Mar 1, 2017
Executives
Darcy Schoenfeld - Director, IR Kevin Stevenson - President Steve Fredrickson - Chairman and CEO Pete Graham - EVP and CFO Tiku Patel - CEO of PRA Group Europe
Analysts
Mark Hughes - SunTrust Robinson Humphrey David Scharf - JMP Securities Bob Napoli - William Blair & Company Hugh Miller - Macquarie Research Robert Dodd - Raymond James
Operator
Welcome to the PRA Group Earnings Conference Call. [Operator Instructions].
As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms.
Darby Schoenfeld, Director of Investor Relations for PRA Group.
Darcy Schoenfeld
Thank you. Good afternoon, everyone and thank you for joining us.
With me today are Steve Fredrickson, Chairman and CEO; Kevin Stevenson, President; and Pete Graham, Executive Vice President and CFO. Tiku Patel, Chief Executive Officer of PRA Group Europe will also be available to answer questions during Q&A.
During our call we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included in the earnings press release we issued earlier today and the related Form 8-K filed with the SEC.
Both the press release and 8-K can be found on the Investor Relations section of our website at www.pragroup.com. A replay of this call will be available shortly after its conclusion and the information needed to listen is in the earnings press release.
We will also make forward-looking statements during this call which are based on Management's current expectations. We caution listeners that these forward-looking statements are subject to risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations.
Please refer to the earnings press release and our SEC filings for a detailed discussion of these factors. All comparisons mentioned today will be between Q4 2016 and Q4 2015 unless otherwise noted.
I'd now like to turn the call over to Steve Fredrickson, our Chairman and Chief Executive Officer.
Steve Fredrickson
Thank you, Darby and good afternoon, everyone. Thank you for joining us for our 2016 fourth quarter earnings conference call.
Before we discuss our Q4 operating results, I want to first take a few minutes to talk about the CEO succession plan we announced today. I'm pleased to share that Kevin Stevenson, who co-founded PRA Group and currently serves as President and Chief Administrative Officer will become CEO following our annual meeting of shareholders which will be held on June 1, 2017.
At that time, I'll transition to a new role as Executive Chairman of the PRA Group Board of Directors. This was an important milestone for the Company and one that we believe best positions PRA Group for long term success.
Kevin and I have worked side by side for the past 21 years building and industry-leading business and we couldn't be more confident of where the Company stands today. One of the Board's most important tasks is succession planning for key leadership positions and we believe the approach we've taken demonstrates the thoughtful way by which we've addressed this critical matter.
Several years ago, I approached the Board and indicated my desire to eventually step down from my role of the day-to-day CEO at some point in the future. At that time, they began executing a very thorough and deliberate succession planning process which included retaining an outside search firm to look at external candidates.
It became clear through this process that Kevin is the ideal person to assume the CEO role and lead PRA Group forward. Since co-founding the group with me in 1996, Kevin's been a true partner and we've worked side by side to make the key decisions that have put in place a platform and a strategy for PRA Group's long term success.
Over his two decades at PRA Group, Kevin's been involved in nearly every aspect of the Company and has served in numerous operational and financial roles. Over 18 months ago, the Board appointed Kevin President and Chief Administrative Officer and named him to the Board.
Kevin also served as the Company's first Chief Financial Officer and successfully lead PRA Group through our initial public offering in 2002. Kevin has tremendous experience throughout the entire organization and he is, without a doubt, the right person to lead the Company forward into its next phase of growth.
Given PRA Group's strong financial and market position and deep leadership team which was bolstered with the recent appointment of Pete Graham as CFO, I am confident that now is the right time to begin executing the succession plan. I look forward to transitioning to a new role as Executive Chairman of the Board while I continue to focus on helping PRA's growth strategy, vision and business development efforts.
With that, I will turn it over to Kevin.
Kevin Stevenson
Thank you, Steve. I'm excited and honored to have been appointed by the Board as PRA's second CEO since it's inception in 1996.
Steve has provided 21 years of leadership to this Company and on behalf of our 4000 employees, I'd like to thank him for not only how he has led this Company, but how he has allow people, myself included, too grow under his guidance. Steve is a tireless worker and thought generator.
I look forward to continue to partner with him and the Board in the coming years. As we move forward, our mission and vision remain unchanged.
We're committed to the same strategic plan. We remain focused on integrating our investments and operations and building one company, one team worldwide.
I'm optimistic about what the future holds and look forward to building upon the strong foundation that we've established. With that, Steve will now kick off a discussion of our fourth quarter results.
Steve Fredrickson
Thanks, Kevin. 2016 was a year of intense work and preparation for PRA Group.
Q4 was an extension of that. We faced many issues, including continued suppressed supply in the U.S.
insolvency and a lesser degree a core, a continuously changing State and Federal regulatory environment in the U.S. and even our own self-inflicted issues, like our legal collection strategy shortfall in Italy and our excessive pursuit of hourly productivity in the U.S.
call centers. Each one of these presented it's own issues and we've worked very hard to adjust quickly and successfully to all of them.
We've shown our ability to face the good with a bad while maintaining our founding principles. This has helped us successfully navigate multiple cycles of the economy, numerous competitive threats, regulatory changes and many other events, all the while growing PRA Group into an industry leader.
At the end of the day, we strive to operate our business to compliantly collect as much profitable cash as possible over the long term, while doing so at minimum expense. At times, accounting methodologies and estimates can impact operating results and Q4 is certainly an example of this, as we had a significant non-cash charge due to a change in our accounting estimates which Pete will discuss in more detail.
