Portfolio Recovery Associates Q3 2007 Earnings Call Transcript

Portfolio Recovery Associates Inc. (PRAA)

Q3 2007 Earnings Call

October 29, 2007 5:30 pm ET

Executives

Jim Fike - VP of Finance

Steve Fredrickson - Chairman, President and CEO

Kevin Stevenson - CFO

Analysts

Robert Napoli

Mark Hughes

John Neff

Edward Hemmelgarn

Audrey Snell

Sameer Gokhale

David Scharf

David Post

Craig Hoagland

Presentation

Operator

Good day, ladies and gentlemen. And welcome to the Third Quarter 2007 Portfolio Recovery Associates Inc. Earnings Call. My name is [Shanik] and I will be your operator for today. At this time, all participants are on a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the call over to Mr. Jim Fike, Vice President of Finance. Pleased proceed.

Jim Fike

Good afternoon. And thank you for joining Portfolio Recovery Associates third-quarter 2007 earnings call. Speaking to you as usual will be Steve Fredrickson, our Chairman, President and CEO, and Kevin Stevenson, our Chief Financial and Administrative Officer. Steve and Kevin will begin with prepared comments and then follow up with a question-and-answer period. Afterwards, Steve will wrap up the call with some final thoughts. Before we begin I’d like everyone to please hear a note of safe harbor language.

Statements on this call which are not historical, including Portfolio Recovery Associates or Management's intentions, hopes, beliefs, expectations, representations, projections, plans, or predictions of the future, including, with respect to the future of Portfolio's performance, opportunities, future space and staffing requirements, future productivity of collectors, expansion of the RDS, IGS and Anchor Receivables Management businesses, and future contribution of the RDS, IGS and Anchor businesses to earnings are forward-looking statements.

These forward-looking statements are based upon Management's beliefs, assumptions, and expectations of the Company's future operations and economic performance, taking into account currently available information. These statements are not statements of historical fact.

Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ from those expressed or implied in any such forward-looking statements as a result of various factors, including the risk factors and other risks that are described from time to time in the Company's filings with the Securities and Exchange Commission, including, but not limited to, its annual reports on Form 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 the Company's website, which contain a more detailed discussion of the Company's business, including risks and uncertainties, that may affect future results. Due to such uncertainties and risks, you are cautioned not to place undue reliance on any forward-looking statements which speak only as of the date here of.

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

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

Steve Fredrickson

Thanks, Jim. And thank you all for attending Portfolio Recovery Associates' third quarter 2007 earnings call. On today's call, I’ll begin by covering the Company's results broadly, and then Kevin will take you through the financial results in detail. After our prepared comments, we will open up the call to Q&A.

To begin let me say flatly that this was not the quarter we were shooting for, it’s important to recognize, however, that the core business of Portfolio Recovery Associates remains strong and growing and the outlook for the future is as bright as ever.

The reality is, several factors came together in the third quarter to limit the earnings growth we were able to generate compared with the year ago quarter. Let me be specific, one interest expense stemming from both our third quarter debt purchasing activity as well as our one million share stock buy-back, which we completed in the third quarter, drove incremental net interest expense of $1.1 million or $0.04 a share net of taxes.

Two, we took a higher than normal allowance charge of $1.2 million or $0.05 a share, again net of taxes, against certain pools of debt. Taken together, these first two factors accounted for $0.09 a share of net income.

Three, sharply increased staffing to accommodate significant increases in debt purchasing hurt near term productivity.

Capacity expansion always has this effect, and we have taken steps to bring these new collectors up to speed more quickly. We’ll discuss these three factors in more detail, as Kevin and I go through the quarter. But I wanted to provide this context for you upfront.

Now in terms of our performance in the third quarter, we continued making significant acquisitions of charged-off debt in Q3, investing $57.4 million. Year-to-date purchases now total more than a $160 million, ahead of any prior full year total in our history.

We produced owned portfolio cash collections of $65.2 million up 9% from $59.7 million in the same period one year ago. Q3 cash collections were also up slightly from Q2 2007, despite seasonal weakness.

In addition, we produce strong fee-for-service revenue $8.5 million in the third quarter representing 39% year-over-year growth. Overall, we saw a 14% increase in revenue to a strong $54.6 $million. Net income grew 4% to $11.7 million for the reasons I mentioned earlier. Per share earnings were $0.75 on a diluted basis.

Finally, we have realized productivity of $142.26 per hour paid which includes the effect of aggressive staffing and lower hourly productivity at our new Jackson Tennessee call center as well as normal seasonal factors. All told, we had more than a 178 owned portfolio collectors in Jackson at quarter's end, up from just a 132 at the end of Q2.

Let me now walk through our performance in detail, starting with a very strong $57.4 million in portfolio acquisitions. Overall, we acquired 59 portfolios from 23 different sellers including several new relationships for us. The majority about 76% of our third quarter purchase volume, in terms of dollars invested was a combination of Visa Visa/MasterCard and private label credit card asset classes. The remainder came from pools of auto-related receivables, both secured and unsecured, medical, utility, and installment loan accounts.

The bankrupt accounts acquired during the quarter are included in the Visa/MasterCard in auto-categories. Bankrupt accounts accounted for about 18% of our purchase activity this quarter in terms of dollars invested. Market conditions continue to slightly improve levels in the quarter with a solid amounts supply in steady to softening pricing. We continue to see less of what we would consider to be irrational pricing during the third quarter. Most competition appeared to be less aggressive than recent prior quarters.

During the quarter, we continued purchasing under an extension of our older, fresh forward flow, which represented about 14 % of the period's purchases. This flow is set to continue through November of 2007. Our second newer flow of prime paper represented about 16% of our buying volume in terms of dollars invested during Q3. This flow runs through March of 2008.

