PRA Group Inc (PRAA) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter Portfolio Recovery Associates earnings conference call. My name is Fab and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to Mr. Jim Fike, Vice President of Finance. Pleased proceed.

Good morning and thank you for joining Portfolio Recovery Associates second-quarter 2007 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, beliefs, expectations, representations, projections, plans, or predictions of the future, including, with respect to the future of 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 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 here of. 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.

Thanks, Jim, and thank you all for attending Portfolio Recovery Associates' second-quarter 2007 earnings call. On this morning's call, I will begin by covering the results, 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. PRA continued 2007 where it left off in Q1 with strong performances from our fee businesses, solid cash collections from our own portfolios, and very impressive debt purchase activity. Specifically, we produced owned portfolio cash collections of $64.6 million in the quarter, up 9% from $59.4 million in the same period one year ago.

We made very significant acquisitions of charged-off debt in Q2, investing $63.4 million, our second-largest buying quarter ever. This speaks directly to our ability to continue producing strong cash collections. We produced strong fee-for-service revenue, $8.4 million in the first quarter, representing 45% year-over-year rear growth. We realized productivity of $148.52 per hour paid, despite the continuation of aggressive staffing at our new Jackson Tennessee call center.

Our financial highlights for the quarter are net income grew strongly, increasing by 17% to a record $13 million. Per-share earnings during the quarter rose to $0.80 on a diluted basis. Cash collections on owned portfolios increased 9%, as I just mentioned, to $64.6 million in Q2 with a 12% increase in cash receipts to $73 million. Cash receipts comprise cash collections on our portfolios plus commissions generated by our three fee-for-service businesses, Anchor, IGS, and RDS. Our Q2 cash receipts drove a 19% increase in revenue to a record $54.8 million.

Finally, we continued to rapidly build our operation in Jackson with more than 132 owned portfolio collectors there at quarter's end, up from just 81 at the end of Q1.

As we have consistently stated since our IPO in late 2002, we are looking to grow PRA not only through the acquisition of new pools of debt, but also through Company acquisitions, targeting businesses that add skill sets and diversified revenue streams to the Company. The acquisition of IGS Nevada in 2004 and RDS/Alatax in 2005, by the way, we're very pleased with both, are good examples of this strategy mentioned.

So before moving on to my detailed discussion of the quarter, I would like to discuss an important new executive appointment we made earlier this month. We have hired Kent McCammon for the newly created position of Senior Vice President, Strategy and Business Development. In this new position, which reports directly to me, Kent will work on establishing a strategic approach to new business growth initiatives, including M&A activity for PRA, as well as directing, all sourcing, reviewing, underwriting, negotiating, and closing of acquisitions of businesses.

A Norfolk area native, Kent has relocated here with his family from the Los Angeles area, where he was Managing Director at Shamrock Capital Advisors, working as cohead and founder of the Activist Value Team. Kent's background prior to joining Shamrock, including senior roles in business development at Trader Publishing, as an analyst and founding member of Atlantic Capital Management and in various investment banking positions. Kent received both his undergraduate and M.B.A. degrees from the University of Virginia.

As opposed to signaling a change in strategy, we are not looking for example to become more acquisitive, Kent's appointment simply demonstrates that we want to apply more precision to the process of aiding our growth agenda and determining which business opportunities to pursue and how to pursue them. This also has the benefit of freeing up our operating executives to drive their businesses rather than be sidetracked with development work. Our intention is to apply the same type of focused, rigorous strategic review we use for portfolio acquisitions to our analysis of Company growth opportunities.

Now back to our second-quarter results. Let me begin by looking at our exceptional $63.4 million in portfolio acquisitions. Overall, we acquired 58 pools from 27 different sellers, including several new relationships for us. The majority, about 85%, of our second-quarter purchase volume, in terms of dollars invested, was a combination of Visa/MasterCard and private label credit card asset classes. The remainder came from pools of auto-related receivables, both secured and unsecured, medical, utility, and installment loan accounts. The vast majority of the bankrupt accounts acquired during the quarter are included in the Visa/MasterCard category. Bankrupt accounts accounted for about 10% of our purchase activity this quarter in terms of dollars invested. Market conditions improved slightly in the quarter with a continued increase in supply and steady to slightly moderating pricing. We continued to see less of what we would consider to be rational pricing during the second quarter. Most competition appeared to be aggressive, yet disciplined.

During the quarter, we continued purchasing under a three-month extension of our older, fresh forward flow, which represented about 25% of the period's purchases. We also reached agreement with the seller of that flow to further extend the arrangement through November of 2007. As we discussed on the Q1 earnings call, a second large forward flow, this one for fresh paper and covering a 12-month term, began in April. We expect purchase volume from this flow of between $1.5 million and $5.5 million per month. We've been purchasing paper from this seller for years and consider ourselves very familiar with both the seller and the paper quality. During Q2, this flow represented about 15% of our buying volume in terms of dollars invested. As I mentioned earlier, on the owned portfolio collection front, Portfolio Recovery Associates recovered $64.6 million in the second quarter, up 9% from $59.4 million a year earlier. Overall, 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 $148.52 for the first six months of 2007 compared with $146.03 for all of 2006.

Excluding the effect of trustee-administered purchased bankruptcy collections, PRA's 2007 productivity through the end of Q2 was $134.83. This compares with $132.15 for all of 2006. Purchased bankruptcy collections did fall 6% year-over-year in the second quarter and 14% sequentially.

Though tracking with our anticipated collection curves, this performance obviously impacted our overall cash collection growth rates in Q2. Legal collections increased 10% year-over-year and call center collections increased by 11% over the same period last year. At quarter's end, our owned portfolio collector headcount was 910, up 7% from the end of Q1 and up 13% since the beginning of the year. This growth in response to our buying over the last six months is pushing up collector FTE dramatically. This, as a result, is producing significant downward pressure on productivity as we layer more inexperienced, less productive employees into our mix.

As I mentioned, we grew our new Jackson call center substantially during the quarter, finishing with about 132 owned portfolio collectors and a startup staff of seven IGS skip tracers. This is more than 60% staffing growth over the past three months and it has made it very difficult to pull up overall productivity at Jackson. At this point, virtually all net new hiring is concentrated in Jackson and will continue to be until 50 new seats come online in Kansas during Q4 2007.

We do continue to be pleased with the quality of personnel in the Jackson office. After a substantial search, we hired a call center manager for that site in late Q2. With this new senior manager in place and a workforce that is starting to mature, we look to put upward pressure on productivity in Q3 and beyond even as we expect continued increases in staffing.

