Nov 11, 2014
Executives
Darby Schoenfeld – Director, IR Steve Fredrickson – Chairman, President and CEO Kevin Stevenson – Executive Financial and Administrative Officer, Treasurer and Assistant Secretary Neal Stern – COO, Owned Portfolios Geir Langfeldt – CEO, Europe
Analysts
David Scharf – JMP Securities LLC Sameer Gokhale – Janney Montgomery Scott LLC Robert Napoli – William Blair & Company L.L.C Robert Dodd – Raymond James David Scharf – JMP Securities
Operator
Good day, ladies and gentlemen, and welcome to PRA Group Third Quarter 2014 Earning Conference Call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.
I would now like to introduce your host for today’s conference Darby Schoenfeld, Director of Investor Relations. Please go ahead.
Darby Schoenfeld
Thank you. Good afternoon, everyone, and thank you for joining us.
With me today are Steve Fredrickson, our Chairman, President and CEO, who’ll give you an overview of the quarter and talk about the current market environment; Kevin Stevenson, Executive Financial and Administrative Officer, Treasurer and Assistant Secretary, who will take you through our financial results; and Neal Stern, Chief Operating Officer Owned Portfolios, who will review our domestic operational results; Geir Langfeldt, Chief Executive Officer of PRA Group Europe will also be available to answer questions during Q&A. The press release announcing our third quarter results was distributed this afternoon.
The earnings release may be accessed at the Investor Relations section of our website at www.pragroup.com. A replay of this call will be available shortly after the conclusion of the call.
The information needed to access the replay is contained in the earnings press release. I’d like to remind everyone that statements made by PRA on this call may constitute forward-looking statements under applicable securities laws.
All statements other than statements of historical fact are considered forward-looking statements, including but not limited to, statements regarding PRA Group’s or its management’s intentions, expectations, plans or projections for the future; statements with respect to the current trend of the market, statements with respect to the future contributions of Aktiv Kapital and a timing and amount of future integration expenses or our ability to fully realize the expected benefits of the acquisition, statements regarding any of PRA Group subsidiaries ability to contribute to earnings, statements regarding our ability to increase market share or operational efficiency, statements with respect to future legal collection costs, statements with respect to our ability to grow our Canadian and European operations or statements regarding our ability to realize any type of benefit from restructuring our European benefits. 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 Group or its management.
These include the risk factors and other risks that are described from time-to-time in PRA Group’s filings with the Securities and Exchange Commission, including PRA Group’s most recent annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Any such forward-looking statements speak only as of the date they are made, except as required by applicable law or regulations.
PRA has no obligation to update any forward-looking statements to reflect events or circumstances that occur after the date they are made, whether as a result of new information, future events or otherwise. All comparisons mentioned today will be between Q3 2014 and Q3 2013 unless otherwise noted.
We will be discussing financial information that includes non-GAAP financial measures on our call today. Certain financial figures are non-GAAP numbers, which exclude the cost associated with the Aktiv Kapital acquisition and foreign exchange losses specifically related to foreign currency forward contracts that were recorded during a three and nine months ended September 30, 2014.
Please refer to our third quarter 2014 earnings release issued earlier today and our current report on Form 8-K filed with the SEC for the most directly comparable GAAP financial measure and reconciliation to the non-GAAP financial measures with GAAP. I’d now like to turn the call over to Steve.
Steve Fredrickson
Thank you, Darby. The third quarter of 2014 proved to be a highly productive three months for PRA Group.
Since the closing of the acquisition of Aktiv Kapital, we’ve confirmed out position as one of the largest debt buyers in the world. We now offer our global clients a compliant partner with a financial capacity to offer maximum value, purchasing consistency and post-sale support.
In addition, aligned with the institutions we buy from, we’re focused on always providing a positive customer experience. We’ve received encouraging feedback on the acquisition from our clients all over the world and are working hard to strengthen and expand our constituent relationships in both North America and Europe.
Let me begin the discussion of our financial statistics with some high level results of the quarter. Cash collections were $373 million or 28%.
Collections help drive net finance receivable revenues up 31% to $224 million. Last year during the third quarter, our CCB business received sizable fee income and therefore fee income declined this quarter, partially offsetting the increase in NFR revenue.
Total revenues increased 21% to $239 million. Excluding the non-recurring transaction related costs and a foreign exchange currency loss specifically related to our Aktiv Kapital acquisition, diluted earnings per share would have been a $1.12, an increase of 20% over the prior year quarter.
These results drove an adjusted return on equity of 23.2%. Kevin will give you a more detailed review of the financials and these expenses in a moment.
The North American market continues to meet our expectations. PRA Group deployed over a $130 million in the quarter purchasing $92 million in core portfolios and over $38 million dollars in insolvency accounts.
Our core purchasing continues to be strong and was in lined with our purchasing last quarter, it was also the highest Q3 of buying we’ve ever had for that line of our business. Investment in insolvency accounts continues to more variable but purchasing in the third quarter was more than double that of the second quarter.
