Oct 30, 2013
Executives
Steve Fredrickson - President and CEO Kevin Stevenson - EVP and CFO Neal Stern - SVP and COO, Owned Portfolios
Analysts
David Scharf - JMP Securities Sameer Gokhale - Janney Capital Markets Hugh Miller - Sidoti & Co. Bob Napoli - William Blair Mark Hughes - SunTrust David Scharf - JMP Securities
Operator
Good afternoon. Thank you for joining Portfolio Recovery Associates Third Quarter 2013 Earnings Conference Call.
Your host of the call today will be Steve Fredrickson, PRA’s Chairman, President and Chief Executive Officer. Also on the call will be Kevin Stevenson, PRA’s Chief Financial and Administrative Officer, who will comment on the specifics of PRA’s results release today.
Then Neal Stern, PRA’s Executive Vice President of Operations will comment on PRA’s collections experience in the quarter. Before beginning, I like to remind everyone that statements made by PRA on this call may constitute forward-looking statements under applicable securities laws.
All statements other than statements of historical facts are considered forward-looking statements including statements regarding PRA’s or its management’s intentions, expectations, plans or projections for the future. Actual events or results could differ materially from historical results or those expressed or implied in any forward-looking statements as a result of various risks and uncertainties, some of which are not currently known to PRA or its management.
These include the risk factors or other risks that are described from time to time in PRA’s filings with the Securities and Exchange Commission, including PRA’s annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K. Now let me introduce Steve Fredrickson.
Steve Fredrickson
Thank you operator. Good afternoon and thank you for joining our call.
I am pleased today to provide you an update to our 2013 results. Following very strong quarterly results in each of this year’s first two quarters Q3 proved to be equally impressive with record quarterly revenue and earnings of particular note contributions from our fee businesses were substantial and well above our expectations.
PRA’s quarterly results today reflect the success of our strategy to press the company’s many competitive advantages in a debt buying and collections marketplace where we continue to find opportunity and see future growth. Among the major selling banks stringent compliance demand contributed to competitor attrition in debt buying market which in turn has allowed us to make substantial investment in new portfolios of debt to the first nine months of 2013.
This investment combined with our exceptional operating efficiencies and diversified business drove our current earnings and is expected to continue to drive future earnings. Cash collections in the third quarter were $292 million up 27% from the third quarter a year ago and comparable with the growth rates of Q1 and Q2.
Neal will comment on our collections experience in more detail later in our call. Collections helped drive revenues up 31% to a record $198 million resulting in net income attributable to PRA of $47.3 million up 42% and also a record.
In a few minutes Kevin will walk you through the specifics of our financial results released this afternoon. PRA generated diluted earnings per share of $0.93, up 43% from $0.65 a year ago and adjusted for our stock split effective August 1, 2013.
We again exceeded our goal of a 20% ROE generating an annualized return on average equity of 23.5% for the quarter. In the third quarter PRA continued to expand our investment in U.S.
and UK defaulted debt with a $131 million in new portfolio acquisitions in the U.S. and an additional $11 million in the UK.
Of the U.S. investment 68% was invested in new core portfolios with the remaining 32% invested in bankruptcy account pools.
Our year-to-date investment totaling $557 million has now exceeded our 2012 full year purchasing of $539 million with one more quarter to go this year. In our trailing 12 month investment of $756 million speaks to our ability to take market share from competitors even as we drive record levels of profitability.
During the quarter, we participated in additional debt seller audits, which we believe have been precipitated in part by the reactions of the major sellers to the OCC’s debt sale, best practice guide. Based on the depth and breadth of these audits, we believe it’s going to be difficult for many market participants to meet the new more stringent requirements being actively imposed by the major sellers.
In conjunction with these audits, we are also seeing new purchase contract terms. Above the exact terms, vary by seller, we have had top sellers prohibit resale of accounts, introduce percentage caps on judgments obtained and prohibit the off showing of collections.
PRA is able to accommodate these requests with little to no impact in our business model, a position we do not believe many of our competitors will be able to replicate. We saw pricing in the third quarter remain competitive, but once again it was relatively more competitive in bankruptcy receivables than in core receivables.
Although volumes purchased at $142 million were down from the exceptional levels of the prior three quarters, they were up 38% from Q3 of last year. In response to the growth of our portfolio as well as the contractual terms I mentioned, we have a signed a lease in North Richmond Hills, Texas for a new 45,000 square foot call center facility as we announced today.
In the coordinated we discontinued the use of our call center in the Philippines. We had already discontinued Panamanian collection operation.
With our exit from the Philippines a 100% of our call center staff on U.S. accounts is now based in the U.S.
We anticipate the new facility in the Dallas Fort Worth area will be in production before year end and will eventually house 500 and more agents. Neal will have more for you on this in a moment.
In the UK, PRA continues to pace its buying as we gain confidence and enhance both our models and operating strategies. In the third quarter PRA invested $11 million in UK core portfolios compared with $9 million a year ago.
