PRA Group Inc (PRAA) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Portfolio Recovery Associates Incorporated earnings conference call. My name is Karis and I will be your coordinator for today. At this time all participants are in a listen-only mode. Later we will conduct our Question and Answer Session.

(Operator Instructions)

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

Good afternoon and thank you for joining Portfolio Recovery Associates fourth quarter 2010 earnings call. Speaking to you today will be Steve Fredrickson, our Chairman, President, and Chief Executive Officer, Kevin Stevenson our Chief Financial Administrative Officer and Neal Stern, our Executive Vice President of Operations. We will begin with prepared comments and 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 future of Portfolio's performance, opportunities, future revenue and earnings growth, future space and staffing requirements, future productivity of collectors and future contributions of subsidiaries to earnings are forward-looking statements.

These forward-looking statements are based upon management's beliefs, assumptions, expectations of the Company's future operation 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 & 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 8K filed with the Securities & 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 forward-looking statements are based in whole or part. Now here is Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim, and thank you all for attending Portfolio Recovery Associates' fourth quarter 2010 earnings call. On today's call I will begin by covering the Company's results broadly. Neal Stern will then talk to you in more detail about our operational strategies and finally Kevin Stevenson will discuss our financial results in detail. After our prepared comments we'll open up the call to Q&A.

Portfolio Recovery Associates concluded 2010 with record financial results, demonstrating exceptional performance across our debt purchase business despite the still weakened economy. Our disciplined approach to underwriting, together with our consistent and continued efforts to improve the efficiency of our collections operations, helped drive record results in cash collections, cash receipts, revenue and earnings both in the fourth quarter and for the full year. Importantly, these results stem from the long-term focus we continuously espoused and the significant investments in people and technology we've made over a number of years.

In terms of specific performance, our bankruptcy business continues to perform well with strongly increasing cash flow as the sizable investments we made over the past few years mature. Our operational strategies are driving increased productivity, even in the midst of this weak economy. Our strategy of developing our internal legal collections capability combined with the targeted use of our external legal channel has again produced strong increases in legal recoveries. Our fee-based businesses continue to be contributors even though they have been negatively impacted by the economic slowdown like so many others.

It is also important to note that PRA's consistently strong performance in sustainable business model are based on a 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 use dialers and dynamic scoring to be efficient and cost effective in our collections practices. Our use of contingent fee collection agencies is minimal. We rely on a combination of analytically driven statistical models and other due diligence procedures utilizing our very deep data set to determine purchase prices and portfolios. And importantly, we accomplish all of this while respecting the regulations that govern our industry and allocating significant resources to comply with them.

Now in terms of our financial results. During the fourth quarter, PRA acquired $85.5 million of defaulted debt representing $1.87 billion in face value. This was comprised of $40.7 million or 48% bankrupt paper and $44.9 million or 52% core charge-off paper. Cash collections were a record $144.4 million, up 52% from $95.3 million in the year ago period. This helped drive our record cash receipts of $160.3 million in the quarter up 42% from $112.5 million in the same period a year ago. We defined cash receipts as cash collections, plus revenue from our fee-based businesses. Fee revenue was $16 million in the fourth quarter, a decrease of 7% year-over-year.

Diluted earnings per share advanced to $1.20, up 50% from $0.80 in the fourth quarter of 2009. Net income of $20.6 million was up 66% from $12.4 million a year ago. Revenue grew 38% to a record $100.8 million compared with the year ago quarter at $73.2 million. Allowance charges in the quarter totaled $5.4 million or 0.65% of net finance receivables. Kevin will provide details about the charges in a few minutes.

Operating expense to cash receipts improved once again. In the fourth quarter of 2010 the ratio was 40.2% compared with 45.4% 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 collections 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 a stepped up level of investment in lawsuits against additional accounts. Lawsuits that will yield incremental cash flow in future periods. Similar to our strategy in Q3, the incremental cost of these lawsuits ran about $3 million above our Q2 legal suit expenses.

PRA realized record productivity of $194 per collector hour paid for the full year 2010, which compares with $145 for full year 2009. This includes a net increase of 147 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. Net interest expense was $2.5 million in the fourth quarter, up from $2 million in the year ago quarter due mainly to the termination of our interest rate swap and a slightly larger average outstanding balance on our line of credit.