We see competitive yet rational pricing in the US coupled with low charge operates, low bankruptcy filings and tighter credit standards. However, despite the headwinds, we did a substantial amount of purchasing in the quarter and our appetite for buying in this market is significant.
Regulation continues to play a large role in the US market. The OCC’s guidelines issued in August have created confusion among some sellers, causing some postponement of sales volume until additional clarifications received from the OCC.
Our client discussions leads to believe that they still view the debt sales process in an important contributor to the credit budgets and they continue to appreciate the incremental net present value selling affords them. However, the process for bringing all prior large sellers of debt back into the market maybe uneven and will probably take well into 2015 to complete.
While, regulation impacts us on the supply side, we continue to see the impact to demand side as well. Increase sellers scrutiny is led to a continued contraction and qualified buyers.
A trend which we view is largely irreversible given the compliance requirements mandated buyers. Although we do not believe this trend will greatly impact pricing, we do believe will positively impact our ability to pick up additional market share.
Moving on the Europe, excluding the $728 million in NFR assets, we purchased when we acquired Aktiv Kapital, PRA Group deployed almost $34 million despite the seasonally slower third quarter due to the summer holidays. As in the US pricing across Europe is rational but competitive.
The benefit to having so many countries to invest in is that we can deploy capital where we find the best return. Our appetite to purchasing Europe is also significant but as we’ve always done, we’ll keep our pricing discipline in tacked.
Our experience is that buying in Europe tends to be lumpy and typically offers only modest forward flow potential. As a result, we expect buying levels each year to have a good degree of variability from quarter-to-quarter.
In Europe, we see a general move across market to increased regulation. We continue to monitor and stay best of evolving compliance issues but believe the experience and discipline we’ve developed in the US and UK markets will generally serve us well throughout the Europe.
Three months in the operating is one company with Aktiv Kapital, I’m extremely pleased with the progress with the integration efforts. I’ve spent three weeks in the last several months travelling to Europe to speak with employees, clients and service providers.
The acquisition and integration is being received positively by all. The magnitude of our opportunity in Europe continues to impress me and by acquiring a Pan-European leader where well positioned to capitalize on it.
Our North American and European teams are coming together to work as one quickly and efficiently. Staff from multiple departments have met together in Europe, Canada and the US as they tackle a number of opportunities allowing us to put names with faces and help us to work more cohesively.
We continue to explore ways to learn from each other and adapt and best practices from both organization, although operational strategy, analytics and compliance are key areas of collaboration. In a few moments, Neal will go into more detail about some of the operational integration efforts that are under way.
I want to emphasis how important it is that we get this integration done correctly. Writing the check to do a deal is but a small part of an acquisition in our view.
Getting all the gears of the combined enterprises mesh properly is the more difficult and much more important part of an acquisition. Due to the size and importance of the Aktiv Kapital deal to us will take a time and devote extraordinary resources to the integration process.
As we look out at the few years, we’re eager to grow our Canadian and European operations. We will continue to strive for further operational efficiency.
In the US, we will look forward to a maturing regulatory environment where competition is between a few smart players and increase lending and regulatory clarity ultimately lead to more attractive sale volumes. We will also keep looking for other places to diversify our business.
PRA Group has believed from the beginnings that building a compliant company that is excellent in both underwriting and operations and focused on the long term is the best course of action for our shareholders, employees, clients and customers and that philosophy has helped us grow into the globally here we are today. Before I turn things over to Kevin, I’d like thank Marge Connelly for her guidance and contributions to the company who one of our board members.
Marge has left our board to devote 100% of her time to a new position is the Chief Operating Officer of Convergys, a global BPO provider. We wish her all the best and so we missed you at PRA Group.
With that let me turn things over to Kevin, who’ll take you through our financial results in more detail. Kevin?
Kevin Stevenson
Thank you, Steve. First it’s important to remember that we acquired 100% of Aktiv Kapital on July 16, 2014 and therefore our combined Q3 results include only the portion of the quarter we owned Aktiv.
To make things a little clear this quarter, we will be using the term Legacy Aktiv Kapital, which will refer the operations at Aktiv Kapital as we acquired them including their Canadian business. In future quarters however, we plan to regroup the reporting and discuss North American and European results but we thought that the Legacy Aktiv Kapital grouping would be helpful for you in this quarter.
On a GAAP basis cash collection increased 28% and revenues increased 21%, while operating expenses increased 27%. As a result, net income attributable to PRA Group was $51.2 million, up 8% from $47.3 million.
GAAP earnings per diluted share were $1.10 versus $0.93, up 9%. Q3 2014 expenses included non-recurring costs related to our acquisition of Aktiv Kapital of $5.9 million or $0.08 in diluted earnings per share.
These fees included legal, consulting and transaction fees. Year-to-date, we’ve incurred approximately $14.3 million in these types of expenses.
