PRA Group Inc (PRAA) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Third Quarter 2011 Portfolio Recovery Associates Incorporated Earnings Conference Call. My name is Shanelle and I'll be your operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Jim Fike, Vice President of Finance and Accounting. Please proceed.

Good afternoon and thank you for joining Portfolio Recovery Associates Third 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. 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 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 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 10K, its quarterly reports on Form 10Q, and it's current reports on Form 8K, filed with the Securities and Exchange Commission and available through the Company's website, which contain a more detailed discussion of the Company's business, including risks and uncertainties that may affect future results. Due to such uncertainties and risks, you are cautioned not to place undue reliance on any forward-looking statements which speak only as of the date hereof.

The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto, or to reflect any change in events, conditions, or circumstances on which any such forward-looking statements are based in whole or in part.

Now, here is Steve Fredrickson, our Chief Executive Officer.

Thanks, Jim, and thank you all for attending Portfolio Recovery Associates Third 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'll open up the call to Q&A.

Portfolio Recovery Associates once again produced strong results in the third quarter of 2011 which saw net income rise 38%, revenues grow 20% and cash collections jumped 33% over the third quarter of 2010. Cash collections from both bankruptcy and core portfolios continue to drive our results. Our call centers also performed exceptionally well with collector productivity continuing at very strong levels despite the weak economy. This was due in large part to the dedicated efforts of our more than 1,500 call center collectors. The continued weak economy together with operational strategies that have us pursuing the collection of relatively low quality accounts continued to put some downward pressure on our average payment size.

This was more than offset by an increase in the number of paying accounts which we believe is being driven by two primary factors. First the volume of our debt purchases has continued to increase. Second, we believe there is an increasing desire on the part of more consumers to do what they can to protect or improve their credit standing by responsibly handling their debt in an environment that offers consumers fewer credit choices than it did a few years ago. PRA's ability to acquire both bankrupt and core charge off portfolio drove our purchase of $122 million of charged-off debt in the quarter, bringing our total purchases year to date to $320 million. These portfolios will provide fuel for continued growth in cash collections, revenue, and income in the quarters and years to come.

Portfolio pricing was once again steady to slightly higher in Q3 compared with Q2 2011 and sales volume continued to be ample, as evidenced by our buying numbers. In particular the resale market was especially active during Q3 -- however, more than 95% of our purchases came direct from issuers. The market continues to be quite competitive yet remains disciplined. We see few if any signs of material new entrants to the market. In fact, our feelings would be there are fewer large well-capitalized debt buyers today than we saw even one year ago.

Certainly since 2008 we've seen some of the largest buyers exit the market completely or downsize significantly. These conditions underscore the importance of our ability to underwrite accurately and collect cash from portfolios in a highly efficient manner. PRA's underwriting capabilities built on our substantial experience, unique, deep data set, and analytical expertise as well as our access to capital, operational effectiveness and long demonstrated record of compliance have allowed us to win more than our fair share of portfolios, both core and bankruptcy in this type of environment.

Moving on to fee income, our fee for service business has generated revenues of $11.4 million during the quarter, a decrease of 27% versus the same period a year earlier. As we anticipated in last quarter's call, this soft performance was largely due to disappointing results at PRA Location Services, our automobile skip tracing and location subsidiary. Revenues and income fell sharply as a result of decreased placements due to a decline in auto finance volume during the economic slowdown that are just now working through the charge-off delinquency cycle and operating strategies we employed to rid ourselves of unprofitable client relationships.

We're very pleased with the new Location Services' management team we assembled earlier this year. That group has taken steps to return this unit to an acceptable level of performance by increasing our business development efforts, focusing on customer profitability, reducing expenses, making significant operational changes to improve efficiency. We believe all of these steps will set the stage for future profitability improvement while we remain focused on sales. Increasing placements for both new and existing clients will be the key driver in future quarters.

Our government services business, our largest subsidiary operation was relatively stable when compared with the prior period. Our CCB subsidiary saw both revenue and income down substantially from the third quarter of 2010. As was the case in Q2 this was due to the quarter's comparison with an extremely strong year ago period -- however, this quarter's revenues were quite low as few settlements were received. As we'd explained since acquiring our interest in CCB more than a year ago, revenues and earnings for this business will tend to be highly variable depending on the timing of larger settlement payments. CCB's expenses are largely fixed while its revenue is extremely variable and timing is generally not in our control. CCB is performing to our expectations overall. This is a business that we're going judge based on long-term, not short-term trends.

