PRA Group Inc (PRAA) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Portfolio Recovery Associates Incorporated earnings conference call. My name is Geri and I'll be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) I would now like to turn the call over to your host, Ms. Jodi Zila. Please proceed, ma'am.

Good afternoon. Thank you for joining Portfolio Recovery Associates' third quarter 2008 earnings call. Speaking to you today will be Steve Fredrickson, our Chairman, President, and CEO; Kevin Stevenson, our Chief Financial and Administrative Officer; and Neal Stern, our Chief Operating Officer - Owned Portfolios. We'll 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'd like everyone to please take note of our Safe Harbor language. Statements on this call which are not historical including Portfolio Recovery Associates' or management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future including with respect to the future portfolio's performance; opportunities; future space and staffing requirements; future productivity of collectors; expansion of the RDS, IGS, and MuniServices businesses; and future contributions of RDS, IGS and MuniServices 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 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 regards 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.

Thanks, Jodi, and thank you you all for attending Portfolio Recovery Associates' third quarter 2008 earnings call. On today's call, I'll begin by covering the company's results broadly. We have Neal Stern on the call today, and he will talk to you next about our operational strategies. And of course, Kevin Stevenson will discuss our financial results in detail. After our prepared comments, we'll open the call up to Q&A.

Before I get into our results specifically, I'd like to take a moment to discuss the current climate and what it means to our business. Clearly, the credit crisis and its impact on some of the world's leading financial institutions are historic events. These come hand in hand with the softening economy that suggests we're approaching a trough in the economic cycle. We've seen down cycles before. But this credit crisis is adding a level of apprehension that is already causing consumers and businesses alike to hunker down perhaps a bit more than they normally would. For PRA, such an environment brings both positives and negatives.

On the positive side, in down economies, charge-offs increase, as we've already begun to see, resulting in more opportunities for us to acquire debt at good price points. Interestingly, the credit crisis already has caused some of our competitors to pull back due to uncertainty and perhaps a concern over the availability of capital. We have not. In fact, we were able to increase our credit line by $25 million during the quarter, giving PRA additional capital to take advantage of the opportunities that may arise. This said, we remain extremely conservative in our view of value. We are underwriting cautiously, bidding strategically, and managing our dry powder so that we can be an advantageous buyer throughout this cycle.

The other side of an economic cycle as dramatic as the one we now find ourselves in is that collections become more difficult for obvious reasons. Certainly, the allowance charges we've been dealing with offer some evidence of this, in our view. We're working in unchartered waters, and as a result may continue to deal with liquidation results that are difficult to anticipate. To account for this situation, we're underwriting using what we feel are conservative assumptions that anticipate future cash collections continue to be negatively impacted by the difficult environment for some time to come. However, we also continue to believe that for a typical customer of ours, lower gasoline and food prices will be more beneficial than falling stock market values will be harmful.

Now let's jump into the quarter's results. First, we're clearly not happy with any quarter in which we produce flat earnings per share. There are two issues we see as largely responsible for this. These are number one, the $3.8 million allowance charge we took in the quarter, and number two, underperformance in our legal collections operations that required some additional investment. The positive news here is that we've addressed the legal collections difficulties, which we will discuss in detail, and expect this channel to return to plan in the next several quarters. In addition, we believe the legal collections issue has played a role in the magnitude of our allowance charges. Thus our efforts in legal collections should result in some relief on the allowance side. Importantly, beyond these two issues, PRA has a very solid business that continues to produce significant amounts of cash, expand into new business areas where we can leverage our areas of expertise, and continue to take advantage of opportunities we see in the market for defaulted consumer debt.

Now for our quarter's results. PRA acquired $52.3 million of defaulted debt during the third quarter, bringing our year-to-date total to $218.8 million. And in an interesting historical note, our life to date acquisitions have now surpassed the $1 billion mark. In August, PRA purchased the assets of Broussard Partners, a government auditing firm based in Houston, Texas. The acquisition strengthens the company's presence in the government service sector.

During the quarter we had record cash receipts of $98.9 million, up 34% from $73.7 million in the same period a year ago. In addition to cash collections of $83 million, up 27.4% from $65 million in Q3 2007, we produced fee revenue of $15.8 million in the third quarter, representing 86% year-over-year growth. This was accomplished despite the complete cessation of our Anchor business, which we have discussed previously, and the inclusion of three months of MuniServices results and two months of results of the Broussard contracts. We saw a substantial 26% increase in revenue to $68.6 million, even with the $3.8 million in allowance charges.

As I mentioned, EPS was flat with the year-ago quarter at $0.75. Net income of $11.5 million was down 2% from $11.7 million. In terms of year-over-year comparison, we did book net interest expense of $3.1 million, which was up almost threefold from $1.1 million in the 2007 quarter.

Operating expense to cash receipts jumped up to 47.7%, roughly level with the same period last year but up from 44.3% last quarter. This is largely a result of the increase in revenue from our fee for service businesses, which operate at generally lower margins than our debt buying business as well as the incremental legal expenses of $1.3 million.

We realized productivity of $134.23 per hour paid for the first nine months of 2008, which compares with $135.77 for full year 2007. This includes the reduction of eight net collectors to our company wide owned portfolio call center staff from Q2 2008.

Lastly, in terms of our balance sheet, we've continued to modestly lever the company as has been our stated goal. This leverage has allowed us to make the purchases of both companies and portfolios that have positioned PRA so well for the future. Our debt-to-equity ratio at quarter end stood at 98% while we maintained almost $100 million of availability under our lines of credit, which includes the additional $25 million added in Q3.

Now, let's discuss our operations in detail, beginning with our third quarter portfolio purchases and overall market conditions. During the quarter, we acquired 56 portfolios from 19 different sellers. The majority, about 92% 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, medical, utility, and installment loan accounts. The majority of the bankrupt accounts acquired during the quarter are included in the Visa/MasterCard and Auto categories.

Bankrupt accounts accounted for 50% of our purchase activity in terms of dollars invested. Our bankruptcy purchases in Q3 included a significant portion that were aged from their initial bankruptcy filing and as a result are already generating significant cash flows. These financial characteristics should create a relatively low ERC to purchase price ratio for these types of accounts. However, taken together with low collection costs and financial leverage, we look for attractive returns nonetheless.

The vast majority of our bankruptcy purchases took place during the final several weeks of the quarter, and so generated little cash flow. In terms of our overall portfolio strategy, our intent is to continue to opportunistically pursue charged off debt in what we view as an attractive albeit complicated market. As I mentioned, we have significant cash flow and available financing to accomplish this. We are extremely vigilant in our bidding in relation to observed competition. Our bid success rate continues in historic ranges at about 1 in 10 which tells us we have plenty of competitors.