That's why we always focus on strong efficient cash flow and our cash efficiency ratio, measured as cash received less operating expenses divided by cash receipts, was 61% in 2016, up slightly from our internal 2016 budget and flat to 2015. Our annual cash receipts, net of operating expenses of $957 million is second only to the $972 million generated in 2015.
We believe this is a significant operating metric and one that demonstrates the health and efficiency of our enterprise and this progress has occurred despite the significant runoff of our U.S. bankruptcy book with its associated low expense ratio, as well as the substantial ramp-up of our compliance and dispute teams over the past several years with all their associated costs.
This demonstrates how we've been able to redesign our business over the years in such a way it's remained efficient, competitive and highly profitable, no matter the challenges. I also mentioned that PRA Group has spent much of 2016 in preparation.
We've had numerous questions recently about possible catalysts for the business, so we wanted to take some time to detail for you what we've been preparing for in order to best capitalize on any opportunities. We've been intricately involved in the NPL market for decades and we've been able to spot trends and take full advantage of them in the past.
Although were operating our Company on the firm footing of today's reality, we've not assumed any of these things happen in our current business forecasts. We've developed plans to deal with these events should they occur and our experience and observations lead us to believe that their likelihood is building.
First, it's potential relief from the overreaching cell phone dialing restrictions extrapolated from the Telephone Consumer Protection Act or TCPA. With the appointment of the new Chairman of the FCC, we believe there's increased likelihood that will be able to join Europe and the rest of the world to use technology to contact our customers.
With a large portion of the U.S. population being cell phone-only, our inability to use modern technology to aid productivity has been a headwind for years.
If we were able to contact customers more efficiently, we would expect to see an immediate increase in our cash collections since we would simply be able to contact more of our customers. It's our long-held belief that we need the ability to speak easily and efficiently to our customers in order to help them resolve their debt and the FCC's past interpretation of the TCPA hinders that opportunity.
The impact of such a change to be significantly beneficial. Technology dramatically increases productivity, allowing further penetration into our portfolios by eliminating nonproductive collection time and boosting productivity as measured by actually speaking to customers.
This allows a collector to help more customers actually solve their delinquent accounts which should be everybody's goal. Second, the potential of building core supply in the U.S.
We've seen delinquency rates and card issuer loss provisioning start to creep up over the last few quarters. While we haven't seen a broad increase in supply yet, we've started to see signs that current sellers may be considering increased use of selling, including during Q1 2017.
We continue to be engaged with the sidelined issuers, but there hasn't been much movement on that front since our last earnings call. We believe the best short term probability is that we see increased sales from existing sellers, as their charge-offs increase and they take advantage of the higher NPV and instant return that selling has proven to deliver.
In any situation, we would like to have plenty of dry powder in place in order to take advantage should an opportunity present itself. Our sales of the government services business in Q1 helped accomplish exactly that as it freed a substantial amount of capital that can now be redeployed to that purchase.
Third, the possibility of building insolvency supply in the U.S. If the OCC provides an FAQ and clarifies their stance on selling bankruptcies in the U.S., there could be an immediate increase to supply.
We did see a leveling off of Chapter 13 filings in 2016 after years of decreases. This opportunity includes not just ongoing sales but also the sale of meaningful levels of older, unsold accounts that have been caught up in this period of regulatory confusion by some market participants.
Fourth, a probable competitive consolidation in Europe. PRA remains one of the few purchasers of NPLs in the U.S., after the core markets consolidation here, based on our ability to operate efficiently and compliantly.
Our goal is to prevail as one of the largest purchasers in the world as compliance, scale and competence become the ultimate determiners of winners and losers of NPL purchases internationally. The consolidation has already begun his of geographies in Europe, as we've seen numerous company transactions take place in the last few years.
Fifth, we have a substantial amount of capital we can put to work in Europe and the U.S. At the end of January, we had available on our revolvers in Europe to repurchase approximately $530 million of NPLs and almost $200 million in the Americas.
We will continue to deploy capital where it makes the most sense for us and we're pleased to be considered a leading global partner too credit originators in all markets. The final item we're tracking is the evolution of U.S.
regulatory environment, including the CFPD. As we've said, we support an appropriately regulated debt collection industry.
While we're unsure what we will ultimately happen, we believe commonsense reforms to the process of regulation look more likely and that could make are operating environment more predictable, if not also more favorable to facilitating debt resolution. We will continue to monitor any events that occur and determine what that will mean to PRA.
Being prepared and ahead of the curve has been very beneficial for us in the fast and we plan to take a similar approach. On to financial and operating results in the fourth quarter starting in Europe, investment in Europe core was $80 million, similar to the fourth quarter of last year and we continue to see good supply of NPLs.
Pricing continues to be aggressive too the point that we believe some portfolios are trading at unprofitable levels. However, we continue to find purchases that make sense for us, all the while shoring up our operations and continuing to focus on execution.
The UK has benefited from our investment in the legal collections channel, with legal collections there up 43% in the quarter. We believe continued development of legal expertise and utilization in the UK can make us significantly more competitive there in certain asset classes.
Spain continues to benefit from operational analytics and last quarter, we mentioned that we had rolled out the same in Norway. We continue to push forward with these efforts and we've been adding additional FTEs to support our efforts.
We've also seen similar positive operating results in Germany, where we recently increased the use of operational analysts. Italy is moving along on schedule.
