PRA Group Inc (PRAA) 2010 Q3 法說會逐字稿

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

At this time, all participants are in a listen-only mode. We will be conducting a Q&A session towards the end of this conference. (Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call Mr. Jim Fike, Vice President of Finance. Please proceed, sir.

Good afternoon and thank you for joining Portfolio Recovery Associates third-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 our prepared comments and then follow up with a question-and-answer period. Afterwards Steve will wrap up the call with some final thoughts.

Before we begin, I'd like everyone to please take note of our Safe Harbor language. Statements on this call which are not historical including Portfolio Recovery Associates or management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future including with respect to the future portfolio's performance, opportunities future revenue and earnings growth, future space and staffing requirements, future productivity at 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 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's Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim, and thank you all for attending Portfolio Recovery Associates third-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 operations 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 has had a very strong year thus far even in the face of a continued weakened economy. In the third quarter, PRA produced record highs in key metrics such as cash collections, cash receipts and revenue.

Net income and earnings per share both showed strong growth and this was achieved despite significant additional investment in our legal channel which Neal will discuss with you in a few moments. Overall, I'm extremely pleased with the performance PRA has turned in across all our businesses. The credit of course goes to our staff which has continued to work smarter and more efficiently than ever.

Our performance during the quarter is due to long-term initiatives in a number of areas. Specifically, one, our bankruptcy business continue to scale well with dramatically ramping cash flow as the sizable investments we have 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 developing our internal legal collections capability combined with the targeted use of our external legal channel has proven itself. We're turning more legal recoveries in Q3 than we had achieved in the legal channel previously.

Four, our fee-based businesses continue to be contributors even though they have been negatively impacted by the economic slowdown like so many others. It's also important to note that PRA's consistently strong performance and sustainable business model are based on our differentiated approach to the debt buying and collections business.

For example, we do not resell debt. We're a patient debt collector working with customers to understand their economic hardship so we can establish a repayment schedule that works for them as well as us.

We employ the use of dialers and dynamic scoring to be efficient and cost effective in our collection practices. Our use of contingent fee collection agencies is minimal.

We use a combination of analytically driven statistical models and other due diligence procedures to determine purchase price of the portfolios. And importantly, we both respect and allocate significant resources to comply with the regulations that govern our industry.

Now in terms of our specific Q3 financial results, during the quarter, PRA acquired $92.5 million of defaulted debt, representing $1.38 billion in face value. This comprises $60.7 million or 66% bankrupt paper and $31.8 million or 34% core charge-off paper.

Cash collections were a record $137.4 million, up 49% from $92.4 million in the year ago period. This helped drive our record cash receipts of $152.9 million in the quarter, up 43% from $106.6 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 $15.5 million in the third quarter, an increase of 9% year over year.

Operating expense to cash receipts continued to improve. In the third quarter of 2010, the ratio was 41% compared with 46.7% a year earlier.

This is the result of a number of factors 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. The improvement in this ratio was achieved despite an investment in additional losses which ran $2.9 million above our Q2 legal suit expenses.

Simply, this investment was needed to bring lawsuits against additional accounts, lawsuits that will yield cash flow in future periods. As I mentioned, Neal will explain this in greater detail shortly.

Generated realized record productivity of $190 of collections per hour paid for the first nine months of 2010 which compares with $145 for full year 2009. This includes a net increase of 97 collectors to our call center staff from Q4 2009.

This measurement has been positively impacted by an increase in bankruptcy portfolio collections and efficiency initiatives related to our call centers. Allowance charges in the quarter totaled $6.5 million or 0.81% of net finance receivables. Kevin will provide details about the charges in a few minutes.

Revenue grew 39% to a record $95.5 million compared with the year ago quarter at $68.6 million. Diluted earnings per share advanced 66% to $1.08 versus $0.65 in the third quarter of 2009.

Net income of $18.5 million was up 83% from $10.1 million a year ago. Net interest expense was $2.2 million in the third quarter, up from $2 million in the year ago quarter, due mainly to a larger average outstanding balance on our line of credit.

Our balance sheet remains strong with ample cash availability to continue building for the future. During the third quarter as a result of our significant cash collections, we decreased debt outstanding slightly to $289.5 million including $1 million of long-term financing not associated with our line of credit. This continues the very controlled financial leverage that we've employed over the past several years.

Our debt to equity ratio at quarter's end stood at 62%, down from 96% at year end 2009 while we maintained $76.5 million of availability under our line of credit. Let's turn now to our operations in detail beginning with third-quarter portfolio purchases and overall market conditions.

During the quarter we acquired 68 portfolios from nine different sellers. The majority, about 95% of our third-quarter purchase volume in terms of dollars invested, was from the major credit card 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. Portfolio pricing continued trending higher during the quarter. Pricing appeared to be driven by both increased demand and slightly tighter supply and affected both the core and bankruptcy markets.

The continued stabilization of the economy and issuer loss rates during the third quarter drove much of the observed increase in competition in the debt sale markets. In 2009 and early 2010, many large buyers remained nervous about their ability to predict the effect of continued consumer stress on collections.

Instead of opportunistically investing as we did, they in general reduced their buying activity, paid down debt and built significant cash reserves. Major economic indicators have since moderated and as a result, these well-funded competitors are now bidding more aggressively and they are driving up pricing.

We expect more robust sales volume in 2011 if banks begin to release their ample supply of retained charge-offs into the market and bankruptcy filings remain elevated. On the legislative front, we saw a few new developments in Q3.

We continue to closely watch developments in both federal and state legislation affecting our businesses. We are working diligently to educate legislators about our industry and its vital role to the US economy.

Moving on to collections, as I mentioned earlier, Portfolio Recovery Associates recovered a record $137.4 million in the third quarter from owned portfolios, up 49% from $92.4 million a year earlier. This quarterly growth rate is as strong as we have experienced since Q2 2003.

Offering a bit more detail on our collections performance, cash collections from our purchased bankrupt accounts were a record $53.3 million, up a very strong 140% from Q3 2009. Call center and other collections were $51.7 million, up 6% from the same quarter last year.

