PRA Group Inc (PRAA) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter one 2010 Portfolio Recovery Associates, Inc. earnings conference call. My name is Haley and I will be your operator for today.

At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jim Fike, Vice President of Finance. Please proceed sir.

Good afternoon and thank you for joining Portfolio Recovery Associates' first quarter 2010 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'll begin prepared comments and then follow up a question-and-answer period. Afterwards, Steve will wrap up the call with some final thoughts. Before we begin, I would like everyone to please take note of our Safe Harbor language.

Statements on this call which are not historical including Portfolio Recovery Associates or management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future including with respect to the future portfolio's performance, opportunities, future revenue and earnings growth, future space and staffing requirements, future productivity of collectors, expansion of its subsidiary, the subsidiary's future business prospects and contributions to earnings are forward-looking statements. These forward-looking statements are based upon management's beliefs, assumptions and expectations of the Company's future operations and economic performance, taking into account currently available information.

These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ from those expressed or implied in any such forward-looking statements as a result of various factors including in 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 any such forward-looking statements are based in whole or in part. Now here is Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim, and thank you all for attending Portfolio Recovery Associates first-quarter 2010 earnings call. On today's call, I'll 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.

Portfolio Recovery Associates began 2010 with strong financial performances across the board. We also took steps to build for the future, demonstrating the long-term focus we have always championed.

In terms of results, our first-quarter performance was highlighted by record results for cash collections, cash receipts, revenue, net income, and earnings per share. Productivity also rose to record levels.

To put this in context, these results did include the seasonal benefits we typically see during the first quarter. However we also faced headwinds from the macroeconomic environment that continues to be less than vibrant with high unemployment and limited access to consumer credit.

Looking to the future, we took a number of steps during the quarter to help assure our successes can be repeated. First, we completed a very successful equity raise, selling 1.4 million shares for proceeds of $72 million.

Next, we purchased a near record $102.6 million in charged off consumer receivables. Third, we acquired a controlling interest in an exciting new fee subsidiary, CCB. And fourth, we appointed two new experienced directors to our board.

We will go into more detail on each of these points in the next several minutes. Now getting a bit more granular, on our first-quarter financial results, PRA acquired $102.6 million of defaulted debt during the quarter, representing $1.9 billion in face value.

This was broken into $71.6 million or 70% bankrupt paper and $31 million or 30% core charge-off paper. Cash collections were a record $119.2 million, up 32.6% from $89.9 million in the year ago period.

This helped drive our record cash receipts of $134.6 million in the quarter, up 26.1% from $106.8 million in the same period a year ago. Fee revenue was $15.4 million in the first quarter, a decline of 8.9% year over year.

Operating expense to cash receipts moved down dramatically. In the first quarter of 2010, the ratio stood at 42.3% compared with 46.5% in the first quarter of 2009.

This improvement in operating efficiency is the result of highly effective collection strategies, a continued shift in our collections mix to the bankruptcy business and a slight shift to our generally higher-margin debt purchase business. PRA realized unprecedented productivity of $182.02 per hour paid for the first quarter of 2010 which compares with $145.44 for full year 2009.

This includes an increase of 54 net collectors to our Companywide owned portfolio call center staff from Q4 2009. PRA achieved these record Q1 results despite recording a sizable net allowance charge in the quarter of $6.9 million. Kevin will provide details about the charges shortly.

Revenue grew 22% to a record $83.4 million compared with $68.2 million in the year ago quarter despite the charge. Earnings per share advanced 38% to $0.91 versus $0.66 in the first quarter of 2009 despite our equity offering which created an increased Q1 share count.

Record net income of $14.8 million was up 47% from $10.1 million a year ago. We booked net interest expense of $2.1 million in the first quarter which was up slightly from $2 million in the year ago quarter due to the additional interest related to our interest rate swap.

In terms of resources, our balance sheet remains strong with ample cash availability. During the first quarter, as a result of our equity raise and cash collections, we decreased absolute debt outstanding to $297.6 million, including $1.3 million of long-term financing not associated with our line of credit.

This continues the very controlled financial leverage we've employed over the last several years. Our debt to equity ratio at quarter end stood 68% down from 96% at year end 2009 while we maintain $68.7 million of availability under our lines of credit.

Now let's review our operations in detail beginning with first-quarter portfolio purchases and overall market conditions. During the quarter, we acquired 84 portfolios from eight different sellers. The majority, about 92%, of our first quarter purchase volume in terms of dollars invested was from the major credit card and private label asset classes.

The remainder came from pools 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 70% of our purchase activity in terms of dollars invested. In Q1, as has been the case for the last several quarters, the majority of our bankruptcy purchases were fresher bankruptcy filings.

Remember since we bought 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 continued to firm slightly during the quarter.

