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Portfolio Recovery Associates, Inc. (NASDAQ:PRAA)

Q4 2012 Earnings Call

February 13, 2013 6:15 p.m. EST

Executives

Steve Fredrickson – Chairman, President and CEO

Kevin Stevenson – CFO and Chief Administrative Officer

Neal Stern – EVP, COO

Analysts

Hugh Miller – Sidoti & Co.

Bob Napoli – William Blair & Co.

Mark Hughes – SunTrust Robinson Humphrey

Edward Hemmelgarn – Shaker Investments

David Scharf – JMP Securities

Operator

Good afternoon. Thank you for joining Portfolio Recovery Associates Fourth Quarter 2012 Earnings Call.

Speaking to you today will be Steve Fredrickson, PRA's Chairman, President and Chief Executive Officer; Kevin Stevenson, Chief Financial and Administrative Officer; and Neal Stern, Executive Vice President, Chief Operations Officer. We will begin with prepared comments then follow up with a question-and-answer period.

Before we begin I'd like to everyone to please take note of PRA's Safe Harbor language. Statements on this call which are not historical including Portfolio Recovery Associates' or management's intentions, hopes, beliefs, expectations, representation, projections, plans or predictions of the future, including with respect to PRA's future portfolio's performance, opportunities, future revenue and earnings growth, future cash collections, future space and staffing requirements, future productivity of collectors and future contributions of its subsidiaries to earnings are forward-looking statements. These forward-looking statements are based upon PRA 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 PRA. 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 PRA's filings with the Securities and Exchange Commission, including but not limited to its annual reports on Form 10-K, its quarterly reports on Form 10-Q, and its current reports on Form 8-K filed with the Securities and Exchange Commission and available through PRA'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, PRA cautions you not to place undue reliance on any forward-looking statements which speak only as of the date thereof. PRA 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 PRA's expectations with regard thereto or reflect any change in events, conditions or circumstances on which any such forward-looking statements are based in whole or in part.

Now, here's Steve Fredrickson.

Steven Fredrickson

Good evening and thank you all for joining us. Today PRA is pleased to report record operating results for the fourth quarter and full year 2012, an exceptional concluding quarter to an equally exceptional year. Our results once again demonstrated the strength of PRA's business model focused on diverse revenue and earnings from our bankruptcy business, our core debt purchase and collections operations and our business in government service subsidiaries.

As we ended 2012, our record results coincided with the substantial strengthening of our financial position as we entered into a new $600 million credit facility and acquired new bankruptcy assets and investment expertise from National Capital Management or NCM. Today PRA is in an excellent position to continue to grow and prosper during 2012 and beyond. Let me take you through highlights of our record Q4 and full year results.

Cash collections including those in the UK were $229 million, up 27% from the fourth quarter of 2011 and up 29% for full year 2012 to $909 million. Revenues were up 31% year-over-year to a record $154 million during Q4 and increased 29% to $593 million for the full year. Net income increased 35% year over year to a record $35.8 million, translating into diluted earnings per share of $2.10 compared with $1.54 in the fourth quarter of 2011. For all of 2012, net income grew 26% to $127 million and earnings per share grew 26% to $7.39.

Return on equity of 20.6% exceeded our 20% benchmark in Q4. For full year 2012, I'm pleased to report that return on equity rose to 19.6% from 18.5% in 2011. In Q4 we acquired $1.9 billion in face value of finance receivables for a total purchase price of $199.1 million including $69 million purchased from NCM. These receivables were purchased at 104 defaulted debt portfolios from 19 different sellers. Pricing remained very competitive in Q4 as it did throughout all of 2012.

In the UK our debt purchase activity continued to be focused on smaller niche opportunities with 10 portfolios purchased in the quarter for a total spend of GBP1.6 million or $2.6 million. We continued to deliberately pace our buying activity as we build and calibrate models and operating strategy.

For full year 2012, total portfolio purchases were a record $538.5 million with a total face value of $6.2 billion. Our expanded focus on legal collections from customers who can but won’t pay their debt continued to produce strong results. Legal collections totaled $65.5 million in Q4, up 49% over the fourth quarter of 2011. Although our legal collection expenses in Q4 were substantially above the same period in 2011 due to our significant build-up in 2012, these Q4 expenses were lower than in Q3 2012 by 3% or approximately $700,000.

