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Executives

Steve Fredrickson - President and CEO

Kevin Stevenson - EVP and CFO

Neal Stern - SVP and COO, Owned Portfolios

Analysts

Sameer Gokhale - Janney Capital Markets

Bob Napoli - William Blair

Hugh Miller - Sidoti

Mark Hughes - SunTrust

Robert Dodd – Raymond James

Edward Hemmelgarn - Shaker Investments

Portfolio Recovery Associates, Inc. (PRAA) Q2 2013 Earnings Call July 30, 2013 5:30 PM ET

Operator

Good afternoon. Thank you for joining Portfolio Recovery Associates Second Quarter 2013 Earnings Conference Call. Your host for the call today will be Steve Fredrickson, PRA's Chairman, President and Chief Executive Officer. Also in the call will be Kevin Stevenson, PRA’s Chief Financial and Administrative Officer; followed by Neal Stern, PRA’s Executive Vice President of Operations.

Before beginning, I'd like everyone to remind everyone that statements made by PRA on this call may constitute forward-looking statements under applicable security laws. All statements other than statements of historical facts are considered forward-looking statements including statements regarding PRA’s or its management's intentions, expectations, plans or projections of the future.

Actual events or results could differ materially from results or those expressed or implied in any forward-looking statements as a result of various factors and uncertainties, some of which are not currently known to PRA or its management. These include the risk factors and 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. Please begin sir.

Steve Fredrickson

Good afternoon and thank you for joining our call. Our quarterly results today, again reflect the success of our strategy to leverage PRA’s competitive advantages to drive exceptional year-over-year results. In a few minutes Kevin Stevenson will comment on the specifics of our second quarter results released this afternoon. Then Neal Stern will comment on our collections experience in the quarter. But first let me open this call with some commentary across our key financial metrics.

Cash collections were $296 million, up 28% from the second quarter of 2012. Revenues were up 24% to a record $183 million in Q2. Net income attributable to PRA was $43.6 million, an impressive increase of 36% year-over-year. This translated into diluted earnings per share of $2.56, compared with the $1.87 in the second quarter of 2012.

Had the stock split occurred prior to our earnings release, diluted earnings per share would have been $0.85 for the quarter, compared with $0.62 in the year ago quarter. We expect to file our 10-Q after the stock split is effective. As a result our 10-Q will reflect post-split results. Return on average equity of 22.5% exceeded our 20% goal.

PRA continued to benefit from the consolidation of the debt buying marketplace in the U.S. As we stated in prior quarters, we see fewer competitors buying sales offerings in our U.S. core markets. This comes in a time when sellers already are restricting bidders to those with the most comprehensive effective compliance programs.

We are pleased to see some of PRA’s best practices endorsed by the OCC in a statement this month to banks selling charged off debt. Such practices is prohibiting resale of customer accounts and limiting customer lawsuits and long term PRA policy. This put PRA in a great position to gain an even larger share of the U.S. market.

Furthermore our underwriting expertise and efficient collections allow us to bid aggressively for maintaining attractive financial results. During the second quarter of this year, we are again a very active buyer. PRA acquired $3.2 billion in face value of finance receivables for an aggregate purchase price of $200 million. We have now invested more than $717 million in newly acquired pools of charged off and bankrupt debt over the trailing 12 month periods. To give this some perspective, it’s 2.5 times the $289 million we invested in 2009; two times the $367 million we invested in 2010 and 1.75 times our 2011 investment of $408 million.

These latest acquisitions will have a significant impact on our revenue and income growth for years to come, and these volumes had been achieved even as several large banks have been generally out of the sales market for the past year as they examine and retool their debt sale processes.

During the quarter 59% of our investment went to core portfolios, with the remaining 41% being invested in bankrupt pools. Pricing remained competitive in Q2, but once again was relatively more competitive in bankruptcy receivables than in our core receivables.

In the UK, we continue to pace our banking strategy. We purchased more in Q2 than we did a year ago and in the prior quarter as we increased confidence in both our models and operating strategies. We are working with the team in the UK to better manage resources to profitable accounts of clients, an initiative which should ultimately help us drive improved results for both the business and our clients. We are approaching the UK market in the same way we did the U.S. charge off and bankruptcy markets, deliberately with a long term view.

