PRA Group Inc (PRAA) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2011 Portfolio Recovery Associates Incorporated Earnings Conference Call. My name is Kianna and I'll be your operator for today. (Operator Instructions.) As a reminder, this conference is being recorded for replay purposes. And I would now like to turn the conference 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 Second 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 of Portfolio's performance, opportunities, future revenue and earnings growth, future space and staffing requirements, future productivity of collectors, and future contributions of the subsidiaries to earnings are forward-looking statements. These forward-looking statements are based upon management's beliefs, assumptions, and expectations of the Company's future operations and economic performance, taking into account currently available information. These statements are not statements of historical fact.

Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ from those expressed or implied in any such forward-looking statements as a result of various factors, including the risk factors and other risks as 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's 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 uncertainties that may affect future results. Due to such uncertainties and risks, you are cautioned not to place undue reliance on any forward-looking statements which speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or to reflect any change in events, conditions, or circumstances on which any such forward-looking statements are based in whole or in part. Now, here is Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim, and thank you all for attending Portfolio Recovery Associates Second Quarter 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 details. After our prepared comments, we'll open up the call to Q&A.

Portfolio Recovery Associates ended the first half of 2011 with yet another record quarter which saw net income rise 31%, revenues grow 23%, and cash collections jump 37%. Clearly, the big story this quarter was collections. Bankruptcy collections were up strongly in the second quarter, as well as both our internal and external legal collections channels. Our call centers also performed exceptionally well with collector productivity continuing at record levels despite the still difficult economy, thanks in large part to the dedicated efforts of our more than 1,500 call center collectors.

PRA purchased $89.5 million of charged-off debt in the quarter, bringing our total purchases for the first half of 2011 to $197.4 million. These portfolios will continue to provide additional opportunities to our collectors in the quarter and years to come. Importantly, we accomplished this while paying down debt by $40 million during the quarter, strengthening our ability to continue acquiring portfolios when we see the opportunity to make smart, profitable deals.

Now, in terms of specific financial results, during the second quarter, PRA acquired $89.5 million of defaulted debt, representing $1.41 billion in face value. This was comprised of $37.2 million, or 42%, bankrupt paper, and $52.3 million, or 58%, core charge-off paper. Cash receipts rose to a record $190.8 million in the quarter up 32% from $144.5 million in the same period a year ago. We define cash receipts as cash collections plus revenue from our fee based businesses. Fee revenues were $14.5 million in the second quarter, a decrease of 10% year-over-year.

Diluted earnings per share advanced to $1.48, up 30% from $1.14 in the second quarter of 2010. Earnings per share gained $0.04 per share from the sale of a remote parking lot adjacent to our Norfolk facility and was reduced by $0.07 per share for ongoing non-cash equity compensation expense.

Net income of $25.6 million was up 31% from $19.5 million a year ago. Revenues grew 23% to a record $114.8 million compared with the year ago quarter at $93 million. Allowance charges in the quarter totaled $2.3 million, or 0.26% of net finance receivables.

Operating expense to cash receipts continued to improve. During the second quarter of 2011, the ratio was 36.9% compared with 40.6% a year earlier. Net interest expense was $2.6 million in the second quarter, up from $2.2 million in the year ago quarter, due primarily to the higher rate on our expanded line of credit.

Our balance sheet remained strong with ample cash availability to continue building for the future. Our cash balances ended the quarter at $25.5 million, while our debt outstanding decreased to $251.9 million, including $1.9 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 46%, down from 62% at year-end 2010, and availability under our line of credit was $157.5 million.

Let's turn now to our operations in detail, beginning with second quarter portfolio purchases and overall market conditions. During the quarter, PRA acquired 76 portfolios from 10 different sellers. The majority, about 97%, of our second quarter purchase volume in terms of dollars invested was from the major credit card and private label asset classes. The remainder came from pools of 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 slight--was steady to slightly higher in Q2, compared with Q1 2011 and sales volumes continue to be ample. The market at this point is quite competitive, yet remains disciplined. These conditions underscore the importance of our ability to underwrite accurately and collect cash from portfolios at a low cost.

PRA's underwriting capabilities built on our substantial experience and analytical expertise, as well as our access to capital, operational effectiveness, and a long demonstrated record of compliance, have allowed us to win our fair share of portfolios, both core and bankruptcy, in this type of environment.