Also with a loss on foreign currency exchange specifically related to the foreign currency forward contracts put in place between finding and closing of the Aktiv Kapital acquisition to mitigate our risk in converting dollars to euros. This amounted $2 million or $0.03 in diluted earnings per share for the quarter and this expense is included in our income statement below the operating expense line.
Year-to-date we’ve incurred approximately $8.2 million of loss on these forward contracts. Excluding these two items, net income would have been $56.2 million, up 19% and earnings per diluted share would have been $1.12, up 20%.
Looking forward, in the Q4 and Q1, we will incur more of these non-recurring costs, specifically as a result of extensive strategic planning with our advisors. We decided to restructure the legal ownership of the European operations.
This will better align portfolio ownership with our collection operations, promoting better operational management and accountability. With the advisor fees, required regulatory notices and other associated costs, we expect this full result in related expenses of approximately $8 million to $10 million over the next few quarters.
We expect about two thirds of that in Q4 with much of the remainder in Q1 2015. Along with matching our portfolio ownership and operations, this should also lower our marginal tax rate over the long term justifying the strategy from both an operational and economic basis.
However, our ultimate effective tax rate will depend on many factors and future events such as mix of income from the various countries and possibly tax reform. Let me provide you some details on our financial results for the quarter.
Cash collections for the quarter increased to 28% to $372.7 million. Payments from insolvency accounts were $10.5 million.
US call center and other collections were $97.3. US legal collections were $91.3 million and Legacy Aktiv Kapital collections were $73.6 million.
Note that the $73,6 million represents collections from July 16th through September 30th. The full quarter of cash collection in Legacy Aktiv Kapital was $89.3.
Revenues increased 21% to $239 million including $224 million in net finance receivable or NFR revenue, $12.9 million in fee revenue and $1.8 million in other revenue. NFR revenue for the quarter was comprised $174 million in core portfolio revenue, net of allowance reversal of $2.2 million.
Net core portfolio revenue increased 51%, mainly due to the addition of our European business. NFR revenue from PRA core portfolios was $128.8 million and NFR revenue from our Legacy Aktiv Kapital was $45.2 million.
For the nine months ended September 30th, NFR revenue from PRA core portfolios was $375.1 million, an increase of 15% versus the same period last year. Including the NFR revenue from Legacy Aktiv Kapital, a year-to-date NFR revenue increased to 29% versus the same period last year.
NFR revenue also included insolvency portfolio revenue of $50.3 million, net of allowance charge of $517,000. Net insolvency portfolio decreased – net insolvency portfolio revenue decreased to 11%.
Year-to-date, insolvency NFR revenue was $164.4 million, a 3% decrease from the same period last year. Fee revenue decreased 51% to $12.9 million from $26.3.
The decrease is mainly due to the fact, in the third quarter of 2013, we’ve received a sizable fee through our CCB business. A quick note on fee revenue for the fourth quarter.
We anticipate an outsized quarterly performance from CCB. Steve Roberts since taking over the management of all of our subs in October 2012, has worked very hard to build up a pipeline of business within the CCB subsidiary.
Those who have followed PRA Group may already know that the CCB business is lumpy by its nature, as fee income is generated depending upon the timing and outcome of specific class action settlement. However, Steve and his team have worked hard building a broader pipeline, so that to put in his words the troughs are not as deep.
The peeks will still happen and you will see one of those peeks in Q4 with revenue of about $9 million over a more typical run rate. Moving on to expenses, operating expenses were $150.8 million, up $32.5 million or 27%, which included approximately $5.9 million in cost related to our Aktiv Kapital acquisition that I described a moment ago.
Excluding these costs, operating expenses were $144.9 million, an increase of 22% partially due to increased compensation and employee services expenses and agency fees. Employee compensation costs were largely a result of increased headcount from the addition of the Aktiv Kapital team.
$4.1 of increase in agency fees was also from the acquisition of Aktiv Kapital which utilizes outsourcing in their blended operational model. Our operating income was $88.2 million and our operating margin was 36.9%.
Adjusting from the acquisition related expenses of $5.9 million, operating income would have been $94.1 million and our operating margin would have 39.4%. Below the operating expense line, we reported a gain on foreign exchange of $3.3 million.
This consistence mainly of the $2 million loss I mentioned before willing the forward contracts we had in place prior to the closing of the acquisition and a $5.2 million gain on foreign exchange associated with the operations and Legacy Aktiv Kapital. Additionally, interest expense was $11.8 million, an increase of $7.8 million versus the same period last year and an increase of $6.7 million sequentially.
This reflects an increase in borrowing associated with the acquisition. Interest expense was favorably impacted by the amortization of the fair value adjustment on Aktiv debt.
This lowered our interest expense in Q3 by approximately $3.6 million. The impact in Q4 will be about $1.3 million with minor impact thereafter.
Non-cash interest expense related to our convertible debt with approximately $1million in the quarter. Our effective tax rate was 34.8% for the quarter by a favorable set of circumstances between the US and European tax rules.
