PRA Group Inc (PRAA) 2009 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the Third Quarter 2009 Portfolio Recovery Associates Incorporated Earnings Conference Call. My name is Melalia (ph) and I'll be your coordinator for today.

At this time all participants are in a listen only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS)

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Jim Fike, Vice President of Finance. Please proceed.

Good afternoon and thank you for joining Portfolio Recovery Associate's third quarter 2009 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 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'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 of Portfolio's performance, opportunities, future revenue and earnings growth, future space and staffing requirements, future productivity of collectors, expansion of the RDS, IGS, and MuniServices businesses, and the 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 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 regard thereto or to reflect any change in events, conditions, or circumstances on which such forward-looking statements are based in full or in part.

Now, here's Steve Fredrickson, our Chief Executive Officer.

Thanks Jim and thank you all for attending Portfolio Recovery Associates' third quarter 2009 earnings call.

On today's call I'll begin by covering the Company's results broadly. Neil 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'll open up the call to Q&A.

Economic conditions remained difficult as PRA began the second half of 2009 yet we continued to perform solidly, excelling in the third quarter in areas such as productivity, efficiency, and teamwork that speak to a business designed for success over the long run.

Not only did we produce strong results operationally but we continued to build for the future, further refining our best-in-class form and taking advantage of our access to capital to acquire large amounts of portfolios that we believe are well priced even in a market where collections have grown more difficult. Overall, PRA is in a position to emerge from this economic downturn a stronger and more efficient competitor. I can honestly say that I am as excited about our future today as I have been in years.

Now, on to our third quarter numbers. Despite the weak economy, PRA acquired $76.7 million of defaulted debt during the quarter. Cash collections were a record $92.4 million, up 11.3% from $83 million in the year ago period. These helped drive our near record cash receipts of $106.6 million in the quarter, up 7.8% from $98.8 million in the same period a year ago.

Fee revenue was $14.2 million in the third quarter, a decline of 10.1% year over year. Operating expense to cash receipts continued its general trend downward. In the third quarter of 2009 the ratio stood at 46.7%, compared with 47.7% in the third quarter of 2008. We continued to tightly control operating expenses despite the difficult economic conditions, particularly at our fee subsidiaries where expenses are mostly fixed over the short term.

PRA realized productivity of $144.69 per hour paid for the first nine 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 Q2 2009 and an increase of 45 from the end of 2008.

Of course, not all our key metrics were positive in the quarter. The recession did have an impact on both the top and bottom lines. PRA recorded a sizeable $8 million allowance charge in the quarter. Kevin will provide much more granularity on the charges in a few minutes.

We did manage to keep total revenue steady compared with the year ago quarter, at $68.6 million despite the charge. EPS was down 13% at $0.65 versus $0.75 in the third quarter of 2008. Net income of $10.1 million was down 11.8% from $11.5 million a year ago.

In terms of year over year comparisons, we booked net interest expense of $1.96 million in the third quarter which was down about 35% from $3 million in the year ago quarter due to lower interest rates.

In terms of resources, our balance sheet remains strong with ample cash availability to continue building for the future. During the third quarter we slightly increased absolute debt outstanding to $308 million which included $1.7 million of long term financing not associated with our line of credit. This continues the very controlled financial leverage that we've employed over the past several years.

Our debt to equity ratio at quarter end stood at 96%, up just slightly from 95% at yearend 2008 while we maintained $59 million of availability under our lines of credit.

Now let's review our operations in detail beginning with third quarter portfolio purchases and overall market conditions.

During the quarter we acquired 100 portfolios from 12 different sellers. The majority, about 95% of our third quarter purchase volume in terms of dollars invested was from the major credit card asset class. The remainder came from pools of utility 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 61% of our purchase activity in terms of dollars invested.

In Q3 the vast majority of our bankruptcy purchases were fresher bankruptcy filings. 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 slower lower multiples with more mature, already cash flowing filings.

Portfolio pricing was steady to higher during the quarter. The resale market continues to experience little to no volume in terms of offerings. Those competitors with access to reasonable amounts of capital appear to be exerting a fair amount of discipline.

On our last call I spoke about governments at all levels contemplating or adopting shortened statutes of limitations or restricting collection activity post statute. This generally speaking defines the time after which an account becomes delinquent that can be enforced with a lawsuit. I said on a prior call that such actions would force collectors like PRA to prefer to work out payments with consumers directly to take them to court much more frequently and much sooner in the collection process than we would otherwise.

During Q3 we saw this come to pass in one state and in response, we had to move swiftly to sue a large number of accounts in that state which would have otherwise been uncollectible after the effective date of the statute. As a result, during Q3 we incurred more than $1 million in legal costs or about $0.04 in EPS terms that we would not have otherwise. Neal will provide more color on our strategy in this area in a few minutes.

To account for the risk of these regulatory activities as well as the weak economic environment, we've 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 capability 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 level, helping to curtail the larger allowance charges we have taken recently.

Moving on to collections, as I mentioned earlier Portfolio Recovery Associates recovered a record $92.4 million in the third quarter from owned portfolios, up 11.3% from $83 million a year earlier. Each month of the quarter had very similar year over year growth rates.

Offering a bit more detail on our collection performance, call center and other collections were $48.6 million, up 11% from the same quarter last year. Cash collections from our purchased bankrupt accounts were a record $22.3 million, up 45% from Q3 2008.

As we've 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 $6.2 million in Q3 2009. This is up 194% from the same quarter last year. We expect continued strong growth from this channel for the foreseeable future.

Externally, legal collections were 17% of total cash collection in Q3 2009 at $15.3 million. This compares with 26% in Q3 2008 which was $21.6 million, representing a 29% year over year decline.

We tracked 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 $144.69 for the first nine months of 2009 compared with $131.29 for full year 2008. Excluding the effect of trustee administered purchased bankruptcy collections, PRA's productivity for Q3 2009 was $115.02 versus $109.82 for the full year 2008. When excluding legal and trustee administered purchased bankruptcy collections, productivity for Q3 2009 was $88.08 per hour paid versus $75.47 for all of 2008.

During Q3 we saw improved site specific productivity per hour paid of about 11% 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 year over year at every call center location. In Jackson, Tennessee productivity was up slightly year over year and down 7% sequentially. Productivity was up 7% year over year and down 4% sequentially in Hampton, up 4% year over year but down 11% sequentially in Kansas, was up 13% year over year and up 4% sequentially in Norfolk and was up 100% year over year and up 9% sequentially in Birmingham. The Philippines office was up 85% year over year but down 15% sequentially. Tennessee was able to increase its productivity substantially even it increased hours paid by a very significant 37% year over year. Kansas to a lesser extent also experienced higher hours paid with 17% growth over the prior year.