Collections from our internal legal collections 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 $12.1 million in Q3 2010. This is up 96% from the same quarter last year.

We expect continued strong growth through this channel for the foreseeable future as we continue to build our internal legal collection resources. External legal collections were 15% of total cash collections in Q3 2010 at $20.2 million. This compares with 17% in Q3 2009 at $15.3 million representing a 32% year-over-year increase.

Excluding bankrupt collections, external legal was 24% of cash collections in Q3 2010 and 22% in Q3 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 $190 for the first nine months of 2010 as compared with $145 for the full year 2009 and $131 for full year 2008.

Excluding the effect of trustees administered purchased bankruptcy collections, PRA's productivity for the first nine months of 2010 was $129 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 nine months of 2010 was $101 as compared to full-year 2009 of $87 per hour paid and $75 for all of 2008. Neal will gave you more color on site-specific productivity in a moment.

Companywide at quarter's end, our owned portfolio collector headcount was 1422, up 38 from the end of June and up 97 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. Please also note that our bankruptcy staff is not included in the collector headcount numbers I just shared with you.

Our fee-for-service businesses saw revenue increase 9% from the same period a year earlier to $15.5 million due primarily to the acquisition of CTB earlier this year. CTB was solidly profitable despite significant non-cash charges primarily related to amortization of intangibles of approximately $840,000 for the quarter.

Each of our other fee businesses has been impacted to some degree by the economic downturn and as a result, their revenues have been negatively impacted. We are working to offset this decline by cutting expenses, developing new product offerings and increasing our sales efforts.

Going through each business briefly, revenue and operating profit declined in our IGS skip tracing units. We're addressing the volume declines we've experienced at IGS since 2008 with new service offerings that increase recoveries for our lender clients.

These services are built on investments and leading edge technology and additional data sources. And indeed IGS is continuing to add new clients as it demonstrates increased recovery results to lenders.

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 looks steady on both the top and bottom line compared with the second quarter as we saw continued stabilization of our service offerings tied to sales and use tax volumes in California and the addition of many new client contracts. However, on a year-over-year basis, revenue and operating income are down.

The base of our existing business has not recovered to pre-recession novels 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 have been successful in integrating these businesses and cross selling our services, thereby leveraging the acquired relationships. 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. Throughout this year, I have been emphasizing how macroeconomic conditions, advances in collection scoring, having an internal legal collections capability and ongoing investments in automated dialing technologies have resulted in a lower average payment size and an offsetting increase in the number of payments we receive.

In the third quarter, those same dynamic held true. Our average payment size was down by 14% over the same quarter in 2009 but the number of payments we received was up by 73%.

This quarter's decrease in average payment size compares favorably with our results in the second quarter when our average payment size was down by 16% year over year. We are hopeful that this is indicative of a trend in which the decline in average payment size moderates.

Regardless however, I'll reiterate that I am thrilled to have our average payment size decline so long as it is being driven by improvements in collections capabilities that are allowing us to profitably work accounts with lower balances and/or lower scores, still hit our internal ROI targets and improve our bottom line results.

In other words, some of the decrease in average payment size is because we're reaching more deeply into our portfolios to profitably collect from lower quality accounts than we have historically. These lower quality accounts generally require more modest payments and this lower average payment size.

With that in mind, I'd like to spend a little time talking about how some of our key initiatives are allowing us to profitably dig deeper into our account base than we have at any other point in the Company's history.

Over the past 2.5 years, we've invested very heavily in automated dialing technologies and we've hired some of the most capable people in the industry to guide our efforts. The number of calls we made in Q3 was up by 57% over the prior year and up by 161% over the same quarter in 2008. This trend is one that is likely to continue over the coming years as we further expand and refine our dialing technologies

Of course making more calls is not helpful unless it's combined with a very advanced scoring methodology and this quarter marks the two-year anniversary of the installation of our dynamic score. It rescores the 25 million accounts in our inventory each day in response to an ever more refined set of variables. In fact, we've refreshed the score's variables several times and I'm more excited about the latest incarnation of our dynamic score than I have ever been.

Now onto legal collections. Our strong focus on building an internal legal channel helps lower our cost base which enables us to place accounts into that channel that otherwise would have been prohibitively expensive for legal action.

Growing this capability has also allowed us to remove external law firms that we felt were underperforming, leaving us with the strongest of external partners and a robust internal team to capture additional margin. As Steve mentioned, our third-quarter legal results were again strong with internal legal cash collections of 96% year over year and external legal collections up by 32%.

We substantially increased our legal costs which rose $5.2 million or 127% over Q3 2009. The increased costs are due to several factors.

First our core costs are often proportional to our total portfolio size which has obviously increased over time. Second, as I mentioned, our internal legal capability has expanded significantly and we have systems and people in place that allow us to pursue accounts that otherwise would have been out of scope.

Third, we've updated our legal score with some new variables that expanded our selections for legal action. And finally, we've responded rapidly to being notified that court costs in a number of jurisdictions were going to be raised significantly.

I firmly believe that this investment represents a great value from an ROI perspective and it obviously negatively impacted our Q3 earnings since we expense rather than capitalize these expenses as incurred. Closing the productivity gap between our collection sites has been a focus for a considerable time because of the opportunity that gap represents.

I'm happy to report that in the third quarter we made more progress in reducing that productivity gap than ever. Had all of our call centers delivered the same cash collections per paid hours as our top site, we would have realized another $6.3 million in collections for the third quarter.

This gap was down by 26% over Q2 and the trend is very encouraging as our September productivity gap was the lowest we've had since January 2008. I believe the improvement was largely driven by modifications made to our selections incentive program as well as the maturing of our call center in Tennessee.

During Q3, we increased site-specific productivity per hour paid by approximately 6% year over year. As a reminder, this site-specific productivity figure looks only at hourly paid productivity by collection reps.

It excludes not only legal and bankrupt collections, but also any non-collector assigned inbound generated collections or collections coming from external activities such as collection agencies. Productivity was up year over year at all call center locations with the exception of our Hampton office which finished down 6% due to a recent expansion and inflated the number of hours worked year over year by 21%.