I want to contrast that with the restricting I mentioned earlier. The lower tax rate in this quarter was not a result of the fore mentioned alignment.
Our net income margin was 21.4%, adjusted for the acquisition expenses and the foreign exchange currency loss associated directly with the acquisition, net income margin for the first nine months was 22.8% compared with 24.1% for full year 2013 and 21.3% for full year 2012. Moving on to the balance sheet, cash balance at the end of the quarter solidly at $70.3 million compared with $10.7 million a year ago.
Sequentially, cash declined $200.2 million as we funded a portion of the Aktiv Kapital transaction using cash and we also make approximately $75 million in principal payment on debt outstanding including payments made domestically and through PRA Group Europe. The NFR balance was $1.91 billion, up from $1.26 billion at September 30, 2013.
The main drive of the increase was the addition NFR assets from Aktiv Kapital but either $728 million. The acquisition also added $1.8 billion in estimated remaining collections or ERC.
Payments principal amortization of finance receivables otherwise known as payments of other principal including net allowance reversals was 39.8% of cash collections compared with 41.2%. The amortization on Legacy PRA financial receivables was 40.1% and for Legacy Aktiv Kapital it was 3.5%.
Cash collections and fully amortized pools were $17.1 million during the quarter, up slightly from $16.9 million in 2014 Q2 and $8.8 million in 2013 Q3. Now turning to liabilities, net differed tax liabilities were $237.2 million at quarter end compared with $200.1 million a year ago.
There is a full reconciliation of differed tax assets and liabilities in our 10-Q. Borrowings totally $1.43 billion at quarter end and consisted of $259.8 in convertible senior notes, $187.5 million in other long term debt, $436.5 million on our domestic revolver, $169.9 in solid financing and $371.7 million that we assume from Aktiv Kapital.
Our debt-to-equity ratio at period end was 148.5%, up from 55.4% in the same period last year. Debt-to-equity ratio including net differed tax liability was 173.2%.
The increase in the ratio is due to the acquisition. We felt very comfortable at this level of debt.
Since cash flows from ERC in our portfolio is ultimately fueled to pays out the loan, we’re trying to look at ERC in relation to debt. This quarter ERC was 3.07 times our total borrowings, which is a pretty comfortable place for us to be.
After the quarter ended, we secured a new line of credit the PRA Group Europe. The new financing agreement has a borrowing capacity of $500 million with a $40 million overdraw facility and it carries interest of IBOR plus 250 to 300 basis points depending upon advance rate.
The new agreement was used to refinance the majority of the debt the PRE Group Europe. Our European finance team headed by (indiscernible) did a fabulous job in secured industry line.
Importantly, this facility of ERC based similar to our US facility. We believe this will give us a substantial funding advantage over many of our peers in Europe.
Now let me turn the call over to Neal for a review of our third quarter collections and operations results.
Neal Stern
Thank you, Kevin. In the third quarter, our US call center collection staff increase their cash collected like 8% over the prior year.
This was the 26th consecutive quarter in which we’ve able to demonstrate an improvement over the prior year’s result. Our productivity gain help us to collect over 2.6 million domestic payment, this is was a 3% increase over the prior year and are able to being a size of increased by 1%.
Because the average paying are going to impacted by a verity of short term market and operational conditions, we believe the more in cycle metric is the track cash collected for acquisition’s core point. That metric increased by more than 10% over the third quarter of 2013, that was primarily driven by purchases made over the last few years and improved collection performance from our legal channel.
Total US legal cash collections were up $9.8 million or 12% over the last year. External legal collections represented 55% of that total and cash collections were 3% higher than last year.
Internal legal collections were 45% of the total and cash collections increased by 24%. Our total spending our core cost of $19.8 million was 10% higher than the same quarter last year, but now sequentially from Q2 by $4.8.
Our total investment at this level continued to product results that meet or exceeded our original goal recouping our costs over six to 12 months delivering a 200% plus return over the next 14 to 16 months. So with our expectation that our core cost from the coming quarter will be roughly similar to our third quarter investment.
As a reminder, legal collection through means are option to last result and only occurs after consumers have not responded to letters and calls but a peer will have to pay out. This is effective component our legal collection efforts to less than 5% of our account base.
I’ll make some comments on our European operations. As of the case across our senior management team, I’ve been working closer with my counterpart Laura to help drive the kind of collaborative best practice initiatives that Steve spoke earlier.
As a result of that strategic alignment, UK results generally benefited from some identified in sourcing opportunities that help lower our expenses and improve cash collections. Throughout our European operations results were lifted by increases in legal collection activity, that the highest level payment incidence at size where slightly above our internal expectations.
On the integration from, most of our work was in the UK. We merge the management teams which report up to (indiscernible) and ultimately Geir Langfeldt and began leverage the two collection operations by moving some of the accounts and functions between the sites in (indiscernible).
At the highest level model favorite non-paying accounts and higher volume and model favorite paying accounts and more specialized collections. Our challenge is just to best optimize the way we spread our old and serviced accounts between the two sites both of which are critical to us.
