PRA Group Inc (PRAA) 2011 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the first quarter 2011 Portfolio Recovery Associates Inc earnings conference call. My name is Lacy and I will be your coordinator for today. At this time all participants are in listen-only mode. Later we will facilitate a question-and-answer session towards the end of the presentation. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the presentation over to your host for today's call, Mr Jim Fike, Vice President of Finance. Please proceed.

Good afternoon. Thank you for joining Portfolio Recovery Associates first quarter 2011 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 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, our management's intentions, hopes, beliefs, expectations, representations, projections, plans or predictions of the future including with respect to the future Portfolios performance opportunities, future revenue and earnings growth, future space and staffing requirements, future productivity of collectors and future contribution of our 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 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 it 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 on the Company's business, including risks and uncertainty that may effect 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 changing events, conditions or circumstances on which any such forward-looking statements are based in whole or in part. Now, here is Steve Fredrickson, our Chief Executive Officer.

Thanks Jim. Thank you for attending Portfolio Recovery Associates first quarter 2011 earnings call. On today's call, I'll begin by covering the Company's results broadly. Neal Stern will then talk to you in more detail about our operational strategies and finally Kevin Stevenson will discuss our financial results in detail. After our prepared comments, we will open up the call to Q&A.

Portfolio Recovery Associates kicked off 2011 with record financial results driven by significantly higher cash collections on our own portfolios both core and bankruptcy. This performance building on PRAs strong results in 2010 in large part reflects the improvements we've continued to make in our collections operations. These long-term investments paid off particularly well in the first quarter with collective productivity up strongly from 2010. Credit for this, of course extends well beyond our management team to our nearly 1,500 call center collectors who consistently strive to establish realistic and appropriate repayment plans for our customers through collaborative, respectful interaction.

Additionally, our fee businesses made progress in the first quarter led by a strong performance from CCB as a result of a significant class action settlement. In terms of specific performances for the first quarter, PRAs bankruptcy business continued to grow at exceptional rate with strongly increasing cash flow as the sizeable investments we have been making over the past few years continue to mature. Our operational strategies and experienced committed workforce drove substantially higher productivity. Our strategy of developing our internal legal collections capability combined with the targeted use of our external legal channel continues to produce significant increases in legal recoveries.

PRAs consistently strong performance and sustainable business model are based on a differentiated approach to the debt buying and collections business. For example, we do not resell debt. We are 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 for 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 deep data set to determine purchase prices of portfolios. And importantly, we accomplish all this while respecting the regulations that govern our industry and allocating significant resources to comply with them. I would also like to note that PRA recognized its 15th year anniversary on March 20th.

Now in terms of our financial results, during the first quarter, PRA acquired $107.9 million of defaulted debt. Representing $1.49 billion in face value, this was comprised of $46.6 million, or 43% bankrupt paper and $61.3 million or 57% core charge-off paper. Cash collections were a record $166.7 million, up 40% from $119.2 million in the year ago period. These helped drive record cash receipts of $182.5 million in the quarter up 36%, from $134.6 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 $15.8 million in the first quarter an increase of 2% year-over-year. Diluted earnings per share advanced to $1.34, up 47% from $0.91 in the first quarter of 2010. Net income of $23.1 million was up 56%, from $14.8 million a year ago. Revenue grew 34%, to a record $111.8 million, compared with the year ago quarter at $83.4 million.

Allowance charges in the quarter totaled $4 million, or 0.5% of net finance receivables. Operating expense to cash receipts continued to improve. During the first quarter of 2011 the ratio was 37.8%, compared with 42.3% a year earlier. PRA realized record productivity of $241 per collector hour paid for the first quarter 2011 which compares with $194 for full year 2010. This includes a net increase of 15 collectors to our call center staff from Q4 2010. Productivity is benefited from an increase in bankruptcy portfolio collections and efficiency initiatives related to our call centers. Net interest expense was $2.9 million in the first quarter up from $2.1 million in the year ago quarter due primarily to the higher rate on our expanded line of credit.