PRA generated a record $176.3 million in cash collections in the second quarter from owned portfolios, up 37% from a year earlier. Specifically, cash collections from our purchased bankrupt accounts were a record $68.4 million, up 56% from Q2 2010. Call center and other collections were $64.6 million, up 19% from the same quarter last year.

Collections from our legal channel set another record at $43.3 million in Q2 2011. This is up 44% 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 lawsuits 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. This metric finished at $242 for the first six months of 2011, compared with $194 for the full year 2010, and $145 for full year 2009. This includes a net increase of 45 collectors to our call center staff from Q4 2010.

Productivity has benefited from an increase in bankruptcy portfolio collections and efficiency initiatives related to our call centers. It is worth noting that we achieved this despite a still difficult economy characterized by high unemployment, which makes collection activities more difficult.

Excluding the effect of trustee administered purchased bankruptcy collections, PRA's productivity for the first half of 2011 was $158 versus $129 for full year 2010 and $113 for full year 2009. Further excluding legal and trustee administered purchased bankruptcy collections, productivity for the first half of 2011 was $121, 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 owned portfolio collector headcount was 1,517, up 45 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 headcount numbers I just shared with you.

Our fee-for-service business has generated revenues of $14.5 million during the quarter, a decrease of 10% from the same period a year earlier. This performance was largely due to disappointing results of PRA Location Services, our automobile skip tracing and location subsidiary. Revenues and income fell sharply as a result of declining placements due to auto finance volume declines during the economic slowdown. Also, we are working to make sure all clients are being charged appropriate amounts given account quality to ensure we're maintaining profitability with all relationships.

We've taken additional aggressive steps to return this unit to an acceptable level of performance. We've replaced the Location Services management team, beefed up our marketing efforts, and made substantial changes in operational design and strategies. These efforts will take time and we expect similar results in Q3 before anticipated improvement in Q4. Our government services business, our largest subsidiary operation, had a good quarter with both revenues and operating income up strongly. This was due largely to the stability of our client base, combined with successful new sales efforts. We look for these trends to continue going forward.

Our CCB subsidiary saw both revenues and income down from the second quarter of 2010. This is due to the second quarter's comparison with an extremely strong year ago period. As we've explained since acquiring our interest in CCB more than a year ago, revenues and earnings for this business will tend to be highly variable based on the timing of larger settlement payments. CCB is performing to our expectations.

Lastly, on the regulatory front we'll continue to work diligently to educate our state and federal elected officials about our business and industry. We operate in a highly regulated industry and it appears certain that more regulations will be coming our way via the new Consumer Financial Protection Bureau. Against this backdrop, I'd like to say I'm very proud of PRA's record in terms of both compliance and customer service. We believe our compliance efforts are industry-leading, from affidavit preparation procedures to new hire screening practices and full call recording. We don't just talk about treating our customers with respect and complying with regulations that govern our industry. It's our practice in every one of our locations every single day.

In fact, we officially launched a new initiative during the quarter called PRA Verification Services, which is designed to assist identity theft victims whose accounts are sold to PRA. Neal Stern, our Executive Vice President of Operations, will describe this program for you in detail in just a moment.

Before I turn the call over to Kevin Stevenson, PRA's Chief Financial and Administrative Officer, I'd like to have Neal provide you with a summary of our operational strategies. Neal?

Thanks, Steve. The key operational trends we've seen over the last few years continued during our strong second quarter, though moderating somewhat on a year-over-year basis. For example, the number of payments received continued to expand in the second quarter. Please recall that in prior quarters we have discussed this trend as a result of our increased use of monthly payment plans for customers who cannot afford lump sum settlements. This trend also relates to customers who have accounts with lower average balances and scores that we've been able to work with increasing frequency as our automated dialing and account scoring improved enough to allow us to address those segments profitably.

In terms of number of payments, PRA received just under 1.6 million payments in the second quarter of 2011. This represents 496,000 additional payments or an increase of 46% from the year ago period. That Q2 2010 total, by the way, had increased 69% over the comparable 2009 period. So you can see there's been some moderation in payment growth. Nevertheless, the second quarter 2011 increase of 46% remains an exceptional number and demonstrates our strong portfolio purchase activity, increased collector productivity, and an ongoing commitment to working with our customers to find workable payment solutions.