Pricing continued to decline during the quarter. We saw generally modest levels of portfolio sales and continued to witness very little activity in the resale market. We continue to vigilantly review our use of capital, especially as we view the potential for very attractively priced deals during the latter part of 2008 or into 2009 as the economy continues to slow and charge-offs increase. While we do not wish to set the market with our bid, neither do we want to sit on the sidelines being too conservative for too long. We plan to be a patient buyer of both portfolios and companies, but moving aggressively when we feel we have the right deal before us.

Now let's move on to collections. As I mentioned earlier, on the owned portfolio collection front, Portfolio Recovery Associates recovered $83 million in the third quarter, up 27% from $65.2 million a year earlier. Offering a bit more granularity, call center collections and our internal legal collections were $46.1 million, up 23% from the same quarter last year. Call center collections without internal legal were $43.9 million, up 22% from the same quarter last year. Cash collections for our purchased bankrupt accounts were a record $15.4 million, up 143% from Q3 2007.

Our internal legal collections strategy, wherein we use our own staff attorneys or in select cases use third party attorneys working on a fixed price basis has been in place for several years now but is growing at a pace that has led us to break those collection dollars out from our call center collection figures. Our internal legal collections were $2.1 million, up 45% from the same quarter last year, and we expect that momentum to continue as we find markets in which we believe we can leverage our call centers in combination with attorneys employed by PRA to improve cash collections and reduce overall legal collection expenses.

External legal collections were 26% of total cash collections in Q3 2008 at $21.6 million. This compares with 33% in Q3 2007, which was $21.4 million, just a 1% year-over-year gain. Excluding bankruptcy collections, legal was 32% of collections in Q3 2008 versus 36% in Q3 2007. We view at least some portion of the 400 basis point decline from last year as potential loss recoveries due to less than optimal levels of cost investment on referred legal accounts. Using year ago legal to non bankruptcy collections and current quarter non bankrupt collections, the missing 400 basis points could mean almost $3 million in missed legal cash. The positive here is we think the majority of these loss collections are simply timing issues, and could well be recovered in future periods.

Overall, 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. As I said earlier, this metric finished at $134.23 for the first nine months of 2008, compared with $135.77 for full year 2007. Excluding the effect of trustee administered purchased bankrupt collections, PRA's productivity for the first nine months of 2008 was $114.37, versus $123.10 for the full year 2007. When excluding legal and trustee administered purchased bankruptcy collections, productivity for the first nine months of 2008 was $78.24 per hour paid versus $79.26 for all of 2007.

Importantly, during the third quarter, our initial build phase of the Jackson, Tennessee office was completed. That office exceeded the productivity of our Hampton office during August and approached productivity levels in Norfolk during that month. Our next challenge is to increase productivity of all centers across the board so that we see less variance from center to center.

Across our call centers in Q3, site specific productivity per hour paid was down slightly, except for the Jackson office, where we saw modest increase as we worked against the weaker economy and normal seasonal fluctuations. As a reminder, this site specific productivity figure looks only at hourly paid productivity by collection reps. It excludes not only legal and bankrupt collections, but also any non collector assigned inbound generated collections or collections coming from external activities such as collection agencies. Using this metric, we saw a consecutive quarterly productivity increase of 4% during the third quarter in Jackson. We saw consecutive declines of 10% in Hampton, 9% in Kansas and 8% in Norfolk. Kansas and Norfolk increased their hours paid during the quarter from the prior quarter, while Tennessee and Hampton worked slightly fewer hours in Q3 when compared with Q2.

On an absolute basis, Kansas remains our top call center. During the quarter, Jackson improved from about 73% of the Kansas standard in Q2 to 83%, while Norfolk and Hampton remained at about 88%. Productivity in the Philippines office was disappointing, remaining relatively unchanged from the prior quarter at about 20% of the top center standard. About 7% of all paid hours came from our Philippines office, with an ending employment there of about 69. Although the Philippines office struggled with some technical issues during the quarter, we're underwhelmed with productivity there and as a result we reduced the number of FTEs there from 74 to 69. During Q4, we'll be looking for improvement despite the seasonal challenges.

Company-wide, at quarter's end our owned portfolio collector headcount was 1,267, down just slightly from 1,275 at the end of June, but still up about 20% from the end of 2007. As it relates to staffing, please remember that a significant amount of our recent buying has been related to pools of bankrupt accounts, which require relatively low levels of staff to handle. Please also note that our bankruptcy staff is not included in the collector headcount numbers I just shared with you.

Now let's turn to PRA's fee for service businesses in the collateral locations skip tracing and government services arenas. During the quarter, these fee for service businesses saw revenue increase 86% from the same period a year earlier to $15.8 million. This growth rate was negatively impacted by our decision to discontinue the Anchor receivables management business, but was positively impacted by the addition of three months of performance of the MuniServices business and two months of contribution from the Broussard contracts.

IGS continued to perform well during Q3 as the markets it serves continue to struggle with high rates of delinquency. Because the accounting conventions involving passthrough expenses that IGS is required to use, revenue grew much more rapidly than operating income, although operating income growth year-over-year was very solid. For the year-to-date, IGS has grown revenue 50% and operating income more than 42%. RDS, positively influenced by the inclusion of the Broussard contracts, grew revenue nicely and operating income substantially on a year over year basis. For the year-to-date, RDS has grown revenue 10% and operating income by 16%.

To give you a bit of feel for the relative sizes of the two government services companies, MuniServices is roughly twice the size of RDS on both a top and bottom line basis. We've been spending a great deal of time along with the management teams from both RDS and MuniServices, working to rationalize and integrate all of our government services businesses into one cohesive unit. We feel this will not only allow us to service our clients more efficiently while offering the broadest possible array of products, but will also permit us to combine resources and product development, sales and marketing, and operations to accomplish much more and more quickly than any of the companies could do alone. We see good demand for our services as more and more municipalities struggle with their sources of revenue and look to experts for assistance. We also believe the current environment may produce more compelling company acquisition opportunities so we're keeping our eyes open.

Before I turn the call over to Kevin Stevenson, PRA's Chief Financial and Administrative officer, I would like to have Neal Stern, our Chief Operation Officer of the Owned Portfolio Business, give you a summary of our operational strategies.

Thanks, Steve. Our current operational focus is all about ROI, return on investment. In a business where perhaps 1% of the accounts might pay us in any given month and where our labor costs run about half of all operating expenses, the work we don't do each day is as important as the work we choose to do. In other words, we have to use our collectors wisely. For this reason, we've been incredibly focused on detailed portfolio segmentation, strategy design and execution by scored segment. During the quarter, we continued to refine our segmentation methodology and strengthened our ability to dynamically alter this segmentation. Much of this work, along with dramatic increase in predictive dialer seats, was realized very late in the quarter and so had negligible impact for Q3. However, I look forward to viewing what lift it may produce in Q4 and into the future.

As Steve mentioned, we determined that our legal portfolio is not liquidating as effectively as we believe it should. In addition to an organization redesign, I've implemented two broad changes to our legal strategy that are already leading to a correction of the situation.