Our bankruptcy business continued to grow and comprised 40% of our total cash collections in the fourth quarter. In Q4 collections from purchased bankruptcy portfolios totaled $91.1 million, a 21% increase from the fourth quarter 2011. Our purchase in Q4 of most of NCM’s assets and operations together with the hiring of a majority of NCM employees was a very exciting transaction for PRA.

We’ve always viewed NCM as a well-run organization. During the past decade NCM carved out a strong competitive niche in the market for secured bankruptcy portfolios, primarily automobile loans. This acquisition not only gave us a large existing pool of seasoned accounts, it also provided us entrée into a new class of bankruptcy receivables that expands our addressable market by 10% or more. As a result, we have begun to close on several follow-on opportunities this year in the secured bankruptcy market.

My congratulations and thanks to PRA’s Bankruptcy Services President Mike Petit and his team for the enormous amount of hard work they put into underwriting and closing this transaction at yearend 2012. We’re also pleased to have former NCM employees on staff as we continue to grow our bankruptcy business.

Turning now to our fee-based businesses, we experienced a modest increase in fee income in Q4 both sequentially and year over year. However, this increase was entirely due to our UK-based contingency collection business acquired in January 2012. As we announced in Q4, Steve Roberts, a long-time marketing and operations executive at the public and private companies, is now leading our US fee-for-service business. He has begun to refocus each business in such a way as to accelerate growth in revenue and profitability and to make the meaningful contributors to PRA once again.

We’ve initiated plans to acquire an additional 19% interest in our Claims Compensation Bureau subsidiary this year. Since acquiring 62% of CCB in 2010, results have been uneven due to the timing of major class action settlement payouts, and 2012 was a poor year for this business. However, we expect that 2013 will be a stronger year for CCB and we anticipate that a single large case may generate approximately $4 million to $6 million in fees during the first half of 2013. The purchase of a larger interest in the company is priced advantageously due to look-back pricing formula and will allow us to participate more fully in the anticipated large fee in the first half of the year.

In the UK, new client business and increased allocations from existing clients in Q4 drove a second consecutive quarterly increase in new contingency accounts. Inflow from direct issuer clients increased for the third straight quarter. Additionally, two major debt purchase clients restarted volume allocations in Q4 with purchaser client inflow increasing quarter on quarter for the first time in 2012. In Q4 our UK business was successful in winning the prestigious Credit Today Consumer Debt Collection Agency of the Year award. The award has been very positively received by our clients, potential clients and sellers.

Finally, regarding our share repurchase program, we made very minor purchases here in Q4. However, we continue to closely monitor market conditions for the remaining $77 million available under the program.

Next, Kevin Stevenson will elaborate on our Q4 financial statements, Neal Stern will have an update on operations, and then I'll have some closing comments before opening this call to your questions. Kevin?

Kevin Stevenson

Thanks, Steve. The quarter-to-quarter comparisons I'm about to make are between Q4 2012 and Q4 2011 unless otherwise noted. Also you'll recall that our UK business is acquired in 2012, thus the results of the UK operation are included in PRA's 2012 financial statements but not in our 2011 statements.

As Steve noted, Q4 2012 was an exceptional quarter. Cash collections, revenue and net income grew 27%, 31% and 35%, respectively. Our net income margin was 23% for the quarter and 21% for the year. Since going public in 2002, PRA has delivered a 20% net income margin every year except 2008 and 2009 while net income margins were still north of 16%. We are very proud of this performance. Let me now move to some specifics in our financial statements.

Our Q4 revenue of $154.3 million is comprised of $138.1 million in net financial receivables, or NFR revenues, and $16.2 million in fee revenue. Financial receivable revenue for the quarter was comprised of $93 million in core portfolio revenue including our UK operation and net of an allowance reversal of $2.1 million. Net core portfolio revenue increased 46%.

Bankruptcy portfolio revenue was $45.1 million net of allowance charge of $4.3 million, the vast majority of which was recorded in the Q4 2007 through Q3 2008 pools. Net bankruptcy portfolio revenue increased 16%. Fee revenue of $16.2 million increased 5% with our UK operation driving that increase. Fee revenue accounted for 10% of the company's revenue.

