PRA Group Inc (PRAA) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to the second quarter 2009 Portfolio Recovery Associates Incorporated earnings conference call. I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). I will now like to turn the call over to Mr. Jim Fike, Vice President of Finance. Please proceed.

Good afternoon, and thank you for joining Portfolio Recovery Associates second quarter 2009 earnings call. Speaking to you today will be Steve Fredrickson, our Chairman and CEO, and Kevin Stevenson, our Chief Financial and Administrative Officer, and Neal Stern, our Chief Operating Officer of Owned Portfolios. We 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, our 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 contribution of the 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 and 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 From 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 and obligation or undertaking to release publicly, any updates or revisions to any forward-looking statements contained herein, to reflect any change in the Company's expectations with regard thereto, or to reflect any change in events, conditions, or circumstances, on which any such forward-looking statements are based, in whole or in part.

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

Thanks, Jim. Thank you all for attending Portfolio Recovery Associates second quarter 2009 earnings call. On today's call, I will begin by covering the Company's results broadly. Neal Stern will then talk to you in more detail about our operational strategies, and finally, Kevin Stevenson will discuss our financial results in detail. After our prepared comments, we will open up the call to Q&A.

PRA concluded the first half of 2009 with another solid quarter, despite an economic environment that remains difficult. Our collector force deserves a great deal of credit for our second quarter performance. With unemployment high and the availability of consumer credit still limited, our collectors needed to work out more payment arrangements over time with customers than usual. This is a condition that we anticipate will continue for some time.

Still through a combination of cutting edge portfolio segmentation and decision science applications, as well as a well trained, managed, and motivated staff, we have been able to focus our work effort on the right accounts at the right time. The result, cash collections were a record $90.5 million in the second quarter, up 6% from last year, and ahead of our internal forecast.s Productivity advanced nicely. Once again, we saw absolute gains in Call Center and Internal Legal Collections, as well as substantially increased collections from purchased bankrupt accounts.

We incurred a significant allowance charge of $3.9 million in the second quarter, which reduced EPS by $0.15 a share. However, this allowance was down substantially from the $6.2 million taken in the prior quarter, and represents the second consecutive quarterly decline in allowance charges, since Q4 2008's historic high of approximately $9 million. Kevin will provide more detail on allowance charges during his prepared comments.

Looking at the quarter's results overall, PRA acquired $84.7 million of defaulted debt during the second quarter. We had record cash receipts of $107.5 million in the quarter, up 12.5% from $96.5 million in the same period a year ago. In addition to cash collections of $90.5 million, up 6% from $85 million in the year ago period, we produced fee revenue of $17.1 million in the second quarter, representing 61.5% year-over-year growth.

The year ago results included the operations of our now concluded Anchor Receivables Management business, which was being wound down in the year ago quarter. But did not include either MuniServices or the Broussard Partners contracts. PRA saw a 12% increase in revenue to $71.1 million in Q2, despite the $3.9 million allowance charge.

EPS was up slightly from the year ago quarter, coming in at $0.76 versus $0.75 in the second quarter of 2008. Net income of $11.7 million was up 3% from $11.4 million. In terms of year-over-year comparisons , we booked net interest expense of $1.95 million in the second quarter, which was down about 26% from $2.65 million in the year ago quarter, due to lower interest rates.

Operating expense to cash receipts continued the sequential trend downward from Q4 2008. In the second quarter of 2009, the ratio stood at 46.4%, compared with 47.6% in the fourth quarter of 2008, and 46.5% in Q1 2009. This demonstrates our continued tight control of operating expenses despite the difficult economic conditions. The ratio was, however higher in Q2, than the 44.3% recorded in the same period last year.

PRA realized productivity of $145.20 per hour paid for the first six months of 2009, which compares with $131.29 for full year 2008. This includes an increase of 31 net collectors to our company-wide owned portfolio call center staff from Q1 2009. Lastly, in terms of our balance sheet, we slightly increased absolute debt outstanding to $289.8 million, continuing the modest financial leverage we have employed over the last several years. Our debt to equity ratio at quarter end stood at 94%, down from 95% at year end 2008, while we maintained $75 million of availability under our lines of credit.

Now let's review our operations in detail, beginning with our second quarter portfolio purchases and overall market conditions. During the quarter, we acquired 119 portfolios from 15 different sellers. The majority about 94% of our second quarter purchased volume in terms of dollars invested, was from the major credit card asset class. The remainder came from pools of utility, medical, and installment loan accounts.

The majority of the bankrupt accounts acquired during the quarter are included in the major credit card category. Bankrupt accounts accounted for about 58% of our purchase activity, in terms of dollars invested. In Q2, our bankruptcy purchases were a mix of aged and fresher bankruptcy filings. However, we bought more fresh than aged accounts. Remember, since we buy the similar IRRs, regardless of the age of the account, we tend to see slightly higher collections to purchase price multiples from fresh filings, with more delayed cash flows, and slightly lower multiples with more mature, already cash flowing filings.

Portfolio pricing was steady during the quarter. We saw somewhat elevated levels of portfolio sales, but continued to witness very little activity in the resale market. We are seeing what we believe to be signs of increased and even new competition in the market. Despite this, we are also occasionally seeing deals that are failing to trade, because sellers and difference points are not being met. As well as what would look to be continued implosions from debt buyers, that had been overly aggressive in buying over the last several years.

The very difficult economic environment, combined with numerous threatened or realized Federal, state and local Government moves, to make the collections arena even more restrictive, are causing us to be very cautious in our pricing decisions. In fact, this regulatory activity, while still uncertain in its outcome, is worth spending a few moments on. Governments at all levels are currently focused on the business of simultaneously saving the consumer, and attempting to restore the consumer credit market.

In our view they are frequently taking a wrong-headed view of accomplishing these goals. A few states are contemplating or adopting shortened statues of limitations. This is generally speaking, the period of time after which an account becomes delinquent, that can be enforced with a lawsuit. If this occurs, collectors, such as PRA, that prefer to work out payments with consumers directly, as opposed to using lawsuits, will be forced to take consumers to court much more frequently, and much sooner in the collection process than we would otherwise.