Our balance sheet remained strong with ample cash availability to continue building for the future. During the fourth quarter as a result of our significant cash collections, our cash balances increased $20.8 million while our debt outstanding increased $12.9 million. Total debt outstanding was $302.4 million at the end of the fourth quarter including $2.4 million of long-term financing not associated with our line of credit. This continues the controlled financial leverage 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. Availability under our line of credit was $107.5 million at year end 2010.

Let's turn now to our operations in detail beginning with fourth quarter portfolio purchases and overall market conditions. During the quarter we acquired 75 portfolios from 11 different sellers. The majority, about 92% of our fourth 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. Portfolio pricing continued the trend we have seen throughout 2010 moving higher in both the core and bankruptcy markets. As pricing becomes more competitive, our ability to underwrite accurately and extract cash from portfolios at a low cost becomes even more critical.

Moving on to collections, as I mentioned earlier, Portfolio Recovery Associates generated a record $144.4 million in cash collections in the fourth quarter from owned portfolios, up 52% from a year earlier. This was our best annual growth rate of any quarter in 2010. Offering a bit more detail on our collections performance, cash collections from our purchased bankrupt accounts were a record $56.3 million, up 110% from Q4 2009. Call center and other collections were $53.8 million, up 19% 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, set another record at $12.8 million in Q4 2010. This is up 70% from the same quarter last year. We expect continued strong growth from this channel for the foreseeable future as we continue to build our internal legal collection resources.

External legal collections were $21.4 million during the quarter. This compares with $15.5 million in Q4 2009 representing a 38% year-over-year increase. Excluding bankrupt collections, external legal was 24% of cash collections in Q4 2010 and 23% in Q4 2009. We track owned portfolio productivity in terms of recoveries per collector hour paid. The core metric that measures the average amount of cash each collector brings in. As I said earlier this metric finished at $194 for the full year 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 full year 2010 was $129 versus $113 for full year 2009 and $110 for the full year 2008. Further excluding legal and trustee administered purchase bankruptcy collections, productivity for 2010 was $100, up from $87 in full year 2009 and $75 for all of 2008. Neal will give you more color on site specific productivity in a moment.

At quarter's end our owned portfolio collector head count was 1,472 up 50 from the end of September and up 147 from year end 2009. As it relates to staffing, please remember that 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 head count numbers I just shared with you.

Our fee for service businesses which include CCB generated revenue of $16 million during the quarter, an increase of 3% from the third quarter but a decrease of 7% from the same period a year earlier. Our California based government services operations continued to fall short of our expectations in the fourth quarter. Our IGS automobile collateral location business fell short in Q4 as well. Looking at each business in detail, revenue and operating profit declined at IGS compared to the fourth quarter of 2009. IGS was negatively impacted by the reduced level of automobile financing over the last several years. We're addressing this issue with new service offerings that increase recoveries for our lender clients along with some larger steps I will discuss in a moment.

We're confident that our operation changes will lead to increased profit even with revenue at constant levels. Revenue and operating income increased in the government services business compared with the prior quarter as we saw continued stabilization of our service offerings tied to sales and used tax volumes in California and the addition of many new client contracts. However, on a year-over-year basis revenue and operating income were down.

The base of our existing government services business has not recovered to pre-recession levels since government budgets are tight for our fixed E-business and our contingency business suffers from lower overall levels of tax revenue. However, while municipalities are facing budget problems, the inherent cost structures of latent liabilities, healthcare, and pension costs are creating opportunities for us to market our outsourced services. We feel we're well positioned to pick up clients in the downturn and harvest our relationships when tax revenues rebound. We're continuing to sign new municipalities as clients as well as offering more products to our existing clients.

We're pleased with the results of our newest fee business, CCB, and we have added clients consistently since the acquisition in March. Quarterly variations in CCB's performance are driven by class action settlement pay outs. So, going forward our focus is on further increasing CCB's client base as well as offering additional services. CCB serves clients in both securities class action and antitrust class action recoveries.

Given the great opportunity we see in these fee businesses, we have taken some larger organizational steps to address the challenges facing those businesses. First during Q4 we reorganized the government services businesses, operationally combining them into a single unit and reducing the level of staffing. We also brought in a seasoned executive with deep experience in government services and sales force management. This executive, Mike Palone, is now President of PRA Government Services, supervising all aspects of the business. Mike has already made a series of organizational changes that we believe will accelerate our sales success. He will be increasing our investment in sales through additional hiring and enhanced operational processes and technologies.