This is a geography where we see significant opportunity over time, but it's also a market with a complicated legal system that has proved challenging. We still have two large pools in Italy on cost recovery which clearly hurts our European revenue and expense ratios.
However, our fixes are in place and we're pleased with the progress we've made thus far. We still see these portfolios which collect about $6 million of cash per quarter, as remaining on cost recovery for most, if not all, of 2017 before we can calibrate further collections accurately enough to bring them back on yield.
This will continue a downward pressure on revenue and income until then. Lastly, earlier this year, we announced the sale of our government services business for approximately $92 million, driving a $47 million pretax gain which will be recorded in the first quarter of 2017.
The actual gain number may differ slightly, due to some final calculations, but this gives you the general. Dating back to 2005, we strategically diversified and carefully built that business through the acquisition of eight different companies.
In recent years, we've improved the consistency and profitability of the business considerably and integrated the separate businesses so that they operated cohesively as a single unit. We were never able to capitalize on our original thesis for entering the government market, collecting on or buying government receivables.
for that reason, combined with the lack of synergies with our other businesses and the ability to redeploy capital, we made the decision to divest the business at an attractive valuation. During the time we owned this business, including allocated internal costs, we produced an unlevered pre-tax IRR in excess of 20% and approximately a three times unlevered multiple on our invested capital.
We believe our patient, professional approach to building and operating this business has driven a very strong result for our shareholders. We now believe this capital can be more optimally redeployed to the NPL business, as opportunities increase in that segment.
For modeling purposes, we estimate the EPS impact for 2017 of loss government services earnings to be approximately $0.15. Now I'd like to turn the call over to Kevin, who will go to operational results in the Americas and global insolvency.
Kevin Stevenson
Thank you, Steve. In core Americas, we continue to work through the items we've been discussing with you over the past year and are pleased with the progress.
First, our insolvency business. Revenues continue to decline as we move away from the peak of our purchasing and resultant cash flows.
Sale volume has been limited by fewer Chapter 13 filings in the U.S., confusion around OCC guidelines for debt sales, sustained demand from the purchasers, as well as certain large issuers remaining out of the market. During full-year 2016, U.S.
insolvency collections decreased $103 million. While the rate of decrease has slowed somewhat from the decline in the previous year, it's still a very significant headwind.
To the extent we start to see more volume in the U.S. insolvency market, this trend could begin to reverse itself.
We've seen some signs of trend improvement in the past six months or so, but so far, no large-scale change in supply has occurred. Steve mentioned this is one of the catalysts were tracking and our team stands ready to capitalize on it.
In the meantime, we've realigned our insolvency management team to reduce expenses while still operating efficiently and profitably. On the core side, the regulatory environment in the United States has been increasingly stringent in the last few years.
We've been impacted not only by our consent order with the CFPB, but also State and Federal consent orders or settlements with other market participants, banks, law firms, even the credit bureaus. One of the bigger impacts in the regulatory environment is increased need for documents.
We have spoken about this for a few quarters now, dating back to Q4 of last year. We worked for through the majority of the backlog in documents and are now receiving and processing them on newer pools much quicker.
While the timing and processing improvements continue to take shape, the work we've done on our side of the document process has allowed us to make significant process on legal collections and be more efficient in our response to disputes. But there's still room for improvement from a delivery standpoint and there are still further advances we can harvest via more automation.
At this point, we feel that from a cost perspective, the majority of the impact from the regulatory environment is reflected in our results. Keep in mind, this is an ever-changing landscape and there will likely continue to be consent orders affecting industry participants, regulatory changes, both State and Federal, that will impact us one way or another.
We simply operate in a regulated industry. In Q2 and Q3, we told you in our effort to optimize staff productivity, we'd allowed attrition to reduce staffing levels too far and the situation led to a detrimental impact on U.S.
core collections. At the same time, adjusting for a few exceptional transactions, we've purchased a record or near record number of accounts in each 2014, 2015 and 2016.
We're confident in our hiring plan and are executing on that plan every day. As we said many times, it's more difficult and time-consuming to increase our staffing levels than it is to decrease them, so this effort may take us a few quarters to complete.
We continue to strive for efficiency, but remember that are overall goal, as it relates to hiring and expenses, is profitability, not to drive to a targeted expense ratio or productivity ratio. We've made significant progress and have hired over 350 net new collectors in the U.S.
We now have a little over 1,700 FTE or full-time equivalent, at the end of January. Our real estate capacity currently fits at 2,200 collector seats, not taking into account part time shifting.
Investment in core Americas in the fourth quarter was $92 million and global insolvency was $28 million. For the year, we invested $454 million in core Americas, slightly ahead of 2015 at $448 million.
2016 investment in global insolvency was almost $140 million, with $94 million in the U.S. and $45 million internationally.
This is an increase of $54 million over 2016 levels and we're pleased with this level of annual investment but always eager for more volume at the right return. We continue work with sellers to be the compliant, well-capitalized partner who can provide them with capital and value for their nonperforming loans.
In core Americas, cash collections were down slightly year over year. The decline was largely driven by an 18% decline in legal collections.
This was partially offset by outstanding growth in collections in Brazil. Total number of payments in the U.S.
core decreased 7%. Average payment size decreased 4%, due in part to fewer payments coming through the legal collections channel which typically yield larger payment sizes.
Additionally, in the recent past got we've been seeing average balances move lower which we believe is an effect of the global financial crisis, increasing credit standards and regulatory environment. Global insolvency collections declined 24% versus the fourth quarter of 2015, as U.S.
businesses continue to fall from the peak of investment and resulting cash flows. However, Europe insolvency cash collections almost doubled from the fourth quarter of 2015.