In the Philippines, productivity was up 47% year over year. Birmingham productivity was up 24%. Jackson productivity was up 21%.

Canada's productivity was up 6% and Norfolk productivity was up 1%. On an absolute basis, Kansas remained our top call center for the quarter.

During the quarter on a relative basis, Norfolk and Jackson were 91% of the Kansas standard, Hampton was 80% and Birmingham was 70%. Productivity in the Philippines office improved over the prior quarter to 50% 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 costs to work these tougher accounts. Because of these factors, the Philippine center's 50% performance measurement does understate that center's relative capabilities.

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 third quarter. One major reason was the continued maturing of the significant investments we've made in the bankruptcy portfolios, particularly over the past 30 months or so as well steady improvements in core call center and legal collections.

Our third quarter 2010 net income of $18.5 million is an improvement of 83% from $10.1 million a year ago with diluted EPS of $1.08 up from $0.65 a year earlier. We achieved this despite incurring $6.5 million in allowance charges the quarter which equated to $0.23 in EPS.

At 0.81% of the NFR balance or net finance receivable and less than 5% of total cash collections, we feel this allowance charge is a fairly reasonable result and given the accounting guidance we must follow represents a normal part of our business. Total revenue for the quarter was a record $95.5 million which was up 39% when compared to the same period one year ago.

Although our fee-based businesses in total did not have a particularly strong quarter at $15.5 million or 16% of revenue, they're still very much solid contributors and remain key elements of our long-term business strategy. Operating income was $32.8 million, up 75% from the year earlier period while net interest expense was up from $2 million one year ago to $2.2 million in Q3.

The return on equity was 16% during the third quarter even as we dealt with increased equity base resulting from our stock offering in February. We're pleased that we once again produced an ROE over 15% but remained focused on bringing that number back closer to our historical 20%.

Our weighted average interest costs on the line of credit during the quarter was 2.43% compared to 2.62% for the full year 2009. Breaking our third-quarter revenue down into its components, the majority of total revenue or $80 million came from income recognized on finance receivables.

This is revenue generated by our owned debt portfolios and our Q3 performance represents another record for PRA. Income on finance receivables is derived from $137.4 million in cash collections we recorded during the quarter reduced by an amortization rate including the $6.5 million allowance charge of 41.8%. This compares with 41.2% in Q3 2009 and the full year 2009 rate of 41.4%.

As I mentioned earlier, during the quarter, PRA recorded allowance charges totaling $6.5 million which compares to $8 million in Q3 2009. This is a nice improvement as it equates to 0.81% of our NFR or net finance receivable balance for Q3 of 2010 versus 1.21% in Q3 of 2009 and it represents 4.75% of total cash collections versus 8.67% in Q3 2009.

[Life to date] reserves all of which were recorded since the change to ASC 310-30 now stand at $71 million. I want to remind everyone that we account for revenue from our overall portfolio on a pool-by-pool basis.

When pools underperform, we do not lower their yields. Rather we move relatively swiftly to take allowance charge.

which show up right away as a revenue reduction on our income statement. Please take notice that underperformance is relative to the current yield that is assigned to a pool and not necessarily to the original book expectations. I will discuss this in more detail later.

In contrast, when pools overperform, that overperformance is generally not reflected right away. Typically after there is sustained evidence of overperformance, we will make an upward adjustment to the pool by increasing the yield expectations for that quarter and 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 be realized in the future and gradually over the pool's remaining life.

This is the process I referred to in the prior paragraph. An overperforming pool whose yield has been increased in this manner could actually incur an allowance charge later in the pool's life if the cash flows weaken even if the pool yields a better return than originally expected.

This implementation of accounting guidelines is further impacted by our long-standing position against permitting accretion during the first six months of a new pool's life. Accretion or recognizing more revenue than cash collected adds to the net finance receivable of a given pool instead of amortizing it, in other words, capitalizing revenue.

Accretion 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 a more robust projection 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. While accretion is acceptable under the accounting guidance, we instead opt to use either cost recovery or a cash method as permitted by Paragraph VI of ASC 310-30. I will talk about a few of the larger charges but not step you through each and every pool as additional details are included in a chart in our press release.

The 2005 core charge-off paper contributed a net allowance charge in Q3 in the amount of $1.7 million which was flat to Q2 2010. As in prior quarters this year, the 2005 Q4 tranche of paper contributed about 90% of the 2005 allowance. It is important to note that the 2005 Q1 tranche of paper recorded a reversal of $400,000 in Q3 2010 as cash flows exceeded our lowered expectations.

I would like to take just a few minutes to talk a little bit more about this 2005 tranche of accounts. Remember that ASC 310-30 is a yield or interest rate based revenue recognition process. It is an amortization table.

It contains an amount to amortize which in our case is the purchase price for a portfolio as opposed to the traditional loan principal balance. The table contains a projection of cash flows and an interest rate to effectuate the amortization.

The most pronounced difference between our amortization tables and that of a more conventional loan is that ours contains the cash projection which can change over time and an interest rate or yield which could also change but only up and not down. This creates a situation where a pool of accounts may be overperforming original expectations but may be underperforming relative to an upwardly adjusted yield and still we would be required to take an allowance charge.

With that quick accounting lesson, it's interesting to note that all 2005 quarterly accounting pools with the exception of one very small pool are currently bearing yields or interest rates that are higher than originally booked. The 2006 core tranche of paper contributed an allowance charge of $2.2 million in Q3 2010, flat to the Q2 charge of $2.1 million and up from the Q1 2010 charge of $1.1 million.

The $2.2 million of Q3 2010 allowances came from the Q2, Q3 and Q4 2006 tranches with Q4 contributing $900,000. Reviewing our press release where we have completed a condensed version of our portfolio supplemental performance data chart from the 10-Qs and 10-Ks. You will we reduced the estimated core purchase price and the cash collection multiple on the 2006 tranche as a whole by nearly 2.8 percentage points for a total non-bankruptcy purchase price multiple of 209%.