The combined UK operation has taken advantage with some pricing power with common suppliers and we’ve improve that technology broad mind. The most impactful stride has been in setting up new cost reporting that the UK team can now begin to use to make more precise decisions about resource allocations in order to obtain a particular return on investment for a given action.
In summary, the integration is going very well and we are more excited than ever about the combining capabilities or PRI Group. Now operator, we’re ready for questions.
Operator
Thank you (Operator Instructions) And our first question comes from David Scharf from JMP Securities. Your line is now open.
Please go ahead.
David Scharf – JMP Securities LLC
Thank you. Thanks for taking the question.
Few things, maybe to start off with Steve, just kind of big picture, comparing where we are today to just three months ago, is your overall outlook in the North American market pretty much the same or is there anything that’s kind of changed one way or the other on the margin and whether supply pricing, collectability anything?
Steve Fredrickson
No, I think the only winkle from last quarter to this quarter is how the seller community has reacted to the OCC guidance and the confusion that was created as I mentioned in m script. We had mentioned that OCC guidance call last quarter in fact didn’t come out soon prior to it.
And our hope was that it was going to provide more clarity as opposed to confusion and unfortunately there was some language in there that has led to I think some consolation on the part of several sellers and they are working directly with the OCC, they try to clear that up and I think the industry as a whole is waiting for clarifying statements from OCC. Other than that David, I think that not much has changed in our world in the last three months.
David Scharf – JMP Securities LLC
Okay, good, good and just a couple more, reading Europe and just the pricing in some of the major market, I know you said depending on any particular quarter or year if some market are up, some are down, are there any markets that you are starting to see a significant increase in competitiveness or pricing versus even before you were Aktiv which were probably keeping an eye. I’m just trying to get a sense for particularly the UK and whether there is anything in the Scandinavian market that’s heating up a lot.
Steve Fredrickson
Well we’ve kept them up until 11:30 local time, so I am going to go ahead and put gear on the spot and let him answer directly, he is got more continues history on that observation outside of the UK. So Geir, you want to grab one?
Geir Langfeldt
Yeah I think we’re seeing a competitive market across all markets in Europe right in UK rational and we’re trying to identify the opportunities that we think we can make richer and we want to have and totally on being confident on our pricing models and underwriting models. But it’s competitive across the majority of the markets we are in.
David Scharf – JMP Securities LLC
Okay, got it, got it. And then just few financial housekeeping question and I will get back in queue.
The outstand the restructuring going forward that may impact the effective tax rate, is this 35%-36% rate we saw this quarter pretty much which you are expecting, I mean is that reflect sustainable rate based on the mix of US versus UK and other markets?
Kevin Stevenson
Yeah, so I would say frankly it might end to be a little bit lower than I expected quite frankly, but again it’s a result of some interesting circumstances I just I don’t want to get into one the call. But I think for modeling purposes if you want to use that Q3 rates for your models that’s probably the best guidance I can give you and we’ll see how it all shakes out later.
David Scharf – JMP Securities LLC
And just lastly, kind of how we ought to be thinking about kind of near term collections out of Aktiv. I know they did about 180 million in the first half of the year and 90 million a quarter on average and it looks like what you did basically 90 million and the third quarter is well.
Are there similar seasonal drop-offs in the fourth quarter in Aktiv’s markets as we see in the US or is it more likely to be closer to that 90 million level?
Steve Fredrickson
I think that what we typically see is a slight drop-off because of holidays in Q3 and there is less of anything remarkable about Q4.
David Scharf – JMP Securities LLC
Got it. Okay, thank you.
Steve Fredrickson
Okay.
Operator
Thank you. And our next question comes from Sameer Gokhale from Janney Capital Market.
Your line is now open. Please go ahead.
Sameer Gokhale – Janney Montgomery Scott LLC
Okay, thank you. Kevin I might need a bit of an account crammer from you but the FX gain of 5 point million, so that include the hedging, you offer that you incurred.
Can you tell me how those were generated, I thought that if you need an acquisition then really the results would be concluded at some sort of rate and then consolidated into your statements at that weighted average rate for the quarter as opposed to showing a separate line item, I probably clearly wrong in that, but if you could just help me understand how that gain generated item, how to think about that going forward, that would be helpful?
Kevin Stevenson
Sure, it’s not that simple, so it’s not a crazy question. What happened, get a little nutshell is that the thing they do every day, that the think that they going on and Aktiv every day and whether that’s your collecting portfolio in pounds but it’s owned in euros or owned in Nok and all that stuff gets translated or I’ll try say transacted at those daily rates.
And it’s part of their operation so it’s through their income statement. Not offsetting some of that would be loans.
So as they had loan repayments or loan reprising and whether that’s company or whether that’s third party loans or bank deposit accounts to get all reprised along the way, that’s the whole runs through the income statement. Once that’s all done for a quarter then all that’s is translated in the US dollars and that’s again we put that as a translation and that’s what you see going through the OCI line item.