On an absolute basis, Kansas remained our top call center for the quarter although monthly productivity there was surpassed by the Norfolk office during September for the first time in a long time. During the quarter on a relative basis, Jackson improved to about 80% of the Kansas standard. Hampton improved to 90%. Norfolk improved to 96% and Birmingham improved to 60%. Productivity in the Philippines office did improve somewhat to 36% of the Kansas standard. As a reminder, we recently began focusing this center on accounts that are more difficult to collect. Since the Philippines collectors are cheaper to employ, we end up risking less to work these tougher accounts. Because of this change, the Philippine center's 36% performance measurement does understate that center's relative capabilities.

Company-wide at quarter's end, our owned portfolio collector headcount was 1,312, up about 31 from the end of June. As it relates to staffing, please remember that a majority 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 and the collateral location skip tracing and government services arenas. Our fee-for-service businesses saw revenue decline 10.1% from the same period a year earlier to $14.2 million. The revenue and income 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.

As I mentioned on our Q2 call, 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. We saw this improvement during the quarter as both revenue and operating income increased when compared with Q2. We expect this trend to continue.

The government services business performance was hurt during the quarter by declining sales and use tax in California, driven by recession. Although we continue to sign new clients and see strong demand from municipalities given the fiscal pressures many of them face these days, this recession related revenue slowdown from some of our larger clients was disappointing.

Although we anticipate a seasonal improvement in Q4 due to yearend business license processing, this sales and use tax decline will undoubtedly keep persistent pressure on the government services business for some time.

Before I turn the call over to Kevin Stevenson, PRA's Chief Financial and Administrative Officer, I'd like to have Neal Stern, our Chief Operations Officer of the Owned Portfolio business, give you a summary of our operating strategies.

Neal?

Thanks Steve. PRA's operational strategies and results in this third quarter as in prior periods reflects our efforts to operate as effectively as possible amid the current macroeconomic and evolving legislative landscape.

Two collection trends illustrate this particularly well. On recent calls I've discussed the fact that our total number of payments has been growing dramatically and that was again the case in the third quarter. In Q3, the total number of accounts making a monthly payment grew to 689,000, 33% higher than in Q3 2008.

Further, the total dollars our call centers receive directly from refinancing companies fell to just over one-half of one percent of total collections in the third quarter, down from a still modest 2.5% a year ago. In total, our average call center payment size was down 12% over the prior year.

In addition, we continue to see increased collections on accounts purchased more than five years ago. Excluding legal and bankruptcy collections, our call centers in the third quarter collected over $4 million on these portfolios, a 61% increase over Q3 of 2008.

Our ability to continue operating effectively given these two trends highlights the true value of our increased dialer capacity which in Q3 was 22% higher than last year and our improved ability to score accounts. In addition, they demonstrate our ability to be a patient collector. Because we do not resell accounts we can work with consumers as their financial circumstances evolve. In fact, the only burdens imposed by a shift away from one time settlements to monthly payments are an increased need for efficiency and a revised view of our collection curves. In the end we believe that with these things managed properly, we stand to collect a larger percentage of the balances owed to us.

Our ability to continue with more patient approaches to collections was impacted as Steve discussed, by new legislation that eliminated our ability to call consumers and ask them to pay on debts that are beyond the statute of limitations. Because of this legislation we had to file suit on approximately 7,500 additional accounts that we might have otherwise chosen to work in our call centers. This raised our legal expenses for the quarter and undoubtedly will result in a modest offset of cash collections from our call centers to our legal channel in the coming quarters.

Despite this recent uptick of activity for our legal channel, total legal collections remained disappointing. For the quarter, our external legal collection dollars were down 29% over the prior year, partially reflecting economic conditions but also reflecting our shift to the internal collection process. Staff was added in Las Vegas and Norfolk to accommodate growth in internal collections which in the third quarter finished 45% higher than Q2 2009 and 75% higher than in Q1.

Overall, our total legal cash collections in Q3 finished 9% lower than the prior year but the net impact after fees is closer to 5%. Moreover, we believe that we are well positioned to realize important savings from our internal process in the coming quarters. I will reiterate our absolute commitment to continue working with external law firms that continue to produce great results for us but firms that don't produce know that we have a very viable alternative.

Closing the productivity gap between our collection sites remains at the front of our operational objectives given the sizeable opportunity that gap represents. Had all of our call centers delivered the same cash collections per paid hour as our top site we would have realized another $5.8 million in collections from the third quarter. This estimated value gap was down by almost $3 million from Q2 and in September our Norfolk site displaced our Kansas site as our most productive location, ensuring a very strong but healthy competition for the coming quarter.

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

Thank you Neal. Although aggregate, I was very pleased with our cash collection performance this quarter as it exceeded our accounting projections by a solid margin. Several legacy pools continue to underperform and cause us to post allowance charges totaling $8 million. These allowance charges were double the year ago period and cost us about $0.31 of EPS. As a result, in the third quarter net income decreased 11.8% to $10.1 million while EPS came in at $0.65 compared with $0.75 in the year ago period.

Total revenue for the quarter was $68.6 million which was flat to the same period one year ago. Operating income was $18.8 million, down 12% from the year earlier period while net interest expense decreased from $3 million one year ago to $2 million in Q3.

Return equity declined from Q2, remaining unacceptably low at 13% for the third quarter due in large part to our continued large allowance charges. We are very focused on bringing that number back toward our historical 20%. Our weighted average interest cost on the acquisition line during the quarter was 2.56%, down from 2.7% in Q2. At quarter end borrowing levels, each 100 basis point swing in Libor either costs or saves us about $200,000.00 monthly.

Breaking our third quarter revenue down into its three components, the majority of total revenue or $54.3 million came from income recognized on finance receivables. This is revenue generated by our owned debt portfolios. Income on finance receivables is derived from the $92.4 million in cash collections we recorded during the quarter, reduced by an amortization rate including the $8 million allowance charge of 41.2%. This amortization rate compares with 40.3% in Q2 2009, 42.9% in Q1 2009, 36.5% in Q3 2008, and our full year 2008 rate of 36.8%.

As I mentioned, during the quarter PRA recorded allowances charges totaling $8 million which compares to $3.8 million in Q3 2008. Allowance charges for the first nine months of 2009 now total $18.2 million versus $19.4 million for all of 2008. Life to date reserves since the change to SOP 03-3 now stand at $41.8 million.