Our balance sheet remains strong with ample cash availability to continue building for the future. Our cash balances ended the quarter at $35.4 million, while our debt outstanding decreased to $292 million, including $2.1 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 57% down from 62% at year end 2010. Availability under our line of credit was $117.5 million, at quarter end.

Let's turn now to our operations in detail beginning with first quarter portfolio purchases and overall market conditions. During the quarter we acquired 79 portfolios from nine different sellers. The majority about 95% of our first quarter purchase volume in terms of dollars invested was from the major credit card and private label asset classes. The remainder came from pools of auto and installment loan accounts. The majority of the bankrupt accounts acquired during the quarter are included in the major credit card category. Portfolio pricing was steady to slightly higher in Q1 compared with Q4 2010. The market at this point is quite competitive making our ability to underwrite accurately and collect cash from portfolios at a low cost critically important.

Moving on to collections, as I mentioned earlier, Portfolio Recovery Associates generated a record $166.7 million in cash collections in the first quarter from owned portfolios, up 40% from a year earlier. Offering a bit more detail on our collections performance, cash collections from our purchased bankrupt accounts were a record $58.4 million, up 76% from Q1 2010. Call center and other collections were $67.4 million, up 18%, from the same quarter last year. Collections from our legal channel set another record at $41 million in Q1 2011. This is up 41% from the same quarter last year. We expect continued strong growth from this channel for the foreseeable future as we continue to invest in new suits, and build our legal collection resources.

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 $241 for the first quarter of 2011, as compared with $194 for the full year 2010 and $145 for full year 2009. Excluding the effect of trustee administered purchased bankruptcy collections PRAs productivity for the first quarter of 2011 was $162 versus $129 for full year 2010 and $113 for full year 2009. Further excluding legal and trustee administered purchased bankruptcy collections productivity for Q1 2011 was $125, up from $100 in full year 2010, and $87 for all of 2009. Neal will give you more color on site specific productivity in a moment.

At quarter's end our own Portfolio collector head count was 1,486, up 15 from year end 2010. As it relates to staffing please remember that a substantial amount 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 generated revenue of $15.8 million during the quarter an increase of 2% from the same period a year earlier due largely to a strong quarter by our CCB subsidiary. This strong performance helped to offset revenue reductions in our government services operations and our automobile collateral location business both of which fell short of our expectations in the first quarter.

Looking at each business in detail, revenue and operating profit declined at PRA location services formally referred as IGS, compared to the first quarter of 2010. Location services was negatively impacted by the reduced level of automobile financing initially triggered by the recession that we've seen over the past several years. We're confident that our recent operational changes will lead to increased profitability even with revenue at constant levels.

In the government services business revenue and operating income both declined compared with both the prior quarter and the first quarter of 2010. The base of our government services business has not recovered to pre-recession levels since government budgets are tight for our fixed fee 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 health care and pension costs are creating additional opportunities for us to market our outsource services. We feel we are well positioned to pick up clients and harvest our relationships when tax revenues rebound. We are 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've added clients consistently since the acquisition in March 2010. CCB serves clients in both securities class action and antitrust class action recoveries. Quarterly variations in their performance are driven by class action settlement payouts, so going forward our focus is on further increasing CCBs client base as well as offering additional services. Before I turn the call over to Kevin Stevenson, PRAs Chief Financial and 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. PRAs strong collection results in the first quarter were driven by a number of factors. First, of course, the typical seasonal strength related to the timing of tax refunds. Second is the expanding base of customers making monthly payments, a trend which we have seen over the past several quarters. Our collectors have done a terrific job in finding payment solutions that work for these customers. In the first quarter we received almost 1.5 million payments which represents a 63% advance over the same quarter in 2010, and another record number of payments for PRA. Operational efficiencies related to account scoring and segmentation, automated dialing technologies and strategic letter campaigns also contributed to help drive the increase in payments. These increased payments did as in prior quarters correspond to a reduction in average payment size which results from our deepening ability to profitably work accounts with lower balances and scores. In Q1 our average payment received was down 14%, from Q1 2010, however as long as the increase in monthly payments more than offsets the decline in average payment size, which it certainly did in Q1 2011, this remains good news.

