PRA Group Inc (PRAA) 2013 Q3 法說會逐字稿

Thank you for joining Portfolio Recovery Associates third quarter 2013 earnings conference call.

Your host of the call today will be Steve Fredrickson, PRA's Chairman, President and Chief Executive Officer. Also on the call will be Kevin Stevenson, PRA's Chief Financial and Administrative Officer, who will comment on the specifics of PRA's results released today. Then, Neal Stern, PRA's Executive Vice President of Operations, will comment on PRA's collections experience in the quarter.

Before beginning, I would like to remind everyone that statements made by PRA on this call may constitute forward-looking statements under applicable Securities laws. All statements other than statements of historical fact are considered forward-looking statements. Including statements regarding PRA's or its Management's intentions, expectations, plans or projections for the future.

Actual events or results could differ materially from historical results or those expressed or implied in any forward-looking statements as a result of various risks and uncertainties, some of which are not currently known to PRA or its Management. These include the risk factors or other risks that are described from time to time in PRA's filings with the Securities and Exchange Commission, including PRA's annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K.

Now, let me introduce, Steve Fredrickson.

Thank you, operator.

Good afternoon. Thank you all for joining our call. I'm pleased today to provide you an update to our 2013 results. Following very strong quarterly results in each of this year's first two quarters, Q3 proved to be equally impressive with record quarterly revenue and earnings. Of particular note, contributions from our fee businesses were substantial and well above our expectations. PRA's quarterly results today reflect the success of our strategy to press the Company's many competitive advantages in the debt buying and collections market place, where we continue to find opportunity and see future growth.

Among the major selling banks, stringent compliance demands contributed to competitor attrition in the debt buying market, which in turn, has allowed us to make substantial investment in new portfolios of debt through the first nine months of 2013. This investment combined with our exceptional operating efficiencies and diversified business drove our current earnings and is expected to continue to drive future earnings.

Cash collections in the third quarter were $292 million, up 27% from the third quarter a year ago. Comparable with the growth rates of Q1 and Q2. Neal will comment on our collections experience in more detail later in our call.

Collections helped drive revenues up 31% to a record $198 million resulting in net income attributable to PRA of $47.3 million, up 42% and also a record. In a few minutes, Kevin will walk you through the specifics of our financial results released this afternoon.

PRA generated diluted earnings per share of $0.93 up 43% from $0.65 a year ago and adjusted for our stock split effective August 1, 2013. We again exceeded our goal of a 20% ROE generating an annualize return on average equity of 23.5% for the quarter.

In the third quarter, PRA continued to expand our investment in US and UK defaulted debt with $131 million in new portfolio acquisitions in the US and an additional $11 million in the UK. Of the US investment, 68% was invested in new core portfolios with the remaining 32% invested in bankruptcy account pools.

Our year-to-date investment totaling $557 million has now exceeded our 2012 full year purchasing of $539 million with one more quarter to go this year. Our trailing 12-month investment of $756 million speaks to our ability to take market share from competitors even as we drive record levels of profitability.

During the quarter, we participated in additional debt seller audits, which we believe have been precipitated in part by the reactions of the major sellers to the OCC's debt sale best practice guide. Based on the depth and breadth of these audits, we believe it's going to be difficult for many market participants to meet the new more stringent requirements being actively imposed by the major sellers. In conjunction with these audits, we are also seeing new purchase contract terms. Although the exact terms vary by seller, we have had top sellers prohibit resale of accounts, introduced percentage caps on judgments obtained and prohibit the offshoring of collections.

PRA is able to accommodate these requests with little to no impact in our business model, a position we do not believe many of our competitors will be able to replicate. We saw pricing in the third quarter remain competitive, for once again, it was relatively more competitive in bankruptcy receivables than in core receivables. Although volumes purchased at $142 million were down from the exceptional levels of the prior three quarters, they were up 38% from Q3 of last year.

In response to the growth of our portfolio, as well as the contractual terms I mentioned, we have signed a lease in North Richland Hills, Texas for a new 45,000 square foot call center facility, as we announced today. In a coordinated move, we discontinued the use of our call center in the Philippines. We had already discontinued our Panamanian collection operation. With our exit from the Philippines, 100% of our call center staff on US accounts is now based in the US.

We anticipate the new facility in the Dallas-Fort Worth area will be in production before year end and will eventually house 500 or more agents. Neal will have more for you on this in a moment.