Now onto collections, as I mentioned earlier on the owned portfolio collection front portfolio recovery associates recovered $65.2 million in the third quarter up 9% from $59.7 million a year earlier. Offering a bit more granularity, call centre collections were $37.4 million up 15% from the same quarter last year and representing faster growth than the 11% year-over-year rate of Q2.

Call centre collections are the first to show an impact from our more recent debt purchases and at this point are the primary drivers of our cash collection growth. Legal collections were 33% of total cash collections in Q3 2007 at $21.4 million compared with $19.6 million in Q3 of 2006 representing year-over-year growth of 9%. This modest increase is as a result of the continued significance investment we made over the last several years in pursuing lawsuits on appropriate accounts. I do feel as though we have more room to be increasingly aggressive with our legal strategy.

Cash collections for our purchased bankrupt accounts were $6.3 million down 15% from Q3 2006 but up slightly from Q2 2007. Bankruptcy cash collections over the past couple of quarters have slowed in stock contrast to the period of exceptional growth we experienced earlier. This change is the result of our moderate bankruptcy buying since the change in the bankruptcy laws in late 2005 and is inline with our projections.

As you know, we track productivity in terms of recoveries per hour paid. The core metric that measures the average amount of cash each collector brings in. This metric finished at the $142.26 for the first nine months of 2007 compared with a $146.03 for all of 2006.

Excluding the effect of trustee-administered purchased bankruptcy collections, PRA's 2007 productivity through the end of Q3 was a $129.35. This compares with $132.15 for all of 2006.

We have taken steps to address this flattening productivity including several significant reengineering initiatives in our call centers. These initiatives are focused on productivity and employee retention although in the short-term they may causes to turn over more highly tenured employees, whose productivity is considered unacceptability low.

Over all we have changed the way we handle in bound calls in an effort to allow our core collection employees to focus more intensely on Q management. We also have adjusted our incentive pay program to more tightly align with tenure based collector goals as oppose to a more static tenure blind approach.

This will permit less tenured employees more opportunity. As a result of these changes we created a new inbound call unit staff with approximately 70 employees. The staff of this inbound group will be included in our productivity and staffing numbers. This new group is been located adjacent to our Anchor Receivables Management operation, and in some cases using seats that Anchor had held historically, as a net result we have freed up approximately 75 seats in our primary Norfolk call center that can be used for new hires.

This combined with the first 20 new seats coming online from our Kansas expansion will permit us to moderate new hires in Jackson during Q4. Our new call center in Jackson Tennessee, continue its substantial growth. We ended the quarter there with about a 178 owned portfolio collectors, in a staff of 11 IGS skip tracers. This is more than 1250% staffing growth over the past six months, and has made it more difficult to pull up overall productivity there, especially when you consider the seasonal factors we face in Q3.

Nonetheless our new call center manager is having a very positive impact on the Jackson center. After finishing his training during July and early August he was able to focus this center in late August and September, with the result being record productivity during September. Even while adding many new employees, Jackson increased productivity from about 30% of our top center standard to about 40% in September.

Our Norfolk center also improved during the quarter on a relative basis. Overall at quarter’s end our owned portfolio collector head count was 973, up 7% from the end of Q2, and up 21% since the beginning of the year.

Now let’s turn to our three fee-for-service businesses, IGS, Anchor and RDS. During the third quarter our fee-for-service businesses saw revenue increased 40% from the same period a year earlier to $8.5 million. IGS continues to shine in terms of revenue and profit growth, increasing both from the prior quarter and year-over-year. We continue to grow placement inventory and are very pleased with the performance of the business.

Anchor continued to operate at fairly modest scale, with both revenue and operating income declining slightly from the prior quarter, but with improvement on a year-over-year basis. We continue to operate this business with the mandate of appropriate profit and risk, which is limiting our ability to strongly grow the business right now. We see no improvement in the pricing environment of the contingency collection business at this point.

RDS increased revenue modestly on a sequential basis, while growing strongly year-over-year. Income was down somewhat on year-over-year basis, as we made staffing investments to support the growth of several new product offerings.

During the quarter RDS acquired most of the assets of a Louisiana-based insurance premium tax administration company, the Palmer Group, in a mostly cash acquisition. Although revenues from this purchase are relatively modest, they still given us over 100 new clients in the state of Louisiana, as well as desirable expertise in the insurance premium tax administration business.

We think this kind of smaller tuck-in acquisition is very exciting, and could help us accelerate the growth in our fee business as we expand our client base, service offerings, and our geographic footprint more rapidly than we could through internal marketing efforts alone.

Lastly, I would like to address our capital structure. During the quarter, we completed our previously announced share repurchase plan, buying back the remaining 900,000 shares under our original 1 million share authorization. We acquired these shares during the quarter at an average price of $50.41. As a result together with our $57.4 million in portfolio acquisitions, PRA ended Q 3 with $100 million of debt on our balance sheet.

Once again, we produced return on equity for the quarter in excess of 20%. With $223 million of shareholders' equity and relatively modest debt at quarter end, combined with strong profitability and cash flow, PRA has significant resources to permit the continued levering of our balance sheet.

Importantly, as we have communicated consistently in the past, we believe the Company will have substantial opportunities in the future to invest in distressed assets or acquire companies to further diversify our business. In fact, as Kevin will discuss with you shortly, we've reached an agreement with our bank group to further increase our credit line providing even greater resources to make such investments.

With that, let me turn the call over to PRA's Chief Financial and Administrator Officer to take you through the financials. Kevin?

