Encore Capital Group, Inc. (ECPG) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Encore Capital Group Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. Adam Sragovicz. Mr. Sragovicz, you may begin.

Thank you, Michelle. Good afternoon and welcome to Encore Capital Group's third quarter 2012 earnings call. With me on the call today are Brandon Black, our President and Chief Executive Officer; and Paul Grinberg, our Executive Vice President and Chief Financial Officer. Brandon and Paul will make prepared remarks, and then we will be happy to take your questions. Before we begin, we have a few housekeeping items. Unless otherwise noted, all comparisons made on this conference call will be between the third quarter of 2012 and the third quarter of 2011. Throughout the call, we will use forward-looking statements, including predictions, expectations, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today. As a result, we caution you against placing undue reliance on these forward-looking statements, which speak only as of the date they are made. We will also use rounding and abbreviations in our conference call for the sake of brevity. For more detailed numbers and explanations, please refer to our Form 10-Q that was filed today with the SEC. We will also be referencing both GAAP and non-GAAP financial results. We believe certain non-GAAP financial measures provide useful information about our business. However, the presentation of this additional information should not be considered an alternative to, or more meaningful than, our results prepared in accordance with GAAP. Management utilizes adjusted EBITDA, which is similar to a financial measure contained in covenants used in our credit agreement in the evaluation of our operations and believes this measure is a useful indicator of our ability to generate cash collections in excess of operating expenses through the liquidation of our receivable portfolios. We included information concerning adjusted operating expenses, excluding stock-based compensation expense, in order to facilitate a comparison of approximate cash costs to cash collections for the debt purchasing business in the periods presented. Once again, please be sure to see our Forms 10-K, 10-Q and other SEC filings, including a press release issued as an exhibit to our current report on Form 8-K filed today, which includes a reconciliation of non-GAAP financial measures for a more complete discussion of these factors and other risks. As a reminder, this conference call will also be made available for replay on the Investors section of our website, and we also plan to post the prepared remarks following the conclusion of this call. With that, let me turn the call over to Brandon Black, our President and Chief Executive Officer.