Now, I'd like to turn things over to Pete to go through our financial results.
Pete Graham
Thanks, Kevin. First, I would like to address non-GAAP measures.
While we believe that we meet the requirements of the evolving SEC guidance on non-GAAP measures, we've decided that this will be the final quarter well connect non-GAAP earnings per diluted share and net income. However, beginning in the first quarter, we will detail for you a significant usual items that impact results in the quarter and we'll continue to give currency-adjusted cash collection metrics.
For the fourth quarter, we've adjusted our reported results for a few items that are nonrecurring which do not relate to our normal operations. These adjustments include acquisition and sale expenses of $458,000 and $3.7 million in legal costs not associated with normal operations.
We've also adjusted to reflect constant currency with the fourth quarter of 2015. I will specifically refer to non-GAAP recurrency adjusted when discussing the results, otherwise all metrics will be GAAP.
Total cash collections for the quarter were $349 million, a decrease of $21 million compared to the prior year. This includes the impact of the declining U.S.
bankruptcy business which at $49 million of collections for the quarter was $24 million lower than the prior year. Currency translation for Europe was a $10 million additional headroom.
Americas core collections were roughly flat to the prior year of $193 million, driven by the U.S. call centers of Brazil, offsetting legal collections which were which were $15 million lower than the prior year, due to delays caused by regulatory uncertainty earlier in the year.
For the full-year 2016, cash collections were $1.5 billion, a decrease of $4.8 billion from 2015. This included U.S.
bankruptcy collections of $241 million which was $103 million lower than 2015. Europe core collections were $390 million, an increase of $47 million and on a currency-adjusted basis, the increase would've been $70 million.
Americas core collections of $837 million were roughly flat to the prior year, driven by the U.S. call centers in Brazil, offsetting legal collections which were $61 million lower than 2015, again driven by delays in filings earlier in the year and the cumulative effect of buying lower balance accounts.
Portfolio amortization, including allowance charges, was 62.2% of cash collections in the quarter and net allowance charges for the quarter were $63 million, of which $57 million related to the U.S. core portfolios.
This outsized non-cash allowance charge reflects a change in our accounting estimates. Previously we forecasted the solutions we put in place or plan to put in place would allow us to recover some, if not all, of the cash shortfalls that we've experienced this year.
However, given the unprecedented regulatory environment, our certainty around how much of that cash we will be able to recoup on the 2015 prior vintages has been reduced from an accounting perspective. This is because as time passes and these accounts age, they score lower and receive less calling efforts.
With the staffing levels that Kevin highlighted earlier, we're focusing our efforts on higher scoring accounts and as a result believe it's reasonable to assume that from an accounting standpoint, these collection shortfalls we've seen may not be recovered on these vintages. Accordingly, we've revised our cash collection estimates.
The fourth quarter allowance charges are the result of those changes in estimates. From an operational standpoint, as Kevin detailed, we'll continue to automate, work on efficiency and hire collectors.
We will certainly be focused on try to recoup the cash shortfalls and improve margins. There are many changes to the operational and regulatory environment that could alter the accounting view in the future, but we have not included them in our forecast at this point.
The 2014 prior vintages in U.S. core incurred $56 million in allowance charges.
No allowance charges were incurred on the 2015 vintage and a small $500,000 allowance charge was accorded on 2016 vintage. Additionally, the yields on 2014 in prior vintages have increased over time, making them more sensitive to changes in cash forecasts which contributes to the elevated charges of the fourth quarter.
Although we made the same forecast changes for the 2015 vintage, this did not result in allowance charges due in part to the fact that yields had not been raised significantly on these pools in the past. In contrast, we believe the operational actions we've taken will have a greater impact on the 2016 vintage.
We've assumed the full recovery of the initial cash shortfalls, however, over a longer time frame, the next 24 to 48 months. So the time value of money becomes a factor in determining the small allowance charge there.
Please keep in mind that allowances are non-cash charges related mainly to a reduction of estimated future cash collections and that all of these annual vintages are profitable and in almost all cases above underwritten levels. Moving to Europe, we recorded a $6 million allowance charge there this quarter.
The majority of this charge was on a portfolio that continued a high percentage of small business or SMA, exposures. These types of loans are naturally more volatile in their payment patterns, as well as being an asset class for which, at this point in time, we've accumulated last robust data.
Because of this, we've decided to move this portfolio to cost recovery and in doing so, we also recorded an allowance charge. We've moved all portfolios that contain significant concentrations of SMA exposure to cost recovery and we will continue with this approach until we believe we're able to develop reasonable expectations of the timing of cash flows for that asset class.
As a result of these allowance charges, net finance receivable or NFR, revenue in the fourth quarter was $132 million, a decrease of 37% from the fourth quarter of 2015. NFR revenue for the full year was $745 million, a decrease of 14% from the full year of 2015.
Fee income was $21 million in the fourth quarter, an increase of 8% from the same period of last year. Fee income for the full year 2016 was $77 million, an increase of 20% versus full year 2015.
As a reminder, we sold our government services business in the first quarter of 2017, so we expect fee income will be lower going forward. Operating expenses were $148 million, down 7%.
Operating expenses in the quarter included an accrual to reflect the fact that the Company has reached an agreement in principle with the opposing party in the Mejia legal case. The fourth quarter of 2015 included our settlement in the TCPA lawsuit.