Kevin Stevenson

Thank you, Steve. Our third-quarter 2007 performance showed solid financial results in all areas. However, as Steve mentioned our net income growth was disappointing. I'll be providing additional insight about the revenue and expense perspective.

Net income in the quarter grew 4% to $11.7 million. Total revenue for the quarter was $54.6 million, which represents growth of 14% from the same period a year ago.

Breaking our second-quarter revenue down into its three components, once again, the majority of total revenue or $46.4 million came from income recognized on finance receivables. This is revenue generated by our owned debt portfolios.

Income on finance receivables is derived from the $65.2 million in cash collections we recorded during the quarter, which represents a 9% increase over Q3 2006. Third-quarter cash collections were reduced by an amortization rate, including a net allowance charge of 29.2%. This amortization rate compares with 28.2% in Q2 2007 and 30% in Q3 2006, and our full year 2006 rate of 38.9%. Year-to-date 2007 amortization is now at 30%.

As you saw in our press release, we incurred a total of $1.2 million in net allowance charges during the quarter, representing about 6% of all amortization realized during the quarter. These charges are associated with various different pools and represent adjustments to better reflect actual versus previously forecasted future collections. To rewind more color on the allowances approximately $200,000 comes from when I referred to as older, high yield deals.

These are pools, it has result of continued consistent over performance had yields increased in many cases substantially. When we experience a period of more modest cash collections, these high yield deals even though all they are performing at levels far in access of original expectations, may need [ambition] reserved to fully amortized the remaining carrying balance over their expected economic life. That was the case this quarter.

We took 480,000 allowances on several high yielding bankruptcy deals. Deposit performed well in access of expectations and therefore had experienced yield increases in the past. Once these high yields, any deterioration in performance can require allowance to set them back on track that was the case here.

Finally, we took a 500,000 allowance on a more normal older deal, where we experienced some degradation in performance during Q3. Although, we believe it might out of the question that this performance can be improved in Q4 and in the future at this point the proper course of the action will take the allowance.

We're not pleased to set higher than normal allowances. I do think it's realistic to assume that some modest percentage of any debt buyers' amortization will always set the allowance charges. SOP 03-3 simply creates an environment to support this. Based on the directive to increase yield on over performing transactions and a provision on lowering yields once they're increased.

Nonetheless, we will continue in an effort to minimize allowances. During the third quarter cash collected on fully amortized pools was $5.6 million down from $7.4 million in Q3 2006. In referring to fully amortized pools, I mean, purchased pools with no remaining basis on our balance sheet with zero basis assets. Eliminating those pools from our amortization calculation gives us a core amortization rate for Q3 of 32% versus 34.3% in the third quarter of 2006 and 35.3% for all of 2006.

We continue to believe it is a byproduct of SOP 03-3 in effect since January 1st, 2005. The quantity of zero basis cash collections should gradually decline overtime and this quarter's trend is indicative of that. It should be remembered that as a result of SOP 03-3 we aggregate all similar paper types acquired in the quarter in order to calculate revenue. These larger groupings allow us to forecast more accurately, generally keeping the purchase finance receivable asset on our books for a longer period of time than we have historically, which in turn drive the lower average portfolio amortization rate over the long-term.

During the quarter, commissions and fees generated by our fee-for-service businesses, Anchor, IGS, and RDS totaled $8.5 million. This compares with $6.1 million in the year-ago quarter and represents a sequential increase from Q2, 2007.

The third component of total revenue, cash sales of finance receivables, was once again zero for the quarter. During the quarter, we retained all of our purchases for our internal collection efforts, as we have in every quarter since our IPO in late 2002.

On the expense side, we have experienced an increase of approximately $1.6 million when compared with Q2, 2007. This primarily came from the compensation line as well as outside fees. The compensation line items grew commensurate with our rapidly expanding workforce, while the outside fees are mostly in IGS impact relating to agent repossessions. As we are able to achieve improvements and productivity, we should be able to put down our pressure on the compensation line in relation to revenue and cash collection, as we have done historically.

Operating margins during Q3 were 35.8% compared with 38.8% in Q2 2007, 38% in Q3 2006, and 38.2% for all of 2006. As we have stated repeatedly in the past, we will make further investments in professional and collector staff throughout 2007 to assure we have the talent on hand to best exploit the money long-term opportunities we see.

During 2005 and 2006, the fee businesses caused our operating margin to be about 450 basis points lower than it would have been without them. During Q3, we continue to run any narrowed compression of about 400 basis points. As we have stated, we see real promise in these fee businesses, great synergy with other PRA activities and believe we will be able to continue to expand our margins and income substantially over the years.

Operating expense to cash receipts is the perhaps more insightful efficiency ratio as variations in purchase price amortization rates cause our revenue ratio to fluctuate regardless of true operating efficiency levels. Operating expenses as a function of cash receipts, excluding sales, have narrowed steadily from 54% in 1999 to 43% in 2004 and 2005 and 45% in 2006. This ration is 47.6% for Q3 up from Q3 2006 of 45.1%. This was driven by the same factors previously mentioned in my discussion of operating margin.

While an interesting metric, please understand we are not running our business solely focused on operating margins. We feel that earnings efficiency ratios, such as return on equity, return on investor capital, and growth, and earnings are much more important for long term health of the company. Should we need to invest in people, data, services or other items the drive up or expense ratios in order to improve ROE, ROIC, and earnings growth over the long term, that is what we will do.

In addition to operating margin expansion, we expect from our fee-for-service business overtime, we will remain keenly focused on operating expenses in 2007, as much as ever. However, we will not cut corners that could impact long term cash generation.