Our total investment in the UK year-to-date is approximately $17 million up about 28% from the same time last year. We continue to view the UK as a great long-term opportunities with thoughtful prudent growth.
Our estimated remaining collections in the U.S. and UK are now $2.7 billion, $1.8 billion anticipated from our core and UK portfolios and $900 million from our bankruptcy accounts.
These collections will continue to drive our finance receivable revenues in the years ahead. Revenue from our fee based businesses was $26.3 million in the third quarter, up 78% from $14.8 million a year ago.
We saw improvement in each of our U.S. businesses with the exception of our auto business.
Our government services business continued to benefit from a focus on sales and marketing as well as expense control with solid gains in year-over-year revenue growth and more significant growth in earnings. As we anticipated in earlier quarters our CCB business received a sizeable $9 million fee during the quarter related to a single case.
We continue to be on track with our strategy of better filling our sales pipeline in order to build and level out revenue and earnings overtime. However, this is a multiyear strategy for us and we expect for the foreseeable future that we will continue to experience significant quarterly and even annual fluctuation in results from this business.
CCB’s financial performance and our call option exercise terms were such that in late September we were compelled to exercise our right to purchase the remaining 19% of the business. After the formal closing tomorrow, we will own 100% of CCB.
Finally we began in the third quarter an incremental $2 million investment in PRA Location Services, or PLS expanding its license plate recognition footprint with the addition of 3M cameras in technology. This expanded equipment rollout will continue nationwide over the next several months.
Law enforcement in auto lenders continue to find value in PLS, which we believe can deliver solid profitability to PRA overtime. We also have hired a new team of industry professionals to lead our auto business.
We believe that over the next year PLS should begin to turn the corner in terms of revenue and earnings growth. These sweeping changes in restructuring efforts were driven by previous core financial performance that performance coupled with a loss of a significant client in Q3 put us in a position from a GAAP perspective to write-off the goodwill on the books related to PLS.
That amount was $6.4 million. This non-cash charge in no way diminishes our optimism about PLS becoming the leader in this industry.
We’re investing millions in hardware, personnel and facilities to be the preeminent force in the auto location business. Now I’d like to ask Kevin to walk you through our third quarter financial information released today.
Kevin Stevenson
Thank you, Steve. As I discuss our financial results the comparisons I make today will be between Q3 2013 and Q3 2012 unless otherwise noted.
PRA had a strong quarter. Revenues increased 31%.
Our operating expenses increased at a slower rate of 27%. This led to a 42% increase in net income attributable to PRA and a 43% increase in earnings per share and 40.2% operating margin.
Before I begin my review I would like to summarize some specific items that occurred during the quarter. The first CCB had an exceptional quarter generating revenue that exceeded the prior quarter by $10.9 million and that exceeded Q3 of 2012 by $10.5 million.
This increase was due largely to a single claim as Steve discussed earlier. Our Q3 tax expense was favorably impacted by approximately $3 million in savings primarily related to state revenue enforcement and other changes made in tandem with our 2012 tax return filings.
We do not expect such a large change in future periods. Our effective tax rate for the quarter was approximately 35%.
We estimate that rate could increase to approximately 37% in Q4 and then 39% next year. On August 1st we completed our three for one stock split and on August 13th we completed the issuance of $287.5 million in convertible senior notes.
We use the proceeds from that issuance to pay down our revolving line of credit and to repurchase $50 million of common stock. The excess proceeds reflected in our cash balance at quarter end.
The notes carry a coupon rate of 3% however for accounting purposes we recorded the interest expense at a market rate of interest which was determined to be 4.92%. This resulted in approximately $525,000 of additional and GAAP interest expense during the quarter versus the amount we would have recorded based on the coupon rate.
Following the convertible debt issuance, we expanded our credit facility by $35.5 million including the addition of three new financial institutions to main group. During the quarter and relative to our expenses accruals, we increased the accrual for contingent earn out consideration by $1.1 million related to our Q4 2012 NCM deal simply due to its better than booked performance.
We have previously a prudent and additional million dollars in Q2 of 2013. We increased our litigation accrual by $1.9 million based on the current status or legal matters.
And given strong performance PRA is generated during 2013, we increased our 2013 and bonus pool accrual in Q3 by $3.5 million relative to Q2, 2013. Lastly, Steve has already discussed the $6.4 million non-cash good write-off at PLS.
I want to iterate that this decision was based on accounting methodology and does not diminish our optimism about PLS in the future. Consider our action plans relating to PLS, we are investing more than $2 million in hardware and support for new camera systems.
We are investing in new integrated skip tracing platform to replace our aging system. We have hired a team of industry experts to build the new PLS.
Running out to goodwill as dictated by GAAP and while certainly agree with the applications, we recognize it seems somewhat entriggering with our optimistic view to future. Also I have already received a question about EPS.
This charge resulted in an $0.08 per share EPS impact, so roughly $4 million. Now I will move to the review of our statement and balance sheet.
