PRA Group Inc (PRAA) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Portfolio Recovery Associates' earnings conference call. My name is Francine and I am 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). I would now like to turn the presentation over to your host for today's call, Mr. Jim Fike, Vice President of Finance. Sir, please proceed.

Good afternoon, and thank you for joining Portfolio Recovery Associates' second quarter 2010 earnings call. Speaking to you today will be Steve Fredrickson, our Chairman, President and Chief Executive Officer; Kevin Stevenson, our Chief Financial and Administrative Officer; and Neal Stern, our Chief Operating Officer of Owned Portfolios. We will begin prepared comments and then follow up with a question-and-answer period. Afterwards, Steve will wrap up the call with some final thoughts.

Before we begin, I would like everyone to please take note of our Safe Harbor language. Statements on this call which are not historical including Portfolio Recovery Associates or management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future, including with respect to the future portfolio's performance, opportunities, future revenue and earnings growth, future space and staffing requirements, future productivity of collectors, and future contributions of its subsidiaries 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 which -- 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 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' second 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'll open up the call to Q&A.

Portfolio Recovery Associates wrapped up the first half of 2010 with a very strong quarter across the board. Chief financial metrics, such as cash collections, cash receipts, revenue, net income, and earnings per share all came in at record highs for the second quarter. This was achieved despite a soft macro economic environment with very high unemployment and limited availability of consumer credit.

Our success this past quarter in the face of these economic headwinds was the direct result of the long-term investments we've made over the past several years and intend to continue making in Portfolio's technology and people. This is nothing new; these are the same items we've been speaking about on earnings calls for some time now.

Looking specifically at these long-term investments, one, our Bankruptcy business is scaling well with dramatically ramping cash flow, as the sizeable investments we've made over the past few years mature. Two, our operational efficiencies are driving better and better productivity even in the midst of this very weak economy. Three, our strategy of vertical integration with the development of our internal legal collections capability is proving itself, returning more recoveries at lower cost than we'd achieved in the legal channel previously. And four, our fee-based businesses continue to be contributors even though they have been hit by the economic slowdown like so many other businesses.

Now, in terms of our specific Q2 financial results during the quarter, PRA acquired $86.8 million of defaulted debt, representing $1.67 billion in face value. This was comprised of $44.5 million or 51% bankrupt paper and $42.3 million or 49% core charge-off paper.

Cash collections were a record $128.4 million, up 41.9% from $90.5 million in the year-ago period. These helped drive our record cash receipts of $144.5 million in the quarter, up 34.4% from $177.5 million in the same period a year ago. We define cash receipts as cash collections plus revenue from our fee-based businesses.

Fee revenue was $16.1 million in the second quarter, a decline of 5.6% year-over-year.

Operating expenses to cash receipts continued its move downward. In the second quarter of 2010, the ratio was 40.6% compared with 46.4% a year earlier. This is the result of a number of events including the continued shift in our collections mix to the Bankruptcy business, highly effective collection strategies and a slight shift to our generally higher margin debt purchase business from the lower margin fee businesses.

PRA realized record productivity of $185 of collections per hour paid for the first half of 2010, which compares with $145 for full year 2009. This includes a net increase of 59 collectors to our call center staff from Q4 2009. PRA achieved these record Q2 results despite allowance charges in the quarter in the amount of $6.3 million. Kevin will provide details about the charges in a few minutes.

Revenue grew 31% to a record $93 million compared with the year-ago quarter at $71.1 million.

Diluted earnings per share advanced 50% to $1.14 versus $0.76 in the second quarter of 2009. Record net income of $19.5 million was up 67% from $11.7 million a year ago. We booked net interest expense of $2.2 million in the second quarter, which was up from $1.95 million in the year-ago quarter due mainly to a larger outstanding balance on our line of credit.

In terms of resources, our balance sheet remains strong with ample cash availability to continue building for the future. During the second quarter, as a result of our significant cash collections, we decreased debt outstanding to $290.7 million, including $1.2 million of long-term financing not associated with our line of credit. This continues the very controlled financial leverage we've employed over the past several years.

Our debt to equity ratio at quarter's end stood at 65%, down from 96% at year-end 2009, while we maintained $75.5 million of availability under our lines of credit.

Let's turn now to our operations in detail beginning with second quarter portfolio purchases and overall market conditions. During the quarter, we acquired 78 portfolios from 11 different sellers. The majority, about 94% of our second quarter purchase volume in terms of dollars invested was from the major credit card and private-label asset classes. The remainder came from pools of 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 51% of our purchase activity in terms of dollars invested. Our ratio of bankruptcy to core buying was more balanced than at any time in the past several quarters.