Thank you, Adam, and good afternoon. I appreciate you joining us for a discussion of Encore's third quarter results. For the quarter, we delivered strong financial results while making investments that will provide long-term strategic advantages and further strengthen our industry-leading debt purchasing and recovery platform. Our deliberate and disciplined approach to portfolio underwriting and management again drove record earnings, record collections and record operating cash flow. When we look out at the current landscape, we see a number of trends that should increase Encore's advantage as a mature, ethical and efficient industry leader. Specifically, the migration to an industry regulated by the Consumer Financial Protection Bureau will put pressure on small and mid-tier firms that are unlikely to be able to make the investments in compliance, audit and information technology that will be necessary to flourish in the new environment. In addition, as supply becomes somewhat constrained, competition will increase, and we believe that those companies without an operating or cost advantage will only be left with the option of paying up to purchase portfolios and hoping they can generate a return. Ultimately, we believe they will not be able to maintain a reasonable level of profitability, and this will lead to industry consolidation. We built Encore for the exact business and regulatory environment we're now entering, one where success will be reserved for those companies with access to low-cost capital, a differentiated operating model, an operating cost advantage and a real commitment to respecting consumers. Cash collections for the quarter were $246 million, which was a 30% increase and the highest in the company's history. These record cash collections reflect the deep insights we've gained into consumer behavior over the past decade and our continued focus only on accounts of those consumers who are reasonably likely to repay their debts. Our cost-to-collect decreased 330 basis points to 40.5%. This reflects savings achieved through various operational strategies, which were partially offset by investments in our internal legal initiative, the increased hiring at our operating site in Costa Rica and additional spending required to proactively manage the changing regulatory and legislative environment. Earnings for the quarter were $0.82, an increase of 37% over the prior year. As anticipated, purchasing was down compared to the prior 3 quarters. During the quarter, we deployed just under $50 million. It's important to keep in mind that our year-to-date purchases of $409 million are a 63% increase over last year. This was a deliberate strategy and the right strategy. We believe that market dynamics could lead to fewer purchasing opportunities in the second half of the year as compared to the previous 3 quarters, and those lower volumes could lead to higher pricing. That's exactly what happened this quarter. Pricing increased meaningfully, especially in the fresh portfolio segment. As a result of our strong purchases in the previous 3 quarters, we were able to avoid overpaying for these portfolios and instead focus on our substantial existing base of accounts. It's our belief that an increasing number of deals currently being completed by our competitors will not be profitable. We have seen periods of temporary, irrational pricing before and have thrived during those periods. If you look back between 2005 and 2008, when we saw similar patterns in pricing, you will see that we were able to deploy capital at very strong returns while many of our competitors were unable to survive. We are better positioned today with our India and Costa Rican operations, our activity cost database and our deeper understanding of the distressed consumer. While the timing of consolidation is uncertain, we believe the historical fact pattern is clear. There is likely to be a significant number of companies who are unable to continue as independent entities, and this is expected to be a big opportunity for Encore. In the quarter, we completed a total of 40 individual transactions from 10 unique sellers. Credit card and consumer loan portfolios made up the majority of the purchases or $29 million. The remaining $19 million was spent to acquire telecommunications portfolios. We remain committed to the purchase expectations we established of $500 million for 2012 and already have commitments of $45 million for the fourth quarter. As I said last quarter, our long-term goal to deploy enough capital across all asset classes, including tax lien transfers, to generate 15% to 20% earnings growth. While it is generally not our practice to comment on the performance of particular portfolios, we thought it would be helpful to update you on the large transaction that we completed in the second quarter. Performance is in line with our expectations, and we have already collected 24% of the purchase price within the first 4 months. This is a very complex transaction, and I want to compliment the team for an amazing job of transitioning the vast majority of the account servicing from the almost 50 external agencies used by the seller to our internal call centers. We continue to believe that our strong track record of acquiring portfolios in the secondary market positions us well for the industry consolidation that is likely to occur. I am pleased to report that the integration of Propel continues to proceed smoothly and is entering another exciting new phase. Now that the integration of systems, operations and personnel has taken place, we have shifted focus to leveraging our core strengths in analytics, call center operations and understanding the financially stressed consumer. When combined with Propel's track record of outstanding customer service, we believe these strengths will enable us to meaningfully increase originations in early 2013 when the annual delinquent tax rolls are released. In December, we will celebrate the 1-year anniversary of our industry-first research platform, the Consumer Credit Research Institute or CCRI. As you know, R&D is not a phrase commonly associated with debt collection or even the broader financial services industry. For years, however, Encore has made careful investments in data, technology and expertise aimed at understanding consumer behavior. As we have discussed previously, the CCRI's goal is to apply modern psychology and behavioral economics methods to understand consumer behavior in order to enhance our business model and advance a research agenda that we hope will benefit policymakers and consumers alike. Our work spans a number of areas, including controlled marketing tests, exploring new analytic methods and building partnerships aimed at creating new tools to help consumers better understand their financial footing. Last week, we presented preliminary results of our first complete field study conducted in collaboration with UCLA, during which we surveyed prime and subprime consumers across a large number of psychological and demographic factors. The CCRI and UCLA are in the process of writing a complete report for publication. Once complete, the report will be available at encoreccri.org. We believe that CCRI provides us the opportunity to have a deeper understanding than anyone in the private or public sectors about the behavior of distressed consumers. We believe this will help us change the conversation with legislators and regulators and will underscore our industry leadership position characterized by innovation, good science and good intentions. As most of you are aware, the Consumer Financial Protection Bureau outlined its scope of influence for our industry last week. In the press release, it identified approximately 175 firms that will be subject to oversight. We were pleased to see the depth of oversight and believe this will be a positive step in the continued professionalization of our industry. We have been making investments in our consumer support and regulatory compliance teams, and that continued in the third quarter. Notably, we hired Mike Haubenstock as Vice President and Chief Risk Officer, and Sheryl Wright as our Senior Vice President in charge of external affairs. Both Mike and Sheryl come to Encore at an important time in our transition to becoming a regulated entity. They will be instrumental in maintaining relationships with the CFPB, working with our internal teams to ensure we have a robust audit and compliance framework and partnering with legislators and regulators who share our commitment to creating a collections industry that operates ethically and treats customers with the respect they deserve. These efforts require significant investments of time and money. We believe that proactively making these investments will reinforce our position as one of the few companies with the ability to help positively shape the future of the industry. With that, I will turn it over to Paul, who will discuss the financial results in more detail. Paul?