In other cases, regulations are being considered or put in place, that would make it more difficult for a debt collector like PRA to actually talk to a consumer. Once again, instead of being able to work out a payment arrangement satisfactory to both PRA and our customers, if we cannot talk to consumers, we are much more likely to take them to court. To reiterate, in order to account for the risk of these regulatory activities, as well as the weak economic environment, we have lowered our collection expectations for new purchases, and continue to book new purchases with cash collection expectations, that are further discounted from our already discounted buying models.

In addition, we continue to build our internal legal capacity, so if necessary we can quickly and cost effectively move accounts into the legal channel, for further collection activity. Over the longer run, we feel confident these moves will help us liquidate purchased accounts at relatively higher levels, assisting in curtailing the larger allowance charges we have taken recently.

Moving on to collections, as I mentioned earlier, Portfolio Recovery Associates recovered $90.5 million in the second quarter from owned portfolios, up 6% from $85 million a year earlier. Although we had year-over-year cash collections growth of more than 10% in both April and June, May was essentially flat to the prior year, due to a very difficult prior year comparison. This is because May 2008 saw a large influx of Government economic stimulus payments.

Offering a bit more detail on our collections performance, Call Center and other collections were $50.1 million, up 7% from the same quarter last year. Cash collections from our purchased bankrupt accounts were a record $19.6 million, up 43% from Q2 2008. As we have discussed for the past several quarters, collections from our Internal Legal Collection strategy, in which we use our own staff attorneys, or in select cases use third party attorneys working on a fixed price basis, were once again a record, at $4.3 million in Q2 2009, up 119% from the same quarter last year. We expect continued strong growth from this particular channel for the foreseeable future.

External legal collections were 18% of total cash collections in Q2 2009 at $16.5 million. This compares with 26% in Q2 2008, which was $22.5 million, representing a 26% year-over-year decline. Excluding bankruptcy collections, legal was 23% of collections in Q2 2009, versus 32% in Q2 2008.

We track owned portfolio 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 $145.20 for the first six months of 2009, compared with $131.29 for full year 2008. Excluding the effect of trustee administered purchased bankruptcy collections, PRA's productivity for Q2 2009 was $116.94, versus $109.82 for the full year 2008. When excluding legal and trustee administered purchased bankruptcy collections, productivity for Q2 2009 was $88.65 per hour paid, versus $75.47 for all of 2008.

During Q2, we saw improved site specific productivity per hour paid of about 3% year-over-year, even as we worked against the recession. 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.

Productivity was up 12% year-over-year, but down 2% sequentially at Jackson. It was flat both sequentially in year-over-year in Hampton. It was up 6% year-over-year, but down 9% sequentially in Kansas. It was down 9% year-over-year and flat sequentially in Norfolk, and was up 500% year-over-year, and up 2% sequentially in Birmingham.

The Philippines office was up 66% year-over-year, but flat sequentially. Tennessee was able to increase its productivity substantially, even as it increased hours paid by 19% year-over-year. Kansas to a lesser extent also experienced higher hours paid, with a 12% growth over the prior year. On an absolute basis, Kansas remains our top call center. During the quarter, on a relative basis, Jackson improved to about 76% of the Kansas standard. Hampton improved to 84%. And Birmingham improved to 49%. Norfolk stayed flat at about 82.5%.

Productivity in the Philippines office remains underwhelming, but did improve further to 35% of the Kansas standard, from about 32% in the prior quarter. We continue to experiment with strategies in the Philippines Call Center, in an effort to make it work from a cost benefit perspective. Recently we began focusing the center on accounts that are more difficult to collect. Since the Philippine collectors are cheaper to employ, we end up risking less to work these tougher accounts.

Earlier we had given the Philippine collectors the same mix of accounts as our US Call Centers, in order to generate apples and apples performance comparison. Because of this change, the Philippine center 35% performance measurement may be understating that center's relative capabilities.

Company-wide at quarter end, our own portfolio collector head count was 1,281, up about 31 from the end of March. As it relates to staffing, please remember 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 head count numbers I just shared with you.

Now let's turn to PRA's fee-for-service businesses, in the collateral location skip tracing and government services arenas. Our fee-for-service businesses saw revenue increase a strong 61.5% from the same period a year earlier to $17.1 million. This growth rate when compared to the same period one year ago, was negatively impacted by our decision to discontinue the Anchor Receivables Management businesses, but was positively impacted by the addition of the MuniServices business, and the contributions from the Broussard contracts.

The Government services business performance was particularly strong, due to high demand from municipalities, given the fiscal pressures many of them face these days. We continue to see this space as a bright spot for growth in the coming years. The revenue of our skip tracing unit fell somewhat from the same period a year ago, as it dealt with volume and business mix changes from clients. Our increased capacity in Las Vegas, together with several newly signed clients, and the development of new product offerings, should work to restore growth to the IGS business over the short run.

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 Operations Officer of the owned portfolio business, give you a summary of our operational strategies.

Thanks, Steve. In the second quarter, our operational results were again bolstered by some of the themes I have spoken about on the last several calls. This is despite what continues to be a very difficult collections environment, a condition that we feel is going to persist for some time to come. One of these has been an increase in our dialing capacity. Again, in Q2 our year-over-year results demonstrated a 36% increase in agent calling. The extra capacity not only ensures appropriate attention for new purchases, but it also allows us to leverage our scoring process, to maximize portfolio wide collections.

As I have mentioned, that scoring process begins with our acquisition score, and evaluates the impact of all of our collection actions. Because of PRA's longstanding policy to not resell accounts, we not only have an extraordinary data set, but we also have a unique opportunity, to demonstrate patience with our customers, and work with them as their financial circumstances evolve.

Looking at cash collections on portfolios that we have owned for more than five years, without legal or bankruptcy collections, highlights our increased dialing capacity, our scoring capability, and our unique understanding of how these consumers perform over longer time horizons. In Q2, we collected over $4.4 million on portfolios owned more than five years, or 109% more than we collected in that category during Q2 of 2008.