Neal Stern and his team have also been reviewing our Government Services Operations, helping to identify opportunities to execute for our clients more effectively and efficiently. Second, Neal has begun working with the management team of IGS to bring the best practices of our own portfolio call centers to our collateral location business. A small team of managers and analysts are providing ongoing support. As a result, we're seeing some early improvements in operational effectiveness. With these changes, our home office can provide better operational, technological and administrative support to our subsidiaries, allowing them to focus on business development, sales, and servicing their clients.

Before I turn the call over to Kevin Stevenson, PRA's Chief Financial Administrative Officer, I would like to have Neal Stern, our Executive Vice President of Operations, give you a summary of our operational strategies. Neal?

Thanks, Steve. Our fourth quarter operational results were again in line with the strong results of the prior several quarters. The efficiencies gained from our ongoing investments in automated dialing technology, which allowed us to make 38% more calls in Q4 2010 than in Q4 2009, our best in class analytics, and our team of collectors committed to finding payment solutions that work for our customers together facilitated our ability to collect a record 1.3 million payments during the fourth quarter. That figure is up by 72% from Q4 2009 and for the full year it was up by 66% as we collected more than 4.4 million payments.

The operational efficiencies we brought to bear over the past few years have allowed us to profitably work accounts with lower balances and lower scores than at any other time in our company's history. That in turn has resulted in a decline in our average payment size. In Q4 our average balance of a payment received was down by 12% from Q4 2009. This represents the second consecutive quarter in which this decrease in average balance has moderated. Over the last three quarters that figure has come in at 16%, 14%, and now 12% respectively. I have been more than happy to see our average payment size fall as a result of total number of payments rising dramatically. However, a moderation in the average payment size decline can have a significant impact on our cash collection figures if the growth of customers on monthly payment plans continues at its current pace.

Another important contributor to our Q4 performance was our legal collection results which finished the quarter 49% higher than the same quarter last year. External legal collections finished 38% higher and our internal legal collections were 70% higher. Comparing the full year 2010 with full year 2009, internal legal collections increased 118%. Our internal legal collection capabilities continued to be an area of intense focus for us and we are very pleased to have captured the additional margin that the increase in cash collections from this channel delivered.

Our investments and court costs were significant in Q4 as we were in Q3. Our legal cost were $5 million higher than in Q4 2009. Again, as in the prior quarter, the increase was primarily driven by prior changes to our legal collections scoring which identified some additional accounts for legal collections and an increase in court filing fees in some jurisdictions. California in particular contributed to this increase. We have significant volume there and the courts in that state raised filing fees at the end of Q3 by more than 50%. As a reminder, those court fees are added to the balance the consumer must pay if we obtain judgment.

I firmly believe that these ongoing incremental investments represent a great value from an a ROI perspective, but they obviously negatively impact earnings over the short run, since we expense rather than capitalize these expenses as incurred. Closing the productivity gap between our collections sites has been a focus for a considerable time because of the sizable opportunities that gap represents. In the fourth quarter we continued to make progress in reducing that gap. Had all of our call centers delivered the same cash collections per paid hours our top site we would have realized another $6 million in collections for the fourth quarter. This gap was down by 19% over the same quarter of the prior year.

During Q4 we increased site specific productivity per hour paid by approximately 13% year-over-year. As a reminder, this site specific productivity figure looks only at hourly paid productivity by collection representatives. It excludes not only legal and bankrupt collections but also any non-collector assigned, inbound generated collections or collections coming from external activities such as collection agencies.

Productivity was up year-over-year at all call center locations. In Jackson productivity was up 29%. Birmingham productivity was up 28%. Norfolk productivity was up 8%. Hampton productivity was up 7%, and Kansas' productivity was up by 6%. On an absolute basis Kansas remained our top call center for the quarter. During the quarter on a relative basis, Jackson was 91% of the Kansas standard, Norfolk was 88%, Hampton was 87%, and Birmingham was 81%.