The decline in our average payment size, which has been trending downward by double-digits year-over-year for more than two years, also moderated. It was down by just 6% from Q2 2010. This average payment size decline was again accompanied by the more than offsetting increase in number of payments, providing a strong testament to our improving operational efficiencies. As long as these moderations continue to move in tandem, they will continue to contribute positively to our overall results.

During the quarter, we increased site specific productivity per hour paid by approximately 5% 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 activity such as collection agencies.

On a site-by-site basis the productivity results were mixed. Norfolk productivity was down 1% and Kansas was flat combined with the prior year. In Hampton, productivity was up 8%; in Jackson, productivity was up 9%; and in Birmingham, productivity was up 16%. On an absolute basis, Kansas remained our top call center for the quarter. During the second quarter on a relative basis, Jackson was 92% of the Kansas standard; Norfolk was 87%; Hampton was 85%; and Birmingham was 72%. Had all of our call centers delivered the same cash collections per paid hour as our top site, we would have realized another $6.7 million in collections for the second quarter. This gap was down by 21% over the same quarter of the prior year.

Our sites in the Philippines and Panama together finished at 63% of the Kansas standard, improving their productivity by 37% over Q2 2010. As a reminder, these sites tend to receive accounts that are more difficult to collect. Since our labor costs are lower in these areas, is it less expensive for us to work these tougher accounts. Given the account selection, these sites' performances typically understate their relative capabilities and we remain pleased with the progress these centers continue to make.

We've also expanded other back office functions to the Philippines and now have 40 staff members working to support various departments. We expect to continue to modestly expand both our call center and back office operations in that country over the coming quarters.

Another important contributor to our Q2 performance was our legal collection results. External legal collections finished 45% higher and internal legal collections finished 41% higher than in Q2 2010. Our internal legal collections accounted for 37% of total legal collections.

Our investment in court costs were modestly elevated relative to prior years, but again, this was the result of increased purchasing, a change made to our legal scoring model in 2010, increased filing fees in some states, and the shifting of some expense arbitraged to our court costs with PRA moving to an internal group of collection lawyers in favor of paying external legal commissions. Kevin will be providing more background and detail on this in a minute.

Finally, as Steve mentioned, during the second quarter we announced the launch of PRA Verification Services, which we began as a pilot program in November 2010. This program is designed to assist identity theft victims who have had their accounts sold to PRA. Of course, we only become aware of their situations once we locate and contact the individuals. According to government statistics, a sizeable percentage of identity theft cases are discovered during the collection process. When this discovery occurs through PRA, our PRA Verification Services program not only rectifies the account we have purchased, but also covers the expense of having a third party specialist from a major credit bureau address the identity theft's impact on the consumer's credit. To date, this program has benefited a few hundred people and the response from consumers has been positive.

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

Thank you, Neal. PRA turned in another strong performance in the second quarter of 2011, driven by record cash collections. This is the direct result of investments we made over time in our collections operations, as well as our ongoing portfolio acquisition activities. Total revenues for the quarter were $114.8 million, comprised of a record $100.3 million in finance receivables revenue and $14.5 million in fee revenues. This compares with $76.9 million of finance receivable revenues and 16.1 million in fee revenues in the year ago period.

Income on finance receivables is derived from the $176.3 million in cash collections we generated during the second quarter, reduced by an amortization rate of 43.1%. This amortization rate includes net allowance charges and compares with the rate of 40.1% in Q2 2010, and the full year 2010 rate of 41.5%. Income on finance receivables net of allowance charges increased 30% in the second quarter of 2010.

Breaking down our finance receivables performance, income recognized on core portfolios was $65.4 million during the second quarter of 2011, net of an allowance charge of $1.8 million. This core--net core portfolio revenues increased 33% over the second quarter of 2010.

Bankruptcy portfolio revenues for the second quarter of 2011 were $34.9 million, net of an allowance charge of $483,000. Net bankruptcy portfolio revenues increased 26% over the second quarter of 2010. The second quarter's overall $2.3 million net allowance charge compares with 6.3 million in the year earlier quarter. The net allowance charge for the second quarter represents .26% of the net finance receivables balance, 1.3% of cash collections, and 2.3% of net finance receivable income. The allowance charges were localized in the Q1 2008 tranche of accounts, both for core and the bankruptcy pools. The core pool incurred a $2 million allowance charge while the bankruptcy pool incurred a $500,000 charge. The core pool currently has a reserve against it in the amount of $13.9 million and the bankruptcy has a life to date reserve of $1 million.