This statistic also speaks to an ongoing trend of consumers choosing to make a series of monthly payments, as opposed to one-time payments to settle, or pay their accounts in full. In Q2 the total number of accounts making a monthly payment grew to 631,000, which was 29% higher than for the same quarter 2008. As I have stated in the past, I believe that building this month to base of payors strengthens our future, because we stand to collect a higher percentage of these balances with monthly payment plans, than if we collected via one-time settlement.

Provided our collection process remains efficient and effective, we will be able to deliver bottom line improvements over time. Through June of this year, almost 50% of these monthly payments are coming from customers who have paid us four months consecutively, with many more having missed just one payment over that time.

Closing the productivity gap between our collection sites remains the biggest single opportunity for us to improve efficiency. Again, this quarter our top Call Center in Kansas finished well ahead of our other centers. Had all of our other centers delivered that same cash collections per paid hour, we would have realized another $8.8 million in collections for the quarter. In June, the value of that productivity gap was $2.3 million, the smallest that figure has been in a single month since September 2008. So we are encouraged that we are making progress on this front, and optimistic we can build off this trend.

Finally, as Steve said, our legal collections were again down over the prior year, although slightly ahead of the prior quarter, reflecting a slower than desired recovery from our previously discussed challenges in this channel. The exciting news on the legal front was that our internal legal collection process continued to gain momentum, with cash collections finishing 20% higher than in the first quarter of the year. This positions us to realize incremental savings for the year, compared with the greater expense of having external law firms make those same collections.

With that, I will turn the call over to Kevin Stevenson, PRA's Chief Financial and Administrative Officer. Kevin.

Thank you, Neal. Once again, a big piece of our quarter story in the financial side involves allowance charges. Unfortunately I am still talking about them. Fortunately however, they are much smaller than recent periods, falling to $3.9 million in Q2. I see that as a positive trend. Overall in the second quarter, net income increased 3% to $11.7 million, while EPS came in at $0.76, compared with $0.75 in the year ago period.

Allowances were down 37% from their level in Q1 2009, and those were down 30% from Q4 2008. Despite this improvement, we are still extremely focused on addressing these continued allowance charges, from multiple standpoints, operational, statistical, and accounting.

Total revenue for the quarter was $71.1 million, which represents growth of 11.8% from the same period a year ago. Operating income was $21.2 million, flat to the year earlier period. While net interest expense decreased from $2.6 million 1 year ago, to $1.9 million in Q2. Return on equity improved slightly from Q1, but in our opinion remained unacceptably low at 15% for the second quarter, due in large part to our continued allowance charges. We remained focus on increasing that number back towards our historical 20%.

Our weighted average interest cost on the acquisition line during the quarter was 2.70%, down from 2.78% in Q1. At quarter end borrowing levels, each 100 basis point swing in LIBOR, either costs or saves us about $200,000 monthly. Breaking our second quarter revenue down into three components, the majority of total revenue, or $54.0 million, came from income recognized on Financed Receivables. There is revenue generated by our owned debt portfolios.

Income on the Financed Receivables is derived from the $90.5 million in the cash collections we recorded during the quarter, reduced by an amortization rate, including the $3.9 million allowance charge of 40.3%. This amortization rate compares with 42.9% in Q1 2009, 37.6% in Q2 2008, and our full year 2008 rate of 36.8%.

As I mentioned, during the quarter PRA recorded allowance charges totaling $3.9 million, which compares to $6.2 million in Q1 2009, and $8.9 million in Q4 2008. Life to date reserves since the change to SOP-03-3 now stand at $33.8 million.

I would like to take a slightly different approach to discussing the allowance charges than I have for the last few quarters. Partly at the urging of some investors. Beginning in Q1 2009, we added a new disclosure in our SEC reports, that displays allowance charges by fiscal quarter, broken down by year of purchase. We have included that chart in our press release for your review in advance of this call.

I will talk about a few of the larger charges but not step through each and every pool as I have done in the past. Before I begin, however, I want to remind everyone that we account for revenue from our overall portfolio on a pool by pool basis. When pools underperform, as they are more likely to do in a recessionary environment, we do not lower their yields. Rather, we move relatively swiftly to take allowance charges, which show up right away as a revenue reduction on our income statement.

In contrast, when a pool overperforms, that overperformance is not reflected right away. Only after there is sustained evidence of overperformance will we make an upward adjustment, and then we will raise the yield on that pool going forward. This adjustment of an increased yield will not show up on our income statement right away, but will only show up in the future, and gradually over the pool's remaining life. The size of allowance charges is driven to a great extent by variability across our pools. As we have said before, given what we believe to be the correct and conservative application of our accounting policies, some allowance charges are always going to be with us.

As I promised, I will not step you through each quarter's aggregated deals today. Instead, I will just briefly mention the larger reserved portfolios. 2003 and 2004 contributed negative reversals. While 2005 through 2007 contributed a net charge of $1.9 million, spread fairly evenly across those years. When you review the chart in our press release, you will clearly see that approximately 60% of this quarter's net allowance charge came from the 2008 traunch of accounts.

As we look more closely at the $2.4 million in allowance charges from the 2008 traunch, you will find that the 2008 Q1 and 2008 Q2 non-bankrupt portfolios, contributed approximately 90% of the $2.4 million reported. That amount in terms of dollars was also nearly identical to the allowance charge in Q1 2009 for these same deals. We continue to be very focused on these two traunches of paper, since they represent 60% of our total quarterly allowance charges, and we will continue to keep you apprised of their status.

To provide a little added color, the majority of the purchases in these traunches, were the result of legacy forward flow agreements, that were priced well prior to the purchase period. And in retrospect, provided little cushion for any performance degradation. Our bankruptcy portfolios are performing nicely, and as a group, ended up with a net a allowance charge for the quarter of $10,000. We incurred a $15,000 allowance charge on one 2004 traunch, and a $5,000 net reversal on two 2005 traunches. We are also watching our bankrupt portfolio closely, and are evaluating book yields and deal multiples. We will keep you apprised on that front as well, as the 2008 Q1 and Q2 non-bankrupt portfolios.