The resale market continues to experience little to no volume in terms of offerings. Most competitors with access to reasonable amounts of capital appear to be exerting continued discipline.

Now let's turn briefly to the political climate. A number of proposed state regulatory bills have faded away but several that are detrimental to debt purchasers and collectors continue to be discussed. Their outcomes in terms of provisions for passage remain unknown at this time.

We continue to work diligently to educate our elected and appointed government officials across the country about our industry and the very real negative results for consumers that may come as unintended consequences of any onerous legislation. Throughout Q1, we worked closely with the FTC in a fact gathering exercise on their part that culminated with a large submission by us just two weeks ago.

As we mentioned previously, we view this FTC exercise as an appropriate and intelligent process of gathering facts when the parent focus on debt resale and account record keeping and documentation. As a reminder, PRA does not resell debt and does not rely on resale as an integral part of our business model.

Moving onto collections, as I mentioned earlier, Portfolio Recovery Associates recovered a record $119.2 million in the first quarter from owned portfolios, up $32.6 million from $89.9 million a year earlier. Each month of the quarter had good year-over-year growth rates although February and March were exceptional.

Offering a bit more detail on our collections performance, call center and other collections were a record $57 million, up 12% from the same quarter last year. Cash collections from our purchased bankrupt accounts were a record $33.2 million, up 88% from Q1 2009.

As we have discussed for the past several quarters, collections from our internal legal collection strategy in which we use our own staff attorneys (inaudible) use third-party attorneys working in a fixed-price basis, were once again a record at $10.7 million in Q1 2010. This is up 203% from the same quarter last year. We expect continued strong growth from this channel for the foreseeable future.

External legal collections were 15% total cash collection in Q1 2010 at $18.3 million. This compares with 20% in Q1 2009 at $17.8 million which represents a 3% year-over-year increase in dollars collected. Excluding bankrupt collections, external legal was 21% of cash collections in Q1 2010 and 24.6% in Q1 2009.

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 $182.02 for the first quarter of 2010 compared with $145.44 for the full year 2009.

Excluding the effect of trustee administered purchased bankruptcy collections, PRA's productivity for the first quarter was $134.70 which compares with $113.42 for full year 2009. When excluding external legal and trustee administered purchased bankruptcy collections, productivity for the first quarter was $106.40 versus $87.13 for full year 2009. Neal will give you more color on site-specific productivity in a moment.

Companywide at quarter's end, our own portfolio collector headcount was 1,379, up 54 from the end of December. 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 business saw revenue decline 8.9% from the same period a year earlier to $15.4 billion. The acquisition of CCB occurred late enough in the quarter that it had a negotiable impact on these figures.

Revenue and income fell at our skip tracing unit when compared with the same period one year ago. Although volume remained relatively strong, the quality of the work we received continued to be lower, generating less revenue per account and lower operating margins.

Some of this is due to shifts in client strategy which may or may not persist, and some is due to new clients that have presented us with more difficult work as they test our capabilities. We are working on a variety of strategies to improve income and revenue but we don't expect results overnight.

We had a mixed performance at our government services business with the result being a drop in both revenue and operating income. A significant piece of the decline was due to a year ago comparable period which included a large one-time recovery as well as continued weakness in the sales and use tax business as a result of lower sales tax receipts in California. We see these trends beginning to improve and anticipate modest increases in the near future.

In terms of our efforts during the quarter to build for the future, we announced in March that we acquired a controlling interest in new fee business, Claims Compensation Bureau, or CCB CCB is a well-established firm headed by its founder that provides very specialized claims filing and payment processing services related to class-action lawsuits and other large legal settlements.

In short, CCB works with commercial clients including hedge funds, mutual funds and other money managers, market makers, major retailers and manufacturers to handle the identification, tracking and highly detailed filing of these specialized types of claims. It's our belief that we can help expand the marketing of this business as well as provide additional resources to drive the continued evolution of the firm's specialized systems and operational processes. All of the existing employees are staying with us and will continue to operate the business as they did prior to the transaction.

I'm also very pleased to have added two experienced entrepreneurs and business leaders to our Board of Directors. [John Sein and John Fuller] both have years of experience at the head of growing vibrant companies and are already offering great counsel as we continue the exciting growth of Portfolio Recovery Associates.

Finally, I want to thank our call center staff for achieving a significant milestone in the history of PRA. On April 21, PRA collected its two billionth dollar. 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. Neal?

Thanks, Steve. PRA's strong first-quarter results were driven in part by a few important long-standing operational initiatives which I would like to talk to you about over the next several minutes and the normal seasonal strength we typically see in the first quarter.

To begin, during Q1 2010, PRA conducted the largest mailing campaign in the Company's history. This was designed to maximize the impact of tax refund season by leveraging the unique data set PRA has developed over the last 14 tax seasons.