Our experience in the U.S. has taught us that growing too rapidly in the search for market dominance or investment scale is a strategy fraught with risk. We have watched many competitors in the U.S. fail as a result of too rapid growth. We remain confident that the UK is a great long term opportunity for us and we are committed to thoughtful prudent growth of our operation there.

In our fee-based businesses, PRA is focused on growing future revenue and earnings. During the quarter, we continued to make progress on our primary goals of building the pipeline of future revenue at CCB, and to better align our sales efforts with our most profitable product offerings in government services. Our government services unit had a good quarter producing solid profitability. We had few cases paid off at CCB, and so have little revenue there.

Our Auto business had another tough quarter as we wrestled with low volumes and competitive pricing. We still believe we can return this business to solid profitability over time through innovation, sales and effective operations.

Before I turn things over to Kevin, let me provide a bit more insight into our operation this quarter. PRA has methodically and carefully built an integrated debt purchase business. We can buy the bankrupt and non-bankrupt charged off consumer accounts to virtually any age or asset class without sacrificing underwriting accuracy or operational capability.

In fact I categorize our competency in both areas as industry leading. We acquired these accounts using similar risk adjusted IRR hurdles regardless of portfolio characteristics. We use world class systems, analytics and operational strategies to optimally collect cash from our portfolios.

Our goal is not to maximize cash collection. Let me repeat that; our goal is not to maximize cash collections. Whether our goal is to maximize the profitability of any given pool of accounts. This is a skill that we have improved steadily over the years. Often times this requires being extremely disciplined about what collection actions we employ, at what time, against what accounts.

We make it a practice not to spend a dollar or more to collect a dollar. That math is simple and straightforward, yet can be complicated to implement across multiple strategies, thousands of call center employees and through millions of customer contacts. We understand our costs as well as the variables that determine the likelihood of a customer making a payment and formulate strict ROI driven strategies that permit us to drive the kind of industry leading margins we put up quarter after quarter, year after year.

Our bankruptcy and core charge off business are integrated, with accounts being passed between the two depending on the status of a given account. Both businesses are supported by underwriters and strategists who determine acquisition pricing as well as collection actions on an hourly basis. These experts support multiple call and processing centers, which in turn focus on maximizing results on action, as dispirit as making a phone call, processing a claim or filing a lawsuit. We manage the effectiveness of all these activities against prescribed metrics and/or control sets.

We operate our business consistently, year in and year out. Kevin Stevenson and I have been with the company since it opened its doors in 1996. We drive our consistency and success using a set of operating principles that we have set out in every Annual Report for the more than 10 years we've been publically traded. One of these principles is to keep leverage low, which we have done throughout our existence and which has put us in a great position to be able to take advantage of market opportunities when they arise.

However, we do not use our low leverage, now at just 52% of shareholders' equity as an excuse for low profit efficiency. We have long stated our goal to produce ROE in excess of 20%, a level we are currently exceeding as we have through much of our existence.

Finally we take our responsibility to shareholders very seriously, we’ve worked hard to provide industry based transparency in everything we do. We work carefully to implement our mandated accounting methods in an appropriate manner. We maintain a policy that calls for booking estimated cash collections on newly acquired pools and a high confidence level, with adjustments down very quickly if required or adjustments up slowly, once sustainable performance is demonstrated over time.

Now let me turn to Kevin for a review of our Q2 financial statements.

Kevin Stevenson

Thanks Steve. The comparisons I make today will be between Q2 2013 and Q2 2012 unless otherwise noted. PRA's cash collections grew 28%. Revenue increased strongly by 24% and operating expenses increased 17%, a relatively modest increase considering our growth in cash collections. As a result PRA's net income margin reached 23.7%.

Breaking the income statement down into its components, let me begin with revenues. Cash collections on financed receivable portfolios drove our revenue growth this quarter. Cash collections increased 28% to $296.4 million.

Payments from bankruptcy accounts were up 37% to $125.7 million. Our growing bankruptcy business accounted for 42% of cash collections. Call center and other collections were $90.2 million, up 23% and legal collections were $80.5 million, up 20%.