Now, let's turn to our three fee-for-service businesses, IGS, Anchor, and RDS. During the second quarter, our fee-for-service businesses saw revenue increase 45% from the same period a year earlier to $8.4 million. All three businesses saw revenue down just slightly from Q1 2007 due to seasonal factors. IGS continues to shine, both in terms of revenue and profit growth. We're growing placement inventory as we deliver strong results and expert service to our clients.

Anchor continued to improve in Q2 although the business is operating at a fairly modest scale. We continue to operate this business with a mandate of appropriate profit and risk, which is limiting our ability to strongly grow the business right now. We see no improvement in the pricing environment of the contingency collection business at this point.

RDS enjoyed solid revenue production during the quarter. RDS is focusing a great deal of time on expanding its geographic reach in order to help propel growth in the future. We hope to have more to tell you on that front in the near future.

As you are aware, we paid a $1 per share dividend during Q2, which represented an approximately $16 million event. We also began repurchasing shares, ending Q2 having acquired 100,000 shares at an average cost of approximately $52 per share. As a result, together with our $63.4 million and portfolio positions, PRA ended Q2 with $38 million of debt on our balance sheet. Once again, we produced return on equity for the quarter in excess of 20% and that comes despite the use of limited financial leverage.

With $256 million of shareholders' equity and relatively modest debt at quarter end combined with strong profitability and cash flow, PRA had significant resources to permit the continued levering of our balance sheet. Importantly, as we have communicated consistently in the past, we believe the Company will have substantial opportunities in the future to invest in distressed assets or acquire companies to further diversify our business. With that, let me turn the call over to PRA's Chief Financial and Administrator Officer to take you through the financials. Kevin?

Thank you, Steve. Our second-quarter 2007 performance said solid financial results in all areas. The exceptional level of bad debt acquisition sets the stage for more the same. Net income in the quarter grew 17% to $13 million, up from $1.1 million in the year ago period. Total revenue for the quarter was $54.8 million, which represents growth of 19% from the same period a year ago.

Breaking our second-quarter revenue down into three components, once again, the majority of total revenue or $46.4 million came from income recognized on finance receivables. This is revenues generated by our owned debt portfolios.

Income on finance receivables is derived from the $64.6 million in cash collections we recorded during the quarter, which represents a 9% increase over Q2 2006. Second-quarter cash collections were reduced by an amortization rate, including a net allowance charge of 28.2%. This amortization rate compares with 32.0% in Q2 2006 and our full-year 2006 rate of 30.9%.

As you saw in the press release, we incurred a total of $90,000 in net allowance charges during the quarter or about 0.5% of all amortization realized during the quarter. These charges are associated with several different pools and represent adjustments to better reflect actual versus previously forecasted future collections.

During the second quarter, cash collected on fully amortized pools was $6.3 million, down from $7.8 million in Q2 2006. 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 31.3% versus 36.9% in the second quarter of 2006, and 35.3% for all of 2006. We continue to believe it is a byproduct of SOP 03-3 in effect since January 1st, 2005. The quantity of zero basis cash collections should gradually decline over time. It should be remembered that as a result of SOP 03-3 we aggregate all similar paper types acquired in the quarter in order to calculate revenue. These larger groupings allow us to forecast more accurately, generally keeping the purchase finance receivable asset on our books for a longer period of time than we have historically.

During the quarter, commissions and fees generated from our fee-for-service businesses, Anchor, IGS, and RDS totaled $8.4 million. This compares with $5.8 million in the year-ago quarter.

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.

In terms of facilities, we're now occupying the new 17,500 square foot administrative and executive center in Norfolk, Virginia as we've discussed in past quarters. During the second quarter, we also agreed to lease the remaining 17,500 square feet available in our new Norfolk building. This base will come online in Q3.

The Kansas call center expansion, which will give us capacity for about 210 collectors, had its first phase completed in early July, and should be totally complete in early Q4. We will not increase capacity over the existing 150 collectors there until that time.

On the expense side, we continue to see steady margins during the second quarter of 38.8% compared with 38.7% last quarter, 38.5% in Q2 2006, and 38.2% for all of 2006. As we've stated repeatedly in the past, we will make further investments in professional, and collector staff throughout 2007 to assure we have the talent on hand to best exploit the many long-term opportunities we see.

During 2005 and 2006, the fee businesses caused our operating margin to be about 450 basis points lower than it would have been without them. During Q2, we narrowed this compression to about 400 basis points. As we have stated, we see real promise in these fee businesses. Great synergy with other PRA activities and believe we will be able to continue to expand our margins and income substantially over the years.

Operating expense and cash receipts is perhaps a more insightful efficiency ratio as variations in purchase price amortization rate caused our revenue ratios to fluctuate regardless of true operating efficiency levels. Operating expense as a function of cash receipts, excluding sales, have narrowed steadily from 54% in 1999 to 43% in 2004 and 2005 and 45% in 2006. This ratio was 46% for Q2, up from Q2 2006 of 44%. This was driven by the same factors previously mentioned in my discussion of operating margins. While an interesting metric, we're not running the business solely focused on operating margin. We feel that efficiency ratios, such as return on equity, return on invested capital, and growth in earnings, are much more important to the long-term health of the Company. In addition to the operating margin expansion we expect to see from our fee-for-service businesses, we remain keenly focused on operating expenses in 2007. However, we will not cut corners that could impact our long-term cash generation.

Legal collections were 32.4% of total cash collections in Q2 2007, up slightly from 32.1% in Q2 2006. This [line] increased as a result of the continued significant investment we've been making over the past several years in pursuing lawsuits on appropriate accounts.

As Steve mentioned earlier, cash collections fell slightly on a year-over-year basis for our purchased bankruptcy accounts, reversing a trend of strong growth that we have enjoyed over the past prior eight quarters. This is the result of moderate bankruptcy buying since the change in the bankruptcy laws in late 2005 and is keeping with our projections.

In order to give the investment community increased understanding of our relative collection performance between legal, purchased bankrupts and call center collections, beginning this quarter, we will publish a table showing cash collection contributions by quarter from Q1 2004 onward for each of these three collection channels. This will be updated quarterly in the future.

Our balance sheet remained strong during the quarter despite significant new purchases of new portfolios, dividend payments and our share repurchase. Cash balances declined to $15 million at the end of the second quarter. Rounding out the balance sheet, we had $288.6 million in finance receivables, $20.3 million in property equipment and other assets, $18.3 million in goodwill and $5.8 million in intangible assets all related to the IGS and RDS acquisitions.