First of all, we're now far less reliant on the judgmental selection of legal accounts by collection reps. Although this methodology supplemented with the automated selection based on account attributes worked well for the company for years, as of late it had been producing suboptimal account selection both in terms of timing and account type. We're now using automated processes to analyze accounts, balances, collection attempts, outcomes, and a variety of other factors to select the right accounts at the right time to refer to the legal channel.

Second, we have not been investing as deeply and intelligently in our referred legal accounts as we need to in order to optimize collections. Based upon our analysis of our legal accounts and their liquidation potential at the end of Q2, we made a determination that we were probably $2 million underinvested in terms of court costs advanced to our attorneys. Without these costs being advanced, our attorneys did not move the account forward in the litigation process and therefore our ultimate liquidation results suffer. During Q3 we advanced about $1.3 million of this estimated $2 million shortfall. Please note this is on top of $3.5 million in normal legal costs, all of which we immediately expense in the period incurred. During Q4, we intend to invest the remaining required amount to set our process back on track. I would expect that we would be seeing some impact in Q4 from the Q3 investment, and likewise in Q1 2009 with any Q4 2008 investment.

Finally, I want to mention that our long tenured SVP of collections, Bill O'Daire, retired during the quarter. Bill had an outstanding career at PRA, rising from the ranks to supervise all call center operations. He made the decision this year to step aside from the day-to-day work of collections and begin what I hope is a leisurely and certainly well deserved retirement. Taking Bill's slot as of Monday is Vivian Coffey, a seasoned professional with more than 20 years in collections and call center management. She most recently filled senior roles with Washington Mutual and before that Bank of America. Vivian's expertise in operations management, working to maximize call efficiency, using decisioning engines, and streamlining processes fits perfectly with the direction PRA's own portfolio call center strategy has been moving in 2008. We look forward to unleashing Vivian's talents and boundless energy on PRA's collection operations nationwide. With that, I'll turn the call over to Kevin Stevenson, PRA's Chief Financial and Administrative Officer.

Thank you, Neal. Our third quarter 2008 financial performance shows both the positive, the benefits of our diversification into the fee businesses, as well as the negative, our allowance charges. Despite otherwise solid performance, especially in the face of an economic headwind, allowance charges moved our net income down substantially from where it would have been otherwise, keeping our EPS and net income essentially flat to the comparable period.

Offering more granularity, net income in the quarter fell 2% to $11.5 million while EPS was flat at $0.75. Total revenue for the quarter was $68.6 million, which represents growth of 25.5% from the same period a year ago. Operating income was $21.4 million, up about 10% from the year earlier period, while net interest expense grew from $1.1 million one year ago to $3.1 million in Q3. This is up sequentially from $2.6 million in Q2 2008. Our average interest cost on the acquisition line during the quarter was 4.57%, down from 4.63% in Q2. At quarter end borrowing levels, each 100 basis point swing in LIBOR either costs or saves us about $181,000 monthly.

Breaking our third quarter down into three components, the majority of total revenue, or $52.7 million came from income recognized on financed receivables. This is revenue generated by our own debt portfolios. Income on financial receivables is derived from the $83 million in cash collections we recorded during the quarter, reduced by an amortization rate, including an allowance charge of 36.5%. This amortization rate compares with 37.6% in Q2 2008, 29.2% in Q3 2007, and our full year 2007 rate of 29.6%. Our stated amortization rate year-to-date in 2008 was 36.0%. During the quarter, PRA recorded allowance charges totaling $3.78 million, which compares to $3.96 million in Q2. Life to date reserves since the changed SOP 03-3 now stand at just under $15 million.

As I've done in the past I would like to take a few minutes to walk through these charges and provide a bit more granularity. First remember that effective January 1st, 2005, PRA began booking revenue under the guidance of SOP 03-3 and the only mechanism companies are afforded to ensure their deal amortizes in its expected economic life is that of allowances. Allowances are taken so that the then current yield amortizes a pool of accounts during its expected economic life.

So on to specifics. To take you back a quarter, in Q2 2008, approximately $965,000 of that quarter's $4 million in total allowances was attributable to normal yielding pools dating from 2004 and back. For Q3 2008, however, we finished with a net reversal of approximately $145,000. This was caused by the combination of stronger than expected cash flows coming from these deals, along with a fairly cautious cash collection outlook set in earlier periods. For reference, this compares to $240,000 of allowance charges in Q1 of 2008. To recap what we've discussed in previous calls, these deals currently bear very high yields in excess of 300%. When yields are this high, any negative variance in cash collections, even of a relatively modest size, can create the need for allowances.

This quarter, approximately $145,000 of the current period allowances were attributable to higher yielding bankruptcy deals. This compares favorably to allowance charges taken in Q2 2008 of $460,000, and again favorably to allowance charges taken in Q1 2008 of $995,000. While the yields on these bankrupt pools are not nearly as high as the pools referenced previously, the yields are currently in excess of their original book yields.

As I mentioned on previous calls, I would like to keep you apprised of regarding allowances on the Q1 2005 pool. We have not experienced any additional allowance charges since Q1 2008. However, the 2005 Q2 and Q3 pools did incur approximately $325,000 in allowances this quarter. This was the first time either of these pools have incurred any allowance charges. As with the Q1 pool, I will keep you apprised as time moves on.

Lastly, taking you back to Q2 2008, we incurred $2.5 million of reserves against normal yielding pools from 2006 and Q1 2007. During Q3 2008, that number increased to $3.5 million and also included the Q2 2007 pool which was not part of the $2.5 million allowance in Q2. Nearly 50% of the $3.5 million in allowance charges was related to the Q1 2007 pool.

The pricing environment in 2006 and early 2007 was challenging, leaving little room for underwriting or operational error. During Q1 and Q2, we saw some weakness in these pools and took allowance charges. As I discussed last quarter, this weakness had expanded somewhat in Q2 2008 as compared to Q1 and it has continued to expand somewhat now into Q3. Given the economy we face, we wanted to take aggressive action by taking allowance charges early. Our practice is to quickly take allowance charges on those pools where we see weakness and wait to move up projections on pool that outperform until that overperformance is very well established. As I've remarked repeatedly, I think its realistic to assume that some modest percentage of any debt buyer's amortization will always be allowance charges. SOP 03-3 simply creates an environment which supports this based on the directive to increase yields on overperforming transactions and the prohibition on lowering yields once they're increased. Further, given the relatively tougher collection environment faced in any economic downturn, we feel it's imperative to take an appropriately large allowance expense when we see weakness.

One other remark as it relates to allowances involves the legal collection process mentioned by both Steve and Neal. Let me try to tie both of their remarks together with perspective on allowances as well as the ultimate impact on revenue and expenses. As previously discussed, our legal collections have been shrinking as a proportion of total non bankruptcy collections, in our view primarily as a result of underinvestment and secondarily as a result of suboptimal selection. Although both issues have now been addressed operationally, we need to work through the effects for the next several quarters.