For example, in terms of our investment facilities we are now occupying the entire new 35,000 sq, ft. administrative and executive centre in Norfolk, Virginia, as we've discussed in prior quarters. During the third quarter, part of our IT and accounting functions also began to occupy the space.

In the our Kansas call centre expansion, which will give us capacity for about 205 collectors, had its second phase completed in Q3, and should be totally complete during Q4. This will permit us to add up to 20 new reps there during Q4 and an additional 25 to 30 in early 2008.

Our balance sheet remained strong during the quarter, despite significant purchase of new portfolios and substantial activity with the completion of our share repurchase plan. Cash balances declined slightly to $14.5 million at the end of the quarter.

Running at the balance sheet, we had $326.5 million in finance receivables $22.3 million in property equipment and other assets. $18.6 million in goodwill and $5.4 million in intangible assets all related to our business acquisitions.

During 2007, we are incurring intangible amortization expenses of approximately $500,000 per quarter. We have about $100.1 million of short and long-term debt and obligations under capital leases. With total liabilities, both long and short-term of $164 million. The majority of this debt is the $100 outstanding under our line of credits. At September 30, 2007, shareholders equity totaled $223.2 million.

As mentioned earlier during Q3 we moved forward towards completing the previously announced capital structure optimization program. And as a result, we completed our 1 million share repurchase program, as the Company bought back 900,000 shares of common stock in Q3, in open market transactions at an average price of $50.41 per share.

To recap our entire program we have now repurchased 1 million shares of stock, at a total price of $50.6 million for an average price of $50.56 per share.

As you saw in our press release, we recently reached an agreement with our bank group to increase the size of our credit line to $270 million, up from $150 million, under terms similar to our prior facility. We took this step because we want to be in a position to capitalize on attractive debt and/or company purchase opportunities that may present themselves. We believe the current market is just the sort of environment that can respond these very attractive situations.

In summary, we are focused on a long-term growth of PRA, while we are interested in driving all the key metrics that measure our progress, we will not substitute short-term goals for long-term goals.

Q3 is an example of just this approach. Those with a long-term view should know that we’re setting strategy based on a multi year view of our operations and opportunities.

With that I have completed my prepared comments I would like to open the call up to Q&A. Steve and I will both be available to answer your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) You have a question from the line of Robert Napoli. Please proceed.

Robert Napoli

Thank you. Good afternoon. Kevin, question for you, though Kevin probably, I guess on the charges that you talked in the quarter, and what kind of confidence do you have that they are in fact abnormal hits this quarters? Didn’t say one should expect something on a quarterly basis? We have seen small hits out of you, obviously this was much bigger. But what is your confidence that level that this is an abnormal level? And why are you confident in that, if you are?

Kevin Stevenson

Well, what I was getting at is that it’s certainly abnormal compared to our past and we booked anywhere from as low as about $90,000 a quarter up to about $450,000 last year. So, I kind of standby my comments saying that really any small percentage of really any debt buyers, amortization is going to come from reserves or impairments. So, we are always going to stayed focused on doing our best to limit this things I think that again the $1 million been about double the largest impairment thus so far to date, but I think still within that normal band that one might expect.

Robert Napoli

Okay.

Kevin Stevenson

Hope that answers your question, or didn’t it?

Robert Napoli

No, I guess it's helpful. Let me think about it. Talking about return on equity: you guys focus on ROE certainly makes a lot of sense, but what is your confidence level that you can maintain at least 20% ROE guys have been generating? I mean, you have been done it without leverage, but now you are using some leverage in generating their 20 ROE, I mean would you guys be -- are you confident with 20 ROE? Would you be disappointed if it’s below that level?

Steve Fredrickson

Well Bob, as we said, we are trying to focus on several different metrics which we feel are important for long-term. We don’t give guidance and so I don’t want to be evasive, but I also want to stay consistent with our policy there. We are certainly running the company in such a way as to create good solid ROE for a long time to come.

Robert Napoli

Okay. And on the expense line: I think Kevin talked about being able to bring that compensation number as a percentage of revenue, or cash collections, back. Putting downward pressure on that, I mean, what kind of a target level? How much downward pressure do you think you can put on that, and right now? In order to, I guess, with the rapid growth in collections, would it be prudent to think about that number maybe going up, before it goes down, as you had collectors?

Kevin Stevenson

Yeah, I didn’t try giving the feel for that was going on, but certainly if you look at Jackson, those guys are very new, yet coming up prepared nicely; but its going to take time to hit those guys to be as productive as reps who have been here awhile. And that's really the point of my comment, is that we've just ramped up so aggressively in the near term that, again be rest assured, our focus is watching the stuff daily and trying to get these guys to curb as fast as possible in terms of productivity.

Robert Napoli

Can you give any specific metrics on the new facility on productivity trend?

Kevin Stevenson

We did comment about one of the things that we do on a monthly basis and that is to examine really core cash collections per hour paid, at each one of the call centers, and we also always look at those relative to the top producing center. And we saw very good movement from the Tennessee office, especially during September, and hope that that's the beginning of a trend in showing that, especially since the manager that took over there just several months ago is having the impact that we hoped for, and he is moving that center along.

Robert Napoli

Thanks, and just one last question: I missed the number you gave the collections from fully amortized pools?

Steve Fredrickson

Do you have exact numbers here? Right, they are $5.6 million.

Robert Napoli

Thank you.

Operator

Your next question comes from the line of Mark Hughes. Please proceed.

Mark Hughes

Thank you very much. What is the FTE equivalent fulltime equivalent in the quarter for collectors?

Steve Fredrickson

I've got that somewhere.