I would like to continue the approach to discussing allowance charges I initiated on our Q2 call. I will talk about a few of the larger charges but not step through each and every pool. For those interested in additional details, we have included a chart in our press release that details our allowance charges by fiscal quarter, broken down by year of purchase. 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 in our income statement.

In contrast, when pools overperform, 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. Its 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. I believe this bias exists today to a greater extent than we've seen in years. In particular, our 2009 purchases have been overperforming expectations by a sizeable margin. However, we feel it is still a bit too early to significantly adjust yield and/or cash flow expectations for these pools.

This conservative implementation of accounting guidelines is currently further compounded by our long standing position against permitting accretion during the first six months of a new pool's life. Instead of allowing accretion, we adopt to use cost recovery or cash method as permitted by the SOP. Accretion, while recognizing more revenue than cash collected, adds to the net finance receivable amount of a given pool instead of amortizing it -- in other words, capitalizing revenue.

Accretion is a technically acceptable event under the SOP and generally occurs in situations where cash flows are ramping up early in a pool's life. Pools with low forecasted initial cash flow curves are more apt to experience accretion than pools with a more front end weighted cash flow curve. Bankruptcy pools with mostly freshly filed accounts are a perfect example of this kind of phenomenon. Although we are not about to change our position on accretion, it did cost us about $3 million in delayed revenue in Q3 2009 for purchases made in 2009 alone. Of course, these revenues will be recognized in future periods.

Besides the allowances charges is driven to a great extent by variability across our pools. Once again, if we had accounted for our portfolio as one giant pool or in quarterly aggregated pools using the older accounting rules of PV-6 we would have taken no allowance charges whatsoever in Q3.

As we 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 net reversals while 2005 through 2007 contributed a net charge of $3.5 million, up rather sharply from the $1.9 million in Q2 2009. The change quarter over quarter centered on one 2005 pool and one 2006 pool that incurred $1.1 million and $1.3 million in allowances respectively. The net shift in those two pools totaled $1.5 million.

Several other pools increased and decreased but they essentially netted zero dollars. If I could generalize this shift, it was generally a weak July and August that led to this change. When you review the chart in our press release you'll clearly see that approximately 60% of the third quarter's net allowance charge came from the 2008 tranche of accounts. The majority of accounts in these pools come from several forward flow transactions that were priced and won during 2007 but that we were required to continue to buy throughout 2008.

In hindsight these portfolios are likely some of the least profitable purchases we have made in our 14 years in business. As you look more closely at the $4.8 million in allowance charges from that 2008 tranche we find that 2008 Q1, Q2, and Q3 non-bankrupt portfolios contributed all of the $4.8 million reported.

Looking back into Q1 and Q2 of this year, we'd incurred $2.1 million and $2.4 million on these very same deals. We continue to be very focused on these tranches to paper since they represent 60% of our total quarterly allowance charges and we'll keep you apprised of their status.

Our bankruptcy portfolios are performing nicely as a group. They ended up with a net allowance charge for the quarter of $90,000.00. As I mentioned on our Q2 call we are closely watching our bankrupt portfolios and we're evaluating book yields and deal multiples. I promise to keep you apprised on that front. In Q3 we did indeed allow our bankruptcy portfolio yields to increase.

As I have mentioned on prior calls one of our goals has been to be very cautious on increasing yields and deal multiples on bankruptcy pools given the allowances we incurred in 2007 and 2008 on older bankruptcy pools. However, they are performing nicely and we've had no allowances on bankruptcy pools purchased in periods after Q1 2006. Before mentioned changes to yields and to a lesser extent deal multiples impacted primarily to 2008 and 2009 bankruptcy deals all of which are performing strongly relative to expectations.

Moving on, approximately $588,000.00 of operating expense in Q3 was due to non-cash equity compensation that was booked during the quarter related to our 2009 performance based restricted share plan as well as other equity based awards. During the quarter, cash collected on fully amortized pools was $6.6 million compared to $7.1 million in Q2 2009, $5.9 million in Q1 2009 and $4.8 million in Q3 2008. In referring to fully amortized pools I mean purchased pools with no remaining debt basis on our balance sheet.

This 37% year over year improvement is attributed to numerous recent advances in 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 portfolios. Eliminating the fully amortized pools from our amortization calculation, it is a core amortization rate for Q3 of 44.3%, up substantially from the 38.7% we saw in the third quarter of 2008 but sequentially up modestly from the 43.7% experienced in Q2 2009.

After a very strong Q2 for our government services group, sequential revenue and income fell substantially in Q3. As Steve described, this decline is largely related to the recession driven decline in sales and use tax revenue in the state of California. Where we derive fees from auditing sales and use taxes, we are paid a percentage of recoveries and typically bill over certain break points so when tax revenue falls below a certain point as in Q3, our fees can drop fairly substantially.

We do have a good pipeline of clients in government services and are working hard to overcome this decline although we do anticipate the impact will continue while the economy is slow.

At IGS, lower revenue drove reduced operating income for the year over year comparison. However, sequentially we did see improvement as a result of new clients. Total commissions and fees generated by our fee for service businesses were $14.2 million in Q3. This compares with $15.8 million in the year ago quarter. Our fee based businesses accounted for 20.8% of the Company's overall revenue.

As a reminder, our quarterly amortization expense related to acquired intangibles from our various business acquisitions is about $668,000.00 per quarter. The third component of total revenue or cash sales of finance receivables was once again zero for the quarter as it has been in every quarter since we became public in late 2002.

Operating expenses in Q3 grew 5.6% when compared to Q3 2008. This was primarily driven by compensation and play services growing $3.9 million or 17% and communication expense increasing by $1.2 million or 53% primarily as strategically targeted letter campaigns increased. The increasing compensation expenses during Q3 relates primarily to the addition of IT employees as we seek to increase project throughput inside legal employees as we continue to build that capability as well as growth in our call center collectors. These cost increases were partially offset by a decrease in legal and agency costs and fees of 21% or $3.1 million as we pulled more legal work in-house and as our IGS business with repossession of the agency stalled somewhat with a decline in volume there.

Operating margins during Q3 were 27.4% compared with 29.9% in Q2 2009 and 31.3% in Q3 2008. Without the margin dilution caused by the fee businesses, the operating margin would have been about 510 basis points higher at 32.5% in Q3. Without the amortization of intangibles, operating margin would have been at 28.4% in Q3 2009 versus 32.3% in Q3 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 purchase price amortization rates as well as allowance charges. Operating expenses as a function of cash receipts during Q3 2009 were 46.7%. This is down from 47.7% in Q3 2008 but up somewhat from 46.4% in Q2 2009.