As above, I wanted to share some insight on the 2006 accounting tranches. Like 2005, the 2006 core and bankruptcy tranches are currently bearing yields that are higher than originally booked.

Moving on to 2007 core tranche of accounts, they contributed a Q3 allowance charge in the amount of $2.2 million, up from $700,000 in Q2 and up from $1.7 million in Q1 of 2010. In terms of current yield, like the 2005 and 2006 tranches, the 2007 core and bankruptcy tranches are currently bearing yields that are higher than originally booked.

However, the differences between original and current yields are generally less than the differences in the 2005 or 2006 tranches. Now I'd like to turn your attention to the 2008 core tranche of accounts.

During Q3, the 2008 core tranche of accounts contributed a modest allowance charge in the amount of $150,000, down substantially from the $2 million charge recorded in Q2 of 2010. While both quarters were up from zero in Q1 2010, this Q3 performance was better than any quarter in 2009.

Additionally, the Q3 and Q2 cash collections were very close to our expectations. Taken as a whole, the 2008 tranche of paper missed our projections by less than 3%.

We continue to track this pool of accounts very closely and while results were good so far at 2010, we still have a long road ahead of us in terms of collections. In terms of current yields, the 2008 core tranches generally remained at their original booked yields while the bankruptcy tranches generally have yields that exceed those originally booked.

Moving forward into 2009 and 2010 core tranches of accounts, we have incurred no allowance charges to date. Additionally, as in Q1 and Q2 of 2010, we once again spent a significant amount of time and effort analyzing our yields and booked deal multiples on the 2009 core tranche of accounts.

As I mentioned on prior calls and as I think is evident in our charts contained in our 10-Qs and and 10-K, these 2009 tranches are significantly overperforming booked expectations. As such, we did increase both yields and deal multiples on these tranches during Q3.

In the spirit of our accounting (inaudible) today, it's important to understand that if cash flows weaken in the future, these significantly overperforming deals could at some point incur allowance charges. Again, the allowance test is always against the current yield which can be increased but never decreased, not the original yield.

Our bankruptcy portfolios continue to perform strongly. Following a Q1 2010 net allowance charge of $1.3 million and a Q2 reversal of $5000, in Q3 we recorded a net allowance charge of $470,000 on purchased bankrupt accounts, the majority of which was recorded on the 2007 Q4 tranche.

I mentioned to you previously that we're closely watching our bankrupt portfolios and evaluating booked yields and deal multiples. As a reminder, for Q1 2010 as with Q4 2009, we left yields in multiple static as set in Q3 2009.

During Q2 of 2010 as a result of long overperformance, we did allow yields to increase on some of our bankruptcy tranches as well as allowing selected deal purchase price multiples to increase modestly. In Q3 of 2010, we generally made no adjustments to yields or multiples.

As I touched on above, looking at the allowance charges in different ways we believe is helpful and puts things in perspective. For example we look at ratios such as allowances to NFR which is net finance receivables, allowances to revenue on finance receivables and allowances to cash collections.

For Q3, all of the aforementioned ratios represented improvement over Q2 and over the average of the entire year 2009. During the third quarter, cash collected on the fully amortized pools was a very strong $9 million. This compares with $6.6 million on such pools in the year-ago period and $10.1 million last quarter.

As Steve described, total commissions and fees generated by our fee-for-service businesses were $15.5 million in the quarter. This compares with $14.2 million in the year-ago quarter. Our fee-based businesses accounted for 16.2% of the Company's overall revenue.

Our quarterly amortization expense related to acquired intangibles from our various business acquisitions was approximately $1.5 million during the quarter. Moving on, approximately $1 million of operating expense in Q3 was due to non-cash equity compensation that was booked during the quarter relating to our 2009 and the 2010 performance-based incentive share plans as well as other equity-based rewards.

Operating expenses in Q3 grew 26% when compared to Q3 2009. This was primarily driven by compensation and employee services which grew $4.4 million or 16%; and legal costs which increased by $5.2 million or 127%.

Now the increase in compensation expense during Q3 relates primarily to inside legal employees as we continue to build that capacity as well as growth in our total call center collectors. Operating margins during Q3 were a very strong 34.4%.

This compares with 27.4% in Q3 2009 and 36.9% in Q2 2010. Excluding the fee-based businesses, the operating margin would have been approximately 520 basis points higher at 39.6% in Q3.

Operating expense to cash receipts is perhaps a more insightful efficiency ratio since it removes the effect of variations in purchase price amortization rates as well as allowance charges. Operating expense as a function of cash receipts during Q3 2010 were 41%. This improved nicely from 46.7% in Q3 2009.

Our balance sheet remains stronger in the quarter despite substantial purchases on new finance receivable portfolios in the amount of $93 million. As of quarter-end, the outstanding balance on our line of credit was $288.5 million which was down $1 million during the quarter.

Our total credit facility is $365 million, leaving us with $76.5 million of availability. Cash balances increased sequentially during the quarter to $20.3 million.

We believe our leverage remains quite modest at 61.8% of equity. We're producing strong internal cash flows and are well capitalized.

We continue to work with our banks on an expanded and extended line of credit. During the quarter, we began a formal process to raise a syndicated credit facility led by Bank of America and Wells Fargo.

Based upon recent conversations, we expect to close on a new line sometime in Q4. We're seeking to raise approximately $450 million at a price target of about L plus 275 plus all of the upfront fees that banks are looking for these days.

I would like at the end my discussion to leave you with some final points. First, as I described in great detail, our recognition methods typically cause us to take allowances quickly when pools underperform while recognizing overperformance slowly over the pool's life.

I have additionally, hopefully, given you some further insight into the accounting world. Second, we have been making significant investments in well-priced pools of bankrupt and charged-off debt over the past 18 months. Based on our underwriting curves and actual cash collection trends, we anticipate strong cash production from these 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.

Fourth, I'd like to give you some further insight related to legal costs that Neal discussed earlier. Let me clarify that I'm speaking about the required costs paid in courts in order to file lawsuits and not the contingent fee paid to an external law firm.