In the UK, PRA continues to pace its buying as we gain confidence and enhance both our models and operating strategies. In the third quarter, PRA invested $11 million in UK core portfolios compared with $9 million a year ago. Our total investment in the UK year-to-date is approximately $17 million, up about 28% from the same time last year. We continue to view the UK as a great long-term opportunity for thoughtful prudent growth.

Our estimated remaining collections in the US and UK are now $2.7 billion, $1.8 billion anticipated from our core and UK portfolios and $900 million from our bankruptcy accounts. These collections will continue to drive our financed receivable revenues in the years ahead.

Revenue from our fee-based businesses was $26.3 million in the third quarter, up 78% from $14.8 million a year ago. We saw improvement in each of our US businesses with the exception of our auto business. Our government services business continued to benefit from a focus on sales and marketing, as well as expense control with solid gains in year-over-year revenue growth and more significant growth in earnings. As we anticipated in earlier quarters, our CCB business received a sizable $9 million fee during the quarter related to a single case.

We continue to be on track with our strategy of better filling our sales pipeline in order to build and level out revenue and earnings over time. However, this is a multi-year strategy for us. We expect for the foreseeable future that we will continue to experience significant quarterly and even annually fluctuation in results from this business.

CCB's financial performance and our call option exercise terms were such that in late September, we were compelled to exercise our right to purchase the remaining 19% of the business. After the formal closing tomorrow, we will own 100% of CCB.

Finally, we began in the third quarter an incremental $2 million investment in PRA location services or PLS, expanding its license plate recognition footprint with the addition of 3M cameras and technology. This expanded equipment rollout will continue nationwide over the next several months. Law enforcement and auto lenders continue to find value in PLS, which we believe can deliver solid profitability to PRA over time.

We also have hired a new team of industry professionals to lead our auto business. We believe that over the next year, PLS should begin to turn the quarter in terms of revenue and earnings growth.

These sweeping changes and restructuring efforts were driven by previous poor financial performance. That performance coupled with the loss of a significant client in Q3, put us in a position from a GAAP perspective to write off the goodwill on the books related to PLS. That amount was $6.4 million. This non-cash charge in no way diminishes our optimism about PLS becoming a leader in this industry. We are investing millions in hardware, personnel and facilities to be the preeminent force in the auto location business.

Now, I'd like to ask Kevin to walk you through our third quarter financial information released today.

Thank you, Steve.

As we discuss our financial results, the comparisons I make today will be between Q3 2013 and Q3 2012 unless otherwise noted. PRA had a strong quarter, revenues increased 31% while operating expenses increased at a slower rate of 27%. This led to a 42% increase in net income attributable to PRA and a 43% increase in earnings per share and a 40.2% operating margin.

Before I begin my review, I'd like to summarize some specific items that occurred during the quarter. First, CCB had an exceptional quarter, generating revenues that exceeded the prior quarter by $10.9 million and that exceeded Q3 of 2012 by $10.5 million. This increase was due largely to a single claim, as Steve discussed earlier. Our Q3 tax expense was favorably impacted by approximately $3 million in savings, primarily related to state revenue apportionment and other changes made in tandem with our 2012 tax return filings. We do not expect this large -- such a large change in future periods.

Our effective tax rate for the quarter was approximately 35%. We estimate that rate could increase to approximately 37% in Q4 and then 39% next year. On August 1, we completed our 3-for-1 stock split. On August 13, we completed the issuance of $287.5 million in convertible senior notes. We used the proceeds from that issuance to pay down our revolving line of credit and to repurchase $50 million of common stock. The excess proceeds reflected in our higher cash balance at quarter end.

The notes carry a coupon rate of 3%; however, for accounting purposes, we recorded the interest expense at a market rate of interest, which was determined to be 4.92%. This resulted in approximately $525,000 of additional GAAP interest expense during the quarter versus the amount we would've recorded based on the coupon rate.

Following the convertible debt issuance, we expanded our credit facility by $35.5 million, including the addition of three new financial institutions to the bank group. During the quarter, relative to our expense accruals, we increased the accrual for contingent earn out consideration by $1.1 million, related to our Q4 2012 NCM deal, simply due to its better than booked performance. We had previously accrued an additional $1 million in Q2 of 2013.

We increased our litigation accrual by $1.9 million based on the current status of our legal matters. Given the strong performance PRA's generated during 2013, we increased our 2013 annual bonus pool accrual in Q3 by $3.5 million relative to Q2 2013.

