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PRA Group (NASDAQ:PRAA)
Q2 2018 Earnings Conference Call
Aug. 7, 2018 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the PRA Group conference call. All participants will be in the listen-only mode. [Operator instructions]. After today's presentation, there will be an opportunity to ask questions.

[Operator instructions]. Please note this event is being recorded.

I would now like to turn the conference over to Darby Schoenfeld, VP of investor relations. Please go ahead.

Darby Schoenfeld -- Vice President Investor Relations

Thank you. Good afternoon, everyone, and thank you for joining us. With me today are Kevin Stevenson, president and chief executive officer, and Pete Graham, executive vice president and chief financial officer. We will make forward-looking statements during the 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. The earnings release, the slide presentation that we will use during today's presentation, and our SEC filings can be found on the Investor Relations section of our website at www.pragroup.com. Additionally, a replay of this call will be available shortly after its conclusion and the information needed to listen is in the earnings press release.

All comparisons mentioned today will be between Q2 of 2018 and Q2 of 2017 unless otherwise noted.

I'd now like to turn the call over to Kevin Stevenson, our president and chief executive officer.

Kevin Stevenson -- President and Chief Executive Officer

Well, thank you, Darby, and good afternoon, everyone. Thank you for joining our second-quarter 2018 conference call. The second quarter was another solid one for PRA Group, characterized by some of the same positive themes we've experienced since late last year. Increased cash collection, increased supply, and appropriate staffing in the U.S.

while in Europe we remained focused with a disciplined approach to the buying market and dedication to improving operations.

Global cash collections increased 9% to $407 million, led by U.S. call center collections increasing 17%. Additionally, U.S. legal cash increased quarter over quarter for the first time since 2014.

Our total global investment and portfolios for the quarter was $221 million. We had another record quarter in Americas core, investing $183 million, and this marks the third record in the last five quarters demonstrating good supply in the U.S. market.

Income and finance receivables excluding allowance charges increased 13% when compared to the second quarter last year. This is driven by the aforementioned buying along with having achieved targeted staffing levels in U.S. call centers and continued performance in the mature markets in Europe. And finally, the estimated remaining collections or ERC were $5.73 billion and this represents less than a 1% decrease from last quarter, primarily due to changes in foreign exchange rates.

U.S. supply continues to be good and pricing has held steady. Credit card charge-off rates continue to inch up and more institutions are seeing the value of selling accounts closer to charge-off. We continue to see a greater emphasis placed on compliance and customer treatment in the sale decision.

Our compliance management system, which I discussed last quarter, positioned us well in this environment and allows us to benefit from the positive conditions domestically. Our Q2 2018 investment and global insolvency was $19 million. The traditional insolvency market in the U.S. remains constrained by both low supply and strong competition.

Like core, some sellers remain out of the market. However, the competitive consolidation that occurred in the core market did not occur on the insolvency side. So demand remains high. Despite this, we're optimistic about the insolvency space and we continue to have interactions with sidelined sellers informing them that we are a prepared and capable partner that will be there when they're ready to do sell.

Europe core investment was $19 million as the European debt-sales market continues to be extremely competitive. There finally seems to be a general market consensus their returns have been pressured for some time, something we've been talking for about two years. We've been carrying the message to our clients that we are in Europe for the right strategic reasons, we're focused on the customer journey, and we plan to traverse this difficult market just as we did in the U.S. in 1996 to 1999 and 2006 to 2008.

When the opportunity to invest heavily in Europe presents itself, PRA will be prepared with adequate capital and solid operations.

A final note on portfolio investment, at the end of the first quarter we had committed maximum forward-flow investment amounts globally of $376 million.

Moving to Americas core, given the record investments we've made and our belief that this trend will continue, we are preparing to open another new call center. Currently, our call centers are close to capacity and have long believed the operating facilities had 100% occupancy or more for more than a short period of time is not a winning strategy, nor is what we refer to as hot feeling or depth sharing. Targeting a lower occupancy rate provides for better employee satisfaction and gives us the ability to quickly flex up in staffing should that be required and all the while not costing significant dollars for the capability. Once the new call center is opened, we will gradually rebalance call center staffing as demand in attrition necessitates.