We incur these court costs whether we sue using external firms or use our own internal attorneys. During Q3, we significantly increased our investment in legal costs by nearly $3 million as compared to Q2 of 2010. As Neal described in detail, some of this increase in dollar amount is simply due to growth in legal channels, both internal and external.

Some of the increase also came from us reacting to notifications that court costs in a number of jurisdictions were going to be raised significantly and we reacted by accelerating some of our suits. However, the largest component of this increase is due to the updated legal score which allowed us to expand our account selections for legal action.

We firmly believe these investments are a smart move from an ROI perspective but obviously negatively impacted our Q3 earnings since we expense rather than capitalize these costs as incurred. On a go-forward basis, you will likely see us continue to increase our investments in legal costs both in an absolute dollar amount but also as a percentage of our cash receipts or cash collections relative to our prior history.

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. Operator?

(Operator Instructions) Hugh Miller, Sidoti & Co.

Just want to obviously thank you guys for the additional information that you're putting out in the press releases. I think it's certainly helpful.

I wanted to touch upon a little bit about the legal cost here. Obviously you mentioned that the greatest increase relative to Q2 was the new scoring models identifying new accounts.

But can you give us a sense of what percentage is really that increase in hikes in some of the jurisdictions you're seeing, maybe what states you're seeing that in and others on the horizon that you think could potentially cause you to speed up placements?

Sure, well the states that went up during this quarter were Maryland, Virginia, New York and Georgia. So you can think about the demographics and populations there.

The one that's on the horizon that's a bit more significant is California and all of these increases are fairly stark. And the reason we try and accelerate -- there's a couple. But the main reason we try and accelerate is because you have to remember, the court costs that we incur, those get added to the consumer's bill.

Ultimately they are responsible to pay us back our balance plus our attorneys fees and court costs. So the consumer really bears the burden of that increase.

However we have have to lay the cash out upfront and there's a lag between the expense and the collection period. So it's not fantastic for us either. But you know, this is the state that many jurisdictions find themselves in and it's not uncommon right now for these prices to go up.

Okay and when would you anticipate that California could potentially come into play?

It is imminent -- days, three days.

Okay, good color there. It seems as though -- you guys had mentioned in the past, you were able to kind of -- you would be able to buy more non-bankruptcy paper without having to materially increase headcount. Is there any particular reason why you haven't been kind of buying more traditional paper than you have been?

Yes, this is Kevin. From our perspective, we are kind of floating around the market trying to decide where the IRRs are best and where we are going to deploy our capital.

So your first statement though is correct. Neal did a fantastic job being able to absorb a lot more volume based on his new approach to analytics and the way we use our dialers.

So it isn't really related to what -- they're not mutually exclusive. We are certainly looking at both pieces of paper. For right now though, it's an IRR bet on our part where we deploy our capital.

Okay, it seems as though you guys have obviously made strides with the predictive dialer, the dynamic scoring model. I guess the question for Neal, what other things are you kind of seeing as additional drivers of productivity gains that you're considering making an investment in? Anything that looks somewhat beneficial?

Well, our IT is department is in no danger of running out of projects and I have got pages of fun and interesting ideas for them to explore. So obviously as time goes on, it gets more and more difficult to move these things on a rate basis and productivity gains can't go up at this rate into infinity.

But we have got a nice long runway and a very healthy list of projects. Most of the projects that really move the needle are around scoring and less so about dialing.

Okay, I guess last question. Obviously you were mentioning that you are seeing a reemergence of some competition on the pricing side which is driving up pricing a bit here and that obviously there's the potential for the supply of receivables to kind of increase. But are we getting to a point where you start to get a bit nervous about the opportunity to kind of reinvest cash flows into new paper as the pricing is coming up? Or are we still very far off on that from that level?

I think based on the volumes that we have seen in the past couple of quarters, I don't feel like we are there yet. We're still seeing very substantial volumes, we're able to put out pretty solid investment dollars at what we think are attractive yields.

And so even at kind of a steady state, we feel good about the environment right now. We would love to see more volume come out though.

The last question, just circling back to the legal fees, are you guys running into issues as well with having to kind of put legal filings into that channel ahead of seeing the statue of limitations come into play for states that might be lowering those?

We don't have anything imminent on the horizon. It's obviously discussed here and there, but there's nothing I am aware of that's imminent or causing us to recalibrate those calculations.

David Scharf, JMP Securities.

A couple of things. Looking at the number of collectors, it looks like it's only increased by about 50 seats I think from the beginning of the year.

And obviously we saw a reversion this quarter back to the majority of purchasing being focused on BK paper which obviously is more automated. But just as we look out to 2011, maybe even early 2012, any issues at all on the horizon as far as seat capacity? Any time over the next 18, 24 months we may have to look at another call center based on the supply outlook you have?

We would not look at another call center from a supply problem. We have got -- we've made some really exciting progress with our scoring. Better scoring equals fewer resources pointed at a more finite set of accounts.

The vast, vast majority of accounts in our inventory don't pay us and the most important job duty we have is always what not to do. So who we don't fool with is our most important decision.

And if we can only try and collect from people that we think have an appropriate profile to pay us, that saves us a lot of time and energy. And we have made really interesting progress on that front over the years.

Sounds like a lot of leverage still out there. Switching back to the court fees, don't want to beat a dead horse but you know it's going to be sort of topical tomorrow, can you just -- give us ballpark just so we can kind of frame what kind of dollars we're talking.

When you throw Maryland, Virginia, Georgia, California and you kind of annualize their -- at today's kind of run rate what you spend in those states on filing fees and how much they're going up on an annual basis, just so we can at least get a reference point and whether this is a huge issue or actually (multiple speakers)

David, I put a whole section on my script just because of this matter. But, really if you guys are modeling, that's why I put that in there, the largest component of this really is due to us looking -- improving that legal score and reaching a little deeper.

So I appreciate your question. To give you a feel for kind of the dollar amount in a court, a 30 might go to a 40, a 40 can go to 100 and those kind of numbers. But again, if you are looking at what happened in Q3 and what you might look at going forward, the majority of the shift in Q3 was a -- was not that issue.

