PRA Group Inc (PRAA) 2007 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2007 Portfolio Recovery Associates Incorporated earnings conference call. My name is Shanika and I will be your operator 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) I would now like to turn the call over to Mr. Jim Fike, Vice President of Finance. Please proceed, sir.

Good afternoon, and thank you for joining Portfolio Recovery Associates third quarter 2007 earnings call. Speaking to you as usual, will be Steve Frederickson, 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, oppportunities, future space and staffing requirements, future productivity of collectors, expansion of the RDS, IGS, and Anchor Receivables Management businesses, and future contributions 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 and 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 AK filed with the Securities and Exchange Commission and available through the company's website which contain a more detailed discussion of the company's business, including risks and uncertainties that may affect future results.

Due to such uncertainties and risks, you are cautioned not to place undue reliance on any forward-looking statements which speak only as of the date hereof. The company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any change in the company's expectations with regard thereto, or to reflect any change in events, conditions, or circumstances on which any such forward-looking statements are based in whole or in part. Now here's Steve Fredrickson, our Chief Executive Officer.

Thank you, Jim. And thank you all for attending Portfolio Recovery Associates' third quarter 2007 earnings call. On today's call, I'll begin by covering the company's results broadly and then Kevin will take you through the financial results in detail. After our prepared comments, we'll open up the call to Q&A.

To begin, let me say flatly this was not the quarter we were shooting for. It's important to recognize, however, that the core business of Portfolio Recovery Associates remains strong and growing, and the outlook for the future is as bright as ever. The reality is several factors came together in the third quarter to limit the earnings growth we were able to generate, compared with the year ago quarter.

Let me be specific. 1. Interest expense stemming from both our third quarter debt purchasing activity, as well as our 1 million share stock buy-back, which we completed in the third quarter, drove incremental net interest expense of $1.1 million or $0.04 cents a share net of taxes. 2. We took a higher-than-normal allowance charge of $1.2 million or $0.05 cents a share again net of taxes, against certain pools of debt. Taken together, these first two factors accounted for $0.09 cents a share of net income. 3. Sharply increased staffing to accommodate significant increases in debt purchasing hurt near-term productivity. Capacity expansion always has this effect and we have taken steps to bring these new collectors up to speed more quickly. We'll discuss these three factors in more detail as Kevin and I go through the quarter. But I wanted to provide this context for you upfront.

Now, in terms of our performance in the third quarter, we continued making significant acquisitions of charged-off debt in Q3, investing $57.4 million. Year-to-date purchases now total more than $160 million, ahead of any prior full-year total in our history. We've produced owned portfolio cash collections of $65.2 million, up 9% from $59.7 million in the same period one year ago. Q3 cash collections were also up slightly from Q2 2007, despite seasonal weakness. In addition, we produced strong fee-for-service revenue, $8.5 million in the third quarter, representing 39% year-over-year growth.

Overall, we saw 14% increase in revenue to a strong $54.6 million. Net income grew 4% to $11.7 million for the reasons I mentioned earlier. Per share earnings were $0.75 on a diluted basis. Finally, we realized productivity of $142.26 per hour paid, which includes the effect of aggressive staffing and lower hourly productivity at our new Jackson, Tennessee, call center, as well as normal seasonal factors. All told we had more than 178 owned portfolio collectors in Jackson at quarter's end up from just 132 at the end of the Q2.

Let me now walk through our performance in detail starting with our very strong $57.4 million in portfolio acquisitions. Overall, we acquired 59 portfolios from 23 different sellers, including several new relationships for us. The majority, about 76% of our third 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 bankrupt accounts acquired during the quarter are included in the Visa, Mastercard, and auto categories. Bankrupt accounts accounted for about 18% of our purchased activity this quarter in terms of dollars invested. Market conditions continued at the slightly improved levels in the quarter with the solid amount of supply and steady to softening pricing.

We continued to see less of what we would consider to be a rational pricing during the third quarter. Most competition appeared to be less aggressive than recent prior quarers. During the quarter we continued purchasing under an extension of our older, fresh forward flow, which represented about 14% of the period's purchases. This flow is set to continue through November of 2007. Our second, newer -- newer flow of prime paper represented about 16% of our buying volume, in terms of dollars invested during Q3. This flow runs through March of 2008.

Now on to collections. As I mentioned earlier, on the owned portfolio collection front, Portfolio Recovery Associates recovered $65.2 million in the third quarter, up 9% from $59.7 million a year earlier. Offering a bit more granularity, call center collections were $37.4 million, up 15% from the same quarter last year, and representing faster growth than the 11% year-over-year rate of Q2. Call center collections are the first to show an impact from our more recent debt purchases, and at this point are the primary driver of our cash collection growth.

Legal collections were 33% of total cash collections in Q3 2007, at $21.4 million, compared with $19.6 million in Q3 of 2006, representing year-over-year growth of 9%. This modest increase is a result of the continued significant investment we made over the last several years in pursuing lawsuits on appropriate accounts. I do feel as though we have more room to be increasingly aggressive with our legal strategy.

