purchased in Q4 50% more than we had ever purchased in an entire year. You're going to have that mouse, I would guess I would say, going through that snake for awhile.

When we had talked in the second quarter there had been more of a -- after the second quarter -- there had been -- you had kind of indicated you would hope to have a new place identified by now. How much longer do you think it will take?

I'm hoping that it doesn't take particularly long. We are working hard to finalize our situation. And you'll just have to bear with us until we have things I think appropriately finalized. It would be premature to talk about it.

Will your expansion of your footprint in Virginia, will that -- you indicated it would allow you to build up more space for Anchor. Will that also allow you to have any more space for your owned portfolio of collections?

We could use it for that if we desired, but our focus would be to have new owned portfolio collectors located in a new call center to get us into a new labor market. We will though be housing our bankruptcy unit in that new building, and those obviously are owned portfolio collection dollars.

Okay. Great. Thanks.

If I could real quickly answer John's question. He asked how many pools do we own currently. These are individual pools we track, and it is 769.

Sameer Gokhale, Bear Stearns.

I had just an initial high-level type question. You're purchasing activity was, I think you invested $35.6 million. I was looking for $27 million, but it looks like for Q4, based on the runrate, if you want your dollars invested to be flat, you may have to invest something like $70 million to purchase portfolios. At a high level, how do I think about longer term your earnings growth relative to growth in purchases, keeping collection multiples fairly similar to where they are at right now?

When we acquired these assets we collect them over a very long period of time. If you take a look at some of our filings or presentations, we tried to show this layering effect that year-over-year purchasing has on how cash collections are produced over the long term. We don't have a particular bogey here to be flat with purchases on a year-over-year basis. We're trying to deploy our capital as intelligently as we can. And if we don't buy $150 million worth a paper this year, so be it. And if we buy $200 million worth of paper, that is fine too. It really needs to be driven by the quality and the return characteristics of the paper, as opposed to the volume.

Now obviously, if we quit buying that is going to affect our ability to grow over time. And we're certainly aware of that. One of the things that Kevin mentioned, we're really trying to spend a fair amount of time and energy on is learning had to get better, more productive, more accurate in our pricing so that in a very competitive market we can be the guys that can afford to pay the highest price and bring down a lot of paper and turn it into high margin, high multiple investment. We are aware of the issue, and we're working hard to on the positive side of it.

You mentioned during the quarter you purchased bankruptcy paper again. And I think you had mentioned what it was 10% maybe your overall purchases. But what was it specifically as a percentage of your credit card purchases?

I don't have it in front of me.

Just some of the things we have been hearing, it seems like some of large credit card companies appear to have met a lot of their financial targets apparently for the year, the opposite of what seems to have happened last year. At least from we are hearing, if it is correct, they seem to be hesitating to sell portfolios or maybe they're pulling back on selling portfolios at the same pace as they did last year. Is that consistent with what you're seeing or hearing as well, or are you continuing to see pretty healthy flow there?

I think you really need to take it down to the individual level because we will see large issuers that appear to have strategies that are quite divergent from one another, again, depending on their overall situation.

I would say though from a high level, like you, our impression would be that the large issuers are not having a particularly difficult delinquency and charge-off environment right now. And so assuming that a more difficult environment causes them to sell more, they would not have that particular pressure hanging over them.

That is helpful. My last question. When I look at the year-over-year growth in your collections, and you talked about this, and just some more color on that, if possible. It looks like your collections growth actually on a year-over-year basis seems to have accelerated. And you talked about some factors there such as your Q4 '05 purchases, may they are still working off to a certain extent.

Is there anything else going on there? Do you currently use third-party collections yourselves? Since you seem to be capacity constrained to a certain extent, is that what maybe is driving some of the acceleration in year-over-year growth in collections?

We use virtually no outside collectors, other than our third-party law firms. And we're not utilizing those law firms any differently than we have in the past. I really think what you're seeing is simply a reaction to the portfolio purchasing that has gone on, obviously in tandem with our strategy of holding things and collecting them over the long term. Obviously, that is driving a lot of cash out of the portfolios.

Also, to the notion of being capacity constrained, we're not making buying decisions in the mindset of being capacity constrained. Again, I'm not talking about a new call center now, because it is not appropriate. I need to get some things in place before it is appropriate to talk about it. But we believe we're going to have appropriate call center capacity prior to needing it.

Daniel O'Sullivan, Utendahl Capital.

Kevin, I just want to ask you a quick question on operating expenses. You are seeing the expense for legal move up here the last couple of quarters. Is that all related to the BK accounts or is some other items in there we should take into consideration?

No, in fact the legal fees, as I -- maybe my script was a little bit confusing -- but actually BK account tend to generate a little legal activity. What you're seeing is definitely a march upward in terms of both the volume of legal dollars that are coming through, which translates into the commissions, as well as more costs as we continue to expenses those costs and sue more accounts. I think that is really the engine that you're seeing behind that delta.

Thanks. That's very helpful. Also, on the center in Alabama, is that all coming online over the fourth quarter? So I guess we would have an impact there for employee compensation and things like that taking that into consideration?

Much like you've seen with the rest of our call center expansion strategy, initially all we're going to be doing is moving from one building to another, so you'll see a little bit of incremental occupancy expense. But from a payroll standpoint, we will slowly but surely employ our way into that site. And so we're not going to snap our fingers and fill it up overnight. You will continue to see just a solid kind of normal sequential step in hiring there.

Nice quarter. Thanks guys.

There are no further questions at this time. I will now turn the call over to Steve Fredrickson for closing remarks.

Thank you, operator. First I would like to thank all of you for participating in our conference call. Before we go, I would like to reiterate a few key points about our third quarter 2006 performance. Net income grew substantially in the quarter, increasing by 20% to $11.2 million. Per-share earnings grew to $0.70 on a diluted basis in the third quarter.

Total revenue rose 28% in the quarter to $47.8 million. This was driven by 29% increase in cash receipts. Portfolio purchases rose to $35.6 million in the third quarter. Our cash balances finished at $26.7 million. With our $75 million line of credit, with no amounts outstanding at quarter end, we stand well-positioned to react quickly to any market opportunity that may occur.

Our performance in Q3 2006 demonstrates just 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 the presentation. You may now disconnect. And have a great day.