Operating expenses for the quarter increased on pace with our revenue growth at 31%. Operating expenses included a $9.1 million increase in personnel related expenses, $8.1 million increase in legal costs and fees related to PRA's expanded focus on legal collections, and the inclusion of the UK business in our 2012 financial results.

The effective tax rate for full year 2012 was 39.1% compared with 39.6% for full year 2011. This rate declined due to various changes including the impact of foreign operation and changes in blended state rates. The effective rate for Q4 2012 was lower than the full year rate at 38.6%. This was consistent with the Q4 2011 rate. We believe that the full year 2012 effective rate of 39.1% is a reasonable basis for an estimate for full year 2013.

Operating income was $60 million compared with $46 million, an increase of 31%. Operating margin was 39% for the quarter, consistent with the fourth quarter of 2011. Sequentially, the operating margin improved from 38% to 39%. Net income margin, as I noted, was a robust 23% for the quarter and roughly consistent with the fourth quarter of 2011. Sequentially, the ratio improved from 22% to 23%.

Moving on to the balance sheet, cash balances ended the quarter at $33 million. During the quarter we invested $199 million in defaulted debt portfolio. Investment activity was comprised of $88 million in core consumer debt purchases including investments made in the UK and $111 million of bankruptcy portfolio purchases. Bankruptcy portfolio purchases included the acquisition of portfolios from NCM.

To give you some further clarity on the NCM transactions which will be further described in our upcoming 10-K, here's how the numbers preliminarily broke out. Total purchase price for NCM was approximately $113 million. $69 million was allocated to bankruptcy NFR assets, $30 million was allocated to other assets including accounts or amounts due from the seller, and $14 million was recorded to goodwill.

Also a liability of $12.2 million was recorded for contingence earn-out. The earn-out liability based on our current estimates of cash collections will accrete to approximately $14.5 million over the term of the earn-out. This accretion will be expensed through earnings with the majority of the expense expected to occur in 2013. Of course this is subject to change in our estimates.

The NFR balance increased to $1.1 billion, up from $927 million. The NFR balance is the amount of unamortized purchase price of acquired debt portfolios recorded on our balance sheet. Principal amortization of finance receivables including net allowance charges as a percentage of cash collections was 39.8% in Q4 2012 compared with 43%. While this quarterly rate is the lowest we’ve seen since Q4 2008, the full year 2012 rate of 41.6% is very consistent with both the full year 2010 and the 2009 rates of 41.5% and 41.4%, respectively. The 2011 full year rate was higher at 43%.

It’s been a while since I’ve spoken at any length about amortization, so a few quick comments as I look forward into 2013. First, the aging of our 2009 through 2011 pools. As these pools have aged and we’ve gained comfort with the over-performance relative to our original projections, per the accounting guidance, we’ve increased yields over time. Moving up yields generally translates into lower amortization rates going forward.

Second, the competitive pricing environment. As prices increase relative to collectability or ERC, the amortization rates are naturally going to be higher simply because gross yields are lower as pricing increases. And third, the mix of bankruptcy portfolio versus core portfolio. Bankruptcy buying reached the near-term high in 2010 at 59% of total purchase price deployed, followed closely in 2009 at 56%. Bankruptcy portfolio purchases were still a robust 48% of total purchases in 2011 and 49% in 2012. More bankruptcy accounts generally translate into higher overall amortization rates.

So in summary, higher pricing and continued significant and bankruptcy buying will tend to move amortization rates up, while continued contribution of the 2009 through 2011 pools will tend to exert some downward pressure on amortization rates.

Moving on, our debt-to-equity ratio at quarter-end was 46%, up from 37%. The debt-to-equity ratio including net deferred tax liabilities was 72%. This is higher than the recent periods due to the greater-than-normal of investment activity in the fourth quarter.

During the fourth quarter we announced an expansion of our credit facility to $600 million. This expansion broadens our lending group to a total of 11 banks including three new banks. At the same time, we lowered our borrowing rate from LIBOR plus 275 to LIBOR plus 250 for normal borrowings under the facility. The balance into our credit facility was $327 million at yearend, consisting of $200 million in term financing and $127 million in revolving credit. Availability under the line of credit, subject to the borrowing and collateral provisions, was $273 million.