As a reminder, our site in the Philippines tends to receive accounts that are more difficult to collect. Since the Philippine collectors are less expensive to employ, we end up with lower costs to work these tougher accounts. Given the solid performance of the Philippines site and strategy over the last several quarters and because of an ongoing increase in our Spanish speaking account base we decided to open another call center in Panama City, Panama. This site became operational in the first week of the fourth quarter and currently has approximately 25 collection representatives. We are very pleased with the initial results of this site, but until we expand the site further we'll be aggregating its productivity figures with the Philippines site. In the fourth quarter those sites finished at 47% of the Kansas standard, but again given the account selection that figure does understate those center's relative capabilities.

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

Thank you, Neal. PRA's financial performance was quite strong in the fourth quarter, as it was for the full year 2010. Cash collections and significant investments we made in the bankruptcy portfolios are the key driver of this performance as were the steady improvements we made in the core call center and legal collections areas.

Our fourth quarter 2010 net income of $20.6 million represents an improvement of 66% from the $12.4 million a year ago. Diluted EPS increased 50% to $1.20 in the fourth quarter of 2010 from $0.80 in the fourth quarter of 2009. Return on equity was 17% for the quarter. Total revenue for the quarter was a record $100.8 million which was up 38% when compared to the same period one year ago. Total revenue was comprised of $84.8 million in finance receivable income and $16 million in fee income.

We incurred $5.4 million of net allowance charges during the quarter, compared with $9.5 million in the year earlier quarter. The net allowance charge for the fourth quarter represented 0.65% of the net finance receivable balance, 3.8% of cash collections and 6% of finance receivable income. Operating income was $36.3 million for the quarter, up 64% from a year earlier period. Taking a closer look at revenue, $84.8 million came from income recognized on the finance receivables. This represents revenue generated by our owned debt portfolios. Our Q4 performance was another record for PRA.

Income on finance receivables is derived from the $144.4 million in cash collections we generated during the quarter, reduced by an amortization rate of 41.3%. This amortization rate includes $5.4 million in allowance charges and compares with 41.7% in Q3 2010 and the full year 2009 rate of 41.4%. Life-to-date reserves or allowances now stand at $76.4 million.

I want to remind everyone that we account for revenue from our portfolio on a pool-by pool-basis. When pools under perform, we cannot 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. This under performance measurement is relative to the current yield that is assigned to the pool, not the original expectation. 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'll make upward adjustments to the pool by increasing 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 allowance charge does. Rather, the increase in yield has some impact on the current quarter but the majority of the impact will be realized in the future over the pool's remaining life. An over performing pool whose yield has been increased in this manner could incur an allowance charge later in the pool's life if the cash flows subsequently weaken. This could happen even if the pool yields a better return than originally expected.

This implementation of accounting guidelines is further impacted by our longstanding position against recording accretion during the first six months of a new pool's life. Accretion, which is the result of recognizing more revenue than cash collected, adds to the net finance receivable amount of a given pool instead of amortizing it. In other words, capitalizing revenue. 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 comprised of freshly filed chapter 13 accounts is a good example of this phenomenon.

In such a pool the cash flow is attributed to the unsecured creditor are delayed as I a security creditors are being paid out during the early portions of the bankruptcy plan. However, the accounting yield used for revenue recognition is computed over the entire life of the pool. This yield is applied to the current net finance receivable balance in order to compute revenue. In the early period that accrual of revenue will likely exceed cash collected and would cause accretion for at least the first few months of a pool's life. Additionally, depending on the exact nature of the bankruptcy plans and the composition of the pool, the computed revenue could possibly exceed cash collections for a number of quarters. So while accretion is certainly acceptable under accounting guidance, we instead opt to use either cost recovery or cash method accounting during the early part of any pool's life, not just bankruptcy pools as permitted by the accounting guidance.

Moving onto allowances; the 2005 core tranche of paper contributed an $850,000 net allowance charge in Q4. This was half the size of the Q3 2010 charge. The 2006 core pool incurred an allowance charge of $1.8 million in Q4 2010, down slightly from the Q3 charge of $2.2 million. The Q3 and Q4 tranches of accounts accounted for the majority of the quarterly charge. The 2007 core tranche of accounts contributed Q4 charge in the amount of $200,000, down significantly from $2.2 million in Q3. I would like to refer you back to the accounting comments I made just a few minutes ago relating to over and under performing pools. In terms of current yield, the 2005 through 2007 pools, both the core and bankruptcy tranches are currently bearing yields that are higher than originally booked.