Cash collections and finance receivable portfolios increased 27% to $291.7 million. Payments for bankruptcy accounts were up 32% to $128.6 million or 41% of cash collections.
Call center and other collections were $89.5 million up 24%. Legal collections were $81.6 million, up 24%.
Revenues increased 31% to $197.8 million including a $171.5 million in net financial receivable or NFR revenue, and $26.3 million in fee revenue. NFR revenue for the quarter was comprised of $115.1 million in core portfolio revenue, including our UK operations and an allowance reversal of $4 million.
Net core portfolio revenue increased 30%. NFR revenue also included bankruptcy portfolio revenue of $56.4 million, net of allowance charge of $1.4 million.
Net bankruptcy portfolio revenues increased 24%. During the quarter, yields increased on all quarterly domestic core pools originated from 2009 through 2012 with one exception of Q1 of 2010.
For the bankruptcy portfolio, yields increased on all 2009 pools. And for 2010 and 2011 pools yields increased on all, but two of those quarterly pools.
Yield also increased more on the 2012 bankruptcy pool. Fee revenue increased 78% to $26.3 million driven largely by the increased income generated by CCB, revenue also increased in our government services businesses, but decreased in our location services businesses.
Moving on to expenses, operating expenses were $118.3 million, up 24.8 million or 27%, due primarily to increases in personnel expenses, legal collection costs and fees and the goodwill charge which again does run through operating expenses. Personnel expenses increased $11.5 million or 28%, due largely to staff size increased and as well as the cash plans accrual I mentioned earlier.
Legal collection cost and document cost increased to $19.8 million from $15.8 million. We intend to spend approximately $20 million on legal collection costs and documents in Q4 2013 bringing our full year 2013 expense to approximately $83 million.
Neal will provide additional comments on our legal collection strategies. As a result of our strong revenue increase coupled with controlled growth in operating expenses, PRA’s operating income increased 39% to $79.5 million which again includes the goodwill charge.
Operating margin was 40.2% for the quarter, up from 37.9%. Net income margin was 24.9% for the quarter, up from 22% a year ago and 23.7% in the second quarter.
Moving on to the balance sheet. Cash balances ended the quarter at $108.7 million.
These balances increased due to funds received from our issuance of convertible notes in August. The NFR balance increased to $1.26 billion, up from $974 million.
NFR balance is the amount of unamortized purchase price of acquired debt portfolios reported on our balance sheet. Principal amortization of finance receivables, otherwise noted as payments applied to principals, including net allowance charges was 41.2% of cash collections compared with 40.7%.
Zero basis collections were $8.8 million during the quarter. Turning now to liabilities, our debt-to-equity ratio at quarter end was 55%, up from 37%.
Debt-to-equity ratio including net deferred tax liabilities was 80%. Borrowings totaled $452.2 million at quarter end and consisted of $255.8 million in convertible senior notes and $196.4 million in other long term debt.
Please note that convertible debt is recorded at discount and will be accretive to its notional amount based on the information difference between coupon rate of 3% and the GAAP interest rate of 4.92%. We have no balances outstanding under our revolving credit facility at quarter end.
Availability under revolving credit facility, subject to borrowing collateral provisions was $435 million. Net deferred tax liabilities were $200.1 million at quarter end, compared $186.5 million a year ago.
With proceeds from our convertible sees note offering we repurchased $50 million in pure stock in the third quarter and at the end of the quarter we had $19 million remaining available for repurchase under PRA’s board approved program. Now let me turn the call over to Neal for his review of our third quarter collection and operations results.
Neal Stern
Thanks Kevin. As I discuss third quarter result and operations I’ll be making comparisons with results from the third quarter 2012 unless otherwise noted.
The third quarter results remained in-line with the trends from the last several quarters. The U.S.
we received just under $2.6 million payments, which represented 22% increase over the prior year. Our average payment size increased by 3% which was worth almost $13.8 million more in cash collections.
Cost under productivity improved by 12%, and legal collections increased by 24%. These results reflect our long term focus on being that complaint, patient and effective collector, the group of accounts making regular monthly payments to us has been expanding as a result of increased buying, improved operational efficiencies and most critically our staff’s ability to identify affordable repayments plans.
Those negotiations can be delicate nuance, but also will prove to be among the most crucial things we do. With that in mind PRA in the third quarter made the decisions to see its all offshore collection activities for our U.S.
accounts. This decision was the result of a number of factors including our observations of total net effectiveness overtime but the primary driver of the change was the decision from some top sellers in the U.S.
to prohibit offshore collections on accounts they sell. All this was alluded to as a best practice in the OCC’s memo from earlier this year, we’re now seeing it appear as a condition in some sales contracts.
Rather than attempt to construct a strategy by which we would segregate accounts our offshore collections are prohibited from accounts where sellers have not yet made such a requirement PRA decided to discontinue all offshoring of U.S. collections which for us was a minimal part of our overall strategy.