Moving on, approximately $654,000 of operating expense in Q2 was due to non-cash equity compensation, that was booked during the quarter relating to our 2009 performance based restricted share plan, as well as other equity based awards. During the second quarter, cash collected on fully amortized pools was $7.1 million, compared to $5.9 million in Q1 2009, $5.1 million in Q4 2008, and $5.4 million in Q2 2008.

In referring to fully amortized pools, I mean purchased pools with no remaining balance on our balance sheet. This was the largest such realization of cash since Q1 2007. And is attributed to the improvement in our scoring and segmentation strategies, which are permitting us to more efficiently and effectively uncover individual accounts, that are more prone to make payment from our portfolio. Eliminating the fully amortized pools from our amortization calculation, gives us a core amortization rate for Q2 of 43.7%, up from the 40.2% we saw in the second quarter of 2008, but down sequentially from 46.0% in Q2 2009.

Q2 proved to be strong for our Government Services Group. While at IGS, lower revenue drove reduced operating income for the year-over-year and sequential comparisons. Lower commissions and fees generated by our fee-for-service businesses were $17.1 million. This compares with $10.6 million in the year ago quarter. Our fee based businesses accounted for 24% of the Company's overall revenue.

Our fee revenue was impacted this quarter when compared to the same period last year, with the closing of Anchor Receivables Management in Q2 2008, as well as the acquisition of MuniServices, and the purchase of the assets of Broussard Partners, both during Q3 2008. As a reminder, our quarterly amortization expense related to acquired intangibles from our various business acquisitions is about $668,000 per quarter. The third component of total revenue are cash sales of financial receivables was once again zero for the quarter, as it has been in every quarter since it came public in late 2002.

Operating expenses grew 17.2% when compared to Q2 2008. This was primarily driven by compensation in placed services growing $5.5 million, depreciation and amortization growing over $800,000, and communication expense increasing by $1.8 million, primarily as strategically targeted letter campaigns increased. The increase in compensation expenses during Q2 relates primarily to the addition of the MuniServices and Broussard Partners employees, as well as well as growth in our Call Center collectors.

Operating margins during Q2 were 29.9%, compared with 27.1% in Q1 2009, and 33.4% in Q2 2008. Without the margin dilution caused by the fee businesses, the operating margin would have been about 212 basis points higher at 32.0% in Q2. Without the amortization of intangibles, operating margin would have been about 30.8% in Q2 2009, versus 34.0% in Q2 2008.

Operating expense to cash receipts as I mentioned before, is perhaps a more insightful efficiency ratio, since it removes the effect of variations in purchased price amortization rates, as well as allowance charges. Operating expenses is a function of cash receipts during Q2 2009 were 46.4%. This is up from 44.3% in Q2 2008, and is down slightly from 46.5% in Q1 2009.

Our balance sheet remains strong during the quarter, despite substantial purchases of new financed receivable portfolios in the amount of $84.7 million. As of quarter end, the outstanding balance in our line of credit was $289.8 million, up $23.5 million during the quarter. Our total credit facility is $365 million, leaving us with $75 million of availability. Cash balances fell slightly sequentially during the quarter to $15.7 million. While our leverage has increased dramatically from zero 2 years ago, on a relative basis it remains quite low at 94% of equity. We are producing strong internal cash flow, and are well capitalized.

I would like to take a moment and expand on our financing situation. As I just mentioned, we currently have a very attractive senior debt facility, which has $75 million of availability left. Between this line and our internally generated free cash flow, we believe we have more than sufficient liquidity to take advantage of current investment opportunities. We are, however, very cognizant of the current market fundamentals in the debt purchase markets, which because of increasing sales supply, and tight capital availability, could cause currently unforeseen buying opportunities to arise.

In order to preserve all of our options in light of these factors, we have obtained Board approval for, and we intend to file a Shelf Registration shortly. Now whether or not we ever issue shares from that Shelf in an offering is yet unknown. However, we will seek to do so, only as a means to capitalize on a attractive investment opportunities.

We continue to operate all aspects of the business with a long-term focus. We feel this is particularly important, as we wrestle with these very difficult economic conditions, and their impact on our businesses. We view our owned portfolios as a long-term asset. And we never make collection strategy decisions, that favor short-term over longer term results. Likewise, we continue to invest in all of our businesses, so that we can compete from a position of strength, regardless of economic conditions.

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

(Operator Instructions). Questions will be taken in the order received. Please standby for your first question. Your first question comes from the line of Bob Napoli with Piper Jaffray. Please proceed.

Good afternoon. A question on the 2008 impairments. Just trying to understand. Your impairments have obviously decreased two quarters in a row. But I am a little bit surprised by the impairments in 2008 last quarter and this quarter. As we view the pricing continuously better since the beginning of 2007. And I know some of the accounting nuances. I was just hoping you would give a little more color, as we try to put a bracket around where impairment risk could remain?

Well, again, so one of the things I put in my script kind of helped to clear that up was the concept, Bob, that while spot pricing and such was improving in 2008, the deals in Q1-Q2 that we specifically just talked about, were related to a forward flow arrangement that had been priced earlier than we bought them in Q1 and Q2. So I think that is a significant part of what is driving this Q1 and Q2 issue.

And how much do you have in 2008 from the forward flow?

I don't have that in front of me right now. I think those are available somewhere. Maybe we can dig that up for you Bob, before the end of the call.

Okay. And I am just noticing we appreciate the additional disclosure on the impairments. Impairments from earlier years prior to 2005 have kind of been reversing. What is driving that, and is that something to look for over the next couple of years, and the impairments you have taken in '05, '06 'and 07 pools?

Well, again, is with driving that I can answer. Certainly we have Neal here. And he did a fantastic job as I mentioned in the script working through different scoring techniques, and ways to identify those pairs and those pools. Coupled though with expectations we set up some time ago, that might be on the conservative side.