Cash collections for our purchased bankrupt accounts were $6.3 million, down 15% from Q3 2006, but up slightly from Q2, 2007. Bankruptcy cash collections over the past couple of quarters have slowed in stark contrast to the period of exceptional growth we experienced earlier. This change is the result of our moderate bankruptcy buying since the change in bankruptcy laws in late 2005 and is in line with our projections.

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 $142.26 for the first nine months of 2007 compared with $146.03 for all of 2006. Excluding the effect of trustee-administered purchase bankruptcy collections, PR A's 2007 productivity through the end of Q3 was $129.35. This compared about with $132.15 for all of 2006.

We have taken steps to address this flattening productivity, including several significant re-engineering initiatives in our call centers. These initiatives are focused on productivity and employee retention, although in the short-term, they may cause us to turn over more highly tenured employees whose productivity is considered unacceptably low. Overall, we have changed the way we handle inbound calls in an effort to allow our core collection employees to focus more intensely on queue management. We also have adjusted our incentive pay program to more tightly align with tenure based collector goals as opposed to a more static tenure blind approach. This will permit less tenured employees more opportunity.

As a result of these changes, we created a new inbound call unit staffed with approximately 70 employees. The staff of this inbound group will be included in our productivity and staffing numbers. This new group is being located adjacent to our Anchor Receivables Management operation, and in some cases using seats that Anchor had held historically. As a net result, we have freed up approximately 75 seats in our primary Norfolk call center that can be used for new hires. These, combined with the first 20 new seats coming online from our Kansas expansion, will permit us to moderate new hires in Jackson during Q4.

Our new call center in Jackson, Tennessee, continued a substantial growth. We ended the quarter there with about 178 owned portfolio collectors and a staff of 11 IGS skip-tracers. This is more than 1,250% staffing growth over the past six months and has made it more difficult to pull up overall productivity there, especially when you consider the seasonal factors we face in Q3. Nonetheless, our new call center manager is having a very positive impact on the Jackson center. After finishing his training during July and early August, he was able to focus the center in late August and September with the result being record productivity during September. Even while adding many new employees, Jackson increased productivity from about 30% of our top center standard to about 40% in September. Our Norfolk center also improved during the quarter on a relative basis. Overall, at quarter's end our owned portfolio collector headcount was 973, up 7% from the end of Q2, and up 21% since the beginning of the year.

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 increase 40% from the same period a year earlier to $8.5 million. IGS continues to shine in terms of revenue and profit growth, increasing both from the prior quarter and year-over-year. We continue to grow placement inventory and are very pleased with the performance of the business. Anchor continued to operate at fairly modest scale with both revenue and operating income declining slightly from the prior quarter, but with improvement on a year-over-year basis. 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 -- we see no improvement in the pricing environment of the contention fee collection business at this point. RDS increased revenue modestly on a sequential basis while growing strongly year-over-year. Income was down somewhat on a year-over-year basis as we made staffing investments to support the growth of several new product offerings. During the quarter, RDS acquired most of the assets of a Louisiana-based insurance premium tax administration company, the Palmer Group, in a mostly cash acquisition. Although revenues from this purchase are relatively modest, this deal gives us over 100 new clients in the state of Louisiana, as well as desirable expertise in the insurance premium tax administration business. We think of this kind of smaller tuck-in acquisition is very exciting and can help us accelerate the growth in our fee business as we expand our client base, service offerings, and our geographic footprint more rapidly than we could through internal marketing efforts alone.

Lastly, I would like to address our capital structure. During the quarter, we completed our previously announced share repurchase plan, buying back the remaining 900,000 shares under our original 1 million share authorization. We acquired these shares during the quarter at an average price of $50.41. As a result, together with our $57.4 million in portfolio acquisitions, PRA ended Q3 with $100 million of debt on our balance sheet. Once again, we produced return on equity for the quarter in excess of 20%. With $223 million of shareholder's equity and relatively modest debt at quarter end, combined with strong profitability and cash flow, PRA has 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. In fact, as Kevin will discuss with you shortly, we have reached agreement with our bank group to further increase our credit line, providing even greater resources to make such investments. With that, let me turn over the call to PRA's Chief Financial and Administrative Officer to take you through the financials. Kevin.

Thank you, Steve. Our third quarter 2007 performance showed solid financial results in all areas. However, as Steve mentioned, our net income growth was disappointing. I'll be providing additional insight from both a revenue and expense perspective. Net income in the quarter grew 4% to $11.7 million. Total revenue for the quarter was $54.6 million, which represents growth of 14% from the same period a year ago. Breaking our second quarter revenue down, into its three components, once again the majority of total revenue or $46.1 million came from income recognized on finance receivables. This is revenue generated by our owned debt portfolios. Income on finance receivables is derived from the $65.2 million in cash collections we recorded during the quarter, which represents a 9% increase over Q3 2006.

Third quarter cash collections were reduced by an amoritization rate, including -- including a net allowance charge of 29.2%. This amoritization rate compares with 28.2% in Q2, 2007 and 30.0% in Q3, 2006, and our full-year 2006 rate of 30.9%. Year-to-date 2007 amoritization is now at 30.0%.