Non-GAAP operating expenses in the fourth quarter were $146 million, almost flat to the fourth quarter of 2015. Decreases in compensation and in employee expenses were offset by increases in legal collection expenses, as we cleared much of our legal backlog in the U.S.
GAAP operating expenses were 40.1% of cash receipts in the quarter. Operating expenses for the full year 2016 were $612 million versus $632 million in the prior year.
Non-GAAP operating expenses for the full year were $609 million versus $583 million in 2015. The increase was primarily driven by agency fees in both Brazil and Europe, where we utilized third-party agencies to collect and increased legal collection expenses as we were able to ramp up legal collection efforts in Italy and the UK.
Operating income for the fourth quarter was $7 million and our operating margin was 4.6%. Full-year 2016 operating income was $218 million versus $310 million in 2015.
Below the operating income line we recorded an impairment charge of $5.8 million related to our investment in the Polish securitization of NPLs. This investment security received net cash flows from a securitization fund which has experienced lower gross collections and higher collection costs than originally anticipated.
As a result, we concluded that the decline in fair value of the security was other than temporary and recorded the impairment charge. Our full-year 2016 effective tax rate was 32.2% compared to 34.7% in 2015.
The decrease in the rate is primarily attributable to changes in the mix of earnings, with the U.S. business being negatively impacted by the fourth quarter allowance charge.
Additionally, 2015 included the CFPB penalty which was not deductible. The net loss in the fourth quarter was $18 million compared to net income of $41 million in the same quarter last year.
For the full year, net income was $85 million versus $168 million in the prior year. Moving to the balance sheet, cash balances ended the quarter at $94 million compared with $71 million a year ago.
The NFR balance was $2.3 billion, up from $2.2 billion a year ago. Our estimated remaining collections were $5.05 billion at December 31, 2016.
Net deferred tax liabilities were $258 million at year end compared to $261 million a year-ago. Borrowings totaled $1.8 billion at year end.
Our debt-to-equity ratio at period end was 206%. ROE for the full year of 2016 was 9.7 % and non-GAAP ROE was 10.7%.
Now I'd like to turn things back to Steve for a few closing remarks.
Steve Fredrickson
Thank you all for joining us today. Despite that headline GAAP EPS results being lower due to the non-cash charge, I want to reiterate how pleased we're with the underlying operational results and progress we've made this quarter in advancing toward our goals.
It's one of the reasons I feel as though now is the right time to begin executing on our CEO succession plan. We have a multitude of opportunities on the horizon and I look forward to continuing to work closely with Kevin over the coming months to ensure a smooth transition.
Together, we've led this Company through highly competitive environments, the global financial crisis, a transformative acquisition, increased regulatory scrutiny and a number of other significant events. I couldn't be more excited for the next phase of growth and success in watching Kevin continue to lead PRA along the path we decided upon over 20 years ago, while I execute my new role as Executive Chairman, supporting Kevin in his strategy and business development.
Operator, we're now ready for questions.
Operator
[Operator Instructions]. Our first question comes from Mark Hughes, SunTrust.
Your line is open.
Mark Hughes
The $349 million in collections, if it had been constant currency would it have been $10 million higher? Is that how I should understand that?
Pete Graham
Yes, sorry, that's correct.
Mark Hughes
Okay. When I look at the finance income, if I add back in all of the allowance charge it was roughly $194 million.
Last three quarters you've been running, again, adding back in the allowance charges, would've been roughly $215 million. It seems like more of a step down in finance income than I would've expected, again, adding back in the allowance.
I know you had some decline in overall receivables, but it seems like it's step down more than I would have expected. Any thoughts on why that would be?
Pete Graham
Yes, I'm not sure the exact math that you are doing, but I would say, in broad terms, we continue to have a headwind from BK decline that we've talked about. That portfolio has been running down from a high point of buying that occurred post financial crisis and continues to be a headwind for us in terms of both cash collections and then as that translates into income.
Mark Hughes
The headcount in the quarter, the collector headcount, was down, as you pointed out, and is coming back up. Your overall headcount, up 6%.
Is that some of the regulatory issues you're talking about, more, I guess, more people required to handle disputes, do the behind-the-scenes works on getting the legal collection straightened out? Should those numbers kind of reverse should we see more growth in headcount or in collectors headcount, but flat to down in overall headcount?
Steve Fredrickson
Your question is -- I'm sorry, I'm trying to follow your question. The question is that collector, you saw it move between collector headcount and total headcount, Mark?
Mark Hughes
Yes, exactly. Your total headcount's up, collector headcount is down.
Why is that and will that reverse?
Steve Fredrickson
I'll have to look at the numbers but I'm thinking that's the dispute reps. Is that correct?
Darcy Schoenfeld
Mark, I think your question is, if you look at the collectors, the sequential increase in collectors is there. You might be looking at year over year it's down.
Steve Fredrickson
Is that right, Mark?
Mark Hughes
Let me take a look here.
Steve Fredrickson
Let me just speak to your question, though, just in general.
Mark Hughes
This is the three month compared to three month, so year-end versus yearend total headcount up 4,000 versus 3,8000, collector headcount down.
Steve Fredrickson
Yes, that's right. We are obviously working overtime to get new collectors in here and the total headcount issue, definitely, has a deal with support reps, which is folks processing dispute and documents and so on.
Mark Hughes
Then final question, you had mentioned the legal expense. I think you had suggested you had cleared the backlog, or that was part of the reason that legal expense was up.
Is that to say some of that was on recurring and it might step down in subsequent periods?
Steve Fredrickson
Yes, probably so.