Our balance sheet remained strong during the quarter despite substantial purchases of new finance receivable portfolios in the amount of $76.7 million. As of quarter end, the outstanding balance in our line of credit was $306.3 million, up $16.5 million during the quarter. Our total credit facility is $365 million, leaving us with $59 million of availability.

Cash balances increased sequentially during the quarter to $19.9 million. While our leverage has increased dramatically from zero two years ago, on a relative basis it remains quite low at 96% of equity. We are producing strong internal cash flow and are well capitalized.

To further update you on our financing situation, as I mentioned on our Q2 call, between our line of credit and our internally generated free cash flow we believe we have sufficient liquidity to take advantage of current investment opportunities. We remain however, very cognizant of current market fundamentals in the debt purchase market which, because of significant sales supply and tight capital, could cause unforeseen buying opportunities to arise. In order to preserve all of our options we did file a $150 million shelf registration during the quarter. Although it is our strong preference not to issue new shares it is our stronger preference to be able to capitalize on appropriately profitable acquisitions of portfolios and companies. Should we find more highly profitable opportunities than we have currently available capital, we will turn to our shelf.

We continue to operate all aspects of the business with a long term focus. We feel this is particularly important in today's difficult economic environment and its impact on our businesses. We view our own portfolios as 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 the economic conditions.

I would like to close with several final important points. First, as I've described in great detail, our revenue recognition methods typically cause us to take allowances quickly when pools underperform while recognizing overperformance slowly over a pool's future life. This occurred to a significant degree in the third quarter, driving financial results down to levels we reported today.

Second, we've been making significant investments in well priced pools of charged off debt over the past 18 months. Based on our underwriting curves and actual collection trends, we anticipate strong cash production from these pools over the next 24 to 36 months.

Third, we have recently been very successful in improving our already strong account scoring and segmentation analytics as well as our collection processes. We believe these will continue paying dividends in the form of improved operating ratios.

Fourth, related to the prior point and also related to the payment versus settlement phenomenon described by Neal, we are modestly bullish on the longer term tails of even some of our older portfolios but yet to have a comfort to increase the ERC expectations which could lead to higher future yields.

Finally, our bankruptcy business has now achieved a level of underwriting expertise and operational scale that we feel will allow it to produce significant growth in cash collections and income contribution over the next several years. As a result, our internal budget calls for revenue and earnings to grow substantially in 2010.

With that, I've 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?

Thank you. (OPERATOR INSTRUCTIONS)

Your first question comes from the line of Bill Carcache with Fox-Pitt.

Good evening. First question I guess is given, with your greater emphasis on legal collections, how do you think about the impact on your expenses and how should we think about that going forward if we see a shift from call center collections to legal, kind of the net bottom line impact or at least the net impact on your expense ratios?

This quarter there was again kind of a unique set of circumstances where we pushed through more volume than we might have otherwise chosen to do because of some legislative changes but the answer to your question over the long run is we think it's possible that that legislative trend could continue and we think it's possible we could need to push a greater percentage of our accounts into the legal channel. It's always our stated preference to try and work this out in our call centers and avoid legal action if we can. That said, if this trend should continue or grow that's really the reason we're building this internal capability. We can have much stronger collection results and do so at a much more reasonable in the markets that we're currently operating so we're very excited about building up this internal capability.

We'll still rely on some external firms where we have strong performance and I think the combination of the two will lead us to have very negligible impact from a net fee perspective if we have to increase our legal collections significantly.

Can you say anything about any kind of impact on margins or I guess what that would do to just overall expenses?

This is Kevin. I think Bill, one of the things it would do it would shift geography a little bit. You would end up, from external to internal legal, the internal costs are going to be centered around salary line for our attorneys and you still have the same costs in the legal line but the fees you would have paid the contingent guys would move up into the salaries and our hope would be that our people will be a lot more efficient from an expense to cash collections ratio.

Relative to the external lawyers.

Right.

Right, but what about relative to if your first choice was to, and you guys have a huge competitive advantage in collections via your call centers, I guess the shift from call center to in-house lawyers as opposed to -- I could see how you guys have stronger performance from your in-house lawyers relative to external lawyers but I guess how do you think about the shift from call center collections to in-house lawyer?

Bill, I think certainly it would accelerate the process you'd end up with -- first of all, it would be the cost. Don't forget the cost. That would be -- we do expense those so they'd be up front. Secondly, you would have attorneys on staff which you should be able to model. I think if you're looking to build models, I think that maybe a real concern should be focusing on bankruptcy because I think if you start looking at salaries to cash collection ratios, that's probably going to influence it more than the core business.

Did you want to say something Neal?

My answer would just be that if there were a shift from call center to legal channel in general you would have an upfront higher cost ratio because you have to pay for the court costs and whatnot up front. Over the longer run with this internal legal channel I think that they would be fairly comparable over the long run.

Right so forgetting about the accounting though, just thinking about the economics and ignoring the timing and just looking at the actual collections, net cash collections, would that actually come down as a result of this shift or --?

I'd say they'd be on par.

Okay and separately, given your available capacity under your line of credit is now at $58 million, you talked about having the shelf there for any opportunities that come up. Would you consider deploying part of the capital from that shelf instead of maybe the acquisition of attractively priced portfolios, maybe another kind of fee based businesses basically for M&A?

Yes, yes.

Okay and just to be clear, your third quarter '08 numbers reflect the acquisition of MuniServices and Broussard, right?

Yes.

Okay so we're looking at the year over year numbers there, they're apples to apples?

Yes.

So I guess final question then is thinking about the -- this is basically the first ever year over year decrease in commissions for these fee based businesses. Some people have kind of viewed them historically as kind of being uncorrelated businesses but it sounds like from your comments about the sales and use tax and the impact, the negative impact from the economy, is it fair to say that you don't really view them as uncorrelated, that they are essentially at least to some extent impacted by the recession?

I think that what we saw is businesses that are weakly correlated at best due to the extreme economic situation that we had to deal with. We saw a number of behaviors occur that we don't typically see. On the skip tracing repossession side we saw clients experiment with strategies that would help them keep their costs down and that interrupted some of our placements. We believe that those experiments didn't turn out as positively as anticipated and so we are as a result seeing an increase in volume once again.