As you saw on our press release, we incurred a total of $1.2million in net allowance charges during the quarter representing about 6% of all amoritization realized during the quarter. These charges are associated with various different pools and represent adjustments to better reflect actual versus previously forecasted future collections. To provide more color on the allowances, approximately $200,000 comes from what I referred to as older, high-yield deals. These are pools that as a result of continued consistent overperformance, had yields increased, in many cases substantially. When we experience a period of more modest cash collections, these high-yield deals, even though they are performing at levels far in excess of original expectations, may need an additional reserve to fully amortize a remaining carrying balance over their expected economic life. That was the case this quarter.

It took $480,000 in allowances on several high-yielding bankruptcy deals. The pools that performed well in excess of expectations and therefore had experienced yield increases in the past. Once that these high yields and deterioration in performance can require an allowance to set them back on track. That was the case here.

Finally, we took a $500,000 allowance on a more normal, older deal, where we experienced some degradation and performance during Q3. Although we believe it is not out of the question that this performance can be improved in Q4 and the future, at this point the proper course of action was to take the allowance. While I'm not pleased with such higher than normal allowances, I do think it is realistic to assume that some modest percentage of any debt buyer's amoritization will always be allowance charges. SOP 03-3 simply creates an environment that supports this, based on the directive to increase yields on overperforming transactions and the prohibition on lowering yields once they're increased. Nonetheless, we will continue in an effort to minimize allowances.

During the third quarter, cash collected on fully amortized pools was $5.6 million, down from $7.4 million in Q3, 2006. In referring to fully amortized pools, I mean purchase pools with no remaining balance on our balance sheet, or zero-basis assets, eliminating liminating those pools from our amortization calculation gives us a core amoritization rate for Q3 of 32.0% versus 34.3% in the third quarter 2006, and 35.3% for all of 2006. We continue to believe that as a byproduct of SOP 03-3, in effect since January 1, 2005, the quantity of zero-basis cash collection -- collections should gradually decline over time and this quarter's trend is indicative of that. 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 purchased finance receivable assets on our books for longer period of time than we have historically, which in turn drives a lower average portfolio amoritization rate over the long term.

During the quarter, commissions and fees generated by our fee-for-service businesses Anchor, IGS, and RDS, total $8.5 million. This compares with $6.1 million in the year-ago quarter and represents a sequential increase from Q2, 2007. The third component of total revenue -- cash sales of finance receivables was once again zero for the quarter. During the quarter we've retained all of our purchases for internal collection efforts as we have in every quarter since our IPO in late 2002.

On the expense side, we experienced an increase of approximately $1.6 million when compared with Q2, 2007. This primarily came from the compensation line, as well as outside fees. The compensation line item grew commensurate with our rapidly expanding workforce, while the outside fees were mostly an IGS-impact relating to agent repossessions. As we were able to achieve improvements and productivity, we should be able to put downward pressure on the compensation line in relation to revenue and cash collections as we've done historically.

Operating margins during Q3 were 35.8%, compared with 38.8% in Q2 2007, 38.0% in Q3 2006, and 38.2% for all of 2006. As we have stated repeatedly in the past, we'll 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 their operating margins to be about 450 basis points lower than it would have been without them. During Q3 we continued to run any narrowed compression of about 400 basis points.

As we stated, we see real promise in these fee businesses -- great synergy with other (inaudible) activities and believe we will be able to continue to expand their margins and income substantially over the years. Operating expense to cash receipts is a perhaps more insightful efficiency ratio as variations in purchase price amoritization rates cause our revenue ratios to fluctuate, regardless of true operating efficiency levels. Operating expenses 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 is 47.6% for Q3, up from Q3 2006 of 45.1%. This was driven by the same factors previously mentioned in my discussion of operating margins.

While an interesting metric, please understand we are not running our business solely focused on operating margin. We feel that earnings efficiency ratios, such as return on equity, return on vested capital, and growth in earnings are much more important to the long-term health of the company. Should we need to invest in people, data, services or other items that drive up our expense ratios in order to improve ROE, ROIC, and earnings growth over the long term, that is what we'll do. In addition to the operating margin expansion, we expect from our fee-for-service businesses over time, we will remain contin -- keenly focused on operating expenses in 2007 as much as ever.

However, we will not cut corners that could impact long-term cash generation. For example, in terms of our investment facilities, we are now occupying the entire new 35,000-square-foot administrative and executive center in Norfolk, Virginia, as we have discussed in prior quarters. During the third quarter, part of our IT and accounting functions also began to occupy the space. And our Kansas call center expansion, which will give us capacity for about 205 collectors, had its second phase completed in Q3 and should be totally complete during Q4. This will permit us to add up to 20 new reps there during Q4, and an additional 25 to 30 in early 2008.