As a reminder, our offshore strategy was limited we had about 140 collectors in the Philippians and the work they are doing was confined to our very lowest scoring accounts and segments from our Spanish language portfolio. The work associated with our lower scoring accounts was simply reduced or eliminated and the work on the Spanish language segment of the portfolio was transferred to our bilingual agents in our domestic call centers.
As Steve mentioned we announced today our plans to open a new call center in North Richmond Hills, Texas and the Dallas Fort Worth area where we believe we will able to hire additional bilingual collectors to help us to properly staff for that growing segment of our portfolio and more importantly to staff appropriately relative to the increased buying trend that we have seen over the year. Our new center together with our others in Las Vegas, Nevada; Hutchinson, Kansas; Jackson, Tennessee; Birmingham, Alabama; and Norkolk and Hampton Virginia will get PRA what we believe is the best and most effective domestic collections workforce in the industry that will provide a total of more than 2,300 jobs in 2014.
Our collection in the call centers has been and remains our more preferred option for core collections, there is a relatively small subset in our 5% of our domestic core account base and we believe can and will pay us voluntarily after months of attempting the result of delinquency via phone calls or letters, those accounts are selected for legal question activity. The level of increased investment in this channel that we began in 2012 has continued to perform above our expectations to deliver at least a 200% return, while recouping investment cost within 6 to 8 months.
As a result the level of investment of legal channel each quarter in 2013 has been maintained or modestly expanded and we expect to relatively similar investments in the final quarter of the year. During Q3 our internal legal collections increased over the prior year by 30% and external legal collections grew by 21%.
Those results reflect our ongoing desire to call are use of external law firms and controls much of that process as possible with our own staff, so as to capture margin, improve effectiveness and deliver maximum complaints oversight. To accommodate this expansion as well as our steady conversion from external to internal legal operations we have expanded our Norfolk campus by another 30,000 square feet, primarily to handle legal support personnel.
Finally, PRA UK was pleased to accept a credit excellence award in compliance for 2013 from Credit and Collections Risk magazine. Our work in the UK during the third quarter continued to yield promise collector productivity results.
Our modeling and segmentation efforts are now delivering more predictable and reliable outcomes and are allowing us to confidently have staff and increase purchase activity as we grow that business in the most reliable way towards our longer term goals. Now some final comments from Steve.
Steve Fredrickson
Thank you, Neal. As we have discussed, our financial results this year have been exceptional, in fact not lost on Fortune Magazine which ranked PRA among its 100 fastest growing companies in 2013.
This year PRA also moved in the top 20 of Forbes best small companies in America. We placed in Forbes annual ranking for each of the last 7 years.
More importantly however is your recognition of PRA's long-term value that we find most gratifying. I thank you for your continued investment in PRA and your continued confidence in our ability to grow and deliver value to shareholders.
Our operator will now open up the call to your questions.
Operator
Thank you, sir. (Operator Instructions).
Our first question comes from David Scharf of JMP Securities. Your line is open.
David Scharf - JMP Securities
Thank you. Good afternoon.
Steve first question, this is the second quarter in a row after years where you actually said the average payment size increased and I think that you said it was up 3% this quarter, up from 1% last quarter. I guess a couple of questions one is just what are you seeing.
Are there any kind of macro consumer behavior employment conclusions we can draw? And secondly is the increase in average size being disproportionately coming from a couple of vintages?
Neal Stern
This is Neal. So I would say there is a number of factors that’s impossible to say at this event, but one that comes to mind is our increased legal activity that tends to generate an average payment size and I am sure it’s impacting the overall number.
In terms of the vintages, you’ll probably look back to the vintages that are a couple of years where legal activities having its most impact. We don’t sue anyone out of the gate we put them in our call centers so there is a pretty good lag there.
So it’s probably I think a modestly outsized impact the vintages from a couple of years back now.
David Scharf - JMP Securities
Okay. So we shouldn’t read anything into this in terms of just consumer behavior or any macro conclusions probably legal channel growth?
Neal Stern
Can’t say, I mean it was steady and average for a long time and so we're very encouraged. Any tiny uptick in payment size has a really outsize impact.
This 3% was worth just under $14 million and that’s not just confined legal, that’s coming from a number of different sources. So it’s a good sign and if it continues it will be great.
David Scharf - JMP Securities
Got it. And staying on the legal channel you had mentioned that the investment in recent quarters has been pretty consistent.
Can you just remind us on a dollar basis, what you are to be thinking about for the fourth quarter which you said would be similar to Q3?
Neal Stern
$20 million.
David Scharf - JMP Securities
Got it. Okay.
And then lastly just on the purchasing side it was a step down in chapter 13 purchasing, obviously bankruptcy filings, chapter 7 and 13 are down year-over-year. Was this sort of an anomaly or breather or in general should we be expecting much lower levels of BK purchases going forward?