During 2007, we are incurring intangible amortization expenses of approximately $500,000 per quarter. We have about $38.2 million of short and long-term debt obligations under capital leases with total liabilities, both long and short term, of $92.4 million. The majority of this debt is the $38 million outstanding under our $150 million line of credit. At June 30, 2007, shareholders' equity totaled $255.6 million.

As Steve mentioned in his comments, during Q2, we moved forward on the capital structure and strategic options we announced in our last earning call. As a result, we paid a special onetime dividend of $1 per share, which was payable to shareholders of record as of May 9, 2007. We doubled the size of our line of credit to $150 million from $75 million. The expanded line of credit includes a reduced borrowing rate, more advantageous terms, and an option for a five-year fixed-rate tranche of $50 million. Note that this $50 million tranche is part of the overall $150 million commitment.

And, as part of our 1 million share repurchase program, the Company bought back 100,000 shares of outstanding stock in Q2 in open market transactions at an average price of about $52 per share. We intend to continue to make open market and planned stock repurchases throughout Q1 of 2008 or until we repurchase all 1 million shares of stock, whichever comes first.

The combination of these actions is designed to do several things for our shareholders. First, the line of credit expansion gives us additional borrowing availability to take advantage of potentially lucrative investments. Note that our borrowing capacity is greater with this expanded line than it was previously even with the share repurchase and dividend.

Second, we're working to optimize our capital structure by utilizing a very modest amount of financial leverage while slightly reducing our capital base via the share repurchase and dividend payment.

Finally, the special dividend returned capital to shareholders in a tax advantageous way, allowing them to receive income from their holdings without having to sell shares. PRA's Q2 performance demonstrates the value of this program. For example, our credit line expansion permitted us to take full advantage of improved deal flow and attractive pricing in the [Badgett] purchase market to the tune of $63 million. With shareholders' equity of more than $255 million, up from $80 million at the end of 2002, with $112 million of remaining availability on our line of credit, we have ample resources to pursue both bad debt and Company acquisitions.

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

(OPERATOR INSTRUCTIONS). Bob Napoli, Piper Jaffray.

Thank you, good morning. Question on -- I don't know if you can -- this may be difficult. If you can quantify in some way, give some -- the moderating prices, it does make sense. There's a lot more debt on the market than I think you maybe have with the margin, less competition. I'm not sure about that, but is there a way to quantify the improvement in pricing that you are seeing or give a little more color on that?

It's difficult to quantify, Bob. I would just give you a directional comment. Consistent with our script, we think that pricing was improved during the quarter. When we ran into situations where we saw what we think he is very consistent offerings of paper from quarter to quarter to quarter, we believe that we saw those trading at similar or slightly lower prices than they had been in prior quarters. But again, there's a lot of moving pieces, and to give you an exact percentage, I think is impossible.

Okay. Just to make sure I understand, the two flow businesses that you have right now, that represented 40% of your collections? They are additive, 25 and 15?

Of our purchases for this quarter, that's right. 25 and 15 in terms of cash purchases for this quarter.

And the new flow agreement, what is -- how long is that? What is the --?

That was a 12-month agreement and we entered into that in April.

Thanks. And last question, on cash collections, I mean you guys did come in lighter than our motto and I just -- I'm just wondering if in addition to the bankruptcies, if there's anything that stood out and if -- could be consumer related or, and I just wondered what the trend was at the end of the quarter going into this quarter. How does July look relative -- and how did June look relative to the rest of the quarter and how does July look?

You know, as we look at the consumer and our ability to kind of extract like payments as we have historically, we don't have a great crystal ball, and so we need to look at things like productivity and average payment size and things like that. And from our perspective, looking at those items, it doesn't seem like the consumer is acting that much differently than they have historically.

If I just look at June, for instance, my average kind of pure payment, and this excludes settlements in fulls or payments in fulls, this and this would just be on accounts where I'm getting some sort of a monthly payment. My average payment was just under $80. That compares with a year ago June, about a $76 payment, and, in fact, both of those are up from $65 two years ago. And if we go back even further, for June of '04 and '03, that number was $66 and $72. So a lot of consistency.

My average settlements, so this is in cases where we do make compromises on claims, those average settlement numbers have also remained very consistent. So my average settlements in June of this year was about 64%, meaning that we compromised the remaining 36% and that number compares with 65% a year ago, 63% the year before that, 62% and 64% if I go all the way back to '03. So again, a lot of consistency there with how the consumer seems to be acting.

If I drill further down into just raw productivity and how it is a collector can take a [queue] and translate that into payments, looking at the various centers, I see slightly different results. Hampton saw a very strong year-over-year kind of core productivity growth. And this strips out legal and bankruptcy; this strips out programmatic type things that we would do. These are just accounts that are in collector's queues, which is kind of a slice of productivity that we look at internally that we typically don't talk about with the investment community.

In Hampton, I saw Q1 or Q2 2007 versus Q2 2006, productivity was up nearly 19%. And this is in terms of dollars collected per hour paid. In Kansas, I saw a 12% increase.

Now, my largest center in Norfolk was flat on a year-over-year basis. And we just -- we're never settled. We're never satisfied with flat performance. We like to see productivity gradually creep upward and we're working on some things.

We're fine-tuning Norfolk so that we can continue to try to apply upward pressure on productivity, which, obviously, for every given amount of paid payroll hours, is going to bring more cash collections in.

And then the other piece of the puzzle is Tennessee. Productivity in Tennessee is running at about a third of productivity in the other centers. So it's down there and it's something that we need to get up.

If we had been able to run productivity even at 2/3 of the other centers, we would have picked up kind of an incremental $1 million plus on the amount of payroll hours that we had down there.

So as I said, we did not hire a call center manager, so this would be the person not just running teams, but running the entire center until essentially the end of the quarter. And that person has been in our Kansas office training for the last few weeks and really this past Monday, just joined his center full time, so has not had much of a chance to make an impact there.

So we're very focused on productivity. We're very focused on bringing the Tennessee office along and believe, as we do so and we continue to add staff that we're going to continue to grow cash collections.

Thank you.

Audrey Snell, Kaufman Brothers.

Thank you. Was there anything in particular that you can verify that caused the reduction of bankruptcy cash collections in the quarter? And what's your outlook on collections for what is typically a seasonally slower second half of '07?

Just one other question. Over the past couple of years, you've been very successful I think in smoothing out these seasonal changes. Is seasonality creeping back into the quarterly performance? Thanks.

Seasonality is always there. Buying and growth have tended to mute it in the past. So let me take your questions one at a time. First, on the bankruptcy side, a big part of what is happening with our bankruptcy collections is just the kind of normal maturing, especially of the very large buying we did in Q4 of 2005.