This data center is especially rich because of our long-standing policy of not reselling accounts and severely limiting our use of outsourcing. Our confidence in this data set allowed us to select a group for this mailing that was roughly twice the size of our 2009 mailing.

As expected, we were able to maintain or improve on the ROI results of our 2009 campaign despite its far greater size this year thanks to the efforts of our analytics team and collections staff. Also contributing to our Q1 results was the trend toward a much larger payer base which was driven by our increased dialing capacity which in March was roughly 17%, larger than in March of 2009, as well as the leveraging of our dynamic scoring process which rescores all of the accounts in our inventory on a nightly basis.

In Q1, the total number of payments we received was up 48% over the prior year. This is not just a reflection of our purchase activity. Our staff has worked hard to move our focus toward building a monthly payer base as macroeconomic conditions have necessitated more monthly payment plans from our customers and far fewer one-time lump-sum payments in full for settlements.

As I mentioned before, the macroeconomic conditions that exist today have caused the average size of a payment taken in our call centers to decline and in Q1, we again saw a year-over-year drop of 12%. However during this quarter, the residual effect from our growing payer base was more than enough to offset this average payment size decrease.

This compounding residual effect of our growing payer base is something I've spoken about on prior calls. As long as we're able to successfully keep people on these monthly payment plans at a low cost, we stand to collect a larger percentage of these balances and actually increase total profitability relative to a time when we were taking a greater number of large payments.

The strength of the annuity stream from our payer base was again evident in our first quarter call-center collections on accounts that we have owned for more than five years which finished the quarter at $5.2 million, a 21% increase over the prior year.

Holding the productivity gap between our collection sites remains at the top of our operational objectives, given the sizable opportunity that gap represents. Had all of our call centers delivered the same cash collections per paid hour as our top site, we would've realized another $10.3 million in collections for the first quarter. Although this estimated theoretical value gap was down by $300,000 from Q1 2009, it was up by $3 million from Q4.

During Q1, we saw increased site-specific productivity per hour paid of about 8% year over year. As a reminder, this site-specific productivity figure was only an hourly pay productivity by collection res. 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 all call center locations. In Jackson, Tennessee productivity was up 16% year over year. In Hampton, productivity was up 9%. In Kansas, productivity was up 4%. In Norfolk, productivity was up 3%. In Birmingham, productivity was up 52%. And in the Philippines, productivity was up 22%.

On an absolute basis, Kansas remained our top call center for the quarter. During the quarter on a relative basis, Jackson was about 80% of the Kansas standard, Hampton was 81%, Norfolk was 82% and Birmingham was 64%. Productivity in the Philippines office remained flat over the prior quarter at 39% of the Kansas standard.

As a reminder, this center tends to receive more accounts that are difficult to collect. Since the Philippine collectors are less expensive to employ, we end up risking less to work these tougher accounts. Because of this, the Philippine centers 39% performance measurement does understate that center's relative capabilities.

The final operational factor contributing to our Q1 success was our legal collection results. As I mentioned on prior calls, we've chosen a focus on building our own internal legal collections capability to take the place of the external offerings that we felt were underperforming. This has not only helped us to improve collection performance in these locations, but has allowed us to capture additional margin that was being paid to the law firms.

Our internal legal collections for the first quarter of 2010 were up 203% over Q1 2009. Perhaps more importantly, this occurred as our external legal collectors generated 3% more in collections than in Q1 2009 with considerably less volume placed into that channel.

I'm more confident than ever that we've managed to retain those external law firms that had real incremental value and we have built the most effective internal legal collections program in the industry. With that, I'll turn the call over to Kevin Stevenson, PRA's Chief Financial and Administrative Officer. Kevin?

Thank you, Neal. To begin, I would like to remind everyone that on our last earnings call, I said I was looking to forward to a future. I would like to talk about record net income along with record cash collections and revenue. Well the future has arrived.

In Q1 I am happy to report record results across the board. Our first-quarter 2010 net income of $14.8 million is an improvement of 47% from the $10.1 million a year ago with record EPS of $0.91 up from $0.66 a year earlier. We achieved this despite incurring $6.9 million in allowance charges which cost us $0.26 in EPS.

The $6.9 million charge was up slightly from $6.2 million in Q1 2009 and down sharply from $9.5 million in Q4 2009. Total revenue for the quarter was a record $83.4 million which is up 22% when compared to the same period one year ago. Operating income was $26.4 million, up 43% from the year-earlier period while the net interest expense was up slightly from $2 million one year ago to $2.1 million in Q1.

Return on equity improved to 15.5% during the quarter, even factoring in the impact of our equity raise in February. We are pleased to get our ROE back up over 15% and remain very focused on bringing that number back toward our historical 20%.