Steve Fredrickson
Well, as we commented, we’re still in a competitive market on the bankruptcy side. And so what you observed in our purchases for any period certainly reflects whether we’re winning a little bit more or winning a little bit less of the offered tools.
In Q3, I’d say the tie just went way from us a little bit and so you saw a decrease in realized purchases there.
David Scharf - JMP Securities
Got it. And then just one more on the competitive front, I mean you’ve mentioned for a while that kind of the new regulatory pressure is driving some out of the business going to make it efforts for others to compete.
Just reflecting on this past quarter, did you have a sense for whether they were clearly fewer bidders out there on the deals that you actually closed on?
Steve Fredrickson
Yeah. I think our sense and again this is going to vary by seller and where they’re at in the process of I would say adapting their sales process to what we’ve seen out of the OCC.
But overall I’d say we’re competing against fewer participants with some sellers it’s more pronounced than with others.
David Scharf - JMP Securities
Got it. Okay.
Thanks very much.
Operator
Thank you. Our next question comes from Sameer Gokhale of Janney Capital.
Your line is open.
Sameer Gokhale - Janney Capital Markets
Yeah. Thanks for taking my questions.
Just to follow-up on that question about purchases, for core customer debt and I am sorry if I missed this in your comments, but when you look at the core purchases they were down slightly compared to Q3 and I would have thought that given that one of your large competitors is still largely out of the market like this would have been the one quarter where you could have really kind of pulled out all the stuffs to buy as much paper as you could on the core side recognizing that on the BK side it seems to be a lot more competitive. So can you just provide us a bit of flavor for that, I mean what happened there, is it just an issue of the supply just isn’t there until we see some large sellers coming back into the market or just some perspective on that would be helpful?
Steve Fredrickson
Sure Sameer. There is certainly more than two of us continuing to compete in the market.
And again depending on which seller we are talking about, there is still a good number of competitors. And so it was just one of those cases where I guess like bankruptcy, we hit on a few less deals this quarter.
Part of what we are trying to do is make sure that we aren’t pushing the market further than we would like and that’s not an exact science and so we are always trying to buy as intelligently as we can and as a result sometimes you lose transaction.
Sameer Gokhale - Janney Capital Markets
Good color, I just wanted to get a sense for, you have said earlier I think that it seems like some of the smaller competitors are facing more challenges it totally makes sense and that’s what we believe for a while too, but it just seems like at this point given all the new regulatory requirements the markets sort of became very concentrated and maybe there, you know what, maybe four of you guys at the very top of the food chain and then everyone else is a lot smaller. So it would team that if you take one of those four out of the equation then you are left with three other companies and that was the context I was asking about, but it’s possible that some other companies got more aggressive with their purchasing sounds like that was also going on?
Steve Fredrickson
Yeah. Well, I think the other thing is, Sameer in thinking about purchase levels year-over-year, we did say we are up almost 40% year-over-year.
Certainly comparing things to Q1 or Q2 of this year I think is a top comparison, just pretty exceptional purchasing levels. So I think we saw a little bit of a normalization of volumes together with missing on a few deals and that’s what happened.
The volumes just bounce around a little bit.
Sameer Gokhale - Janney Capital Markets
Okay. That’s helpful.
And then the other question was related to the contracts like, can you give us a sense for what percentage of contract required onshore collectors or U.S. based collectors versus those that are okay with offshoring.
And then what were the new ones, I mean some of you mentioned some of the things, but is there a certain [Asia] paper that they would rather not have collected offshore or what types of paper are acceptable from onshore versus offshore from that perspective. I mean what kind of flavor can you give us there?
Steve Fredrickson
Yeah. I don't think we saw any differentiation in terms of age or type of paper, it's really driven more by particular seller.
And I think where the sellers are in their review and adaptation of the OCC's guidelines. And to answer your first question, we have seen a couple of sellers that are requiring the contract terms that we discussed regarding offshoring.
Sameer Gokhale - Janney Capital Markets
Okay. And then maybe one for Kevin on the litigation, Kevin did you say you had expenses this quarter of $1.9 million related to incremental reserve bidding for litigation?
Kevin Stevenson
Yeah. That's correct.
Sameer Gokhale - Janney Capital Markets
Okay. That is helpful.
And then just lastly in terms of the fee revenue and you talked about the $9 million from the single case, the large case and fees you got from that. I thought originally you took $6 million plus and certainly 9 is more than 6.
But was there anything else that happened related to that claims case that was different from your original expectation, it just seems that that number was significantly higher than what your original expectations were?
Kevin Stevenson
Yeah, definitely. It was really a function primarily of not being able to exactly predict how these things are going to come in and it just turned out to be a substantially larger payout as the trustee work through the settlement formula than we’d anticipated.
Sameer Gokhale - Janney Capital Markets
Okay. It looks like an early Christmas present.
All right. Well, thank you.
That’s all I had.
Kevin Stevenson
Thank you.
Operator
Thank you. Our next question comes from Hugh Miller of Sidoti.