Sameer Gokhale – Janney Montgomery Scott LLC
Okay, so coming through the income statement, I got that below the line that $5.2 million, that’s based all these transactional items converted back into US dollar, so we have made some sort of assumption about those sort of transactional volume amounts, we assume those are whether to be stable and then whatever we assume for FX completion that’s how we should think about it. I am just going to figure out how we should model that going forward, it looks like it’s going to be something in there basis growth.
Kevin Stevenson
Well, I am going to go back. You said translated US dollars, that’s not right.
So these that will go the income statement are generally remeasured again from something like Swiss franc from a pound of from a Nok, you know all the things they are dealing with every day and they operate in 15 countries but 14 over there with seven currencies, all that stuff is what’s being transaction revalued. And then once that’s all done for a given quarter, that ending result is translated in the US dollars and the US dollars is what goes on OCI.
And so you asked a question how do you think about it. You know I don’t quite what to tell you with foreign currencies moving around like they have been moving around lightly.
Just keep in mind that the things you’ve got to do every day in term of collecting like I described it, that stuff is going through income statement. Again more to our best to hedge or mitigate or do what can they top that out, but at the end of the day that entire results for Europe is roughly speaking will be translated through the OCI.
Sameer Gokhale – Janney Montgomery Scott LLC
Okay, so I’d probably need to follow-up with you on that. But the other question I had on an unrelated note was I think you had said legacy actually the amortization rate was 38.5% is that correct?
Kevin Stevenson
That’s correct, yes.
Sameer Gokhale – Janney Montgomery Scott LLC
And then how much was it for Aktiv in your core business?
Steve Fredrickson
The core business was 40.1.
Sameer Gokhale – Janney Montgomery Scott LLC
Okay, so if you assume that you’re going to kind of push the peddle on the Aktiv front then just all – it’s equal today so the amortization rate blend should come, what should we be thinking about it the blend going forward in terms of the mix of Aktiv versus non- Aktiv, is that reasonable?
Kevin Stevenson
And again giving any kind of flavor on going forward amortization rates tough, it just depends on the US for example depends and over performance for older deals, for incidence we just $17.1dolars full amortized cash come through which is the big number historically for PRA it’s a record. Again not my goal from an accounting perspective but that definitely has an impact on amortization.
So I don’t – I’ll can’t give you too much guidance on go forward rates. You got the right idea.
Sameer Gokhale – Janney Montgomery Scott LLC
Okay. And then in terms of the restructuring that you talked about going forward, it seems like there was a restructuring of eagle structures and I think part of the commentary was around better operational alignment.
So can you help us understand that if you maybe just more going on there then just tax restructuring, if I’m understanding it correctly. So give us some flavor for what kind of operational alignment that you could see improved, that would be helpful.
Kevin Stevenson
It’s just right now the things are kind of broken apart, so you’ve got portfolios that are being collected and UK, you got portfolio that are being collected in various places over Europe being owned and a country that make sense for Aktiv, you might have situation where again portfolio is round one of the codex being more throughout that area. So it’s all broken apart from our perspective in the wrong places.
So you know what we’re going to do is take portfolio that owned and say Switzerland but it’s been collected in pounds, we’re going to move that portfolio into UK kind of where it belongs. And then from a reporting from a ledgering perspective it all makes great sense to us.
And again you do hopefully will get a tax benefit that as well.
Sameer Gokhale – Janney Montgomery Scott LLC
Okay, and then just my last question in terms of leverage, I know in the past, I believe you’ve talked about max leverage more on a debt-to-equity basis of about two times and I know that probably better you are looking at it is whether it’s ERC, so as you appetite for taking on more leverage increased at all if you think about continue to generate like 20% ROE going forward or are you sticking to what your higher guidance are.
Kevin Stevenson
You know – one person at the stable, my appetite for taking on debt it really changes upon my appetite or my ability to lay – to purchase well yielding asset. So that two to one fund-to-dent equity number, we’re just something that we’ve done in the past, we’ve operated the company decade or more ago with that level and didn’t seem very challenging for us.
We thought that was always comfortable to talk about. So I think the right answer to your question is sure, I am certainly interested in putting on more debt and you find more assets to buy.
Sameer Gokhale – Janney Montgomery Scott LLC
Okay, thanks, Kevin.
Kevin Stevenson
I mean if you any other question of the FX stuff, you feel free to give me a call.
Sameer Gokhale – Janney Montgomery Scott LLC
Okay.
Operator
Thank you. And our next question comes from Bob Napoli from William Blair.
Your line is now open. Please go ahead.
Robert Napoli – William Blair & Company L.L.C
Thank you and good afternoon. I had just a question on I guess the purchase, when you talked about – Geir talked about the competitive environment there, you purchased $37 million in this quarter, what is – which of it that is, I mean it’s seasonally lighter in the third quarter and it was not totally a full quarter but what would be your feel for kind of – and then what wouldn’t be – can you remind me what the purchases were a year ago in 2013 and what do you think would be kind of reasonable level of purchases to be able to expect out of those market.