Our balance sheet remains strong during the quarter despite significant purchases of new portfolios and substantial activity with the completion of our share repurchase plan. Cash balances declined slightly to $14.5 million at the end of the quarter. Rounding out the balance sheet, we had $326.5 million in finance receivables, $22.3 million in property, equipment, and other assets, $18.6 million in goodwill, and $5.4 million in intangible assets all related to our business acquisitions. During 2007 we are incurring intangible amoritization expenses of approximately $500,000 per quarter. We have about about $100.1 million of long -- short- and long-term debt and obligations in our capital leases with total liabilities both long- and short-term of $164.0 million. The majority of this debt is the $100 million outstanding under our line of credit. On September 30, 2007, shareholder's equity totaled $223.2 million.

As mentioned earlier, during Q3 we moved forward towards completing the previously announced capital structure optimization program. As a result, we completed our 1 million share repurchase program as the company bought back 900,000 shares of outstanding stock in Q3 in open market transactions at an average price of $50.41 per share.

To recap our entire program, we have now repurchased 1 million shares of stock at a total price of $50.6 million for an average price of $50.56 per share. As you saw in our press release, we recently reached an agreement with our bank group to increase the size of our credit line to $270 million, up from $150 million under terms similar to our prior facility. We took this step because we want to be in a position to capitalize on attractive debt and/or company purchase opportunities that may present themselves. We believe the current market is just the sort of environment that can spawn these very attractive situations.

In summary, we are focused on the long-term growth of PRA. While we are interested in driving all the key metrics that measure our progress, we will not substitute short-term goals for long-term goals. Q3 is an example of just this approach. Those with a long-term view should know that we are setting strategy based on a multi-year view of our operations and opportunities. 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.

Thank you. (OPERATOR INSTRUCTIONS) You have a question from the line of Robert Napoli. Please proceed.

Thank you. Good afternoon. Kevin I guess -- Steve. question for you though Kevin, probably. On the -- the charges that you took in the quarter. And kind of your confidence that they are, in fact, abnormal hits this quarter. You did say, I mean, you should expect something on a quarterly basis. And we have seen small hits out of you -- obviously this was much bigger. But what is your confidence that -- level that this is an abnormal level? And why would you -- why are you confident in that, if you are?

I think what I was getting at, it is certainly abnormal compared to our past. We have booked anywhere from as low as about $90,000 a quarter up to about $450,000 last year. So, I think that - I'm going to kind of stand by my comment saying, I think, any -- any small percentage of really any debt buyer's amoritization is going to come from reserves, impairments. So we're just going to stay focused -- we're going to stay focused on doing our best to limit these things. I think that again a million dollars being about double the largest impairment thus -- so far to date, but I think still within that normal band that one might expect.

Okay.

I don't know if that answers your question or not?

No. I guess it's, it's helpful. Let me think -- talking about return on equity, you guys focus on ROE, certainly makes a lot of sense. But what is your confidence level that you can maintain at least 20% ROE that you guys have been generating. I mean, you have done it without leverage and now you are using some leverage in generating the 20 ROE. I mean, would you guys be -- are you confident in that 20 ROE? Would you be disappointed if it fell below that level?

Well, Bob, we're -- as we said, we are trying to focus on several different metrics, which we feel are important long-term. And we don't give guidance, and so I don't want to be evasive. But I -- I also want to stay consistent with our policy there. We're certainly running the company in --in such a way as to create good, solid ROE, for a long time to come.

Okay. And on the expense line, with the -- I think you had talked, Kevin, about being able to bring that compensation number, as a percentage of revenue or cash collections, back -- put downward pressure on that. I mean, is the would -- what kind of a target level? How much downward pressure do you think you could put on that? And right now, in order to, I guess, with the rapid growth in collections, would it be prudent to think about that number maybe going up before it goes down as you add collectors?

Well yes. I didn't kind of give you any feel for where I thought that was going. But certainly if you look at Jackson, those guys are very new and coming up the curve nicely. But it is going to take time to get those guys to be as productive as reps that have been here awhile. And that's really the point of my comment is that we've just ramped up so aggressively in the near term that -- that again, rest assured our focus is watching the stuff daily, trying to get these guys to come up the curve as fast as possible in terms of productivity.

Can you give any specific metrics on the new facility on productivity trends?

We did comment, Bob. One of the things we do on a -- on a monthly basis is examine really core cash collections, per hour paid, at each one of the call centers and we always look at those also relative to the top producing center. And we -- we saw very good movement from the Tennessee office, especially during September. And hope that that is the beginning in a trend in showing that especially the manager that took over there just several months ago is having the impact that we hoped and is moving that center along.

Thanks. And just last question I missed a number you gave -- the collections from fully amortized pools?

5.5. I'll give you an exact number here. Right there -- $5.6million.

Thank you.

Yes.

Your next question from the line of Mark Hughes. Please proceed.

Thank you very much. Who was the FTE equivalent -- full-time equivalent in the quarter for collectors?

I've got that somewhere.

Yes, because I think the -- the total number 973 -- just kind of curious what the FTE was.

Hold on, the headcount. Yes, FTEs were 872.

That will be what you report in the Q?

Yes. I wanted to get the right number there, from my notes.

Okay. Yes. 872. That's correct.

Okay. Thank you very much.

You bet.

Your next question comes from the line of John Neff. Please proceed.

Hi. Thank you. I was just wondering if you could just break out the gross impairment charge and the recoveries to get to that net 1.2 million?