We continued to be in pay-down mode as it relates to our deferred tax liability. As a reminder, income taxes are fully expensed as income is earned. As we've described in the past, using cost recovery method for tax accounting creates a timing difference, not a permanent difference between book and tax revenue. Revenues are generally deferred in times of heavy buying and heavy operational ramp-up. And when buying and/or operational growth normalizes, tax revenue and tax payments increase.

For the full year 2012 actual cash income tax payments were nearly $100 million as compared to the expense provision for income tax on our income statement of just over $80 million. Tax payments in 2012 were up from $24 million in 2011 and $107,000 in 2010. The net deferred tax liability at December 31, 2012 was $185 million, down from $194 million at December 2011.

Finally, let me provide some details on cash collections. Cash collections increased 27% and 29% for the quarter and full year, respectively. Fourth quarter cash collections were $229 million. Core portfolio collections included $3.4 million from our UK business and were $138 million or up 31%. This increase was led by growth in legal collections which increased 49%. And bankruptcy portfolio collections were $91 million, up 21%.

So it is clear that 2012 was an outstanding year for PRA on many levels, from top line cash collections to bottom line net income. As we look into 2013, our challenge will be to find and invest in NFR assets both core and bankruptcy in this very competitive market and to execute with precision on all fronts while dealing with the existing portfolio amortization and cash flow dynamics that I mentioned earlier.

Neal Stern now has additional comments on our Q4 and full year 2012 collection results. Neal?

Neal Stern

Thanks, Kevin. Our Q4 collections provided an appropriately strong end to a strong 2012. The key contributors to our success were an increase in the number of monthly payments augmented by the rate at which our US customers are maintaining their payment plans, an end to a multiyear trend in which our average payment size is in decline, strong call center productivity results, legal collection performance that exceeded our expectations, and continued improvements in the productivity of our UK operations. Let me expand on these points.

The number of US payments collected on our debt portfolios in the fourth quarter represented a 25% increase over the same quarter in 2011. For the full year 2012, payments increased by 27% to a record 8 million payments. The growth of these payments has been on a steep rise for several years. Since 2009, our monthly payments from customers are up by an impressive 204%. I'm extremely proud of our team's work with customers that generated more than 8 million payments this year, 90% plus of which can be attributed to customers that have made a prior payment to us. If fact, more than 60% of the payments we received were from customers that have made six or more prior payments to us.

When payment plans are reasonable, they provide a mechanism for customers to eliminate debt as well as a low-cost recurring cash collection stream for PRA. Doing this properly requires the hard work and patient approach that our team has consistently delivered. That patient and reasonable approach is also central to our commitment to compliance and is an important of the dialogue we have had and seek to have with the CFPB. During the fourth quarter PRA continued to meet with the CFPB to discuss aspects of the debt-buying market and to introduce recent company initiatives that we thought might be of interest to the bureau.

Our US call center cash collections were strong in Q4, finishing 13% higher than the same quarter in 2011. For the full year, call center cash collections finished up by 11.5% over 2011. Collector productivity ended the quarter 3% higher than Q4 2011, and for the year, the productivity finished 6.7% better.

Q4 legal collections increased by 49% over the same quarter in 2011, external legal collections finished 58% higher, and internal legal collections were up 36%. So the full year 2012 legal collections were up by 49% over 2011. Performance from our legal collection channel remained above our internal expectations and continued to benefit from the incremental court costs invested during the year. In total, the results of our incremental investments in court costs finished the year 21% ahead of our internal expectations, which were to recoup our investment within six to 12 months and to deliver a 200% plus return on investment.

Our legal collections obviously had a favorable impact on our 2012 cash collection results, but more importantly, they've also begun to positively impact our longer-term cash expectations for the portfolios we acquire. This also has a positive impact on our ability to competitively buy portfolios. While we regularly review our models and return on investment hurdles, it's our near-term expectation for our court costs to remain relatively flat in 2013 relative to 2012, but moderated relative to our total accounts volumes and legal cash collections.

Our legal collection strategy has been and remains differentiated. Our focused efforts to grow our internal legal collection efforts have generated improved compliance, meaningful savings and increased effectiveness. In short, we ended relationships with many of the external law firms that lacked analytical and operational sophistication, resulting in a much stronger external network and an internal capability second to none.