Thank you, Brandon. As Brandon discussed, we had a very strong third quarter. Collections reached an all-time high, and continued investments in our operating platform give us confidence in our ability to expand upon the operating leverage created over the past few years. We generated record earnings from continuing operations of $0.82 per fully diluted share during the quarter, an increase of 37% over the third quarter of 2011. Adjusted EBITDA, which represents the cash we generate that is available for future purchases, capital expenditures, debt service and taxes, was $151 million in the third quarter, an increase of 41%. The strong cash flow allowed us to fund all of our portfolio acquisitions during the quarter and reduce our net debt by over $90 million from the end of the second quarter. We had mentioned that the acquisition of Propel and the large portfolio purchase in the second quarter had resulted in higher-than-normal debt levels. While we are very comfortable operating at an even higher levels -- at even higher levels of leverage as expected, our leverage ratio improved substantially this quarter to 1.15x, down from 1.43x. At the end of the quarter, we had over $141 million of available operating -- available borrowing capacity. Our overall cost-to-collect decreased 330 basis points to 40.5%, down significantly from 43.8% in 2011. We achieved these results even as we made investments to expand our internal legal channel and ramp up our new operations center in Costa Rica. While cost-to-collect is an important metric, there are other related drivers of our success. One example is generating the greatest net return per dollar invested. We accomplish that by generating more gross dollars collected per investment dollar at what we believe to be the lowest cost per dollar collected in the industry. Over time, we expect our cost-to-collect to continually improve but also expect it to fluctuate from quarter-to-quarter based on seasonality, the cost of investments in new operating initiatives and the ongoing management of the changing regulatory and legislative environment. Over the next 12 months, we will be making additional investments in more comprehensive audits of third parties, internal compliance staff and various consumer support services. Due primarily to the large purchasing volume and the strong performance of portfolios purchased over the last couple of years, our estimated remaining collections, or ERC, at September 30 increased by $425 million to approximately $1.9 billion. As we've discussed previously, we believe that our ERC, which reflects the estimated remaining value of our existing portfolios, is conservatively stated because of our cautious approach to setting initial curves and our practice of only increasing future expectations after a sustained period of overperformance. As Brandon mentioned, third quarter collections were very strong at $246 million, up 30% from 2011. Our call centers contributed 48% of total collections or $117 million compared to $83 million. Direct cost per dollar collected in our call centers fell to 5.9% in the third quarter from 7.2%. This improvement is largely the result of 2 factors. The first is enhancements to our analytical models, which allow us to focus our efforts on consumers who we believe have the ability and are most likely to pay. The second is the increasing maturity of our operations center in India. In the third quarter, our call center in India accounted for 53% of total call center collections compared to 50% in 2011. Legal channel collections grew to $111 million in the third quarter, compared to $95 million, and accounted for 45% of total collections. Cost-to-collect in the legal channel was 39.1%, down from 42.3%. I'd like to reiterate that our long-stated preference is to work with our consumers to negotiate a mutually acceptable payment plan tailored to their personal financial situation. These plans almost always involve substantial discounts from what is owed. We not only believe that this is the right thing to do for our consumers, but the right thing to do for our business. When we do litigate, we pledge to be fair and reasonable throughout the process. Unfortunately, the vast majority of our consumers do not engage with us to resolve their financial obligations. Accordingly, and as a last resort, we are often left only with the option of using legal means to recover debts that are owed. Finally, 7% of collections came from third-party collection agencies. In general, we expect collections from this channel to continue to decline as we shift more of our work to our internal call centers at a lower overall cost-to-collect. As a result of the large portfolio purchase we completed in the second quarter, we saw a temporary increase in third-party collections as many of those assets were already placed with third-party agencies at the time of acquisition. Because of our lower cost-to-collect and because we are better able to ensure a consistently positive consumer experience, we will continue to shift much of this work to our internal call centers. Consistent with our stated practice and in keeping with our Consumer Bill of Rights, we had no portfolio sales in the quarter. Moving on, revenue from receivable portfolios was $141 million, an increase of 21% over the $116 million in 2011. As a percentage of collections and excluding the effects of allowances, our revenue recognition rate was 56.9% compared to 62.1% in 2011. Our revenue recognition rate is attributable to our cautious approach when setting initial IRRs and our policy of increasing them gradually after periods of overperformance. For example, as a result of sustained overperformance, we have slowly increased the multiples on the 2009, 2010 and 2011 vintages to 2.9x, 2.7x and 2.3x, respectively, up from 2.4x, 2.2x and 2x, respectively. During the quarter, we had $700,000 in net allowance reversals compared to $1.6 million of allowance charges in 2011. Looking at the breakdown by year, we had $139,000 of allowance reversals in the 2005 vintage, $25,000 in the 2006 vintage, $343,000 in the 2007 vintage, $908,000 in the 2008 vintage and $919,000 in ZBA allowance reversals. These were partially offset by allowances of $1 million in the 2006 vintage and $590,000 in the 2007 vintage. We had no allowance charges for the 2009, '10, '11 or '12 vintages as has been the case since we acquired these portfolios. As many of you know, we account for the business on a quarterly pool basis rather than overall. When pools underperform, we take allowance charges, which are reflected as an immediate reduction in revenue. We measure underperformance against the current yield that is assigned to our pool, not its original expectation. This pool-by-pool accounting treatment leads inevitably to noncash allowance charges in certain periods even when we are overperforming a pool's initial expectations. In contrast, when pools overperform, that overperformance is not reflected immediately. Once we have evidence of sustained overperformance in a pool, we will increase that pool's yield. Unlike allowance charges, which are realized immediately, this increased yield will be reflected as increased revenue during the current and future quarters. Consistent with this practice, and as a result of continued overperformance primarily in the 2009, '10 and '11 vintages, we increased yields in those pool groups this quarter. Shifting now to expenses. Our total operating expenses were $104 million, up from $85 million in the third quarter. Included in operating expenses were stock-based compensation charges of approximately $2 million. Turning to Propel, the integration continues to move ahead successfully, as Brandon mentioned. The transaction was finalized in mid-May, and Propel experienced a successful third quarter. As Propel becomes more meaningful, we will provide additional context in our quarterly earnings calls. We are pleased to note that this quarter, Propel contributed $1.4 million in net income. Before turning the call over to the operator for questions, Brandon has a few, final remarks.