Our weighted average fixed cost on the acquisition line during the quarter was 2.35% compared with 2.62% for the full year 2009. Breaking our fourth-quarter revenue down into its components, the majority of total revenue or $68 million came from income recognized on finance receivables. This is revenue generated by our owned debt portfolios and our Q1 performance represents another record for PRA.

Income on financed receivables is derived from the $119.2 million in cash collections recorded during the quarter, reduced by an amortization rate, including the $6.9 million allowance charge of 43.0%. This is essentially flat to Q1 2009 even while purchased bankruptcy cash collections have nearly doubled.

During the prior four quarters, we incurred the following amortization rates. 41.3% in Q4 2009. 41.2% in Q3 2009. 40.3% in Q2 and 42.9% in Q1 2009. Our full-year 2009 rate was 41.4%.

As I mentioned during the quarter, PRA recorded allowance charges totaling $6.9 million, up slightly from $6.2 million in Q1 2009. [Life to date] reserves since the change to ASC 310-30 now stand at $58.1 million. I'd like to continue the approach to discussing allowance charges that I initiated last year.

I'll talk about a few of the larger charges, but not stepping through each and every pool. For those interested in additional detail, we've included charts in our press release, the detailed 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're 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 pools overperform, that overperformance is not 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. This yield adjustment is not like the previously described allowance charge that shows up in its entirety in the current period.

The adjustment of a an increased yield will show up on our income statement gradually over time. Some portion will impact the current period, but the majority will show up in the future over the pool's remaining life. I believe this [bias] exists today to a greater extent than we have seen in prior years.

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 opt to use either cost recovery or a cash method as permitted by the ASC 310-30.

Accretion, or 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 ASC 310-30 and generally occurs in situations where cash flows are ramping up early in a pool's life.

Pools of low forecasted initial cash flow curves coupled with more robust cash flow projections in later portions of the curve are more apt to experience accretion than pools of more front end weighted -- with a more front end weighted cash flow curve. Bankruptcy pools with mostly freshly filed Chapter 13 accounts are perfect examples of this kind of phenomenon.

Although we're not about to change our position on accretion at this time, it has cost us about $7.9 million in delayed revenue in 2009 and 2010 from bankruptcy purchases made in 2009 and 2010. Recall from last quarter's conference call, that total was approximately $5.5 million related to the 2009 bankruptcy deals alone for the fiscal year 2009.

Of course these revenues will be recognized in future periods. 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 and every deal today. Instead I will walk through the larger reserve portfolios, however, I will get into a a bit more detail as I have in the prior few quarters.

2004 and earlier deals had no activity during Q1 in terms of allowances. In 2005, core tranche of paper contributed an allowance charge in Q1 in the amount of $2.7 million, up from the Q4 charge of $1.3 million and up from the $1.1 million charge in Q1 of 2009.

The delta was driven by a $2.3 million charge in the 2005 Q4 pool of accounts. That pool contributed $1 million in Q4 to the allowance bucket and $475,000 in Q1 2009.

This was a disappointment for us given the strength of overall cash collections in Q1 of 2010. In fact, 2005 Q4 did indeed collect more cash in Q1 2010 than it did in Q4 2009, but it was simply not the level we had expected.

Offering a little more granularity, January's results contributed the most in terms of missing expectations or approximately 50%. Additionally for the quarter, the actual cash collection miss represented only about 25% of the allowance, while the additional 75% represented some near-term adjustment of the collection curve. We are watching these accounts closely and as always, we will keep you apprised.

The 2006 core tranche of paper contributed an allowance charge of $1.1 million now and this is flat to the Q4 level of $1.2 million but up somewhat from the Q1 2009 level of $860,000. The $1.1 million of 2010 allowances came from the Q3 and Q4 2006 tranches.

The 2007 tranche of accounts contributed an allowance charge in the amount of $1.7 million. 2007 Q1 and Q2 tranches were the primary driver of this result. It's too a disappointment for us because it was up from zero in Q4 2009 and up from $340,000 in Q3 2009.

It was however down from the $2.3 million in Q1 2009. Looking deeper at the Q1 and Q2 2007 tranches combined, as with the 2005 tranche of accounts, January contributed more of the negative results than did February and March, just over 70% of the negative variance was attributable to January. Again, similar to 2005 tranche, the actual cash miss for the quarter represented 32% of the allowance charge while the balance was a result of lowering some of the future expectations.

Now I'd like to turn your attention to 2008 tranche of accounts. For those of you that have followed PRA, you should remember that the 2008 tranche of accounts in Q4 2009 was responsible for approximately 70% of the fourth quarter's net allowance charge. Additionally, during Q3 and Q2 of 2009, that 2008 tranche of accounts represented approximately 60% of those respective quarters' net allowance charges.

And for the full year 2009, the 2008 tranche represented approximately 58% of the allowance charges. The majority of these accounts and these pools come from several [forward flow] transactions that were priced [in one] 2007 but that we were required to continue to buy throughout 2008.