Your line is open.
Hugh Miller - Sidoti & Co.
Hi. Thank you for taking my questions.
I was wondering if you could obviously, we saw a tremendous strength in the fee-based businesses, but just as a housekeeping question if there. I assume that there still was some fee-based business margin dilution, if you could just give us a sense of where that’s certain?
Steve Fredrickson
Yeah. It’s about 227 basis points dilutive.
Hugh Miller - Sidoti & Co.
Okay. And you talked about kind of caps on settlements that you can for some of these new contract terms, can you give us a sense of how far off you guys are from those caps in terms of the level of settlements that you’re achieving at this point?
Steve Fredrickson
As I think the cap you’re referring to is on the number of judgments that will be obtained in any given pool?
Hugh Miller – Sidoti & Co.
Correct, correct.
Steve Fredrickson
Yeah, okay. So we have not felt a lot of pressure there.
Again our model is different, we don’t sue out of the gate on a rate basis to the very small percentage of our portfolio on the legal channel so that sort of request is fairly easy for us to accommodate and our models are very precise at this point.
Hugh Miller – Sidoti & Co.
So you would say that you’ve got plenty of room depending where those caps would hit?
Steve Fredrickson
It’s hard, plenty is the tough word. It’s hard to say pools are changing all the time and the composition of any one pool at any one point in time could make that interesting, but it’s harder to imagine that being the problem for us I guess.
Kevin Stevenson
I think though the most significant issue is we know about whatever these requirements are going to be upfront and that's built into our purchase price. And so it’s not a case of these contract requirements being applied retroactively to our own portfolio, this is all being valued and priced as we look at these new deals.
Hugh Miller - Sidoti & Co.
Sure. I can certainly appreciate that I guess my question is and if you start to come up towards the cap rates at some point then I guess you have to make a decision on not only if there is a customer who is this [evil] and is not willing to pay us, but is this the best use our dollars relative to someone else who may be even more worthy to repay and what I mean just because you would at some point, you limit in exactly who you could sue?
And is that your analysis going there?
Steve Fredrickson
We think we know exactly what you mean and that's why we think terms like this actually play to our strength. I firmly believe that we can model the behaviour of a customer in a legal environment better than anybody and that's going to be a huge competitive advantage as you have only so many of those legal chips to use in any portfolio.
Hugh Miller - Sidoti & Co.
Okay. And given kind of the potential for further industry consolidation on the horizon, how do you guys foresee kind of some of the changes in portfolio re-sales for example in California, how will that likely play into the equation in your opinion?
Steve Fredrickson
I think we've said before, it will be more difficult to do a resale after January 1st, with the California Law emendating that there be direct access or contractually guaranteed access to the documentation from the original creditor. So hard to say, but I would predict it’s not going to an end to that marketplace.
Hugh Miller - Sidoti & Co.
And are you seeing any pools coming about in the fourth quarter now ahead of that rule change that you could be buying?
Kevin Stevenson
First of all we are not the most active participant in the resale market, but even that being said, I don’t think that we would say we see anything we characterize as unusual volume and resale that looks to be getting ahead of that.
Hugh Miller - Sidoti & Co.
Okay. And then I guess last question on the purchasing side is obviously you guys are maintaining a higher level of cash than you normally would just maybe given kind of the lighter purchasing than maybe some are expecting in the third quarter.
But can you talk about the ability for you to quickly to deploy that and also are you seeing kind of greater than kind of seasonal pickup in fourth quarter supply coming to market?
Steve Fredrickson
Well, the cash is primarily sitting there because of the convertible debt deal that we did just a couple of months ago. So we anticipated that we’re probably going to run with a little bit more cash than usual.
It’s not burning a hole in our pocket. We are going to I think have plenty of opportunity to deploy it over the kind of the medium-term horizon and that’s why we went after that capital raise.
From a Q4 outlook perspective, I think we see a more normalized market as opposed to the hyper buying market that we saw in the first couple of quarters. And for a while now we haven’t seen the big year end rush to sales that we saw some time ago.
So I think and then Q4 is going to be a relatively normal quarter from a buying perspective.
Hugh Miller - Sidoti & Co.
Okay, very good color there. And then the last question I had was with the loss of the client technical location services business.
Can you just talk about kind of what might be driving that decision? How should we thinking that in terms of kind of revenue headwinds?
And obviously you guys are giving your outlook on the longer-term power of that particular subsidiary, but in the near term how should we be thinking about that?
Steve Fredrickson
Yeah, from a macro PRA perspective, I don’t think you are going to notice it. It’s not a -- it’s just not a big enough piece of things that you are going to see in effect net, net.
Hugh Miller - Sidoti & Co.
Okay, thank you very much.
Operator
Our next question comes from Bob Napoli of William Blair. Your line is open.