On the government services space, we deal with this sales and use tax especially in California, on a delayed basis and it's generally kind of a two to three quarter look back for us and so we are right now, in this quarter we're coming through the very low point of Q4 2008 and we simply saw things occur there that we typically wouldn't model in so I think it was more the extreme economy that caused that to occur as opposed to really being a tightly correlated businesses.

Okay and sorry, finally, when you said the seasonal improvement that's relative to Q3 so we would expect a seasonally stronger number in Q4 but can you give a sense as to what you think it would look like relative to Q4 of last year?

I think that we're out on a limb as far as we want to be as far as predicting the future. Last year we saw some particularly nice pick up at RDS. They do a lot of business license processing and we'd anticipate a similar type pick up but beyond that we're just not comfortable commenting.

Okay great. Thank you very much, appreciate it.

Our next question comes from the line of Mark Hughes with SunTrust.

Thank you very much. You said something about the 2008 paper and the four slow contracts that makes it difficult to get ahead of the game in terms of allowances. You had mentioned that last quarter as well. When do you think that will be mark-to-market so to speak?

Mark-to-market for Mark, good. I'll tell you the same thing I did last quarter. We're chasing that curve. We're trying to get that thing shaped right and that's one of the reasons though we kind of gave you the insight to 2010. I understand the challenge that you guys experience so all I can tell you is that we're moving the curb down. We're trying to get the stuff shaped correctly. In fact, Neal brought it up as well. Additionally, being priced in '07 we've got issues with PIF/SIF arrangements today as opposed to a plain old Jane payment.

I said in my comments our monthly payers were up 33% over the prior year which is fairly stunning but average payment is down 12% and all of that really messes with curve shape but we're seeing very strong collections from pools that we've owned for more than five years so there's reason to be optimistic that those tails will perform well but that's not booked into any of (inaudible) curve at this point.

And that's why I put it in my script but with all that considered these deals will probably still be some of the least profitable deals we've purchased. They were booked at kind of lower IRRs and they are underperforming those curves so it is still a challenge for us.

Right. You talked about the $3 million in foregone revenue because you don't accrete. How much capital or how much purchase price is tied up in those, I guess those are fresh BK which will as I understand will eventually pay off but just are not generating revenue now. How big of an impact is that?

So in terms of -- that $3 million dollars would be generally related to the Q3 and Q2 again primarily and some Q1 BK so I guess you can probably do the math yourself. Just look at how much we bought Q1, Q2, and Q3. The bulk of it is going to be Q3 and Q2.

Right and so what you're saying is there's not any yields on that at this point.

We'd have used the cash method on those.

Right so since you're not getting much cash in the door you're not recognizing much revenue and that --

That's correct and with these freshly filed BKs there can be kind of a long low tail for quite a number of months and so again we refer to it as "cash capped" internally and that's where we stop the income recognition. It's about $100 million. Is that right guys? About $100 million of purchase price that's in that group.

And Mark, I don't know if it helps or not but just to give you a little feel how the age of the bankruptcy portfolio has shifted, it had been running pretty steady at around the average age of an account since filing was around 12 months during most of 2007, 2008 and on the trailing 12 month look back as of 9/30, that has been reduced to about five months so we are getting fresher paper and with it much lower payments in these periods that obviously will accelerate as those accounts age.

Right, but had you invested in other assets then the cash and revenue impact would be much more positive.

Absolutely, from an immediacy standpoint, cash related to investment, this type of bankruptcy investing is about as extreme or bad from that perspective as it gets.

And I guess I would add just from a technical accounting standpoint, we're talking about cash collections because the revenue, remember revenue is based on a yield so theoretically if you deployed $100 million on freshly filed like we did -- it was a $3 million cash cap -- if those deals had been more aged or seasoned portfolios, theoretically you get by with the same IRR, the revenue would be roughly the same. You'd have had a lot more cash.

Right, exactly.

Three million dollars higher though.

Right, sure.

And then with respect to your outlook for next year, the consensus is around $350 million. Is that substantial growth?

We had a lot of internal discussion on this matter and that's why we settled on the sentence we settled on so "substantial" is probably bigger than "significant." I don't think I want to put a number on it though.

Okay, thank you.

Our next question comes from the line of Hugh Miller with Sidoti.

Thanks for taking my questions. Obviously I'll be quick because I think a lot of people have questions.

First one was with regards to the $77 million acquired in the third quarter portfolio, I didn't catch what the split was between bankruptcy and traditional. If you could give that to me, that would be great.

I've got it right here. It's about 60%.

61% BK.

Yes, Neal is right, 61% BK.

61% BK, wow. So that means, is it safe to say that given the reduction in multiple discount on BK to traditional that you guys are much more pleased with the opportunities in the BK market now?

We don't feel as though we are shifting acceptable investment dollars from one bucket to another. We're generally acquiring everything that we see that meets a current hurdle rate that we're using. We just hit on more bankruptcy deals this year than core. I guess it's just kind of the way things are settling out.

Okay and on a sequential basis there was a drop in communications expense there. What was driving that? Was there a pullback in mailers during the quarter or something like that? Any color there?

No and in fact we had a pretty strong mailer program. Again, you're comparing it to Q2. I've got a little more granularity here than you're looking at so -- there's a lot of stuff in there but yes, it would have to be based on the level of campaigns.

Okay so nothing that's jumping off the page then?

No, nothing that's jumping off the page right here to me.

Okay and Steve's comments on pricing, I heard steady. Was it steady to slightly higher or steady to slightly lower on pricing that you guys were seeing during the quarter?

Our view is that it was steady to slightly higher.

Okay so possibly a little bit more competition coming in here but -- okay, great. And last question is do you have the ERC figure as of the end of the third quarter?

We'll get it here in a second.

Okay then you can take the next caller and I'll get that.

Alright.

Thank you.

Thanks.

Our next question comes from the line of Bob Napoli with Piper Jaffray.

Good afternoon.

Hi Bob.

Hey Bob.

Let's see here, how to go about this. If you look at -- I mean, your goal was 20% return on equity. If you didn't have any impairments this quarter your return on equity would have been pretty close to 20%. As you look at next year's earnings and substantial growth, are you targeting getting back to that 20% ROE?

Kevin commented specifically that that's our long term goal. We're not prepared to specify whether that's a 2010 achievement or not but that's definitely our long term goal, Bob.

Okay, if you looked at payment supply to principal this quarter which includes the $8 million impairment, if you backed out the $8 million impairment, your amortization rate or your payment supply to principal as a percentage cash collected would have been about 32%. Now that seems low. Does that --?

That's right.