Another important contributor to our Q1 performance was PRAs legal collection results which finished the first quarter 41% higher than the same period last year. External legal collections finished 39% higher, and our internal legal collections were 46% higher. Internal legal collections now account for 38% of our total legal collections. Growth in this collection channel continues to be an area of intense focus for us.

Our investments in court costs were significant in Q1 as they were in the prior two quarters. Our legal costs were $3.7 million higher than in Q1 2010, but as a percentage of our total legal collections, these costs were down from the prior quarter by 21%. Again as in the prior quarters the increase was primarily driven by prior changes to our legal collections scoring, which identified additional accounts for legal collections and an increase in court filing fees in some jurisdictions. These on going incremental investments represent a great value from an ROI perspective but they obviously negatively impact earnings over the short run since we expense rather than capitalize these costs as incurred.

Closing the productivity gap between our collection sites has been a focus for a considerable time because of the sizable opportunity that gap represents. In the first quarter, we continued to make progress in reducing that gap. Had all of our call centers delivered the same cash collections per paid hour as our top site we would have realized another $7.6 million in collections in the first quarter. This gap was down by 26% over the same quarter of the prior year.

During Q1 we increased site specific productivity per hour paid by approximately 10% year-over-year. As a reminder this site specific productivity figure looks only at hourly paid productivity by collection representative, 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 Birmingham productivity was up 32%. Jackson productivity was up 17%, Norfolk productivity was up 10%. Hampton productivity was up 8%. Kansas productivity was up by 2%. On an absolute basis, Kansas remained our top call center for the quarter. During the quarter on a relative basis, Jackson was 92% of the Kansas standard, Norfolk was 89%, Hampton was 85%, and Birmingham was 82%. As a reminder our sites in the Philippines and Panama tend to receive accounts that are more difficult to collect. Since our labor costs are lower in these areas it is less expensive for us to work these tougher accounts. The combined performance of those sites finished at 49% of the Kansas standard. But again given the account selection that figure does understate those center's relative capabilities and we remain pleased with the progress those center's continue to make.

Finally we have been working hard to deploy some of our best practices around scoring, account segmentation and automated dialing from our core business to our fee for service businesses. In the first quarter those efforts were primarily focused on PRA location services and I'm happy to report that our clients were securing their automotive collateral more quickly and more often as a result. The opportunities to leverage cutting edge practices and technologies are exciting and having the depth of capabilities that we do positions us to add even more value for our clients over the coming months. With that I will turn the call over to Kevin Stevenson, PRAs Chief Financial and Administrative Officer. Kevin?

Thank you, Neal. PRA turned in a strong performance across the board in the first quarter, building on record cash collections that were driven by long-term investments in purchase portfolios as well as investments we made in our collections operations. We saw substantial strength in both core and bankruptcy areas. In addition, our fee businesses posted a modest improvement from a year ago primarily due to a strong quarter by CCB. Total revenue for the quarter of $111.8 million was comprised of a record $96 million in finance receivable revenue and $15.8 million in fee revenue. This compares with $68 million of finance receivable revenue and $15.4 million of fee revenue in the year ago period. Income on finance receivables is derived from the $166.7 million in cash collections we generated during the quarter, reduced by an amortization rate of 42.4%. This amortization rate includes net allowance charges and compares with 43% in Q1 of 2010 and full year 2010 rate of 41.5%. Like to date reserves or allowances now stand at $80.4 million.

The first quarter's $4 million net allowance charge compares with $6.9 million in the year earlier quarter. The net allowance charge for the first quarter represents 0.5% of the net finance receivable balance, 2.4% of cash collections and 4.2% of finance receivable income. Operating income was $42.7 million for the quarter. Up 62%, from the year earlier period. Our return on equity was 18% for the quarter.

I want to remind everyone that we account for revenue from our defaulted consumer receivables 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 the income statement. This under performance measurement is relative to the current yield that is assigned to the pool and not to the original expectations.