There were no other gross allowance charges in Q2. We did see reversals of $217,000 in the 2005 tranche of accounts. For 2009 and 2010, tranche of accounts are significantly over performing booked expectations and as such we did increase both yields and estimated total collections. The 2011 tranche of accounts are performing as expected through the first six months of 2011. Cash collected on fully amortized pools was $10.1 million for Q2 2011, as well as the year ago period.

Moving on to operating expenses, PRA's operating expenses in Q2 increased 20% from the second quarter of 2010. This compared favorably with the growth in revenues in cash receipts of 23% and 32%, respectively, and resulted in our operating margins increasing to 39.7% from 36.9%. Excluding the gain on sale, which Steve mentioned earlier, the operating margin is 38.7% for Q2 2011. The growth in expenses was primarily driven by compensation, which grew $3.9 million, or 13%, and legal costs--legal collection costs, including media, which increased by $3.4 million, or 54%. The increase in compensation expenses that are in Q2 relates primarily to inside legal employees as we continue to build that capability, as well as growth in our total call center collectors.

I would like now to take some time and talk a little bit more about our legal expense line items. First, please notice that we have provided expanded disclosure this quarter in our income statement. Previously, we had combined legal collection fees, legal collection costs, and agent fees in a line item called legal and agency fees and costs. Since Q3 of last year, we've fielded a number of questions about this line item. We did provide additional granularity in the MD&A section of our filings regarding the composition of this line item, but felt that breaking it out in the income statement was appropriate at this time. The three new line items are legal collection fees, legal collection costs, and agent fees.

Legal collection fees are contingent fees we pay to a third party attorney as a commission for collecting cash. The cash could be collected by the attorney using fairly standard collection techniques, or it could be collected through the judicial process. In any case, cash from the third party attorney would bear a commission and create what we call legal collection fees. Legal collection costs are costs that are paid to the various courts where a lawsuit is filed. The courts charge a fee for their services rendered, which can range from a low of $28 per filing in some states to $330 per filing in others. These costs are expensed [as incurred], but in our view represent additional investment in an account.

If our selection criteria are accurate, we'll end up collecting these costs back from the customer through the judicial process. We have booked the return of these costs as they are received simply as cash collections, and those cash collections come through the normal revenue recognition process. These legal collection costs are incurred anytime a lawsuit is filed. It does not matter if the attorney is a third party or a PRA attorney.

The last item is agent fees. These are costs paid to repossession agents primarily to repossess vehicles. However, they can also include various other fees paid to the same type of agent. Legal collection costs as a percentage of cash receipts had been in the three to 4% range from 2002 to 2009. However, in 2010 and continuing into 2011 we have moved up our investment percentage to approximately 5% of cash receipts.

During the same timeframe, legal collection fees have been building steadily from 3% in 2001 to 5% in 2002, and up approximately one percentage point per year to a peak of 8% of cash receipts in 2005. Since that time we have steadily moved the number downward to 3% in 2010 or 2010 and are currently at 3% thus far in 2011.

Lastly, this movement in legal collection fees is a result of moving a material portion of our legal collections in-house and hiring our own attorneys in high volume areas. Our attorney salaries increased from just $111,000 in Q2 of 2007 to $2.3 million in Q2 of 2011, which represents 1.2% of cash receipts. So in summary, in terms of investment dollars into the legal channel, we are spending less as a percentage of cash receipts now than we did in 2008.

Setting aside our legal collection expense discussion for now, operating expenses as a function of cash receipts during Q2 2011 was 36.9% compared with 40.6% in Q2 of 2010. This was driven by a number of factors. The continued shift in our collections mix to the bankruptcy business, plus our highly effective collection strategies, and a shift to our generally higher margin debt purchase business from our lower margin fee businesses.

