PRA Group Inc (PRAA) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Portfolio Recovery Associates earnings conference call. My name is Brian, and I will be the Operator on today's event. At this time, all participant lines are muted and in listen-only mode. At the end of today's presentation, there will be a question-and- answer session, and instructions will be provided at that time. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. And now, I would like to introduce to you your host for today's call, Mr. Jim Fike. Please proceed, sir.

Good afternoon. I am Jim Fike, Vice President of Finance and Accounting for Portfolio Recovery Associates. And thank you for joining our first-quarter 2012 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 and Chief Operations Officer of Owned Portfolios. 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' or 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 beliefs, assumptions, and expectations of the Company's future operations and economic performance, taking into account currently available information.

The 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 Securities and Exchange Commission, including, but not limited to -- its annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its reports on Form 8-K, filed with the Securities and Exchange Commission and available through the Company's website, which contain a more detailed discussion of the Company's business, including risks and uncertainties that may affect future results.

Due to such uncertainties and risks, you are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date hereof. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any change in the Company's expectations with regard thereto, or to reflect any change in events, conditions, or circumstances on which any such forward-looking statements are based, in whole or in part. Now, here is Steve Fredrickson.

Thanks, Jim, and thank you all for joining us. Today, I will be providing a high-level overview of our results, and comment on some of the key drivers and trends we are seeing. Neal Stern will then talk in more detail about our operational strategies, Kevin Stevenson will discuss our key financial results, and then we will open up the call to Q&A. Let me open by saying how pleased I am with the strong results across our Company in the first quarter. In addition to significant portfolio purchases and fantastic cash collections, we have real progress to report on our plan introduced last quarter to expand legal collections. I will have a comment on that in a moment.

Since we last spoke, we have continued to execute on all facets of our business model. We again reported strong quarterly results across all key line items. Cash collections were up 31% to $218 million, largely from our domestic operations. Revenue was up 25% year over year, to $140.1 million. This includes $4.6 million of revenue from Mackenzie Hall. Net income increased 10% year over year to $25.5 million, translating into earnings per share of $1.47, compared with $1.34 in the first quarter of 2011 -- and this result was in spite of the significant increase in legal collection costs incurred during Q1.

I would like to turn now to five areas where we continue to implement and execute initiatives designed to ensure continued growth through 2012 and beyond. First, an update on our decision to expand legal collections from those who we believe can, but won't, pay their debt. We are seeing performance from the group better than we expected. As we discussed last quarter, we seek to drive a meaningful level of net incremental cash flow from these customers, as well as net income to shareholders by investing more in court costs. Less than three months ago, we believed this investment would have an attractive return targeted at about two to one, with an expected payback of 6 to 12 months and significant profitability thereafter. I am pleased to say that we are ahead of expectations.

We saw a softer impact to earnings than expected, by handily exceeding our internal projections for cash collections on this front. Neal and Kevin will provide you with more details. But I believe our first-quarter experience is a positive indicator of what is to come. A second area of emphasis -- continued discipline in our purchasing decisions, as the market for charged-off consumer debt and bankrupt receivables remains competitive. We had a particularly strong quarter, acquiring $1.46 billion of face value finance receivables for $111.4 million. These receivables were acquired in 91 defaulted debt portfolios, from 16 different sellers. Pricing continues to be quite competitive and trending upward in both the direct from issuer and resell markets.

Third, we remain focused on keeping the expense line in check, with any meaningful increases being attributed to investments for future growth. Fourth, we are making progress in expanding our operating model. Revenue from our fee-for-service businesses slightly improved year over year, largely due to growing tax and fee revenue discovery for clients of our Government Services business, and the inclusion of Mackenzie Hall in our fee results. We are deep into integration of Mackenzie Hall, our newly acquired debt collection and purchase group operating throughout the UK.

We continue to be very pleased with our acquisition and the Mackenzie Hall team. Neal will have more to say about how we are introducing our processes and systems to improve Mackenzie Hall efficiency and implement the best practices. We look forward to the growth and diversification opportunities that McKenzie Hall provides shareholders. And fifth, an update on the share repurchase program authorized by our Board of Directors. While contending with quiet periods surrounding first-quarter earnings, we have purchased to date 100,000 shares at an average price of approximately $68 per share.