Operator
Thank you. Our next question comes from David Scharf, JMP Securities.
Your line is open.
David Scharf
Steve, I assume congratulations are in order. As one who witnessed the Company first in your early days as a public entity, obviously, been an awful lot of accomplishments over the years, so congratulations.
Steve Fredrickson
Thank you.
David Scharf
A couple of things. I was wondering if you can just dig in a little more to some of the catalysts, or potential catalysts, that you highlighted.
I know starting with the bankruptcy, the US bankruptcy headwinds the last few years with this confusion over interpretation of OCC regs, which has led so many to just not sell BKs. Has there been, other than it being kind of the hope they amend those FAQs and provide some more concrete guidance, has there been any change in the outlook there or any dialogue with the OCC, or is this -- should we just think of this as something that is always out there, but we should think of it as status quo for the time being?
Steve Fredrickson
Yes, no, I think there's a couple of things. First and foremost, there isn't anything specific new that we're aware of with the OCC, other than just is general trend in Washington, which definitely seems to be moving toward less business-interrupting regulation and so we're hopeful that, that will, perhaps, help somebody at the OCC provide this clarifying guidance.
I think the second piece of it is Chapter 13s, which had been declining year over year for quite a while now have leveled off and we believe that the trend there may be turning. The third part of it really dovetails with our comments concerning the core market.
We believe were seeing a growing interest by banks that have been selling into reviewing their portfolio and, perhaps, considering it for sale. We think it's possible that existing sellers may decide to part with either different segments of their portfolio or more of their bankrupt portfolio.
Of course, we could always get to the point where some of these banks that have been sidelined, perhaps, not because of OCC confusion, but because of their own concerns about being able to comply with regulation, they may finally get their house in order be able to bring bankrupt accounts to market.
David Scharf
Switching to the US core, I'm curious, it's been several quarters now in which you and Encore as well have been commenting about how this seems to be a little more return to normalization and equilibrium of supply and pricing, stabilizing yields improving relatively to the last few years. The actual amount of capital deployed in the fourth quarter was actually the lightest of the year.
Was that deliberate on your part as you are still working through this process of adding call-center staffing? Or was it just the quarter-to-quarter nuance of timing that, maybe, sellers didn't have that much to market?
I'm just curious how we ought to think about the next few quarters, whether there's a step function in supply and purchase volumes in the US?
Kevin Stevenson
David, it's Kevin. I think that your first question was, is it some sort of deliberate plan for us because we're light on collectors to back away a little bit?
The answer is, no. I would tend to agree, we do see a good supply in the market.
Any quarter to quarter, you can win deals, you can lose deals, so I don't think I'd read anything into it other than that. And I think that next year -- or I guess were in 2017, aren't we?
I think that the volume levels do look promising.
David Scharf
One last question and I'll get back in queue. I apologize in advance for the numbers I'm going to throughout but, if the allowance charge this past quarter were similar to maybe the last two or three quarters, call it $12 million, $13 million, suggesting that let's say I take that extra $50 million allowance and I add it back to revenue, assuming it were more in line with previous quarters.
If I take that interest income divided by your average balance for the quarter, I come up with a gross revenue yield of about 31%. Obviously, that's before collection costs.
Just given all of the accounting changes, estimate changes, trying to understand if that's a good starting point for thinking, with all of the things that have moved with cost recovery, with the reset, with the allowances, whether sort of a low 30% gross yield is a good way to think about the returns on the portfolio near-term.
Kevin Stevenson
David, its Kevin again. Let me jump into that one.
I think that your math, if I understand it, seems to be sound. You're kind of normalizing allowance charge based on the last year and adjusting it and backing into the yield.
That's probably a decent methodology.
David Scharf
Okay, and at these levels, is it fair to say that nothing on the near-term horizon should materially change that, just based on the macro environment and where pricing is?
Kevin Stevenson
Well, I would say that you're probably looking at a situation where there's probably more room for move up in yield, so to speak, as we enter the next year so as opposed to looking back as to what those yields were.
Operator
Thank you. Our next question comes from Bob Napoli, William Blair.
Your line is open.
Bob Napoli
Kevin, congratulations on becoming CEO and a few months. Steve, what does -- Executive Chairman can mean a lot of things.
Is this a steppingstone that at the end of the year you'll step back to being on the Board to non-Executive Chairman or is this a long-term role? Is an Executive Chairman a full-time job?
Steve Fredrickson
I want to make sure that, number one, we get the transition right between Kevin and I. Although, talking about a transition between two guys who have work together as long as we have, I think we both feel pretty confident about that.
Also I want to be around to support Kevin's new administration, as it were, especially around this concept of business development and strategy. I think that Kevin and I foresee that this is a certain position over the next year to 18 months and, after that, we'll play it by ear.
There's not a hard drop-dead in it, but if at the end of the day, Kevin doesn't feel like it's a value-added, then I'll find my way onto the Board. But as long as I can add value, and as long as Kevin sees it as, indeed, value-added, I'm ready, willing, and able to continue to pay that row.
I think it's somewhat less than a full-time role, but it's a pretty significant role and far from a part timer.
Bob Napoli
Okay. The impairments in the fourth quarter, I mean, we've had -- you guys have had now for six or seven quarters have had -- I'm not sure exactly how many higher impairments.
Is this stepping back and just saying that taking kind of a much deeper look, if you would, such that we should not expect to see, based on what you see today, material impairments over 2017. You have a new CFO, you have a changeover in CEO.