Lastly, Steve's already discussed the $6.4 million non-cash goodwill write off of PLS. I want to reiterate that this decision was based on accounting methodology and does not diminish our optimism about PLS and its future. Consider our action plan relating to PLS, we are investing more than $2 million in hardware and support for new camera systems. We are investing in new integrated skip tracing platform to replace our aging system. We've hired a team of industry experts to build the new PLS.

Writing off the goodwill was dictated by GAAP. While we certainly agree with the application, we recognize that it seems somewhat incongruent with our optimistic view of the future. Also I've already received a question about EPS. This charge resulted in an $0.08 per share EPS impact, so roughly $4 million.

Now on to the review of our income statement and balance sheet. Cash collections on financed receivable portfolios increased 27% to $291.7 million. Payments from bankruptcy accounts were up 32% to $120.6 million, or 41% of cash collections. Call center and other collections were $89.5 million, up 24%. Legal collections were $81.6 million, up 24%.

Revenues increased 31% to $197.8 million, including $171.5 million in net finance receivable or NFR revenue and $26.3 million in fee revenue. NFR revenue for the quarter was comprised of $115.1 million in core portfolio revenue, including our UK operation and an allowance reversal of $4 million. Net core portfolio revenue increased 30%.

NFR revenue also included bankruptcy portfolio revenue of $56.4 million, net of an allowance charge of $1.4 million. Net bankruptcy portfolio revenues increased 24%. During the quarter, yields increased on all quarterly domestic core pools originated from 2009 through 2012 with one exception of Q1 of 2010.

For the bankruptcy portfolio, yields increased on all 2009 pools. For 2010 and 2011 pools, yields increased in all but two of those quarterly pools. Yield also increased on one 2012 bankruptcy pool. Fee revenue increased 78% to $26.3 million driven largely by the increased income generated by CCB. Revenue also increased at our government services businesses but decreased in our location services businesses.

Moving onto expenses, operating expenses were $118.3 million, up $24.8 million, or 27%, due primarily to increases in personnel expenses, legal collection costs and fees and the goodwill charge, which again does run through operating expenses. Personnel expenses increased $11.5 million, or 28%, due largely to staff size increase and as well as the cash bonus accrual I mentioned earlier.

Legal collection costs and document costs increased to $19.8 million from $15.8 million. We intend to spend approximately $20 million in legal collection costs and documents in Q4 2013, bringing our full year 2013 expense to approximately $83 million. Neal will provide additional comments on our legal collection strategies.

As result of our strong revenue increase, coupled with controlled growth in operating expenses, PRA's operating income increased 39% to $79.5 million, which again includes the goodwill charge. Operating margin was 40.2% for the quarter, up from 37.9%. Net income margin was 24.9% for the quarter, up from 22% a year ago and 23.7% in the second quarter.

Moving on to the balance sheet, cash balances ended the quarter at a $108.7 million. These balances increased due to funds received from our issuance of convertible notes in August. The NFR balance increased to $1.26 billion, up from $974 million. The NFR balance with the amount of unamortized purchase price of acquired debt portfolios recorded on our balance sheet.

Principal amortization of finance receivables otherwise known as payments applied to principal, including net allowance charges was 41.2% of cash collections compared with 40.7%. Zero basis collections were $8.8 million during the quarter.

Turning now to liabilities, our debt-to-equity ratio at quarter end was 55%, up from 37%. Debt-to-equity ratio including net deferred tax liabilities was 80%. Borrowings totaled $452.2 million at quarter end and consisted of $255.8 million in convertible senior notes and $196.4 million in other long-term debt. Please note, the convertible debt is recorded at a discount and will be accreted its notional amount based on the aforementioned difference between the coupon rate of 3% and the GAAP interest rate of 4.92%.

We had no balances outstanding under our revolving credit facility at quarter end. Availability under the revolving credit facility, subject to borrowing and collateral provisions was $435 million. Net deferred tax liabilities were $200.1 million at quarter end compared to $186.5 million a year ago. With proceeds from our convertible senior note offering, we repurchased $50 million in PRA stock in the quarter. At the end of the quarter, we had $19 million remaining available for repurchase under PRA's Board approved program.

Now let me turn the call over to Neal for his review of our third quarter collections and operations results.

Thanks, Kevin.

As I discuss third quarter results and operations, I'll be making comparisons with results from the third quarter 2012 unless otherwise noted. Our third quarter results remained in line with the trends from the last several quarters. The in the US, we received just under 2.6 million payments which represented a 22% increase over the prior year. Our average payment size increase by 3%, which was worth almost $13.8 million more in cash collections.