Geir Langfeldt
The purchase in 2013 was $236 million that depends on currency rates on that level. And it’s very hard to predict the investment in Europe as a lot these – there is really from individual deals and more than full and full contractors is more in US.
So you will see a lot of fluctuations up on that one in quarters. So it’s hard to estimate exactly when and where the deals will land.
I think on activity level, we see European environment what we had last year it’s not even a little bit more that sales activity.
Robert Napoli – William Blair & Company L.L.C
So the activity is the same or little bit more than last year, is that mean your deals – I mean some of the bigger deals you’ve just missed out on or?
Geir Langfeldt
Yeah, we look at is in bigger deal and if we see the right opportunity to invest, we’ll take it. And one other advantage is we have operating in multiple countries, so it’s that we follow where we can get there the best return and some of the deals are very large and will be both in order to exactly where will land.
Robert Napoli – William Blair & Company L.L.C
And then seasonally is the Geir, you usually a bigger quarter?
Geir Langfeldt
Normally, the seasonality in the markets we operating is Q2 and Q4 are the seasonally strongest quarters in terms of activity.
Robert Napoli – William Blair & Company L.L.C
Okay and from what you are seeing in opportunities you don’t feel like this year is any different?
Geir Langfeldt
No.
Robert Napoli – William Blair & Company L.L.C
Okay. And then just the operating margins, is there anything in the accounting or incremental investments that would change the operating margins proactive versus what we saw in the 8-K?
Kevin Stevenson
Bob, it’s Kevin. I think we talked about in last several quarters that we do think that Aktiv’s margins will be more in line with our margins historically overtime.
So I think there is going to be some more – something more legal expenses that are Aktiv. But I think from a modeling standpoint, I would think more about margins like PRA’s margins.
Robert Napoli – William Blair & Company L.L.C
Okay, now it’s because of incremental investment in legal?
Kevin Stevenson
However there is legal, there is you are adding some compliance folks on board like we – I don’t forget, operating margin is dictated largely by mix as well. So to the extent that Aktiv might be buying a lot of paying paper, one point in time that’s going to increase that margin.
Not like bankruptcy does, so just he is going to aware that again I think like what paper you are buying can change your operating margin mix where we’re still targeting a similar after expense IRR.
Robert Napoli – William Blair & Company L.L.C
Okay, got it. Just on the collection side, your US call center collections were much longer than what we were looking for, on the other hand the bankruptcy was allow, what is there, is it test I mean you’ve bought a lot of less bankruptcy recently on the requiring in the bankruptcy collections and just improve correct productivity in the call centers which is driving the mix between the two?
Steve Fredrickson
Yeah, I’d say it’s a combination of that, you know also the bankruptcy collections that come in each month, come in through the bankruptcy trustees. And the bankruptcy trustees are not really motivated to get us our payments for a quarterly reporting period, and so it’s not uncommon for payments to be delayed and for us have one quarter come up several million dollar short of where we think it’s going to be in the next quarter, sees a little bit of catch up of that and I think we’ll probably see a little bit of that between September and October.
So I don’t know to what magnitude you are looking for different bankruptcy collection. But that’s probably a little bit of away along with the other items.
Robert Napoli – William Blair & Company L.L.C
Great, and then just on the internal legal versus external legal collections, where can that mix go to, and can you remind of the operating efficiency that you get on that internal versus external be improve in profitability?
Steve Fredrickson
Yeah, I mean we’ve been talking about we pick up about 500 basis points as we shift work from an external legal environment to an internal. But again that being said, and they are standing here so there is no reason for me to put words in his mouth, but it’s those markets where we can develop really efficient operation that were able to get a pick up like that.
And so to answer your answer question Bob, we’re never going to see a 100% internal legal environment here simply because there is too many markets that either we can’t get scale in or there are vagaries of the local way of conducting yourself in the core that just don’t lend itself well to somebody doing it in with employee turnings like we do. So we certainly help that we can put pressure on from this 45%-55% mix but where that’s going to go I think it’s conjecture.
Kevin Stevenson
So just a quick, so the average weighted month for a legal recovery its way out there from – so even though we’ve been devoting more than 50% of our cost and investment in internal cash collected show up it is still kind in this 50-50 range because we put resources in internal in the last couple of year, that will began showing up more in the coming year. so I fully expect that internal legal will get well mark in the company.
Robert Napoli – William Blair & Company L.L.C
Great. Great, thank you.
I appreciate it.
Operator
Thank you. And our next question comes from Robert Dodd from Raymond James.
Your line is now open. Please go ahead.
Robert Dodd – Raymond James
Hi, guys. Just following up a little bit on Bob’s question.
When it comes to European purchase volumes, I know that was very hard to predict, and lumpy. But can you give us any kind of view on a confidence in the full range – like it should be between 20% and 60% on a quarter, or is it 0% to 100%?