So we just are, again experiencing the culmination of those two factors. Looking at the existing old deals, I am just trying to think how much is left allowance in the books, again, I don't think I have that right handy, I think to the extent that Neal can continue to penetrate these portfolios, and that there is some possibility that we can see more reversals down the road.

Thanks. And any just last question on the fee based business, and the government debt collections business in particular, do you have year-over-year revenue growth, it is just becoming a year old now, but what kind of acceleration and opportunities are you seeing in that business?

Well, we are selling to governments. And so our sales cycle is fairly prolonged. That business doesn't turn on a dime. However, our opportunities to get in front of clients, I would say are much enhanced over the last 3 to 6 months. So we believe that it is a build that we can continue to push on. Again, I would say it is more subtle and steady, than dramatic. But it is moving in the right direction, we feel.

All right. Thank you.

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

Good afternoon. I just had a question on the fee based businesses. I know the fourth quarter tends to be pretty strong, especially in the government services businesses. And then maybe I was kind of surprised in the first quarter of this year, with the sequential movement there. I was wondering is there any seasonality that we should be anticipating there, going from Q2 to Q3 within those businesses?

No. I don't think there is any particular seasonality that we see from Q2 to Q3 in really either of those businesses.

But there would be going from Q3 to Q4?

Yes. Q4 tends to be in the government services space for us, especially as we process business licenses, and things like that, a little heavier, a little more robust results in Q4.

Okay. And you also mentioned, I guess with IGS in the second quarter that there were some issues that caused revenue to be a little bit lighter than you would have possibly expected? Can you just talk about what your expectations on a go-forward basis would be with that business?

Yes. We didn't lose any clients. We are just dealing with clients tweaking some of their operating strategies. We did comment that we have signed some new clients. And so we would hope to get that business back on a growth trajectory very quickly.

Okay. Fair enough. And obviously you have been very aggressive within the bankruptcy purchasing market. I was wondering if you could talk about the competition that you are seeing there? Obviously a lot of people dealing with capital constraints. I know you only had a limited number of people that you were competing with in the past for purchasing there. But can you talk about the competitive landscape there from the purchasing side, and whether or not you are kind of seeing yields on the bankruptcy paper, net of collection costs that are actually exceeding traditional paper?

We are continuing to run into competition in both parts of our business, where we are certainly not the only guys out there, in either bankruptcy or core purchasing. As you said, just historically there have been fewer numbers of competitors on the bankrupt side. However, they have tended to be larger, stronger competitors. And so I would continue to characterize the bankruptcy market, as one that has plenty of competition.

Okay. And is there any particular reason why you favored the purchases in that market relative to traditional paper more recently?

No. It is really just how the opportunities came down, and how we ended up doing on kind of a bid by bid basis. It is very much where the dust settled, as opposed to a specific strategic drive in one direction or the other.

Okay. And just one last question with regard to the impairments. Obviously we have continued to see a trend here for two quarters, and quarter-to-quarter is always kind of a wild card with impairments and trying to forecast them. But does it seem as though with what you are seeing in the markets now, that these levels in the second quarter seem somewhat of a reasonable ceiling, barring any type of material problem with the economy on a go-forward basis?

Well again, the very nature of an impairment is something that is impossible for us to forecast. So you asked a tough question. We have been working very hard as we have seen underperformance to appropriately adjust our go-forward expectations. And I would just say borrowing any shift in what we are seeing in certain portfolios, both from a cash collection and a projection standpoint, I think we would feel fairly good about where we are at, with the allowances that have been set up.

However, we have got a quarter's worth of performance that is unknown at this point. And if collections fall off, even on individual portfolios, forget the aggregate. The aggregate could be great. We could have individual portfolios that cool off, and we have expectations that are too high. We are going continue to see allowance charges. So I guess it is a long way of saying it is an unknown, and it is just not something that we feel real comfortable commenting on.

Fair enough. Thank you very much.

You bet.

Your next question comes from the line of John Neff with William and Blair. Please proceed.

Hey, guys. A few questions for you. I guess I was surprised at the blended rate lowest since 3Q '07, just simply in light of the 58% of buying that was bankruptcy, which I guess I associate as having a higher blended rate than the traditional portfolios. Any insights there?

Well, as you know, and hopefully everybody knows, we hate talking about that blended rate. I think it can just be wildly deceiving. And that is one of the reasons why we don't talk about it, and haven't really for years. A single portfolio or two of extraordinarily low priced paper could throw off that entire statistic. So, John, it is largely a nonsense statistic. I don't know why anybody talks about it. And I certainly wouldn't urge any investor to pay much attention to it.

No. Understood. I was just curious if there was anything particularly about the BK pricing, or anything else. But understood. Could you give maybe a comment, actually if you don't have the first half '08 numbers, but could you give, Kevin, if you have that, the first half productivity metric excluding bankruptcy and legal? We have it for the full year, but I was wondering if you could give the first half '08 number.

Which one do you want, John?

The productivity metric, excluding both bankruptcy and legal collections.

I don't have that. I don't have the report.

We will see if we can dig that one out too, John. I don't have that one printed out.

No worries. And you mentioned the 31 sequential increase in collector head count, but I just want to get that total collectors and supervisors, the comparable number was 1,496 last quarter.

It is 1,526 this quarter.

Okay. Then some questions, I guess, about where we are. We have had some interesting statistics in terms of declining delinquency levels the last few months among the major credit card issuers, and there has been some speculation that credit card charge-offs may peak in Q2 2009. Was wondering what outlook in terms of what that dynamic is, or do you envision, have we seen the peak potentially in charge-off rates, and what, if any impact does that have on the outlook for supply and pricing over the next few quarters?

Well, you are certainly I think more expert on the current charge-off and delinquency rates than we are. As to the magnitude of accounts that are available, or are going to be available, we are talking about charge-off volumes today, that are roughly 2X what they were a year ago. And I think most buyers in this business would agree that there was a lot of paper for sale a year ago. So we are talking about a very substantial supply of paper, that is either going to be coming to market shortly, or in the next whatever strategy plays out in the next year, or two years, et cetera. So I think there is going to be a lot of supply for some time to come.