Okay, you've answered it perfect. It doesn't sound like it's going to be that material.

And lastly, completely out of the realm of collections and purchasing, any thoughts on your healthcare costs next year as it relates to fully burdened compensation expense given all the changes we have seen?

Yes, actually we have just wrapped up our redo on our health costs for the next year and it's going to be a very modest increase.

Good for you, you are in the minority. That's all, thanks.

Mark Hughes, Suntrust.

The 2010 paper seems to be performing very well just looking at collections relative to average purchase price, better than the 2009 one at this point last year. Anything artificially boosting that or does that reflect just the underlying performance of the paper?

No, we had nothing at artificial boosting that. I think that the techniques and strategies that have been evolving steadily on Neal's side of the business certainly are impacting kind of layer upon layer as time goes on. And so maybe there's an impact from that, but there is no overt strategy change or anything like that if that's what you're looking for.

Just trying to [seemingly] collectibility keeping ahead of any increase in the portfolio price. Is that fair?

Yes, I think that's right.

Yeah and then the -- Kevin, with the extra collections in the quarter, obviously you extend the costs associated with that but you don't necessarily get the revenue upside. Did you do any internal calculations as to what the collection strength might have hurt in terms of EPS or dampened EPS?

The legal costs?

Just the overall costs, just the strength in collections. Given that you had a very good quarter say compared to Q2 and given the accounting, you can't flow all that extra collections through the P&L. Any comment on how that might have negatively affected the earnings in this quarter? But obviously the upside is spread out over future periods.

What's interesting about that -- that's an interesting question. What's interesting about it is really expenses are -- if you look at the delta in expenses -- and I've got a lot more granularity here in front of me [than the delta on] the SEC data.

But if you kind of go down through all the categories -- Q2 to Q3 -- they are incredibly consistent. And the one delta is indeed that legal cost matter.

And so from our perspective, a lot of that cash came from the BK side, came from the court side through Neal's efforts. So I see that as a situation where the margins are improving and expenses are kind of under control and cash continues to roll in so to speak.

And again, to point out, there was no -- I know we talked in prior quarters about accretion and again just to remind everybody, we don't have any accretion of our portfolios.

That was consistent as a percentage of collections from quarter to quarter?

No, a dollar amount. So you're right, we are improving. So the issue is I think as you go down through these line items, they are improving as a percentage of collections.

But they've been very consistent in terms of a dollar amount with the exception of the legal costs this quarter.

Edward Hemmelgarn, Shaker Investments.

Great job. A couple of questions. First -- this is for Kevin and Neal. Kevin, you spent a long time discussing the yield on the -- I guess it was the '05 through '08 portfolios. Are you -- I guess if the yield would remain at the same run rate over a long period of time as your collections -- you would expect, are you implying then at the pace at which you are getting your yield right now, it would be -- it's consistent with your initial projections, so therefore all the more you would expect to be able to recapture the -- your allowances [you've shaken] if you got the returns to remain at the level they are at over a long period of time?

I thought you were going somewhere else with that question. So you are asking me if we continue to get the cash collections on pools that we are getting today at the current yields --

Well the current -- at the rate you seem to imply is that the yields were at least equal to or better than what you had initially projected.

Yes, so was the question if the yields would have been at the original rates (multiple speakers)

No, no, my question is this. Given that you have put on some rather large allowance charges on these portfolios, are you trying to say is that given the factors of the yields in actuality now are running at rates that are higher than or equal to what you expected, are you saying that if that continues to -- along that line (multiple speakers)

I got it. So the yields have indeed -- the booked yields are higher. I spent a lot of time talking about cash, 2005 for example, the booked yields are a lot higher than -- they are currently higher than they were when we booked them, but those particular tranches are yielding better than where we had booked them, just not as high as the yield is currently.

So the allowance obviously in those 2005 tranches are almost all related to an increased yield, not as opposed to that yield being lower than we originally thought it might be. So the issue would be, to your point, that if that yield then starts approaching -- as it increases, it's got quite a gap to fill.

So I think at the current rate, you would end up -- at the end of the life of a deal, you'd have an allowance sitting there at some point when that deal is fully amortized and then you have to decide whether you start releasing that allowance or you call it permanent and call it a day.

Okay, so it's -- all right, I guess the accounting as you have correctly stated many times is a bit confusing, but you're not really trying to -- I guess as the life to date yields on these things that have -- the reason why you have the allowance is because overall the [life to that] yields have been below what you had originally booked.

It depends on what tranche of paper you're talking about. So that isn't always the case. So again, with a 2005 tranche of paper, the life of the yields are better than we expected, just not as high as we had moved them up to at one point in time.

Now if you look at maybe say a 2006 tranche of paper, those yields -- they were firming pretty strongly upfront. The yields were raised modestly and some of those tranches are actually performing less than we expected. So it depends on what tranche of paper you're talking about, it goes both ways.

Okay, all right. My second question then relates to your fee-for-service businesses. Clearly the way they're operating right now, the op margin is way below what the -- your collection businesses are but you also have lower amounts invested. What has been over the period that you have owned these things, in essence what has been your return on investment?

Well the fee businesses aren't terminal. So it's difficult to give you a -- I think a really full accurate read on what our return on investment has been.

I can tell you that we track this every quarter and we look at how we're trending just from a cash flow standpoint, how much have we invested, how much cash flow has been returned to the Company net net. And we are I would say very competitive with the long-term averages that we see in the portfolio businesses with the fee-for-service businesses.

Okay, I realize you've got a lot less invested in those businesses than you obviously (multiple speakers)

They are very I think very appropriate yields.

And also remember that they're bearing their own amortization of intangibles too. So the price you paid for them is being amortized out of their margin as well.

Robert Napoli, Piper Jaffray.

I guess I was trying to -- with the increased legal costs and expenses we saw this quarter, I don't want to beat that to death, but I guess I'm just trying to think a little bigger picture longer-term. Do you expect to continue to get operating leverage?

Do you expect your operating margins to increase? I know your goal is to have 20% plus return on equity and you are generating more capital and it gets difficult to get there unless you drive up those margins or reduce the equity, increase the leverage.