Bob Napoli - William Blair
Another question on the competitive environment, you mentioned some of these contracts, excluding the ability to collect from outside of the U.S. I think a couple of your large competitors also maybe outsourced the collections almost totally to agencies, even agency kind of, I mean whether it’s in U.S.
or outside, but with the agency in the U.S. couple of your non-public competitors might be more active in that area.
Is there any exclusion from outsourcing the collections to agencies in that and have you seen any change in competitive actions based on that?
Steve Fredrickson
I haven't seen a prohibition against outsourcing, but outsourcing does come with a new caveat that is to really audit very, very heavily. And so the burden on the people who have a big outsourcing model is going to be really significant.
They're going to have to be there very, very frequently and have a very deep understanding and approval of all the actions that outsourcers undertaking. For us, it's part of the impetus to move from an external legal model to an internal legal model.
There is other reasons as we have discussed, but that's definitely part of it.
Bob Napoli - William Blair
Okay, thanks. The U.K.
business, I mean just to understand it, I mean you're looking at this over the long term and have growing the business at a very gradual basis. It does seem like there is a pretty good opportunity over there.
There was an IPO company in your space and obviously on core, but caveat in that market. I mean have you, how develop this year strategy there?
I mean it seems like there is different, more pools of different types of paper maybe that make more sense in that market. There are companies that provide, that are purchasing, performing paper versus non-performing paper, larger balance, smaller balance.
I mean, are you essentially looking to do there what you’re doing here or how are you acting differently in that market and how are you seeing that opportunity unfold for you?
Steve Fredrickson
I think long term, we like the expertise that we’ve built here and think that it really helps provide defensible value over time. So that being said, our approach in the U.K.
is to be an entity that can take nonperforming asset and convert them into performing assets. And again that’s where we think our shareholders are going to get paid well over the years.
We're less interested in big purchases of paying pools where perhaps there is a financial play in cutting the rate on the DCAs down from one number to a lesser number and extract some cash as a result. It’s a good way to deploy capital, but at the end of the day we don’t know how much expertise is really being built there and we're much more about as I said earlier the former strategy and being somebody that can convert non-paying accounts into paying accounts in long-term.
We think that’s a big opportunity in the UK.
Bob Napoli - William Blair
Now you did buy more this quarter, I mean are you getting into a more consistent flow in that market or are you still kind of in the buy and test phase?
Steve Fredrickson
Well, I would still characterize us overall as more in the buy and test phase than anything, although we are advancing our models pretty well. We are I’d say making some real advances on our modeling and Neal working in tandem with the operational guys in the UK have really been able to sophisticate how we’re using our work force over there and how we’re using predictive dialers and another collection metrics.
And so we've really come a long, long way from where we began over there.
Bob Napoli - William Blair
Great. Then last question.
Just obviously with the capital you raised you have the lot of liquidity right now and I know do you like the one with the strong balance sheet and feel that that serves you very well over the long term. But I just wondered with that much capital available to you, if I mean you can slightly acquisitive here or there, are you interested in on the corporate acquisition side?
If you were to be, I am sure, you are looking and you always are looking, where you looking more intently or is there a strategically, are there areas geographically your products that you may have interest in over the next couple of years?
Steve Fredrickson
I’d say that we’re interested in continuing to seek opportunities that provide both geographic and product diversification for us, but having done our first acquisition 10 years ago or so now, we also realize that you’ve got to live with them and operate them over time and so we want to be very careful about where it is, we pull the trigger and how it is we get involve with any acquisition. So we’re going to be pretty cautious about the whole process.
Bob Napoli - William Blair
Great, thank you.
Operator
Our next question comes from Mark Hughes of SunTrust. Your line is open.
Mark Hughes - SunTrust
Could you talk about the margin impact of $9 million fee, was it more or less profitable than your typical fee income?
Steve Fredrickson
Yeah, it would be more profitable than our typical fee income.
Mark Hughes - SunTrust
I mean, can say how much have dropped to the bottom line?
Steve Fredrickson
Yeah, most of it.
Mark Hughes - SunTrust
Right.
Steve Fredrickson
The work on this thing was done years ago and that’s really the formula is that CCB business. You do the work and then you sit and wait for the fee to be paid out.
Generally we are being paid on a contingency basis. And so Kevin’s point virtually everything dropped to be the bottom line in this quarter.
Mark Hughes - SunTrust
The non-controlling interest, the 1.9 million, is that an offset for that?
Kevin Stevenson
The 19%, yeah it will be come out of the MCI line in the income statement, so it will be taken out of the net attributable to PRA, yes.
Mark Hughes - SunTrust
Right, okay. So it would be pretty much all that less roughly 1.9 million.
Kevin Stevenson
Yes.
Mark Hughes - SunTrust
Okay. The bonus catch up in the quarter, will that be elevated next quarter or would one think that will drop back to more normalized level?
Kevin Stevenson
Yes, good question. So the 3.5 million I gave you in Q3 again was relative to Q2’s run rate.
So I think the delta I ran the math, it was like another million bucks in Q4. So it’s not 3.5 it’s 1 million in Q4.