Back in the third quarter of 2017, we started to see a shift in the nature of accounts we're purchasing with more qualifying for the legal channel. So, for example, the average balance of domestic core accounts we were purchasing has increased from around $1100 in 2016 to $1475 during 2018. As a result, in the second half of this year and into 2019, you should expect to see an increase in legal collection costs as we invest in the legal channel. Pete will have more details on that in a moment.

Moving on to Europe, in Europe most of our markets are performing in line or slightly ahead of expectations. In Poland, we made a number of technological advances and have plans in place to further improve efficiencies. This coupled with recent cash performance has given us more confidence around our cash collection curves and will allow us to be more competitive in the market in the future.

In Italy, we began to expand our internal operations group some time ago as well as build out a legal collection platform. While we made good progress on both fronts, the legal process is complex, time-consuming and can vary between different regional jurisdictions. We continue to track very closely the performance of these channels and will adjust our models and processes accordingly.

In prior quarters, I've made an effort to talk about areas of the company that investors normally don't hear much about. And this quarter I want to talk about the government outreach initiative that we ramped up earlier this year and how that might influence our outlook for legal. So, over the years we have observed that well-intentioned efforts by those seeking to protect the customer's best interest have, as a byproduct, made it more challenging for us to work dynamically with the customer, which we believe is in all of our best interests.

Shortening statute limitations, [Inaudible] calls to contacts requiring lengthy verbal and written disclosures, authorizing phone companies to take all the scams, reinterpreting the TCPA or Telephone Customer Protection Act, all have one thing in common. They make it more difficult for us to have a conversation with our customers, oftentimes forcing us to utilize the legal channel as our sole means of communication.

Earlier this year, I decided to increase our focus on government outreach. I created a new senior position, hired a new leader, and combined our previous government relations function with our communication department. This position reports directly to me and we plan to build the function over the remainder of 2018, adding up a few more positions and significantly increasing our touch points at all levels of government. We hope that increased dialogue with regulators and legislators will help them understand that allowing us to communicate with our customers is a good and necessary thing.

PRA has been in business since 1996 and we certainly understand that many times consumers would rather avoid our call. However, it is not changing the fact that the debt exists and ignoring it does not make it go away. No communication simply drives an increased focus on the legal channel.

From our perspective, we want to enable each customer to find a solution as they deal with their personal debt situation. We want to work with them, understand their financial challenges, and make it easier for them to work with us over time. Working with the customers out of the court system is a win for everyone. Our goal is simply to communicate with the customers, set up a payment plan that works for their situation.

We'd rather meet our customers where and how they want to meet. If we can do that, they don't end up in court, the court systems have lower utilization, and we have a lower cost to collect.

If you've been on our website recently or read my annual letter, you know that part of our vision is to change the world's perception of the nonperforming loan industry for the better. It is incumbent upon us to make sure that everyone we interact with realizes what we're trying to accomplish. We want shareholders, clients, customers, lawmakers and regulators to know that we are an integral piece of the credit cycle and we intend to operate ethically, respectfully, and compliantly in each and every one of our markets across the world.

Now, I'd like to turn things over to Pete to go through our financial results.

Pete Graham -- Chief Financial Officer

Thanks, Kevin. I will start with a quick overview of our debt results and then move on to cash operations.

Cash collections were $407 million and total revenues were $222 million, both 9% increases over the second quarter of 2017. Operating expenses were $163 million and net income was $20 million, generating $0.43 in diluted earnings per share.

We've started presenting income recognized on finance receivables excluding allowance charges and showing allowance charges on a separate line item instead of netting them. This presentation change was made at the request of the SEC and has no impact on operating income or net income.

Total cash collections for the quarter were $407 million, an increase of $32 million. Americas core collections were $234 million, an increase of $17 million. This was led by a $21 million increase in U.S. call center and other cash collections and $3 million increase in legal cash collections.

As Kevin mentioned, this continues the positive turn in cash collections that we expected as we reached targeted staffing levels in the U.S. These increases were partially offset by decreases in cash collections in Brazil, reflecting several quarters of lower buying coupled with the strengthening of the U.S. dollar versus the Brazilian real in the quarter.

Europe core cash collections increased $10 million to $109 million, including $7 million of increase from favorable foreign exchange rates. Growth in the U.K. and the Nordics from significant purchases in the fourth quarter of 2017 outpaced runoff in other countries.

Global insolvency cash collections increased $5 million, driven primarily by record portfolio investments made during 2017 in the U.S. During the second quarter, we returned portfolios in Poland to accrual status as we've made technological advances and operational improvements that have given us the confidence to reasonably project the cash-collection curves.