Mark Hughes

I think total number 973 just trying to curious what the FTE was?

Steve Fredrickson

FTEs were 872.

Mark Hughes

And that will be what you report in the Q?

Kevin Stevenson

Yes.

Mark Hughes

Okay.

Steve Fredrickson

Which one is right number there [one or two?]

Kevin Stevenson

Yes 872, that's correct.

Mark Hughes

Okay. Thank you very much.

Operator

Your next question comes from the line of John Neff. Please proceed.

John Neff

Hi. Thank you I was just wondering if you could just break out the gross impairment charge and recoveries to get to that net 1.2 million? Could you net out anything.

Kevin Stevenson

I got it. No, that was gross that we didn’t net out anything, there is no recovery.

John Neff

No recovery. Okay, and top to say but would you attribute the charge in the quarter to productivity decline thing as were back at, roughly 2005 levels and I know typically sort of model out current productivity levels. When you’re making a purchase?

Kevin Stevenson

So your question is: What I attribute, any of that reserve, to productivity issues?

John Neff

Yes.

Kevin Stevenson

Or, I guess corresponding with staffing issues. That's hard, that’s a tough one I think from the accounting perspective, we simply view cash collections and we look at the flow. And as I talked about, two of the three deals were very high yielding deals and any kind of weakness. So I suppose one could make the argument that it could be impacted by either staffing or productivity issues. That's the case and hopefully we will be back on track in a few quarters. And will be able to recover that. But right now, we decided to take the allowance as it sets.

John Neff

Okay. And then I was just wondering if you can give us a little bit of an update on the purchasing environment: both on the supply and on the demand side?

Kevin Stevenson

As we commented, we felt that the environment continues to move slightly in a debt purchaser’s favor. We continued to see good flow of portfolios; we also felt that pricing was steady to slightly softer. We continued to believe we’re buying at slightly better long-term yields than we had been previously.

John Neff

And, I just want to make sure that I heard this right, Kevin did you say 75% from credit cards in terms of purchasing in the quarter.

Kevin Stevenson

Yes, 76% was combination of Visa MasterCard and private label credit card and that’s in terms of investment amount.

John Neff

You had mentioned that it has been closer to that 90% level, and you mentioned medical purchasing in you prepared comments, any elaboration there. And also can you elaborate on the step-up here after kind of your tailing down for a while, looks like bankruptcy stepped up as well?

Steve Fredrickson

Yeah, on the medical side, I would say that we continue to make some modest progress in our program there. Our feeling is that pricing in the medical environment is getting a little bit more rational, we felt that pricing had been kind of crazy in the prior year, year and half and it seems as though it’s leveling out a bit, more meeting what we believe is, realistic level.

So, we are doing a little bit more there and then on the bankruptcy side, we are simply seeing a little bit more flow of product, really specially as you see portfolio's growth somewhat, and filings increased somewhat from the very low level that they had been following that 2005 change in law.

John Neff

Are you buying pre-reformed law or post-reformed law?

Steve Fredrickson

It would continue to be a combination of the two, although as time goes on we are buying more and more post-amendment filings.

John Neff

Okay. It looks encouraging, and then, you gave the collector headcount, Kevin, but it is 978, but what would that headcount be? And if you add in the first line supervisors as well, the number I am taking out of the second quarter, was 1051.

Steve Fredrickson

Right yes, that will be 1144.

John Neff

1144. And last question, do you anticipate doing any outsourcing of collections, at least temporarily, while given the purchasing and the ramp in the productivity, the current sort of softening in productivity? Thank you.

Steve Fredrickson

We have done, and continue to do, small amount of outsource of collection work. We continue to look at kind of experiments and projects that would allow us to work various segments of our portfolio in an outsource scenario.

So, that’s something that we continue to evaluate on an ongoing basis. Just to provide a little bit of clarity, we were not looking at that in lieu of building our own capacity at this point. We are looking at it simply as a supplemental collection channel.

Operator

Your next question comes from the line of Edward Hemmelgarn. Please proceed.

Edward Hemmelgarn

Yeah, just a couple of questions here, one, could you talk a little bit about, you mentioned an inbound call centre that you said how does that work?

Steve Fredrickson

Previously an inbound call would be made, it would travel to one of our call centers, and be distributed automatically to any given collector in any given call centre.

We had changed that call routing, so that all inbound traffic is being received by a dedicated group of collectors. And we are trying to deal with those inbound calls in a kind of [sync] uniform manner, as opposed to distributing them across the floor.

Edward Hemmelgarn

Well, I guess it’s much of a thing: How does an inbound call originate? I am just curious, it doesn’t strike me as people are typically calling you if they owe you money.

Steve Fredrickson

No, only about 10% of our call volume is inbound, so it is not a huge piece of our volume. However, when someone is calling a debt collector, generally you've got a higher propensity that that call is going to be a payer then in outbound call and so you want it, make sure you treating it with a very high quality experience. And so, we're focusing on making sure that we are creating that high quality experience in capturing as many of the dollars as possible through those inbound call.

Edward Hemmelgarn

That they are calling and after you'd made a prior contact of that?

Steve Fredrickson

That's right. Either through an outbound call through a later or in some cases they may be calling off of a credit line or something like that.

Edward Hemmelgarn

Okay. Thanks. Second you've also said that you've been adding to your collector based very nicely this last year, it has lag grow significantly your increases in dollars at least to spend on non-bankruptcy debt, which is up about a 150% or something last couple of years. Can you give more on the exact numbers through the latest purchases of this flip? But as your number of collectors are in near a much. Do you think that you, that there is an opportunity to continue to significantly increase the collectors, I mean, as that your leaving something there on the table, if you had more material collectors you would be able to be collecting substantially more than you are really now?