During Q1 2010, the 2008 tranche of accounts contributed no allowance charges. We continue to track this pool of accounts very closely. While the results were good in Q1, we still have a long road ahead of us in terms of collections.

Moving forward into the 2009 and 2010 core tranche of accounts, we've incurred no allowance charges to date. Additionally, during Q1, we spent a significant amount of time and effort analyzing our yields and booked deal multiples on the 2009 tranche of accounts.

As I mentioned in prior calls and I think as is evidenced in our chart contained in our 10-Qs and 10-Ks, these 2009 tranches are strongly overperforming book expectations. As such, we did indeed increase both yields and deal multiples on these charges primarily focusing on Q1 and Q2 2009.

Our bankruptcy performance continues to perform nicely, however, allowances did increase to a higher level than we have seen in many quarters. During 2009, bankruptcy portfolio allowance charges averaged $135,000 per quarter with a peak charge of $280,000; while in 2008, when they averaged $588,000 per quarter with a peak charge of $995,000.

For Q1 2010 as a group, the bankruptcy portfolios ended up with a net allowance charge for the quarter of $1.3 million. $1.2 million of the charge came from Q3 and Q4 2007 tranche of bankruptcy paper. We're working with our bankruptcy group very closely and watching this and all tranches of bankruptcy paper.

I mentioned to you previously that we were closely watching our bankrupt portfolios and we're evaluating booked yields and and deal multiples. I further mentioned in Q3 2009 that we did indeed allow bankruptcy portfolio yields to increase somewhat but generally not their deal multiples. For Q1 2010 as with Q4 2009, we left yields in multiple static as set in Q3 2009.

Looking at the allowances in different ways we believe is helpful and puts things in perspective. For example, we look at ratios such as allowance to NFR which is net finance receivables; allowance is the ERC, estimated rating collections; allowances to revenue on finance receivables and allowances to cash collections.

For Q1 all of the aforementioned ratios represent a nice improvement over Q4 and over the average of the entire year of 2009. Moving on, approximately $880,000 of operating expense in Q1 was due to non-cash equity compensation that was booked during the quarter relating to our 2009 and 2010 performance-based restricted share plans as well as other equity-based awards. During the first quarter, cash collected on fully amortized pools was a record $10.3 million.

During the prior four quarters, we recorded cash collections on fully amortized pools of $7.6 million in Q4 2009, 6.6 in Q3, 7.1 in Q2 and 5.9 in Q1 2009. Eliminating the fully amortized pools from our amortization calculation gives us amortization rate for Q1 of 47.1%. This is up from Q4 2009's 44.9% and Q1 2009 of 46.0%.

As Steve described in some detail, fees generated by fee for service businesses were $15.4 million. This compares with $16.9 million in the year ago quarter. Our fee-based businesses accounted for 18.5% of the Company's overall revenue. With the new CCB deal, our quarterly amortization expense related to acquired intangibles from our various business acquisitions is now $1.8 million per quarter.

Operating expenses in Q1 grew 14.6% when compared to Q1 2009. This was primarily driven by compensation in employee services growing $3 million or 11.2%, communications expense increasing by $1.6 million or 46%, primarily a strategically targeted letter campaign was increased.

The increase in competition expenses during Q1 primarily relates to the the addition of IT employees as we seek to increase project throughput, inside legal employees as we continue to build that capability and as well as growth in our call center collectors. Operating margins during Q1 were 31.7%.

Looking back into the prior four quarters, operating margins were 30.2% in Q4 2009, 27.4 in Q3, 29.9 in Q2, and 27.1% in Q1 of 2009. Without the margin dilution caused by the fee businesses, the operating margin would have been about 567 basis points higher at 37.4% in Q1.

Operating expenses as a function of cash receipt during Q1 2010 were 42.3%. This is down nicely from 46.5% in Q1 2009.

Our balance sheet remains strong during the quarter despite substantial purchases of new finance receivable portfolios in the amount of $102.6 million. As of quarter end, the outstanding balance on our line of credit was $296.3 million, down $23 million during the quarter.

Our total credit facility is $365 million, leaving us with $68.7 million of availability. Cash balances increased sequentially during the quarter to $23.0 million.

We believe our leverage remains quite modest at 68% of equity. We are producing strong internal cash flows and are well capitalized. Last quarter, as I updated you on our capital position, I had discussed the fact that we were working with our bank group on a new expanded syndicated facility.

During Q1, however, the $150 million shelf registration that we put in place back in September 30 of 2009 looked like a more expedient and ultimately superior capital raise. The equity offering has allowed us to further strengthen our balance sheet, raise plenty of capital for portfolio and company acquisitions and kept in place the very favorable borrowing terms under our existing bank lines.

We continue to operate all aspects of the business with a long-term focus. We believe this is particularly important in today's difficult economic environment and its impact on our business.