Net allowance charges were $3 million in the quarter. Americas core had net allowance charges of $3.3 million primarily in the 2013 and 2014 vintages, offset by net reversals in Europe core. The other component of cash receipts is fee income, which was $2 million in the second quarter, in line with expectations. Fee income declined from the prior year, primarily due to the sale of POS in June of 2017.

Operating expenses were $163 million, increasing $11 million from the previous year. This is largely due to increases in compensation and employee services and communications expenses. Compensation and employee services costs have increased as anticipated due to having more collectors than we did at the same time last year and having additional collectors as well as having more accounts from the record investments in the Americas last year increased the number of calls and letters we send driving communication costs higher.

As we've discussed previously, beginning in mid-2017 we started seeing an increase in average balances from sellers and pressure accounts and anticipated more accounts would qualify for the legal channel. As a result, legal collection costs have been slowly increasing in the U.S. These trends have continued during the first half of 2018 and we expect to spend approximately $20 million more in the second half of this year versus the first half of the year to address this increasing volume.

Our cash-efficiency ratio was 60.4% in the first six months of 2018, compared to 60.8% for the full year of 2017. With the additional investment in legal in the second half of the year, we now expect the full-year cash-efficiency ratio to be slightly lower than our previous estimate of 60% as legal costs are expensed as incurred. However, as this is an investment in cash collections, we will start to see the return beginning in 2019.

Below the operating income line, interest expense was $31 million. The increase in interest expense was due to higher balances outstanding and slightly higher average interest rates. In addition, we incurred a loss on the change in fair value of interest rate swap agreements increasing interest expense by $1 million in the quarter. Last quarter we incurred a $3.7 million gain on the change in fair value of interest rate swap agreements.

So that swing is driving the majority of the increase in interest expense from the first quarter.

Net non-cash interest expense on the convertible bonds was $2.9 million and amortization of loan fees and other loan cost was $2.5 million. Our effective tax rate for the first six months of 2018 is 18%, down from the 21% expected at the end of the first quarter. This is a result of the change in the mix of income with more income coming from Europe.

For the full year of 2018, the tax rate could still be influenced by additional guidance around the [Inaudible] tax and income mix differences by country. However, at this time, 18% is our best estimate for the full-year.

Estimated remaining collections totaled $5.73 billion with 58% in the U.S. and 39% in Europe. ERC decreased sequentially largely due to foreign exchange rates. In addition to the substantial cash flow generated by the business, we have capital available for portfolio purchases of $354 million in the Americas and $546 million in Europe for a total of $900 million worldwide.

Last quarter we provided a revenue model which produced a base revenue estimate on currently owned portfolio of $206 million. Actual revenue on finance receivables not including allowance charges was $219 million, a difference of $13 million. This difference was driven primarily by new buying and yield raises.

In addition, there was $2.8 million in cash collected on fully amortized pools. It was not previously accounted for by the model. This cash was collected on the 96 through 2012 vintages for Americas insolvency in the 2012 Europe core vintage. The remainder of cash collected on fully amortized pools is accounted for by the model.

This quarter the same model generates a base revenue estimate of $212 million. As a reminder, there are three items that can impact the space estimate: investment in NPLs in the quarter, yield increases, and cash collected on fully amortized pools not accounted for by the model. Remember that we now show allowances and reversals as a separate line item on the income statement.

Operator, we're now ready for questions.

Questions and Answers:

Operator

Thank you. [Operator instructions]. Our first question will come from David Scharf with JMP Securities. Please go ahead.

David Scharf -- JMP Securities -- Analyst

Hi, good afternoon. Thanks for taking my question. Kevin, I had a question on the European operations. Look, I know you've been building up more stuff in Italy but are the bulk of the collections in Europe still on an outsource basis?

Kevin Stevenson -- President and Chief Executive Officer

I don't have that data in front of me. I wouldn't say the bulk of it is on an outsource basis. We've got our largest operation in U.K. We've operations in Spain, Norway.

A significant portion though is outsourced very different than the United States. I don't know if Pete has anything on that.