Great. And then just a question about arbitration, and some of the difficulties that have taken place there recently, with arbitration cases seemingly put on hold for a while. Is there any, this is for credit card and cell phone disputes, and things like that. Is there any impact there on your legal or your purchasing strategy?

So just a bit of context. So the percentage of accounts that are in our legal channel is relatively small out of our 20 million accounts, significantly less than 0.5 million are in the channel altogether, and then a smaller percentage of that are in arbitration. And there is still a lot to unfold here with arbitration. We will see how this all falls out.

But from my perspective, if arbitration is no longer an option, and we need to proceed through the courts, that is a forum that we are very familiar with. And I don't believe that we have ever really realized any sort of significant benefit from a cost standpoint, by going through the arbitration process. So I wouldn't view the disintegration of that channel necessarily a bad thing, provided it means that we shift over and go through the courts.

Great. A quick question, Kevin, first a clarification. Did you say the operating margin drag for fee-for-service was 212 basis points?

212 basis points, right.

212. And then any indication of the size of the Shelf that you are filing, and is that equity only? Thank you.

Before you go, John, I have that number for you as well, you had asked earlier.

Yes.

That was Mr. Fike pulled this up for us. So Q2 '08 would have been $78.75, the productivity that you asked for.

Just for the quarter?

No. For the first six months '08.

First six months. Okay. Thank you.

And, John, on the Shelf, it is not complete. So I don't want to speculate on what the terms are going to be. But equity I would say is foremost in our thoughts at this point.

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

My questions have been answered. Thanks.

You bet. Thanks.

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

I just have a few questions. One, would you talk a little bit about your legal collections of how you expect the relative proportions of internal versus external to continue to go, obviously increasing the internal, and external has been declining, is that a trend we should expect?

Yes. Well, we have ramped up our internal channel from really next to nothing, to having a decent sized presence in '10. So as our inventory builds, and as they have garnishments and judgments flowing in, that will continue to build on itself. That said, there are a good number of external law firms where we are still very pleased with their performance, and we really think that they bring a lot to the table for us.

And so we are not looking to eliminate them by any stretch. So the challenge has really been that a number of external firms lack certain sophistication, when it comes to scoring, and dialers, and what not. And so to the extent that we can leverage those internal core competencies, that is where the shift to internal makes a lot of sense. To the extent we have other law firms that are able to demonstrate those proficiencies, we are more than happy to stay in business with them, and do business for a long time to come.

How long of a lag is there usually from when you make the effort to initiate these legal collections an go through the work, and when you actually begin to receive the money? Have you ever looked at that timing?

In terms of investing in core costs, and that sort of thing?

No. You have legal collection costs. I am just curious is it on average like a six-month lag, or a year lag, or two years, or what?

When we invest in court costs and filing fees, and things of that nature, I am looking to have our money fully back within six months, and build from there. And those tails go out a very, very long time. I talked a little bit about the amount of money that we recovered on accounts we have owned for more than five years. And I said that was $4.4 million, excluding bankruptcy and legal. I think we collected something close to $9 million in total. $8.8 million in total on those vintages. So clearly legal is a big chunk of what builds on those tails.

Okay. Do you expect legal to continue to decline? It has been declining pretty steadily now for the last four quarters. Is that something in total? When I looked at both internal and external, is that something you expect to continue to drift down, or is that near a stable number?

There are a lot of variables there. We put people in the legal channel only after we make a pretty solid legitimate attempt to get them on the phone and work something out. It is not our preferred option. It is not like we are going to say, gosh, we are going to a abandon that strategy, and just start suing people all over the place.

In terms of what the future holds, Steve talked a little bit in the script, about some of the changes that might entice us to move the accounts into that channel earlier in the process. So if the statutes of limitations grow shorter, or if we are not able to get people on the phone and work things out on the phone, then it really kind of forces our hand. And that type of thing can grow the legal channel very quickly. And that is one reason why we have an eye towards this building up this internal process. We like it regardless of any change in the regulatory environment, because there are some bottom line savings. But it is not terribly difficult to imagine scenarios where having that internal competency could be a really big deal.

Okay. You seem to be doing a great job of collecting in this environment, but are being impacted by the change, or the decline in payments in full versus payment plans. What is the relative ratio of money that you are getting in, or you got in Q2, in terms of Call Center collections, versus full payments versus payment plans?

I can tell you year-over-year, I think a year ago in the quarter, the number of people making payment was something like 400,000, and now we are up to 630,000-some-odd. So the number of payors is growing very significantly, and obviously the number of settlements from things like mortgage refinancing, and what not, is down on a rate basis relative to our total payment number down pretty dramatically.

Just kind of ballparking the numbers, during Q2 2009, about 20% of our payments were settlements. About 13 to 14% were payments in full. And the remainder, so two-thirds or so were pure payments.

Is this in dollar values, or in number of payments?

This is in dollar volume.

Dollar volumes. Okay. So that is down significantly, or in terms of payments in full?

If I go back let's say three years, 2006, about half of our payments would have been payments in full, and the other half would have been split kind of roughly 50/50, between balance in fulls and settlements.

Well, are you getting any feeling that maybe, that this number in terms of payments in full and settlements, there is a light at the end of the tunnel, as to how low that number may go, or have you not seen any encouragement at all? Because clearly you are doing a great job on the plans. And at some point as they build, that should begin to increase your overall collections?

Yes. I think to some degree the balance in fulls, and the settlement in fulls, are some read on the availability of consumer credit. So when I go back to that Q2 2006 number, it is fairly easy for somebody to get a home equity loan, or refinance and get some cash out. Much more difficult obviously to do that these days.

And I think that that is largely what we are seeing here. So I don't know that we would have a feel that these numbers would continue to slip. Hopefully this is kind of the toughest environment that we will be in. But time will tell.