Shouldn't it be, with the amount of bankruptcy paper in there, shouldn't that number be a higher number?

No. So first of all, we're using the cash method, right, for the bankruptcy? So while we kind of left that $3 million on the table in my script, theoretically if we'd booked that you'd have negative, for those pools you'd have negative amortization or accretion so by capping it using the cash method, you had zero amortization for those pools.

Additionally I would say that we are getting our curve shape better so we are tending to perform closer to our expectation so that should kind of narrow that amortization down because remember if you look at kind of a core deal -- let's just think about a core deal for a second. That amortization in the first fiscal year should be pretty low. It depends on how your curve looks but 32/5 x allowance strikes me as, based on how much we're buying it strikes me as a good number.

Your substantial growth next year means that you feel like your impairments are going to be mostly behind you. It's got to be, right? I mean, I know you always said there are always going to be some impairments but the size of impairments has got to moderate.

I would say very good catch. Yes, I'd say allowances will always be with us but between some combination of reduced allowances or increased yields, that's how we feel. That's how we submitted our budget, in some combination thereof.

How much is left in that forward flow on your balance sheet that is the least profitable paper that you guys have ever purchased?

I can't dig that out, because we are talking about these flow transactions that are inside a quarterly deal. We evaluated that statement really on the deal level itself, not the quarterly aggregated deal.

Have you tried to "kitchen sink" it to the extent that you can? I mean, from an impairment perspective and it's, we'd rather have the kitchen sink than the Chinese water torture method.

I guess what I'll think about is that we -- so what Neal has done -- you mean from an operational perspective?

From an accounting perspective as you look at those pools.

I gotcha. I'm thinking operationally. It's been practice, if you look back at the deals, if you look at the disclosure on the press release you're going to see kind of a consistent approach at the way we look at these curves and we're shaving stuff off these curves trying to deal with allowances that are current and trying to get those curves kind of brought down to the right level. We feel that, well I feel it from an accounting perspective the kitchen sink is not a good accounting method.

Okay, alright, thank you very much.

Your next question comes from the line of Sameer Gokhale with Keefe, Bruyette & Woods.

Thank you for taking my question, just a couple of questions. First one Steve, you referenced the one state which I think you talked about last quarter, North Carolina and the change there to the statute of limitations and the impact and then you referenced New York State as being potentially another state exploring that same issue. Now there seems to be a coalition of debt purchasing companies that are trying to approach this issue and dialog with the regulators. Can you give us an update on where that stands specifically?

I think you've provided as good of an update as we have. There are even beyond North Carolina and New York there are other states where there are in various levels or various states of the approval process, other such bills and as you can imagine, the debt buying community and in some cases financial institutions as a whole which would be affected are trying to communicate to the legislative world what we believe are a lot of negative unintended consequences which could result from continued changes like this.

I think that we've had a few of these early ideas pop through. I think we feel better in a lot of situations that we were able to get in there and start the communication process earlier and so we have a reasonable shot at getting a good education program going and hopefully either shooting this stuff down or getting it thoughtfully amended so that it doesn't impact us to as great a degree but at this point at least it is all kind of a fluid situation.

Okay thank you for that color and then another question which I think is for Kevin. I'd like your thoughts as to how to think about this or what may be wrong in this thought process but if I look at or I calculate your estimate of monthly collections, gross collections for you guys, I think it's in the ballpark of about $23 million or $24 million a month.

Now, and this is for the portfolio less your bankruptcies, the non-bankruptcy receivables and if I look at the, at least as of the last quarter the carrying value of those receivables was about $401 million. I assume it's gone up this quarter but if I use that and I calculate it like a multiple, so I take the carrying value, divide that by the monthly collections, that multiple works out to be somewhere in the ballpark of about 17 times and if I run the same calculations for your competitors I come up with about 13 times for Encore Capital and about 11 times for Asset Acceptance so what might account for that disparity? This is all again non-bankruptcy stuff. Shouldn't they be in the pretty close ballpark and how do you think about that differential? Should we think okay, well if you were to normalize PRA and get it to the other multiples of the other two companies that there's the $85 or $100 million of revenue that won't be collected in the future if that multiple comes down. What is wrong with the thought process?

I think that part of what you could be missing is assuming that all debt collectors go after the portfolios at kind of the same pace. We believe that there are some people whose, and understand me, I'm not faulting these strategies. I think different debt buyers can employ different strategies and still have very satisfactory results but I believe some of our competitors would rather settle more quickly, get cash flow in more quickly and forego the tail of the portfolio. We go at things a little bit more slowly. We purposefully try to work with people before we sue them and we tend to have longer tails and as Kevin and Neal both commented, based on the economic situation and everything that we're dealing with, we have what we think is a lot of opportunity in those tails that we have not yet recognized. So it's kind of pent up ERC if you will and to the extent we get comfortable recognizing that ERC, you'd see those relative ratios shift somewhat.

Okay so in your case if we say the averages of our competitors, let's say about 11 or 12 times and yours is about 17 times and the differential of let's say $80 million to $100 million, that $80 million to $100 million is the kind of incremental revenue say you expect to collect over the next two to three years on a weighted average life of the portfolio because of your differential collection strategy. That's another way of capturing that. Is that fair?

I think it's a potentially very complicated issue with a lot of moving parts and you're trying to simplify it. I'll just go back to my comments and say I think that strategy and pace is a part of it and I think also our approach on the tails and recognizing ERC on tails is a part of it as well. Certainly buying pace relative to the competitors plays in as well.

And then how should I think about the trend line in that multiple? If you look at it for you guys versus your peers, for your company it's gone up from 11 to 17. For the other peers it's gone from 11 to 13 or nine to ten so there is that more of a move up. How should we think about the slope of that? Is that due to changing collection practices, attributable to or is there some other reason for that?

We've specifically stated that we are experiencing far fewer balance in fulls and settlement in fulls than we have historically and generally those balance in fulls and settlement in fulls are aided by a strong economy where people either have the ability to refinance to gain access to other consumer credit or get assistance from friends, relatives, you name it.

We have chosen not to compromise what we believe is the future collectability of our portfolio by changing the rates at which we're ready to settle out accounts so in keeping those relative settlement amounts rather steady, what we've done is driven down the amount of accounts that we settle, driven down the amount of accounts that we're taking payments in full on at the same time and we're driving in to more pairs.

I don't know what our other competitors are doing. They may be choosing a different strategy and saying whereas in the past they may have had a 60% average settlement rate, they may have dropped that to 50% or 40% in order to try and accelerate cash flow. I do not know if they're doing that or not but that could be another possible explanation but that's definitely happening with us. We are seeing more and more of our payments come in via payment stream.