Did you net out anything?

Oh, I'm so glad. I got it. No, that was gross. That we didn't net out anything. There was no recovery.

No recovery?

No.

Okay. And tough to say. But would you -- would you attribute the -- t he charge in the quarter to productivity decline, seeing as we are back at roughly 2005 levels? And I know typically you sort of model out current productivity levels when you are making a purchase?

So your question is would I attribute any of that reserve to productivity issues?

Yes.

Or I guess correspondingly staffing issues? That is a tough one. I think from an according perspective, we simply view cash collections. And we look at the flow. And as I talked about, two of the three deals were very high-yielding deals and any kind of weakness. So I suppose one could make the argument that it could be impacted by either staffing or productivity issues. If that's the case, then hopefully we'll be back on track in a few quarters and we'll be able to recover that. But for right now, we just had to take the allowance as it sits.

Okay. And then the -- sort of if you could give us a little bit of a update on the purchasing environment, both on the supply and on the demand side?

Well, as we commented, we felt that the environment continues to move slightly in a debt purchaser's favor. We continued to see good flow of portfolios. We also felt that pricing was steady to slightly softer. We continue to believe we are buying at slightly better long-term yields than we had been previously.

And, I just want to make sure that I heard this number correctly. Did you say 75% from credit card? In the -- in terms of purchasing in the quarter?

Yes. 76% was a combination of Visa, Mastercard, and private label credit card. And that's in terms of investment amount.

Right.

You -- I'm sorry.

Go ahead.

You had mentioned, I mean that's a -- it has been closer to the 90% level. And you mentioned medical purchasing in your prepared comments. Any elaboration there? And also can you elaborate on the step-up here after -- after kind of tailing down for awhile, it looks bankruptcy stepped up as well?

Yes. On the medical side I would say that we continue to make some modest progress in our program there. I think that our feeling is that pricing in the medical environment is getting a little bit more rational. We felt that pricing had been kind of crazy in the prior year, year and a half. And it seem as though it's leveling out a bit -- more meeting what we believe is realistic levels. So we're doing a little bit more there. And then on the bankruptcy side, we're simply seeing a little bit more flow of product, really especially as you see portfolios grow somewhat and filings increase somewhat from the very low level that they had been following the 2005 change in law.

And is there -- are you buying pre-reform law? Or post-reform law?

It would continue to be a combination of the two, although, as time goes on, we are buying more and more post-amendment filings.

Okay. That is encouraging. And then could you give -- you gave the collector head count, Kevin. But I think it's 978. What would that head count be if you add in the first-line supervisors, as well? The number I'm thinking of in the second quarter was 1,051.

Right. Yes. That would be 1,144.

Last question. Do you anticipate doing any outsourcing of collections, at least temporarily, while you are given the purchasing and ramp in the productivity -- the current sort of softening in productivity? Thank you.

We have done and continue to do a small amount of outsourced collection work. We continue to look at kind of experiments and projects that would allow us to work various segments of our portfolio in an outsource scenario. So that's something that we continue to evaluate on an ongoing basis. Just to provide a little bit of clarity, we are not looking at that in lieu of building our own capacity at this point. We are looking at it simply as a supplemental collection channel.

Your next question comes from the line of Edward Himmelgard. Please proceed.

Yes, just a couple of questions here. One -- could you talk a little bit about the -- you mentioned an inbound call center that you have established. How does that work?

We, previously an inbound call would be made, it would travel to one of our call centers, and be distributed automatically to a -- any given collector in any given call center. We have changed that call routing so that all inbound traffic is being received by a dedicated group of collectors, and we are trying to deal with those inbound calls in a -- kind of a succinct, uniform manner as opposed to distributing them across the floor,

Well, I guess as much as anything, how does an inbound call originate? I'm just curious, it doesn't strike me as people are typically calling you if they owe you money.

No. Only about 10% of our call volume is inbound. So, it is not a huge piece of our volume. However, when someone is calling a debt collector, generally you've got a higher propensity that that call is going to be a payer than an outbound call. And so you want to make sure you are treating it with a very high quality experience. And so we are focusing on that we are creating that high quality experience and capturing as many of the dollars as possible through those -- through those inbound calls.

They are calling in after you had made a prior contact of them?

That's right. Either through an outbound call, through a letter, or in some cases, they may be calling off of a credit line or something like that.

Okay. Thanks. Second, you've added rather although you've been adding your, to your collector base very nicely this last year. It's -- it has lagged rather significantly your increases in dollars at least spent on nonbankruptcy debt, which is up about 150% or something the last couple of years -- maybe more because I don't have the exact numbers for the latest purchases, or the split. But whereas your number of collectors aren't up near that much. Do you think you -- there is an opportunity to continue to significantly increase the collectors? I mean is that you're leaving something there on the table if you would -- if you had more mature collectors you would be able to be collecting substantially more than you are really now?