Operating income was $45.5 million in the second quarter of 2011, compared with $34.3 million in the second quarter of 2010. Our operating income includes a $1.2 million gain related to the sale of a parking lot adjacent to our Norfolk headquarters building. This gain is required by GAAP to be included as a component of operating income. Operating income increased 32.6% quarter-over-quarter under GAAP. But if you exclude this unusual transaction, the increase quarter-over-quarter would be 29.3%. This gain is approximately $690,000 after tax, or $0.04 per share.

Operating margins, including the gain on sale, was 39.7% for the quarter. Excluding the fee based businesses, operating margins would have been approximately 470 basis points higher at 44.4% in Q2. Excluding the gain on sale, the operating margin would have been 38.7%. And excluding the fee based businesses and the gain on sale, operating margins would have been about 360 basis points higher at 43.3% in Q2. Amortization expense related to intangible assets from our various business acquisitions was approximately $1.3 million during the quarter.

PRA's return on equity ratio continued to improve to 19.2% in Q2 2011, up from 17.9% in Q2 2010, and from 16.6% for full year 2010. Please note that our internal goal has been to achieve a 20% ROE.

Moving on to the balance sheet, our deferred tax liability increased by $23 million to $188 million at the end of Q2 2011 from $165 million as of December 31 of 2010. This deferred tax liability is a result of the timing difference between book and tax income. It's caused by the utilization of cost recovery method for tax versus the interest method as prescribed by GAAP. In situations where the Company is growing its operations and buying more defaulted debt portfolios, we tend to defer taxes and grow the deferred tax liability. Likewise, in climates where we might slow down our buying, we tend to flip into a pay down mode and begin reducing the deferred tax liability. This is the primary matter that the IRS has challenged us on and--as disclosed in our filings. And we have nothing new to report to you at this time. Our first quarter 2011 10-Q remains our most recent update.

As of quarter end, the outstanding balance on our line of credit was $250 million, down $40 million from March 31 of 2011, leaving us with $157.5 million of availability. Our weighted average interest cost on the line of credit increased during the quarter to 3.7% from 2.44% in Q2 of 2010, primarily as a result of higher interest spread and the newly expanded line of credit.

The net finance receivable balance increased to $879.5 million as of June 30, 2011, from $831.3 million at year end 2010. The net finance receivables balance represents the amount invested in our portfolios reduced by amortization, otherwise known as payments applied to principal, which includes allowance charges. In other words, it is the unamortized purchase price. This amount on the balance sheet is further broken down in our supplemental data section by purchase year.

Cash balances decreased sequentially during the quarter to $25.5 million from $35.4 million in Q1. We believe our leverage remains quite modest at 46.4% of equity. We are producing strong internal cash flows and are well capitalized.

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

(Operator Instructions.) And our first question comes from the line of David Scharf with JMP Securities. Please proceed.

Thank you. Good afternoon. Steve, I'm going to start with a topic you didn't focus too much on which is on skip tracing and auto recoveries. I'm just curious, is there a general lag--rule of thumb for a lag effect between the volume of loan origination and the volume of placements you get over there? Because it sounds like right now it's clearly suffering from the depressed auto lending of a couple years ago, but we have seen auto sales and loan approval rates pick up in the last year. Does that give you any kind of roadmap for when that business might recover?

Well, I think that we are near the trough, given what we've been seeing. There is definitely a bit of a lag, obviously, between the time the loan is made and when typically we're seeing charge-off activity. And so, anywhere from 12 to 24 months on a look back would be very typical from what we see.

Okay. So it's possible probably 12 months from now--nine to 12 we may start to see a pickup in placement volumes then?

Yes, that would be our hope. And what we're trying to do is rationalize our processes in the operation so that we can make it to that time in relatively good shape.

Got you. Want to shift to revenue recognition sort of in the context of how strong the collection growth has been. I think it was mentioned that the yields on the '09 vintages on average were raised. Just trying to get a sense for sort of earnings flow through. And obviously, it seems like the rate of earnings increase really is not commensurate with necessarily how strong the collection growth is. And the amortization rate, excluding allowances, was as high as it's been in a few years. And I'm just wondering, is implicit in that still rather conservative revenue recognition in the form of yields that potentially have room to go up more?