Before I turn the call over to Neal, let me add we have seen little in the way of developments on the regulatory and legislative front over the past two quarters. We continue to engage in proactive dialogue with various organizations and committees at the federal and state levels. In closing, this was a very strong quarter, and we continued the momentum we generated in 2011. But let me reiterate that our focus remains on the future and implementing measures for sustained growth and success in 2012 and beyond. Now, here is Neal Stern. Neal?

Thanks, Steve. Our first-quarter results generally benefit from the strong seasonal performance associated with tax refunds. That was again the case this year, but our performance exceeded those seasonal expectations, primarily as a result of strong performance from our legal collections, which increased by 42% over the same quarter last year. External legal collections finished 37% higher, and internal legal collections were up by 50%. Internal legal collections accounted for 40% of our total legal collections, which was up from 38% in the first quarter last year. The strong performance from our legal channel was in part due to the increased spending on court costs that we discussed on our last earnings call.

As planned, we increased our spending on courts costs by just over $14 million over the same quarter in the prior year. As we stated last quarter, it was our expectation that we could move from having approximately 5% of our portfolio in our legal channel to 8%, and deliver a 200% plus ROI on the incremental court costs that would be required by the strategy change. We also stated that it was our expectation that we could recoup our costs within 6 to 12 months after making the investment. In Q1, we exceeded our internal expectations for cash collections from the incremental legal costs by more than 20%.

Although we cannot be sure as to whether or not these excess cash collections represent an acceleration or an actual improvement to our longer-term cash collections, it does seem apparent that our revised legal scoring models and assumptions will sustain our historical track record of generating strong results through an ongoing commitment to improved account scoring and segmentation. Now, last earnings call, we also detailed our intention to expand legal court costs in the first quarter of 2012 to $24 million, and then reduce our court costs to $14 million over each of the remaining quarters of 2012. Given our increase in confidence in our legal models and our strong execution to date, we will increase our legal costs accordingly.

Kevin will provide more detail on that in a moment. But I want to emphasize that the strategy change has not altered our philosophy about how and when to pursue legal collections. We will continue to only file lawsuits on 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 pays, not can't pays. This philosophy differs from many of our industry peers, and is most evident when observing the percentage of accounts selected for this treatment and when observing the length of time between the purchase date and the date of a collections lawsuit. It remains our stance that this approach delivers the most fair collection experience and the most profitable results over the longer term.

Cost center cash collections were also strong in the first quarter, and were bolstered by the increased staffing that we added in the fourth quarter of 2011. Total paid hours were up by 21% over the prior year, which was the largest year-over-year increase in the last four years. These added hours normally dampen collector productivity, but increased efficiencies negated most of that impact and allowed us to finish within 1% of the productivity results from Q1 of last year.

Kansas remained our top-performing call center, and Birmingham, where we had added the most out, was our least productive, but improved nicely over the prior quarter. In the first quarter, we received just over 1.9 million payments, which was 439,000, or 30% more payments, than we received in Q1 of 2011, when the number of payments had increased by 63% over 2010. For the first time in several years, our average payment size remained flat for the quarter over the prior year. When paired with the healthy increase in monthly payments, our cash collections can be most meaningfully improved.

Finally, I want to talk very briefly about our ongoing efforts with Mackenzie Hall. In the first quarter, we did make modest new portfolio purchases in the UK, and expect to grow that purchasing activity as we become increasingly comfortable with our data sets. We did make meaningful progress in organizing data, so that we can begin to build models and strategies. We were also able to begin sharing best practices between our call centers. And as part of that effort, we had one of our more experienced call center managers from the US join [Paul] Mackenzie's operational team, as they seek to further sophisticate their operating strategies.

Also during the quarter, Mackenzie Hall purchased and installed a new predictive dialing system that should give the business significant productivity lift, while Scottish and US dialer strategists are working on designing new programs that will provide meaningful productivity gains. The overall results from these efforts were extremely positive, and I remain confident that there will be an opportunity for us to leverage our core competencies to an even greater extent, as time goes on. With that, I will turn the call over to Kevin Stevenson. Kevin?