Our most important differentiator is that legal collection efforts are truly an option of last resort. PRA always puts significant and prolonged efforts into reaching customers by phone and through the mail in order to try and obtain payment arrangements. But for approximately 5% of our core accounts, these efforts yield no result in spite of customers having an asset or income that could be used to resolve their accounts. The fact that this small minority of accounts contributes almost a third of our total cash collections speaks to the precision of our models and the differentiating account segmentation.

Finally, our work in the UK during Q4 continued to produce positive results for the near term in the area of collector productivity. We expect to see significant improvements stemming from our reduction in outsourcing, increased legal collection efforts, and our ongoing work to improve account scoring and segmentation. These results should drive better results for UK clients as well as make us a more effective debt buyer.

And now, some final comments from Steve.

Steve Fredrickson

Thanks, Neal. Before I turn the call over to your questions, I'd like to thank our more than 3,000 employees for PRA's exceptional record 2012 growth. As a reminder, this growth follows 23% growth in 2011 revenue and 37% growth in 2011 net income which followed 33% growth in 2010 revenue and 66% growth in 2010 net income. In just three years, we've more than doubled revenue and have almost tripled net income for our shareholders. This is an extraordinary track record by an equally extraordinary team of employees.

Our operator will now open up the call to your questions.

Question-and-Answer Session

Operator

[Operator Instructions].

The first question comes from Hugh Miller from Sidoti & Company.

Hugh Miller – Sidoti & Co.

Hi. Good afternoon.

Steve Fredrickson

Hi, Hugh.

Hugh Miller – Sidoti & Co.

Hi. I had a couple of housekeeping questions to start with. One was, if you have it, what was the fee-based business margin dilution during the quarter?

Kevin Stevenson

I actually looked it down before I came into this call because I knew you'd ask that question.

Hugh Miller – Sidoti & Co.

Right.

Kevin Stevenson

About 350 basis points.

Hugh Miller – Sidoti & Co.

Three-hundred-fifty, great. And as we think about -- you gave us some great color on the NCM portfolio, obviously it's a higher quality -- or maybe that's not the right way to look at it, but more secured asset class relative to the BK paper you buy that often at times isn't cash flowing, and how should we be thinking about the purchase price multiple on that particular portfolio?

Kevin Stevenson

You know, it's buried in because it's part of the Q4 buying.

Hugh Miller – Sidoti & Co.

Right.

Kevin Stevenson

I think the Q4 buying multiple is in the 135 range, off the top of my head, if you look at just that plain Q4 quarter.

Hugh Miller – Sidoti & Co.

So, NCM is probably lowering that a touch relative to the normalized 1.4 to 1.6 range?

Kevin Stevenson

Probably so. And it's, again, we did book it. It's a big deal. It's got flavor of a new asset class for us, so we probably put it on at a little bit of a discount just to make sure we know where things are going, and then we'll watch that curve. And if things look more like kind of the original expectations, we'll start moving it up over time.

Hugh Miller – Sidoti & Co.

Okay. And as you think about, obviously solid capital deployment even, you know, excluding the NCM purchase during the quarter, but can you just give us a feel, you know, it seems like you guys continue to point towards just very competitive pricing. I'm not sure if that's solely in the direct paper market, but what are you seeing there, and are you kind of seeing the opportunities -- it seems like there's going to be opportunities for you guys to buy receivables from competitors that are exiting the space because of how competitive the environment is.

Steve Fredrickson

Yeah. We continue to see a fair amount of portfolio activity from people either exiting the space or selling down portfolios, and that's been on both the core and the bankruptcy side. And we've been fairly careful making sure that we've got enough dry powder to take advantage of those opportunities as they come available. It's one of the reasons why we haven't been more aggressive on the share repurchase today. We're keeping a close eye on that amount of dry powder.

Hugh Miller – Sidoti & Co.

Okay. And obviously with the limited purchasing within the UK business, I realize that Mackenzie, as you talked about, it is a niche type of buyer and you need to gain a comfort level with how the curves are for general asset category in that region. But how should we be thinking about the duration of time that you think is going to be -- take you to get comfortable before you can start to kind of, I guess, get a little bit more aggressive with capital deployment in that area?

Steve Fredrickson

Yeah. We're looking at it as a long-term play. We had quarters where we've deployed, relative to our experience over there, a fair amount of cash. And as in this quarter we've had others where we didn't deploy as much. So we're just taking it slow and measured approach, and as we said in the script, calibrating those models and making sure that we're understanding exactly how this stuff is performing. So we don't think the opportunity there is going away anytime soon and we're very happy to take it slow and steady.