We view our own portfolios as a long-term asset and we do not make collections 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.

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

(Operator Instructions) Mark Hughes, SunTrust.

Is this a permanent shift in the market? You seem to be getting superior returns in BK. Is that something that it is going to persist here or is it still temporary?

I think it's too much to say that it's a permanent shift. One of the nice advantages we think we've got right now being able to go in either direction is we just follow yields where ever they are strongest in a particular period. You know, I wouldn't expect that we would continue with this mix throughout the year. I would expect that it's going to ebb and flow somewhat.

Any updates, Kevin, on when you might lap this decline in payment size? Still down again this quarter. Obviously the number of payments is up. What do you think about that?

Well, I think Neal addressed that in his prepared comments. So Neal was talking about how the sheer number of payments given the lower volume seems to have been -- you used the word laughing. So again, that was in Neal's prepared comments. I think we're getting close to that point.

Okay and then finally, the expectation for collections for the 2010 portfolio relative to purchase price collections multiple?

Lets see. I don't have a Q in front of me but I have got -- my numbers say 240 ex BK (inaudible) yes, 240 ex BK and then 208 overall.

David Scharf, JMP Securities.

Just a couple here. One, I don't have the prior releases in front of me. But just curious, the purchasing this quarter was from eight sellers. I think that is a relatively low number for you guys.

Are you sensing any changes in the selling environment whereby you have some more concentrated pockets of selling and perhaps that may bode somewhat for a little firmer pricing continuing or are you -- was this just a quarter where it was just a few large transactions on your part with a few large guys?

David, I think that actually what's happening is fairly consistent with what's happened with our buying historically. The changes really are all of the consolidation that has gone on on over the last few years.

And beginning 2010 in particular, we were careful to count each particular seller really as a single combined entity even when you had kind of multiple brands or divisions within a particular seller. So those are pretty broad umbrellas that we're counting at this point.

You know, we may very well be dealing with different sale groups and different products, but if they all ultimately roll up to the same organization, we're just calling it one seller right now.

Okay, so I will take that to mean it doesn't look nearly as concentrated as it did here. Question for Neal. Regarding productivity, just curious, obviously there have been a whole host of operational changes and improvements during this tough cycle in terms of just the level of mailings and dialing and so forth.

Kind of wondering, as we think about the balance of the year and perhaps into the early part of next year, are you at the point where future productivity improvements are pretty much dependent upon a macro shift at this juncture? Or are there still some very identifiable operational things you would like to put in place that you haven't gotten around to implementing?

We have made great strides and I am extremely proud of everything that we've accomplished. But it's easy for me to say that there's still plenty of room for improvement on all levels. Technology and scoring and on a whole host of other items. So I'm confident we will stay on this path.

Okay, so I'll take that to mean the current levels of productivity gains could be sustained for the next few quarters even without a material change in the liquidation environment out there?

The only thing I would caution you there, obviously Q1 has some seasonality. I don't predict that will be continued but I think part of our strong Q1 results are something over and above seasonality and I do expect those things to continue and strengthen.

Okay and then the last question. Kevin, obviously terrific news on the directional trend in allowances and particularly the '08 and '09 vintages being charge free if you will. A little bit of a surprise with the reversals in the '05 and '07 vintages.

Are there any commonalities, common features of the particular pools that suddenly reversed course or underperformed expectations? It seemed a little bit of a surprise after the downward trend in those vintages the last few quarters to suddenly pop up.

No, in fact I even said in my script I was disappointed as well. But I think the only common thing that I noticed was that January contributed the lion's share of that delta and that's why I pointed that out in my script.

And we did hit it pretty hard. So, again, just to remind you in '05, of that allowance we took, only about 25% of it was really driven by the cash shortfall. It was kind of looking into the future and kind of reducing those expectations a little bit.

Again, that's pretty consistent. The '07 tranche was 32% cash miss versus the total. So yes, we were a little disappointed as well but we will keep our eye on it and hopefully got the right allowance on there now.

Bill Carcache, Macquarie Research.

We have seen some of the credit card issuers basically talk about peak charge-offs in terms of charge-off dollars and charge-off rates having hit and been hit kind of already in the first quarter. Do you feel that we have seen a peak in terms of the supply of charge-off debt? And then can you just kind of give a sense of how you see that impacting pricing as we look out from here?

Our view would be that there is an enormous amount of charge-off debt that has already been created and even at these delinquency levels are going to continue to be created. We think that the issuers, the sellers have done a very nice job of kind of managing inventory to maximize price in a market that is capital constrained.

So there is an awful lot of agency and internal pipelines that are filled with product that you know we presumably would see over the next few years. So we are fairly bullish on the long-term supply of charged off paper.