The regulatory front was fairly quite in Q3. The President's nominee to head the Consumer Financial Protection Bureau has not been confirmed, limiting the Bureau's ability to issue regulations. We are supporters of the recently introduced Mobile Informational Call Act of 2011, HR3035. This legislation was designed to modernize the Telephone Consumer Protection Act of 1991 which was enacted before any one contemplated that 25% of the country would abandon landlines in favor of mobile phones by 2011.

The collection industry and other businesses support the bill because it would restore Congress's original legislative purpose of the TCPA which was to regulate telemarketing. We remain advocates of opened and candid communications between debtors and collectors. It's the best way for consumers to avoid burdensome litigation that can saddle them with costs and repayment terms that are far more onerous than they would likely negotiate out of court. We believe this legislation would help in that effort.

Before I turn the call over to Neal Stern, I'd like to note that Portfolio Recovery Associates has once again been recognized by Forbes as one of America's 100 Best Small Companies for 2011. This is the fifth consecutive year PRA's been named to the Forbes' 100 List which recognizes companies with remarkable sales and earnings growth across industries. This year, PRA's ranked 63rd on Forbes' Best Small Companies List.

I'd now like to have Neal Stern, our Executive Vice President of Operations provide you with a summary of our operational strategies. Neal?

Thanks, Steve. In the third quarter we sustained a strong operational momentum we've seen thus far in 2011. PRA generated a record $182.2 million in cash collections from owned portfolios in the third quarter, up 33% from a year earlier. Specifically, cash collections from our purchased bankrupt accounts were a record $74.5 million, up 40% from Q3 2010. Call center and other collections were $64 million, up 24% from the same quarter last year. Collections from our legal channel set another record at $43.7 million in Q3 2011. This is up 35% 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'll provide more details on legal collections in a moment.

In the quarter we received just under 1.7 million payments which was 478,000 or 40% more payments than we received in Q3 of 2010 when the number of payments had increased by 73% over 2009. Increasing at this rate over a prior year that exhibited such exceptional growth demonstrates our strong purchase activity, increased productivity, and an ongoing commitment to working with our customers to find workable payment solutions. Our average payment size decreased 5% year over year. Again, this moderation occurred in light of a tremendous growth in monthly payments and is attributable to increased efficiencies that have allowed us to profitably work accounts with lower balances and scores.

At quarter's end, our owned portfolio collector headcount was 1,520. As it relates to staffing, please remember that a substantial amount of our recent buying has been related to pulls 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.

We tracked 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 $245 for the first nine months of 2011, compared with $194 for the full year 2010 and $145 for full year 2009. This metric includes bankruptcy collections but not bankruptcy personnel and reflects a net increase of 48 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. Excluding the effect of trusty administered purchased bankruptcy collections, PRA's productivity for the first nine months of 2011 was $156 versus $129 for the full year of 2010 and $113 for the full year of 2009. Further excluding legal and trustee administered purchased bankruptcy collections, productivity for the first nine months of 2011 was $118, up from $100 in full year 2010 and $87 for all of 2009. It's worth noting that we achieved these improvements despite a still difficult economy characterized by high unemployment which makes collection activities more difficult.

During Q3 we increased site specific productivity per hour paid by approximately 11% 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 collection but also any non-collector assigned inbound generated collections. In a year over year comparison, productivity was higher at all of our sites with the exception of Birmingham which was flat year over year. Norfolk productivity was up by 8% and Kansas and Jackson were both up by 12%. In Hampton, productivity was up by 18%.

On an absolute basis, Kansas remains our top call center for the quarter. During the quarter on a relative basis, Jackson was 90% of the Kansas standard. Norfolk was 88%. Hampton was 84% and Birmingham was 67%. Had all of our call centers delivered the same cash collections per paid hours as our top site, we would've realized another $7.7 million in collections for the third quarter.

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 60% of the Kansas standard and improved their productivity by 35% over Q3 2010. This performance was obtained in spite of the fact -- the third quarter.

Another important contributor to our Q3 performance was our legal collection results which finished 35% higher than in Q3 2010. External legal collections finished 35% higher and the internal legal collections were up 36%. Our investment in court costs was slightly lower than in Q3 of 2010 when we made a change to our legal scoring models that elevated the volume of accounts selected for that channel.