I mentioned in my script there was a 61% increase in cash collections on portfolios owned more than five years for our call centers. That was $4 million and so I think inherent in that is some optimism about how older portfolios will perform in the future.

Okay that's interesting, helpful commentary. I'll guess we'll try to circle back with the other companies and try to put things on an apples to apples basis but thank you very much for your color, thanks.

You're welcome.

Our next question comes from the line of Rich Shane with Jefferies.

Thanks guys for taking my questions. Kevin, you'd made the comment that you beat your cash collections projections for the quarter. How much was the variance?

I didn't disclose that, Rick.

Okay, was it significantly -- using the terminology you used before about significant or material, was it a material beat or was it pretty close?

No, it was a pretty healthy number so there's a new word for you.

Okay, thanks. As we head into the fourth quarter, obviously you guys have pretty detailed internal projections. This is an interesting quarter because by your estimates or by your assumptions, you beat your expectations. Are you expecting, given seasonality, that cash collections are going to be up or down sequentially during the fourth quarter?

Our insight to 2010 is all we've given so I think that we'll leave it at that and we didn't provide any guidance or insight on Q4.

Okay, I'll respect that. I'll move on. In terms of, you made the comment regarding basically having -- with the regulatory changes, changes the tail assumptions on some of your pools and accelerating legal, or driving things to the legal channel more quickly so that you can prevent the statute of limitations from tolling. What was the implication in terms of the increase in allowance associated with potentially reducing those tails?

I just wanted to clarify -- so what happened here was not that they changed the length of the statute of limitations. What happened in this scenario was they said you can't call people who are past the statute of limitations so there is a subset of accounts that we would normally let go beyond the statute of limitations knowing that we would have some call center opportunity with them. Without that opportunity, then the only choice that was left was to file suit. It's an important distinction.

That doesn't answer my question but it brings up another interesting question. Basically you were calling people after the statute of limitations had tolled and trying to get them to essentially voluntarily pre-pay given that the debts at that point were abolished or new obligations were abrogated or whatever the terminology would be?

Oddly enough, there is a subset of people who want to repay their debt and we certainly would call and ask them to do so.

I don't want any of us to turn into jailhouse lawyers here but the mere occurrence of a statute of limitations running, in most cases doesn't forgive, abrogate, blow away the debt. It simply makes it unenforceable via legal means.

We have never, obviously never sued anyone who is beyond the statute of limitations knowingly so that wasn't impacted. There's just a subset of people that we thought we would be able to work with in our call centers where that wasn't an option. I don't know that that affects the tails at all. We expect that after pursuing legal action, there is a very healthy tail on legal collection so I'm not sure that it impacts the tail in any way.

Okay so there was no impact related to the allowance from this?

I got it. So your question is was this event, did that trigger somehow part of this $8 million?

Exactly, exactly.

It did not. We ended up with $1 million more expenses and that was hard enough to deal with.

Okay, last question and this goes to Sameer's what I thought was a very interesting line of questioning. Basically the implication is that your accounting suggests that you think that there is a higher end PV to longer collection tails. When we look at -- again it's hard to tell because these vintages are, at least the new vintages you're not far enough out but if we look back at some of your peers on a 2005 basis, the actual collection multiples for you are a little bit lower so do you think that this is something that really goes out even beyond five or six years and does that actually make sense from an MPV basis?

I'll just say that the whole thing is -- being on a call and kind of hit with that kind of level of detail of numbers is a little difficult to assimilate so I just don't know. I would have to see something in front of me to look at what you guys are talking about in terms of your flow but I guess what I'll say in terms of tail, especially if we're looking at older deals, I assume you guys have pulled sales out and all that kind of stuff and I know we talked about settlements and there's a bunch of noise. As Steve said, it's kind of a complicated thing to try to generalize so again, we're modestly bullish on those older deals, on the tails, so there's probably some ERC there that we haven't put in yet.

But clearly if you point is if Company A can collect a higher multiple more quickly than Company B and can do so at less expense, Company A has figured out something that Company B hasn't. That is obviously not a point we would ever argue it indeed those were the facts.

Okay and I apologize. You're right in terms of the detail. I'll circle back with you guys. Thank you very much. I appreciate your patience.

Our next question comes from the line of Thomas Morton with CPMG.

Hi guys. I was wondering if you guys could give us some color on the IRS issue and by that I mean what's the company's position? What's the IRS' position and what if any potential acceleration of the deferred tax liability is out there, what kind of timing we might expect in terms of that getting to a point of resolution?

That's a good question. What we filed in our Qs and our Ks, it continues. We're certainly in the appeals process. We just don't have any feel for how that appeals process is going to run. Some estimates could say it's nine, 12 months down the road. We just don't know. I think the IRS is very busy right now and we're certainly pushing on them because we think that from an industry standpoint, for instance we've got what we think is kind of rock solid data in a case, two cases and I think most industry participants look at those same cases and so to some degree we kind of feel like we should be out there on the tip of that spear and talking to the IRS and letting them understand what our position is and how our industry works. It's a maddening, slow grinding process.

And does it basically boil down to your on cost recovery basis and the IRS thinks it should be something that's more accelerated in terms of income or revenue recognition?

That's correct.

We're getting into detail here but what are those two sort of landmark cases somebody could check out and sort of --

Lipton and Underhill.

Lipton and Underhill? L-i-p-t-o-n?

Yes. In short what you'll find is that these guys bought assets that were in my opinion, dramatically better than the assets we're buying and they, of course the IRS disagreed with them too and they had to take them to tax court and of course they won. So there's a lot of words here. It's complicated but those are the two court cases that most in industry use and --

Okay, thanks guys.

Steve just passed me a note. Another kind of interesting twist on that is that the IRS also doesn't have a position on what they should be using either because it depends on who you are. You might be audited and they'll give you one answer and someone else maybe get a completely different answer and that's, they really can't do that and so that's one of the reasons we're out there fighting this thing because they've got to either come up with a homogenous clear piece of guidance that everyone can use or we're going to use that Lipton Underhill analysis which I think should happen.

The interesting thing is the IRS is not offering their own version of Lipton or Underhill. They would rather not see cost recovery but we're having a very difficult time in getting a more kind of reasoned case or law supported guideline on what exactly they do want.

Okay, thanks guys.

Yes.

Our next question comes from the line of John Neff with William Blair.

Hey guys, I'll try to keep it really quick here. The call is getting long so thanks for the patience.