Hugh Miller – Sidoti & Co.

Okay. And given the delay we've seen in the tax return season this particular quarter, do you expect that to really have an influence on your cash collections in 1Q?

Steve Fredrickson

So far we don't see any evidence of that.

Hugh Miller – Sidoti & Co.

Okay. And one last question, just on the regulatory front, with regards to some of the recent rulings about recess appointments. Do you expect that to really have any influence over your relationship with the CFPB and how they go about regulating the industry as we look into 2013?

Steve Fredrickson

I think both the CFPB and us look at things as business-as-usual, and if the courts decide differently, then we'll react at that point in time.

Hugh Miller – Sidoti & Co.

Okay. Thank you very much.

Operator

Your next question comes from Bob Napoli from William Blair.

Bob Napoli – William Blair & Co.

Thank you. Good evening. The NCM deal, I just want to make sure I understood. In the buying for the quarter, there was $69 million from NCM and then $30 million due from seller. What does that -- is that $30 million portfolio to be delivered?

Kevin Stevenson

No, no, no. That's like, again, a stubbed [ph] period cash that would be moved over, so it's like -- think about it like a receivable almost.

Bob Napoli – William Blair & Co.

Okay. So all you bought from them was $69 million then in the quarter?

Kevin Stevenson

Yeah, $69 million NFR and then we had $15 million of goodwill --

Bob Napoli – William Blair & Co.

Right. Yeah.

Kevin Stevenson

Yup.

Bob Napoli – William Blair & Co.

Okay. Now, is the -- are the margins and the returns, the return on equity or returns in that business, similar to the rest of your business?

Kevin Stevenson

Yeah, absolutely.

Bob Napoli – William Blair & Co.

Okay. And I guess you said you are seeing additional opportunities. You've been able to buy additional paper in that market?

Steve Fredrickson

That's right. Having now the expertise and the data set that we've obtained from the employee group and from the assets that we bought in that deal, we can underwrite these secured bankruptcy assets with a much higher degree of confidence than we have been able to in the past. And as a result, we're competitive in that market and have been able to do some additional buying.

Bob Napoli – William Blair & Co.

Okay. Who else competes in that market?

Steve Fredrickson

You know, a number of the -- a number of guys that we'd compete against in the normal unsecured bankruptcy market, but there's a couple of I guess nuanced buyers that are in there as well. It's not a huge market, Bob. Obviously it's a segment of a segment, so it's not a huge market.

Bob Napoli – William Blair & Co.

Okay. The UK business, I'm sorry I missed, how much did you purchase in the quarter?

Kevin Stevenson

$2.6 million, in US dollars.

Bob Napoli – William Blair & Co.

Okay. And I mean as far -- just I understand taking the long view and I agree the market's not going away anytime soon, but is there, you know, is the activity, are you seeing more portfolios in that market, or I mean, what does the flow look like? And do you have access, are you tied in to all the flow that is out there?

Steve Fredrickson

Yeah, there is significant flow in the UK. In fact, there's very significant opportunities; the deals, however, are large. And I would say at this point in time we just don't have the confidence level to do a single large deal in an asset class in which we are not really well-steeped in terms of being able to understand our operational capability as well as our underwriting capability. So in our view, we'd rather let opportunities like that go by and not make a mistake. And again, there's going to be plenty of opportunity there. The charge-offs in the UK aren't going away.

Bob Napoli – William Blair & Co.

But you saw, you know, I mean you had a pretty, you know, a very hefty buying quarter x the NCM, and given it's only about $2.6 million from the UK, in the US, are you seeing, is that broad? Are you seeing that, when you saw real strong comeback of paper, is that continuing in the first quarter?

Steve Fredrickson

Well, I would say what we saw in Q4 is to a degree continuing in Q1, and it's really two-fold. Number one, we're seeing decent flow of portfolios both in terms of resale and direct from issuer. But this phenomenon of a consolidation in the industry is real and is continuing. And as a result, we have seen our win rate move up slightly, and that's having an impact on the amount of money that we deploy in a quarter.

Bob Napoli – William Blair & Co.