Portfolio pricing continued trending higher throughout the quarter. Pricing increased considerably during the quarter for selected offerings, especially as compared to the lows of Q1 and Q2 of 2009. Increased demand for certain types of charge-off offerings and bankrupt portfolios caused us to adjust our buying mix during the quarter as we strove to achieve our targeted IRRs. Pricing appeared to be driven by both increased demand and slightly [higher] supplies.

Although delinquency rates for large credit card issuers are currently falling, charge-off rates remain near record highs and at levels more than twice those experienced just a couple of years ago. The proportion of this significant charge-off volume that's been sold into the debt sale market has been somewhat constrained by market forces. Dramatic pricing reductions which occurred in 2009 that resulted from consumer distress, increasing supply and decreasing demand caused large issuers to keep and collect upon a larger share of their charged-off accounts. If these market forces continue to moderate, as they have recently, it's our expectation that this now considerable supply of retained accounts will come to market at some time in the future.

Legislatively, we faced a mixed bag. Although a number of potentially negative state laws were not passed, the Dodd-Frank Financial Regulatory Reform legislation was. Although Dodd-Frank has no regulations that speak specifically to debt collections or debt buying, our industry will fall under the oversight of the Bureau of Consumer Financial Protection with its broad rulemaking and enforcement powers. Once it is established, staffed and able to focus on our industry, we'll obviously have to face whatever regulations come our way.

Judging by the recent report released by the FTC, the industry will continue to see increased expectations relative to account documentation, examination of collection activities post-statute of limitations in all actions revolving around the legal enforcement of consumer debts. We feel particularly well positioned to deal with these changes with our long-term focus on compliance and our several-year-old initiative to in-source the majority of our legal activity, which we will be compelled to ramp up if statutes are shortened or post-statute collection activity is limited. We feel our collection efficiency and in-house legal strategy will be a particularly effective competitive tool, as the legislative world becomes more onerous.

Finally, in the past quarters, we had discussed a suit brought by the Missouri Attorney General against us. During the quarter, this case was thrown out by the judge with a ruling in our favor. However, on July 26, 2010, the Missouri Attorney General filed a Notice of Appeal on this ruling.

Moving onto collections, as I mentioned earlier, Portfolio Recovery Associates recovered a record $128.4 million in the second quarter from owned portfolios, up 41.9% from $90.5 million a year earlier. This quarterly growth rate is the strongest we've experienced since Q4 2003. Offering a bit more detail on our collections performance, call center and other collections were $54.5 million, up 9% from the same quarter last year. Cash collections from our purchased bankrupt accounts were a record $43.7 million, up an extremely strong 123% from Q2 2009.

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 $11.4 million in Q2 2010. This is up 167% from the same quarter last year. We expect continued strong growth from this channel for the foreseeable future.

External legal collections were 15% of total cash collections in Q2 2010 at $18.8 million. This compares with 18% in Q2 2009 at $16.5 million, representing a 14% year-over-year increase. Excluding bankrupt collections, external legal was 22% of cash collections in Q2 2010 and 23% in Q2 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 $185 for the first half of 2010 as compared with $145 for the full year 2009 and $131 for full year 2008. Excluding the effect of trustee-administered purchased bankruptcy collections, PRA's productivity for the first six months of 2010 was $131 versus full year 2009 of $113 and $110 for the full year 2008. When excluding legal and trustee-administered purchased bankruptcy collections, productivity for the first half of 2010 was $103 as compared to full year 2009 of $87 per hour paid and $75 for all of 2008. Neal will give you more color on site-specific productivity in a moment.

Company-wide, at quarter's end, our own portfolio collector headcount was 1,384, up about five from the end of March and 59 from year-end 2009. As it relates to staffing, please remember the majority of our recent buying has been related to pools of bankrupt accounts, which require relatively low levels of staff to handle (inaudible). 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 locations skip-tracing, government services and claims administration arenas. Our fee-for-service businesses saw revenue decline 5.6% from the same period a year earlier to $16.1 million. Each of our fee businesses has been impacted to some degree by the economic downturn and as a result, our revenues have been negatively impacted. We're working to offset this decline by cutting expenses, developing new product offerings and increasing our sales efforts.

Going through each business briefly, revenue did increase at our IGS Skip-Tracing Unit and operating profit rose as well. At IGS, we're addressing the volume declines we've experienced since 2008 with new service offerings that increase recoveries for our lender clients. These services are built on investments in leading-edge technology and additional data sources, and indeed, IGS is now adding new clients as it demonstrates to lenders increased recovery results. Our expanded product line and client base should provide IGS with a solid foundation from which to resume its growth.

