Welcome to the second quarter 2008 Portfolio Recovery Associates, Inc. earnings conference call. (Operator Instructions) I will now turn the presentation over to Jim Fike, Vice President of Finance.

Thank you for joining Portfolio Recovery Associates second quarter 2008 earnings call. Speaking to you, as usual, will be Steve Fredrickson, our Chairman, President and CEO, and Kevin Stevenson, our Chief Financial and Administrative Officer. Steve and Kevin will begin with prepared comments and then follow up with a question-and-answer period. Afterwards Steve will wrap up the call with some final thoughts. Before we begin, I’d like everyone to please take note of our Safe Harbor language. Statements on this call which are not historical, including Portfolio Recovery Associates or management’s intentions, hopes, beliefs, expectations, representations, projections, plans, or predictions of the future, including with respect to the future of Portfolio’s performance, opportunities, future space and staffing requirements, future productivity of collectors, expansion of the RDS, IGS, MuniServices, and Anchor receivables management businesses, and the future contribution of the RDS, IGS, MuniServices, and Anchor businesses to earnings are forward-looking statements. These forward-looking statements are based upon management’s beliefs, assumptions, and expectations of the company’s future operations and economic performance, taking into account currently available information. These statements are not statements of historical fact. Forward-looking statements involve risks and uncertainties, some of which are not currently known to us. Actual events or results may differ from those expressed or implied in any such forward-looking statements as a result of various factors, including the risk factors and other risks that are described from time to time in the company’s filings with the Securities & Exchange Commission, including but not limited to its annual reports on form 10K, its quarterly reports on form 10Q, and its current reports on form 8K filed with the Securities and Exchange Commission and available through the company’s website, which contain a more detailed discussion of the company’s business, including risks and uncertainties that may affect future results. Due to such uncertainties and risk, you’re cautioned not to place undue reliance on any forward-looking statements which speak only as of the date hereof. The company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the company’s expectations with regard thereto, or to reflect any change in events, conditions, or circumstance on which any such forward-looking statements are based in whole or in part. Now, here’s Steve Fredrickson, our Chief Executive Officer.

On today’s call, I’ll begin by covering the company’s results broadly, and then Kevin will take you through the financial results in detail. After our prepared comments, we’ll open up the call to Q&A. I’d like to begin by looking at the quarter’s results and how they reflect the steps we’re taking to build long-term growth. To my mind, that’s what Q208 was really about, building a company that can produce growth, both now and in the future, not just for the next quarter or two, but year after year. We accomplished this in Q2 in a number of areas despite the difficult economy. Briefly, we realigned our fee-based businesses in Q2, closing our Anchor fee-based collection business and announcing the acquisition of MuniServices, a California based revenue enhancement firm serving local governments. We see our fee-based businesses as an important diversification of PRA’s growth engine. PRA also acquired $71.1 million dollars of defaulted debt during the quarter, which is a significant number and of course positions the company for future collections. We have addressed start-up productivity issues at our Jackson, Tennessee call center to the point where its productivity in June was about 80% of our most efficient call center. Our Jackson staff has done a tremendous job in Q2 and I’m proud of the great improvement there. We’ve been extremely vigilant on the cost front, bringing down operating expenses to cash receipts, which is a key ratio for us. We stood at 44.3% at the end of Q2 down from 45.9% a year ago and our best performance since Q107. Lastly, in terms of our balance sheet, we have continued to lever the company as has been our stated goal. This leverage has allowed us to make the purchases that have positioned PRA so well for the future.…