The 2008 core tranche of accounts contributed a $1.8 million allowance charge compared with $150,000 recorded in Q3 of 2010 and a $2 million charge recorded in Q2. In terms of current yields, the 2008 core tranches generally remain at their original booked yields while bankruptcy tranches generally have yields that exceed those than originally booked. Moving forward into 2009 and 2010, core tranches of accounts we have incurred no allowance charges to date. These tranches are significantly over performing booked expectations as we have discussed on prior calls and as is evidenced in our 10-Q and 10-K filings in the supplemental data section. As such, we did increase both yields and estimated total collections on these tranches during Q4.

Our bankruptcy portfolios continue to perform strongly although additional allowance charges were taken in the fourth quarter in the amount of $892,000. This compares with a net charge of $470,000 in Q3. 64% of the Q4 charge was recorded on the 2007 Q4 bankruptcy tranche. The remainder of the charge was primarily recorded on the 2007 Q3 tranche. Cash collected on fully amortized pools for the quarter was a strong $9.3 million. This compares with $7.6 million on such pools a year ago and $9 million in Q3.

Total fees generated by our fee for service businesses were $16 million in the quarter, up from $15.5 million in Q3 and down from $17.3 million during the fourth quarter of 2009. Our fee based businesses accounted for 16% of the company's overall revenue. While this is not a particularly strong showing, they remain key elements of our long-term business strategy.

Amortization expense related to intangible assets from our various business acquisitions was approximately $1.5 million for the quarter. Approximately $1.1 million of operating expense in Q4 was due to non-cash equity compensation related to our 2009 and 2010 performance incentive share plans as well as other equity based awards. Operating expenses in Q4 grew 26% from the fourth quarter of 2009. This was primarily driven by compensation, which grew $5.9 million or 22% and legal costs which increased by $5 million or 101%. This increase in compensation expenses during Q4 relates primarily to inside legal employees as we continue to build that capability as well as our growth in total call center collectors.

The consolidated operating margin during Q4 was a very strong 36.0%. This compares with 30.2% in Q4 2009 and 34.4% in Q3 2010. Excluding the fee-based businesses, the operating margin would have been approximately 440 basis points higher at 40.4% in Q4. Operating expense to cash receipts is perhaps a more insightful efficiency ratio since it removes the effect of variations in principle amortization rates as well as allowance charges. Operating expenses as a functions of cash receipts during Q4 2010 were 40% compared with 41% in Q3 2010 and 45% in Q4 2009.

During the quarter we expanded our credit facility from $365 million to $407.5 million. This new facility is a syndicated transaction as compared to our prior club deal. All but one of the banks that have been part of the old facility took part in this new loan as did several new banks. We certainly are pleased with the participation of our long time banking partners and look forward to working with the new banks as they become more familiar with PRA's business. The new facility matures in December 2014. The revolving facility carries an interest rate of LIBOR plus 275 versus a rate of LIBOR plus 140 in the old facility. Note, there is a $50 million fixed rate tranche that carried over from the old loan that matures in May of 2012 and carries a fixed rate of 6.8%.

As of quarter end the outstanding balance in our line of credit was $300 million, up $11.5 million from September, leaving us with $107.5 million of availability. Our weighted average interest costs and line of credit during the quarter was 2.63% compared to 2.62% for the full year 2009. Cash balances increased to sequentially during the quarter to $41.1 million from $20.3 million in Q3. We believe our leverage remains quite modest at 62% of equity. We are producing strong internal cash flows and are well capitalized.

I would like to end my discussion with some final points. First, as I've described in great detail, our revenue recognition methods typically cause us to take allowances quickly when pools under perform while recognizing over performance slowly over a pool's life. Second, we've made significant investments in well priced pools of bankrupt and charged off debt. Based on our underwriting curves and our actual cash collection trends we anticipate strong cash production from these pools over the next 24 to 36 months. Third, we have been very successful in improving our already strong account scoring and segmentation analytics as well as our collection processes. We believe these will continue to pay in dividends in the form of improved operating ratios.

With that I've completed my prepared comments and would like to open the call up to Q&A. Operator?