So, just to put some things in perspective, we started buying bankrupt accounts in the first quarter of 2004. Since we got into that business, we have deployed about $63 million and that's net of buybacks, in acquisitions of bankrupt paper. In Q4 of 2005, as you will remember, it was a very big buying period for us and we did buy some significant portfolios. We put out almost $23 million on bankrupt portfolios in Q4 of 2005. So it was a significant purchase. Also, that purchase contained portfolios that were kind of well into their life and so they were cash flowing as we acquired them.

Those bankrupt accounts purchased in that quarter, I would say that their quarterly performance has peaked at this point and we're starting to see kind of the normal gradual downward trend. Because of the size of that particular portion of our buying, as it slows down, it's having an effect on our ability to overall grow bankruptcy recoveries, and hence the slowdown this quarter.

So what has happened is bankruptcy was a growth business for us, was contributing very nicely to our cash collection growth, and now, when this particular buy is slowing down a little bit, it's making continued growth just that much more of a challenge.

I don't know that we, what we don't see is a continued dramatic falloff there. I think we're more into a plateau period. We have also been doing some nice buying since that Q4 2005 time period, in many cases buying bankrupt pools whose cash flows don't start significantly for a period of time. So we're going to see those cash flows come up normally and build over time and I think they will take some of the downturn in this one large portfolio out. But again, this quarter, that was certainly a piece of what we saw.

Back to your question on seasonality and the impact of seasonality, buying, obviously, is a counter to seasonality. Given the amount of buying that we have done over the last couple of quarters, we will be armed as well as we have been in some time, I think, to combat the effect of seasonality and produce strong cash collections regardless of the particular quarter that we're in.

Thank you.

Dan Fannon, Jefferies.

Thank you. It looks as if you raised the expected yields on several pools in the quarter. Given that we don't have the 10-Q yet, can you give us some color on which ones and potentially by how much, and then also the factors that went into those changes, whether it be you're more conservatism at the outset or more bullish on your collection environment going forward.

Hi, Dan. Yes, we will have the Q out hopefully in the not too distant future. But to answer your question, certainly I think if you look at CDO 5 tranche, you'll probably see a little bit of movement between accretable yield and non-accretable difference by the '05 tranche, simply because it's been on the books now for 12 to 18 months. It's kind of gone through its period where we're analyzing it and trying to track data points compared to the original projections. So just -- I actually don't have the data in front of me either, but just looking from the work we did on level yield.

So again, we also talked about the bankruptcy accounts. We definitely, in fact, when we started buying bankruptcy accounts, we told the Street we put those on a little more conservative yield because they were new for us back then and they have been performing quite well, so there's been some release of some of that as well.

Okay. And then in the press release, you talk about generating higher returns in the purchases in the quarter than what you have seen over the past 12 to 18 months. But then in your commentary, Steve, you talked about steady to moderating pricing. Where are you -- can you kind of connect those dots and where you are seeing the excess returns if it's something different than just pricing moderating?

Well, I'm sorry if we told an inconsistent story there. Those two points were supposed to be linked. We believe that pricing has moderated slightly, and we believe that the IRR potentials in deals that were purchased in Q1 and Q2 on average, have higher potential than we have seen in some time. So, obviously, only time will tell, but we do believe there is more IRR potential in this last couple of quarters of buying again, than we had seen in let's say the prior 12 to 18 months.

Okay, thank you.

Mark Hughes, SunTrust.

What was the headcount at Jackson, Tennessee at the end of Q1?

As far as collector -- at the end of Q1, in terms of collectors, it was 81.

And that is versus 132 at Q2, right?

That's right.

Okay. And that settlement number, the 64%, that just includes settlements, not payments in full. Is that right?

That's right. We -- this particular report that I'm looking at segregates anything that's a settlement in full and anything that's a payment in full and then what we do is drill down further into anything where we settled in a particular period. And we say of all those settlements, what was the average settlement. In there, what we're trying to do is really track and maintain vigilance over what kind of compromise we're doing -- average compromise we're doing in the call centers to make sure that we are not cannibalizing future recoveries for sake of accelerating current period. And that's a number we really pay close attention to and try to manage in controlled bands.

But you don't want the debtors to find out?

Well, on average, those numbers kind of in the mid '60s is where we're at, but as you can imagine, we will settle widely. We -- in the right case, we take a very low settlement and in many cases, we would offer almost nothing. It really, if we're doing our job right, it would really depend on the individual credit characteristics of that customer we're settling with.

Exactly. Okay. Thank you very much.

David Scharf, JMP Securities.

A couple of things. One, I just wanted to clarify a previous question regarding the role of seasonality, the normal second-half seasonality for collections and the role of the above trend purchasing.

I believe I heard you say that as we look at second-half collections, that the rate of purchasing in the first half should negate that typical trend. Does that mean on an absolute dollar basis, we would expect to see the same pattern we've seen in recent years, where dollars collected in the second half will be above the first half?

If that's what you heard, I'm glad you are giving me an opportunity to clarify. The normal seasonality is always going to be here. The normal seasonality is just part of the collection business.

For a number of years, we showed sequential growth in cash collections in every quarter regardless of what was going on in seasonality wise because of buying pace. And that, over the last couple of years, has changed somewhat and we have seen some sequential quarter-over-quarter downturns as seasonality has really overcome the positives from debt buying growth.

My comment was intended to say the more buying that we do, the more opportunity we have to overcome that seasonality downturn. And so given the buying that's gone on in Q1 and Q2, we've got more opportunity than we have had in some time to have that debt buying growth working for us against the seasonality downturn, but I certainly wasn't trying to give guidance that a particular thing was going to happen. Just that that's a strong counter veiling force in the face of seasonality coming up here Q3 and Q4.

Okay. And I'm basically trying to -- can you, on a level of guidance you historically haven't given in the past. That's a little bit helpful.

Secondly, reflecting on the two flow deals, which in combination it looks like they accounted for around $25 million of capital deployment, which I would assume, as we look into the third and fourth quarters, the one month for the MBNA deal won't exist, but should we infer from those two deals that $25 million of capital deployment per quarter is a good minimum starting point, just based on those two deals?

Yes, those two flows that we discussed will be intact on the same terms throughout Q3. One of them, the smaller of the two will be throughout Q4 and into Q1 of 2008. The other deal, the larger deal was renewed through November. So you will see two months of effective there if we do not continue buying under that flow.

Got you. And are there other flows that you are currently bidding on? Are you finding that in the current selling environment, there is a greater willingness of card issuers to enter into forward agreements or is it more of a spot market for the rest of the purchases?