David Scharf -- JMP Securities -- Analyst

The reason I am asking is to the extent that projected returns are going to be pressured for quite a while, it sounds like you still have a pretty big variable cost structure versus more fixed. Is it fair to conclude that if you decide to pull back volumes in Europe for the foreseeable future that there's quite a bit of variable cost that kind of goes away as well? I'm just trying to get a sense for ultimately how you're viewing all those markets in aggregate because it's been quite a while now since we're hearing that the returns are arguably in the single digits. And if there's room to cut costs even further if we continue to see purchasing at these levels?

Pete Graham -- Chief Financial Officer

Yes, I think that's a good observation. I would kind of echo what Kevin had said in terms of the areas where we have the biggest scale, primarily the U.K. That's our largest market outside the U.S. That's where we have our largest in-house collection center in [Inaudible].

And in the other countries where we have a significant sort of own collector footprint those are the areas where we've been making continued investments even in a tough market but to the extent buying does not materialize, we do have the ability to flex cost as well.

David Scharf -- JMP Securities -- Analyst

OK. And then on the cost side in the U.S., I mean, you addressed the uptick in legal spending in the second half. Is there anything, and I might have missed it, that we need to know about second half spend versus the first half as it relates to getting the new call center up and running?

Pete Graham -- Chief Financial Officer

No, I think in terms of the call centers, most of the spend there is going to be CAPEX. And so that would be cash flow required in the second half the year but wouldn't start to impact the P&L until the call center opens and [Inaudible] we're getting amortized over a number of years. So that's something that would really stand out. We had previously given a view of our cash efficiency ratio as a way to target overall expense levels and, as we updated, I think the only significant change to that prior view is this increased legal spend in the back half of the year.

Kevin Stevenson -- President and Chief Executive Officer

David, you asked something that [Inaudible] something on my head. In my script, I said that we're going to try to just rebalance call centers. I just want to reiterate that. Last year when we added some 1100 people and then put about 350 on in Q1 net new, we did that with those two new call centers primarily.

So that's not what this one is for. This one is to take the heat off the current centers and rebalance a little bit.

David Scharf -- JMP Securities -- Analyst

OK, that helps. And just lastly just housekeeping because I wasn't writing down quickly enough, the tax rate guidance, Pete, was that for the full year or the 18%?

Pete Graham -- Chief Financial Officer

Yes, I mean that's our best view as of right now. The 18% is what we've booked for the six-month period and borrowing changes and mix are other developments around [Inaudible] that we're still waiting for some final clarifying guidance to come out maybe in the third quarter. We think that's our best view as of right now.

David Scharf -- JMP Securities -- Analyst

Got it. And the cash-efficiency ratio below 60, was that a full year or a second half?

Pete Graham -- Chief Financial Officer

That's for the full year.

David Scharf -- JMP Securities -- Analyst

Full year. Got it. All right, thanks very much.

Operator

The next question comes from Bob Napoli with William Blair. Please go ahead.

Bob Napoli -- William Blair & Company -- Analyst

Thank you. Just I guess on the international business and the fact you guys are buying close to nothing there at the moment. How do you keep the purchase organization engaged and excited as we go through this period? I have obviously followed you guys long enough to know that being disciplined is a hallmark and patience as well but some of your competitors dispute the returns that are available on the paper over there. So, the sales organization, I guess, or the underwriting, the purchase group.

How do you keep that together when you're buying so little? And what do you think is the difference between your view and that of some of your competitors that are based in Europe?

Kevin Stevenson -- President and Chief Executive Officer

That's a great question, both of them, Bob. Thank you for that. Trying to keep the folks motivated and engaged and feeling valued is absolutely one of my areas of focus right now, especially exactly as you put it that we're buying a lot less than we hoped to buy. So I will tell you that there are pretty engaged folks.

It's not a dour bunch of people over there. They look at a lot of deals. So that's the thing. It's not like they're just waiting for a deal to stroll by.

They are engaged -- almost every hour they're at work, they're looking at deals and spinning up through what we call the investment committees and the global investment committees. So, a lot of people working. We do indeed lose a lot of deals and but you'd have to take it from me, I think we've done a decent job at keeping them engaged. And importantly, they understand what we're doing and I have these fireside chats with people and I'll do it with kind of cobbled together folks from different levels or I'll do with entire departments and I did one not long ago with the entire investment crew over in Europe and they not only accept but they like what we're doing and they agree with it.

And I think they have seen so many trainwrecks in the past that they're not interested in being part of that. So, that's the best I can tell you. It's one of my Job 1's for me and I'll keep moving forward on that.