In contrast when pools over perform that over performance is generally not reflected right away. Typically after there is sustained evidence of over performance, we will make upward adjustments 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 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 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 long standing position against recording accretion during the first six months of a new pool's life. Accretion which is a result of recognizing more revenue than cash collected adds 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 are a good example of this phenomenon. In such a pool the cash flows attributed to the unsecured creditor are delayed as the secured 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 then applied to the current net finance receivable balance in order to compute a 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 the 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 on to allowances, the 2005 through 2007 core traunches of paper contributed a net reversal of $200,000 in Q1. This is a significant improvement over the past four quarters where we recorded allowance charges between $2.8 million and $5.8 million, on these yearly core traunches. In terms of current yield the 2005 through 2007 pools, both core and bankruptcy, are currently bearing yields that are higher than originally booked. The 2008 core traunche of accounts contributed a $2 million allowance charge. Compared with $1.8 million in Q4 of 2010. The 2008 core traunches generally remain at their original booked yields while the bankruptcy traunches generally have yields that exceed those originally booked.

Moving forward into the 2009 through 2011 traunches of accounts we have incurred no allowance charges to date. These traunches are significantly over performing booked expectations and as such, we did increase both yields and estimated total collections on many of the 2009 and 2010 core and bankruptcy traunches during Q1.

Our bankruptcy portfolios continue to perform strongly. Although additional allowance charges were taken in the first quarter in the amount of $2.2 million. This compares with a net charge of $892,000 in Q4 of 2010, and $470,000 in Q3 of 2010. These charges were incurred primarily on the 2007, and 2008 traunches of paper. Cash collected on fully amortized pools for the quarter was $10.6 million. This compares with $10.3 million on such pools in the year ago period.

Moving on to expenses, in support of the Company's growth operating expenses in Q1 increased 21%, from the first quarter of 2010. The increase compared favorably with the growth in revenue and cash receipts of 34% and 36% respectively. This is primarily driven by three factors, compensation, which grew $4.5 million, or 15%, as well as legal costs which increased $3.7 million, or 66%. And legal fees which grew $1.6 million or 41%, commensurate with external legal cash collections. As a reminder, legal costs represent amounts paid to courts and expenses incurred in order to file collection lawsuits and it also includes media costs. Legal fees represent those commissions paid to external attorneys for successful cash collections. The increase in compensation expense during Q1 relates primarily to inside legal employees as we continue to build that capability as well as growth in our total call center collectors.

Amortization expense related to intangible assets from our various business acquisitions was approximately $1.3 million during the quarter. Approximately $1.7 million of operating expense in Q1 was due to ongoing non-cash equity compensation relating to our 2009, 2010, and 2011 performance based incentive share plans as well as other equity based awards. In addition, a $900,000 portion of the 2010 annual bonus award which was fully accrued at year end 2010, was paid out in 2011 in the form of non-cash equity awards.

Consolidated operating margin during Q1 was a very strong 38.2% this compares with 31.7% in Q1 of 2010. Excluding the fee based businesses, the operating margin would have been approximately 470 basis points higher at 42.9% in Q1. Operating expense to cash received is perhaps a more insightful efficiency ratio since it removes the effect in variations in principal amortization rates as well as allowance charges. Operating expenses as a function of cash receipts during Q1 2011, were 37.8% compared with 42.3% in Q1 of 2010. 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 shift to our generally higher margin debt purchase business from the lower margin fee business. 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 during the last half of 2010, the incremental costs of these lawsuits ran $3.7 million above our Q1 2010 legal suit expenses.

As of quarter end the outstanding balance on our line of credit was $290 million, down $10 million from year end 2010, leaving us with $117.5 million of availability. Our weighted average interest cost on the line of credit increased during the quarter to 3.64%, from 2.35% for Q1 of 2010, primarily as a result of the higher interest spread on the line of credit. As a reminder the revolving facility carries interest rate of LIBOR plus 275, versus a rate of LIBOR plus 140 in the old facility. Cash balances decreased sequentially during the quarter to $35.4 million from $41.1 million in Q4, we believe our leverage remains quite modest at 57% of equity. We are producing strong internal cash flow and are well capitalized. So with that I've completed my prepared comments and I would like to open the call up to Q&A. Operator?

(Operator Instructions) Hugh Miller, Sidoti & Company.