Well, so there's a couple of things going on, David. First, as I've said quarter after quarter, those 2009 and 2010 tranches continue to perform strongly. The 2010 tranche especially is still very new. And again, 2009 continues to improve better than expected. So we continue to move those things up. So as we move them up, that implies there is some conservatism built into what you've seen thus far. Additionally though, keep in mind that bankruptcy is a bigger and bigger piece of the mix. I think off the top of my head bankruptcy collections was 37% or something like that of cash collections. So the amortization rate of bankruptcy is just innately higher, and so that's part of it as well.

Got you.

It's also--by the way, what you're seeing in the salary, that bankruptcy cash collections--along with [those] improvements --but the bankruptcy cash collections themselves are also driving that like salaries to cash receipts ratio down. We've long talked about that phenomenon and it's kind of nice to see that come to fruition.

Yes, and clearly, the trends are all moving in the right direction. Just trying to get a handle on whether or not you're still being a little cautious perhaps on the 2010 vintages in terms of writing those up. One last question just on capital deployment. Should we read anything into your outlook for supply given that you chose to pay down as much debt as you did this quarter?

Well, I'll take the debt question. I guess Steve and Neal can talk to supply. But from a debt perspective, a couple of quarters ago we were talking about we had a little too much cash on our balance sheet. So it's been my goal in life is to--if I've got cash, my goal is to pay down that line of credit first. And we can always draw from it. It's a revolver. I can just do a draw anytime I want to buy a portfolio.

Right.

And I mean, David, if your question is are we continuing to see attractive deals in quantity, we did say in the script that we believe there's ample deal flow out there. I made the comment that the market continues to be disciplined and I think like all disciplined competitors, everybody's got to decide just how far they're going to push the market in any quarter. And we pushed it hard enough to come up with our particular buying numbers this quarter. And that did result because of our strong cash collections in a debt pay down. But we don't see the market in the least as running short of what we think are still pretty attractive buying opportunities.

Got you. And just one last one on sort of what you're seeing in terms of consumer health or lack thereof. The average payment size moderating to just a 6% decline, that's a very, very small figure compared to what we've seen previously. I mean, I think it was sort of mid-teens declines throughout last year. I mean, just in an effort to kind of search for any positive indicators of consumer health out there, did that surprise you at all that you were able to ultimately drive consumers to that level of the average payment? Should we read anything into perhaps improving the liquidation environment out there?

So from my perspective, I don't see any grand macroeconomic improvement that would lend itself to a generally healthier consumer than in the year ago period. Just a quick reminder - the average payment size going down, that is really almost entirely attributable over the last year to improving efficiency. So because our automated dialing and scoring got so much better, we were able to call smaller balance accounts, lower scoring accounts. Those are accounts that would have been ignored two years ago or three years ago, and now that we can work them profitably that has us digging down quite a bit further.

So because this is measured year-over-year and we were going down double-digits for two years, at some point that has to start to level off. And so, I think that's really what we're observing.

Got you. Thank you very much.

And our next question comes from the line of Hugh Miller with Sidoti and Company. Please proceed.

Hi, there. Just I guess a little bit of a follow up question on the purchasing. Was wondering kind of--we were hearing about opportunities that were kind of rising a bit here and there in the secondary re-trade market. Is that something that you guys are seeing as well, kind of the older paper aside from what the credit issuers have that have possibly started to come up into the market a little bit more?

Yes, I would say that we're observing some increased activity in that part of the market.

And is there anything that you're seeing that's kind of driving that and would that--do you expect that to be sustained for that level of supply?

The sustain part I think is always a tough call. The particular deals that we've seen I think have probably tended to be fewer larger deals as opposed to a real threat to that re-trade market. But as to what we'll see on a go forward, I don't know.

Okay. And I realize that purchasing is always going to be opportunistic from one quarter to the other, but Q2 purchasing coming in a little less than what I, I guess, had expected, and certainly down a little bit from the prior quarter. Was wondering if there was anything in particular that was kind of driving that or is it purely opportunistic?

No, I'd say it's purely opportunistic and even includes things like when particular deals close whether they're included in one quarter or another. So I think that our view internally at least is that the buying pace was very comparable to the first quarter. And I don't think that we saw this as really a down volume quarter at all.

Okay. And on a relative I guess value question for purchasing, are you seeing any difference there in trends on relative value between bankruptcy and traditional purchasing?

We continue to shoot to very similar IRRs in both businesses. And although from deal to deal you're going to see some fluctuations, overall we think there are pretty comparable returns available in both markets.