If I could jump in, and just kind of give you insights on the accounting perspective. As you start off with a curve in accounting, there is an area under that curve. And as cash comes in short, as you guys were just talking about, say there is less PIF and SIF activity and more payment activity, in the near term I would have less cash being received, and therefore we book an allowance for that. What we don't do, is try to project out how long that tail, and how much thicker that tail might be. So again, from an accounting perspective, the cash is just kind of gone. So that is the good news out of it.

And I think Neal talked about in the quarter before, is that to the extent that those plans hold, and Neal does a good job keeping those people at a good price and good margin paying, that will result in a thicker tail down the road, and hopefully if all works out, a release of allowances. So we are kind of taking a wait and see approach on that.

It looks like you are doing a good job of working with what you have got. Lastly, just one more question, can you talk a little bit about the expected returns in your bankruptcy paper. You have been, really buying a lot of it. When you are evaluating purchases now, what kind of expected returns do you think you are going to be getting now, relative to say, what you were buying two years ago?

Well, I think pricing across the board has softened up. And we hope if we are doing everything right that we are buying to better returns today, than we were two years ago. We have kind of long been on record that we are looking at ultimately similar hurdle rates when we price bankruptcy or core deals, and then we keep everybody updated with our best expectations for cash flows, and are a combination of showing you our quarterly cash numbers and then our estimated remaining collections. So I guess I would just point to those, and have you put those together, and you can get some feel for the magnitude of our expectations.

Okay. Thanks.

You bet.

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

Thank you very much. How much were the May collections down? You suggested that was a tough comp with the stimulus at this time last year. Was it single digits, mid, double digits?

Down on a year-over-year basis?

Yes.

It was flat really. It was more of a flat month, and that compares with two kind of plus 10% months on each side of it.

Got you. And then you had mentioned increased competition. Was that from larger existing players getting a little more interested? Can you flesh that out a little bit?

It is difficult to tell. There is definitely pricing competition out there. Although we do see, for instance, deals that don't even sell, because they are not hitting seller and difference points. We have seen prices recently even that we are scratching our heads at. We might think something is worth X, and we get feedback that it actually sold for 2X. So no matter what market we are in, it seems as though there are either undisciplined competitors, or people who simply don't know how to price right, that are going to be participants.

And it is just one of the things that we deal with. The observation though, at this point is it is much more on the margin, as opposed to a significant influence on the market. But we definitely have our antenna up over it.

And then a final question, you had discussed some potential regulatory changes. How much has actually changed, versus has been discussed?

Most of it is being discussed, although there have been a couple of changes. New York City, in particular, has made some changes. And we are working very hard, both ourselves and through our trade associations, to try to provide education to both state and federal legislators, to let them better understand what we think are unintended consequences of some of these moves that they want to make. And I think the industry has been fairly successful in doing that thus far. But the job isn't over.

Thank you.

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

Hey, guys. Thanks for taking my questions. I appreciate the consistency in which you guys talk about pricing. Obviously that has optically gone in your favor, and your story is very much the same as it has always been, and we definitely appreciate that. One of the things that I am wrestling with here, is trying to figure out what the amortization rate is and project amortization rate. And when we look at the numbers over the last couple of quarters, Xing out any impairments, the amortization rate has been around 36%. You guys, again, you provide a lot of good data. One of the slides that you have been showing to folks in investor presentations over the last couple of months, shows the remaining required amortization rate by vintage.

And when we look at that on a weighted average basis, based on estimate remaining collections, we get a weighted average remaining a amortization rate of about 51%. So your current amortization rate X impairment seems to be pretty far below that. Should we expect some sort of correction over the next 2 to 4 quarters? How does that work, or how do we reconcile those two numbers? Am I looking at this the right way?

Sure, I am glad we put that chart out. I think maybe you asked that question last quarter, or maybe we didn't quite attack it correctly. So we put that data out, just so you could do what you did. The issue is from a mathematical standpoint, your calculations are right. And again remember it is interest method accounting. So you are always in a position where you are layering new deals on. They amortized at lower rates early on, and then higher rates down the road.

There are also mix issues. You have bankruptcy paper floating in there as well, which is a much higher amortization rate than core paper, if you are looking at historically. Again, that is all masked. The issue that I would stress is that to the extent that those multiples expand, and I talked a little bit about that in my script, to the extent those multiples expand, that will have a dramatic impact on the going forward amortization rate.

So I understand you are at a difficulty. I certainly do. But the math is there. I was trying to show people in that slide how to look at the data, not giving any guidance as to what that data might be. Just showing you how to look at it. So just watch that multiple, understand that bankruptcy has had quite an impact on that, and again, we take a wait and see mentality here on the accounting side.

Again, one of the things I tried to do, and it was someone else's question last quarter, and it certainly caused us to go take a look at this as well, if I look at even on an actual cash collection basis, and I have to do this on a trailing quarter, because we obviously don't have Q2 at this point. But the Q2 amortization numbers and the Q1 amortization numbers X are pretty close, I still get to about a 44% amortization rate. Is there something I am missing there? Is it bankruptcy driven? I am trying to figure out what is not on there? Is it just a timing issue, in terms of lower amortization rates on the front ends of the curves?

Are you asking me why it is not 51%.

I am asking why it is not closer to 44%. I understand why it is not 51. 51 is too extreme.

Timing is always impacted by, again, think about a concept where if you have got a projection on your accounting model, and let's say that Neal does a great job and really overcollects in that particular quarter, that can cause timing variances. So if you really overcollect in a given quarter, and all of that overcollection tends to go to amortization. And then conversely if you collect closer to the estimate, than tends to record what would be the normal planned-on amortization, I can give you a little more granularity that might help a little bit.

But if you look at Q2, let me get my notes here, if you look at amortization rates for bankruptcy paper, for example, including the allowance charge which wasn't much in BK, but it is about 55.2%. So we indeed in Q2 amortized all BK cash at about 55.2. On the core side, again, including the amortization it was about 36.14. That would include both the reserves and again non-BK.