This is an important time in the history of Encore and our industry. We're in a period of significant change for our industry as a whole, and we expect the collection landscape to change dramatically over the next few years. For too long, firms have been started in this industry with a handful of staff, an Excel spreadsheet and some legacy relationships. That will not be the case going forward. We expect to see a significant number of existing firms go away and the required level of investment for new entrants to increase meaningfully. No longer will large financial institutions place or sell their consumers' accounts to a hedge fund or an operator without the ability to withstand heightened regulatory scrutiny. Encore is positioned extremely well for this period of change and the new landscape that will follow, and we look forward to working with the new regulators and continuing to treat consumers with the respect and fairness they deserve. We'll go to the Q&A session right now, operator, and we'll take people's questions.

[Operator Instructions] Our first question comes from the line of Dave Scharf with JMP Securities.

I may have missed this. First, as far as kind of Q4 outlook, I believe last quarter or on your Investor Day, you had mentioned you were looking for $130 million to $140 million of purchases in the second half, in light of which you saw in the third quarter as well as your commentary on the environment. Is that still a good number to think about?

Yes. It's still our target. There's a lot of time left in the quarter. We're more than halfway past that goal. And so we think fourth quarter supply will be significantly greater than it was in the third quarter. And so we believe that that's still the number to use.

Got it. And actually, your comment there is a good segue to my next question about supply. You had just mentioned you think supply will pick up quite a bit the fourth quarter very often. There are some year-end kind of housecleaning by the banks anyway. Was there anything in the third quarter, just based on your commentary of competitiveness -- and it's the first time I've heard that phrase "irrational pricing" used in quite some time. Was there anything that you thought was just a temporary lull in supply in the last few months? Or do you think we're entering a period of 6 to 9 months where it's going to be more challenging to maintain kind of the recent pattern of purchases excluding the AEF deal?