It has been and remains a Company goal to file lawsuits only in the minority of accounts where we have attempted to collect in our call centers, identified an asset, and have not been able to compel the account holder to pay -- in other words won't pay us. It's not can't pay us. This very slight decrease in year over year spending on court costs will not be sustained in terms of absolute dollars, our portfolio growth, and ongoing legal scoring refinements will lead to increased spending over the near-term.

However, we have no intention of moving away from having a single digit percentage of accounts being selected for legal action to a scenario in which legal action becomes our first collection option with a large percentage of our portfolio moving down that path.

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 strong performance in the third 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 acquisitions. Financial results during the quarter include the following highlights.

PRA invested $123 million in 95 defaults debt portfolios from 12 different sellers. This represented $5.68 billion in face value and was comprised of $64.8 million or 53% bankrupt paper and $57.2 million or 47% in core charge off paper. Cash collections rose to a record $182.2 million in the quarter, up 33% from $137.4 million in the same period a year ago. Cash collected on fully amortized pools was $8.7 million for Q3 2011 versus $9 million in the year ago period. Total revenues grew 20% to $114.3 million, up from $95.5 million in the year ago quarter.

Net income of $25.5 million was up 38% from 18.5% a year ago. Diluted EPS advanced to $1.48 from up 37% from $1.08 in the third quarter of 2010. PRA's returned equity ratio was 18.3% in Q3 2011, up from 16% in Q3 2010 and from 16.6% for full year 2010. Net allowance charges in the quarter totaled $741,000 or less than one-tenth of 1% of net finance receivables. The ratio of operating expense to cash receipts continued to improve. During the third quarter of 2011, the ratio was 36.4% compared with 41% a year earlier.

Operating income was $43.8 million in the third quarter of 2011, compared with $32.8 million in the third quarter of 2010, increasing 34% quarter over quarter. Our operating margin was 38.4% for the quarter. Excluding the fee based businesses, the operating margin would've been approximately 510 basis points higher at 43.5%. Our balance sheet remains strong with ample cash availability to continue building for the future. Cash balances ended the quarter at $30 million while our debt outstanding increased slightly to $261.6 million. Our debt to equity ratio at quarter end stood at 46%, down from 62% at year end 2010. And availability under our credit line was $147.5 million.

Turning to more specific results, total revenues for the quarter were $114.3 million comprised of a record $102.9 million in net finance receivable or NFR revenues and $11.4 million in fee revenues. As Steve mentioned, the fee revenue was adversely affected by both the economy and our decision to purposefully manage it down in some cases in order to drive stronger bottom line results. Q3 results compare with $80 million in NFR revenues and $15.5 million in fee revenues in the year ago period. NFR revenue which grew 29% over Q3 was derived from the $182.2 million in cash collections we generated during the quarter, reduced by an amortization rate of 43.5%. This amortization rate includes net allowance charges and compares with a rate of 41.8% in Q3 2010 and the full year 2010 rate of 41.5%.

Breaking down our financial receivables for performance, revenue recognized on core portfolios was $66.1 million during the third quarter of 2011, net of an allowance charge of $900,000. Net core portfolio revenues increased 33% over the third quarter of 2010. Bankruptcy portfolio revenues for the third quarter of 2011 were $36.8 million net of an allowance reversal of $159,000. Net bankruptcy portfolio revenues increase 21% over the third quarter of 2010.

The third quarter's overall $741,000 mid-allowance charge compares with $6.5 million in the year earlier quarter. This quarter's amortization rate was 43.53% versus a rate of 43.10% in the second quarter of 2011. This increase can be attributed primarily to three factors -- first, one pool purchased in the third quarter which was placed on cost recovery for accounting purposes generated nearly $2 million in cash collections. We will monitor this pool's performance and if it continues to perform in this manner, we will place it on interest method possibly in the near future. Had this pool been placed on the interest method in Q3 it would've generated well in excess of $1 million of revenue during Q3.

Second, two pools purchase in Q2 which had their revenues booked under the cash method of accounting in Q2 were converted to interest method in Q3. As a reminder, no amortization is recorded while pools are accounted for under the cash method. Finally, one pool purchased in late 2010 experienced very strong cash collections during Q3 compared to Q2 and simply recognized a higher amortization rate. Excluding the impact of these four pools, the amortization rates were approximately the same Q2 versus Q3 of 2011.