The Government Services business performance improved on both the top and bottom lines compared with the first quarter, as we saw continued stabilization of our service offerings tied to sales and use tax in California. However, on a year-over-year basis, revenue and operating income are down substantially. The base of our existing business has not recovered to pre-recessionary levels since government budgets are tight for our fixed-fee business and our contingency business suffers from lower overall levels of tax revenue.

On a positive note, while significantly down from peak levels in 2008, the California sales tax base has stabilized. We continue to sign new municipalities as clients and offer more products to our existing clients.

We also continue to search for small business acquisitions, as we've been successful in integrating these businesses and cross-selling our services, thereby leveraging the acquired relationships. Our newest business, CCB, was solidly profitable despite significant non-cash charges primarily related to the amortization of intangibles of about $780,000 for the quarter.

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. In the second quarter, we were able to sustain and build on the operation momentum we've seen over the past few quarters. On our Q1 call, I discussed the fact that our total number of payments in the first quarter had been up by 48% over the prior year. In Q2, that figure rose to 69% over the same quarter of 2009.

The significant growth in the number of monthly payments has several components. First, we have made significant purchases during the year, but it's important to note that those accounts represent a small minority of our total account inventory. In fact, over the past few years when buying has been of similar magnitude, we collected only about 17% of our total dollars from account purchases in that same year.

Second, we have seen, and continue to see, a migration away from one-time lump-sum settlements toward ongoing monthly payments. This is a phenomenon that I've spoken about extensively and generally springs from a weakened economy that includes reduced home equity lending and higher unemployment. The resulting reduction in our average payment size, which in Q2 was down by 16% over the prior year, also has been a function of our increased dialing and productivity gains which are allowing us to work accounts with a relatively lower balance and/or a lower score and still hit our internal ROI targets.

Third, and most important, is the compounding residual effect that the building and growing of our payer base over the past 18 months or so is having on our total results. As I've mentioned before, in my view, this is the most important variable for us to watch. When the economy initially faltered, we saw the immediate reduction in larger lump-sum payments that our collection curves had predicted, resulting in a number of larger allowance charges. In many cases, we still received smaller monthly payments, but we did not book an expectation for those payments to continue out into the tail end of our collection curves, and we certainly did not book an expectation for those payments to bring in a greater percentage of the balances owed to us than if we had settled the account in a lump sum at a discount.

Finding payment plans that meet our consumers' needs without generating burdensome operational costs will drive our ability to improve yields on the purchases we make and also help improve total productivity. In Q2, excluding bankruptcy purchases, more than 75% of the accounts that made a payment to us in the quarter had made at least one other payment to us in the preceding 12 months. In our call centers alone, we collected over $4.9 million from accounts that we have owned for more than five years, which was a 10% increase over the same quarter in the prior year.

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 $8.6 million in collections for the second quarter. Although this estimated theoretical value gap was down by $1.7 million from Q1, it was up by $200,000 from Q2 2009.

During Q2, we increased site-specific productivity per hour paid by approximately 7% year-over-year. As a reminder, this site-specific productivity figure was only an hourly productivity by collection reps. It excludes not only legal and bankrupt collections, but also any non-collector assigned inbound generating collections or collections coming from external activities such as collection agencies.

Productivity was up year-over-year at all call center locations with the exception of our Hampton office which finished down 3% due to our recent expansion that inflated the number of hours worked year-over-year by 14%. In Birmingham, productivity was up 26% year-over-year. Productivity in the Philippines was up 25%. In Jackson, productivity was up 17% and Norfolk, productivity was up 10% and Kansas, productivity was up by 3%.

On an absolute basis, Kansas remained our top call center for the quarter. During the quarter on a relative basis, Norfolk was 88% of the Kansas standard, Jackson was about 84%, Hampton was 78% and Birmingham was 59%. Productivity in the Philippines office remained flat over the prior quarter at 46% 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 with lower cost (inaudible) these tougher accounts. Because of these factors, the Philippine centers 46% performance measurement does understate that center's relative capabilities.

The final factor contributing to our Q2 success was our legal collection results. As I've mentioned on prior calls, we have chosen to focus on building our own internal legal collections capability to take the place of external law firms that we felt were under-performing. This has not only helped us to improve collection performance, but has allowed us to capture additional margin that was being paid to the law firms. Our internal legal collections were up 167% over Q2 2009, and perhaps more importantly, this occurred as our external legal collections brought in 14% more year-over-year. Our significant investment in this channel continues to provide a strategic advantage that we believe will serve us extremely well in the current and future collections environments.