The other one about why is our view potentially different, I put that in my script. I think you're hearing a lot more people saying in the market that pricing is elevated. So I feel like the wave's kind of coming our way to that understanding. That's how I hear it.

Maybe I'm biased. So what would make us wrong? Let's look at that, right? What would make us wrong? So I don't pretend to be the best in any market that I'm in. We're very good at what we do. We're very good at pricing.

We are very good at operations. And someone could have a leg up on us somewhere but the problem with that is I would expect to see tighter ranges of bids. A lot of times we've been on deals we're so far off the winning bid, it's just not possible to explain it with that. So, if I lose a deal by some number of basis points, 100-basis-point deal, but I'm losing by lot more than that in a lot of cases.

So I think we're right but I would say that someone could have some sort of data advantage on us. It's possible. Someone could have some advantage in the way they approach a legal collection, possibly. It could be a number of things.

So, trying to be humble here but we think that pricing remains really elevated in Europe.

Bob Napoli -- William Blair & Company -- Analyst

And then I guess in North America, I think a comment you said in your script was more institutions are selling accounts, more institutions than last year are some people that were not selling are selling.

Kevin Stevenson -- President and Chief Executive Officer

No, the comment was about they're seeing the value in selling accounts closer to charge-off, and I could have probably phrased that better, fresher accounts. So folks are moving from selling tersh paper to fresh paper or secondary. They're moving it sooner in the sales pipeline.

Bob Napoli -- William Blair & Company -- Analyst

OK. So not necessarily more of the percentage of charge-offs being sold. It's just sold sooner.

Kevin Stevenson -- President and Chief Executive Officer

Well, the good news about that is that there's some collection being harvested by that pipeline that we in the U.S. market have a shot at buying. And I would say it's being driven by, I think, the realization by some of these banks that the folks that do participate in this U.S. market right now offer great NPV versus the alternatives.

Bob Napoli -- William Blair & Company -- Analyst

Thanks. And last question, the TCPA, lots of noise on auto dialing. Where do you stand on turning on the autodialers?

Kevin Stevenson -- President and Chief Executive Officer

We're nowhere yet. We're kind of in listen-only mode on that one and that's one of the things I want to engage with. I spend a long time talking about our government outreach and I am passionate about doing this and really having a seat at the table but we're nowhere right now but I want to get out there and tell our story and I think today was a good start publicly.

Bob Napoli -- William Blair & Company -- Analyst

Thank you.

Operator

Our next question comes from Eric Hagen with KBW. Please go ahead.

Eric Hagen -- Keefe, Bruyette & Woods -- Analyst

Thanks. Good afternoon. Of the $219 million in revenue, can you just maybe tease apart for us the revenue that came from yield increases and the revenue that was associated with the new purchases during the quarter? Thanks.

Pete Graham -- Chief Financial Officer

That's not something that we've ever really disclosed. In the tables. You can see sort of by vintage and geography where the revenues are coming from, but components like that we haven't disclosed.

Eric Hagen -- Keefe, Bruyette & Woods -- Analyst

OK, thanks. And, Pete, I think I heard you say $2.8 million on fully amortized pools. I may have misheard you. I just wanted to clarify.

Pete Graham -- Chief Financial Officer

Yes, that's the amount that was not accounted for in the model. And in terms of the fully amortized cash for the quarter, that was $14.6 million.

Eric Hagen -- Keefe, Bruyette & Woods -- Analyst

Got it. Thank you. And I'll just try my hand at some Europe questions as well. Can you just maybe give us a sense for what the expenses were that were associated with Europe? I'm trying to sort of back into an EBITDA number for just the Europe operation in general and then we can see where the revenue was but if you can just help me back into what the costs were associated with Europe, that will be very helpful.

Thanks.

Pete Graham -- Chief Financial Officer

Yes. Unfortunately, that's not something that we've disclosed.

Eric Hagen -- Keefe, Bruyette & Woods -- Analyst

All right. Thanks, guys. Appreciate it.

Operator

Our next question comes from Mark Hughes with SunTrust. Please go ahead.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. Good afternoon. The incremental expense for legal collections, would it be the most useful approach to assume sort of the 60% efficiency ratio, then tack on $10 million on top of that? Any offsetting factors in the model?