Well, the summer is always the lower volume period. So we expect the summer to be a low volume. There was one seller who was a big seller in the second quarter that was not a seller in the third quarter that contributed to it. So we expect -- actually, we expect volumes to recover. And it's not to be a prolonged period of time. Your comments, which may not have been heard around, the irrational pricing is mostly in the fresh paper. We have some competitors who focus their business exclusively in that area, and that happened to be a place with very low supply. And if that's what the business is built off of, your only choice is to pay what it takes to win. We have the luxury of buying across all vintages of time, different asset classes in the resale market direct from issuers. And so those companies that can go in and out of different parts of the marketplace, we think, will do well. Those with the specific business model will likely struggle as supply is constrained especially in the fresher paper.

Got it. And switching to your channel mix and on collections, legal is obviously the highest cost-to-collect dollar. And it looked like the mix of collections coming out of legal was down, I think, to 45% or so, well below last year as well as the first half of the year. Is that -- the difference between 45% or 50% of your collections coming out of legal actually has a pretty material impact on the cost, the blended cost-to-collect. Are you finding that your analytics is such that you're not having to sue as bigger proportion of the accounts you're going after? I'm just trying to get a sense for whether kind of 50% or 45% is the right way to think about the legal mix going forward for at least the next 12 months.

So I think what you'll see is that the third quarter was impacted mostly by the large purchasing in the first half of the year, where most of the collections, about all of the collections in the first 6 to 12 months, are exclusively from our call centers as we work with consumers to try to get them to repay their obligations through those means first. So they have almost no contribution from the legal channel on the large volume of purchasing. So I think that's what you're seeing here, more than intentional shift towards or away from any one particular channel.

Got it. So it was just the mix impacted by those in-house accounts from AEF. And lastly, Brandon, I noticed that the ERC sequentially declined. I think it's the first time in about 3 years we saw that. My guess is there was a big ramp from the Q2 purchases. And is the AEF portfolio have an unusually large amount of liquidating accounts already? I mean, I'm just trying to get a sense if kind of Q3 collection activity was unusually impacted to the upside just based on how many accounts were already liquidating.

Well, I think ERC is a function of -- or the drop quarter-to-quarter is more a function effect of the very large purchasing over the prior 3 quarters followed by just the lower purchasing in the quarter. So you had -- you didn't replenish the supply at the same rate. So I don't think there's much trend in there. From a collection perspective, we did acquire some accounts that were in repayment. And so that's certainly helpful for the quarterly results.

And our next question is from Mark Hughes with SunTrust.

The, let's see, stock comp expense. Is it presented differently this quarter? Or did I miss it?

It is presented differently this quarter. It's not carved out as a separate line item. You can get it from the cash flow statement.

Okay. The deferred legal expense, it seems like you're deferring less these days. Is that something you've explained before? What's the reason for that?

A portion of what we're deferring is all based upon the specific accounts that would litigate on -- in any given quarter and our estimated recovery on those particular court cost expenditures. So it's all based upon mix of suits in one quarter compared to the other. So it can fluctuate from period to period it, and it's largely timing and mix of accounts.

Right. Which mix usually would drive the deferred portion to be less with circumstances?

Just ultimate anticipated recovery on those accounts. So there are different qualities of accounts in terms of what we would ultimately -- if you have a pool of 100 accounts which are litigated on and you apply certain court costs to those, different credit quality and other factors will determine how much of those costs will be recovered. So that's how we look at it. And that determines our ultimate recovery rate in the mix placed in any channel -- in any quarter.

Right. The -- it looks like the commissions that you paid for the collection agencies, outsourced collections -- it looks like it's a fairly low commission rate. Am I reading that properly? And why would that be?

It's almost my answer to the last question. We -- when we acquired the accounts from the large seller in the prior period, many of the paying accounts have a lower contingency fee. So it's just a mix shift.

Yes, okay. Well, it looks like the monthly IRR for the 2012 paper, you're keeping that at a pretty conservative level. I know you've got lower collection assumption, but it seems as if the IRR is even more conservative than that when I look at the 3Q. Anything to that? Am I reading that properly?

Yes, you are reading that the IRR is lower. And we do try to set them very conservatively early on and then increase them over time. So it's just a product of the philosophy we have around setting initial IRRs.

Yes. Is there anything more you can say on the -- which is what happened in 3Q in terms of supply and competitions? Having heard it now for the third time among the public companies, it seems unusual. Why now? We've been at this for this expansion, the improved recoveries. This has been going on for some time. Why Q3?