I would say that really throughout our history, in any quarter, we're always looking at flows. There's generally always some flow business that is up for sale and I don't know that we are seeing any aberrant level of sellers hitting the market with flows at this point. So I would say our opportunities on a go-forward are kind of the usual mix of spot and flow.

Okay. Shifting to the yields once again, Kevin, trying to get a sense for how to model the amortization rate going forward. This was a substantial reduction or increase in yield this quarter. I think you commented that you released some of the early yield on those original big tranche of BK's but the class of '05 probably didn't change that much. Can you once again give a little more color on that 28% figure and how to think about that going forward?

Sure. And remember, maybe this is a good time for a bit of an accounting review, Mark had asked about a specific yield question. I was really kind of not thinking about it in terms of the amortization rate, because, remember, it's revenue that's computed, not amortization. And that's extremely important to remember, and the revenue is generated from a yield number multiplied by your NFR, your net finance receivable outstanding. So to the extent that you significantly collect in excess of your projection, and you're holding that yield constant, you're going to end up with excess amortization. And conversely, if you hit your expectations or collect somewhat more modestly over your expectations, you are still going to have a yield and at times a deployed asset.

So it's really -- the buffer is the amortization, which historically you guys have seen year in and year out kind of the early part of the year, the Q1, Q2s historically have that higher amortization rate because we tend to significantly overperform those as projections. And then the Q3, Q4 numbers have historically been a little closer or slightly less overperformance as opposed to the projections. So, I think it's important to remember. And from a perspective, if you look at, especially since January 1st of '05, SOP 03-3, it allows us to aggregate those deals and really gives us the ability to hopefully project even more accurately down to that, that it was an accounting projection.

So again, I hope that helps a little bit. If you had a situation where you are predicting $10 on a given pool and in that $10 is a component of revenue that's already computed. And so if you collect 11, generally that extra dollar just more amortization or if you collect 13 or 14. So again, that might help a little bit answer your question for the quarter.

Sure. As we think about the second half, should we be thinking about an amortization rate on average below what we saw in the second half of '06, given that Jackson is still going to kind of depress the ability to outperform on a productivity basis?

With 80 plus pools, working with 80 plus pools, I don't know if I can answer the question. I think a lot depends on again, how the pools that we purchased in Q1 and Q2, which are pretty dramatic, come out of the gate and then, of course, what layers on in Q3, Q4. And as you point out, how Jackson in those hours paid starts converting to cash collections. So I'm not going to be able to give you much help on that, I don't think.

Okay. And lastly, obviously, we're looking at a roughly 15% addition to collector headcount in just six months, so it kind of speaks to what you feel the supply environment is. The drag on productivity, which is understandable, but can you give a little color based on your past practices opening up new facilities such as in Kansas, how long it would take until you would see Jackson's for FTE collector productivity match that of other centers because that seems to be a primary drag on that collection growth.

Right. It is a function both of how quickly we ramp that up and then, how it is we continue to layer on new staff. So, for instance, we have aggressively built that center up to let's call it 140 people at this point.

If we left it alone at that 140, we could expect to put some pretty good pressure, upward pressure on productivity. To the extent we ask it to go to 160 or 180 people, in a short period of time, obviously the ability to get that overall productivity metric increased is going to be more difficult. So, it's going to be a function really of how continued buying goes, where we think we need to take staffing, and essentially, what we ask that Tennessee office to do in terms of accepting new personnel and continuing to layer on new, less productive people.

Okay, but the expectation is there is still going to be some considerable increased staffing in that facility?

I believe so.

Just lastly, quickly, as you think about prioritizing capital deployment, it looks like only 100,000 of the million share buyback took place in the quarter. Any sense for just what the criteria is in terms of fulfilling that million shares? And how we ought to think about timing? Obviously you want to be selective and opportunistic, but would you expect that figure to be higher in the near-term?

Yes, we obviously entered into the program with the expectation of getting those shares back. So, it would be -- it would certainly be our intention if it's reasonable and rational to make that happen. That said, we, hopefully, as good stewards of the capital in this Company, are going to look at opportunities we have on the buying front, other opportunities that we might have and weigh that together with the opportunities to repurchase the shares and act from there.

I can also give you a little bit of color. We have pretty short trading windows here by policy, and so obviously, the Company is following those same trading windows that employees follow, and so we were essentially put this program into a 10b5-1 prior to entering our blackout period at the beginning of June, and we didn't completely and perfectly forecast price levels and so we ended up repurchasing less shares than we may have overall otherwise.

But again, to summarize, we wouldn't have entered into the program if we didn't have the intent of trying to repurchase those shares and we will continue to assess our opportunities over the remainder of that program, which goes to the end of Q1, 2008.

Got you, great. Thanks a lot.

Sameer Gokhale, KBW.

Good morning. I think at this point, most of my questions have been answered, but just a few things I wanted to ask. On the share buyback, when are you free to again, buy shares? Is it as soon as tomorrow or when does that window open again?

Well, we would transfer between a plan, which would take us through blackout periods and making the decisions through a committee which we have formed when the blackout period lifts. So we will, through either the plan or through the committee, we would be really always I guess "in the market" at least at this point in time.

Okay. And then Kevin, thank you for that color on the amortization and the cash collections. But one thing I wanted to ask was, was there a way to quantify -- you gave the 31.3% I think core amortization rate number for this quarter and I think in the same quarter last year it was 36.9%. Can you quantify that change? How much of that change could be attributed to raising yields on certain portfolios? Because then, I think we can figure out the remainder was just kind of the differences, the movements in the cash collections on those portfolios.

That's kind of granular for me right now. I'm not going to be able to answer the question at this point. As soon as the Q is filed, you might again get some more insight into that. But, because the core, you're right. Your numbers are correct. They dropped 31 versus the 36 in the prior quarter.

So and also, part of that, I would bring out, because I've been kind of talking about since '05, in fact, over time, 03-3 will gradually decline or decrease our cash collection on fully amortized deals. So that's also some component as well. As we forecast more accurately on the pool level, what you end up with is deals at the end that looks longer than they have historically. And instead of having X amortization for number of years and then all of a sudden no amortization, hopefully we will be able to keep those deals on the books again longer at a different amortization rate. So that's got to be having a factor as well.

Okay. And then, I know you've gotten a question about the second half of the year and the amortization rate, but if I just try to think of the yields as being relatively constant, maybe you're raising them a little but then seasonally cash collections on pools being lower or weaker in the second half, granted there's some offset from the large purchases you did in Q2, but those would presumably take some time to kick in from a collection standpoint. So directionally it doesn't seem like the amortization rate next quarter should also be going down again slightly compared to this quarter?