Kevin Stevenson -- President and Chief Executive Officer

No, I don't think so. I think that's a reasonable way to think about it. If you look at the level of expense that we've had in the first half, we expect it's going to be around $20 million more on that legal collection expense line. And that's going to push that cash efficiency for the full year a little bit below the 60% that we had previously targeted.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And then any carryover from that into 2019? Do we drop back to sort of the earlier run rate or is that similar higher level?

Kevin Stevenson -- President and Chief Executive Officer

I think a lot of that is going to depend on buying in the second half of the year but our expectation is that those trends are probably going to continue at the level we've seen. So, whether it's at that same level that we're going to experience in the third and fourth quarter but I don't think it's going to drop back down to the run rate that we've had for the first half.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And presumably, that'll be at least somewhat offset by higher collection from the flow through the initial investments?

Kevin Stevenson -- President and Chief Executive Officer

I think that's a reasonable assumption.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

And then talking about the still good supply growth, we've seen some of the broader charge-off metrics. They're still definitely up double digits but it decelerated a little bit. Do you see any impact of that in the marketplace? Is the supply growth different now than it was six months ago or back into 2017?

Kevin Stevenson -- President and Chief Executive Officer

I think the supply remains good. It remains strong. And then I put in my script that the pricing has remained fairly steady. I think the thing I pointed to in my script again, as I mentioned earlier, was folks selling a little closer to the charge-off period, so moving things up in their pipeline.

I think that's contributed to more volume to the U.S. market. Those are the primary things that I'm thinking about at this point.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

The next question comes from Robert Dodd with Raymond James. Please go ahead.

Robert Dodd -- Raymond James --- Analyst

Hi. Following up from [Inaudible]. On the legal expense to the point of flowing through into '19, of the $20 million that's coming in the second half, is any of that related to kind of catching up with spend that arguably in hindsight, whatever, you would've spent in the first half but maybe the increase is 10 to 15 on kind of go-forward basis and [Inaudible] catch-up. And is that kind of how to think about it in terms of some of it will recur, some of it is catch-up or maybe should've been spent earlier but you were waiting to see how trends played out?

Kevin Stevenson -- President and Chief Executive Officer

No, again, we've had sort of a steadily building inventory of legal accounts starting around the back half of last year and that trend is continuing. So that just has been a build that we anticipated is going to continue into the second half of the year and potentially into the year after.

Robert Dodd -- Raymond James --- Analyst

Got it. And then just talk on timing of that, to the question of when does ... What's the lead time of legal expense versus cash collections starting to materialize? There's a bit of a lag but can you give us some viewpoint on the spends really kind of picks up in the third quarter, just the cash starts to come in Q1, Q2, a year from now? What is it?

Pete Graham -- Chief Financial Officer

I think it's generally, I mean, as a rough rule of thumb, three to six months sort of payback time period. So I think if we start investing that higher level in the third quarter and fourth quarter we'll certainly start to see an impact of that in the first quarter. And then, again, our expectation is that these trends in the legal accounts will continue. And so we probably will stabilize at a higher level than what we've had in the first half of this year.

Robert Dodd -- Raymond James --- Analyst

Got it. I appreciate it. Thank you.

Operator

The next question is a follow up from Bob Napoli with William Blair. Please go ahead.

Bob Napoli -- William Blair & Company -- Analyst

Hi. Just on Poland, what was the amount that was on nonaccrual for Poland, the dollar amount? And what is left on nonaccrual? I think it's Italy and I'm not sure what else.

Pete Graham -- Chief Financial Officer

Yes. So, if you look at what we had disclosed last quarter, I think off the top of my head it was around $17 million of cash from nonaccrual pools and we're down by $10 million, probably half of that was due to the Poland pools and the rest of that's volatility in those pools that are on nonaccrual. And just to recall, that's one of the reasons they're on nonaccrual is because there's a level of volatility that we can't predict.

Italy is probably the biggest area that we have significant nonaccrual remaining but keep in mind we also employ nonaccrual for new areas like SMEs. So we've got some SME pools in Europe that are on nonaccrual. Those are probably the biggest areas, I'd say.

Bob Napoli -- William Blair & Company -- Analyst

OK. I'm sorry, the dollar amount of NFR that was associated with Poland.

Pete Graham -- Chief Financial Officer

I don't have it off the top of my head. Why don't you give me a second? It's in the cue. I can look it up for you.

Bob Napoli -- William Blair & Company -- Analyst

OK. And my last question just on the new call center. What are your thoughts around the location of the new call center and when do you hope to have it up and running?