Our second quarter 2008 financial performance reflected our focus on building long-term growth for PRA. Net income in the quarter fell 12% to $11.4 million collars, while EPS declined 6.3%. Total revenue for the quarter was $63.6 million dollars, which represents growth of 16.1% from the same period a year ago. Operating income was $21.3 million dollars, which is essentially flat year-over-year. While net interest expense grew from $218,000 dollars one year ago to $2.6 million dollars in Q2 and up sequentially from $2.5 million dollars. Our average interest cost on the acquisition line during the quarter was 4.63%. Breaking our second quarter revenue down into three components, once again the majority of total revenue or $53 million dollars came from income recognized by finance receivables. This is revenue generated by our owned debt portfolios. Income on finance receivables is derived from the $85 million dollars in cash collections we recorded during the quarter which is a new record and represents growth of 31.6% over Q207. Second quarter cash collections were reduced by an amortization rate, including allowance charge of 37.6%. This amortization rate compares with 33.7% in Q108, 28.2% in Q207, and our full year 2007 rate 29.6%. During the quarter, PRA record allowance charges totaling $4 million dollars, which compares to $2.8 million dollars in Q1. Life to date, reserves, since the change to SOP03-3 now stand at just $11 million dollars. As I’ve done in the past, I’d like to take a few minutes to walk through these charges and provide a bit more granularity. First, remember that effective January 1, 2005, PRA began booking revenue under the guidance of SOP03-3. Prior to SOP03-3, we used the guidance of practice bulletin 6. As it related to allowance and impairments, the key difference between these two pronouncements is…

(Operator instructions) Your first question comes from the line of Bob Napoli from Piper Jaffray. Please proceed. Bob Napoli – Piper Jaffray: Question on the impairments in trying to forecast impairments. You didn’t have any impairments from 05 and we’ve been most concerned about 05, 06, and early 07, and the way SOP03-3 works, I understand there’s likely to be more. It is $0.16 cents per share if you had a quarter where your impairments were, we’re far lower obviously which changes the numbers and it looks like volatility may be for awhile as those 06 and early 07 pools sort out could be high. I don’t know if you could put some color around other than ripping apart the queue, which we do, but even doing that it’s hard to say, because we don’t have the individual pools that you’re looking at, Kevin. How can we get a feel for what you feel could be left in the impairments in those pools and when you would decide to move up yields in say the 08 pools?

I can answer part of that. Some of what you’re asking is giving you some guidance on your modeling, which you know we don’t do; however, as you pointed out we did not incur allowances on that Q105 deal, which I think was excellent news. Additionally, the allowances on the bankruptcy pools were about halved, which again I think is also good news. The 2006 and early 2007 pools as you mentioned certainly come from a high price environment and leaves little room for price or operation error. The way this works is that as we see data coming in, what we’re trying to do is match these curves that are forecasted to the data points we have, so every month goes by we know something more than we did in the prior month. One of the reasons I’m trying to give you guys a lot of granularity as to where these allowances are coming from and actually where they’re not coming from. I think as time moves on, I’m going to keep providing that data for you guys to digest. Bob Napoli – Piper Jaffray: Essentially, what you’re doing is you’re putting on pools, you’re paying apples for apples, theoretically 30% less or maybe even more at the same evaluation as these pools where the evaluations are much tighter. Is that a fair characterization?

That’s an excellent observation. As we go into 08, we believe we’re buying the higher IRRs than we have in the past 18 to 24 months, but we are booking them from an accounting perspective as prudent projections. That’s a good place to start. Bob Napoli – Piper Jaffray: The Philippines going from 50 to 74 and expecting a significant increase in productivity in the third quarter, maybe explain why?

Again, so the test was suppose to be 50 people. The extra 25 was kind of a separate thing. It was a situation where we saw the ability to put these guys on a technology based collection solution. Bob Napoli – Piper Jaffray: What is the revenue out of MuniServices?

We haven’t disclosed that. We did say it was accretive to earnings though, Bob.

Your next question comes from the line of Hugh Miller of Sidoti & Company. Hugh Miller – Sidoti & Company: I was wondering if you could give us a little bit of color on how long the employees from Anchor that are coming over, how long do you anticipate it will be before they really establish a meaningful book of business and talk about the productivity ramp-up for these types of collectors relative to a new hire.

Hugh, we actually invited Neal Stern, our new COO for the owned portfolio business to sit in. So it’s probably an appropriate question for him to take a shot at.

I think I would say that our Anchor employees obviously have some collection experience. So this is not like hiring someone off the street with little or no collection experience. I think they will ramp up the pace of our best collection center, but early on that pace is modest. So we shall see. Hugh Miller – Sidoti & Company: Maybe if I could ask a follow-up question. As you’ve been there at PRA now for close to six months, can you talk about what initiatives you see for productivity enhancements near and longer term?