I think mathematically, I think you are lined up properly. It depends on, again, so much of this industry is productivity based and it just depends on how much cash the collectors can bring out of the pools. And so -- but again, I think your thought process is generally correct though.

Okay. And then I think maybe Steve had mentioned the effect of the bankruptcy collections and the seasoning of that portfolio, given the large amount of bankruptcy purchases in the fourth quarter of '05, but I think that was also a quarter of, if I'm not mistaken, pretty high purchases in the nonbankruptcy paper as well. So can you give us a sense for the seasoning of that part of the portfolio and have you already past the seasoning of that or are we expected to get peak collections maybe a couple of quarters going out?

Well I think the big difference as you look at those two specific types of paper bought in that big buying quarter at the end of '05, is the typical life. The bankruptcy pools, in that particular quarter, tended to be more cash flowing, and so had a much shorter average life than we would typically experience, really even with most bankruptcy purchases. The charge-off paper that we purchase there, we would anticipate would have very typical cash flow collection attributes, and so you would tend to see cash come off of those as you do, as you have for years, and as you can I guess model off of our historical statements.

So if I were to just kind of see where, get a sense for the seasoning of the peak collections on that, is it your sense that we're kind of in the period like in '07, experiencing the majority of the collections on that? Because it was kind of a big bulge in purchases and expected to play out. And so I was just trying to get a sense for have you already seen it play out or is it ahead of us at this point? Are we in the middle of it?

I don't have specifically the nonbankruptcy cash flows by quarter in front of me. So, I'm talking a little bit more generically here. Generally, what you see is when you look at our cash collections by year, by year of purchase, you see that first partial year and then you see -- the first full year followed by the second full year of peak cash collections and then the third year it starts coming down somewhat, the third full year and so on and so forth. And I don't, off the top of my head, know of any reason why those '05 purchases would behave any differently except that as you kind of stack them into that kind of normal recovery curve, they would have a bit of a late start. So as you look at kind of the first partial year that has a kind of a half-year effect, because we buy linearly typically throughout the year, that first year, as we have commented numerous times in the past, really didn't happen to any great degree for those '05 purchases. So it pulled that into '06 a little bit. So if anything, we will probably see that curve extended out a little bit more than you might typically see.

Okay. And then just a couple of quick last ones. Kevin you were talking about the amortization rate. One thing that kind of occurred to me was, is that really a reason -- a number we should be as focused on currently given the fact that you have these bankruptcy purchases, which, if I'm understanding correctly, they have lower collections multiples, so they should be having an impact on the amortization rate? And then, but you have lower OpEx or collections expenses related to those potentially? So is that amortization rate really the way we look at in aggregate, the right number to be focused on?

Right. That's an excellent question. It's also one of the reasons we wanted to put out this extra data this quarter. So I think that if you look at amortization, also I mentioned, again, I think it was Mark Hughes had asked the question about yields. I also mentioned about the concept that when we bought those original bankrupt deals, you're absolutely right, they do have a lower multiple, and we put them on relatively conservatively just because it was a new thing for us. They have been being released over the past few quarters and they also are performing, again, better than we expected. so you've got a little bit of that going on, so I didn't do that math.

I think, again, as I said before, I apologize, but I think your head is in the right spot in terms of bifurcating the amortization rates between the BK's and non-BK's.

But again, remember it's about revenue too. So revenue is what's being computed and that's a number that's based on yield, again, I would say yield on deployed assets. And then it's the cash collections that is the driver of the amortization, essentially. Again, as long as your cash collections are over your expectations, which they are.

Okay, and then just the last one, to clarify on the purchase prices and the comments about the prices relative to the last I guess 18 months or so, or 12 to 18 months, when you are talking about returns, I'm assuming you're not factoring in any returns, any leverage into that commentary. That's just in absolute terms commentary about prices themselves.

Very good point, and absolutely right. We continue to do all of our pricing assuming unlevered IRRs. So we are not factoring in any bump or use of leverage to look at those returns.

Okay, great. Thank you very much.

John Neff, William Blair.

Good morning. This is really kind of left with some housekeeping questions here. Question I had just starting out here, outside legal expense declined sequentially from the first to the second quarter. I don't recall that ever happening and that happened despite the growth in legal collections. Anything there?

Part of what went on, this is legal costs or legal fees?

Both.

Combined. So a piece there is negotiating down our overall commission rates modestly based on volumes that we have grown to; so that is a piece of that move.

Are you talking quarter over quarter, John?

Yes.

Again, Q1 actually had a pretty hefty legal commission component in that, which would play in exactly what Steve described. If you look back at it historically, back over the past few quarters, I have some more granularity in front of me, it looks very consistent, the fees versus the costs. I think again, trending down a little bit because again as Steve mentioned, we did renegotiate slightly our fees, but I don't think there's anything really to talk about there.

Okay, and then Kevin, I was going to ask you for the total headcount at PRA in terms of collectors and first-line supervisors, the number in the first quarter would be 984. I know you said 910.

Again, that was reps. And it was actually, I've got 911, so we've got one rep floating around somewhere. But the 984 from last quarter is now 1051, and that's reps and those front-line people talking to customers.

Great. You talked about there's obviously the productivity ramp, the Jackson call center needs to go up. Is there -- can you give us the percentage just to give us of sort of where they are, maybe, give us a sense, perhaps, of the percentage of cash collections coming from the Jackson office versus the percentage of overall collectors in Jackson?

I can tell you, order of magnitude, our top center is Kansas, and our Hampton and our Norfolk offices are kind of next in line, and actually very close to each other. They are operating about 10% less than Kansas productivity, and so that is obviously one piece of performance differential that we're very focused on that we are trying to figure out how to close as rapidly as we can.

Then, we've got the Tennessee office and the Tennessee office is performing at about a third of the productivity of the Norfolk and Hampton offices. So, the delta there is substantial at this point.

That's helpful. The other thing, just in terms of your purchasing, you bought from 27 different sellers, which, from my records, looks like far and away the most ever. Any things of note there?

There's a lot of paper in the market from our perspective. Buying seems to be very diversified. Obviously we have these couple flows, but we're seeing paper from all over the place, and we are buying accordingly.

Okay. Kevin, a question for you. In cash from operations, a large part of the growth year over year from this growth in this deferred tax expense item, can you just describe what is that arising from?

Well, the deferred tax expense is again primarily what it's been for a while, it's the cost recovery method for income tax. Basically from a financial perspective, we all know how we book interest method for finance and for tax we use cost recovery. So anytime you are buying a lot of paper, you grow that deferred tax, and anytime you slow your buying down, you start eating into that.