Had a question about obviously seeing a big improvement in the expense ratio but, I guess when you strip out the bankruptcy collections and look at the expense ratio ex the bankruptcy cash receipts, a more modest increase, maybe about 60 basis points year-over-year, I think that the majority of it's coming from the stepped up legal suits which were running higher than what I was expecting in the communications. You had mentioned prior to this that you would expect that it would be a period of kind of higher placements and then followed by a moderation at some point, has there been a change in that strategy and should we expect kind of this level of placements go-forward or is it just that it's taking a little bit longer to throw everything through the system?

So the legal class did come down over the prior quarter by 21% relative to the legal cash collection. In my mind that seemed like a pretty significant down tick. But you have to do these things on a rate basis. Because the total inventory is bigger than it used to be. Obviously we have been purchasing a healthy amount and as I mentioned we made some changes to our legal scoring and some courts raised their filing fees. So all of that stuff will remain pretty constant. But as a percentage of our legal cash collections I thought it came down pretty nicely.

Okay. And the communications costs, kind of stepped up, I realize that Q1 tends to be seasonally stronger with outbound efforts and so forth, but any commentary with regards to expectations for communications expenses go-forward?

No, I think your observation is correct, though the Q1 communication costs tend to be higher it's about $1 million-ish over Q1 of 2010. I think it's probably a Q1 effect.

Okay. Obviously you made some commentary about the increases in the yields on the totals for the 2009 and 2010 traunches, which is good to see. It seemed like you had a much lower multiple that you were applying to the bankruptcy purchases for this particular quarter, can you just talk about, I guess the level of competition you are seeing there and the value in BK relative to what you are seeing for traditional.

Well, the hurdle rates that we're shooting at are roughly similar between the 2 businesses. So we don't see hugely disparate pricing in bankruptcy versus core. As we commented, we have continued to see pricing in competition extend that slow tick up that we've observed throughout 2010 and that in combination with wanting to make sure that we don't get ahead of ourselves with how these things are booked, I think is the explanation.

Okay, are you starting to see kind of some of the older paper that's been charged off in prior periods being marketed a little bit more than in the past or is that not occurring yet?

I think that the volumes in the market, we would describe as pretty healthy, pretty significant, although I think there is still a feeling that there is a lot of volume that was created during the economic downturn that is still with agencies or the banks and has not been turned loose on the debt sale market.

Okay, so still a feeling that there is plenty more to come and opportunities will be kind of sporadic?

That's our view.

And I don't believe you made comments on it but I saw the authorization to try and increase the shares outstanding, was wondering if you could make some comments as to the plans for that. The reasoning behind it.

I think more than anything we are trying to give ourselves flexibility. We didn't have a lot of excess there, and so we are trying to take care of something that generally you can take care of once a year. We are doing a little bit of housekeeping. But nothing imminent that we are planning on.

I mean, is it to be used for compensation, is it potentially acquisition related? Growth in certain business over another or any color there?

It's certainly not compensation related. It's to give us options down the road I guess as it would relate to a number of things. As disparate as acquisitions to stock splits or something like that. At this point we felt like the excess was just tighter than was prudent and so we wanted to take care of that. There really is no signaling going on here.

Okay. The last question I had was, I assume, call it a roughly $20 million rate of cash on hand still seems to be the appropriate level for you guys to run the business and that should kind of trend down towards that level over time?

Yes and if you see, we made a move downward a little bit. I think you asked the question last quarter about the higher cash balance. I described the LIBOR traunches, the euro dollar traunches we're in and we are starting to ladder some of those.

Okay, just trying to gauge a sense of how much cash is on hand, what is your overall purchasing capacity includes some of the free cash and also the line of credit. Okay.

I will also bring up to you that there will always be quite a chunk of cash on the balance sheet at quarter end simply because so many of our payments are processed on the last day. So that stuff, a lot of that cash is in float.

David Scharf, JMP Securities.

Steve, I know this is going to be a difficult one to pinpoint more of a guesstimate. But when you look at the productivity improvements, year-over-year, excluding the more automated BK recoveries when you throw in all of the core collections both call center and legal, it looks like it's up 20% year-over-year in terms of recoveries per hour per collector. Would you venture to guess how much, if any of that you would attribute to just macro factors, any improvement in consumer payment patterns or would you characterize that entirely process operations improvement and that any macro improvements are still entirely on the come.