Well, I think that there is room for cash collection improvement as our productivity comes up. However, you don't want to staff up -- you don't want to double your staff if your staff is in a certain area collecting it at half the productivity. You're going to have issues down the road in that situation. So we're simply, for at least a short period of time, living with the lower productivity. But I think the other concept that you've got to focus on in the numbers that you threw out, is not just the the dollars of investment, but also the multiples that we think are associated with those. So certainly as time goes on, and as purchase multiples in different periods become evident, it's also clear that a dollar of investment in one period doesn't necessitate the same level of collectors as another. And so we're trying to staff appropriately for the amount of cash collections that we see in each tranche, and at this point we think we are staffed appropriately. If we see collection results or multiples start to expand, we may rethink our staffing models.

Okay. Thanks.

Your next question comes from Audrey Snell. Please proceed.

A few questions, gentlemen. Do you expect seasonal slowness in the fourth quarter of this year?

Well the -- the seasonality in the collection business, Audrey, I think is it -- it's just a fact. And generally, cash collections, all things being equal, tend to peak in Q1, continue to some degree in Q2, and then fall sequentially in Q3 and Q4, strictly from a seasonality standpoint.

Okay, so, we should factor that in. Also, how much of your results would you attribute to a slowing economy?

Well, we've spent a fair amount of time going through our payment data, trying to make sure that we understand that specific issue. And as we look at really a wide variety of data from all of our annual tranches of purchasing, we are -- we are not seeing significant differences in how papers liquidating for us. Payment sizes continue to look good. The amount of payment-in-fulls that we take continue to look good. Our settlement rates are steady. We get some anecdotal evidence that the consumers are certainly as difficult as ever, if not more so, to collect from. But thus far our payment data is looking pretty steady.

And yet Kevin alluded to the impairments, in part ,being caused by the backing off of some of the yields informally increasing yield pools. So I'm curious about that, whether that's the function of perhaps the age of the portfolios or something else?

Yes, I don't -- again, John Neff, I think, had actually also asked do I think it is related to short staffing or productivity issues and I kind of said well if it does it will be released. Actually, one of these pools I mentioned with a $200,000 reserve again, you had actually seen one of those earlier. We had some reserves on those some quarters ago. So,to give you particular insight to that particular deal, it has got a almost 600% yield on it. So, I mean these yields are just -- they are kind of legacy deals that had accrued these large yields any weakness in cash flow. We we'll see how it goes in Q1 Q2 with those deals, but I don't know if that answered your question. But I don't know that -- again from an accounting aspect, we are looking at these things. They are just incredible home-run deals and we just were a little bit off on the cash projections.

So the comps are getting harder on the older deals that were stars? But -- so are we to conclude, then, that really it's a blocking and tackling question of just getting some of these productivity measures improved and simultaneously expanding in additional directions?

That would be our perspective. We feel that this productivity challenge, continues to be a -- an issue for us. We think we're moving it in the right direction, based on data that we've gotten through, through September. But it certainly continues to be, I think as you put it, a blocking and tackling issue. This is all about managing and motivating your people, and increasing their ability to collect per-hour pay.

One last question, Kevin. Why increase the line of credit significantly at this point? Are you proactively anticipating a lot of charge-off paper coming into the market in the fourth quarter or perhaps the first quarter of next year, given the credit issues we have seen in the general market? Or is it the -- something to do with perhaps an acquisition? Or something else? Could you elaborate a little bit?

Yes, that's what I tried to do initially I tried to in my script. That might have been buried in there a little bit. But that was really the goal. The goal is that we need to make sure we are prepared to take advantage of anything this particular environment might yield to us. In either of those two cases. So should buying continue to be robust, I want to make sure at least from my standpoint the credit facilities there to let Craig and all the other guys that buy debt do that. Or if a attractively priced tuck-in acquisition, as Steve put it earlier, should present itself, I want to make sure there is capital there for that as well.

Part B of the same questions is will you consider using some of those proceeds for additional repurchase authorizations?

We're never going to preclude any action, Audrey, but at this point in time, as is evident by our lack of communication in that direction, that's not something that the board has authorized.

Okay. Thank you.

Your next question from the line of Sameer Gokhale. Please proceed.

Hi. Good evening. I just had a question about the, I think, that some comments about the collector turnover and I wanted to talk about it within the context of the productivity improvements. I think you all had mentioned on the call that you were trying to put in some more policies where there might be some more turnover among the seasoned collectors. I was wondering how we should think about that relative to the overall productivity improvement that you are expecting.

Certainly. It is a -- I guess not a completely evident issue, when we talk about tenured productivity. But as we have long commented, our most tenured people tend to be our most productive. We have long operated under a collection concept of account ownership in most of our collection processes. And as such, a tenured collection representative will build a book of business -- build a book of performing accounts over time. And generally, as their skill set builds, their book of business also builds and they are paid for the dollars collected. So they get paid a residual, I guess you could call it, on work they've done in the past, as well as dollars that they're bringing in, fresh dollars they are bringing in each month.

In really digging into our month productivity, in an attempt to make sure we understood exactly what's going on in the floor, we made the determination that we had some level of experienced people who had built that book of business, so to speak, but who had backed off in current production. And without changing the world in which they live from a compensation standpoint, we've simply tried to tweak the goal environment so that they need to complement that existing book of business with a constant fresh dollar collections or new money collections. And if we have very experienced people, that have this existing base of business, that for whatever reason are not up for producing new money in acceptable level, then perhaps it's time that the employment of those folks is re-examined.