Steve Fredrickson

Well, I think that there is room for cash collection improvement, as our productivity comes up, however, you don't want to staff up. You don't want to double your staff. If your staff is in a certain area collecting it has the productivity you are going to have issues down the road in that situation. So, we're simply, for at least a short period of time, living with the lower productivity, but I think the other concept that you have got to focus on, in the numbers that you threw out, is not just the dollars of investment, but also the multiples that we think are associated with those. So certainly, as time goes on, and as purchase multiples in different periods become evident, it's also clear that a dollar of investment in one period doesn't necessitate the same level of collectors as another. And so, we're trying to staff appropriately for the amount of cash collections that we see in each trench and at this point, we think, we're staffed appropriately if we see collection results are multiple start to expand we may rethink our staffing models.

Edward Hemmelgarn

Okay, thanks.

Operator

Your next question comes from Audrey Snell. Please proceed

Audrey Snell

Few questions gentlemen, do you expect seasonal slowness in the fourth quarter of this year?

Steve Fredrickson

Well, the seasonality in the collection business Audrey, I think is it just a fact and generally cash collections all things been equal tend to peak in Q1 continue to some degree in Q2 and then fall sequentially in Q3 and Q4 strictly from a seasonality standpoint.

Audrey Snell

Okay. So, we should factor that and also how much of your results would you attribute to a slowing economy?

Steve Fredrickson

Well, we've spent a fair amount of time going through our payment data trying to make sure that we understand that specific issue and as we look at really wide variety of data from all of our annual trenches of purchasing. We are not seeing significant differences in how papers liquidating for us payment sizes, continue to look good, the amount of payment falls that we take continue to look good. Our settlement rates are steady. We get some anecdotal evidence that the consumers are certainly as difficult as ever, if not more so to collect from, but thus far our payment data is looking pretty steady.

Audrey Snell

And yet Kevin alluded to the impairments impart being caused by the backing off some of the yields and formally increasing yield pools. So, I am curious about that whether that's function of perhaps the age of the portfolios or something else?

Kevin Stevenson

Again, John Neff actually also asked: Do I think it's related to short staffing or productivity issues? And I kind of said: “Well, if it does, it will be released”. But actually, one of these pools that I mentioned with $200,000 reserve against, you'd actually seen one of those earlier with some reserves on those some quarters ago. So, just to give you a quick insight of that particular deal, it's got almost of 600% yield on it.

So, I mean, these yields are just the kind of legacy deals that had accrued these large yields on, and any weakness in cash flow. So, we'll see how it goes in Q1, Q2 with those deals. But I don't know if that answered your question? But I don't know that again, from accounting aspect, we are looking at these things they are just incredible home run deals and we just were a little bit off on cash projections.

Audrey Snell

So, the comps are getting harder on the older deals that were stars? So, are we to conclude then that really it's a blocking and tackling question, and just getting some of these productivity measures improved and simultaneously expanding in additional direction?

Steve Fredrickson

That would be our perspective. We feel that this productivity challenge continues to be an issue for us. We think we're moving it in the right direction based on data that we've gotten through September. But it certainly continues to be as you put it a blocking and tackling issue, this is all about managing and motivating your people and increasing their ability to collect per hour paid.

Audrey Snell

One last question, Kevin: Why increase the line of credit significantly at this point? Are you proactively anticipating a lot of charge-off paper coming into the market in fourth quarter or perhaps first quarter of next year? Given the credit issues we’ve seen in the general market, or has it something to do with perhaps an acquisition or something else could you elaborate a little bit?

Kevin Stevenson

Yeah. That’s right. I try to in my script, and it might, I am bearing there little bit, but that was really the goal, the goal is that we need to make sure we’re prepared to take advantage of anything in this particular environment that might deal to us. So, in either of those two cases so, you should be buying, continue to be robust.

I want to make sure that at least from my standpoint, the credit facility is there to let Craig and all the other guys, who buy debt do that. Or if they attractively price tuck in acquisition as Steve put it earlier. Should present itself, I want to make sure there is capital there for that as well.

Audrey Snell

Partly is the same question, will you consider using some of those proceeds for additional repurchase authorization?

Steve Fredrickson

I mean, we are never going to preclude any action, Audrey, but at this point in time as evidenced by our lack of communication in that direction that’s not something that the boards authorized.

Audrey Snell

Okay. Thank you.

Operator

Your next question comes from the line of Sameer Gokhale. Please proceed.

Sameer Gokhale

Hi, good evening. I just had a question about the, I think there is some comments about the collector turnover and I wanted to talk about those within the context of the productivity improvements. I think you all had mention on the call that you are trying to put in some more policies were there might be some more turnover among the season collectors?

Steve Fredrickson

Right.

Sameer Gokhale

I was wondering how we should think about that relative to the overall productivity improvement that you’re expecting?

Steve Fredrickson

Certainly. It is I guess not a completely evidence issue, when we talk about tenured productivity, but as we have a long commented our most tenured people tend to be our most productive. We have long operated under a collection concept of account ownership in most of our collection processes and as such, a tenured collection representative will build a book a business, build a book of performing accounts overtime and generally as their skill set builds, their book of business also builds and they are paid for the dollars collect. So, they get paid a residual I guess you could call it, on what they've done in the past as well as dollars if they are bringing in, fresh dollars they are bringing in each month.