I think it's a function of a couple of things. One is loss rates have been coming down at the banks in general. So you've got back to the fresh portfolio, which is a dilemma because that's where you focus your time within the lower supply there. The second is, the banks are watching what's happening in the regulatory environment, making decisions about what -- or where they think pressure may or may not come from and they want to get a good read on what that's going to look like. And I think that's starting to become more clear. And the third piece is whether they need to sell or not. And they always balance their decisions of whether to sell or not based on the returns they have in any period of time. So any combination of heightened regulatory scrutiny, which is now getting clear and we think will relieve supply getting towards the end of the year, we'll eliminate much of the supply challenge. And I think what we just saw was in those people who kind of had to buy, they had to pay for the small amount that was out there. And we planned for that. We've thought about that as a possibility and didn't have to participate.

So once the CFPB approved supplier, then that will make the sellers more likely to sell more paper.

I think once they spend their time setting the agenda and setting the expectations, that will give a lot of comfort to the sellers, both where they place their accounts or where they sell their accounts. But it will impact both decisions. So if your bank is sort of sitting around, trying to understand what's happening, we think that's becoming much clearer.

Our next question comes from the line of Michael Grondahl from Piper Jaffray.

Two questions. India was 53% of collections. Where do you think that can be in 1 year or 2? And then maybe, Paul, could you talk a little bit about investments? Is that sort of the normal course of business or were you signaling that that's going to be something kind of above normal course?

On the India question, we continue to think both we'll have growth in India and in Costa Rica as a percentage of total collections. It will slowly go up over time as the employees there mature. If you think about Costa Rica, we started operations in February. The weighted average tenure of our team there is probably 3 or 4 months. And in India, we've been hiring significant numbers of people over the past few years that are continuing on there on a ramp. So you will see continued growth. We don't have a target. We're adding account managers here in the U.S.. We're adding them internationally. There's a greater percentage international, but I don't think we'll give you a specific number to shoot other than we would expect it to go up. And regarding the investments, we'll definitely be making incremental investments in a number of different areas. But I think as you think about those, I would take those into context with Brandon's comment around our goal of achieving 15% to 20% long-term earnings growth. So that's our goal and focus, and we believe we can do that even when we're making investments in new things.

Our next question comes from the line of Brian Hogan with William Blair.

A question on the use of third-party collectors. Obviously, the AEF portfolio used a lot of those. Are you -- do you have plans to shift that over to your own call centers or you just stick with those third-party collectors?

We're in the middle of shifting all of that work internally. So that's a temporary short-term blip. The vast majority has already worked through our call centers.

All right. And then I guess what are your views on the CFPB? Well, I guess maybe with your dialogue with them, what are their views on the use of third-party collectors? Do they prefer to stay in-house? Or just kind of to get a grasp of that.

Most of the feedback we have as it relates to the CFPB's view about third parties come through the issuers who have gone through a cycle. We've yet to go through a cycle. But understandably, they want anyone who is working with consumers to have the right checks and balances in place, the right investment, audit and compliance. And they are telling the issuers they need to care about who they place accounts with, who they sell them to and I'm sure they'll tell us of we're the third party we need to care about, who they -- who we place accounts with and then we work with. And that's why we've been building over the past few years the internal legal capabilities, which should be done by our own employees and why we have very little reliance on third parties in the collection front. Again, we saw this pattern emerging and believed making that investment sooner was the right decision to make.

And then industry consolidation. I mean, you acquired the AEF portfolio earlier, and I've heard some others have traded. Have you seen an increased activity? Or is this still kind of a wait-and-see and wait and see how the CFPB regulatory environment kind of shakes out?

Well, this year has definitely been a year of heightened activity. We've seen it on a lot of different levels. We don't -- we think it's a combination both of the regulatory expectations that all companies are going to have on their business, as well as the profitability element. I mean, we saw a lot of people who have a high cost of capital, have a high operating cost, who are unable to collect as much as we can and independent of the regulatory environment are likely to struggle. When you combine the 2 together, we just don't see a way for most of the companies in the space to remain a viable entity going forward.

And then on pricing. How much is up? I know it's probably higher on fresher paper, but would you say is it above the prior peak levels of 2007?