So that's what we're going through now. We don't want to get into a situation where we're simply paying people for what they did yesterday. We need people driving in cash collections from portfolios today.

Okay. So it's net/net and improvement in productivity offset partly by this impact from maybe higher turnover on the seasoned collectors? Is that fair to say?

Well, we -- the changes were made during the quarter. And so I don't think you saw a great deal of impact. I would say that our comment is more related to what may happen in the future. So if you see our one-year-plus collection numbers bounce around a little bit, it may very well be that situation.

Okay. And then the other thing I just wanted to clarify is the tax rate. I was wondering -- it seems like this quarter the tax rate was at 36.7%, compared to kind of the roughly averaging of the mid-38% range. Going forward should we expect the lower tax rate on a quarterly basis or how should we think about that from a modeling standpoint?

No, no this is the Q3, the time we file of our tax returns and get our annual true-up for the quarter. So that is really what you saw there.

Okay, and then do you have the dollar amounts for the average payment size? I think you said last quarter it was a little bit under $80 or so. Is it roughly about the same number this quarter? Maybe slightly below that? This was, I think, when you were talking about the -- the collections trends on your portfolios and the health of the consumer.

Right. Just give me one second. Actually, our average, as we would call it pure payment was trending up slightly during this quarter.

Okay. That's helpful. Thank you.

Yes.

You have a question from the line of David Sharret. Please proceed.

Hi. Good afternoon. Just a couple quick follow-ups. Norfolk, I didn't catch it. I know the productivity was flat last quarter, which was among the bigger surprises. How did that perform in the third quarter?

Our productivity there, I did comment, was on a relative basis, moving up. So we feel like some of the changes that we are making are doing the right things to that Norfolk staff. The Norfolk staff also, being our most tenured, is going to be the site that I think has got the most impact to the change in the collection policies and collection practices. So it will be very interesting, I think over the next couple of quarters, to see how our Norfolk productivity tracks.

Okay. Switching to purchasing, you have commented on the overall environment. Just curious, you've got two flow deals that account for a pretty big chunk of purchasing these last few quarters. And one of them of course expires next month. As you look at the supply environment, have you already entered into any other material flow deals to kind of plug that hole? Or did you see more general spot selling on the market? Is that any cause for -- for concern in terms of the volumes we should think about modeling?

I would say given what we have seen in the supply side of the market, we are not concerned about the flow deal -- repricing this quarter.

Okay. And obviously after all these years, I'm not going to even attempt to get any ounce of guidance out of you. But is it safe to say that the fourth quarter is typically seasonally very strong in terms of a lot of banks purging accounts? And that at least directionally we ought to be looking at probably a larger number than we saw in the third quarter?

Well, you had me right up until the last part of your question. I'll just say that generically, we have typically seen good activity in Q4 in years past. And given everything that's been going on in the financial sector, I think it's reasonable to anticipate that we continue to see pretty decent volumes of portfolios for sale in the fourth quarter.

Okay, and then just lastly, I wanted to make sure I heard correctly. Productivity year-to-date it looks like at least measured in terms of collections per hour paid is off about, I guess, 3.5% versus the prior year. If you are seeing pretty constant payment metrics in terms of settlement rates and payment sizes, and the like -- is 3.5% -- would you characterize that as entirely related to the aggressive staffing at Jackson? Or is there anything else that you could point your finger at?

Well there is nothing else I could point my finger at. However, while we don't believe that the underlying economy, if that's what you are getting at, gives us big swings on the collection front, given the fact that we collect from these charge-off customers that are so -- so deeply delinquent, we do think that all things being equal, it's a little bit easier to collect in a better economic environment than a worse. And so part of it may be some economic impact there. But again, it is -- it is not evident enough for us at this point to be able to extract that from the -- at least the data that we look at.

Okay, and just lastly, I mean, given how labor intensive it is, is there any discernible change in the overall wage environment over the last couple of quarters or year?

No. At the collector level, we feel like it's pretty much steady as she goes.

Okay. Got you. Thank you.

You have a question from the line of Michael Tannenbaum. Please proceed.

Hi. This is actually David Post. Can you give us the monthly cash collection by tenure for the third quarter?

Actually, we'll give you a heads-up on that one. Because of these re-engineering efforts that we have put forth, we are no longer obviously going to be collecting the same way that we have in the past. And so that particular metric is going to go into kind of an apples and oranges situation, and so we won't publish it on a go-forward basis.

Okay, well the -- my follow-up was going to be, and I guess I'll adjust it, with the older data up until this quarter, if I look at the one-year tenured collectors, relative to the less seasoned collectors, the ratio of the one-year tenured collection to the less seasoned in the second quarter was 240%, the previous quarter was 246 and the numbers if you look back in '05 and '06 was about 180 or 190%. So relative to the less-seasoned collectors, the last two to three quarters the more seasoned collectors appear to have been doing quite a much better job. So I'm wondering why is the focus on the more seasoned collectors as opposed to the less seasoned collectors?