In really digging into our productivity in an attempt to make sure we understood exactly what’s going on in the floor, we made the determination that we had some level of experienced people who had build that book of business so to speak, but who had backed off in current production. And without changing the world in which they live from a compensation standpoint, we've simply tried to tweak the goal environment so that they need to compliment that existing book a business with a constant fresh dollar collections or new money collections.

And if we have experienced people that have this existing base of business, that for whatever reason are not up for producing new money in acceptable level, then perhaps its time that the employment of those folks is reexamined. So, that's what we are going through now. We don't want to get into a situation where we are simply paying people for what they did yesterday. We need people driving in cash collections from portfolios today.

Sameer Gokhale

Okay, so its net, net an improvement in productivity offset partly by this impact, from may be higher turnover on the season collectors. Is that fair to say?

Steve Fredrickson

Well the changes were made during the quarter and so, I don't think you saw a great deal of impact. I would say that our comment is more related to what may happen in the future. So, if you see our one year plus collection numbers bounce around a little bit, it may very well be that situation.

Sameer Gokhale

Okay and then the other thing I just want to clarity is the tax rate. I was wondering, it seems like this quarter the tax rate was at 36.7% compared to kind of the roughly averaging of the mid 38% range. Going forward, should we expect the lower tax rate on the quarterly basis or how should we think about that from a modeling standpoint?

Steve Fredrickson

No, this is our Q3, which is the time we follow-up our tax returns. We get our annual true up after the quarter. So that's really what you saw there.

Sameer Gokhale

Okay and then do you have the dollar amounts for the average payment size, I think you had said last quarter that it was a little bit under $80 or so. Is it roughly about the same number this quarter or maybe slightly below that?

This is I think when you were talking about the collection strength on your portfolios in the health of the consumer?

Steve Fredrickson

Right, just give me one second. Actually our average as we would call it pure payment was trending up slightly during this quarter.

Sameer Gokhale

Okay. That’s helpful thank you.

Operator

You have a question from the line of David Scharf. Please proceed

David Scharf

Hi good afternoon. Just a couple of quick follow-ups. Norfolk I didn’t catch it I know the productivity was flat last quarter which was among the bigger surprises how did that perform in the third quarter?

Steve Fredrickson

Our productivity there I did comment was on a relative basis moving up so we feel like some of the changes that we were making are doing the right thing to that Norfolk's staff. The Norfolk staff also being our most tenured is going to be the sight that I think has got the most impact to the change in the collection policies and collection practices. So it will be very interesting I think over the next couple of quarter to see how Norfolk productivity tracks.

David Scharf

Okay. Switching to purchasing you have commented on the overall environment just curious you’ve got two flow deals that account for a pretty big chunk of purchasing these last few quarters and one of them of course expires next month. As you look at the supply environment have you already entered into any other material flow deals to kind of plug that whole or do you see more general spot selling on the market. Is that any cause for concern in terms of the volumes we should think about modeling?

Steve Fredrickson

I would say given what we have seen in the supply side of the market, we are not concerned about the flow deal we pricing this quarter.

David Scharf

Okay. And obviously after all these years I am not going to, not can even attempt to get any I'll say guidance side of view, but is it safe to say that the fourth quarter is typically seasonally very strong in terms of lot of banks purging accounts in that at least directionally we on to be looking it probably a larger number than we saw in the third quarter?

Steve Fredrickson

Ahead we are right up until the last part of your question. I’ll just say that generically we have typically seen good activity in Q4 and years past. And given everything that’s been going on in the financial sector, I think it’s reasonable to anticipate that we continue to see pretty decent volume of Portfolio’s for sale in the fourth quarter.

David Scharf

Okay. And then just lastly I wanted to make sure, I heard correctly, productivity year-to-date it looks like at least measured in terms of collections per hour paid is off about I guess 3.5% versus the prior year. If you’re seeing pretty constant payment metrics in terms of settlement rates in payments sizes in the like is 3.5% would you characterize that as entirely related to the aggressive staffing at Jackson or is their anything else that you could point your finger at.

Steve Fredrickson

There is nothing else I can point my finger at, however while we don’t believe that the underlying economy if that’s what your getting at gives us big swings on the collection front given the fact that we collect from this charge-off customers, that are so deeply delinquent. We do think that all things been equal it’s a little bit easier to collect in a better economic environment than a worse. And so, part of it maybe some economic impact there. But again it is not evident enough for us at this point to be able to extract that from at least the data we look at.

David Scharf

Okay. And just lastly, given how labor intensive it is, is their any discernible change in the overall wage environment over the last couple quarters or year.

Steve Fredrickson

No at the collector level we feel like its pretty much steady as she goes.

David Scharf

Okay. Got you, thank you.

Operator

You have a question from the line of [Michael Tanbon]. Please proceed

David Post

Hi this is actually [David Post]. Can you give us the monthly cash collections by tenure for the third quarter?

Steve Fredrickson

Actually we’ll give you a heads-up on that one, because of these reengineering efforts that we have put forth. We are no longer obviously going to be collecting the same way that we have in the past, and so that particular metric is going to kind of an apples and oranges situation, and so we won't publish it on go forward basis?

David Post

Okay. Because my follow-up is going to be and I guess I will adjust it with the older data up until this quarter. If I look at the one year or ten year collectors relative to the less seasoned collectors, the ratio of the one year tier collection to the less seasoned in second quarter was 240%, the previous quarter was 246%, and the [newer] if you look back in '05 and '06, it was about a 180% or 190%. So, at least relative to the less seasoned collectors, the last two to three quarters the more seasoned collectors appear to be doing quit a much better job. So, I am wondering why is the focus on the more seasoned collectors as oppose to the less seasoned collectors.