Is this -- it's probably a good time to do that if that's what's happening. Is that -- can you help me there?
Steve Fredrickson
I probably wouldn't couch it in exactly those terms, but I guess what I'd say is that over the course of the year, as we went through the year, we gained better understanding of what it was that was really driving our collection shortfalls and the amount of the forecast miss that we had in the fourth quarter caused us too really dig into that more deeply. As I highlighted in my prepared remarks, we made some significant assumptions around 2015 and prior vintages regarding whether or not consider recouping those cash flows and based on we sit now, we've assumed we do not have any recouping of prayer cash shortfalls on a go-forward basis.
The main thing that drove the bigger allowance charges in the fourth quarter, with regards to kind of outlook on a go-forward basis, I would say based on that sort of assumption that we've made, barring something really significant that we haven't foreseen at this point, I wouldn't expect any sizable allowances in the US core portfolios on a go-forward basis.
Bob Napoli
What was the fee income from the government services business for all of 2016 and in the fourth quarter so we have a handle on that run rate for that fee income line?
Pete Graham
It was $0.15 -- hang on. Just give me one second.
Bob Napoli
$0.15 of EPS and how much revenue?
Pete Graham
Fee income was $14 million, roughly, of the $21 million that we reported for the quarter and, call it, $43 million of the $77 million we reported for the full year.
Bob Napoli
Okay. Let's see, so you did restate, I guess, the number of collectors.
I want to say [indiscernible] the question somebody had on collectors, I think you might have moved some people out of collectors and those into dispute people, something like that so you had a little bit of a -- just moved around some of the numbers in the -- is that right?
Steve Fredrickson
That's right, Bob.
Bob Napoli
Okay. That was the confusion there.
Let's see, then as far as supply goes and you talked about that you said that you are seeing signs. We're two-thirds of a way to the first quarter.
Does that mean that purchasing has been -- in the US core has more fruitful in the first quarter?
Steve Fredrickson
Bob, I'd say that, as we said in the script, it appears to us as though we're seeing some signals, some body language, in some cases, some movement by existing sellers to offer, perhaps, a bit more volume than we might have anticipated at this point in time. We are believing that it might be appropriate to extrapolate some of those moves, both throughout the year and perhaps to other sellers as well.
We'll see if that, indeed, comes down the pike, but we've seen some, from our perspective, a positive movement, albeit subtle, thus far in Q1.
Bob Napoli
Last question, Brazil, how was -- Brazil seems to have been very strong. Are you still seeing those same types of trends in Brazil?
If you can give any color on your purchase level or cash collections and the growth rate for 2017 or Brazil?
Steve Fredrickson
It's still a small business for us, Bob, although, obviously, coming from nothing, it's growing substantially. I think it's safe to say we believe very strongly that it's an interesting market for us to be in long term.
We couldn't be more pleased with the local partners that we are in business with. They're really smart guys, and the deals that we've purchased thus far are performing at or better, or in some cases much better than expectation.
So for us it's so far, so good, but it's a new geography and so we don't want to get overly excited. Obviously, there's also a volatile currency down there.
All of those things play into how comfortable we're going to be growing that business. But thus far, as you observed, it's been a good place for us to invest.
Operator
Our next question comes from Robert Dodd, Raymond James. Your line is open.
Robert Dodd
On the dry powder question, obviously you mentioned the [indiscernible] potential that volumes made, purchase volumes and ability maybe there for some market expansion. As you say, you've got $200 million in available capital.
Obviously you generate over $200 million in cash a quarter, right, so that builds pretty quick. Is there any strategic plan on the financing side to generate more dry powder in case these major sellers do come back, in which case the market could potentially, right now, at least, exceed your ability to capitalize on?
Pete Graham
Yes, I guess I would agree with kind of your thesis around both availability of capital, as well as significant amount of cash generation by the business on a normal basis. We're always in discussions with the banks and we're always kind of connected with the capital markets and thinking about different alternatives for raising capital and we'll be ready when the opportunity arises.
I think the thing to keep in mind that it's not going to be a light switch on/off, that's going to catch us off guard. We'll have advance warning before significant volumes are coming to market.
Operator
Our next question comes from Hugh Miller, Macquarie. Your line is open.
Hugh Miller
I wanted to start off one with just on kind of the quality of the accounts in the US market. Obviously, we've talked about supply going up, pricing coming in a bit.
If we exclude the impact from the improvement in media that you're getting when you're buying US purchases, at this point in the cycle, are you seeing any deterioration in the underlying quality of the consumer that's being charged-off?
Steve Fredrickson
No, Hugh, I don't think so. It is kind of tough to exclude the media impact, by the way.
That's a big deal for us. But I think that from our perspective, we're just dealing with mostly the shortage of reps and how we're working through that process.
But the consumer themselves seem to be not changing a lot. I would say, we are booking on payment plans at record rates, actually.
I think it all feels pretty good from a health perspective.
Hugh Miller
I guess just following up on the rep question, you guys mentioned that you added 350 net advisors -- net representatives, call-center reps and you gave us a sense of what the capacity in the call center is, but I didn't catch it. Is there a target are looking to get that number to?
You mentioned that you still have a couple of quarters worth of investment there.
Steve Fredrickson
No, I didn't give you target. What we're doing is we're layering on reps, we are analyzing call quality and looking at some other call metrics that we add folks, so I didn't provide an update, other than we do have 2,200 seats and about 1,700 FTEs and we can always part time shift time toward folks if we ever got to that level.