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

Thank you, Neal. As you've seen, PRA's financial performance was quite strong in the second quarter. One major reason was the continued maturing of the sizeable investments we've made in bankruptcy, particularly over the past 30 months or so, as well as the improvements in the core call center and legal collections. Although we look for all these trends to continue, we also think it is likely for the normal seasonal headwinds of Q3 and Q4, as well as (inaudible) large numbers will begin to temper the kind of growth rate that we've seen in the past couple of quarters.

Our second quarter 2010 net income of $19.5 million is an improvement of 67% from the $11.7 million a year ago with record diluted EPS of $1.14, up from $0.76 a year earlier. We achieved this despite incurring $6.3 million in allowance charges in the quarter which cost us $0.23 in EPS. However, at less that 5% of total cash collections, we feel this is a fairly reasonable result, and given the accounting guidance we must currently follow, it represents the normal course of business.

Total revenue for the quarter was a record $93 million which was up 31% when compared to the same period one year ago. Although our fee businesses did not have a particularly strong quarter at $16 million or 17% of revenue, they're still very much solid contributors and remain key elements of our long-term business strategy.

Operating income was $34.3 million, up 62% from the year-earlier period, while net interest expense was up from $1.95 million one year ago to $2.2 million in Q2.

Return on equity improved to 17.9% during the second quarter even as we deal with the increase to equity base, resulting from our stock offering 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 interest cost on the acquisition line during the quarter was 2.44% compared to 2.62% for the full year 2009. At quarter end, borrowing levels, each 100 basis point swing in interest rates either costs or saves us about $200,000 monthly.

Breaking our second quarter revenue down into its components, the majority of total revenue or $76.9 million came from income recognized on finance receivables. This is revenue generated by owned debt portfolios and our Q2 performance represents another record for PRA.

Income on finance receivables is derived from the $128.4 million in cash collections recorded during the quarter, reduced by an amortization rate including the $6.3 million allowance charge of 40.1%, which is relatively flat to the Q2 2009 rate of 40.3%.

During the prior four quarters, we incurred the following amortization rates -- 43.0% in Q1 2010; 41.3% in Q4 2009; 41.2% in Q3; 40.3% in Q2; and our full year 2009 rate was 41.4%.

As I mentioned during the quarter, PRA recorded allowance charges totaling $6.3 million which compares to $3.9 million in Q2 2009. [Life to date] reserves since the change to ASC 310-30 now stand at $64.4 million.

I want to remind everyone that we account for revenue from our overall portfolio in a pool-by-pool basis. When pooled under performed, 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 over-perform, that over-performance is generally not reflected right away. Typically, after there is sustained evidence of over-performance, we will make an upward adjustment to the pool by increasing the yield expectations for that quarter end for future periods. This adjustment of an increased yield will not show up immediately on our income statement like an allowance charge does. Rather, the increase in yield has some impact on the current quarter, but the vast majority of the impact will only be realized in the future and gradually over the pools' remaining life.

This conservative implementation of accounting guidelines is currently further compounded by our longstanding 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 cash methods as permitted by the ASC 310-30. Accretion, or recognizing more revenue in 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 accounting guidance and generally occurs in situations where cash flow projections are ramping up early in a pool's life. Pools with lower early period cash flow projections, followed by more robust projections in later portions of the curve, are more apt to experience accretion as compared to pools with more front-end weighted projections. Bankruptcy pools with mostly freshly filed Chapter 13 accounts are a perfect example of this kind of phenomenon. Given what we believe to be the correct and conservative application of our accounting policies, some allowance charges will likely always be with us.

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

2004, an earlier [yield], as in Q4 of this past year, contributed a small net reversal for the quarter. Those same tranches had no allowance activity in Q1 of 2010. The 2005 core tranche of paper contributed an allowance charge in Q2 in the amount of $1.6 million which was down nicely from $2.8 million in Q1 2010 and up from the $500,000 charge in Q2 of 2009.

The move down relative to Q1 2010 was entirely attributable to a reduction in the allowance charge relating to the 2005 Q4 tranche of paper. The 2006 core tranche of paper contributed an allowance charge of $2.1 million in Q2 2010, up from the Q1 charge of $1.2 million and up from the Q2 2009 charge of $765,000. The $2.1 million of Q2 2010 allowances came from the Q2, Q3, and Q4 2006 tranches with Q3 contributing $1.1 million.

Reviewing our press release, where we've included a condensed version of our portfolio's supplemental performance data chart from the 10Qs and 10Ks, you will see we've reduced the core purchase price to cash collection multiple on a 2006 tranche as a whole by nearly 2.7 percentage points for a total non-bankruptcy purchase price multiple of 212%.