Mark Hughes - SunTrust
Right, it drops back to $1 million?
Kevin Stevenson
Yeah, again relative to Q2.
Mark Hughes - SunTrust
Right, okay, so it’s down?
Kevin Stevenson
Yes.
Mark Hughes - SunTrust
2.5 million sequentially?
Kevin Stevenson
Yes.
Mark Hughes - SunTrust
Okay. And then Neal, if you like you have been restrained from the capacity standpoint, you talk about the closing of (inaudible) etcetera not necessary working lower performing accounts, you bought a lot of paper, now you are increasing capacity in Texas, but you haven’t I presumed increased capacity much.
Has that been any kind of restrained on your ability to collect?
Neal Stern
Just a quick review of what we gave up in the Philippines. The majority of the work that was being done, the bulk of the collectors working on very low scoring accounts.
And while it provided some good news in the short term, the total net return over the longer period of time was virtually nothing. And so we’ve really been feel like we gave up all hike from a lot there over the longer term.
The Spanish speaking part of the portfolio, it’s a very small percentage of our collections, a couple of percent and so it was easily accommodated by the folks that we have here domestically. Dallas Center is opening as I tried to stress more as a result of the giant purchasing that we have done in Q1 and Q2 and that trend was so significant and we feel good about the future and what the marketplaces doing and contraction with our other competitors, and so that is really driving force behind the Dallas expansion.
If we have the choice on where to expand it’s great to be able to expand somewhere we think we can find more bilingual collectors because we think that part of the portfolio will continue to expand at a sort of an outsized base. But to answer your question most simply, no capacity concern feel good about capacity, our models are better than ever and we are -- we feel very good about our ability to handle whatever the acquisition spokes for our way.
Mark Hughes - SunTrust
Right. Where you did win deals this quarter, how was the pricing on those deals relative to prior trends?
Steve Fredrickson
I would characterize it as fairly steady with what we have seen over the last few quarters.
Mark Hughes - SunTrust
Okay. And then you talked about a couple of sellers that are prohibiting offshoring, were those significant sellers, what proportion prefer to the market do they account for?
Steve Fredrickson
Yes, they are significant sellers.
Mark Hughes - SunTrust
And then any particular number you want to throw at it, third half the quarter less or?
Steve Fredrickson
The sellers are in and out of the market. I don't know that we can pin a number on it, but I’d characterize on both as kind of top 10 names.
Mark Hughes - SunTrust
Okay. And then you had I think talked about a couple of particular sellers, could you give us an update on where they are in their process?
Is it anybody still out there that is working through that process and expecting to come back?
Steve Fredrickson
Yeah, I mean the various banks are in different places and we do believe that there is some participants that have been out, that are close to coming back and there is others that are probably more of the long term in that process. I think all of them are working at understanding exactly what the OCC and you know the other regulators that care about that sale are looking for.
And I would firmly expect that there is going to be a little bit of ebb and flow on the part of the big sellers as they come to groups with the future of debt sales and what it means to the processes. So I think it’s going to be a journey for everybody here for the foreseeable future.
Mark Hughes - SunTrust
A final question, the Texas facility, how much will that increase your collection capacity, is there a number at it?
Steve Fredrickson
Set capacity for 550 employees.
Mark Hughes - SunTrust
And what is the total employee count now?
Steve Fredrickson
3200 total collectors.
Mark Hughes - SunTrust
Collector fees?
Steve Fredrickson
Collector’s fee is by about 2000.
Mark Hughes - SunTrust
I did 2000, then the new collectors in Texas, I am sorry how many?
Steve Fredrickson
It has capacity to 550, we are starting with the 150.
Mark Hughes - SunTrust
Okay, yes. All right, I think that’s it.
Thank you very much.
Operator
Our final question for the hour comes from David Scharf of JMP Securities. Your line is open.
David Scharf - JMP Securities
Just one quick follow-up, the increase in the litigation reserve, you said as soon as for the tax matter?
Kevin Stevenson
No, it’s for just various normal litigation stuff that we accrue for on a quarterly basis.
David Scharf - JMP Securities
Okay, got it. Can you just give me a flavor for kind of what (inaudible) quarters of the year relative to the 1.9?
Kevin Stevenson
We’re up to 8.6 right now, so I got in total 8.9 in total reserve, that's a total bucket that we accrued to so far. I think it was 0.5 million last quarter.
David Scharf - JMP Securities
Okay. So it’s nothing out of the ordinary?
Kevin Stevenson
No.
David Scharf - JMP Securities
Got it. Thank you.
Operator
Thank you, sir. And thank you ladies and gentlemen, that does conclude Q&A portion for our call.
We’d like to thank our host for today, Mr. Fredrickson, Mr.
Stevenson, and Mr. Stern.
That does conclude Portfolio Recovery Associates third quarter 2013 earnings conference call. You may disconnect your lines at this time.
Have a great day.