From a cash collections perspective, we generally see limited recoveries from the legal process during the first year we own a portfolio. This builds significantly during the second year of ownership and remains a significant contribution throughout the remaining life of a typical pool of accounts, especially accounts purchased as fresh or primary recall. Our current underperformance in the legal channel is having a negative impact, not just in terms of creating a cash collection shortfall, but is also exacerbating our issue with allowances as the 2005 through early 2007 pools enter what should be the sweet spot for legal recoveries. Thus, all things being equal, we have lower cash collections and higher amortization or impairment charges.

This is made even more dramatic with the recent catch up in investing we've been doing with legal costs. We invested an incremental $1.3 million in legal costs during Q3, which represents a substantial current period expense, while at the same time revenue has been negatively impacted as described. We do believe that the majority of these recovery can be recouped through the process that we are undertaking and the effects will be seen in future periods. Obviously, this will take some time to realize.

During the third quarter, cash collected on fully amortized pools was $4.8 million, down from $5.6 million in Q3 2007, and down sequentially from $5.4 million in Q2 2008. Through the first nine months of 2008, cash collected on fully amortized deals stands at $16.5 million. This compares to $24.8 million in the full year 2007, and $19.5 million in the first nine months of 2007. In referring to fully amortized pools, I mean purchased pools with no remaining basis on our balance sheet. Eliminating those pools from our amortization calculation gives us a core amortization rate for Q3 of 38.7%, up from 32.0% we saw in the third quarter of 2007, and down sequentially from 40.2%. We continue to believe that as a byproduct of SOP 03-3, the quantity of zero basis cash collections should gradually decline over time, due primarily to the fact under the guidance of SOP 03-3, we aggregate all similar paper types acquired in the quarter in order to calculate revenue.

During Q3, commissions and fees generated by our fee for service businesses totaled $15.8 million. This compares with $8.5 million in the year ago quarter. Our fee based businesses now account for a record 23% of the company's overall revenue. This quarter was our first without Anchor receivables management since that unit was begun in 2000.

Offsetting the decline in revenue in operating income from the loss of Anchor was the addition of MuniServices, acquired at the beginning of Q3 as well as the purchase of the assets of Broussard Partners at the beginning of August. The purchase of MuniServices and the Broussard asset purchased together increased our quarterly amortization expense related to acquired intangibles by about $354,000 to $699,000 for Q3. This number will increase to $712,000 for Q4. The third component of total revenue or cash sales of financed receivables was once again $0 for the quarter as it has been in every quarter since our IPO in late 2002.

On the operating expense side, we saw a significant increase as compared to Q2. This was primarily driven by our increased cash receipts and their associated expenses, our increased intangible amortization expenses relating to the acquisitions as just discussed, and the previously mentioned $1.3 million in incremental or catch up legal investment and a shift in our business mix in the quarter to lower our margin fee for service businesses. These increases were partially offset by a net reversal of equity based incentive accruals for the 2007 performance based long-term incentive plan. This reversal of the LTI program amounted to approximately $1.4 million in gross reversals to the income statement, which translated to approximately $850,000 after taxes or $0.06 per share EPS benefit.

Operating margins during Q3 were 31.3%, compared with 33.4% in Q2 and 35.8% in Q3 2007. This compares with full year 2007 operating margin of 36.8%. Without the margin dilution caused by the fee businesses, the operating margin would have been about 400 basis points higher at 35.3% in Q3.

Operating expense to cash receipts, as I mentioned before is perhaps a more insightful efficiency ratio, since it removes the effect of variations in purchase price amortization rates. Operating expenses as a function of cash receipts during Q3 2008 were 47.7%. This compares with 47.6% in Q3 2007, although this is a reversal from the very positive trend we saw in Q2. Again, it was driven by the same factors previously mentioned in my discussion of operating margin, including business mix, legal investment, and amortization costs.

While an interesting metric, please understand that we're not running the business solely focused on operating margins. We feel that earnings 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. Should we need to invest in people, data, services or other items that drive up our expense ratios in an effort to improve ROE, ROIC, and earnings growth over the long-term, that is what we'll do.

Our balance sheet remains strong during the quarter despite significant purchase of new finance receivable portfolios in the amount of $52.3 million as well as the purchase of MuniServices and the Broussard asset purchase totaling approximately $25.4 million and related subsequent draws on our line of credit. As of quarter end, the outstanding balance of our line of credit was $267.3 million. As previously announced, our total credit facility line amount now stands at $365 million, which represents a $25 million increase over the previous line amount. This was accomplished by adding JPMorgan Chase to our bank group. Prior to the addition of JPMorgan Chase, the group had consisted of Banc of America, Wachovia, SunTrust and RBC Centura.

Cash balances also increased substantially during the quarter to $28 million. Rounding out the balance sheet, we had $535.4 million in finance receivables; $32.6 million in property, equipment and other assets; $28.1 million in goodwill; $3.7 million in income taxes receivable; and $13.7 million in intangible assets all related to our business acquisitions. Once again, for Q4 2008, we will incur quarterly intangible amortization expenses of approximately $712,000, which takes into account the acquisition of MuniServices and the Broussard asset purchase. For 2009, that number will fall to approximately $677,000 per quarter.

We have about $267.3 million of short and long-term debt and obligations under capital leases with total liabilities both long and short-term of $368 million. On September 30th, 2008, shareholders equity totaled $273.5 million.

We are very focused on the long-term growths of PRA. While we are interested in driving all key metrics that measure our progress, we will not substitute short-term goals for long-term goals. At the same time, I also want to make it clear that a long-term view will not be used as an excuse for poor short-term execution. We are closely watching productivity and operating costs and believe we have opportunities for improvement in both during the final quarter of 2008 and extending into 2009. With that, I've completed my prepared comments. I'd like to open the call up to Q&A. Steve and Neal and I will be available to answer your questions. Operator?

(OPERATOR INSTRUCTIONS) We'll pause briefly while we compile a list. Your first question comes from the line of David Scharf with JMP. Please proceed.

Good afternoon.

Hey, David.

Steve, I wanted to start off with a familiar topic, obviously this is about five quarters in a row now of material allowance charges. I know you've discussed this in the past, but can you back up again, and walk through the process of determining at what juncture you decide to write down those collection curves? And how you come up with the magnitude? Because obviously we're looking at sequential quarters where unemployment is increasing, consumer confidence is dropping, there are a lot of moving pieces and I know in the past the topic of -- it has come up of whether or not the accounting rules actually permit you to really slash and burn those curves and take a lot of pain up front. I'm just sort of curious what factors keep changing every sequential three-month period that leads to these incremental charges? And more importantly, as you look at the macro environment today, what gives you confidence that I think you commented Q4 may in fact be a turning point where we start to see the magnitude lessen?