You described what's happened to the, in terms of breaking down the impairment charge in the quarter you sort of described that the 2008 allowances are mainly related to the fact that you purchased some 2008 stuff under forward flows and pricing went against you relative to those locked in prices. Can you describe sort of the drivers behind the '05 and '06 write-downs? You mentioned they were just related to one pool in each vintage and also I think -- I think we touched on this but I just wanted to confirm it. Was there any part of the impairment charge related to sort of an expectation or a reaction to some of the regulation changes that you've seen in North Carolina, possibly New York, and an expectation that that continues, that trend continues?

Okay, so no to that question. None of the allowance is related to some legislative expectation. The 2005, 2006 charge I stated in my comments, it was kind of buried back on page 17 or something, that it was really related to one 2005 pool as you heard and one '06 pool and it was kind of, not that all allowances aren't unforeseen but I would localize these two into kind of a weak July and August so again, we just thought hey, it was a weak July and August. We better take the allowance.

Now what's interesting about that is should Neal recover that in say, November, it's just going to end up being excess amortization so that's kind of one of the downsides of the accounting button. Neal is laughing about that but that's how it would work.

John, just given the economy, we're trying to be very careful with signs of underperformance and if you were to look at many of our pools, especially as pools get a little older, you'd be looking at a curve that can really start to get some fluctuation in it up and down and we have two ways to go when something like this happens. We can either say hey, it was a fluctuation down. We'll let it ride and based on our long experience, it's probably going to bounce back up next quarter and it'll be fine. The problem in doing that if you're wrong, you get behind an eight ball especially when you have a decent sized yield on these things and the hit you've got to take in the future is even worse.

So what we're trying to do as we deal with this really weak economy is just be as quick on the allowance button as we ever have been and if Kevin sees two out of three bad months, he's hitting the portfolio. We're not waiting.

Appreciate that, something else related to just the increase in legal expenses related to the legislative change. I just want to narrow down this universe because I think if I understood you correctly, what you're doing, this isn't a situation where you were -- you let certain accounts go past the statute because you were planning to call them and the increase in accounts referred to the legal channel, was that simply, were those simply people you had otherwise planned to go past the statute and call them or is this just that you have to put everybody, you have to sue everybody that's in that state before statute hits and that's the plan going forward?

Okay, so we are obsessed with what kind of ROI we are going to get on a legal expense or on a call center expense. There is a -- the number of accounts we talked about is a tiny, tiny portion of the accounts that we have in any state. A fraction of our portfolio is in legal altogether. It's again not our preferred method but there is a small group of people for whom we think, the way that we score them, the way that we see them, we think that they would respond to calls over a period of time and their financial situation is likely to evolve and if they get back to work or some other situation changes, we think that we will get paid voluntarily from a phone call with them. It's a very tiny, tiny number of people that we think we're going to see that from but nonetheless there is some population. If that possibility is gone for that population that we were going to continue calling in the call center, then we have to go legal.

There is a huge number of people that will go past the statute of limitations that we won't bother calling because we don't think they have the score and we don't think we'll get a decent ROI out of that phone call. I've said in previous calls by far the most important decision we make every day is what not to do and what to leave alone. The vast majority of our accounts won't pay us and one to go bankrupt is to attempt calling people who have no intention of paying you. So we really try and focus our efforts on people that we believe have the wherewithal to pay us via one channel or the other.

And I think it's an important point especially as you think about this line of questioning that we've gotten about comparing multiples between competitors and I'm not suggesting in the least that's not a valid analysis to do but a debt buyer can generate a huge variance in the amount of collections that they can drive out of any given pool. The question is how profitably are you doing that and if you want to drive your expenses up very high you can do that and you can create a higher multiple than the guy who is setting a lower threshold for how much they want to spend to create another set of collection results and so that's all got to be factored in and it's something that we try to understand here to a very great degree and manage as we make any strategy decision be it, as Neal said, legal or call center be it letter or phone, whatever we do.

We're keenly aware of the ROI of all of our efforts and any portfolio that is in danger of impairment, that's not lost on us and we will look closely but we certainly aren't going to have a negative ROI trying to chase after a possible impairment.

Thank you and last really quick housekeeping one Kevin, my typical total collectors and supervisors, the number was 1,526 last quarter.

Yes, 1,549.

Thanks guys.

Yes.

And our final question comes from the line of Edward Hemmelgarn with Shaker Investments.

Great, just a couple of questions about the bankruptcy portfolio. First is are you seeing or at least in these bankruptcy accounts that you're purchasing, has the kind of curve lengthened on those just as you're seeing the curve, collection curve lengthen on your non-bankruptcy accounts?

Edward, I think generally the courts are keeping people to a program. We've seen dividend rates come down somewhat over time but the length of the typical case is not moving to our view at least.

Okay, alright then the second thing is at some point given the extent of your purchases of how the mix has changed rather significantly and to greater bankruptcy paper versus non-bankruptcy. Would you expect in coming years that your ratio of compensation expense will decrease relative to your revenue and your, as your amortization rate increases I guess is what I'm trying to say here.

That's right. That's what I was trying to say earlier. I think it was the first caller. I forget who that was. They were really kind of focusing on the shift of collections from internal collectors to internal legal people and I made the comment that if you're really trying to think about modeling, probably the better thing to do is focus on the bankruptcy factor which you've just done. That's what should happen. So theoretically you should have amortization rates that are creeping up. Theoretically, cost to collect out is kind of dramatically smaller and you'd have a lower ratio in salaries, cash collections.

And so that's something that we should be focusing on in the future and is driving some of your upside in '10?

Yes, I would say it's something that if you're building a model you need to at least think about that mix. That's correct, yes.

Okay, thanks.

Yes.

And ladies and gentlemen this concludes our question and answer session. I would now like to turn the call over to Mr. Steve Fredrickson for closing remarks. Sir?

Thank you Operator. I'd like to reiterate a few key points about our third quarter performance before concluding this call.

While economic conditions remained difficult, PRA continued to perform solidly in the third quarter of 2009. Not only did we produce strong results operationally but we continued to build for the future, further refining our best in class platform and taking advantage of our access to capital to acquire large amounts of portfolios that we believe are well priced even in a market where collections have grown more difficult.

Overall, PRA is in a position to emerge from this economic downturn a stronger and more efficient competitor. I can honestly say that I'm as excited about our future today as I have been in years. I'd like to thank all of you for participating in our conference call. We look forward to speaking with you again next quarter.

Thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Have a great day.