Now, moving on to operating expenses, PRA's operating expenses in Q3 increased 12% from the third quarter of 2010. This increase compared favorably with the growth in revenue and cash receipts of 20% and 21% respectively and resulted in our operating margins increasing to 38.4% from 34.4%. Outside fees and services increased $2.8 million or 79%, primarily due to legal related expenses as well as costs associated with software development. Compensation and communications expenses increased by $2.3 million and $1.9 million respectively, largely due to increased staff size and growth in collection activities. Legal collection fees increased by $1.4 million or 30%.

Similar to my talking points last quarter, I'd like to once again spend some time on the legal expense line items. I'd like to remind everyone that starting in Q2 we provided expanded disclosure relating to legal collection costs and fees on our income statement versus previously being broken out just in our MD&A. Legal collection fees are those fees that we pay to third-party attorneys as a commission for collecting cash. Legal collection costs are those costs that are paid to courts where a lawsuit is filed. The courts charge a fee for their services rendered. These costs are expensed as incurred and in our view represent additional investment in an account.

As we collect these monies back from the customer through the judicial process, we book the returns simply as cash collections. The last item in the new disclosure is agent fees. These are costs paid to repossession agents, primarily to repossessed vehicles. Legal collection costs as a percentage of cash receipts were in the 3% to 4% range from 2002 to 2009. In 2010 and continuing into 2011, we've moved up our investment percentage to approximately 5% of cash receipts. During the same timeframe legal collection fees as a percentage of cash receipts had been building steadily from 2001 until it hit its peak of 8% in 2005. Since that time we have steadily moved that number downward to 3% in 2010 and we are currently at 3% thus far in 2011.

Lastly, this movement in legal collection fees -- and remember, this is commissions paid to external attorneys to collect cash -- is the result of moving a material portion of legal collections in-house and hiring our own attorneys in high volume areas. Our staff attorney compensation expense increased from $118,000 or 0.2% of cash receipts in Q3 of 2007 to $2.4 million or 1.2% of cash receipts in Q3 2011. As Neal mentioned earlier while our legal investments this quarter were lower than Q3 of last year, you should know that this should not be viewed as a long-term trend. We intend to continue to invest in this legal channel for those accounts where it makes sense to do so.

Moving on, total operating expenses as a percentage of cash receipts during Q3 2011 were at 36.4% compared with 41% in Q3 2010. This was driven by a number of factors including the continued shift in our collections mix to the bankruptcy business and their highly effective collection strategies and a shift to our generally higher margin debt purchase business from the lower margin fee businesses. Amortization expense related to intangible assets from our various business acquisitions was approximately $1.2 million during the quarter.

Moving on to the balance sheet, our deferred tax liability increased by $27 million to $192 million at the end of Q3 2011 from $165 million as of December 31, 2010. This deferred tax liability is the result of a timing difference between book and tax income. Recall that we use cost recovery as our NFR revenue recognition method for tax. As disclosed and discussed many times, we've been under an IRS audit for the 2005 through 2007 tax years for a number of years now. We've been consistent in communicating our position to the IRS that the existing legal authorities, the court cases of Litton and Underhill apply to distressed debt buying and support the use of cost recovery for tax purposes.

In both Litton and Underhill, the tax payer was permitted to use cost recovery despite have discounts significantly less that in our case. Further, we've been consistent in articulating this fact to the IRS, the judicial decisions in Litton and Underhill are binding with respects to our case. We have taken every available step that we know of to avoid litigation. We have sought the advice of IRS Chief Counsel. We have met and negotiated the issue with IRS personnel. We have twice sought to participate in the IIR or Industry Issue Resolution process, and of course participated in meetings with the IRS appeals office. In each case we were turned away.

In August, we received notice from appeals that they in short agree with the IRS field office that GAAP, not cost recovery, as specified in Litton and Underhill should be used for tax purposes. At this point we believe we have little choice but to defend our position in US Tax Court. Therefore, we intend to timely file during the fourth quarter a petition in US Tax Court challenging the decision of the IRS appeals office. We remain confident that in our position and we are aware of no new arguments which have been made by the IRS. Likewise, we are aware of no new court cases which have occurred that might impact us and no new rulings by Treasury which have been made. As a result we are not accruing any interest under Fin 48. After filing our petition in US Tax Court, the IRS will file its answer. Discovery will take some time and it's likely that the trial will not take place for at least 12 months.