I'll go back to my notes. I'm not sure I remember saying that. But let me answer your question, though. So, does accounting convention allow you to slash and burn? I don't know that it does. Let me talk about how we do it. So every aggregated deal for a quarter -- and again, remember, aggregate deals several different ways. But one would be if I bought a cost recovery deal, that would be by itself and I would have no yield on it. There would be the core buying paper that's aggregated in one deal. There'd be bankruptcy buying in another and medical papers if you bought some. That's generally the four categories we'll put them into.

What we'll do is we set the curves and we talked about from time to time we do try to take a pretty hopefully pragmatic approach to how we book these deals from the start. And we'll start watching the cash collections come in and generally the first year, six months to a year, we don't allow any accretion. If cash collections came in light, we don't allow accretion. We use either the cost recovery or cash method for those deals. Your question specifically though is when it comes in weak, and so what we'll try to do is that -- like, for instance, this legal component I talked about. If indeed this investment in legal pays off down the road, I am not taking that consideration right now. So I will look at current period cash shortfalls and then take a look at how that flows into future projections. And it's literally on this aggregated deal by deal basis, there are graphs that I work with Jim Fike and we'll call in the guys from bankruptcy purchasing as well as the core buying group, and try to curve fit that -- look at the actual data points and sitting on the curve. And we'll come up with our best shot every quarter on what we think cash collections are going to come in at. So it's a very detailed, very painstaking process, but that's how we do it. So we don't say what's the worst case scenario and slash it and burn it. We don't do that.

Just to clarify, at the onset I thought you had made some comment that part of the allowance charges this quarter or really year-to-date had been the result of somebody underinvesting in legal, and I thought you commented you would see some relief here.

Well, we said that could generate some relief. That was a good clarification. But if it does, it's not in my ERC estimate. I am not counting on that. If I'm looking for an '05 to an early '07 deal, and Neal tells me, hey, I haven't got the $2 million in legal costs, that's going to generate something. I generally don't put any great weight in that.

Okay. On the fee for service side, MuniServices in particular, you still in aggregate have that 400 basis point delta and just the inherent profitability of that versus the purchasing business. Is MuniServices -- is it generally a more profitable business than Anchor, than the contingency business? I would imagine that was the least profitable, right?

No, no, that's a home run. You're absolutely right. The margins of Muni and RDS, again, you've got to figure out if you're going to take out the amortization of intangible or not, but they're fairly similar. IGS can move around a little bit, depending on how much pass-through EITF and 19 fees that are there, but you're right, Anchor was definitely the lowest one.

Okay. So as we look over the next year, is there much margin opportunity, incrementally, in RDS and Muni? I mean, obviously they're very labor intensive but I would imagine wage rates are moderating as well.

Well, I guess the opportunity is going to be moving Anchor out and moving Muni in. And then also, as the amortization of the intangibles starts to decline over time, that's going to be an opportunity. There's also some opportunity for some back office production advantages, so-to-speak, so I can hopefully take some back office support from Muni and let them focus on their business a little more.

Okay. Two more. Philippines, I mean, do you have any internal deadline in your mind as to when you make a decision whether that's working or not and you might possibly cut off that experiment or conversely expand the seats over there?

This is Neal. There's no data in my mind. We watch their results closely every month and we'll react accordingly. So the results they produced for the quarter were disappointing. We took the FTE number down some, and like Steve said, we're hoping that will improve in the fourth quarter and if it does we could go the other direction. But we watch this very, very closely every month in isolation and in comparison to our other centers.

Okay. And you know, once again, back on the allowance charges, I want to make sure I wrote it down quickly, or correctly, you were speaking quickly. The allowances now grew to include I guess the pools from the second quarter of '07, is that correct?

That's correct, yes.

And obviously last year was a tremendous ramp in purchase volumes '07 over '06. Any early warning signs that the back half of the year, those pools purchased in the second half of '07 may be seeing some write-downs as well? Obviously it's the -- ?

That's a good question. No, again if I had seen them, you would have seen them in this conference call, so that's about the straightest answer I can give you.

Along those lines, was there any material change in the pricing environment from the first half of '07 to the second half of '07? Because obviously a lot of folks are looking at just the magnitude of buying last year and wondering what another potential shoe to drop is. I think you put about $160 million to use in the second half.

No, we felt as though pricing moved along in the buyer's favor as the year 2007 went along. So Q1 was the most difficult and Q4 was probably the most advantageous pricing and the year flowed that way, David.

That's if you noticed on my script I talked about the Q1 2007 pool -- that was about 50% of that $3.5 million allowance taken on those pools.

Okay. Okay. And last question, it's interesting. You mentioned that obviously the pullback in inflation and really gas and grocery is potentially a counterveiling benefit here. Any anecdotal evidence that that started to kick in yet in terms of liquidations or is that just pure speculation at this point?

Well, I mean, given the freshness of that data combined with the I think incredible hunker down mentality that all of us have felt over the last few weeks, it's tough to sort out which one is impacting our consumers the most. So I think that's going to be more a question for Q4 performance than something we can give you a feel for right now.

Got you. Great. I'll get back in line. Thanks.

And your next question comes from the line of Mark Hughes with SunTrust. Please proceed.

Thank you very much. At what point in the last economic cycle did you see prices bottom out?

Well, I guess in looking at things from a multiple standpoint would be the purest way to answer that question. So we saw things bounce along there. I don't have the statistics in front of me, but I guess I would refer you to our multiple tables and as the multiples expanded, generally it's a pretty good view on when pricing came down the most significantly.

And I will take your advice and do that. How did that relate to the job market or GDP, any recollection on that relationship?

Again, I -- you guys have as good historical data as I. I don't have that in front of me.

Okay. Thank you.

And your next question comes from the line of John Neff with William Blair. Please proceed.

Hi. Thank you. Curious if you could just comment on your financing flexibility and ability to keep on buying, assuming prices would continue as I think you mentioned before, potentially really great opportunities in perhaps the fourth quarter of this year, maybe early next year. But you've got about $98 million in remaining borrowing capacity. That would get you less than two more quarters of -- at the kind of pace you bought at in this most recent quarter. If you could you give us a sense of what your total including cash flow, a sense of your total purchasing capacity at this point and how you think about metering that out over time and an outlook on pricing?

Sure. And just let me quickly follow up on the last question. We've got our multiple table up in front of us now and it looks like from a multiple standpoint, we are kind of peaking in 2000 through 2002. So those were years where I think that the macroeconomic environment was fairly tough and obviously pricing was pretty attractive. We had originally booked those deals at pretty conservative numbers and those 4.1 to 4.8 multiples that we have been able to achieve over time, certainly weren't apparent day one. They expanded as we experienced actual liquidation results on those things.

So, then, John, it's Kevin. Your question then is how we think about buying. I think Steve addressed it in his script in terms of our strategy, and we don't want to [be] the market but you also don't want to sit on the sidelines. So with about $100 million of line available, and free cash flow I think got a pretty healthy bit of capital to deploy. I'll let you forecast what you think free cash flow might be next year, but you can just add that to the $100 million.