So do you expect to continue to get operating efficiencies? And is that how you're going to drive up the ROE? Or do you need more leverage?

I think we are looking at kind of the list of possibilities, Bob, as a dynamic set, not an either/or. And so I think over the long run, we would hope to put upward pressure on return on equity by employing a number of different strategies.

Do you expect, Steve, that operating margins are going -- should -- I mean, you talked -- I think you seem like you have built-in operating efficiencies now offset partially by some increase in court costs. Do you expect to see -- do you expect your operating margins -- you have some good operating leverage from current levels.

Remember too, Bob, this legal thing that we have all spent a great deal of time talking about is a miserable concept in terms of matching expenses to revenue itself. What we've done is just prepaid expenses for a whole lot of revenue that we feel very, very strong about that they will be coming out in future periods. So just from a P&L perspective, moves like that are going to help drive out additional operating efficiencies for us in future periods.

If I could share one more concept, if it's all right. I've got to get a little more granularity here. One of the things as Steve pointed out is 100% accurate. It's really accurate on prepaid.

That call it $3 million (inaudible) this quarter really generated next to nothing in terms of collections. What's interesting is from Neal's perspective and also from the increase in bankruptcy cash collections, the salaries -- you look at salaries and wages as a percentage of cash collections or cash received, they showed a nice trend downward over the past couple of years actually.

So we're more like in the 20% of salaries to cash received, really improving from about -- almost 21 last quarter and 21.5 in Q1 and those numbers were more like in the 24s year. So, we're showing really nice improvement in current period expenses to current period cash collections. And there's this $3 million number is there as -- again considered a prepaid.

We really focus on only suing people who we think are going to have some asset to pay us back and they will be on the hook for the court costs. So we feel very good about the investment and the ROI out of that channel or we wouldn't push people down that channel because it is expensive and there is this lag of upfront costs.

So we sue a tiny fraction of the accounts in our inventory. Way less than 5% of the accounts in our inventory will be pushed through the legal channel. But the ones we put there we put there for good reason.

Great, that's very helpful. On the competitive front, the -- I was just hoping to get a little more color on -- are you seeing new players come into the market at all? I mean, I think what you have said is that you're seeing players that have been longer-term players kind of coming back to the market.

I did see that [encore] I guess entered the bankruptcy buying process. And if you broke it out by business, the bankruptcy versus the core, I'm hoping for a little more color on that front.

I think that overall, Bob, our feeling is that we are seeing the typical competitors just competing more vigorously as opposed to a whole bunch of new names entering the space.

Can you give a feel for like how much has pricing gone up? Has it gone up 10% from the bottom or -- ? I don't know if you can try to give some color around that. I know it's difficult to

Well, I mean, the bottom as we have remarked on prior calls, occurred early in 2009 under a very different set of conditions. So I don't know that it's a great apples to apples to say pricing given what the collections outlook was in early 2009 compared to where we are at currently has moved up X percent or Y percent. Now on an absolute basis, pricing is up significantly from where it was at the darkest hour of early 2009.

(multiple speakers) there's a heck of a lot less risk there too.

Right, are you seeing or are you hearing -- do you expect to see banks that are sitting on a lot of charged off paper? Do you expect to see more paper coming to market? Are you hearing that it is or are there more flow businesses coming up for bid or anything (multiple speakers)

I think our feel at this point is we don't have a good read on it and we're sitting and watching and waiting and seeing what ultimately those year-end and then 2011 strategies are.

And then I guess last question. Have you heard anything at all out of the Consumer Financial Protection Agency regulatory front? I know it was quiet this quarter. But have you had the opportunity to speak to Elizabeth Warren or anybody -- what are you hearing if anything regarding the collections industry?

Well we have continued to push on our contacts to see what kind of reads we can get coming out of that regulatory process. And we hear pretty consistently that they're not going to get to the debt collectors for quite a while yet. Now, exactly when that is, as you know, nobody knows. But at least at this point, we haven't heard of anything imminently coming our way.

The [FKC] remains [the most factored regulator].

Sameer Gokhale, KBW.

In terms of the weekly remittances, I just want to clarify, is there anything like one fewer week of remittances this quarter -- or excuse me -- one extra week of remittances this quarter that's going to -- and there's only one less week of remittance next quarter that we should take into account when forecasting out the cash collections?

No, that's not a phenomenon we experience. We generally try and scoop up our cash on a daily basis when it's there.

Okay, that helps. Because I know one of our peers had that issue this quarter. And then the other question I had was, in terms of like thinking about this new syndicated credit facility which is going to add to your ability to invest and buy portfolios, how do you think about purchasing activity?

Because clearly when you look at portfolios, you want them to meet your hurdle rates, but you're expanding your capacity. I would argue you seem underlevered relative to your peers.

You seem to already have the capacity to buy more in portfolios and receivables. So what's the gating factor there?

Is it just the supply currently or are you expecting pricing to come down a lot in the future and you're kind of building up the capacity to capitalize on that or both? How do you think about that?

Well logic would tell us that there's an awful lot of portfolio that has been created that's sitting on people's -- sitting in people's collection shops right now, either outsourced or being worked internally but eventually in some form will come to market.

And so we are -- want to be prepared for that occurrence. Also, we have been working really diligently on becoming more and more competitive as it relates to our ability to extract cash from these portfolio acquisitions for the lowest possible cost and at the same time, as Kevin remarked, we are raising or hope to be raising additional debt capital.

We believe that we can compete with anybody and we intend to do so on a go-forward basis. And we have really gone through all this work and development to be able to be a very, very tough competitor.

So, reaching further into the portfolio is to extract more cash to be able to be more competitive and keep our profitability acceptable is really what we've got our eyes focused on on a go forward.

As you think about the pricing environment and the supply -- the pent-up supply that could come out into the market, it seems like, you know, the issuers are hanging onto the paper and placing them with the contingency collectors. And then as prices continue to increase, that clearly makes it more attractive for them to sell over time but that also results in higher prices for portfolios from a purchasing side.