Call center productivity improved by 12%, and legal collections increased by 24%. These results reflect our long-term focus on being a compliant, patient and effective collector. The group of accounts making regular monthly payments to us has been expanding, as result of increased buying, improved operational efficiencies and most critically, our staff's ability to identify affordable repayment plans.

Those negotiations can be delicate and nuanced, but ultimately prove to be among the most crucial things we do. With that in mind, PRA, in the third quarter, made the decision to cease all offshore collection activities for our US accounts.

This decision was the result of a number of factors, including our observations of total net effectiveness over time. But the primary driver of the change was the decision from some top sellers in the US to prohibit offshore collections on accounts they sell. While this was alluded to, as a best practice in the OCC's memo from earlier this year, we are now seeing it appear as a condition in some sales contracts.

Rather than attempt to construct a strategy by which we would segregate accounts. Our offshore collections are prohibited from accounts where sellers have not yet made such a requirement. PRA decided to discontinue all offshoring of US collections, which for us was a minimal part of our overall strategy. As a reminder, our offshore strategy was limited. We had about 140 collectors in the Philippines. The work they were doing was confined to our very lowest scoring accounts and segments of our Spanish-language portfolio.

The work associated with our lower scoring accounts was simply reduced or eliminated. The work on the Spanish-language segment of the portfolio was transferred to our bilingual agents in our domestic call centers. As Steve mentioned, we announced today our plans to open a new call center in North Richland Hills Texas and the Dallas-Fort Worth area. But we believe we'll be able to higher additional bilingual collectors to help us to properly staff for that growing segment of our portfolio, and more importantly, to staff, appropriately relative to the increased buying trend we've seen over the year.

Our new center, together with our others in Las Vegas Nevada; Hutchinson, Kansas; Jackson, Tennessee; Birmingham Alabama, and Norfolk in Hampton, Virginia will give PRA what we believe is the best and most effective domestic collections workforce in the industry. We'll provide a total of more than 2,300 jobs in 2014. While collecting in the call centers has been and remains our most preferred option for core collections, there is a relatively small subset, about 5% of our domestic core of account base, that we believe can but won't pay us voluntarily.

After months of attempting to resolve the delinquency via phone calls or letters, those accounts are selected for legal collection activity. The level of increased investment in this channel that we began in 2012 has continued to perform above our expectations to deliver at least a 200% return while recouping investment cost within 6 to 8 months. As a result our level of investment in legal channel each quarter in 2013 has been maintained or modestly expanded. We expect to see relatively similar investments in the final quarter of the year.

During Q3, our internal legal collections increased over the prior year by 30% and external legal collections grew by 21%. Those results reflect our ongoing desire to call our use of external law forms and control as much of that process as possible with our own staff so as to capture margin, improved effectiveness and deliver maximum compliance oversight. To accommodate this expansion as well as our steady conversion from external to internal legal operations, we've expanded our Norfolk campus by another 30,000 square feet, primarily to handle legal support personnel.

Finally, PRA UK was pleased to accept a credit excellence award in compliance for 2013 from Credit and Collections Risk magazine. Our work in the UK during the third quarter continued to yield promising collector productivity results. Our modeling and segmentation efforts are now delivering more predictable and reliable outcomes that are allowing us to confidently add staff and increased purchase activity as we grow that business in the most reliable way toward our longer-term goals.

Now some final comments from Steve.

Thank you, Neal.

As we have discussed, our financial results this year have been exceptional, a fact not lost on Fortune Magazine, which ranked PRA among its 100 the fastest growing companies in 2013. This year PRA also moved into top 20 of Forbes Best Small Companies in America. We placed in Forbes annual ranking for each of the last seven years. More importantly, however, is your recognition of PRA long-term value that we find most gratifying. I thank you for your continued investment in PRA and your continued confidence in our ability to grow and deliver value to shareholders.

Our operator will now open the call to your questions.

(Operator Instructions)

David Scharf, JMP Securities.

Steve, first question, this is the second quarter in a row after years, where you actually said the average payment size increased. I think you said it was up 3% this quarter, up from 1% last quarter. I guess a couple questions, one is just, what are you seeing? Are there any kind of macro consumer behavior employment conclusions we can draw? Secondly, is the increase in average size been disproportionately coming from a couple vintages?