Sure. So we’ve been doing everything we can to leverage the massive data set that we have to do everything we can to maximize cash collections and maximize the return on investment that we have and a number of things, you know, make sure we’ve got the right account to the right person at the right time and give appropriate treatment and as Kevin mentioned we’re doing a lot in terms of collection technology and leveraging. Hugh Miller – Sidoti & Company: I know it’s very hard from a quantitative standpoint to pinpoint, but from a qualitative can you talk about the impact from the tax rebates it may have had on the cash collections?

I’d say it’s difficult to extract exactly what we were getting from the rebate and what we were getting from other sources. We did run some specific mailing programs that were targeted at people getting rebates and again as to whether they would have taken those with or without the rebate, it’s difficult for us to know, but on those specific programs we received about three quarters of a million dollars. So again, some of that is probably net left from rebate, some of it we would have gotten otherwise, and obviously there’s other rebate impact scattered throughout the quarter just as there would have been normal tax return monies in Q1.

And I would just add that the three quarters of million was incremental to our control group. So it’s something north of that in total. Hugh Miller – Sidoti & Company: You guys have talked about the initiatives you have to try and really bolster the legal collections. Can you give us some insight as to what those are, what you’ve seen possibly that is working, what may not be working, and what you plan to do going forward?

So we are aggressively trying to model which accounts are going to respond best to that treatment and again model at what point in their lifecycle they’ll best respond to that treatment. So we’re quite prepared to make an investment in legal when we can quantify that we’re going to get an appropriate return. Hugh Miller – Sidoti & Company: Legal accounts through the system as quickly as you could have done, has that been remedied? Is that something that’s going to be worked on?

That’s what I was alluding to. So we’re again trying to determine when in the life cycle to place an account and so we’re trying to make sure we’ve had appropriate calling attempts before we place the account and then making sure that those accounts are getting their other right accounts. So there’s been an enormous amount of effort and I think that will show up for us.

We’re really looking at two broad examples. One would be a situation where an account may be pushed into the legal channel too early by a collection rep and so that is a non-optimal strategy in many cases and one that we’re working closely on trying to pull into line. Another, almost opposite situation, would be an account that is placed in the legal channel but for whatever combination of circumstances isn’t pushed through as rapidly or as aggressively as would be optimal and the key there is suing the right accounts not suing every account, it’s an expensive process, and working on our modeling and our optimization strategies there is something that we’ve been spending a great deal of time on. Hugh Miller – Sidoti & Company: Last question. Can you talk about whether or not you’re seeing significant opportunities out there in the resale market?

Actually we’re seeing very little activity in the resale market as a continuation of what we saw in Q1. I don’t know if it’s just that prices in that resale market have dropped to a point that people are saying I’m not going to sell at these levels and that the need to make those sales hasn’t risen to the point where they’re willing to bite the bullet and move them at market prices yet or not, but we’re just seeing very, very little happening in the resale market right now.

Your next question comes from the line of Mark Hughes of Centrix. Mark Hughes – Centrix: What was your guidance in terms of your tolerance for debt. I think you used 1.3 times. Is that the equity?

Yes, that’s correct. I did way we would consider going somewhat higher than that, depending on the opportunity for the investment. Mark Hughes – Centrix: Anything you can say regarding monthly collection trends through the quarter?

Pretty steady, Mark. We didn’t see anything too unusual in one versus the other. It was generally fairly related to a number of work days.

Your next question comes from the line of Richard Shane of Jeffries. Richard Shane – Jeffries & Company: Just one detail, you mentioned the rebate mailing that you did. What was the timing of that during the quarter?

Our goal was to try to hit the consumer with the mailer as close to the kind of pre-advertised rebate mailing dates as possible. So we were trying to hit them within a couple of days of those mailers and they were fairly sprinkled throughout the period, but I can’t give you much more than that.

The IRS posted a schedule of when people with different social security numbers could expect to get their checks. Our mailing schedule would have approximated that schedule. Richard Shane – Jeffries & Company: So you didn’t see any particular variance during the quarter, because the benefits were spread out from the rebate checks.