Thanks, Neal. Hopefully, most of you on the call have had an opportunity to review our earnings results that were released earlier today. I am going to run through some of the key items, and I plan to leave plenty of time for Q&A. I would note the comparisons I am about to make are between the first quarter of 2012 and the first quarter of 2011, unless otherwise noted. Total revenues grew 25% to $140.1 million, up from $111.8 million. Revenue was comprised of $124.2 million in net finance receivables, or NFR revenues, and $15.9 million in fee revenues.

The $124.2 million in finance receivable revenue for the quarter included $83.7 million in core portfolio revenue, including an allowance reversal of $500,000; and $39.5 million in bankruptcy portfolio revenues, net of an allowance charge of $1 million. Net core portfolio revenues increased 34%, while net bankruptcy portfolio revenues increased 23%. Our fee-for-service business revenue of $15.9 million was a slight improvement over first-quarter 2011, accounting for 11% of the Company's revenue. Fee income from Mackenzie Hall, plus year-over-year increases from our Government Services area, offset a year-over-year decline in fee income from location services and [CCB].

During the quarter, we recorded approximately $1 million in finance receivable revenue from our foreign operation, Mackenzie Hall, and approximately $3.6 million in fee-based revenue. The Company's quarterly operating expenses increased to 38.6%. This increase was largely the result of our $23.7 million in court costs and document expenses for legal collections. These court costs and legal document expenses are costs that we incur to file a lawsuit on those accounts that, as Neal has repeatedly mentioned, represent people who won't pay -- in other words, people that we believe have the ability to pay, but not the inclination.

It is our accounting position that the court costs represent an operating cost that is paid to a court, at a point in time, to provide a service -- namely, permitting us to file the lawsuit in the court. For that reason, we expense these costs as incurred, and do not capitalize them. Last quarter, we talked about our estimated increased expenditures in legal collection costs and documents. As you can see from our results, we hit our first-quarter estimate of $24 million on the nose. Additionally, we commented last quarter that we were planning to spend $14 million in court and document costs during each of the last three quarters of 2012.

As Neal mentioned, based on our legal collections success, we intend to incur additional court and document costs of $4 million in Q2 and in Q3, bringing our total estimate to $18 million for each of those quarters. We continue to project costs of $14 million in Q4. Again, it is our expectation that we will recoup his costs within 6 to 12 months, post-investment. Operating income was $44.4 million, compared with $42.7 million -- an increase of 4%. Our operating margin was 31.7% for the quarter. Excluding all our subsidiaries, the operating margin would have been 36%.

As a reminder, amortization expense related to acquired intangibles is expected to be approximately $1.5 million per quarter in 2012 -- of which, approximately $450,000 is related to Mackenzie Hall. Net income of $25.5 million was up 10% from $23.1 million, and diluted earnings per share advanced to $1.47, compared with $1.34. Moving on to the balance sheet, our balance sheet remains strong. Cash balances ended the quarter at $28 million.

During the quarter, we invested $111.4 million in 91 defaulted debt portfolios from 16 different sellers. This represented $1.46 billion in face value, and included $56.9 million of bankrupt consumer paper and $54.5 million of core consumer debt charged-off paper, which includes Mackenzie Hall activity. The net finance receivable balance increased to $945 million, up from $867 million. The NFR balance is the amount of unamortized purchase price of acquired debt portfolios that is on our balance sheet. Our debt to equity ratio at quarter-end stood at 43%, down from 57%. Our debt to equity ratio, including the net deferred tax liability, was 74%.

Please note that our deferred tax liability was up about $15 million from Q1 of 2011, while our line of credit during that same time decreased by $25 million. Also notice that our deferred tax liability was relatively flat to year-end 2011. After March 31, our line of credit availability was $142.5 million. In April, working with our bankers, we increased our line of credit facility by $51 million to a total of $458.5 million. Our existing lenders provided $41 million of the increase, while $10 million was provided by a new lender.