Okay, separate question. Can you talk about what kind of revenue contribution you are expecting this year from CCB at least in 2010 independent of the other fee businesses just to kind of give us a sense of kind of incrementally what the addition of that business will do? We know it didn't have really much of an impact on this quarter.

No, I'm not going to give you any specifics. I will tell you however that the nature of that business is very lumpy. So they frequently will be involved in large settlements. Sometimes those settlements will take a great deal of time to come to fruition and payout.

And so we could have a quarter of significant revenue followed by several with much more nominal revenue. What we will do is as it comes through, we will be talking to you about what is going on and what we see and what kind of trends you can draw from what has occurred in a given quarter.

What would you say -- probably among the least correlated to the overall macro economy relative to the other fee businesses given what you just described?

Absolutely. That is a great perception on your part. I would say that it is not correlated to the economy at all.

Great and, Kevin, can you talk about -- you got a little bit into the bank line, but can you talk about the thought process? It sounds like there is a change in thought process like you probably felt like you had enough capital and you would want to just keep the more attractive pricing on your existing line. When does that expire and how should we be thinking about that going forward?

Okay. So you are correct in your assumption, again. The bank line -- so the 365, 315 of it matures May of 2011. So we still have over a year left on that and it is LIBOR plus 140. So it is a nice thing to have in your back pocket.

$50 million of it is a fixed-rate tranche and it expires in May of 2012. And as in terms of what to expect, obviously I've got a date looming in front of me one year from roughly from now. And so we will be working with bank groups or whoever else to talk to about what our options are to get that thing renewed as we get later on in the year.

Okay, great. Finally, if I may, one last housekeeping question. What should we be thinking about in terms of the impact on the diluted share count next quarter from the equity offering given that the -- I don't believe that the weighted average share count this quarter necessarily reflected the entire impact of the outstanding shares.

Right, just to recount, so this quarter was 16.2. It should be about 16.9, 16.8 with the current share count.

Thank you.

Bob Napoli, Piper Jaffray.

Questions on the -- I guess the mix of purchases. Your purchase of traditional assets I guess is relatively steady with what you purchased on a quarterly basis last year. Your bankruptcy purchases were much higher.

Was there -- is that level of purchasing something that you would expect to continue as we move through the year? Is the pipeline -- I would imagine that there is -- and I agree with you guys. There's an enormous amount of debt out there that will probably be out there for many years. Are you seeing the opportunities to continue buying at this level and are you comfortable with that?

Yes, we -- every quarter, Bob, will play out independently and we could run into a quarter where we don't like the pricing (technical difficulty) away and so we do a number that's less than what we did this quarter.

We remarked earlier that that mix of bankruptcy in core -- I would guess over time is going to equal out a little bit more. But the nice thing about being able to move in either direction is we can kind of chase the higher-priced deals during a particular quarter.

I guess given the mix that you have, you're seeing the IRRs and the bankruptcies being comfortably higher than the traditional paper or is it just a mix of what's available?

Yes, I would say that during the quarter, we probably felt a little bit better about the bankruptcy paper and some of it was related to some short-term float transactions that we entered into. So I would -- again, I would expect that quarter to quarter, we will be looking at different dynamics.

Okay and then I know your Q, Kevin, will be out shortly but the increase in the total estimated collections I guess you said started tweaking up 2009 pools and I'm just wondering if you can give some idea. We'll obviously have that as soon as you file the Q. But of the magnitude and is that something that if you go back to the last recession, I think you had a several year time period where you were kind of tweaking up collection multiples. Are we at that inflection point clearly today?

Well like I said in my script, we spent a lot of time looking at that 2009 tranche, a lot of time. So what we ended up doing you'll see on the Q when it's filed, but we look at that 2009 tranche -- again, I'll it ex BK. Ex BK, it will be 272 and that will be up from about 252 at the end of the year.

Okay, that's a pretty healthy move.

Yes, that's a pretty healthy move. So we're just going to keep our eyes on it and --

How much is -- can you quantify in some way how much 2009 is outperforming your initial expectations?

You know, I don't have that in front of me. But it's a big number and this change here really reflects primarily Q1 and Q2 of 2009. So Q3, Q4 did have some increase but not to the extent Q1 and Q2 did.

Is that just because of the age, younger age of those pools?

Right now, I mean our hesitation is certainly because of the younger age. We did make some curved shape changes as the year went on. So, yes.

The improvement in your collections from fully amortized pools, is that, Neal, related to your -- the improvement in collections broadly or did a couple of additional pools in 2003-2004 hit, fully amortize? What is going on there? Is that a trend?

So year over year on the stuff that we have owned for more than five years in the call centers was up 20%. So nothing flowed into that timeframe that would come anywhere close to representing 20% of the bucket.

So I attributed that to our dynamic scoring process, our more prolific dialing is taking us deeper into those tranches. And obviously a staff that's doing a nice job of keeping people on payment plans and coming up with plans that are workable for both the consumer and PRA.