That’s right. The rebate checks continued to be mailed even into early Q3. Richard Shane – Jeffries & Company: When I do a big picture sources and uses of cash, $85 million dollars from collections, $17 million dollars from borrowing, $102 million of basically gross sources. You bought $71 million and I estimate the cash operating expenses at about $40 million. So $111 million of cash operating expenses, cash was flat for the quarter and the difference is in the deferred tax liability, which makes sense. Can you help us understand what the difference between GAAP and tax accounting that causes that creation of the deferred tax liability and how long you expect to be able to maintain that before you actually have to start paying cash taxes?

Sure. I don’t have the history of the balance sheet in front of me, because there was a period at some point in our past several quarters ago where we did start to either start to slow down or reverse that liability, but your question specifically is for tax purposes, we report revenue to the IRS under the cost recovery method, which simply is that every dollar goes against that portfolio is amortization until the full cost of the deal is recovered and then every dollar is revenue. For financial, SOP03-3. So I think we know the financial side and the M1 adjustment, which is the adjustment of the tax return, is the difference between that and cost recovery. That help out? Richard Shane – Jeffries & Company: That helps perfectly and realistically, because over the last couple quarters and given the big portfolio purchases you would expect to see this, it has started to grow again. Where do you reach a steady state where that would either flatten out or actually start to go down?

You’ve exactly hit on the head. As buying ramps up, that number would theoretically grow as well and then as buying slows down, that would start to level out and start to get repaid and you start to burn into that. If you back, 18 months ago, I just don’t recall, and look at those balance sheets, you’ll see it and you can plot that against buying. You’ll see that works. Richard Shane – Jeffries & Company: How long does it take before you reach a zero basis from a tax perspective?

To some degree you can see that in our filings and will be filed shortly, but in the supplemental data section we give you the cash collections and the purchase price. I will warn you that from a tax perspective, we don’t aggregate the deals like we do for financial. So for financial statement purposes we can aggregate portfolios together of common risk characteristics in a quarter. For tax purposes, we leave them at the deal level we call it and the deal level simply represents one purchase from one seller at one point in time of relatively modest accounts. So there could be some noise in there, but you can use that supplemental data section to maybe get a beat on that.

John Neff – William Blair & Company, LLC: The blended rate of $7.4 cents highest in quite a while and I know that’s not a price barometer, but what does it say of anything about the mix in your strategy in recent purchases?

What it speaks to, number one, is the bankruptcy buying in the quarter. As we stated, we are buying a lot of cash flowing deals on the bankruptcy side at 40% of the overall dollar spent. That definitely sends the blended rate up. In addition, we have been buying more, because we’re seeing more of it for sale of pressure paper, especially as sellers work through some of the agency pipeline and are left with lesser old paper and more fresh paper. So we’re seeing more fresh paper than we may have seen in other periods. Back to the earlier question about the resale market, we see very little happening in the resale market which tends to be a lower priced market as well as some of the deeper recall paper that we would normally buy and so those purchases of low weight paper that typically are part of our purchase blend simply aren’t there and thus you’re left with this higher blended rate that you see in this period. John Neff – William Blair & Company, LLC: Kevin, total collectors and supervisors. At the end of the quarter, the comparable number from last quarter was 1,305?

1,490. John Neff – William Blair & Company, LLC: You did cite a couple of times a tough economy during your comments. I’m just wondering, is there any quantifiable or anecdotal impact in terms of what you’re seeing in terms of your ability to collect?

Our observation is really a continuation of what we have talked about in the past. Relatively speaking, if you look at our three long-term sources of cash collections being payments in full, where we get paid everything all at once. Settlements in full, where we take a compromise, but we’re done with it all at once. Or payments, which tend to be ongoing payments stream. We’ve seen a continued subtle shift from the balance in full, containments in full, into the payments, although the average payment size continues to be above our historical averages. So it would tell us we’re seeing less ability for people refinance out of a say a sub prime mortgage or something like that which may offer them increased liquidity to pay off accounts like ours and those same consumers still seem to have the desire to repay, they’re just doing it in payment streams opposed to larger one-time payments. John Neff – William Blair & Company, LLC: Is that a phenomenon you’re seeing most often in 06-07 paper where most of the reserves were concentrated?