(Operator Instructions)

And your first question comes from the line of Hugh Miller with Sidoti. Please proceed.

Hi there. Good afternoon.

Hey there.

One question, you comment a couple times and I noticed it as well the rise in the cash balance up to $40 million, consistently you guys have in the past wanted to carry roughly closer to $20 million. Any particular reason why given the exposure to debt during the quarter why you were carrying the extra $20 million and should we assume that, that should come down in future periods?

Actually it is a great question. The reason is the current syndicated facility is based on these zero dollar tranches, the LIBOR tranches, and once you fix one of these tranches in, they're set for 30 days, and of course we just booked our new loans, so the entire balance at the old facility rolled over into one LIBOR tranche at year end.

So we could have probably paid down $20 million had we had the old facility, so our goal here is going to be to start laddering these LIBOR tranches out and to your point try to keep the cash balance more down that $20 million range.

Okay. I guess you guys have talked about strengthening cash flows and so forth and as I take a look here, I am having a very hard time in seeing how you're not going to be paying down debt next year, and which would beg the question why you go out and there and increase the revolver.

Even with you guys ramping up purchasing towards $400 million or something like that, I still have you actively paying down debt. Just wondering is that the way you're viewing your model or am I missing something? Seems like the free cash flow should strengthen materially in 2011 over 2010.

I think that the missing ingredient and the one that we can't possibly know is just what the purchase volumes are going to look like and we feel as though it is riskier for us to potentially not have available capital to take advantage of opportunistic volumes that may come to the sale market in 2011 so we're erring on the side of being conservative and having extra availability on our bank lines here.

Do you foresee an environment where you could potentially put materially higher than $400 million to work in purchasing in '11?

I don't think that it is out of the realm of possibility. I don't know that, that is the most likely situation, but again, we just felt like the side to err on is having a little more as opposed to less availability especially given the condition of the banking markets and the difficulties that you have in pulling a large facility together.

Sure, sure. Given some of the challenges you guys have faced with some of the fee-based businesses and how strong the core business, the debt buying business has been, does it make you maybe a little bit cautious as to going out there and doing another acquisition at some point in the near term or is that not at all a thought in your mind?

I think it is always a thought that you've got. I think that a lot of people wondered what we were doing goofing around with the bankruptcy business five, six, seven years ago as we were working on that, and in the core business was so attractive, so we're trying to think far down the road. We're trying to make sure that we've got a lot of seeds planted and so that we've got a number of great diverse opportunities for the business over the long-term. So we're going to continue to keep our eyes open for opportunities.

Okay. A quick question about the comp costs in the Panama office. How does that compare on a relative basis to the Philippines? I realize that maybe the focus is on a particular niche of client but is there any comparison there on the expenses from one versus the other?

It is very small bit tiny bit higher, but it is almost flat.

Okay. And then just quick question on the sequential rise in the call centers despite obviously the seasonal head winds during the quarter. Any color you can provide as to what's driving the strength there?

By the staffing you mean?

No. By the actual cash collections from the call centers? Typically you see seasonal head winds and they seem to be stronger than expected.

Yep. We had a record number of payments. We had over 1 million payments come in during the quarter. And the number of people we have on a payment plan now is really stacking up on top of each other quarter after quarter after quarter, and the people are really sticking to their payment plans and they're not falling away, and so all of that has a compounding effect, and we realize some of that gain in Q4.

You guys still haven't then gone out there and assumed that the tails of your collection curves are going to benefit from the stickiness of those payment plans at this point?

Yes. I made no adjustments like the older tranches we have written down, for example, Hugh, we made no adjustments to those curve projections.

Okay. And last question just with regards to obviously in this quarter we saw a little bit of a shift in dynamic on the purchasing side looking more at the traditional purchases relative to BK. We were hearing a little commentary about some firming of pricing in BK, maybe a little bit more than what we have seen in traditional. That's what I was hearing a little bit about.

Wanted to get your thoughts on that and also given the need to staff if you're going to ramp up purchasing traditional, I know you made comments that with the productivity gains you have with the dialer and so forth, how much can you envision ramping up purchasing of traditional paper without having to go out there and materially ramp up head count?