The 2007 tranche of accounts contributed a Q2 allowance charge in the amount of $700,000, down from $2.9 million in Q1 2010. This is a significant improvement and as in the 2005 tranche of accounts above, was a nice follow-up to a somewhat disappointing Q1 performance.

Now, I'd like to turn your attention to the 2008 tranche of accounts. For those of you that have followed PRA, you may remember that for the full year 2009, the 2008 tranche represented nearly 60% of the allowance charges. During Q2 2010, the 2008 tranche of accounts contributed an allowance charge of $2 million. While up from zero in Q1 2010, this Q2 performance was better than any quarter in 2009. Additionally, the Q2 cash collections were very close to our expectations. Taken as a whole, the 2008 tranche of paper missed our projections by less than 1%. We continue to track this pool of accounts very closely and while results were good in Q1 and Q2, we still have a long road ahead of us in terms of cash collections.

Moving forward into 2009 and 2010, the core tranches of accounts, we've incurred no allowance charges to date. Additionally, as in Q1 2010, we once again spent a significant amount of time and effort analyzing our yields and booked [deal] multiples on the 2009 tranches of accounts. As I mentioned in prior calls, and as I think is evident in our charts contained in our 10Qs and 10K, these 2009 tranches are significantly over-performing booked expectations. As such, we did increase both the yields and yield multiples on these tranches during Q2.

Our Bankruptcy portfolios continue to perform nicely. For those of you that joined us for our Q1 2010 call, the Bankruptcy pool allowances in that quarter increased to a higher level than we've seen in many quarters. In Q1 2010 as a group, the Bankruptcy portfolios ended up with a net allowance charge for the quarter of $1.3 million. For Q2 2010, we incurred a reversal of $5,000 relating to the purchased bankrupt pools. This is a dramatic improvement over Q1 and over every other quarter since Q2 of 2007.

I mentioned to you previously that we are closely watching our Bankrupt portfolios and evaluating book yields and deal multiples. I further mentioned in Q3 of 2009 that we did indeed allow our Bankruptcy portfolio yields to increase somewhat, but generally not their deal multiples. For Q1 2010, as with Q4 2009, we left yields and multiples static as set in Q3 of 2009. During Q2 of 2010, after working closely with our purchased bankruptcy department, and focusing primarily on 2008 and 2009 pools, as a result of prolonged over-performance, we did allow yields to increase on some of these bankruptcy tranches, as well as allowing selected deal purchase price multiples to increase modestly.

Looking at the allowance charges in a different way we believe is helpful and puts things in perspective. For example, we look at ratios, such as allowances to NFR, net finance receivables, allowances to ERC, estimated remaining collections, allowances to revenue on finance receivables, pre-allowance charge, and allowances to cash collections. For Q2, all of the aforementioned ratios represented a nice improvement over Q1 and over the average of the entire year of 2009.

During the second quarter, cash collected on fully amortized pools was a very strong $10.1 million. During the prior four quarters, we recorded cash and collections on fully amortized pools in the amounts of $10.3 million in Q1 2010, $7.6 million in Q4 of 2009, $6.6 million in Q3 and $7.1 million in Q2 of 2009. Eliminating the fully amortized pools from our amortization calculation gives us an amortization rate for Q2 of 43.5%. This is largely unchanged from the Q2 2009 rate of 43.7%.

As Steve described, total commissions and fees generated by our fee-for-service businesses were $16.1 million. This compares with $17.1 million in the year-ago quarter. Our fee-based businesses accounted for 17.3% of the Company's overall revenue. With the new CCB acquisition, our quarterly amortization expense related to acquired intangibles from our various businesses for business acquisitions is about $1.4 million per quarter.

Moving on, approximately $1.2 million of operating expenses in Q2 was due to non-cash equity compensation that was booked during the quarter relating to our 2009 and 2010 performance-based incentive share plans, as well as other equity-based awards.

Operating expenses in Q2 grew 17.7% when compared to Q2 2009. This was primarily driven by compensation and employee services which grew $4.4 million or 16.8% and legal and agency costs and fees which increased by $2.4 million or 22.1%. The increase in compensation expenses during Q2 relates primarily to inside legal employees as we continue to build that capability, as well as growth in our total call center collectors.

Operating margins during Q2 were very strong, 36.9%. Looking back in the prior four quarters, operating margins were 31.7% in Q1 2010, 30.2% in Q4 2009, 27.4% in Q3 and 29.9% in Q2 2009. Without the margin dilution caused by the fee businesses, the operating margin would have been about 600 basis points higher at 42.9% in Q2.