Just how volatile can it be?
Steve Fredrickson
I’ll go with 0 to 100.
Robert Dodd – Raymond James
Okay.
Steve Fredrickson
I think we’re always going to get fair share and so getting blanked in a quarter is going to be highly unlikely but there are many size of transaction, so it’s not unusual to see $10 million or $20 million or even $30 million transactions in the market. And so if you missed on two of those, if you were second place on two of those, obviously a couple of basis points could really swing your reported buying for a quarter and that’s the type of dynamic where that were dealing many times in Europe.
Robert Dodd – Raymond James
Okay, perfect, thank you. On the OCC side, when you talk about a bit of confusion for the banks here, in terms of what the process is for them now, if you have any clarity on that.
Are they waiting for opinions from their legal teams about exactly what the OCC meant? Or are they sitting back and waiting for the OCC to clarify?
Obviously that second part could take potentially a lot longer.
Steve Fredrickson
I don’t think anybody is sitting back and waiting for the OCC, I thing suppose that selling and buyers alike are actively reaching out to the OCC in an attempt to gain clarification through a statement of some sort or the publishing of FAQ or something that would give us some additional clarity on what we can expect to see in a final rule. So the industry is pushing on it.
Robert Dodd – Raymond James
Okay, thank you.
Operator
Thank you. And we have a follow-up from David Scharf from JMP Securities.
Your line is now open. Please go ahead.
David Scharf – JMP Securities LLC
Thank you. Just wanted to follow-up on thinking about how we model amortization rate or yields overseas.
I seem to recall from the filing, originally, Aktiv historical accounting, it was a higher revenue recognition rate than the 61.5% that we saw this quarter. And I know there was going to be a conversion process.
But should we be thinking about this as the normalized rate, the reflection of current yields on a go-forward basis?
Kevin Stevenson
Well, I would say that certainly where are ended 930 was the current yield on the portfolio but I did when I address – comment the historical numbers under IFRS are probably not probably comparable. As you know that they can ride up, ride down and it’s pretty open environment in terms of how you can do that.
In United States, obviously we are restricted we can ride down but we can’t do go back. So the yields where they are at right now are generating this 35.
Over the long term, if you think about just on the back of the envelope $728 NFR rate on 1.8 billion is right around 40% for from the long rate it will probably be half around there.
David Scharf – JMP Securities LLC
That leads into the more qualitative question, which is, obviously we’ve been seeing the forecasted collection multiples – and by definition, the gross yields on your domestic portfolios – really gently edge up each quarter for multiple vintages. Which probably speaks to both productivity collection performance, as well as a dose of conservatism when initially forecasting.
Would you characterize that $728 million NFR value you ascribed at the time of the acquisition as having a healthy dose of conservatism in it? Or does it have as much – should we think of it as much upward potential yield adjustments as we’ve been used to seeing with the domestic pools lately?
Steve Fredrickson
That’s a tough one out of that purchase. So the issue is this is a very, very big transaction and obviously very material.
So I would say we were clearly aggressive I think with our ERC number. So take some numbers for example, if you look at some of the other Aktiv filings that they put out there, from IFRS standpoint I think if I remember correctly they were running about 1.6 something billion dollar equivalent for their accounting records and 1.9 and some change billion for what they are tracking to I think operationally.
And so we’re somewhere between there, you might see that as a discount from 1.9 billion you might see that as an aggressive approach 1.6 billion. So I’ll let you decide what you think that is, but I feel pretty comfortable we are at, I certainly hope that we’re able to move those yields up overtime.
I will say again this is a big deal, these are 120 month curves and if you look at the Q, our average duration outstanding has gone up quite up quite bit from last quarter. So these are lot aren’t staying out longer on the amortization curve.
So again in summary, they are out there ways but it certainly hope that Geir and his group will be able to collect more than we projected.
David Scharf – JMP Securities
Okay. And then lastly, another follow-up on the regulatory side.
I know you’ve spoken generally about some uncertainty emerging in the OCC guidelines or rules. We’re aware of some uncertainty around language regarding bankruptcy sales.
Are there other specific topics that you’re referring to? Or is it very broad-based as it relates to the rules?
Steve Fredrickson
Certainly the specific language and then follow-up commentary that has come out around bankruptcy is one of the issues that we are most interested in getting clarification on. There is some other issue as well that especially on the core side where we are trying to make sure we have a clear understanding on but that bankruptcy conversation is one of the biggest issues.
David Scharf – JMP Securities
Got it, thank you.
Operator
Thank you. I am not showing any further questions at this time, I would like to turn back to Steve Fredrickson for any further remarks.
Steve Fredrickson
Well, thank you for joining us for this Q3 2014 earnings conference call. I’d like to also thank all of the great PRA Group employees in North America and Europe that are working so hard to produce our excellent results.
I look forward to speaking with you again next quarter.
Operator
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today program.
You may all disconnect. Everyone have a great day.