Revenues increased 24% to $183 million and were comprised of $168.6 million in net financial receivables or NFR revenue, and $14.4 million in fee revenue. NFR revenue for the quarter was comprised of a $108.9 million in core portfolio revenue, including our UK operation and an allowance reversal of $1.75 million.

Net core portfolio revenue increased 23%. NFR revenue also included bankruptcy portfolio revenue of $59.7 million, net of allowance charge of $565,000, the majority of which was recorded in the Q4 2008 pool. Net bankruptcy portfolio revenues increased 38%. During the quarter, we increased yields on all 2009 through 2011 domestic pools, both core and bankruptcy. We also increased yields on all 2012 domestic core pools and one 2012 bankruptcy pool.

Moving to expenses, operating expenses were $109.1 million, up 17%. Our operating expense to cash receipts ratio improved from 37.7% to 35.1%, largely due to improved efficiency in our core operations.

Beginning in Q1 2012, we increased our investment in legal collection costs and document costs. PRA's focus on legal treatment has always been designed to identify those accounts we believe can pay us and that have been given opportunities to pay us but have not. The incremental approach we took last year was a continued refinement about long standing focus.

Legal collection costs increased $4.5 million to $22.7 million, up from $18.2 million. We intend to spend approximately $20 million in legal collection and document costs in each of Q3 and Q4 of 2013. Neal will provide additional comments on our legal collection strategies.

As a result of our strong revenue increase, coupled with controlled growth in our expenses, PRA's operating income increased 35% to a record $73.8 million. Operating margin was 40.4% for the quarter, up from 36.9%.

Net income margin was 23.7% for the quarter, up from 21.7% a year ago and 22.8% in the first quarter. We are very pleased that we have generated a net income margin of 23.2% in the first half of 2013. Since we became publically traded in late 2002, we've delivered a net income margin of 20% or more for all full years except two. In those two years the margin was 16% and 17%.

Moving to the balance sheet, cash balances ended the quarter at $43.5 million. As Steve mentioned our buying over the past few quarters has been very strong. During the quarter we invested $200 million in defaulted debt portfolios. The investment activity was comprised of a $113.3 million in U.S. for consumer debt purchases, $82.3 million in U.S. bankruptcy accounts and $4.9 million in UK debt portfolio purchases. These were purchased in 94 defaulted debt portfolios from 14 different sellers.

The NFR balance increased to $1.24 billion, up from $967 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, otherwise known as payments applied principal, including net allowance charges as a percentage of cash collections was 43.1%, compared with 43.0%. Zero basis cash collections were $10.6 million during the quarter.

Turning now to liabilities, our debt-to-equity ratio at quarter end was 52%, up from 46%. The debt-to-equity ratio including net deferred tax liabilities was 76%. The balance under our credit facility was $413.5 million at quarter end, consisting of $197.5 million in term financing and $216 million in revolving credit. Availability under our line of credit, subject to borrowing and collateral provisions was $185 million.

Net deferred tax liabilities were $187.7 million at quarter end, down from $190.6 million a year-ago and slightly up from year-end 2012. As a reminder, income taxes are fully expensed as income is earned.

As we’ve described in the past, using the cost recovery method for tax accounting creates a timing difference between the book and tax revenue. For those who are unfamiliar with our IRS tax matter, please refer to our SEC filings for more information. However, in summary there are no significant changes in the status of case versus last quarter.

Finally, an update on our stock repurchase program. We had a modest amount of stock repurchase activity this year in Q2. Total repurchase volume was $6.6 million and $69 million remains available free of purchase under PRA’s Board approved program.

Neal Stern now has additional details on our Q2, 2013 collections and operational results.

Neal Stern

Thanks, Kevin. As with Kevin's commentary my comparisons will be between Q2 2013 and Q2 2012, unless otherwise noted. Our second quarter results again demonstrated PRA’s commitment to maximizing the profitability that Steve spoke of earlier. We did not simply maximize cash collections. For example we end at the second quarter with 80 more collectors that we did at the end first quarter.

These additional staff members were added to keep pace with our current and immediate future purchasing activity and we desire to only collect more cash or raise the amount of cash we could collect relative to the purchase price of any given period we would have hired several hundred more people.