Operating expenses to cash receipts is perhaps a more insightful efficiency ratio since it removes the impact of any effect of variations in purchase price and amortization rates, as well as allowance charges. Operating expenses as a function of cash receipts during Q2 2010 were 40.6%. This is down nicely from 46.4% in Q2 2009.

Our balance sheet remained strong during the quarter despite substantial purchases of a new finance receiveable portfolio in the amount of $86.8 million.

As of quarter end, the outstanding balance in our line of credit was $289.5 million, which was down $6.8 million during the quarter. Our total credit facility is $365 million, leaving us with $75.5 million of availability. Cash balances decreased sequentially during the quarter to $18.3 million. We believe our leverage remains quite modest at 64.9% of equity. We are producing strong internal cash flows and are well capitalized.

We continue to work with our banks on an expanded and extended line of credit. Based on recent conversations, we are optimistic that an attractive arrangement can be concluded in late Q3 or early Q4.

I'd like to close with some final points, final important points. First, as I've described in great detail, our revenue recognition methods typically cause us to take allowances quickly when pools under-performed, while recognizing over-performance slowly over the pool's life. 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 natural collection trends, we anticipate strong cash productions from those pools over the next 24 to 36 months.

Third, we've 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.

And finally, our Bankruptcy business has 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.

With that, I've completed my prepared comments. I'd like to open the call up to Q&A. Steve, Neal and I are available to answer your questions. Operator?

Yes, sir. (Operator Instructions). We have a question from the line of Bob Napoli of Piper Jaffray.

Thank you. Good afternoon and congratulations on the quarter. A question, I guess -- very impressive operating leverage and the -- I was wondering how sustainable you feel those operating margins are, I mean, obviously, 10 million growth in revenue and 2 million growth in expenses. I know you've talked about the operating leverage in the Bankruptcy business and now we're seeing it, but how do you -- how confident are you that you can maintain that type of margin?

Bob, it's Kevin. So I'll take first crack at it. So if you think about the things we've been talking about for the past number of quarters, a number of things that Neal's been doing in terms of producing increased efficiencies, those things he learned will continue. And the Bankruptcy business, again, as we've talked about before, that 2009 tranche of paper, we [didn't] purchase a lot of early-stage bankruptcies. So those cash collections are likely still ramping up, so I think for some time, both of those factors will still contribute positively to some margins.

I mean, the substantial jump you saw, I guess, again it sounds like you're suggesting, Kevin, that that's not -- that there was nothing unusual in that 44 million, that 10 million jump you still expect to see continued increases off of the purchases. Is that -- now that's -- how quickly does that -- the bankruptcy paper has a much shorter collection life than the core paper, I believe. Would you expect that to remain at increasing and high levels, say, in 2010 and '11 and then start to decline from those pools or how -- what does the curve look like on that bankruptcy paper?

Well, there's a bunch of stuff there. So first of all, yes, the bankruptcy paper generally does have a shorter lifespan, but again, remember, compared to the other bankruptcy tranches you've seen in our portfolio, these were more early stage. So theoretically, you'll see a little longer duration on the books. So -- and the other question was how does it ramp up or what --

I guess what the curve looks like, when -- how quickly does the bankruptcy paper -- did the cash collections moderate from those, would you expect, from those pools?

Yes, I don't know that I can speak in generality -- in general (inaudible).

But does it fall off at a much faster clip than the core business?

I would say yes if I had -- if you want me to answer the question, I would say, yes, they would tend to ramp up a little faster and then down a little bit faster, but again, remember, these bankruptcy pools for the '09 tranche are a little different than you've seen historically.

Okay. And then last question -- on the competition, you said competition has -- or pricing has increased, Steve, I think pretty significantly and I just wondered what you were seeing; if you could quantify that a little bit and if you're concerned about that and where the competition is coming from.

Well, Bob, it's always difficult to quantify because we're talking with -- talking about constantly shifting collectability on pools that we acquire, but this quarter, we did see steady increase in price and as we remarked, we are now at levels that are up quite a bit from the low point, which we think is probably Q1, Q2 of 2009.

Does that mean we'll see purchases kind of drop off from here?

Well, I don't know that you'll see purchases drop off. We're seeing a one-quarter phenomenon and even during the quarter, we saw pricing bounce around a bit. So we're not sure we've got a sustainable trend here or not. We also do believe that on the supply side, there's a lot of product that has not yet made it to market, and so that may help reverse or avoid a further trend if we're seeing increased levels of supply come to market.

Thank you.

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

I appreciate your taking my questions here. One question I had was, I guess you guys are mentioning that you're seeing obviously an uptick in purchasing competition, but that you'll expect to see supply continue to come to market here. Do you guys anticipate that you'll have a pretty decent purchasing market to go out there and continue to ramp up purchases and reinvest the strong collections that you're having? Do you see anything that would really kind of change that in the next year or two?