Moving on, the net finance receivables balance -- again, referred to as NFR increased $919.5 million as of September 30, 2011 from $831.3 million at year end 2010. NFR balance is the amount of unamortized purchase price that is on our balance sheet. It is further broken down by yearly tranche in our supplemental data section. Cash balances increased sequentially during the quarter to $30 million from $25.5 million in Q2. We believe our leverage remains quite modest at 46% of equity. We are producing strong internal cash flow in 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) Your first question comes from the line of Hugh Miller of Sidoti.

Good morning. Afternoon. It's been a long day.

Long day.

That's for sure. One question about the fee for service business. I know historically in Q4 there was a segment that kind of typically had some type of lift because of pricing or new contracts and those types of things. Could you just walk us through that again and whether or not we should expect to see that again this year?

Sure. A portion of the government services business gets a year end lift as they process a lot of business license tax at the end of the year. And that normal process should occur again this year.

Okay. Any particular reason why I believe -- that we didn't get much of a lift last fourth quarter?

I think you saw a lot of various factors going up and going down. That particular part of the government services business always has enjoyed an updraft in Q4.

Okay. The compensation within the third quarter just came in a little less than what I was anticipating. I was wondering whether or not that was kind of driven by just -- I guess you mentioned that CCB is fixed cost but anything on the location services that's kind of pushing it a little down or anything abnormal in this particular quarter?

Yes. I think there was some movement, we moved some folks from that PLS center to another part of PRA. I think we probably had some vacancies during the quarter that caused some -- you know, again, vacant positions, you don't pay salaries for. So, that's probably part of the equation as well.

Okay. Are you anticipating replacing those vacant positions near-term? Or should that continue to go unfilled?

No. We've actually likely completely replaced them at this point would be my guess. Yes. Neal's shaking his head. Yes. We have.

Great. And the last question was more just on housekeeping. I was wondering if you happened to have the productivity metrics broken out just by the third quarter, not the year to date?

I don't have them in front of me.

We'll dig around.

We'll grab that for you.

I appreciate it. Thank you very much.

Your next question comes from the line of Mark Hughes, Suntrust.

Thank you very much. You had suggested that perhaps the competition for portfolios was even slightly less to year over year. Care to name any names of bigger players that might've backed away from the market?

I think we're referring more to bigger players that have made rather public exits. So, we weren't trying to imply that existing participants were more or less aggressive, rather making the longer-term observation that some prior large players have stepped away from the market completely.

Yes. How about the -- it sounds like resale has been picking up in activity. Do you think there will be an increasing volume of that paper coming to market? And how much more was available on a resale basis this quarter versus 2Q or 1Q?

There was a substantial amount of activity that referred this quarter. It's been at very low levels for quite an extended period of time and so almost any activity would've been an uptick but in particular there were some larger transactions that occurred. I don't know that there's an expectation that that trend will necessarily continue but it was an observation for Q3 activity at the very least.

And then finally, Kevin, the EPS impact of that drop in fee income? Care to give us a sense of how much the fee business contributed to the bottom line this year versus last year?

Yes. I think we were limiting ourselves in talking about the fee businesses on the growth, on the revenue side.

It's safe to assume though, less contribution?

Yes. That would be fair.

Okay. Thank you.

Your next question comes from the line of David Scharf, JMP Securities.

Hi. Good afternoon. Thanks for taking my questions. A couple things on the -- actually was this a quarterly record for you in terms of capital deployed? $122 million?

I'm not certain.

It certainly seems in hindsight as I look at the last few years, I'm wondering, the number of sellers was a dozen. Is that typically less than what you deal with in most quarters? I'm wondering if there were any unusually large transactions involved in the quarter or anything that may have been attributable to a flow agreement?

Generally we're dealing with between nine and a dozen different sellers. And there was I'd say a good variety of more typical deals as opposed to being marked by an extraordinary large deal or two.

Okay. Good. And you know, referencing the last caller's question about profitability, the fee for service businesses, I believe I heard the metrics that overall operating margin would've been 510 basis points higher without those businesses? Is that correct?

Correct.

Okay. When I do the math I come up with about an $800,000 operating loss for -- is it safe to say in this quarter there was a net loss at the EBIT level for the fee businesses?