Conversely, we also did not reduce our cost to collect beyond the point that our planned productivity improvements dictated. We could have stopped hiring collectors, sending letters, filing lawsuits or even moved our operational call centers to another location with lower labor cost but such actions will only short term improvements at the bottom line at the cost of our longer term outlook. One of the factors driving productivity, and ultimately net income is the growth of the number of consumer making regular multi-payments and the stabilization of average payments size.

In Q2, we received a record $2.5 million U.S. payments which was 23% higher than in Q2 2012, when payments had increased over the prior year by 30%. This quarter, the increase in payments was accompanied by an increase in the average domestic payment size which was up almost 1.5%. That small increase in average payment size added approximately $800,000 in cash collections for the quarter.

The growing number and consistency of this monthly payer base enhances productivity as significantly less effort is required to collect those payments. It also favorably impacts the accuracy of our projections for future cash collections and serves as a testament to our staff's ability to reflect PRAs patient and long term approach to debt collections and our interactions with our customers.

Our U.S. call center cash collections were again strong in Q2, finishing 23% higher. Collector productivity ended the quarter 8% higher. Our second quarter legal collections increased by 20%. External legal collections finished 21% higher and internal legal collections were up 20%. Net income performance from our legal collections channel remained above our internal expectations and continued to benefit from the incremental court costs previously invested.

While we regularly review our models and return on investment hurdles, to remain our near term expectation for our court cost to remain relatively flat to modestly elevated in 2013 relative to 2012, of moderated relative to our total account volumes and legal cash collections. As we discussed in our last several calls, the spending and court costs in 2012 was abnormally weighted to the first quarter making our year-over-year cost lower in Q1 of 2013 and elevated for the remaining quarters of 2013.

We remained please with the performance of this incremental investment as this continues to exceed the goal of recouping that investment 6 to 12 months and delivering a 200 plus percent return on investment over the next 14 to 16 months.

Just to be clear, this return does not come at expense of other call center collections and the return goals are net of the incremental expense. This is proven to be one of the better improvements in our modeling and operational history.

As we’ve regularly reminded in our calls, the context of our legal spend is important in that legal collection efforts are truly an option of last resort. PRA puts significant and prolonged efforts into reaching customers by phone and through the mail to attempt to obtain payment arrangement, 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 over one fourth of our total cash collections speaks to the precision of our models and our differentiating account segmentation.

Finally, our work in the UK during the quarter remained focused on account scoring in segmentation and we’ve now started to reap some of the very early benefits of that work. Collector productivity and production have improved and we are adding staff there at a more rapid pace, again in an effort to maximize net income.

Now, some final thoughts from Steve.

Steve Fredrickson

Thank you, Neal. Through the years PRA has acquired outstanding talent across the company. Our employees in all positions are among the very best in the industry. This team is responsible for the outstanding results we're reporting today and I want to thank each and every one of them for their hard work and dedication.

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

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Sameer Gokhale from Janney Capital Markets. Your line is now open.

Sameer Gokhale - Janney Capital Markets

Just have a few questions here. The first one was on purchasing the numbers were indeed stronger than I had modeled and I wanted to get a sense for the underlying dynamics. Clearly there is one competitor who is not in the market and probably would jump back in, in Q4, but are you seeing excluding that factor anything else going on in the market, some of the supply driven again by folks exiting the market. Just some incremental color because again the purchasing was quite a bit stronger than we had modeled. That would be helpful.

Steve Fredrickson

I think primarily what we're seeing is a lack of other buyers competing for product as opposed to anything else. There wasn't any resale activity in our filing really to speak off. So it is primarily by just a lack of overall competition.

Sameer Gokhale - Janney Capital Markets

And then just on a different note when I look at operating expenses, those were also lower than we had modeled in. And I was trying to get a sense for, there were couple of line items, communications, other expenses which were down sequentially.

So just wanted to get a sense for whether there was anything one-timish in nature there that you can point to. And then on OpEx again, I think Kevin if you could just clarify, you talked about the additional expenses for the legal and document costs. And I think if I heard you correctly you said $20 million in each of Q3 and Q4. So should we think of it as kind of the run rate of Q2 plus an addition $20 million? I just want to clarify how to think about that?