This is Neal. So I would say the -- there's a number of factors. It's impossible to say it's this or that. But one that comes to mind is our increased legal activity. That tends to generate an average payment size. I'm sure it's impacting the overall number. In terms of the vintages, you would probably look back to the vintages that are a couple years old, where legal activity is having its most impact. We don't sue anyone out of the gate. We put them in our call centers until there's a pretty good lag there. So it's probably having a modestly outsized impact of vintages from a couple years back now

Okay. So we shouldn't read anything into this in terms of just consumer behavior or any macro conclusions? It's all probably legal channel driven.

I can't say -- it was steady and average for a long time. We're very encouraged. Any tiny uptick in payment size has a really outsized impact. This 3% was worth just under $14 million. That's not just confined to legal. That's coming from a number of different sources. So it's a good sign and if it continues it will be great.

Got it. Staying on the legal channel, you had mentioned that the investment in recent quarters has been pretty consistent. Can you just remind us on a dollar basis, what we ought to be thinking about for the fourth quarter, which you said would be similar to Q3?

$20 million.

Got it. Then lastly, just on the purchasing side. It was a step down in Chapter 13 purchasing, obviously, bankruptcy filings -- Chapter 7 and 13 are down year over year. Was this sort of an anomaly, a breather or in general, should we be expecting much lower levels of BK purchases going forward?

Well, as we commented, we are still in a competitive market on the bankruptcy side. So what you observe in our purchases for any period, certainly reflects whether we are winning a little bit more or winning a little bit less of the offered pools. In Q3, I'd say the tide just went away from us a little bit. So you saw a decrease in realized purchases there.

Got it. Then just one more, on the competitive front, I mean you've mentioned for a while that the new regulatory pressures are driving some out of the business, going to make it tougher for others to compete. Just reflecting on this past quarter, did you have a sense for whether there were clearly fewer bidders out there on the deals that you actually closed on?

Yes. I think our sense, again, this is going to vary by seller and where they are at in the process of, I would say, adapting their sales process to what we've seen out of the OCC. But overall, I'd say we are competing against fewer participants. With some sellers it's more pronounced than with others.

Got it. Okay, thanks very much.

Sameer Gokhale, Janney Capital.

Just to follow-up on that question about purchases. For core customer debt -- I'm sorry if I missed this in your comments, but when you look at the core purchases, they were down slightly compared to Q3. I would've thought that given that one of your large competitors is still largely out of the market, like this would've been the one quarter where you could've really pulled out all the stops to buy as much paper as you could on the core side, recognizing that on the BK side, it seems to be a lot more competitive. So can you just provide us a bit of flavor for that? I mean what happened there? Is it just an issue of this -- the supply just isn't there until we see some large sellers coming back into the market? Or just some perspective on that would be helpful.

Sure, Sameer. There's certainly more than two of us continuing to compete in the market. Again, depending on which seller we are talking about, there's still a good number of competitors. So it was just one of those cases where I guess like bankruptcy, we hit on a few less deals this quarter. Part of what we are trying to do is make sure that we aren't pushing the market further than we would like. That's not an exact science. So we are always trying to buy as intelligently as we can. As a result, sometimes you lose transactions.

That's good color. I was trying to get a sense for -- you had said earlier I think that it seems like some of the smaller competitors are facing more challenges, which it clearly makes sense. That's what we've believed for a while too. But it just seems like at this point, given all the new regulatory requirements, the market became very concentrated. Maybe they are what? Maybe four of you guys at the very top of the food chain and everyone else is a lot smaller. So it would seem that if you take one of those four out of the equation, then you are left with three other companies. That was the context I was asking? But it's possible that some other companies got more aggressive with their purchasing. It sounds like that was what was going on.

Yes. I think the other thing is, Sameer, in thinking about purchase levels year over year, we did say we're up almost 40% year over year. Certainly comparing things to Q1 or Q2 of this year, I think, is a tough comparison. It was just pretty exceptional purchasing levels. So I think we saw a little bit of a normalization of volumes, together with missing on a few deals and that's what happens. The volumes just bounce around a little bit.

Okay, that's helpful. Then, the other question was related to the contracts. Can you give us a sense of what percentage of contracts, it required onshore collectors or US-based collectors versus those that were okay with offshoring? Then what were the nuances, you had mentioned some of the things there. But is there a certain age of paper that they would rather not have collected offshore? Or what types of paper are acceptable from onshore versus offshore from that perspective? What kind of flavor can you give us there?