And just on the CFPB, as far as kind of the full-fledged audit, is that happening? Are they on site? Or what is the timing of an audit by the CFPB?

Steve Fredrickson

You know, we anticipate that we'll have them on-site at some point during the year, but we don't have anything more to report at this point.

Bob Napoli – William Blair & Co.

Thanks. And then last question, on your leverage, I mean your leverage, obviously you have a very strong balance sheet and that's a great asset to have. Where are you comfortable as far as leverage? How high would you take leverage? I mean your competitor, one public competitor, is comfortably above you on the debt-to-equity side. Where do you feel comfortable?

Kevin Stevenson

You know, in the past there's certainly pre-public and we run the company at an almost two-to-one funded debt-to-equity level. So certainly, you know, a one-five number doesn't give us any pause at all. So that one-five, between one-five and two shouldn't be a problem. Again, assuming you're buying the right NFR assets.

Bob Napoli – William Blair & Co.

Right. Great. Thanks. Nice job.

Operator

The next question comes from Mark Hughes from SunTrust.

Mark Hughes – SunTrust Robinson Humphrey

Yes. Thank you. Good evening.

Steve Fredrickson

Hi, Mark.

Mark Hughes – SunTrust Robinson Humphrey

Hello. The -- Kevin, you gave us three factors on amortization, two up, one down. How do they net out?

Kevin Stevenson

I'd leave that for you to decide. But I can't, you know, we've avoided guidance for years. I just wanted to give you guys, make sure you're thinking about those three factors. I think I couched it pretty well. In summary, I wrote, so in summary, higher pricing and continued bankruptcy buying tend to move rates up, while the contribution of '09 and '11 pools will tend to exert downward pressure. So I think, you know, I can't see '09 and '11 deals driving rates down next year, but it's going to have some influence on it.

Mark Hughes – SunTrust Robinson Humphrey

Right. So I guess I would interpret your language as steady.

Kevin Stevenson

Might be a good read on that.

Mark Hughes – SunTrust Robinson Humphrey

Dramatic pause.

Kevin Stevenson

Right. Shuffled the papers too.

Mark Hughes – SunTrust Robinson Humphrey

The FTC report, did you -- what was your take on that? The most negative thing seemed to be that maybe a lot of people got contacted, who shouldn't be, erroneously. What do you make of all that?

Steve Fredrickson

No. I mean overall, I think our take on the report, that it was fairly benign. It is a bit of a look-back. This data was extracted from a number of folks a while back, and so I think almost everyone, especially over the last couple years, has been moving their regulatory regime along and working hard on compliance issues. So overall I don't think that it was a huge surprise to us other than the fact that it didn't come up with any, at least from our perspective, glaring issues for the industry.

Mark Hughes – SunTrust Robinson Humphrey

Right. And then what's your philosophy on stock split? Is there a strong feeling that stock split shouldn't be done, or how should we think about it?

Kevin Stevenson

No, it's a topic that we do discuss on an ongoing basis here and it's something that is currently being debated. So I don’t -- we certainly don't have an opinion that's immovable one way or the other.

Mark Hughes – SunTrust Robinson Humphrey

Okay. My vote would be to consider that.

Kevin Stevenson

Okay. Duly noted.

Mark Hughes – SunTrust Robinson Humphrey

Thank you.

Operator

The next question comes from Edward Hemmelgarn from Shaker Investments.

Edward Hemmelgarn – Shaker Investments

Hi. Just one question about the portfolio that you purchased of bankruptcy, the new company. You said that was secured by auto, or was it secured credit that you bought?

Kevin Stevenson

The Chapter 13 bankruptcy accounts that are secured by automobiles --

Edward Hemmelgarn – Shaker Investments

Okay. Anyways, what I was getting at is you would expect those to pay off at a more rapid rate, right?

Kevin Stevenson

I think all things being considered, that's right.

Edward Hemmelgarn – Shaker Investments

Because you collect -- in bankruptcy, don't you collect the secured first and then --

Steve Fredrickson

Unsecured second, correct.

Edward Hemmelgarn – Shaker Investments

Yeah, okay. So we should assume -- okay. Let's see -- okay. That's all for me. Thanks. Congratulations on another good quarter. Thank you.

Steve Fredrickson

Thank you.

Operator

The next question comes from David Scharf from JMP.