Let me take the pricing angle first, and I will let Neal talk about the latter part of the question. We have seen as we commented, pricing continue to firm in both the bankrupt and core segments. Though, within each one of those segments, there are variants by issuer and product type on pricing even further, and so we tried to remain nimble and chase the best IRR's that we can, during the quarter really just the way things came down. We shifted a little bit more toward the core side of the equation, but again we think we see compelling investment opportunities in both segments and certainly believe that we're going to have a nice mix during 2011.

In terms of capacity, you know, we would have to buy an awful lot of paper for me to even approach being concerned. Our scoring has become more and more sophisticated quarter over quarter. We've added a really big amount of dialing capacity, and the two in combination leave us with an awful lot of capacity and opportunity, so it is not high on my worry list.

Okay. So even if you shifted towards buying the overwhelming majority of traditional paper that it still wouldn't cause a concern at all?

I guess there is some amount of paper where we could get there, but it would be very exciting for all of us if we got there.

Okay. Thank you very much.

You bet.

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

Thank you very much. Looking at the 2007, 2008 paper, looks like hardly dropped off at all year-over-year, the performance was much improved even relative to Q3. Are you doing anything different? I know you talked about the success you've had in a lot of different ways but it looked like in this quarter something was materially improved on some of these older portfolios. Can you address that?

So there is a couple of things. Obviously we have been stacking up multi-payment plans and that's just compounds over time. There is also a pretty considerable lag in between when we would buy an account and really start reaping legal recoveries. We don't sue everybody out of the gate.

We make a good faith effort to only sue people after we have made an attempt to get them on the phone and send them a letter and work with them. They have to have an identifiable asset and really not be willing to come to some sort of payment arrangement with us before we sue somebody, so the 2007, 2008 tranches, those are really just starting to kick up in our legal collections at this point.

Yes. When I look at the 2010 paper, just the collections relative to your purchase price, it looked like it is still doing better than the 2009 paper. Is that a fair assessment and if so, seems like maybe putting more capital to work more quickly would be a good idea.

This is back to the question, Mark, on the deal multiples and the cash flow dynamics of 2009 and 2010's right?

Yes, exactly.

So we talked about that before. I think it is a good observation. I think it is awfully early for us to comment too much on that, but the 2009 tranche paper is spectacular. If 2010 does indeed do as well as '09, to use Neal's term, we'll all be very happy about that.

Thank you.

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

A couple of questions. One, I noticed you had a real pickup in the fully amortized collections in the fourth quarter. Especially in like the 2001 year. Is there a reason for why you suddenly have seen an acceleration? I think in 2010 it was up across the board from 2009, pretty much for all of those portfolios.

So I have explained our dynamic scoring process I think a couple of times, but just to refresh there, so our scoring process we re-score all the accounts in our inventory every day, and we look at how they respond to internal treatments and look at all kinds of external factors. The really cool part of this is that we can take pretty old accounts and leave them alone when it is appropriate to do so and then start working them again when it looks like it is an opportune moment to engage.

So that allows us to work some of these older tranches without going under water from an ROI perspective. And we have revised our dynamic score a number of times over the last couple of years, and that really has strengthened our ability to collect on these older portfolios in a profitable manner. The other thing that contributes there is an increase in dialing capacity, and having call centers in Panama and in the Philippines. All of that allows us to work accounts that have lower scores and lower balances and dig deeper into some of those older tranches.

And Edward, to your point, this is Kevin, cash collected on fully amortized pools if my little notes here are right, about $39 million for the year 2010, up from about $27 million in 2009.

Yes. I was impressed with the performance. Congratulations on the job well done, Neal.

Thank you.

Anyway, Steve, one question. Could you comment or maybe you did and maybe I missed it, but just what your expectations are in terms of the amount of paper that's going to be available to purchase this year? Are you seeing any signs that there should be more this year than the last couple of years?

Well, we don't have a crystal ball as it relates to how volumes are going to come out by the sellers, and we have made that comment I know year after year. From everything that we have seen in conversations that we have had, it would be our expectation that 2011 would be I think a continuation of the kind of volumes we saw in 2010 but you know there is a lot of speculation in that statement, so we'll just have to see how things come out.

Have you been able to enter into any more forward flow agreements?