Yes. I don't think we saw any differentiation in terms of age or type of paper. It's really driven more by a particular seller. I think where the sellers are in their review and adaptation of the OCC's guidelines. To answer your first question, we have seen a couple of sellers that are requiring the contract terms that we discussed regarding offshoring.

Okay. Then maybe one for Kevin, on the litigation reserve. Kevin, did you say you had expenses this quarter of $1.9 million related to incremental reserve building for litigation?

Yes, that's correct.

Okay, that is helpful. Then just lastly, in terms of the fee revenue, you talked about the $9 million from the single case -- the large case and fees you got from that. I thought originally you had said $6 million plus. Certainly $9 million is more than $6 million, but was there anything else that happened related to that claims case that was different from your original expectation? It just seemed that number was significantly higher than your original expectations were.

Yes. No, definitely. It was really a function primarily of not being able to exactly predict how these things are going to come in. It just turned out to be a substantially larger payout, as the trustee worked through the settlement formula, than we'd anticipated.

Okay. It looks like an early Christmas present. All right. Thank you, that's all I had.

Thank you

Hugh Miller, Sidoti.

I was wondering if you could -- obviously, we saw a tremendous strength in the fee based businesses. But just as a housekeeping question, I assume that there still was some fee-based business margin dilution. If you could just give us a sense of where that stood?

Yes. So it was about 220 -- 225, 227 -- 227 basis points dilutive.

Okay. You talked about caps on settlements that you can -- for some of these new contract terms. Can you give us a sense of how far off you guys are from those caps, in terms of the level of settlements that you're achieving at this point?

So, I think the cap you're referring to was on the number of judgments that would be obtained in any given pool?

Correct.

Yes. Okay. So we have not felt a lot of pressure there. Our -- again, our model is different. We don't sue out of the gate as a -- on a rate base, it's a very small percentage of our portfolio in the legal channel. So that sort of request is fairly easy for us to accommodate. Our models are very precise at this point.

So you would say that you have got plenty of room between where those caps would hit?

It's hard -- plenty is a tough word. It's hard to say -- pools are changing all the time. The composition of any one pool at any one point in time, could make that interesting. But it's harder to imagine that being a problem for us, I guess.

I think though, the most significant issue is, we know about whatever these requirements are going to be up front. That's built into our purchase price. So it's not a case of these contract requirements being applied retroactively to already owned portfolio. This is all being valued and priced as we look at these new deals.

Sure. No, I can certainly appreciate that. I guess my question is, if you start to come up towards the cap rates, at some point then I guess you'd have to make a decision on not only is this a customer who is able and unwilling to pay us. But is this the best use of our dollars relative to someone else who may be even more worthy to repay. Just because you would, at some point, be limited in exactly who you could sue? So is that your -- is your analysis going there?

No, we know exactly what you mean. That's why we think terms like this actually play to our strengths. I firmly believe that we can model the behavior of a customer in a legal environment better than anybody. That's going to be a huge competitive advantage, as you have only so many of those legal chits to use in any portfolio.

Okay. Given kind of the potential for further industry consolidation on the horizon, how do you guys foresee kind of some of the changes in portfolio resales? For example in California, how will that likely play into the equation in your opinion?

I think we've said before, it will be more difficult to do a resale after January 1, with the California law mandating that there be direct access or contractually guaranteed access to the documentation from the original creditor. So, hard to say, but I would predict it's not going to enhance that marketplace.

Are you seeing any pools coming about in the fourth quarter now ahead of that rule change that you could be buying?

First of all, we are not the most active participants in the resale market. But even that being said, I don't think that we would say we see anything that we'd characterize as unusual volume in resale that looks to be getting ahead of that.

Okay. Then I guess the last question on the purchasing side, is obviously, you guys are maintaining a higher level of cash than you normally would, given the lighter purchasing than maybe some were expecting in the third quarter. Can you talk about the ability for you to quickly to deploy that? Also are you seeing kind of a greater than kind of seasonal pickup in fourth quarter supply coming to market?

The cash is primarily sitting there because of the convertible debt deal that we did just a couple months ago. So we anticipated that we're probably going to run with a little bit more cash than usual. It's not burning a hole in our pocket. We are going to, I think, have plenty of opportunity to deploy it over the kind of medium-term horizon. That's why we went after that capital raise. From a Q4 outlook perspective, I think we see a more normalized market as opposed to the really hyper buying market that we saw in the first couple of quarters. For a while now, we haven't seen the big year-end rush to sales that we saw some time ago. I think Q4 is going to be a relatively normal quarter from a buying perspective.