David Scharf – JMP Securities

Hi, good afternoon. Steve, just one more follow-up on NCM. Can you give us a little color on just the size of that secured market? My understanding was the portfolio you acquired actually, even though they do have exposure to secured BKs, that that that might actually just be a small portion of it.

Steve Fredrickson

The portfolio that we acquired was a strong mix leaning toward secured BKs. NCM had been in the business of buying both types of debt, but again the portfolio we acquired was weighted towards the secured side.

David Scharf – JMP Securities

And is there any way for us to just get a feel on the order of magnitude when we compare the amount of claims out there relative to, for example, what you'd seen in the unsecured credit card BK market these past few years?

Kevin Stevenson

I think you can find a lot of that data online, David. Clearly when you look at it, the secured filings are enormous, right? But so much of that's already real estate, is real estate based, so you've got to take a big chunk of that out. Then you kind of work your way down to really automotive segment which probably, I think if you really peel the onion back, is probably similar to 13 unsecured, but then only a portion of that trades too because it doesn’t -- a lot that doesn't charge off. So it's the big pot, you got to take out all the real estate, get down to the automobile, which is probably roughly the size of the unsecured market. And then you've got take a fraction of that that actually trades.

David Scharf – JMP Securities

Okay, got it. And then lastly, Kevin, I just wanted to make sure I wrote this down correctly. With respect to the upfront court filing costs, 2013 should be roughly flat in terms of absolute dollars, was that what I heard?

Kevin Stevenson

Right. Yup.

David Scharf – JMP Securities

Okay. Got it. Thanks so much.

Operator

[Operator Instructions].

The next question comes from Bob Napoli from William Blair.

Bob Napoli – William Blair & Co.

Thank you. Just wanted to follow up on I guess competition in the bankruptcy industry. There was a pretty big trade that your public competitor, one of your public competitors, announced tonight that they had acquired. Is that, I mean what is the -- so you have a new competitor I guess. Is that your view on that situation, a new significant competitor?

Steve Fredrickson

Well, I mean, we've always had competition in the bankruptcy space and our view of that competition has been, although maybe not as many in number, they've been pretty sophisticated and have had access to substantial capital. So another competitor in the fray certainly isn't something that we look forward to, but I don't know that it changes the dynamic in that market a whole lot either.

We think that we're very, very good underwriters as demonstrated by the track record that we've built over the last eight years or so in the bankruptcy market. And we think that our cost to administer these claims is as low as it gets. I mean we are really proud of the engine that we've built here. And so if people want to compete, we're ready for it. We think we can compete with the best.

Bob Napoli – William Blair & Co.

Okay. And then other types of paper, are you taking a harder look or testing close to initiating any different types of paper? I know you had looked at I guess private student loans at one point, and I'm not sure, is there anything else on a diversification front from a buying of paper standpoint?

Steve Fredrickson

I don't know that there's many other places to go. We have bought just about every type of paper since we've been in business. Certainly discussions continue to abound in the industry and here about the potential in the student loan market, but to date there's just not a whole lot of transacting going on there yet. But you can be sure that's an area that we're watching closely.

Bob Napoli – William Blair & Co.

Any interest in the mortgage market, I guess, is -- maybe through a small acquisition of a platform or something like that or?

Steve Fredrickson

I would say that's down on our list.

Bob Napoli – William Blair & Co.

Okay. And then I guess I would -- not that I have a vote, but I would vote for a stock split. It might help the liquidity a little bit as well.

Steve Fredrickson

Okay.

Kevin Stevenson

Two-zero so far.

Steve Fredrickson

Yeah, right.

Bob Napoli – William Blair & Co.

Thank you.

Steve Fredrickson

Thank you.

Operator

The next question comes from Hugh Miller from Sidoti & Company.

Hugh Miller – Sidoti & Co.

I just had a quick question about the -- did you guys give a stat on the average payment size? I saw the volume, your number, but I didn't catch it if you talked about the average payment size and how that was trending.

Neal Stern

It was flat in the quarter and -- for year over year, flat, and flat for the year. So that's a big improvement. In 2011 average payment size was down 7%, and in the year prior it was down 13%, so flat was happy news.

Hugh Miller – Sidoti & Co.

Right. Thank you very much.

Operator

I am showing no further questions. Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.

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