I don't know that we are seeing what we would call anything approaching a significant wind at our backs from macro conditions. If anything I think we feel as though as we have commented the last couple of quarters, we are on more solid ground, things certainly aren't getting worse. I don't even know that we feel like they are necessarily getting better. We do think that the majority of that is due to collection strategies that have been employed here over the last couple years and maybe a smaller portion due to some macro factors.

Okay. Fair enough. Shifting to the fee for service businesses, I'm wondering, has there been any change in just the overall philosophy towards how you view those businesses? I seem to recall when you made a number of these acquisitions among the high level rationale was that this would smooth out otherwise an innately volatile business on the purchasing side. But I think particularly on the auto skip tracing and government services, in hindsight we found out that those actually can be fairly volatile themselves. Is fee for service in general or the concept of acquiring businesses that should be more recurring and less volatile in nature still part of the long-term strategy, is that a mix you want to actually still increase over time?

Yes, David. It absolutely is the case, we do believe that over the long run, we can structure this group of fee businesses to produce recurring revenue for us on a more predictable basis. Obviously your observations have been spot on, we have dealt with the economy on several of those businesses and in some cases they've been more correlated to the debt purchase business than we would have at first thought. But we do believe that through a combination of operating and sales strategies we can get those fee businesses into that re-occurring base that we are striving for.

Okay. One last question, maybe just as a follow up to the prior question about supply. There is no question we have in the rear view mirror, the last couple of years a record number of charge-offs but it's certainly an unusual cycle in that as loss rates have been improving evidence of improving credit quality, we are not seeing balances grow like we usually would at this part of the cycle. I'm wondering, as you balance the glass is half full of a record amount of charge-offs over the last few years against the glass is half empty of an unusual recovery in which the card issuers just aren't growing balances, do you foresee this kind of purchasing cycle perhaps being a little, having shorter legs than prior recovery cycles or more on par with what you saw maybe in that 2002, 2007 time frame?

I think you've got to keep a couple of things in mind, one is the cycle itself, the second though is the cash flow and operating effect of the receivables that are acquired in those cycles. So the cycle itself may not be as long as the prior one that we saw, but we have been able to accumulate a pretty significant amount of paper and we're also employing, I think much more intelligent work processes, effective work processes so we're going to be able to squeeze cash out of that Portfolio for quite an extended period of time. But obviously your commentary is correct to the extent that balances don't reverse their flattening or decline and grow again and create that future charge-off for us. At some point down the road there will be some volume issues.

Okay, but it sounds like there is clearly no pressure at all as we look out at least 24 months.

For 24 months, absolutely.

Bob Napoli, Piper Jaffray.

Let's see, the purchases this quarter, it looks like, I know, I have been covering you guys longer than anybody, so I understand how volatile that can be. But just trying to get a feel, I guess for the competitive environment and the type of paper you're purchasing. I mean it looks like that the core paper that you might be buying a little bit more fresher paper than you have historically, is that fair or no?

Yes, I think that's a fair analysis.

Why is that? You guys have typically loved the more aged paper. I think that it's been more profitable for you over time. Is it that's what is available in the market and those prices were adequate?

Yes. That's exactly the case. I mean we will buy anything at the right price internally we really don't have a preference for age versus fresh and that's, we saw more value toward the fresher end and so that's where we spent more of our money this period.

Competitively, you've mentioned the competition is ramped up, continued to ramp up a bit. Is it just the same players buying more or have you actually seen, I mean are you seeing any significant new players coming in to the market or hearing plans of other new players coming back in to the market?

No, I would say our view is very much that it's the same players ramping up and sharpening their pencils. I think that, that also is one of the reasons why we would categorize things as highly competitive but disciplined. I don't think that we have the new entrants to the market that don't really understand dynamics and have got crazy bids in. It's competitive but we think within reason.