As Steve mentioned, our Board previously authorized during the first quarter the implementation of a share repurchase program, of up to $100 million of our common stock. To date, we have repurchased 100,000 shares at an average purchase price of approximately $68. I would again remind everyone that our strong operating cash flow provides us with the flexibility to opportunistically use this program to enhance shareholder value and take advantage of market displacements, should they develop. And our expanded line of credit provides us with ample funding for portfolio purchases and other business opportunities.

Finally, let me turn to other data. Return on equity was 16.7% in the quarter, down from 18.3%. The decrease was largely due to the expense related to our expanded focus on legal collections and the resulting increase in court and document costs, as well as one-time charges relating to the acquisition of Mackenzie Hall of approximately $500,000. Cash collections on finance portfolios increased 31% to $218 million in the quarter, while experiencing positive, seasonal trends that typically occur during the first quarter. Cash collected on fully amortized pools was a $8.5 million, compared with $10.6 million. This quarter's principal amortization rate was 43%, the same as in full-year 2011. With that, we have completed our prepared comments. I would like to open the call up to Q&A. Operator?

(Operator Instructions) Hugh Miller, Sidoti.

I was wondering if you could just talk to us a little bit about some of the -- you give us a little bit of language on the pricing of portfolios out there in the market, in both the direct and the resale market. But I didn't catch the language you are saying about, to what extent they may be up. And just your expectation about the opportunities to buy receivables in the coming quarter in both of those channels, and whether or not you feel as though that might improve in your ability to deploy capital?

Well, we have continued to see pretty good supply in the direct from issuer market. We have seen some larger transactions come to market on the resale side. So, that is a market segment that is healthier, in terms of the deal flow, than it has been for some time. Despite that, though, pricing competition continues to be pretty keen, and our view would be that it rose slightly quarter over quarter, sequentially.

Okay. And can you give us any color on the pricing you are seeing in the resale market? And does it seem to be a substantial disconnect between buyers' and sellers' expectations? How is the purchasing competition in that market?

I would say that the characteristics are very similar to the direct from issuer market. Most big buyers can go in either direction. And so, you tend to see a blending of prices from one to the other. We see both compelling prices, and at times, prices that we think are way out of what we would consider solid profitability in both markets. So, it really depends on deal specifics, Hugh.

Okay, okay. So, then, in thinking back on your willingness to go out there and raise the credit availability on the revolver after the quarter, is that more a function of just allowing you to maintain your current purchasing capacity and give you the flexibility to buy back stock? Or do you anticipate that there will be more opportunities in the coming quarters to deploy capital, maybe at a faster pace than you normally expected?

I would say -- number one, the lending market is loosening up a little bit; and so, we are trying to take advantage of that, trying to round the banking group out a little bit. Also, we continue to see, as I mentioned, solid deal flow. And we want to make sure that we can take advantage of that, especially when larger transactions, especially in the resale market, might come along. So, we are just trying to make sure we are ready to react to whatever opportunities come down the pike.

Okay, I appreciate the color there. And it looks like you were active in writing up the yields on most of the vintages in the core portfolio in the earlier part of the last decade. I assume that it's in regard to the investment in the legal channel and some of the initial performance you are seeing there. But could you talk to us about what gives you the confidence at this point, given how soon it is after the investment, to go out there and ratchet up those expectations? That also maybe took a toll on some of the zero-basis revenue that you received this quarter, which was down on a year-over-year basis and down from -- as a percentage of collections. But just color on what gives you the confidence to go out there and raised the yields at this point.

Well, Hugh, let me hit the zero-basis collections first. I just feel compelled to hit that one first. The accounting goal really isn't to generate zero-basis collections; the accounting goal is to try to keep your NFR assets on your books as long as possible. So, personally, I view that as a bit of a victory, keeping NFR assets on the books longer. But your question is a good one, with regards to yield write-ups -- yes, we did move yields up. We moved them up to a nice extent in Q4; we have some dusted-off bankruptcy curves and did a lot of work in Q4.