Okay. And last question. I guess looking at the zero basis collections, I know that you mentioned on an absolute basis was relatively on par with the prior year period. Looking at it as a percentage of total collections, it is down probably close to 200 basis points year-over-year and down a little less than 100 basis points on a sequential basis. But was wondering kind of is that just a function of just the rise in bankruptcy collections and a greater mix there, or are you making more of an emphasis on working kind of newer purchase or something like that?

Yes. So it's not the latter, and I was kind of formulating my answer when you were asking. So your observation on the bankruptcy portfolio is an interesting one. In general though, I think what we have talked about is that we're getting better matching our collections to our curves. You're also in a period where you've got the older deals, we've still got some allowances on the '08 tranches, there's still some balance out there. This is the first real quarter where you've seen kind of a--I guess I'd call it compartmentalization of the allowances into the 2008 tranche. So the older deals are starting to kind of behave themselves and kind of collect along a curve that we expect. So I think that that's probably the mechanism behind that.

And then, keep in mind from an accounting perspective it's a big victory. We don't--I know investors love fully amortized cash, but accountants don't.

Okay. And I guess one last question with regards to the bankruptcy channel. I know that this also varies from quarter-to-quarter. But in a general sense of trend, are you noticing any difference in the typical fallout rate, people moving out of the bankruptcy channel, relative to let's say a year ago?

I think that our view or our observation there has been relative to a year ago we're relatively steady.

Okay. Great. Thank you.

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

Thank you very much. The pricing, Kevin, you talked about the 2010 paper performing very well and it looks like it is collecting better and amortizing slightly faster than the 2009 did. When you look at pricing for the 2011 paper compared to that 2010 paper, any way to characterize it? I know you can't give specific numbers, but what would you say in terms of relative attractiveness of these recent portfolios?

I'd say that they remain attractive, but pricing relative to the overall 2010 book is up slightly in 2011.

So up slightly you'd characterize it?

Yes, I think that's fair.

And then the skip tracing and the location servicing business, any way to characterize how much of a drag that was on EPS in the quarter?

We've really stayed away from getting too granular on that, so I'll not get into specifics on that one. But it was definitely a disappointing quarter for us.

Yes, okay. Thank you very much.

And our next question comes from the line of Robert Riggs with William Blair. Please proceed.

Hey, guys. Thanks for squeezing me in. You've done a great job pushing that cost to collect lower, and cognizant that you're benefiting from the bankruptcy paper. But how much lower can that go and what will be some of the key drivers? Neal, you mentioned doing some back office work offshore. Kind of what's going to drive that down further?

A couple of things. I mean, I've talked a lot about the number of people we have set up on a monthly payment and that's probably the segment that has the most wind in our sail. People are staying on their payment plans at a very surprisingly healthy rate. So the number of people that we have set up on automatic ACH payments where there is very little follow up work involved is going to help us quite a bit and will be sustained for quite a while. We also continue to refine our scoring. We regularly update our dynamic score and each time we do that it's proven to be very beneficial. There's a very modest opportunity to increase dialing. That one we've probably come close to exhausting.

Great. Nice quarter. Thanks.

Thank you.

And our next question comes from the line of Sameer Gokhale with KBW. Please proceed.

Hi. Thanks for taking my questions. Just a couple of them I guess. Earlier you were asked, Kevin, about the capital management or the balance sheet. And what I was curious about is you still seem to have a relatively low level of leverage. So I think some time ago you guys had issued debt and then used the proceeds I believe to pay a special dividend. This is going back maybe a couple of years. But is there--is that something you might contemplate doing again? Because I mean, I understand your desire to pay down the debt, but you have a low level of leverage. And it seems like from a return perspective, you may want to maintain some level. So how are you thinking about that at this point?

Sure. So I'll take the first crack at it. If someone else wants to dive in, they can. So again, from my perspective, the earlier question, I'm simply trying to manage cash in that side of the transaction. I just don't want to have a negative overcharge situation where I've got all of this cash sitting on my balance sheet. To your point, would we consider--it really depends on a couple things. What does the market deliver to us in terms of opportunities to buy debt? And so, if we get into a situation where we think that we're generating so much cash and we become so, I guess, delevered, would we consider a dividend or a stock buyback or something? Sure. Sure we would.