Steve Fredrickson

Again, it's really a focus on new money production and the thing that you can't separate out in those macro statistics is how productive an individual is in the new money category versus their existing book of business. Now, we have experienced reps who are incredible negotiators, and who produce a very high amount of new money each month and they add that to their existing book of business, and as a result they are very well paid.

However, we have other very tenured people, who have a very high base of existing money, who bring in very little new money, in fact significantly less new money than someone who may have three, four, five months of tenure. And though, that sub-segment of the tenured reps, is really what we are really trying to deal with. This is by no means an issue with all our experienced people. Most of our experienced people remain our most productive, but there are pockets there that we feel grew significant enough that we needed to make some changes.

David Post

Okay. So, are you essentially with the more seasoned people, is there going to be change in the commission system so it's kind of a tailing commission, so once you've been making a collections on this particular account for certain period of time, you get a smaller and smaller percentage and that's how they are intended to raise new money?

Steve Fredrickson

It's more of a new money requirement; as opposed to tailing things off on the older book of business.

David Post

Okay. Quote obvious, thank you

Steve Fredrickson

Just a quick comment, although no one asked about it, we think the other positive with this new system is that it will give a newer rep that is producing high amounts of new money. More reason to stick around and become tenured, and it will help us reduce some of the turnover that historically we had run into in months say three through nine. We think it's going to be productive for us.

David Post

When you do let go various more seasoned collectors, what will happen to those accounts that were assigned to them previously, where do they go?

Steve Fredrickson

Well they are just simply maintained, those furthermost part we're talking about legal money which is no longer being handle by that rep which the dollars will come in regardless and then the other is what we call a direct cheque base and those are cheques that are on file and they simply get moved over to a customer service unit that make sure those cheques all liquidate out overtime and if they don't or need to reset. They'll get a call, so we don't lose that money at all.

David Post

But there will be a lower commissions or lower expense associated with that account, right?

Steve Fredrickson

That's true. Yes.

David Post

Okay, thank you.

Operator

You have a question from the line of Craig Hoagland. Please proceed.

Craig Hoagland

Hi, I was just wondering on going back to the allowance, how mechanistic is the process of determining that amount? Is it just strict completely mathematically driven or is there a judgment involved as you look back on these?

Steve Fredrickson

So, the question is how mechanical is it versus how much judgment?

Craig Hoagland

Yeah.

Steve Fredrickson

So, what happened actually is that actually, gentleman here in the room Jim Fike, who read the opening few pages. Actually, we'll start off that process entire income recognition process and then he looks at it. And then it gets moved over to me to do a sign-off and review. So the answer is, it is mechanical once the cash collection projection is set. But that it so but there is judgment used in terms of where do we think the cash collections are going and what has cause them to be kind of where they are at.

Craig Hoagland

Okay. So that cash collection forecast is refreshed periodically.

Steve Fredrickson

Right.

Craig Hoagland

And that's the judgment call.

Steve Fredrickson

What will happen is, we've got the original curves and we've got the curves that are adjusted overtime. And what we're basically doing is just trying to do some curve fitting, trying to look at where those data points actually have fallen and what their trend lines tell us. In some cases, we will go back to the acquisitions group and say, hey, what you guys seem here, where these accounts on the floor, are they pocketed somewhere, they shouldn't be. So, there are situations, in fact, the larger reserve that I talked about, that was one where we were looking at where the accounts are, whose working and what queues they are in. So, we really kind of dive into them in some cases on a very, very detailed level.

Craig Hoagland

Okay. So, it's not just a simple thing, we thought we get this much correction and we got less than that?

Steve Fredrickson

Right, yeah, no, its not, if that easy I can close lot quicker, lot quicker.

Craig Hoagland

Okay. My other question is, how quick when you buy a, like last couple of quarters, you've done a lot of buying. What's the lag between when you buy things and when they are fully integrated into your collections process?

Steve Fredrickson

I think when they full integrated.

Craig Hoagland

When they are being addressed with the full effort of your collections team?

Steve Fredrickson

Good question, and it definitely can be impacted by volumes, there will be times where literally, we will be backed up loading and converting accounts and in those cases, we could have something that gets moved out from a perfect scenario by may be 30 days or so. There will be other situations where we will plan when we do our purchase that a collection activity is going to be ramped somewhat and we will price accordingly. So those accounts may be treated slightly differently than we would in a different scenario but again we try to price for situations like that.

Craig Hoagland

What was the range of time, I mean, is it from within a week of making a purchase to several months later, or what is the range?

Steve Fredrickson

No, generally, we have got accounts in converted, loaded, and lettered within a couple of weeks of the purchase. Again, if we're really busy and it's a low priority portfolio. You could get pushed out some what from that.

Craig Hoagland

Okay. Thank you very much.

Steve Fredrickson

Thanks.

Operator

There are no further questions. I would like to turn the call over to Mr. Steven Fredrickson for closure remarks. Please proceed.

Steve Fredrickson

Thank you, operator. First I would like to thank all of you for participating in our conference call. Before we go, I would like to reiterate a few key points about our third quarter.

As Kevin and I discussed, interest expense from both our substantial debt purchasing activity and stock buyback, a higher than normal impairment charge, and sharply increased staffing combined to holdback earnings growth from the levels we had hoped to achieve. However, the core business of Portfolio Recovery Associates remains strong growing and the outlook for the future is as bright as ever.

In the context of the long-term, we continue investing in our businesses, adding expertise, capacity, and capabilities as we develop ever more effective methods of underwriting in collecting. Thanks again for your time and attention. We look forward to speaking with you again next quarter.

Operator

Thank you for your participate on today's conference. This concludes the presentation. You may now disconnect. Good day.

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