And Q1 was just very strong, in terms of cash collections. So, we didn't so much, though, however, to your point, rely on any kind of excess cash from the legal side of the house based on this increased investment. In fact, from our perspective, we ended up taking quite a bit of amortization against that investment. So, I think our ability to peer inside these deals would tell us that this betterment that we saw in terms of just overall Q1 results was kind of separate and apart, likely, from this legal investment. So, we were pretty pleased with the deal performance, and accordingly wrote the yields up.

Okay, yes. Because I also noticed that in the core portfolio in the '09, '10, and '11 vintages, that you guys were continuing to move those higher. I realize that your goal is to set expectations very conservatively off the bat, and then raise them as you see their performance coming in. Would you assess those portfolios, especially like in the '09 and '10 vintages, as still being very conservatively booked? Or coming closer towards where you guys would view them as more market value, I guess, is one way to put it?

Of course, the answer is -- always, every time we book a quarter, we think that is the right place to be, right? But from our perspective -- let's put it this way, the deals are still tending to overperform our results. So, we are -- hopefully, we are narrowing that gap, however, between what is coming in from the operations group versus where the finance estimates are. So, we are certainly narrowing the gap. There is probably some more room to go somewhere, but we will have to watch over the next few quarters, especially in light of -- to the extent it's an older portfolio, maybe an '09 deal, that might have some legal benefit from the investments.

Right, right. Okay, good color there. And then, last question was just with regards to some of the color you gave about the location services -- was wondering if you could give us a sense of the magnitude that on a year-over-year basis that might have been down? Obviously, we have seen some improvements in the auto lending market, and then there was a lag there until yields started to see some benefit. But your outlook for that business as we look over -- for the rest of 2012?

Yes, our outlook is we have taken pretty strong steps to pare back our overhead there, and feel as though we really have cost containment at a strong place now. And the business has -- as much or more operating leverage in it than it ever has, when we are able to feed more revenue into it. So, at this point, it's really all about sales; our focus is on sales, and our expectation is that as those increased levels of auto finance work their way through the delinquency cycle and we start to see some more delinquency and repossession from that, that that business will benefit. But right now, it's bouncing along those lows created 18 to 24 months ago.

Yes. And can you talk about historically, what type of lag you have typically seen? And how we should be thinking about that, in terms of the financing change and the potential for improved placements?

We have never come through a -- while we have had the business, at least, come through a financing volume change like we have seen here. But in the past, we did deal with some client loss and turnover, and watched as the business turned around with new business coming in. And as I said, this is a business that does have a lot of operating leverage in it, and we can see pretty significant swings in revenue, and especially net income, once we get a little bit more volume going in. So, right now, we are very focused on trying to bring in that incremental revenue.

Thank you.

David Scharf, JMP Securities.

A few things -- I wanted to start off on productivity. Did I hear correctly that the total collector productivity, at least in terms of dollars per FTE, was just within 1% of last year?

Yes.

And obviously, there has been a substantial increase in headcount. Should we be thinking about the balance of the year being a net positive, relative to what we saw in 2011, based on what you have seen early on? Because I imagine there is still an awful steep learning curve that dampened Q1 productivity, yet it was still flat.

Yes, I think hours were up 21% or something, so it was pretty significant increase. And provided nothing crazy happens with attrition, those hours will be sustained for the remainder of the year. But I am very pleased with how we are coming, in terms of bringing people up the productivity curve, and I would expect to stay at least level with where we are at.

Okay, got you. Shifting gears -- the allowance charges, which were treated quite a bit this quarter, and I think there was a $500,000 reversal -- we went through a prior period of sustained sequential declines in allowances, and then they reversed themselves upwards. But is there anything in your internal modeling that is telling you we should be thinking about the gross level of allowances differing materially from what we just saw this quarter?

So, the allowance for the quarter was about a $500,000 charge; it was about $1 million of charge in [BK] in $500,000 reversal in core. So, using SOP 03-3 -- or I'm sorry, ASC 310-30, the new nomenclature -- really, allowances are something that we try to avoid. And I just think, though, that with the variability that occurs in this kind of interest method accounting, in this particular asset class, I think that there is something that they are always going to be there. I have been saying that for -- it seems like a dozen years. But they have been retreating, and hopefully we can keep them to a dull roar.