Okay.

And obviously this quarter we also used the line to some degree to acquire a couple companies.

About $25 million, right.

We think we've got pretty sufficient dry powder, John, to be a pretty aggressive buyer through the next 12 to 18 months.

Okay. Good. Kevin, my normal question about total PRA collectors and supervisors, headcount at quarter end. You gave the collector number -- the number referencing last quarter would be 1,490.

Yes, 1,482.

Actually down 8.

Is the down 8, does that include the Philippines FTEs?

Well, it's a net number, so we had people moving up, people moving down. The Philippines did end up net down just about that much, but it's a complicated mix as opposed to saying it happened strictly because of the Philippines moves.

Okay. Right. But that was a factor, the Philippines?

Sure. And of course Neal mentioned in his dialogue in the way he's moving accounts around, that's where Neal felt where the number needed to be for that quarter. Remember, that's headcount -- that's headcount at the end of the quarter too. That doesn't tell you much about FTEs. You have to wait until the Q comes out in the FTE side.

Okay. I was just wondering, again, I was scrambling, could you walk through the breakdown of the impairment again? It included -- so it was net of $145,000 total reversals, but could you walk through the pre '04 -- how much was from the pre '04, how much was on bankruptcy and how much was on the more recent purchases?

I can do it pretty quick here. As you pointed out, it was $145,000 reversal for the older deals. Interestingly enough, there was $145,000 charge on the bankruptcy deals. There was about $325,000 on the Q2 and Q3 2005 tranch. And then $3.5 million on the '06 through Q2 of '07 pools. About 50% of that was on Q1 2007.

Okay. That's great. And then one last question, I can get back in the queue. Could you just elaborate a little bit more on what the legal investment, the $2 million, the advancement of $1.3 million in the quarter -- what is that an investment in? What is that going towards?

It's predominantly an investment in court costs, so the fees that you pay the courts when you file the lawsuit.

Make sense, John?

It does. Just tell me what that does for you. Is that something -- ?

Remember, there's two components to the legal side of the equation. One is the contingent fee you pay your attorneys and the cash collection consumed. That's the easy one. The other one is when you sue somebody, you've got to pay court costs and fees, and those could range from a couple hundred bucks out in California and there's some states that are $50 to $80 -- I don't know what else off the top of my head. But those that you've got to pay that to the court to get that suit in front of the court.

Once you filed the suit, if you're awarded a judgment, then you have a number of other collection options that could be used subsequent to having that judgment.

So my -- I want to make sure I understand it. So you were underinvesting in that and that was forcing attorneys to fork that over out of pocket and they don't want to do that so the cases weren't being filed?

No, so what they were doing -- we were assigning or not assigning accounts to attorneys. When the attorney gets the account, they've got different actions that they can take with it as well. They can work on it from a contingent standpoint. They can collect it themselves or they can litigate it, and we were distributing court costs allowance to them so-to-speak, maybe not as deeply as we should have.

And there's some timing in play here too. So we send the account to them and maybe they were waiting 120 days when in fact they should have gone at day 90 to court. And so really this involved tightening up our MIS, which had some looseness about it. And now that we've tightened those controls we've got much better insight into how that inventory is moving through these various steps of our legal process, and we'll be much more mindful while making sure that accounts are moving through at the right velocity.

If you recall, back in the Q1 conference call I mentioned that new MIS we got for our legal department. That was one of the first things we did when Neal came on board.

Thank you very much.

Your next question comes from the line of Rick Shane with Jefferies. Please proceed.

Hi, guys. Thanks for taking my questions this afternoon. A couple different things here. You made the point that your -- the business model and the metric that you guys are really focused on is return on invested capital and I think that's a really good way to be looking at this. And frankly it really does fall squarely with what our concern is. When you look at the ROIC, what is the hurdle rate that you're targeting?

Well, I'm not throwing out a specific ROIC hurdle rate and I also don't want to suggest that we're looking at a single statistic. But we feel that a number of those metrics taken in combination will help us over the long term make the right shareholder friendly decisions on how we're going about putting out capital.

And what I'm getting at is this. I'm wondering with the expected collections on vintages in the [2 to 2.5] range, what sort of IRR you can expect on those types of acquisitions, because, again, the operating expenses associated with the collections seem to run about 50% of cash collections. And so I'm wondering in that range what type of IRR you think the pools generate. And again, I think one of the subtleties we may be missing here is the impact of the bankruptcy portfolios on IRR.

I think there's another mix of statistics that you've got because you're looking at our operating expenses including all of our fee for service businesses, which magnifies the observed operating expenses that we're lugging around there. So our actual cost to collect on the bankruptcy side is much, much lower than 50%. And for the most part regardless of what type of accounts we're purchasing on the core side, our operating expense ratio is also much lower than that.

Okay. Well, let me delve into a couple other things. Maybe we'll talk about this offline. Cash collections were up 27% year-over-year. The revenues on those collections are up only 14% and the portfolio size is up actually about 80%. When we look at it -- and the way we track these efficiency of collection is we look at what the portfolio size is coming into the quarter and then what percentage of that carrying value you actually collect in cash during the quarter. And one observation we made is that over the last 18 months, that's basically degraded about 50%. When -- if this is really an investment for the future, when is this going to flip? When should we expect to see those cash collections start to move -- they're moving in the same direction as the portfolio growth, but not nearly at the same rate of change. When should we see that converge?

Well, I think one of the things that you've got to take into consideration is the rate of purchasing that we've done over the last 18 months, especially relative to what you've observed, what we've experienced over much of the life of the company. You can't expect -- if you take an example to the extreme, making a huge buy in one quarter and then seeing that liquidate at a historical rate the next quarter. It just doesn't happen that way. And certainly the economic environment that we're in is not helping create instant recoveries. We think in a lot of cases we're going to be taking payments over potentially a longer period of time than we did historically. Maybe where we were taking a settlement or a balance in full, we're going to have to take payments over longer period of time in this environment. So the cash flow dynamics may be changing somewhat. But I would say the rate of growth and the current economy that we're dealing with both are going to combine to affect that observed ratio and our ability to liquidate NFR or whatever number you're looking at.

Okay. And then the last question, I'm not sure I followed this entirely and I apologize if I didn't. I understood that there was a question that basically said that during the first half that the vintages -- or the purchases from early '07 were subject to more impairments than vintage or purchases from the second half of '07, and the intimation was that there was -- it turns out that there was better pricing in the back half of '07 that you were able to take advantage of. Is that correct?

That's right.

Okay. Because I went back and I looked at the transcripts as we were talking about this, and basically quarter after quarter you guys said slightly moderating, steady to slightly softening pricing throughout the year. So I'm curious, is there something that you've seen now that really differentiates that or is this -- or was there something going on back then when you were discussing pricing that is now apparent that wasn't then?