Two things here, David. Again, I don't really want to break out operating income from the subs. That's just something we haven't done. One of the things though that I was looking at earlier was that dilution of the margin. Actually if you look back into last year, the dilution was about 600 basis points in Q1 and Q2 of last year and then about 500 and about 400 in Q3 and Q4 and then again moving into this year about 470 both in Q1 and Q2 and then 510. So, we give those numbers to you so you guys can get a feel for margin but that's about it.

That's fair enough. Again, I know you ran through the update on the tax issue and I missed a little bit of it. I just want to make sure I understood the chronology. Your decision to shortly file a petition in US Tax Court. That's in response to an updated IRS ruling that took place when?

Right. It occurred -- again, I went through the whole chronology of it as you said. It was in August. We got the notice from the appeals office.

So, it was in August?

There's a prescribed period of time you have to respond to those notices and we're going to do that.

Okay. We can talk offline in terms of kind of quantifying the different scenarios. Got you. Lastly, and I apologize for this question in advance because it may seem nit picking. As I look at the estimated collection multiples for the various vintages including the release relative to the June 30 Q. It looks like for recent vintages core and total, they've gone up. The forecast of yields. One that went down slightly were the 2011 BKs and I'm just -- I know in the past there may have been some commentary that the pricing on Chapter 13 paper has perhaps risen at a greater rate than core portfolios. I'm wondering should we read anything into this? Just in the same year that we're kind of bringing down the forecasted collection multiples of the 2011 BKs? Is it getting more overheated?

No. A couple things. One is that on the BK multiples inter-year, it's being affected by the later quarter buying. So, yes, your June buying, you're layering in your Q3 buying and so on. But the BK pricing has kind of returned to where it was historically. I tell investors when I talk to them as you look at those BK multiples in 2009 and 2010, they should just put a piece of paper over those and kind of enjoy those and enjoy them for what they were. But if you look back historically before that and after that, I think that BK pricing has kind of returned to where it was.

Okay. Got you. I ask because on the core portfolios it's 2011 current year vintages are subject to the same phenomenon of current period purchases but it looks like you took the collection multiple up considerably from the average year.

We still really like that BK business. I don't want to necessarily take things offline on the IRS thing. If you've got a question on passing it's perfectly fine to ask it here if you like.

Ultimately just trying to quantify worst case scenario of what the IRS -- that deferred tax liability. Is it just accelerating that payment over how many years or how quickly?

So, again, as you can tell, I don't know if you caught the end of that discussion or not, but we are not accruing anything under Fin 48. So, we're still pretty confident in our position. But again, if you had an adverse ruling I can say pretty firmly that I would appeal that. And that -- at the end of the day you're looking at interest and you're looking at some acceleration of this for tax liability. My guess would be that would be repaid over some period of time.

Got you. Thanks so much.

Your next question comes from the line of Edward Hemmelgarn of Shaker Investment.

Yes. Just a couple of questions. Would the reduction in estimated collections as a percentage of purchase price for the BK portfolio -- you're bringing it down to 154 for this year. Does that also reflect the fact that you may be buying paper is later in the collection stage?

Yes. That could also be part of the mix as well. That's a good catch. Yes.

Okay. Then was the -- it looks like you bought a lot more face value of the core portfolio in terms of dollars. Is that just a reflection of buying like a lot more tertiary paper?

Yes. Whenever you see a blended purchase price it tends to go down. You can imply that we did more buying of older vintages. We just saw more older paper that was well priced this quarter than some of the immediately preceding quarters.

Are you starting to see more out on the market now?

Yes. All we can really talk about is the existing quarter because we're at the whim of what sellers' strategy is for any given period but during the period we saw a fair amount of older paper.

Okay. In terms of your -- the fee business, the skip tracing business, that was a -- you know. What was the percentage fall off in revenue year to year for that fee business?

Edward, we don't break them out individually.

Do you think that there's any potential that business will ever get back to the size that it was?

One of the things we talk about internally is -- and Steve touched on it in his script is that we are very, very pleased with the management changes we made out there and we think that everything is set up for the future. It's just that you've got to get through economic downturn. You've got to get through the reduction in the number of auto loans that have been written. So, whether it gets back to where it was, I don't know. In the near-term certainly. But as underwriting increases, as those things become delinquent and they skip, hopefully we've got a good engine for people to use to find those people.