Kevin Stevenson

Your first question was kind of what about Q1 to Q2 expenses that came in a little lower than you expected. You just have to remember that Q1 is tax season, right? So especially in communication side you got a lot of letter expenses and so on in Q1. So that's a big driver of Q1 to Q2 expenses.

On the legal costs, the filing costs and the document costs, we are currently at about $43 million year to date, and for lack of a better word, the guidance we have given you guys is about $20 million each quarter coming out for Q3 and Q4. So about $83 million for the year would be a good target for that.

Sameer Gokhale - Janney Capital Markets

And then just the last question in Q1 I think you talked about some $6 million or so in fees, you expected to get from large case and I don't think that came through in Q2. So the expectation is that again comes through in Q3. Is that right?

Kevin Stevenson

That's right.

Operator

Our next question comes from Bob Napoli of William Blair. Your line is now open.

Bob Napoli - William Blair

Just question on the bankruptcy business. How much of the bankruptcy buying that you did during the quarter was in the secured versus unsecured? I was wondering how that secured business might be progressing?

Steve Fredrickson

Bob I think I will go back to our original comments when we acquired that business. It's one that we expect to be kind of up and down in terms of volumes. And it's not a huge market, and for a lot of reasons I think we like to avoid becoming too granular in saying specifically how much secured versus unsecured bankruptcy we brought in any quarter.

Bob Napoli - William Blair

Okay, the paper you brought in the quarter, have you seen any new sellers or is it more concentrated than normal and the big buyers that have been out of the market for a year, that seem to be getting reported now, but do you expect any of those to come back to market?

Steve Fredrickson

So on the selling side Bob, I think you said buyers. So the couple of large sellers who have been reported is on the sideline, continue to be on the sidelines. So the volume that we have done recently has been with those guys not participating in the market. And from what we anticipate from them, they are seeking to get comfortable with their processes and return to selling.

Bob Napoli - William Blair

Just on the regulation side, there has been, there is no ways state-by-state, the CIPB pretty continuous and what are you seeing that, is there anything that stands out? This has been continuous for the last decade or so, but is there anything recent that stands out to you? Obviously the OCC pay seems it is somewhat new.

Steve Fredrickson

I think the OCC actually codifying their thoughts on best practices for debt sale was very interesting. Certainly everything we saw in that list seems to make sense to us. In fact many things we've been doing for quite a while. So I think sellers paying attention to those things is only going to help us over time.

Certainly from, a regulatory front, if there is any kind of consistent drum beat, it's certainly around account documentation, and that's an item that we anticipate is going to continue to receive a fair amount of scrutiny on a go forward from a variety of regulators.

Bob Napoli - William Blair

Then last question, just on pricing trends in the quarter. It seems with the amount that you are buying and with non-core of the market, there is a little less competition. Would you characterize pricing as steady, having improved slightly or maybe just give a little bit of color on pricing and your thoughts around the entire orders on the paper you are buying versus the historical levels?

Kevin Stevenson

I would not characterize pricing as improving. I would say it's steady at levels that we find very attractive from a return perspective.

Operator

Our next question comes from Hugh Miller of Sidoti. Your line is now open.

Hugh Miller - Sidoti

I just wanted to start off with the housekeeping questions. For Kevin with just the fee based business margin dilution in the quarter?

Kevin Stevenson

Hugh, I did not bring that to this call. My guys are here. I’m thinking it’s around 400 basis points. Again I did it on the back of the envelope but I just didn’t bring it to the call and we’ll get it out for you before the call.

Hugh Miller - Sidoti

Sure, sounds great. Thank you. And then you guys mentioned the hiring activity that you guys were doing during the quarter. Is that solely domestic? I couldn’t write it down quick enough, but could you just talk about the level of hiring that you’ve been doing in the UK? I know you guys indicated that you guys are ramping up there. Just trying to get a sense of, if you can quantify to what extent you guys are adding collectors and just obviously in anticipation of kind of more purchasing activity there?

Steve Fredrickson

We feel like we’ve made some nice progress with our scaring and segmentation and that allows us to add more people. We can have confidence that we’re applying resource to accounts that will have appropriate return on investments and then we can hire a good chunk of more people. Relative to the size of the operation, we’ve been hiring at a good clip.