Okay, got you. And shifting to the legal investments -- last quarter, you positioned it as cash flow-neutral, right? I think about a $20 million increase in court fees, to result in $20 million of incremental collections. Obviously, with 40%, 45% amortization, it was GAAP dilutive. How should we think about this incremental $8 million on top of that? Based on the fact that you materially exceeded your modeling in the first quarter, would we be expected to see more than an $8 million and more than just a cash flow-neutral impact from this second round of increased investments?

So, Mr. Stern and I have had long conversations about this particular matter. And currently, our outlook is that even with this additional $8 million -- so, $4 million in Q2 and $4 million in Q3, this will still be cash flow-neutral for the year.

Okay. Still cash flow-neutral, which would imply, obviously, GAAP diluted?

Yes, likely so. But again, it gets really complicated, as you might imagine, going -- now that the program has started, and you start getting into the quarter -- and again, Neal already disclosed that he was some 20% above his expectations. So, it starts getting a little more difficult to give you guys any kind of feel, but it will still be GAAP-dilutive, likely based on whatever you had going into 2012.

Right.

But probably less so than we had thought in -- last quarter. So, if the range was, what? $0.30 to $0.50 last quarter, it would probably be towards the low end of that.

Okay, got you. Thanks so much.

Bob Napoli, William Blair.

The Mackenzie Hall -- when you guys bought that, I think you suggested it would be accretive. And I am just trying to understand -- is it accretive? And what are the plans there to ramp that up? It looks like you paid -- you had, what, $4.6 million of revenue. So, if you annualize that, about $18 million of revenue?

Yes. The deal was accretive. We were dealing with a number of one-time costs. We also, as we mentioned, had the implementation of a new dialer there, and so that was a less than optimal operating scenario for those guys. We anticipate that we are going to be able to ramp up their buying there nicely, and we are hoping that we are also able to help them accelerate performance for clients, so that we can attract additional fee-for-service businesses. We really view this thing for the long run, and it's our toehold into the UK. And we think, just like entering the bankruptcy market here a number of years ago, that over the long term as opposed to quarter to quarter, there is going to be some real interesting growth avenues for us there.

What are your -- what is your buying -- what did you buy there? What do you expect to buy this year out of the UK?

Bob, we never talk about buying goals. I can hit -- I should be able to hit any buying goal I ever give the public, right?

Right.

That we just write checks and make it happen. So, we are very reluctant to give you buying numbers. We would like to see us, certainly, step up what they have done there historically. It will be modest, based on where we are at or in comparison, at least, to our US activity. But we expect from it an absolute number, based on where they have come from historically, to step up the investment pretty nicely over time. And again, we will let you know every quarter what we are buying in the UK, and you can watch that develop. It's going to be small -- it's going to be a very small impact.

Is the market over there more competitive or less competitive, or about the same as the US market?

There is no lack of competitors over there, that is for sure. There is a number of well-established, well-performing competitors that seem to have a bunch of capital. But we also think that there is room for more competition, and that is why we are over there. And we think, relative to the size of the market, we can walk away with a decent piece of it over time.

Okay, moving on to other opportunities -- I think you guys have done some looking, some studying of the private student debt market. What are your thoughts on that market? There is obviously a lot of noise these days about looking at it from a regulatory perspective and bankruptcy and things like that. What have you done in that market, and what are your plans?

Well, I would characterize our efforts to date, or at least our recent efforts, as in the research point. We have -- over the years, we have bought a few student loan portfolios, so we do have some experience in the asset class, although not significant. So, we are trying to do a fair amount of homework at this point, talking to participants in that market, and trying to become as familiar with the nuances there as we possibly can.

Okay, thanks. Last question -- your return on equity this quarter was not unexpectedly below your target of 20%. Is 20% still a target for you guys? And if so, when would you -- when do you hope to be there?

Well, we had a big part of our arm tied behind our back with our investment in legal. And again, we are really trying not to manage this Company quarter to quarter. We are looking at the long term, we think that those investments we made in legal were very shrewd -- again, from a long-term perspective. And our goal to achieve and maintain a 20% return on equity remains the same.

Great. Thank you.

Mark Hughes SunTrust.