I don't know. I guess I would characterize repeated progressive commentary of steady to slightly softening pricing as meaning pricing's getting a little better, pricing's getting a little better, pricing's getting a little better. So I think our observation is fairly consistent with what we were saying at the time.

From a reserves standpoint, again, I guess the number speak for themselves. I haven't seen any yet maybe on Q3 '07 and Q4 '07. I guess time will tell how that goes.

Is that a function of you don't reprice these for 12 months after they're in the pool or could you actually start impairing things a lot faster than that if you saw slight variances?

If I saw variances -- that's a good question. So I generally -- as we're looking at level yield accounting as we call it, SOP 03-3, we generally wait to move ERCs up. You guys can see that when you look at the tables. You can tell that really in that first year or so, we assume collections ahead of projections are accelerations and not true betterments. And it isn't until, say, 18 months go by that we let that ERC start to run a little bit. But the converse is not true. So the converse is that if I've got some cash shortfalls coming in, indeed we could book impairments sooner.

Okay. Great. Guys, thank you for answering the questions and I apologize for taking so much time.

No problem.

Your next question comes from the line of Edward Hemmelgarn with Shaker Investments. Please proceed.

On your compensation, I'm assuming that compensation would have been higher by about $1.4 million if not for the reversal?

Yes.

So we should assume is that compensation is probably going up by that amount, plus more for the extra month of the Broussard.

That's correct.

In Q4.

That's correct, yes.

Okay. How would you -- I guess my question now is getting at as we're in our recessionary period here -- how would you characterize the pricing now relative to the pricing that you were seeing back in 2000, 2001, 2002? We clearly understand is that the pricing was at least based upon collections so far, the pricing environment was much tougher in '05 and '06 and the first part of '07 than it was back then but are we -- you said that you're seeing improvement but are you -- do you think that you're seeing the type of improvement that you saw back in the recession in the high write-off period that we saw back in that time period?

I tell you, when we purchased deals in that -- especially that 2000 to 2002 period, we felt as though we were getting very good value. I can tell you, however, we did not know at the time that we were buying assets that had the multiples built in them that they ended up doing. We feel as though we are underwriting extremely conservative right now and that even with extremely conservative underwriting, we are buying to significantly wider IRRs than we had been in some time. In addition, we are then booking things at we feel the highest possible confidence levels -- so that, again, we have -- the accounting guys don't like to use the conservative word. I don't know if I've got a better one, though. We just try to book these things at a very high confidence level, trying to make sure that allowances can be avoided. So we're in that environment right now and even if it persists, we believe that we've got collection curves drawn that will allow us to have appropriately profitable deals. If the economy picks up and if like the last cycle over the life of these assets we're able to expand those multiples somewhat, it should be all to the upside for us.

Would we -- back at that time, you saw in obviously in collections as a percentage of the purchase price were much higher than they've certainly been recently or that it looks like we haven't seen obviously the data for '08 yet in the third quarter in your 10-Q. But it doesn't seem up -- at least based upon the data that through the second quarter 10-Q that we've seen have a real -- much of pick up yet in terms of increased collections. Is that something we should be concerned with or are you really just seeing that major of a change in the type of payment plans that you're opting for with your collectees?

Well, we've definitely seen and we talked about it the last couple of quarters a shift from the percentage of payment in fulls and settlements we get to more what we would call a pure payment. And a typical pure payment is smaller than the typical balance in full or settlement in full. So that would suggest that liquidations are going to be more drawn out, all things being equal, and we'll just have to see how the balance in full and settlement in full activity picks up after we're able to hopefully get further through this economic trough.

The collector productivity at your older centers was really fell off in the third quarter relative to second quarter, was a bigger falloff than I think I'd ever seen before. Maybe you've seen something similar, but at least with the numbers you cited. Is that something that you think is totally related to the economy or is it something that was more at least partially unique to the problems or issues that you were having at your collector centers?

Well, actually, we've only been giving you that site specific data that I think you're referring to for a relatively short period of time. I can't recall when we first gave it to you but it hasn't been that long. Typically, we're giving you only that macro number, which includes legal activity and non-collector specific activity, which especially in down periods can somewhat offset what's happening specifically with collector owned queues. So I think our view was more that it's the normal economic downturn that we see in a typical Q3 compared to a Q2. But, again we're calling on people that see and hear and feel all the same things that are apparent to all of us every day in looking at the general economic news and there is some detrimental effect there and accounts are liquidating somewhat slower as a result.

Okay. All right. Thanks.

Edward, I'll also say that as you look at '08, remember we do book things at a high and it does -- we generally wait call it 18 months before we start moving or allowing that ERC to expand. So even if we were overcollecting on the '08 tranch, which you can probably squeeze yourself when you get the Q out one way another, it would be a while before you saw that ERC multiple expand, as opposed to the '06 tranch which has now got some vintage on it, and get a feel for that (inaudible). Make sure you're looking at stuff ex bankruptcy too, especially if you're looking at stuff historically.

Next question comes from the line of Bob Napoli from Piper Jaffray.

I was on all those calls in 2007 and clearly you guys suggested as the year went on that pricing got a little better. So for my buddy, Rick Shane, I'm sure he's listening. I don't have to read the transcripts. The Anchor business, the collectors that you shifted over -- how is that going and on a collections side, have you -- I'm sorry, I missed some of the discussion up front. Did you talk about turnover trends and your collectors, given tougher economic environment and job environment?

Well, first of all, turnover trends and the ability to attract new people is improved as the economy weakens, as you would anticipate. Our open house attendance is up substantially. Our turnover, I think we could characterize it as down substantially for the quarter. So that part of it is working well. I'll turn the other part of it over to Neal.

I would say we're pleased with the anchor collection folks. They got out of the gate strong as we expected they would and I think they've added a lot of value.

When did they essentially fully ramp up on the core business?

Well, they -- by the end of Q2, they had just about all been flipped or were the pipeline to flip over, so there was a short training period and they have been ramping up throughout the quarter. But I think you could characterize the entire Q3 as having the benefit of that redeployment.

Okay. The purchases you made in the quarter, ex the bankruptcies, was -- I mean, it was in line overall with what our expectations were, but I got to believe there's a fair amount of additional paper in the market. Are you -- have you tightened your underwriting further or raised your prices or reduced your prices I guess I should say incrementally to moderate the amount you're taking in?

Yes, we are underwriting conservatively, more conservatively than we have been and we have also raised internally our pricing hurdle requirements. So both of those are impacting what's going on. We're also -- we're not trying to solely base our projection of what we think future activity is going to be on how much we're willing to take down. But given the news that's out there, it would seem reasonable to expect that we'll be seeing increasing levels of delinquency charge-offs and portfolio sales in the next five quarters or so. And so we're trying to make sure that we are buying paper at nice prices today, if that's going to take us out of the market to some degree in the future. So we're trying to be careful.