We often don't know the clearing price of what somebody paid for something. We just know we lose. And so it's hard to know where exactly the pricing is, but we know where we've bid to know that if it was a 1 basis point above us, we would know it's above meaningful. And so it's hard to give an exact number, but it's -- if it was up only 5-or-so percent, we wouldn't have called it out. So it's up a decent amount.

And you're not changing your underwriting strategies so you've still remained disciplined and haven't lowered your bar? Is that fair?

That's been a hallmark of how we run the company. It's being intelligent about how we buy portfolio and not making the mistakes that others have made. And we're going to continue to be disciplined.

And the Propel, you're in Texas. I think there was a law that was going through New York and didn't make it. What is -- are there any progress in the other states?

Well, you can imagine not much is happening in any government right now with the election next week. So we've pushed off all of our activity until 2013 as it relates to new regulatory pushes. There's nothing going on right now than what we're doing behind the scenes. So we expect to be very active next year on a variety of fronts as it relates to the expansion of Propel, but right now is not a time to try it march through.

And then your interest in other asset classes. I know you continue to look at other things and -- but what particular areas are you focused on?

Well, I guess what we would say there are very few areas we're not focused on in terms of understanding the profitability dynamics. The only asset class that we've consciously ruled out is the collection of medical receivables, which we bought 5 or 6 years ago, and we're unsuccessful finding a model that works. But anything other than that is something that we actively test and look at and value. And we're always buying different pools to look at profitability and that's what led to the telecommunications investment we're making today. And you should continue to see us try to do that.

[Operator Instructions] Our next question comes from the lines of Hugh Miller with Sidoti & Company.

One quick housekeeping question. In the other income line item, there was roughly about $1 million benefit in the quarter. And we're just wondering if there's anything unusual there, if it was possibly tied to Propel and we should be -- how should we be thinking about that going forward?

That largely does relate to Propel, Hugh. So it relates to some of the fee income that Propel generates. So it is something that you would -- you should expect to see continuing going forward or the bulk of it that you should expect to see going forward.

Okay. Okay, good to know it there. And given some of the commentary you've made on the purchasing market and your willingness to kind of buy telecom paper in the quarter, is that just a very different dynamic in that market relative to credit card paper just because of a lack of competitors that are buying that paper?

We certainly believe there's a lot less competition in the telecommunications space given the balance sizes and the inability, we think, for most people to be able to make phone calls as part of the collection effort. That being said, the investment this quarter was about the run rate for the last couple of quarters. So there wasn't a shift in strategy. There just was a lower amount of buying in the credit card space and a fairly consistent purchases of the telecommunications space.

Okay. And is -- the purchases that you've already kind of committed to in the fourth quarter, is there any differential in the mix there relative to the third quarter?

Hugh, we probably won't comment on the mix as it stands right now.

Okay, okay. And then with the Propel business, you guys have talked about how the dynamics there are very active in deployment of capital in the first half of the year as those lists come out. As we think about kind of the fourth quarter and the lien portfolio, should we be actually expecting the lien portfolio to contract and interest income from that business to contract in 4Q? Or is it still a situation where you'll deploy capital and generate collections but just at a slower pace?

It's the latter. We'll continue to deploy capital. I wouldn't expect a meaningful change in the book one way or the other in the fourth quarter.

Great, okay. And you commented about making investments, doing some audits of third parties. Obviously, that's going to become more meaningful to know who you're doing business with. But as you look at it, are there any things in particular that you guys see as potential risks arising from those audits or things that you're most focused on to try and ensure that you won't run into issue with the CFPB?

We've been actually doing audits of our law firms for many years now. So it's not something that -- and our agency. It's not something new. I think it's much more comprehensive than it has been in the past. And I think that's out of an abundance of caution so we don't get surprised. So that's really what we're talking about here. It's an expansion of a program that already exist, but it will mean more resources. It will mean more visits, and we'll pay more attention on what's going on kind of the day-to-day activity level than we would have been previously.

Mr. Black, I am showing no further questions in the queue. You may proceed with any further remarks.

Thank you, everybody, for joining us today. And once again, I apologize for the technical glitch that happened in the middle of the call. We look forward to speaking with you a couple months from now. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you all may disconnect. Everyone, have a great day.