Now just strategically, you guys are a much bigger business than you used to be, and your leverage is extremely low. I think it's lowest leverage you've had in a few years. Are -- the fee based businesses are one kind of diversification strategy are there others that you're working on? Do you have interest in geographic diversification and -- I mean there are some debt market in other countries that could be viable. Are you thinking about other products or other markets or are your hands full, right now with your current business. Just trying to think a little bit longer term about what PRA is going to look like sitting here today as $1.5 billion market gap light years away from where you were 10 years ago.

We are trying to look at a variety of smart opportunities and I can't say that we are trying to single out any specific thing but we are looking at smart diversity options for us as we are able to develop those opportunities. We are certainly as interested in the diversification play today as we were 5 years ago.

Are you seeing anything more interesting? Is it more developed? Do you have a more developed strategy in that regard?

I think we will talk about something as being interesting when it actually materializes, short of that all we are doing is turning over rocks and obviously when we actually find something we are interested in moving on, we will make the appropriate disclosures.

Last question, when you look at the estimated total collections, you wrote up your core Portfolio in most years by a little bit but looks like you actually took the bankruptcy Portfolio down a few bip ticks in some of the pools. Is there -- and you did buy more core versus bankrupt this quarter, are you seeing on a relative basis a little more value in the core and are the returns in bankruptcy maybe, the returns in core seem to be expanding and the returns in bankruptcies seem to be maybe stable to down slightly. Is that fair?

So, Bob, a couple of bips, you are right. It's really kind of adjusting the tail of those and time is going to tell on the tail by the way I will put a shameless plug in for Neal Stern here. I think Neal does a fantastic job dealing with the fallout collections on those bankruptcy Portfolios. I think what you saw was just a little bit of -- we moved yields up in a lot of cases, the cash came in on those bankruptcy deals faster than expected and we trimmed a little bit of tail off. Then as the quarters go on, what we will be watching is how Neal effectuates collections on that tail. Again time will tell. Maybe you will see those bips come back.

Mark Hughes, SunTrust.

The outlook for purchasing last year, you averaged about $90 million per quarter. This quarter closer to $110 million. You describe a pretty healthy supply, prices steady to slightly higher. Is this a decent base of purchasing volume to think about going forward?

Well, I think that's going to be more of a function of market. We really try not to look at our buying for a year as being budget driven, we would like to look at it as opportunity driven so clearly from a sustainability perspective, we have the ability to buy the amount that we did in the first quarter and finance it all out of internal cash flow what we pay down the line. So certainly from a sustainability perspective, we can buy at that pace should the opportunity be there.

Right, so it sounds like the opportunity probably is there, though, any given quarter could vary.

That's correct.

Then the legal cost that increased $3.7 million, I'm sorry if you gave this, but what is that on a base of for last year?

So last year was -- I will give you a little more granular number than you probably have in the filings but it was about $5.6 million, up to $9.3 million for an increase.

Right. So very meaningful.

Again, Neal pointed out though, as we went in to Q3, we talked about that effort that we were going to put out in terms of legal costs and I think I mentioned that it would be for the next few quarters and then Neal pointed out that the ratio actually dropped in Q1. So, you did see a downward tick in terms of percentage of legal cash was more like 529, down to 512 percentage points, Q4 to Q1.

When you say the percentage, you are talking about the percentage relative to total collections or --

No, legal cash.

Edward Hemmelgarn, Shaker Investments.

Yes, actually my questions have been answered. Thanks.

Ladies and gentlemen, this concludes our question-and-answer portion of today's call. I will now turn the call back over the Steve Fredrickson for closing remarks.

Thank you operator. I would like to reiterate a few key points about our first quarter performance before concluding this call. Portfolio Recovery Associates kicked off 2011 with record financial results driven by significantly higher cash collections on our own Portfolios both core and bankruptcy. This performance building on PRAs strong results in 2010 in large part reflects improvements we've continued to make in our collections operations. These long-term investments paid off particularly well in the first quarter with collector productivity up strongly from 2010. Credit for this of course extends well beyond our management team to our nearly 1,500 call center collectors who consistently strive to establish realistic and appropriate repayment plans for our customers through collaborative, respectful interaction. I'd like to thank all of you for participating in our conference call. We look forward to speaking with you again, next quarter.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect, good day everyone.