Again it is really a focus on new money production. And the thing that you can't separate out in those macro-statistics is how productive an individual is in the new money category, versus their existing book of business. Now, we have experienced reps who are incredible negotiators and who produce a very high amount of new money each month and they add that to their existing book of business and as a result they are very well paid.

However we have other very tenured people who have a very high base of existing money who bring in very little new money. In fact, significantly less new money than someone who may have three, four, five months of tenure. And those -- that sub-segment of the tenured reps is really what we're trying to deal with. This is by no means a -- an issue with all of our experienced people. Most of our experienced people remain our most productive. But there are pockets there that we feel grew significant enough that we needed to make some changes.

Okay. So, are you essentially with the more seasoned people going to be changing the commission system so that they -- it's kind a tailing commission? So, once you have been making the collections on this particular account for a certain period of time you get a smaller and smaller percentage and that is how they are incented to raise new money?

It is more of a new money requirement as opposed to tailing things off on the older book of business.

Okay. That'll do it. Thank you.

The other, just a quick comment, although no one asked about it. We think the other positive with this new system is that it will give a newer rep that is producing high -- high amounts of new money more reason to stick around and become tenured. And it will help us reduce some of the turnover that historically we had run into in months say, three through nine. We think it's going to be productive for us.

Who's going to, if you do let go, or when you do let go various more seasoned collectors, what will happen to those accounts that were assigned to them previously? Where do they go?

Well, they are just simply maintained. They are -- those -- for the most part, we are talking about legal money, which is no longer being handled by that rep, which the dollars will come in regardless. And then the other is what we'd call a direct-check base, and those are checks that are on file. And they simply get moved over to a customer service unit that makes sure those checks all liquidate out over time and if they don't or need to be reset, they'll get a call. So we don't lose that money at all.

But there will be a lower commission, or lower expense, associated with that account, right?

That's true. Yes.

Okay. You have a question from the line of Craig Hoagland. Please proceed.

I was just wondering on -- going back to the allowance, how mechanistic is the process of determining that amount? Is it -- is it just completely mathematically driven? Or is there judgment involved as you look back on these -- ?

So the question is how mechanical is it versus how much judgment?

Yes.

So, what happens actually is that actually a gentleman here in the room, Jim Fike, who read the opening few pages, actually will start off that process. The entire income recognition process and then he looks at it and then it gets moved over to me to do a sign-off and a review. So the answer is, it is -- it is mechanical once the cash collection projection is set.

Yes.

That -- so, but there is judgment used in terms of where do we think the cash collections are going, and what has caused them to be kind of where they're at.

okay, so that cash collection forecast is refreshed periodically?

Right.

And that is a judgment call?

Well, what will happen is we've got the original curves and we've got the curves that are adjusted over time. And what -- what we are basically doing is trying to do some curve fitting, trying to look at where those data points actually have fallen, and what their trend lines tell us. In some cases we'll go back to the acquisitions group and say hey, what are you guys seeing here? Where are these accounts on the floor? Are they pocketed somewhere they shouldn't be? So, there are situations, in fact the larger reserve we took that I talked about. That was one where we were looking at where the accounts are, who is working them, what queues they are in. We really kind of dive into them in some cases on a very, very detailed level.

So, it is not as simple as saying we thought we'd get this collection and we got less than that.

Right. Yes, no it is not. If it were that easy I could close a lot quicker -- a lot quicker.

My other question is how quick when you buy -- like the last couple of quarters you have done a lot of buying. What is the lag between when you buy things and when they are fully integrated into your collections process?

When you buy things when they're full integrated?

When they're fully integrated.

When you -- when they are -- when they're being addressed with the -- the full effort of your collections team?

Good question. And it definitely can be impacted by volumes. There will be times where literally we'll be backed up loading and converting accounts and in -- in those cases, we could have something that gets moved out from a perfect scenario by maybe 30 days or so. There will be other situations where we will plan, when we do our purchase, that the collection activity is going to be ramped somewhat and we will price accordingly. So those -- those accounts may be treated slightly differently than we would in a different scenario. But again we try to -- we try to price for situations like that.

Okay. What would the range of time, I mean is it -- does it -- is it from within a week of making a purchase to several months later or what is the range?

No, generally -- generally we have got accounts in converted, loaded, and lettered within a couple of weeks of the purchase. It -- again if we are really busy, and it's a low priority portfolio, it could get pushed out somewhat from that.

I see. Okay. Thank you very much.

You bet.

There are no further questions. I would like to turn the call over to Mr. Steve Fredrickson for closing remarks. Please proceed.

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. As Kevin and I discussed, interest expense from both our substantial debt purchasing activity and stock buy-back, a higher than normal impairment charge, and sharply increased staffing, combined to hold back earnings growth from the levels we had hoped to achieve. However the core business of Portfolio Recovery Associates remains strong and growing and the outlook for the future is as bright as ever. In the context of the long term, we continue investing in our businesses, adding expertise, capacitym and capabilities as we develop evermore effective methods 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. Good day.