Now, have you -- what is going on in the competitive environment? I mean, there's certainly several very stressed competitors, some that have gotten out of the business by choice, some that have gotten out of the business because they're very stressed economically. What are you seeing? Are you seeing any new competitors? How would you characterize the environment?

I don't think we're running into a lot of new competitors. We seem to be reading more about people who are either pulling back their buying or in some cases exiting altogether, and they have been some very significant players over the last three to four months announce that they are either, again, pulling back or getting out of the business all together. So volumes that are available to the rest of us have got to be affected, and we think that it's got to push down prices.

Okay. On the collection front, this is probably a much more difficult environment than the last recession, I would -- feels like it to me, anyway, for your type of a business. What did you see in October relative to September and the CNBC effect and headlines and consumer confidence declining? Have you seen -- as you moved September to October, is October more difficult than September, September more difficult than August to collect?

Well, the jury's still out on October. We, like I think every collection firm in the US at least, do a huge amount of business the last few days of the month. And so even though we're very close, I cannot give you a definitive call for how October looks. We've had days that have looked great. We've had days that look like our customers are all listening to CNBC and we'll just see how the entire month plays out.

On the MuniServices business, I'm not sure if you gave this, but what is the growth rate and what do you think the organic growth rate of the business is, what is the organic growth rate of MuniServices, what is the revenue of the two businesses you acquired and what would be a reasonable goal for organic growth for those fee businesses that you currently have?

I think that's -- it's really more than we're wanting to talk about at this point, Bob.

Okay. Can you give me any feel for historical MuniServices revenue growth or the opportunity or something like that, try to size up?

Well, we hope that we've got a nice opportunity to grow the combined government services businesses. We think that these companies, both RDS and Muni are really well-positioned, especially given the current economic environment, to come in and help municipalities that are strapped for revenue find missing revenues or find undercollected revenues, really without raising taxes. It's simply helping them close their tax gap as opposed to increasing taxes on their constituencies. And we have from a sales environment certainly been feeling that that's the case and I think it's incumbent upon our team now to close more and more of those opportunities and help improve our revenue and net income there. But we think we've got some very nice growth opportunities overall.

Okay. Thank you.

Your next question comes from the line of Bill [Karkosh] with Fox-Pitt. Please proceed.

Hi, can you talk about how generally speaking you think about the resilience of each of your collection channels through different phases of the cycle, particularly BK?

On BK, at the end of the day, it's a consumer either living with or not living with a plan, and so just because they're in BK doesn't mean they're immune to the rest of the economic pressures that are on them. We're closely watching dividend rates and trying to make sure that we understand both trends there and also what's happening to our particular consumers. And we're also watching fallout rates, so that we can properly estimate how many people are going to complete or not complete plans. Both are key variables in our bankruptcy underwriting and we have -- as I would hope you would imagine, we have been trying to be very conservative looking at both of those assumptions to make sure we're making proper decisions on pricing those bankruptcy pools.

Okay. That's helpful. And you mentioned that you were keeping your eyes open for other acquisition opportunities in the contingent fee business area. Can you describe how you think about the trade off between putting your capital to work through additional portfolio purchases in this environment versus doing a deal, and along those lines how much of your remaining capacity would you be willing to allocate towards acquisitions?

I think it all comes down to how much opportunity we think we've got in one versus the other. So to the extent the pricing on the asset purchase market turns very positive or continues to offer us very wide IRRs, that's going to be a very compelling area and tough for us to walk away from. To the extent we see particular transaction that may be in the right space or a nice tuck-in for us, an existing business at what we think is an attractive price, we'll do a company acquisition. Clearly, our pool of capital, though, is limited, and if it goes into a company purchase it won't go into an asset acquisition and vice versa. So we are trying to be very careful in that capital acquisition decision. We're trying to involve all of our management team in making those decisions so that we're really understanding where long-term we're going to get the most bang for the buck for the investment.

And along that thought process, you wouldn't necessarily be reluctant to, if you got to the point where you used up the line, making investments in either area that you thought were attractive, if you thought it was important to seek a credit line increase from -- even from where you are right now, you'd be open to that as well?

That's right.

Okay. And the relationship between cash collections to receivables balances, would you agree that there's an apples and oranges issue to the extent you're comparing companies and using this metric given the different expectations of future cash collections basically would distort the result?

Absolutely. It would have effect -- not only between how you liquidate your paper but what the portfolio is composed of, et cetera.

Okay. And then finally, on the line increase and the addition of JPMorgan to your bank group, how much higher is the cost of the incremental funds that they're making available to you?

It's the same, LIBOR plus [140].

Okay. Thank you.

Your next question comes from the line of Hugh Miller with Sidoti. Please proceed.

A quick question about the predictive dialer and an update there, how many reps were using it in the third quarter and the productivity enhancements that you were able to achieve?

It's up significantly. We're looking at the portfolio and segmenting it and trying to figure out who responds to a call from an automated dialer versus who responds to calls from a manual attempt, and our conclusion is that we had some room to increase dialer capacity. And so we've ramped it in accordance with the opportunity that we saw.

Do you have a number as to how many reps were using the system in the third quarter, and I believe you mentioned before that that in prior quarters in the first half of the year you were able to work somewhere in the high teens, 17% to 18% more accounts per hour with that than what you were able to see than in the third quarter.

At the end of it, about half of our time now is spent on the dialer. We've got 1,300 collectors and there's 400 seats, but because they're more productive when they're in those seats by some factor, it okay equates to about half of our given day is on the dialer.

Any numbers there as to the increase in accounts worked per hour?

Actually, this is Kevin. I didn't compute that this time. We had said earlier [70] more discrete accounts were worked. I didn't do that for this call.

The number I think we gave last time was 17% or 18%. That numbers, we were comparing wherever we ended Q2 against where we were in December -- so that number now ending Q3 was 27% higher than it was in December.

Okay. Great. And can you just give the figure again for the collector headcount as of the end of the quarter?

Sure, again, collector head count -- this is actual headcount, not FTEs -- is 1,267. That's the collectors. With their direct supervisors, it's about 1,482.

Okay. And do you give out the FTE full number?

It will be on the Q as soon as we put that out, which shouldn't be very long.

Thank you.

Can I clarify one thing? FTE, if there is a part-time person in there, they would be a 0.5. The FTE we put out in the Q are based on real hours work. I want to clear that up.

At this time there are no additional questions. This concludes the Q&A portion of your conference. I would now like to turn the call over to Mr. Steve Fredrickson for closing remarks. Sir, you may 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 some key points about our third quarter. As I mentioned at the outset of the call we're moving into an economic environment that holds both challenges and opportunities for PRA. As we work through the legal collections issue we've discussed at length today, it's important to understand that PRA enters this period with a very solid business that continues to produce cash and take advantage of opportunities we see in the market for portfolio and company acquisitions. Thanks again for your time and attention. We look forward to speaking with you again next quarter.

This now concludes the presentation. You may now disconnect, and have a great day.