So I mean, is there anything else missing in that dynamic other than prices could go up further, that will drive the supply higher? Or is there something else that might give issuers an incentive to actually go ahead and sell this paper as opposed to use collectors or otherwise retain it?

Well I think that what we have seen historically -- and not that this will always repeat itself -- but I think that the sellers have not always made sell/no-sell decisions based purely on the economics of that sales transaction. Many times, the big issuers were selling because they could use a few extra recovery dollars to help out at earnings time.

And in the current environment, people don't appear to be stressed for extra EPS and so nobody is dipping into that well. We can't make a call as to whether that is going to change next quarter or the quarter after that, but I would expect at some point, we will get into an environment where people are needing a little bit more EPS, and so they use the debt [fail] alternative strategically as it has been in the past. And at that point, we may well see some additional volume come out.

On the legal costs, if you kind of look out the next quarter or two and we try to model that out, you mentioned the various reasons why those costs went up today. But if you kind of adjust for the acceleration in some of these costs, as did that because of the increase in the court fees, I mean, is it reasonable to model out that line item based on say the midpoint of where it was this quarter and last quarter? Or do you expect those costs to come down to the first-half levels looking out the next couple of quarters?

So, again, that's why I wanted to make sure I was kind of clear on that. Again, just to recap, the largest component of what that -- those costs represented was this -- basically this legal score and our ability to kind of reach deeper into the portfolio.

So, what I put in my script was kind of the concept that -- as a percentage as well. So if you look at a percentage of cash received or cash collections, however you choose to model it, those numbers likely will be a little bit higher. Again we're talking about $3 million this quarter. And so if that ratio -- I wouldn't look at -- I wouldn't look at really Q2/Q1. I would focus on Q3 for that number.

Okay, that is helpful. And just the last question -- thank you, you've been very patient. Just the last question.

Just the last question, thank you, you have been very patient. Just the last question.

I haven't seen any of your presentations or you specifically give us some numbers, or have you done any sort of statistical analysis to show your -- the effect of the statistical work that you do and the list you get in collections if you were to look at say base case where no analytics were applied and then measuring that against your outsourcing into third parties versus your in-house ability to use sophisticated analytics, like how much of a lift you get from your analytics. I don't know if you ever shared that before or not or if you considered sharing that and having the percentages available.

So, you know, I love using the words Kolmogorov statistic. That's the lift over the control group.

So as fun as it is to get into all of that, that's not something we have gotten into in our presentations. But you can rest assured that is a metric that we spend a great deal of time on.

We literally do nothing without a control group to measure things by and we try and be religious about making sure we have got good control groups in place so we know exactly what these scores are doing for us.

Matthew Prince, King Street Capital.

Is there any update you guys can give us on what is going on with the IRS with the issue over the deferred taxes?

Again, so we disclosed what that is. So the issue for those that don't know is that we are under audit for the 2005 year. It's been going on for about three years now.

The IRS basically -- I guess I'll say has taken issue with our use of cost recovery for revenue recognition. And so the update simply is that we are in appeals and we think we have got a very, very strong case.

Our positions are quite squarely on two court cases. One is called Underhill and one is called Lipton. You guys can look them up yourselves and see what you think. But that's going to go on for a while and we think we've got case law on our side.

And the estimate of timing or --?

I wish I did. I'd never thought it would go on three years, quite frankly.

And then I had one other question. You know, bankruptcy it looks like now has become actually the bigger part of your business, at least in collections relative to the call center. I'm just curious, you guys have done a good job explaining what your competitive advantage is on the call center side. What do you think your competitive is on the bankruptcy side versus other guys buying the paper out there?

Sure on the bankruptcy business, we see really two essential competitive strengths in addition to being able to underwrite very, very accurately. And so let's just say that's kind of the table stakes.

You've got to be an extremely accurate underwriter because remember, unlike the core businesses, you don't have a huge chance to influence cash collection once that buy decision has been made. So first of all, we have invested very significant dollars in developing a proprietary bankruptcy administration system that we believe gives us operating costs as low or lower than anybody that does this.

The second part of our competitive advantage we think is being able to very quickly push any kind of a dismissed account over to our call center collection floor depending on what type of accounts you are buying and where you are buying them in their life. You can get a significant amount of these accounts that do fall out of the bankruptcy plan.

And so, we are able to seamlessly move those over to Neal's call-center teams and start effectuating collections on those essentially the day after they move out of their bankruptcy protection. So really those I guess three elements taken together we believe put us in a very competitive stead with bankruptcy.

Robert Riggs, William Blair & Co.

Hi, a couple quick questions. You have shown nice improvement in the Philippines center in terms of the productivity the last couple quarters. Anything in particular driving that?

And then I know it's a relatively small amount of seats, but any particular benchmark level that we should be looking for before you think about expansion plans there? Thanks.

So part of the improvement in the Philippines is simply one of tenure for all of our collectors. Tenure tends to be pretty helpful.

We have had our management staff in Kansas which is our top center very focused on the Philippines, spending a lot of time with them and we think that has paid dividends as well. In terms of gauging their performance, again it's really tricky because we're not sending the same accounts that we work at our other sites.

Because we've got the lower labor costs, we're really trying to take advantage of that site and reach down into the portfolio in a way that would not be possible to do at the labor rates we have in the US. So it's really all incremental collections. So because it's all incremental, we have been and continue to be reasonably pleased. And if things stay on pace, we certainly would look to expand that over time.

I'd now like to turn the call over back to Mr. Steve Fredrickson for final thoughts.

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

Portfolio Recovery Associates has had a very strong year thus far even in the face of a still weak economy. In the third quarter, PRA produced record highs in key metrics such as cash collections, cash receipts and revenue.

Net income and EPS both showed strong growth. Overall, I'm extremely pleased with the performance PRA has turned in across all of our businesses.

The credit goes to our staff which has continued to work smarter and more efficiently than ever. PRA's success is the direct result of the long-term investments we've made over the past several years and intend to continue making in portfolios, technology and people.

I'd like to thank all of you for participating in our conference call. We look forward to speaking with you again next quarter.

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