I don’t have granularity in front of me, John, as it relates to breaking that data into our various purchase trounces. John Neff – William Blair & Company, LLC: You said $2.5 million dollars of the impairment charge in the quarter was for 06 and 07 pools and it included some sort of sub sector to that $2.5 million, but I didn’t catch what it was.

It was $650,000 of that $2.5 million was related to Q107 deals. John Neff – William Blair & Company, LLC: We got a little bit of distance on those purchase vintages. What about those vintages, I should maybe not vintages, because you said in aggregate they are outperforming initial expectations, but what about some of the portfolios within those vintages? Can you pinpoint a specific change or what has been different from your initial expectation?

Just to make sure I’m clear, if you look at 06 for the entire year and lumped everything into one big pool, that is performing in excess of accounting assumptions; however, individual aggregate pools might not be. From a pricing standpoint, 06 was very competitive right into the first part of 07 and it just left, I mean from an operational standpoint or from a pricing standpoint, there’s relatively no margin for error and so you might be onto something. Maybe there’s something in there with the percentages, but from my perspective, all I know is that it’s not tracking to where I need it and I’m taking allowances against them at this point.

Our next question comes from the line of A. Hamagarn from Shaker Investments. Please proceed. A. Hamagarn – Shaker Investments: Will you give us an indication as to what you think your amortization rate is going to be quarterly on your new acquisition?

I don’t have the final breakout of the numbers yet. A. Hamagarn – Shaker Investments: Do you have an idea of what the amount of the intangible is?

Not yet. A. Hamagarn – Shaker Investments: Regarding your bankruptcy, you really stepped them up over the last three quarters, do you expect the collection patterns of second year, third year to be similar on those portfolio purchases as the past data was on much smaller purchases?

We’ve been looking at pretty large purchase amounts for quite a while now on the bankruptcy side. As we underwrite these deals, especially the deals that are cash flowing, we’re generally able to peel that data right back to the dividend rates that are included in each case for each account that we acquire and we are closely looking at the cash flows from those in the cash flow trends and feel as though we’re underwriting conservatively and appropriately. A. Hamagarn – Shaker Investments: I’m just trying to say is there any difference in, you know, given the fact that these amounts are so large and if you follow past patterns you would expect to see pretty significant ramps over the next few quarters in the amount of total bankruptcy. Is that a reasonable assumption?

We had an increase year-over-year in bankruptcy collection of 120% and obviously as we continue to ramp up that bankruptcy buying, cash collections from bankruptcy will ramp up accordingly.

Your next question comes from the line of Justin Hughes of Philadelphia Financial. Please proceed. Justin Hughes – Philadelphia Financial: On the impairment charge, essentially an MPV calculation, I was wondering are you lowering the amount that you expect to collect or pushing out the timing or both?

In the situation of these allowances, you’re right, it is an MPV calculation. I would say in the vast majority of these cases, there would be a lowering of the future ERC and essentially curving. So if that helps you, we’re trying to fit this to data points and we’d be lowering that curve somewhat to try to fit the existing data points and just recomputed the IRR. Justin Hughes – Philadelphia Financial: So it sounds like you’re saying the lifetime collections of the pools will be lower?

It depends. So if you look at the older deals. That might be the million dollars of the 960 we booked on the older higher yielding deals. That may be more of a timing issue. On the 06 and 07 deals, I would say that the situation would be a lowering of the curve. So the area of the curve would be less. Justin Hughes – Philadelphia Financial: We’ve seen a lot of research of pricing down 30 to 40% this year, but given the economy and collection trends, if you’re looking at the same portfolios today versus a year ago, if pricing is down 40%, how much is your expected collection down when you’re looking at pools?

We are underwriting to what we believe are very conservative assumptions and as you can see based on the multiples that we’re booking, we’ve got some pretty conservative multiples out there. So even though we’re buying at lower prices, we’re factoring in substantially more conservative assumptions I believe. Justin Hughes – Philadelphia Financial: Same multiples today that you were before, but more conservative?

The multiples for 2008 thus far are actually down a little bit from where we had been the last couple of years even though we are buying at lower prices. Justin Hughes – Philadelphia Financial: Can you give us a total estimated remaining collections on the entire portfolio?