And we hope if we are reading these businesses correctly, that if indeed our buying weights more heavily towards bankruptcy in any period, or over an extended period like it has been, that our operating expenses will be reduced commensurately. It is a different business. It requires much less operating expense, but much higher amortization expense. So you should see some push and pull, as the mix shift works its way through our financials over the years.

Okay. Great. Guys, thank you for answering all of my questions.

Certainly.

Your next question comes from the line of David West with Davenport and Company. Please proceed.

Good evening. I wonder if you could talk a little bit more about the communication expense? You mentioned that that was due to the issuance of some strategic letter campaigns. Are those likely to continue, and are those letter campaigns likely to continue at this point?

I think I will speak for Neal, and he can stop me if I am incorrect here, but I think Neal does plan on looking at increased targeted campaigns.

Yes.

Any comments regarding the responses, or what any particular type of account you are targeting with that campaign?

So we are able to an analytically drill down into what the proper treatment is, and there is a segment of accounts where adding more FTE and making more phone calls is not the solution, and we need to have very specifically targeted letter campaigns for those folks. So to the extent that we are able to keep up with identifying good sized pools for those folks, we will swap off collector expense for letter expense where it is appropriate.

Very good. And I wonder if you could comment, you have been very good about your quarterly comments regarding your various Call Centers. Could you talk a little bit about what dollars are being spent on the center in the Philippines, and is that making a contribution to profits at this point in time?

We have a got a relatively small number of FTE there, it is less than 50. So it is not a meaningful part of total picture at this point. And as we talked about, we have essentially given up on trying to have an apples to apples comparison there. And imagine building it out the exact same way that we have our other centers. But that doesn't mean that we are not able to find some opportunity there.

So there is a segment of accounts there, that may require a lot more phone calls to get a contact, and to the extent that we can take advantage of some labor arbitrage, and spend more time calling on those types of accounts. We will do so, and come out ahead.

Very good. And, lastly, I wonder if you had that number where you have collectors that have been with you for more than one year, and could you maybe talk about retention of collectors at this point?

More than one year. Okay. So as of 6/30/09, collector head count with more than one year is 587.

Okay.

And that total FTE number is a little different on the Q than as I read head count. It is going to show 1,099 in total.

Any general comments about turnover among collectors?

Turnover is down for us as you might expect. We have an internal debate about how much of that is the result of the economy, and how much of that is the result of improved management. But we have been able over the course of the last year and a half, to be able to bring in some very talented folks, who are exiting banks, and decided it was a better time to be a debt buyer than a banker. And so I am thrilled with the caliber of management that we have been able to bring on board, and I am absolutely certain that has had a positive impact on our attrition numbers, but obviously the economy drives a good chunk of that as well.

Your next question comes from the line of Justin Hughes with Philadelphia Financial. Please proceed.

Hi. Thanks for taking my questions. I just wanted to follow up on the earlier questions on arbitration. The Minnesota Attorney General said that arbitration has claimed to be 60% cheaper than litigation, and you said it is generally the same cost. How do you get to such different conclusions?

I can only speak to the math that is apparent to me on our books. I really can't talk to that. I can tell you that a good number of arbitration awards, that is really just one step in the process. If a consumer still doesn't want to pay you after an arbitration award, have you to domesticate it, get a judgment, and then you have to go through the procedure to get a garnishment or what not. It can be just another added step in that process.

So perhaps someone else is having more success collecting after the arbitration award than I am. In many cases, we have to go several steps beyond that. So it could have something to do with the type of paperwork collecting on, or any number of things. But my hats off to anyone who is doing it better.

Okay. Is your win rate significantly different between the two?

My win rate?

What percentage of the time you prevail against the debtor?

Oh, I don't know. I don't know the answer to that.

Okay. And then also on the litigation side, the New York Attorney General a couple weeks ago went after probably 20 different law firms, that used, that did not properly notify people before getting judgments. It is called the American Legal Processing, I think was the firm. Are you a part of that as well?

We have law firms that may have some exposure to that, and we are trying to understand to what extent that is true. We don't believe it is significant.

Okay. And then last question you said it was a very small percentage of your accounts that went through the legal channel, but it is over 20% of your collections. So on average these are much higher awards, I guess, is the conclusion?

Of the accounts that are, so the legal collection process is expensive. So we don't put just any account over them. The account has to be particularly high scoring, and have certain balance thresholds met. And so certainly an outweighted amount of cash collections comes from those accounts, given their credit scores, and average balance size.

Okay. Thank you.

You are welcome.

Your next and final question comes from the line of Sameer Gokhale with KBW. Please proceed.

Kevin, I think in your comments you talked about this Board approval for this Shelf Registration, and you would issue shares. And I know you said you could only provide some limited information, but it would be helpful to get a sense for magnitude of this type of registration? Are we talking about something for $200 million, is it going to be $50 million? The reason I ask is, because it seems like this window of opportunity here from a pricing standpoint, to really pick up portfolios at cheap prices, and the benefit for that over a number of years. But it seems in order for that to be meaningful, you really have to buy, invest a significant amount, and clearly the run rate in Q2, indicates that you are willing to invest significant amounts. Are we talking about 200 million or $300 million capital raise, or an order of magnitude are we talking about a $50 million raise?

I think that what we are thinking about at this point, especially with how a shelf works, is that we would go for a relatively modest amount. And if buying continued to be very robust, and we had the opportunity to invest at very high IRRs, we would simply go back and amend it, or do another offering.

Okay. That is helpful. That is all I had. I think all of my other questions were answered. Thank you very much.

You are welcome.

There are no further questions in the queue. I would now like to turn the call back over to Steve Fredrickson for closing remarks. You may proceed.

Thank you, operator. First I would like to thank all of you for participating in our conference call. Before we end the call, a few final thoughts. PRA concluded the first half of 2009 with another solid quarter, despite an economic environment that remains difficult.

Our collector force deserves a great deal of credit for our success. Through a combination of cutting edge portfolio segmentation and decision science applications, as well as a well trained managed and motivated staff, we have been able to focus our work effort on the right accounts at the right time. The result was record cash collections of $90.5 million in the second quarter, and solid earnings.

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. Great day.