Hugh Miller - Sidoti

Are you guys comfortable just sharing what the collection headcount is there and how much it's gone up possibly?

Steve Fredrickson

I don’t have that. And the 80 that I mentioned, that was U.S. domestic.

Hugh Miller - Sidoti

Okay, and if you have it at some point, then you can share that, that would be helpful as well. Another question just about industry and I guess piggybacking on some of the regulatory items, we obviously saw some things coming out of California with their Fair Debt Buying Practices Act and the potential for seeing some higher cost to mail and those types of things. If you could just talk about, obviously with California being such a big state, what you guys see from that, any implications on potential for higher cost of doing business there?

Kevin Stevenson

Nothing, and there are some additional disclosures and some additional documentation as it pertains to debt validation and dispute. But, there is nothing that’s really jaw dropping or striking. It's in line with what a number of other states have done of late.

Hugh Miller - Sidoti

And do you guys anticipate that, that will continue to drive further consolidation of the industry as kind of the smaller size collectors find it challenging to meet all of these higher standards?

Kevin Stevenson

Well, in California, the standard that’s probably the most interesting there is the access to our original documentation. And so just my personal opinion would be that that would have an interesting impact on the resale market because those contracts are going to have to essentially guarantee that they can get access to the original documents and I’m not sure how that will impact the re-trade market. So I suspect it will be unfavorable to that market.

Hugh Miller - Sidoti

Okay, and the last question I had, you guys gave the color on the increase in the average payment size, 1.5%. I assume, the lease is relatively flat, that’s 1.5%. Is it both quarter-over-quarter and year-over-year and if you could you just let us know, is this kind of probably the first time in several years that you guys have seen a rise in that metric? Correct?

Kevin Stevenson

Yes, so that was a year-over-year metric. I look back; five out of the last six have really been flat or less than a percentage point. So the 1.5% sounds small but as I mentioned that was worth $800,000 in incremental collections. So we’re happy to see it.

Hugh Miller - Sidoti

And is it kind of safe to say that that possibly could have been also a driver of the impairment reversals in the quarter?

Kevin Stevenson

That’s probably a leap. Oh I had guessed 400 basis points. It’s 395.

Operator

Our next question comes from Mark Hughes of SunTrust. Your line is now open.

Mark Hughes - SunTrust

You had talked about couple of the sellers that have been out of the market and I think you said they were getting comfortable with the process. Is that to say there is an ongoing dialog or there is an end point for their process of getting comfortable that you can look at and they make you feel good that they’re going to be back in the market?

Steve Fredrickson

Well, I don’t want to speak for any of the sellers. It’s our understanding in our dialog with some of these guys and let me digress a moment. We’ve really seen the majority of the large banks go through a very detailed vetting process of people that they sell debt to and how we handle that bad debt once it’s been acquired.

And there have been a couple who for whatever set of circumstances have really pulled out of the market for the last 12 months or so, as they assess their selling processes and get comfortable with how that’s being conducted. And we understand again that one of them is on a track to returning to that sale market in a matter of months and another maybe somewhat longer than that.

Mark Hughes - SunTrust

So based on that, the fact that the majority have gone through the process, would it be fair to conclude that we won’t see any more deadlines about banks of stepping back?

Steve Fredrickson

Actually, I’ve been amazed at the press's fascination with reporting news that occurred a year ago. So I have no idea what’s going to be in the paper. But from a process standpoint, it would look to us like we’re in the latter innings of this bank lease adding process as opposed to early on in the process.

Mark Hughes - SunTrust

How about, where you had less competition perhaps, how much of that was decided not to participate for whatever reason versus we’re invited not to participate because the banks have gone through this process?

Steve Fredrickson

Well, based on the bidding that we’ve seen in all sort of offerings, both bankrupt and non-bankrupt, I would suspect that people are being invited, they are bidding aggressively. I don’t want to paint a picture that we’re winning a lion's share or anything close to that of the portfolios that we review. We’re continuing to win a minority of what we see and there continues to be a lot of competition in the market.

Operator

Thank you our next question comes come from Robert Dodd of Raymond James. Your line is now open.