No, I don’t have that in front of me right now. It shouldn’t be long. You won’t have to wait long in the queue hopefully. Justin Hughes – Philadelphia Financial: It sounds like it will be similar numbers as first quarter.

You have it, Jim?

We do have it. It’s a billion, 065.

Your next question will be from the line of Sameer Gokhale from KBW. Please proceed. Sameer Gokhale – Keefe, Bruyette & Woods: The first one I have is basically Aero Financial, they’re trying to figure out what to do with that business. It’s a pretty large collections operation. I was wondering if you would be open to doing some sort of business combination with them? What would be some of the factors you would take into account?

As it relates to any business combination between us and another debt buyer, especially a debt buyer that does a lot of the same kind of thing that we do, we don’t see a lot of value in a combination like that. We believe that any debt buyer is really value kind of in two broad chunks. One is the platform, the technology, the underwriting, and the operation, and the second is the portfolio. We feel like we have the former and so we would only really be able to pay for the latter and it would be the rare transaction that we’d run into that somebody would be willing to part with the entire organization for just the value of the portfolio. Should that occur, we’d certainly be interested in the portfolio, but we’d have a difficult time in paying much if anything for someone else’s platform, especially for a similar level of expertise to what we have. Sameer Gokhale – Keefe, Bruyette & Woods: When you look at year-over-year, there’s a pretty significant increase in that other category. What is in that other category of paper that you buy?

The primary secondary table, Sameer? Sameer Gokhale – Keefe, Bruyette & Woods: That’s right.

Like warehouse kind of paper, quads, quints, believe it or not. Sameer Gokhale – Keefe, Bruyette & Woods: So it’s older paper, but we should not necessarily assume that out of stat paper?

No, probably not, and I just want to remind everybody. On that table, that’s the life-to-date purchase price that we put out from inception. What I tend to tell people to do is kind of shift those people together and subtract them, which it sounds like you did. Sameer Gokhale – Keefe, Bruyette & Woods: Yeah, I was looking at the year-over-year comparison and it looked like there was an increase in the number of accounts and face value also. So I was just kind of piece out what kinds of accounts are in there, but it sounds like the majority of those are not out of stat. And then, it seems like every quarter since the implementation of SOP03-3 obviously there’ve been a lot of discussion about impairment charges and the effect on amortization rates and the like, but have you considered potentially or can you switch to the cost recovery method for GAAP purposes and then maybe provide some pro forma disclosure with amended PD6 so that investors can piece out what the economics of the business are versus all the impact of these impairment charges, which to a large extent seem to be non-cash in nature. Is that something you considered doing?

I think under SOP03-3, if you look through the evolution of what has ultimately become SOP03-3, I actually omitted guidance on cost recovery for years and it wasn’t until very late version of this, finally got approved that they actually put the words in there that they do approve cost recovery and actually early, early versions of it said we think the management teams can always predict something and so again thankfully they removed it and gave us the ability to put things on cost recovery. So there’s cost recovery, there’s cash method. Those two methods are really only approved for timing issues or for portfolio you really don’t know. So if there’s something we really aren’t comfortable with, we’ll put it on cost recovery. One individual deal. We will not aggregate that with the other yielding deals. Or if there’s something out of the gate and we’re timing perspective and we converted something, you know, it took us a month for some reason to convert something and we can put it on cost recovery or cash method for a period of time. So I think from a GAAP perspective, we’d probably be prohibited from doing what you suggest.

This concludes the Q&A session.

First I’d like to thank all of you for participating in our conference call. Before we go, I’d like to reiterate a few key points about our second quarter. As I mentioned at the outset of the call, I look at the quarter in terms of building future growth for PRA, not just for the next quarter or two, but year-after-year. In this regard, we realigned our fee-based businesses in Q2 ending fee-based collections via Anchor and acquired MuniServices. We acquired $71.1 million dollars of defaulted debt, addressed start-up productivity issues at our Jackson call center to the point where its productivity was about 80% of our most efficient call center in June, brought down operating expenses to cash receipts to 44.3%, our best performance since Q107, and continued to modestly lever the company to make the purchase that has positioned PRA so well for the future. Thanks again for your time and attention. We look forward to speaking with you again next quarter.