Okay. Very good color there. Then the last question I had was with the loss of the client in your location services business, can you just talk about kind of what might be driving that decision? How should we be thinking about that in terms of kind of a revenue headwind? Obviously you guys have given your outlook on the longer-term power of that particular subsidiary. But in the near-term, how should we be thinking about that?

From a macro PRA perspective, I don't think you're going to notice it. It's not just not a big enough piece of things that you're going to see an effect net net.

Okay. Thank you very much.

Bob Napoli, William Blair.

Another question on the competitive environment. You mentioned some of these contracts excluding the ability to collect from outside of the US. I think a couple of your large competitors also maybe outsourced the collections almost totally to agencies -- use an agency kind -- whether it's in the US or outside, but the agency in the US. A couple of your non-public competitors might be more active in that area. Is there any exclusion from outsourcing the collections to agencies in that? Have you seen any change in competitive actions based on that?

I haven't seen a prohibition against outsourcing. But outsourcing does come with a new caveat that is to really audit very heavily. So the burden on people who have a big outsourcing model is going to be really significant. They're going to have to be there very frequently and have a very deep understanding and approval of all the actions that outsourcer is undertaking. For us, it's part of the impetus to move from an external legal model to an internal legal model. There's other reasons, as we've discussed but that's definitely part of it.

Okay, thanks. The UK business just as I understand it, you're looking at this over the long-term and growing the business in a very gradual basis. It does seem like there's a pretty good opportunity over there. There was an IPO company in your space. Obviously, Encore bought Cabot in that market. Have you -- how developed is your strategy there? It seems like there's different -- more pools of different types of paper maybe that make more sense in that market. There are companies that provide better purchasing performing paper versus nonperforming paper, larger balance, smaller balance. Are you essentially looking to do there what you're doing here? Or how are you acting differently in that market? How are you seeing that opportunity unfold for you?

I think long-term, we like the expertise that we've built here and think that it really helps provide a defensible value over time. So that being said, our approach in the UK is to be an entity that can take nonperforming assets and convert them into performing assets. Again, that's where we think our shareholders are going to get paid well over the years. We are less interested in big purchases of paying pools, where perhaps there is a financial play in -- cutting the rate on the DCA's down from one number to a lesser number and extract some cash as a result. It's a good way to deploy capital, but at the end of the day, we don't know how much expertise is really being built there. We are much more about, as I said earlier, the former strategy and being somebody that can convert non-paying accounts into paying accounts. Long-term, we think that's a big opportunity in the UK.

Now, you did buy more this quarter. Are you getting into a more consistent flow in that market? Or are you still kind of in the buy and test phase, if you would?

I would still characterize us overall as more in the buy and test phase than anything. Although, we are advancing our models pretty well. We are -- I'd say making some real advances on our modeling. Neal, working in tandem with the operational guys in the UK, have really been able to sophisticate how we're using our workforce over there. How we are using predictive dialers and other collection metrics. So we've really come a long way from where we began over there.

Great. Then last question. Just -- obviously with the capital you raised, you have a lot of liquidity right now. I know you like to run with a strong balance sheet and feel that serves you very well over the long-term. But I just wondered with that much capital available to you, if -- you've been slightly acquisitive here or there. Are you interested in -- on the corporate acquisition side? If you were to be -- I'm sure you're looking and you always are looking. But are you looking more intently? Or is there strategically are there areas geographically or products that you may have interest in over the next couple of years?

I'd say that we are interested in continuing to seek opportunities that provide both geographic and product diversification for us. But having done our first acquisition 10 years ago or so now, we also realize that you've got to live with them and operate them over time. So we want to be very careful about where it is we pull the trigger and how it is we get involved with any acquisition. So we are going to be pretty cautious about the whole process.

Great. Thank you.

(Operator Instructions)

Mark Hughes, SunTrust.

Could you talk about the margin impact of the $9 million fee. Was it more or less profitable than your typical fee income?

It would be more profitable than our typical fee income.

I mean can you say how much it dropped to the bottom line?

Yes, most of it.

Right

The work on this thing was done years ago. That's really the formula in that CCB business. You do the work and then you sit and wait for the fee to be paid out. Generally, we are being paid on a contingency basis. So, to Kevin's point, virtually everything dropped to the bottom line.

In this quarter.

In this quarter.

Does the non-controlling interest, the $1.9 million, is that an offset to that?

The 19% -- yes. It will be -- it will come out of the NCI line in the income statement. So it will be taken out of the net income attributable to PRA. Yes.