Robert Dodd – Raymond James

First another one on the regulatory side. You mentioned that OCC talking to their banks telling them to do things a little differently. What kind of impact do you think that could have and timeframe, because obviously the moves and maybe some arbitrage that the banks could do and the incentives that they have to do some things in house versus essentially using an external provider. So how significant of an effect do you think that could be to the market that you invest?

Steve Fredrickson

Well, I don’t want to speculate too far on what a regulator that isn’t directly involved in our businesses at least is going to do to the people that we buy debt from. So we’re little bit removed from directly understanding what’s going on there. But our understanding from the whole process is that re-examination of the selling procedures that the banks have gone through has been driven by the OCC and its concerns about how customers are being treated after debt is being sold to third parties.

Robert Dodd – Raymond James

And just second one, one thing you told about is this increased concentration in the sense of 25% cash collections coming from the minority of accounts, big accounts, large balances with unwilling rather than in capable payers. Has that changed or does it change, how you go about analyzing a portfolio when it’s put up a bit because you get a sample, that sample may not, the question is do the sample that you get on these portfolios accurately reflect the subset that the large concentrated account potential collection. Are there any adjustments you’re making to how you go about evaluating a portfolio with the prices to take that kind of more aggressive approach you're taking with types of account?

Steve Fredrickson

I think you’re speaking of the accounts that we select for legal collection, I believe?

Robert Dodd – Raymond James

Yes.

Kevin Stevenson

So, yes, that’s all built into our models and would be contemplated at all the different points where we look at our score both in acquisitions and during the operational life account. So, yes it's baked into to all of those places. And to be clear, we changed the model and we changed some of the variables and their rates in that model, back in late 2011, early 2012. We also changed the return on investment hurdles and all of that came into play and caused us to move that incremental investment off. The change that we made in the return on investment hurdles had very little to do with modeling and thus would have no impact to any of our buying models.

Steve Fredrickson

It’s also a fact, so we get that out. In the majority of portfolios that we’re acquiring, we’re not looking at simple samples, we’re looking at an entire portfolio. So there is not lot of mystery as to what’s in there.

Kevin Stevenson

And one point, our goal was not to, we’re not going to buy a portfolio with the thought process of, hey let's get a lot of these accounts immediately driven into our legal channel and have that as a new and different tactic. Our strong preference is always to put things through the call center for a good chunk of time and make every effort to collect via that channel. It's just subsequent to that effort over whatever 90 days or more at least. Unusually it’s a year or more. Then we’re going to look at those accounts in a different way.

Operator

Thank you. Our next question comes from Edward Hemmelgarn of Shaker Investments. Your line is now open.

Edward Hemmelgarn - Shaker Investments

Thank you. Actually my questions have all been answered. Thanks.

Operator

Our next question is a follow up from Bob Napoli of William Blair. Your line is now open.

Bob Napoli - William Blair

Just want to follow up on whether or not you’re looking at additional types of paper. I know you always are and any thoughts on your interest in new markets and the development of looking at new markets if you would and I mean second home equity loans in particular seems like an interesting market in the U.S. and some of your other unsecured related agency type are going after that market. Can you give some thoughts on different types of paper that may be of interest then and obviously you’re in the UK but are there other markets, Canada or other areas of Europe or South America that are of interest to you?

Steve Fredrickson

Bob, I think it’s safe to say that really across a number of geographies and as well number of asset types, we’re doing research and looking at opportunities and spend a fair amount of time every quarter doing that. So our eyes are open and we’re actively looking for opportunities that we think might make sense.

Bob Napoli - William Blair

Does the second lean home equity, you’ve been never been interested in I guess in mortgage related but second lean home equity, it's an unsecured product if you would, much of it. Is that something that makes any sense for you?

Steve Fredrickson

Bob, we do a lot of things there that we tend not to talk about. I will tell you that dating back to 2006, 2007, we spent more than a year during a pretty deep dive into looking at the second lean space and at that time decided that it wasn’t right for us. Its space that continues to be interesting and we continue to watch it but saying any more than that, just at this point in time would be speculative.

Operator

Thank you. (Operator Instructions). At this time I’m not showing any further questions. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Everyone, have a wonderful day.

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