The 2010 paper seems to be performing quite well in the non-BK category, better as I look at it today than the 2009 paper did at a comparable point. Anything unusual there? Are they benefiting from the stepped-up legal investment, some strategy that is helping you harvest the newer paper better? Or is this just a good vintage?

Well, it's interesting -- I have to give you credit. You pointed that out some time ago, the 2000 tranche is performing quite nicely. I have Jim Fike here, who helps me do -- or actually does level yield for us, and then I review his work. And he was shaking his head when you were talking about the 2010 vintage doing well. So, there is nothing interesting there that I could point out for you. And specifically, though, with regards to the legal investment, probably a tiny -- well, I don't know if it's tiny, but a pretty small component of that on the legal side right now. But I just think it's going to be a good tranche, and we are just letting it unwind as time goes on.

Yes, and just going out to 2011, it seems like it's just about as good, it's 50 basis points less good, let's say. But it's right up there. And I assume there is nothing unusual about the 2011 paper at this point?

Yes -- no, right. And one thing I will make a comment, just in general, I think that the -- again, the accounting process, the level yield process, is a lot smoother, so to speak, with all these payments that Neal is generating, it provides a nice, smooth result, which makes it easier for us accountants to do our job.

And Neal's operational strategies have been evolving year over year. And so, these newer pools, I would say, are simply more completely benefited by those strategy enhancements over time. So, I think that is definitely a big piece of what you are seeing.

And so, time will tell whether it's an acceleration or a betterment, I guess, is --

We are always cautious that way, correct.

Yes. And then, one final question -- the communications expense was -- seemed like it was up more so than other expenses, other than legal. Is this a higher level it should stabilize at?

In Q1, I think you will find that our letter expense is always up. We -- tax time is the time of year for us to focus on letters. And so, that usually comes down sequentially.

Okay. Thank you.

Edward Hemmelgarn, Shaker Investments.

Are you seeing any, or you think there is still any hope of being able to purchase existing portfolios that are out there? As people are exiting the markets?

So, you are talking about resale?

Right.

We look at resale deals every quarter, every month; and as I commented earlier, remain optimistic that we are going to continue to see some nice opportunities there this year.

Do you think that the declining delinquency rate in credit cards, as the companies, the banks are very good about restricting the availability of credit cards for a number of years -- is that really having an impact as to what is available?

Well, at this point in the cycle, it doesn't seem to be having a huge impact. We are continuing to see pretty solid deal flow. Now certainly, in a volume -- or in a vacuum, as charge-off rates come down, there is ultimately less raw material in a short period of time that is being generated for debt purchasers. We have seen, I think, an offset to that through a number of competitors exiting the market over the last three years, so that is definitely going to be a different demand side of the equation as we go through this next cycle. And I would say the missing question is going to be what happens to new lending and new creation of those -- especially credit card accounts over time, in addition to what happens with other asset classes, such as student loans, if indeed that becomes a viable debt purchase market.

Okay, thanks.

David Scharf, JMP Securities.

Just one follow-up -- we haven't talked much about the overall macro environment, but the average payment size not declining this time around -- was this a reflection of anything purposeful on your part? In the past, you have obviously been extending payment periods, and we have seen some declines. Or was this something that surprised you during the quarter, and has given you any indications of perhaps a shifting collection environment?

It surprised me, only because it has gone down sequentially for such a long period of time; perhaps I got trained to expect some deterioration. But again, that deterioration was mostly something that was celebrated, because we were improving efficiencies, and that was allowing us to dial smaller average balances and reach down lower into our score bands. But in this quarter, with the number of payments increasing as it did, which was still amazing, any moderation in average payment size deterioration and being flat, it's extremely helpful. So, if that is sustained, it becomes quite a multiplying effect, and something that is very exciting.

Right, right. But obviously, we are all trying to call the bottom in terms of liquidation patterns. It doesn't sound like you are drawing any broad conclusions, though, about the consumer arguably improving?

No, that is one in a row -- we will see how we do next quarter.

Got you. Thank you.

Ladies and gentlemen, that concludes today's conference call. We thank you for your attendance. You may now disconnect your lines, and have a nice day.