And that did translate into some -- a few more pools that would fully amortized though. So it's the same dynamics that Neal has talked about also drove some pools fully amortized.

Great, and last question just on the fee-based businesses, and I appreciate the diversification and they are related in some regard. They're collections related businesses.

But you have had some -- your core businesses, it appears to be really cooking. This bankruptcy business which you know I would now call a core business is performing very well. The fee-based businesses have had -- they must take some decent management time. They have had some more challenges versus the core business.

It seems like the opportunity in the core is so large, does it makes sense to have the distractions of the other fee-based businesses? Will they ever be able to become material enough to be worth the management time and distraction to own those businesses?

Yes, Bob, definitely a very appropriate concern and commentary and one we appreciate. I can tell you, we are working very hard to be able to walk and chew gum and manage our debt buying business and be able to build this portfolio of fee businesses.

We think over the long term, our capabilities to build those kind of non-correlated in many cases, less correlated in other cases, fee businesses to augment what is happening in the debt purchase world are ultimately going to make us a better, more patient debt purchaser. We believe that there is an awful lot of overlap in what goes on in those businesses.

It may not always be apparent to the investment community exactly how much, but I would say that the amount of kind of extraneous work that goes into managing those businesses is not as great as you might think. So we are big believers in those fee businesses.

We're bullish on it, we're going to continue to build them. And we believe that in a market like this, now is the time to continue to build those and not lose focus. If we have learned anything in our almost 15 years in the business, it's that pricing will come and go and one day we will be looking at a tighter pricing environment and I think we will be very pleased that we've built these complementary businesses.

Rick Shane, Jefferies.

Looking -- you made the comment that you had searched the mailings during the quarter in anticipation of tax refunds. When we look at the P&L, we see that -- I assume going primarily through the communications line, went up to $5 million, up from $3.4 million year over year. What's interesting is we're just trying to model this going forward. Presumably there is a normal degree of seasonality. What should we expect as sort of a normal level on that line going forward?

As far as ratio to cash collections?

Sure, that's one great way to look at it. What's strange about it that we historically -- and I saw last year there was a surge in the second quarter, it didn't actually spike in Q1 and then go down in Q2 the way we would've expected. But I'm assuming that that is going to be the trend in 2010?

Yes, I would suspect that as well. I don't -- wasn't prepared for a Q2 2009 question. But I think the best advice I can offer would be to do what you are doing, look at those cash collection ratios and look for the outlier. But I think that Q2 may have had a big mailing in it last year as well of 2009.

Probably stimulus checks or something like that?

Could've been that. Just memory is a little foggy right now.

Understood. Second question, this had been asked before, but I just wanted to follow up on it. It would sitting in our seats seem like there should be some linearity to the way the impairments and reserves occur.

And you look at them by vintage and that is clearly not the case. I realize that one of the sensitivities here is that you are trying to take one month numbers and extrapolate them out over five or six years and that creates a lot of noise.

But is there I mean anything else that you guys are seeing that explains that? I mean is it certain sellers, are there certain geographies? I mean it just sort of pops out of nowhere, you see what happened to some of the vintages. We thought the impairments were behind us. Then they spiked back up and vintages that had big impairments last quarter, it seems to be behind them.

Again, I don't want to be flippant about it. But that is the nature of allowances or impairments, as you use that word. I think if you knew what they were going to be, you would book them. But I'll second the (inaudible) again that '05 and '07 were a disappointment. But you know I think we're all pretty excited about '08 and '09 and 2010.

Got it. Again, there's nothing in there like a geographical concentration or a seller concentration?

I don't think so. Again, it was -- on the '05 and '07 tranche, a lot of it was focused on just one bad month -- not a bad month. It was a result more of the cash miss in January on both the '05 and '07 tranches.

Edward Hemmelgarn, Shaker Investments.

Just one question. What -- you had mentioned that the amortization expense is going up or is going to be at a certain level. How much is that going up on a quarterly basis?

Intangibles, okay, you broke up a little bit. I'm sorry. So the intangibles went up I believe it was $668,000 to $1.4 million. So --

I'll now hand the call back over to Steve Fredrickson for closing statements.

Thank you, operator. I would like to reiterate a few key points about our first-quarter performance before concluding this call.

Portfolio Recovery Associates began 2010 with strong financial performances across the board. We also took steps to build for the future demonstrating the long-term focus we have always espoused.

In terms of results, our first quarter performance was highlighted by record cash collections, record cash receipts, record revenue, record net income and record earnings per share. Productivity also was at unprecedented levels.

Overall, we have begun 2010 a stronger and more efficient competitor. I would like to thank all of you for participating in our conference call and we look forward to speaking with you again next quarter.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect and have a great day.