Well, I think it's difficult to look at the magnitude of charge-offs that have occurred and are occurring, and not walk away from that thinking that there's going to be quite a lot of product that's coming to market over the next whatever you want to call it, 12, 18, 24 months. It's at much higher levels than we've seen historically and historically, we saw some pretty robust sales numbers. So we think we're going to see an awful lot of supply coming down the road in the future.

Again, I think I'll also touch on Bob Napoli's question. We've been working very hard on becoming a very effective, efficient collector, better, we think, than we've ever been, and not that we are perfect on the underwriting side, but I think we can also underwrite [tighter] than we ever have. So I don't think we're going to back away from buying volumes that make sense to us. We may see somewhat decreased profitability levels from the peaks that we saw in 2009, but we think at our operating scale and the kind of profitability that we're continuing to see that there's no reason for us not to continue to be aggressive in the market.

Okay. And I know that you've been very active in the BK market. That's enabled you to kind of limit headcount growth on the call center side. How should we be thinking about the additional purchasing capacity that you have until you're going to have to then go out there and ramp up headcount at a faster pace?

(Inaudible).

The headcount need is moderated quite a bit by the segmentation and by the automated dialing. We continue to keep investing in both of those areas and I'm telling the acquisitions folks that we have ample capacity to handle whatever might come their way.

Okay. So just improved efficiencies there that will allow you to still purchase a lot of traditional paper and not have to increase [again]?

Sure, we will increase headcount. That's going to happen, no doubt about it, but I think if you look at the Company's history and the kind of rate increase in headcount, I don't think -- I think it'll be much more moderate relative to other times in the Company's history because we've been able to really take advantage of segmentation and automated dialing.

Okay. And I think Kevin mentioned that you guys anticipate late Q3 sometime, maybe Q4, that you'd be able to close on an expanded facility. Is there any information you can give us as to maybe potential increase in size that you're targeting and at what increase in cost? Any idea there that you'd be able to share?

Well, yes, I can share ideas. That's about all right now. Again, nothing signed with the banks. We're just talking with them. They've all given us pitches, as you might expect. Given us some feel for indicative pricing. Again, I think from a modeling standpoint, you should certainly budget something higher than LIBOR plus 140, but it'll be a LIBOR-based loan, probably be more like in the 2-5 to 3 range, just ballpark. It depends what the market will bear. It'll probably be a syndicated deal and the market will have to clear it and it'll probably be in the -- call it 400 to 450 range that we'll target.

Okay.

400 to $450 million range.

Okay. That's great; great insight there and just -- and then the last question I had was, Kevin, did you mention that -- I thought I picked up that you mentioned that the second quarter impairment rates here, given the level of collection activity in purchasing, did you say that this would be considered kind of a normalized run rate under the current operations, or did I mishear that?

No, I made a comment early in my script as saying that, hey, it's less than 5% of total cash collections, looking at the run rate has been -- we just kind of consider it -- it's going to be business as usual kind of thing.

Okay. So I guess in other words, you do feel that, even though it's an elevated position relative to historical norms that just given the current level of collections, that this would be considered somewhat type of a normalized --

Again, somewhat. It's impossible to predict allowances, but again, we're a bigger company. You can't just look at $6 million as $6 million. You've got to look at it as a ratio of the entire entity. I've long -- forever said that you've just got to expect some level of allowances, so here as good as anything, I guess.

I think Kevin's mentioned a couple of times we'd love for people to look at this as a percentage of (inaudible) finance receivable or some other thing, so that -- I think the [rate] will be surprisingly stable for people if they look at it in that way.

Okay. And do you still feel confident then, considering you've been conservative about not putting expectations until collections at the tail and then raising your expectations from the shift from (inaudible) payment plans, you are not expecting that overage of collections at a greater percentage of the face value, that you will see reversals at some point in the future just to -- that it's likely that you will receive those types of collections?

It very well could reverse prior allowances. That's kind of a different topic, but I guess I was just giving you guys a feel for, hey, you know what? These things are always going to be here, at least (inaudible), and -- but you're right, though. Again, if Neal's able to hold these payment plans and do it economically, you could very well see reversals out of certain tranches.

Okay. Thank you.

Yep.

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

Thank you very much. Since the topic is here on the increase in price, is any percentage numbers you can throw at that, 10, 20, 20 to 30% up off the bottom?

Depending on exactly what kind of paper you're talking about, you could use any of the numbers that you just threw out.