That's what I thought, but thanks for that reminder. And then, can you remind us about the fee for service -- you've got a lot of questions on seasonality, but can you talk about seasonal trends specifically as it relates to the fee-for-service lines?

Sure. IGS first, IGS has a little bit of kind of opposite seasonality during the tax season, so the latter part of Q1, early part of Q2. As people get more liquidity and more cash, they tend not to need their cars repossessed, so our business, all things being equal, is a little softer there, and then, modestly picks up as the year goes on. So it's almost countercyclical to our other collection businesses. Anchor's seasonality is in lockstep with the owned portfolio seasonality. And then, RDS tends to have year end seasonality, especially as people renew their business licenses, et cetera.

Year-end seasonality at RDS in terms of being seasonally strong or seasonally weak?

Yes, seasonally strong. I'm sorry. And then, it's pretty well nonseasonal throughout the year and then we see a bit of a bump at year-end.

Okay, so it sounds like overall we might expect stronger second half '07 fee-for-service revenues. Okay.

And then, just last quick question here. Is there any way to quantify or describe the impact, potential or otherwise, to your ability to collect based on what's happening in the sub prime and the housing market? Any impact? Are these the same -- in other words, are these the same debtors who you are trying to collect from? Are these the folks who are sitting here and defaulting left and right on their sub prime mortgages, to the extent you can tell? Thanks very much.

Well, in looking at our payment statistics and looking at the percentage of settlement in full versus payment in full versus payments that we do, again, the size of the payments, it doesn't look like our customers are behaving substantially different than they have in periods past. We tend to purchase and always have, very adversely selected customers. And so in many cases, these would be the type of people who aren't even working currently in the sub prime mortgage world, or that have already gone through a similar experience like that and we are buying them on the back end.

So at least as we look at our performance statistics, it doesn't appear in the reading of our tea leaves that we're seeing any kind of dramatic impact from that sub prime mortgage market.

Thank you.

Edward Hemmelgarn, Shaker Investments.

Just a couple of questions regarding your collector base. Did you give the -- you disclosed in your 10-Q or in your filings the productivity by full-time equivalent collectors with one year and less than one year. Did you give those stats out?

That's in our Q, which is not out yet and it wasn't in the press release. Let me see if I can dig that out for you real quick. You're talking about the monthly cash collections?

Yes, yes, you talked about that. I was curious if what has -- the way you've been describing it, it sounds as if you have seen a -- because of Tennessee, you have seen a decline in productivity for the less than one year.

No, I've got it here right in front of me. You're absolutely right. If you look at 6/30/07, the one year plus bucket a year ago was 18,200 and now it's $20,000. And in that less than -- that was in the more than one year bucket, I'm sorry. In the less than one year bucket, it was 9373 in Q2 of last year. It was 8314 in Q2 of this year.

8314. Okay. Do you have the numbers for the -- your FTEs for one year plus -- at the end of or for the quarter, one year plus and less than one year?

Sure. Again, one year plus is about 360 and less than one year was 481.

481. One of the things you talked about was when you were -- when you were adding Tennessee, you were going to try to give yourselves the flexibility to be adding collectors where they were most productive. I think you made that comment or Steve did towards -- on one of the calls at the end of last year or something like that. If you are having problems with productivity in Tennessee, but you seem to be continuing just to add there. Are you at your basically limits as to what your collectors can be in Norfolk and have in Kansas City (multiple speakers)?

Great question, and yes, when I made those comments, I was not foreseeing the kind of buying levels that we've been fortunate enough to have with the requisite staffing requirement.

Just to give you an order of magnitude, paid hours in Kansas, Q2 of '06 was $74,000. Q2 of '07 was $75,000 and I'm pretty well maxed out there. In Norfolk, or in Hampton, 125,000 hours and almost an identical 125,150 hours going from Q2 '06 to Q2 '07. Norfolk, we went from 168,000 hours a year ago to 172,000 hours. So those are three pretty well capped out centers.

Now, we're going to be able to get some more people in Kansas. We are in the midst of an expansion there that is going to take us from roughly 150 seats to slightly over 200 seats. And we are moving that along as quickly as we can to help take some of the pressure off of Tennessee, but right now, Tennessee is the expansion space.

And it's your ability to generate increased cash collections is probably as much as anything influenced by your productivity in Tennessee right now.

Yes, I think so.

Okay. Thanks.

Kirt Corregan, Delta Partners.

Thanks for taking my call. Just a follow-up on the amortization rate, what effect did that change have on a year-over-year basis to earnings per share?

I don't have the math on that, but the amortization rate just -- the stated rate was about 32 last quarter, year-over-year quarter and it was again, 28.2 this quarter.

Again, it's all about revenue, so you'd have to really dive into yield on pools. So again, I don't know if I'm being clear because it's revenue that's computed, not amortization. So the revenue, again, is based on a yield times deployed asset. And fluctuations, again positive, again much more than expected or modestly more than expected, really get sucked up into amortization one way or the other.

Okay. And I hear what you're saying on the IRRs on the paper you are buying in the past couple quarters being better than the prior 12 to 18 months, but can you give us a sense of how much better? Is it 50% better? And could you also make that comparison versus looking back a bit farther because that prior 12 to 18-month timeframe is probably the top of a long bull market for this asset class. How would the IRRs on the paper you are buying now compare to, say, the 2002-2004 timeframe?

Time will tell perfectly on where IRRs were, where they went and where they might go in the future. I really don't want to get into a speculation game about how much better they may have been in this past quarter because now we have to execute on these purchases and we need to convert them into cash collections over a long-term timeframe. Suffice it to say that we think that the IRR potential in the last six months of buying is modestly better than it had been in that prior period.

Okay. The reason I ask is that the consensus view being spelled out by the sell-side analysts is that the Company is in a sweet spot for buying paper right now, so it's kind of critical to the this investment thesis. I'm just trying to get some clarity on that.

I understand exactly, but it's one thing to buy it and talk about what you believe you are going-in yield is and then it's another to look back three or four years later and say this is what we've been able to achieve. This is the aging of those pools and this is what we think we can go forward.

If you wanted to talk about '03, '04, I think those are -- 2003, 2004, those are vintages that we feel pretty good about. They are well-established and from an ERC, estimated remaining collections, standpoint, we feel like we know where they are going to be to a very great degree. The more time we get with these, the better feel we will have for that. But I would say right now, other than giving you a notion that our modeling is suggesting that we are buying at righter IRRs than we have been, it's just a tough one to I think comfortably quantify.