Okay. And then, just the other question was maybe if you could just refresh my memory in this. In terms of the productivity statistics, I mean, usually it seems that always Kansas is kind of the standard and everyone is a fraction of that. And I know it's a function of when you started up the other call centers and how those collectors have matured. But in terms of your more mature call centers, if you will, I mean, is there something that specifically related--the Kansas call center, what makes it that much better than the other centers? Is there some secret sauce they have that the other guys don't? I mean, if you could just revisit that a little bit for me, because I just don't know why historically they have been so much far ahead of the other guys.

Well, it's been something that we've been chasing for a while. So if I had that absolutely nailed, we'd probably have done a bit better job in closing that gap. But the gap is down. In the year ago period, if we collected the same amount as Kansas relative to this year, that gap decreased by 21%. So we've made nice steady progress in closing the productivity gap. Kansas is good for a whole bunch of reasons. There's a great management team in place there. They have very low attrition. Even though they're not our oldest call center, they're actually our most tenured call center because their attrition has been relatively low for an extended period of time. And so, that certainly serves them well. When you have more tenure, you've got more people making monthly payments to you, and that builds over time and sort of delivers an annuity stream. So that has certainly helped.

I think it's a great marketplace. It's a great town for us to be in. And we're thrilled with the labor pool there. But I'm also equally happy with all the progress we've made in Tennessee and Hampton. Tennessee just a couple of years ago was way back and they've really closed the gap tremendously. And Hampton, we added over 100 seats and the fact that they added all of those hours and people and are still within range of Kansas, which has been really full up for several years, impresses me.

Okay. And then, just one last one, if I may. I mean, in terms of acquisition activity or starting up new businesses and the like, I mean, I know you have the CCB business you bought some time ago and then now you've talked about launching the PRA Verification Services business. How do you all think about diversification? I mean, because historically when you look at companies that have diversified into some newer businesses, it can be a little tricky when companies stray a little bit from what they do really well. So how are you thinking about that at this point? Are there five, six other businesses that you are also interested in diversifying into, or at this point you feel you have a pretty complete product set that you are happy with?

So, first, let me set the record straight on the Verification Services. That is not a fee-for-service business. That is a free service that we're offering to people whose accounts we acquire that have I.D. theft or other issues. And so, that is a service we're actually paying for that the credit bureaus offer on behalf of the customers. So that was not a new business and we had a number of people confused on that. So we probably needed to describe it better.

Thank you for clarifying that.

Absolutely. As it relates to our fee-for-service businesses, we look at it like this. Number one, indeed we are trying to diversify away with these businesses from the debt purchase business. But we're really--we're trying not to diversify away from the core activities that we think we do really well. We think we are great at moving around back office widgets and managing both people and arcane processes. And so, that's really the common denominator in all of the businesses that we've gone after and all the businesses that we continue to look at. And yes, we are continuing to look at possible acquisition candidates or businesses that we may grow like the bankruptcy business from scratch. We're just being very careful about what it is we decide to put our energies and capital behind. And since CCB, we really haven't run across something. But I can tell you it's a subject we spend a lot of time on and we're continuing to work hard at developing.

Okay, great. Thank you.

You bet.

If there are no further questions in the queue, I'll turn the call over to Steve Fredrickson for closing remarks.

Thank you, Operator. I'd like to reiterate a few key points about our second quarter performance before concluding this call. Portfolio Recovery Associates ended the first half of 2011 with yet another record quarter which saw net income rise 31%, revenues grow 23%, and cash collections jump 37%. The big story this quarter was collections. Bankruptcy collections were up strongly in the second quarter, as well as both our internal and external legal collections. Our call centers also performed exceptionally well with collector productivity up sharply despite the still difficult economy, thanks in large part to the dedicated efforts of our more than 1,500 call center collectors.

PRA purchased $89.5 million of charged off debt in the quarter bringing our total purchases for the first half of 2011 to $197.4 million. These portfolios will provide additional opportunities for our collectors in the quarters and years to come. Importantly, we accomplished this while paying down debt by $40 million, strengthening our ability to continue acquiring portfolios when we see the opportunity to make smart, profitable deals.

I'd like to thank all of you for participating in our second quarter 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 great day.