Right, okay. So you would be pretty much all that, less roughly $1.9 million

Yes.

Okay. The bonus catch-up in the quarter, will that be elevated next quarter? Or would one think that will drop back to a more normalized level?

That's a good a question. Yes. So, the $3.5 million I gave you in Q3 again was relative to Q2s run rate. I think the delta -- I ran the math, it was like another $1 million in Q4. So it's not $3.5 million, it's $1 million in Q4.

Right. It drops back to $1 million?

Yes. Again, relative to Q2.

Right, okay. So it's down.

Yes.

$2.5 million sequentially.

Yes.

Okay. Then, Neal, do you feel like you've been restrained from a capacity standpoint? You talk about the closing of Philippines et cetera. Not necessarily working lower performing accounts. You bought a lot of paper, now you're increasing capacity in Texas, but you haven't -- I presume, increased capacity much. Has that been any kind of restraint on your ability to collect?

No. So, just a quick review of what we gave up in the Philippines. The majority of the work that was being done, the bulk of the collectors were working on very low-scoring accounts. While it provided some good news in the short term, the total net return over the longer period of time was virtually nothing. So we really didn't feel like we gave up a whole heck of a lot there, over the longer term. The Spanish-speaking part of the portfolio, is a very small percentage of our collections, 2%. So it was easily accommodated by the folks that we have here domestically. The Dallas center is opening. As I tried to stress, more as a result of the giant purchasing that we've done in Q1 and Q2.

That trend was so significant and we feel good about the future and what the marketplace is doing in contraction of other competitors. So that's really the driving force behind the Dallas expansion. If we had a choice on where to expand, it's great to be able to expand somewhere where we think we can find more bilingual collectors, because we think that part of the portfolio will continue to expand at sort of an outsized pace. But to answer your question most simply, no capacity concern, feel good about capacity. Our models are better than ever. We feel very good about our ability to handle whatever the acquisitions folks throw our way.

Right. Where you did win deals this quarter, how was the pricing on those deals relative to prior trends?

I'd characterize it as fairly steady with what we've seen over the last few quarters.

Okay. Then the -- you talked about a couple of sellers that are prohibiting offshoring. Were those significant sellers? What proportion of the market do they account for?

Yes. They are significant sellers.

Then any particular number you want to throw at us -- one-third, half, one-quarter? Less? More?

The sellers are in and out of the market. I don't know that we can pin a number on it. But I'd characterize them both as kind of top 10 names.

Okay. Then you had, I think, talked about a couple of particular sellers. Could you give us an update on where they are in their process? If there's anybody still out there that is working through that process and expected to come back?

Yes. The various banks are in different places. We do believe that there are some participants that have been out that are close to coming back. There's others that are probably more of a long-term in that process. I think all of them are working at understanding exactly what the OCC and the other regulators that care about debt sales are looking for. I would firmly expect that there is going to be a little bit of ebb and flow on the part of the big sellers as they come to grips with the future of debt sales and what it means to their processes. So I think it's going to be a -- I think it's going to be a journey for everybody here for the foreseeable future.

Then a final question. The Texas facility, how much will that increase your collections capacity? Can you throw a number at us?

Is got capacity for 550 employees.

What's the total employee count now?

3,200.

Total. Collectors --

Collector seats?

Collector seats is probably about 2,000. Did you hear that Mark?

I did. 2,000. Then the new collectors in Texas, I'm sorry, how many?

It has capacity to 550. We are starting with 150.

Okay. Yes. All right. I think that's it. Thank you very much.

Thanks.

David Scharf, JMP Securities.

Just one quick follow-up, the increase in the litigation reserve, I assume that's for the tax matter?

No, it's for just various kind of normal litigation stuff that we accrue for on a quarterly basis.

Okay. Got it. Can you give me a flavor for kind of what is been for the first couple quarters of the year, relative to the $1.9 million?

We are up $8.6 million right now. Something like that in total, or $8.9 million in total reserve. That's the total bucket that we've accrued to so far. I think it was -- so it was $1.5 million last quarter --

Okay. So it was nothing out of the ordinary?

No.

Got it. Thank you.

Thank you, sir. Thank you, ladies and gentlemen, that does conclude the Q&A portion for our call. We'd like to thank our host for today Mr Fredrickson, Mr Stevenson and Mr Stern. That does conclude Portfolio Recovery Associates' third-quarter 2013 earnings conference call. You may disconnect your lines at this time. Have a great day.