Well we have been entering into forward flow agreements, but The Forward flow agreements really over the last few years have been recharacterized and rather than very common twelve-month flows, you're seeing many more three-month and six-month flows, and so it is much more difficult for a debt buyer to lock up a huge part of their buying for the entire year. It is coming in smaller chunks, and you're rebidding on a more regular basis.

Okay. Lastly, are you just seeing any increase in competition to buy?

I think that what we believe we're seeing is the same competitors with sharper pencils as opposed to net new entrants into the market.

Okay. Thanks. Congratulations on a good job.

Thank you.

Your next question comes from the line of Bob Napoli with Piper Jaffray. Please proceed.

Nice job. Also concur with that statement. What bothers you the most from the regulatory perspective and some of the statements? Seems like there are a lot of things flowing around and it varies by state and there are statements coming out of the consumer financial protection board which is still nobody knows what exactly it is going to do at the end of the day but what kind of things that you're watching would concern you the most?

I think there was things out there about not being able to use the-- do the scoring the way you have been doing it if you read the letter of the statements that some people are reading which seems pretty crazy, but what bothers you or what concerns you the most and what would affect you the most?

The vast majority of the scoring that we do is the use of our own internal data, so I am not certain that what you are referring to --

Aren't you pulling in credit reports from the outside, Steve, as you're doing that?

We have got the ability to get the vast majority of the list that we get with our dynamic scoring without touching third party data, so you that one would not keep us up at night. Uncertainty is the biggest deal, Bob. We can adapt to almost anything, and we really feel like with the level of compliance that we adhere to, that increased regulatory scrutiny is almost going to be a competitive advantage for us.

Naturally we wouldn't prefer it, but we feel like we run highly, highly compliant shops and so I think we're less concerned about regulatory scrutiny than many others. I think especially the smaller players that probably aren't doing the same credit to the industry that the larger more compliant guys are, so first and foremost I think we would like to see some certainty, but we understand its going to be a wait.

Certainly I think the whole regulatory regimes are trying to figure out how they are going to work together and who is going to be leading which charge and certainly as the consumer financial protection agency is ginned up and formulated that's a significant piece we all have to watch and wait and see how it comes up. And then I think probably their first order of business is not going to be the dead person's business.

I think they're focusing on larger industries like credit card and mortgage and eventually they will get to us. So I think we're going to be in this wait and see for some period of time. Not to say that the state regulators won't continue to be active in that period where perhaps the federal is not but we'll take them as they come down the road.

Okay and then on the pricing side, did-- has pricing gone up substantially in bankruptcy? Would that be a way to read? Your mix shift went back towards your traditional type of paper in the quarter. Would that be a mix wise on bankruptcy? Would that suggest that prices have gone up a lot more in bankruptcy than they have in the core product?

I think that our read is the increases in bankruptcy pricing have followed the increases in the core pricing pretty steadily. I don't know that one market as a rule has gotten that far ahead or behind of the other. We're continuing to see some attractive opportunities in bankruptcy and we are continuing to see some deals to trade at prices that we consider too slim for us and so we missed some purchases because of that. But its not unlike what we see in the core market.

And then, doesn't it make sense that there is theoretically a ton of paper out there that hasn't been sold? If you look at the charge-offs in the industry, in the credit card industry in 2010 and 2009 and you look at the data that's out there and what's been sold to the charged off debt industry it seems like an abnormal amount of paper that is still sitting at the banks that traditionally would have been sold. Is that-- what are the discussions around that? Do you agree with that?

Yes. Theoretically we agree with you. But as to whether that theory is going to pan out and actually result in increased levels of both bankrupt and non-bankrupt sales, who knows?

Thank you.

At this time there are no further questions in queue and I would like to turn the call back over to Mr. Steve Fredrickson for closing remarks.

Thank you, operator. I'd like to reiterate a few key points about our fourth quarter performance before concluding this call. Portfolio Recovery Associates concluded 2010 with record financial results, demonstrating exceptional performance across our debt purchasing business, despite the still weakened economy. Our disciplined approach to underwriting, together with our consistent and continued efforts to improve the efficiency of our collections operations helped drive record results in cash collections, cash receipt, revenue and earnings, both in the fourth quarter and for the full year. Importantly, these results stem from our long-term focus on people and technology investments we have made over a number of years. 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, that concludes today's conference. Thank you for your participation. You may now disconnect, have a wonderful day.