Okay. And then the BK paper, did you say this is the fresher BK paper you purchased this quarter?

This quarter was a little bit of a combination. I think Kevin's earlier commentary was really that through '09 and into 2010, we've had more of a shift to buying a larger proportion of newer paper versus what we had done, say, in '07, '08.

Correct.

Which continued into this period, this quarter?

Yes.

Okay. And then the -- did you give the number for the increase in the number of payers year-over-year?

Yes, it was 69%.

Okay, great. And then how about the persistency of those payers, do you have any kind of metric on that, how many months on average or what's your month-to-month or quarter-to-quarter?

In my script, I mentioned the fact that in excess of 75% of the payments we received came from people who had been making payments to us previously in the year. So I continue to be very encouraged by the stickiness of our payers and I think it really speaks well to our staff's ability to identify payment plans that are workable for the consumer and for PRA. And I think the staff's done a great job of that.

Did you give a comparable number last quarter?

I think I've given it the last several quarters, yes.

Okay. I'll look for that. Thank you.

Yes.

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

Yes, just congratulations on a very good quarter again. Can you -- I missed some of the discussion just about when you were talking about the environment. I noticed this time you bought about an equal amount of non-bankruptcy and bankruptcy paper, at least by my calculations or something. Is that kind of a trend that you would expect more as moving forward? I mean, after you've gone through a long period of where most of your purchases have been -- or a large percentage have been bankruptcy.

Well, first, I just want to make a public service announcement that we're in the middle of a pretty dramatic storm here. So if you hear things rumbling and crashing, it's not us; it's lightning and thunder. Just as we said when we were buying a much larger proportion of bankruptcy, it really isn't a specific strategy on our part. It's simply where we saw more value throughout the quarter and so at times in the quarter, we saw more pricing competition on the bankruptcy side than we did on the core side. And so that's why the mix was a little bit different this period.

In general, what would you describe -- I mean, the credit card companies, are they -- do you think they're holding onto the debt, that they're not releasing it as rapidly as you might expect them (inaudible) the pace of their write-offs or is it just there's more competition for purchase (inaudible)?

Well, our belief is that especially given the magnitude of the observed charge-off rates, that the large issuers are retaining more of that paper, selling less of it. And so we're seeing a somewhat constrained supply hit the market.

Do you think that because -- or that there may be a trend then? Is it that they will be in the future will be selling more debt that's been worked over many more times than early paper?

They may, which is fine with us. We're pleased to buy charged-off paper really at any stage and we're very capable, we think, of pricing accurately, whether it's fresh charge-off or it's been worked through by two or three agencies post-charge-off.

Okay. Thanks.

You between.

Our next question comes from the line of Robert Riggs from William Blair and Company.

Hi, thanks for taking my question. Just real quick on the -- you've been very successful with the bankruptcy purchases. From a competitive standpoint, is there anything unique in terms of the processes, the infrastructure, that you've put in place in that market that gives you maybe more of a sustainable competitive advantage over your competitors, or is it pretty easy for people to ramp up their purchases there?

Well, I think it depends on the specific competitor, but among the things that we feel are advantages, number one, we feel as though we have produced a statistical and underwriting team that is extremely accurate at predicting these cash flows. Number two, we have spent a lot of money creating a very, very automated, very accurate bankruptcy processing system that allows us to file proof of claims and joint notice of transfers and stay on top of the cash flows on these things for a very low cost, which obviously, goes to our advantage.

And then significantly, we're talking about typically Chapter 13 accounts which fall out of their plans at fairly high rates and we feel like we're one of the few in the industry that is excellent at quickly passing those accounts that do fall out over to a normal collection environment. And so they would pass from our Bankruptcy Group to our Core Group, where literally, the day after, we're pursuing a standard collection there. So we're able to extract cash regardless of the ultimate outcome of that particular filing, and all of that plays to our advantage to price these things as aggressively or more than the next guy and extract more profit.

Great. Thanks for the detail.

Okay.

And ladies and gentlemen, that concludes the Q&A portion of the presentation. I would like to now turn the call over to Mr. Steven Fredrickson for closing remarks.

Thank you, Operator. I'd like to reiterate a few key points about our second quarter performance before concluding this call. Portfolio Recovery Associates wrapped up the first half of 2010 with a very strong second quarter across the board. Key financial metrics such as cash collections, cash receipts, revenue, net income and earnings per share all finished the second quarter at record levels.

This performance was achieved despite a soft macro economic environment with high unemployment and a limited availability of consumer credit. Our success during this period was the direct result of the long-term investments PRA has made over the past several years, and intends to continue making, in portfolios, technology, and people.

I'd 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, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.