Edward, there's nothing that we've observed of the market that would suggest that the potential for getting back to where that business has been historically doesn't exist. Whether it happens and over what time period it happens would be speculative but we don't of anything that suggest that it won't.

What about -- do you anticipate that there will be a pickup of -- or are you seeing any improvement in the tax collection business now? I know that really fell off because of the economy. Has that started to come back at all?

Yes. As we commented, the government services space had very fairly solid year over year performance. So, pretty steady year over year. There were segments of that business that were up. There were other segments that were still a little softer. We have had a strong sales initiative there, really starting back about a year ago and we believe that we're developing some nice sales traction there and we look for steady growth out of that business.

Okay. Thanks.

If I could -- if Hugh's still on the line, I've got your numbers for you. Get a pen and paper ready. I do have a draft of the Q in front of me. But Hugh Miller had asked for the quarter to date productivity metrics. Again, just for the quarter. Not for the year to date numbers. So, I'll read these in the order they appear in the Q. So, I refer to your older Qs for the footnote disclosures on those. But core cash collection is 152, total cash collection was 249, non-legal cash collections was 212, and non-legal slash non-bankruptcy cash collections was 115. And that's it.

Your next question comes from Robert Napoli of William Blair.

Thank you. Good afternoon. Just have you guys been hearing of new entrants coming into the business? I've been hearing little noises here and there of venture people starting to think this is a great business again. I was just wondering if you're seeing any new entrants on your side yet in either of the core or the bankruptcy business?

We always hear conversation about new entrants in terms of actually bumping into people, Bob, we commented in the script that we actually believe there are fewer good sized players today than there were even a year ago. I think that number one, the rather poor performance that a lot of new comers realized over the last few years in this market is keeping some people out. I think that the legislative question marks and difficulty is keeping some people out.

And quite honestly, between us and some of our very sophisticated, very strong competitors, I think that the barriers to entry, the barriers to really profitable entry in this market have definitely ramped up over the last few years. It's all about being able to -- number one, very accurately underwrite so you don't have mistake son the underwriting side, but number two, very efficiently extract cash from portfolios. I think it's a lot more difficult to cobble together an underwriting engine with a collection capability and compete with the large, existing debt buyers.

That makes -- I agree. That doesn't stop people from looking at it and trying to come in. It doesn't seem logical to me.

I think that they've seen some very large and sophisticated people make runs at the market and things have not ended well for those. Without going through names specifically, people can do a little bit of homework and see ample evidence of sophisticated sharp operators do poorly in the debt purchasing.

I'm sorry. I missed the front end of the call. Everybody took Thursday night on this week during earnings to report earnings for some reason. But the pricing -- did you comment on pricing on what -- and how much pricing is up this year in different types of paper? Have you given much color on that?

We commented that our view on pricing was that it was steady to slightly higher versus Q2 of 2011.

Okay. But obviously it's at a level where you feel like you're still generating very attractive returns or you wouldn't have bought as much paper as you did.

That's correct.

Have you seen any significant movements out of the big sellers, either not -- there are some out there that sell more than others and some that never sell. HSBC, I think that was -- they were a pretty consistent seller. That's a pretty big portfolio that's moving with probably sitting on a lot of charge offs and going to an intermittent seller. So, have you seen any significant moves out of the industry? I know you can't use names but -- any significant change in strategy out there?

I don't know that we're viewing anything that we call a substantial change in strategy at this point in time at least.

Then last question, I guess maybe not a good quarter to ask this, the question. But on the fee based businesses, are you -- does it make sense to -- are you looking to add through acquisition at all to those businesses or are you going to make sure that what you have is clicking the way you want it to before you do that?

We think we can walk and chew gum as it relates to the fee businesses. We've got some very good management teams in place in each one of those businesses and we feel at this point like we're reacting to the various operating challenges that we've been dealt. We value these businesses or watch the cash on cash return from these businesses just like we do our portfolio investments and as we've commented in past calls, we are pleased with each one of our investments when viewed over the lifetime that it's owned. So, we continue to be interested in these diversifying fee for service businesses and anticipate like any business, we're going to see some ups and downs in individual activities.

Thank you.

Ladies and gentlemen, that concludes the Q&A session. This concludes the presentation as well. You may disconnect. Have a great day.