Okay. And when you say that the supply of paper is increasing, can you give us a sense for how much of an increase? Is it 30 or 40% versus a year earlier? And what was the change in supply of paper in 2006 versus 2005?

I don't have all of the stats in front of me, so I'm going to have to pass on that one. I don't want to give you a guess number.

Okay. And just on the cash collection growth rate this quarter, I understand that the productivity per employee has been increasing, but the cash collection growth rate has been decelerating for a while. And operating costs seem to be increasing faster than the growth rate in cash collections. Can you reconcile these trends? I'm a bit confused by how productivity appears to be improving while cash collection appears to be decelerating.

You are talking about to some degree, things that could be independent. When we look at productivity, we look at cash that's collected in a period and we divide that by the number of hours paid, so if cash is growing at one rate and hours paid is growing at another, you could get productivity numbers that do one thing and cash numbers that do something else. So it's a number that's relative to the amount of payroll hours that we are incurring in any given period. So they are certainly -- they are numbers that we relate to each other, but they don't need to grow in lockstep. On the expense side, I will let Kevin give you a commentary there. I don't know quite what you are looking at.

It seems that operating costs are increasing faster than cash collections. Operating cash collections.

On the operating costs side I address that actually I think every quarter. Really, we are absolutely focused on that operating metric between expenses to cash collections and especially over the past year or so, I've talked about the fact that we are really trying to layer in professional and collector expertise to try to take advantage of future opportunities. So that's definitely a driver that Steve and I are focused on. So I know that's certainly part of it. So I don't know if that's what --

So is it getting -- is finding quality people more difficult and, it's, therefore, you have to pay more for these type of people that have higher productivity?

From a -- again, I think from a rep side, we're doing one thing from a collector side. And then from a professional and exempt and business development, bench strength, it's a different mechanism kind of completely. So I think from a collector's side, I think we are pretty pleased with the costs that we are incurring. Again, I'm really, again, my section of the script was really trying to talk about I guess I would say building bench more than anything else. But IT, again, as you probably know, I run IT. So we've made huge investments in IT over the past 12 to 18 months. So I don't know how -- again, I didn't run the numbers on a percentage basis, but that's certainly contributing to that as well.

And another piece, if you are looking at long-term expense trends and we've tried to comment on this and help you back these out is the impact of the fee businesses. The fee businesses, it's a piece of our business that we're growing for the long-term. Right now, we are lugging around some intangible expenses there and it has had an effect on margin. So, as Kevin commented, historically it's been as much as 450 basis points. We have been able to narrow that slightly as we, number one, burned off some of these intangible expenses, but also, as we have approved operations and gained scale in these fee businesses. And we think long term, these fee businesses are exciting, great places to be and so we are willing to suffer a little bit of operating margin compression to get to that future. And that's really what Kevin made some comment on in his part of the presentation, that we are not focused solely on these operating margin metrics. We certainly are aware of them, but if we are making some short period trade-offs in operating margin for long-term profitability and cash flow, we will do that trade.

Okay. And early in your call, you mentioned that you are thinking about making acquisitions. Are there particular types of businesses that you have in mind?

We are -- we are looking at a variety of let's say related type activities. We are very focused on -- just like we are when we buy distressed assets -- we are very focused on return on capital for the investments that we make. So we are -- I guess casting a wide net and looking for complementary, well-priced deals and we are going to be very patient and take our time with that process.

Regarding the return on capital, is there a minimum hurdle rate that you have for any acquisition that you would potentially make?

There is, but it's not one that we've shared.

Okay. And last question, regarding the average price that you are paying for the stock and the buyback, how are you arriving at that price? Is there a particular metric that you're focused on where you think it's a good value?

We've formed a committee of operating management and Board members that is wrestling with that decision and there's no single point that we are looking at. We're trying to factor in a lot of things.

Okay. Thank you very much.

Hugh Miller, Sidoti Company.

Just had a couple of other quick questions. First, was there any adjustment in the age of paper that was purchased this quarter versus prior quarters?

Well, I mean in all periods, we buy everything from fresh charge-offs as we commented with our couple of fresh flows to very, very old paper and really every quarter is a mix of that entire spectrum. It's one of the reasons why a number of years ago, we quit talking about this average price paid because it is -- we really think it's a potentially misleading number.

Sure. So on average was the composition materially different than prior quarters or is that not something that we would be able to quantify?

I don't have a feel for that. Again, I would be guessing and I would rather not do that.

Okay. And I'm not sure if you guys had mentioned this. Had you guys published the multiple that was applied to the second quarter purchases?

No, we haven't. It will be in the Q and hopefully we will be quick with the Q, but we don't have that yet.

Okay. Thank you so much.

[Rick Biggs], [Second Curve] Capital.

Thanks for the extra detail this quarter, especially on the collections side. I actually wanted to go back to the purchase market and your discussion on the modest softening. And while that, unless I missed something, while you were talking sort of across the spectrum, I was wondering if there were any particular areas either asset class or sort of seller that were particularly weak or where you see more softening, in other words, a more attractive market than maybe a year ago.

I don't think that we've seen weaker pricing out of any particular seller. Generally as more supply hits the market, I think it -- all things being equal on the demand side, moderates pricing pretty well across the board. I don't believe that we are seeing any real weakness in any particular segment. Although we, as usual, we've tended to see most of the volume coming from the Visa/MasterCard world, and that certainly wasn't any different during this past quarter.

What about resales from other debt buyers versus issuers?

We continue to see a pretty reasonable volume of resales. That's a market that we do look at, we do participate in, although we tend to be extraordinarily picky about the people that we are willing to buy from. And so that somewhat limits the resale market for us. But I would say that that, too, is fairly active.

Okay. Thank you.

There are no further questions at this time. I would now like to turn the call back 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 second-quarter performance.

Net income grew substantially in the quarter, increasing by 17% to $13 million. Per-share earnings grew to $0.80 on a diluted basis in the second quarter. Total revenue rose 19% in the quarter to $54.8 million. This was driven by a 12% increase in cash receipts to $73 million. Portfolio purchases were a very substantial $63.4 million in the second quarter, our second largest quarterly investment ever. Our cash balances finished at $15 million. With our line of credit having $112 million of availability at quarter's end, we stand well positioned to react quickly to any market opportunity that may occur.

Lastly, our new capital structure optimization program is working and should help drive an even more efficient use of shareholder equity. Our performance in Q2 is continued evidence of the exciting opportunities ahead of us at PRA. We are investing in our businesses, adding expertise, capacity, and capabilities as we develop ever more efficient ways of underwriting and collecting. 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. Have a wonderful day.