Hugh Miller
Okay. Would you be able to give us a rough sense what that incremental cost was for the extra 350 reps?
Steve Fredrickson
Remember, they collect cash too.
Hugh Miller
Sure, sure.
Steve Fredrickson
I don't have any of that data with me, but I kind of anticipated a question like that. Just keep in mind that when you add these folks, it does take a while to ramp them up.
They are revenue-producing people and incremental to the overall Company. Just keep those things in mind as you're modeling.
Hugh Miller
Yes, and it's been, obviously, a while since you guys had a significant ramp in headcount. I guess we're maybe too early in the process, but are you noticing any difference in the typical seasonality -- not seasonality, the seasoning of these people and getting the productivity up to the expected level?
What has that historically been in the past to get a new rep to the PRAA standard? Are you seeing any differences this go around, given the lessons you've learned relative to prior cycles?
Steve Fredrickson
That's a great question. No, I think I'm actually generally very, very pleased with the reps we've been sourcing.
There's also -- I had something in my script and took it out, but I'm going to say it anyway. It's actually changed the tenor on the floor.
We're buying a lot of new accounts. We're hiring a lot of people.
We've had some management changes and there is a real, real interesting vibe going on the floor as well. It's a bit of a contagion, so to speak, but back to your question, I think that the reps we're hiring, I'm very pleased with.
They're ramping up kind of as we might expect.
Hugh Miller
You guys mentioned in the prepared remarks that you think some of these sales in Europe are going out at unprofitable levels. I was wondering if you can talk about, is that specific to any particular jurisdictions?
Is it just a handful of buyers that you're seeing that with? Any color there would be helpful.
Tiku Patel
Hi there, Hugh. This is Tiku Patel.
I think generally the market in Europe, whilst it remains strong in terms of supply, remains competitive in most of the markets now. One of the things that Steve referred to was consolidation in Europe and what we're seeing is a handful of competitors expanding internationally across those markets and looking to grow rapidly.
It's difficult to say there are some markets where the returns our different to others. What we are doing is we're finding opportunities with vendors that like our proposition.
That's enabling us to still continue to invest at what we think are decent levels.
Hugh Miller
Maybe just a follow-up, then, as you think about maybe the UK market in particular, where you've now recently had midsized peer that was acquired by a firm that has a bigger balance sheet and appetite for growth. What are your thoughts in terms of returns for that market as we had into 2017 relative to 2016?
Tiku Patel
The UK market has been competitive for quite a while now. I'm not sure that, that -- I'm not sure which one you're referring to but there have been a number of acquisitions of UK platforms by these handful of competitors over the last few years.
We've continued to invest decent numbers in the UK. I expect it to continue as it has been, I'll be honest with you.
In fact, we see a decent supply as we go into the first half in the U K.
Operator
We have a follow-up question from Bob Napoli, William Blair. Your line is open.
Bob Napoli
Are you guys seeing any effects from the delays and tax returns that's been out there in the market? The numbers today that came out showed some real catching up in the refunds but was way behind for most of the quarter.
Are you seeing any effect in your US business from that?
Steve Fredrickson
The answer is, yes, Bob. I'm looking at a chart in front of me.
Just for the sake of everyone on the call in case they're not familiar with it, there was this Path Act there where the IRS was holding refunds for two weeks anyone who'd claimed in an earned income credit or a childcare credit. If you look at the charts, between what we've experienced so far in the quarter versus what we experienced in the last two years, you can see it very, very plainly, very plainly, and over the last handful of days, it is just kind of leapt off of the page and coming back in line.
It's definitely there and whatever you read is accurate. There's a lot of money flowing at this point.
Bob Napoli
Are you still seeing -- is pricing better in the US? Are you getting higher IRRs, do you believe?
Has that been a steady trend through the year, or not?
Steve Fredrickson
Yes, I feel comfortable saying we're seen pricing improving, probably since the second half-ish of 2016.
Bob Napoli
Okay. Tax rate for 2017, your competitor has a higher tax rate based upon changes in the UK that seemed a little different, but what would you expect for just generally kind of a tax rate for 2017?
Pete Graham
We've been monitoring some of those same things related to our European funding structures, changes in the UK and other jurisdictions. I'd say probably for 2017, we're thinking somewhere in the 34% to 37% effective tax rate, and possibly towards the higher end of that, the higher end of that range.
Bob Napoli
Is that -- on a relative basis year over year, are you seeing -- is it UK that you're not able to deduct interest expense in the UK? What changes are you seeing in Europe?
Pete Graham
There's some legislative changes that'll go into effect with regards to interest rate deductions in the UK this year. We're anticipating that, that will have some impact on taxes related to UK, in particular.
Bob Napoli
Okay.
Pete Graham
But again, we operate in quite a number of different jurisdictions in Europe as well as having a big Americas business. We're a global company, so we can get lots of put and takes in the effective tax rate.
Bob Napoli
Okay. Last question, the IRS case, is that still -- what are your expectations on that front?
Pete Graham
Bob, I expect to see them in court in May. As best as I can tell you, everything is still scheduled and we're going through the process and most of the stuff is out there in the public.
You can read it. I would expect us to [Technical Difficulty] in May.
Operator
Thank you. I'm showing no further questions in queue at this time.
I would like to turn the conference back over to Steve Fredrickson for closing remarks.
Steve Fredrickson
Thank you, Operator. Thank you all once again, for joining our Q4 2016 earnings call.
We look forward to speaking with you again next quarter. Good night.
Operator
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect.
Everyone, have a great day.