Kevin Stevenson -- President and Chief Executive Officer

Yes. We haven't talked about the location yet. I want to keep it a little bit in my back pocket, so to speak, but probably be in the Eastern [ph] time zone, I'll give you that much. But timingwise, I would say that hopefully we'll have a deal done with the area, I'd say late '18, maybe we'll do some hiring in late '18, but certainly by the first part of '19 that building should be fit out and ready to go. And I'll also add, it's going to be a pretty decent-sized center.

From a square-foot perspective, it could be one of our larger centers. So we're kind of excited about it, quite frankly.

Bob Napoli -- William Blair & Company -- Analyst

How many collectors do you expect it would hold approximately?

Kevin Stevenson -- President and Chief Executive Officer

We're looking at about 60,000 square foot building. So it's a big place and that would hold ... based on the way we put desks in, it would certainly be the largest physical building in our network but, again, I am not looking to necessarily fill it up right away. There's also some opportunity for us to provide a little bit of diversity of functions such as, if you look at disputes and complaints department, customer service groups, also moving to this area to give us some geographic expansion in our diversity.

Pete Graham -- Chief Financial Officer

Coming back on your question on nonaccrual pools, so I don't have the prior-quarter number but we had $80 million remaining on nonaccrual after putting Poland back on. You'd be able to compare that to the chart from the prior quarter.

Bob Napoli -- William Blair & Company -- Analyst

Thank you.

Operator

The next question is also a follow-up from David Scharf with JMP Securities. Please go ahead.

David Scharf -- JMP Securities -- Analyst

Hi. Thank you. I wanted to revisit the legal collection discussion. Kevin, did you say that the primary reason you're seeing more accounts qualifying for that channel is the average size of accounts increasing because I know there's a breakeven because it costs more to sue people? I mean, is that increased from 1100 to 1,450 or 1,475? Is that pretty much the reason why it looks like there's a reason to allocate more to that channel?

Kevin Stevenson -- President and Chief Executive Officer

Yes, that balance component is part of it as well as we're buying fresher paper. That's also a component, as you kind of work through the length of the deal. Those would be the two things I'd pick from the [Inaudible] call.

David Scharf -- JMP Securities -- Analyst

The reason I'm asking is trying to get a sense as we move deeper into the cycle. If you would anticipate legal collections being a bigger part of the overall collection mix because they tend to be lower margins than call center collections. Do you typically find that as lost rates go up and you move deeper in the cycle, by definition the average size of the account you buy is typically larger? I mean, should we assume that the 60% cash efficiency, as you move deeper into the cycle and there's larger accounts, more legal collections, that we should hold the efficiency ratio below 60% for a while or am I mistaken?

Kevin Stevenson -- President and Chief Executive Officer

No, it's a good question. You're testing my memory though. I would say that your logic is interesting. I don't have average balance stuff in front of me but I feel if I look back at the data, I'm going to find that the kind of the aberration was the stuff we're buying at that $1100 balance as opposed to where we're at today.

That will be my first comment. I think, though, to the extent that we have to protect from, say, shortening statutes, things like that, as we entered a down cycle, I would say we would probably see more legal. I can't let my claim go just because someone took a statue of limitations from five years to three years. And so I got to take action on that.

And so that would be ... I think your hypothesis is sound but I can't back up it with [Inaudible] data on the call.

David Scharf -- JMP Securities -- Analyst

Got it. And then since more is being allocated to the legal channel, just a couple more questions on it. Is any change in just the upfront costs to sue somebody in the largest states? I mean you gave us the $20 million, we'll plug it in but just as we think about trend lines, is it a pretty static kind of business where the cost to file a claim and go through the process doesn't change much from year to year?

Kevin Stevenson -- President and Chief Executive Officer

Yes, the process and all that doesn't change a lot. It's an ever-evolving process. If you go back 10 years, it's a different ballgame. The way you sue people today is completely different post-CFPB, a lot of new documents required, but it's a good thing because I think more documents help everybody.

Helps the consumer understand what's going on, helps the courts through their processes and the sellers have been great as they have been required to give us more documents and they have been very efficient at it. The filing fees, anecdotally, I hear courts raising the fee but off the top of my head I don't have that data but I would say anecdotally courts probably tend to tweak their fees up over time.

David Scharf -- JMP Securities -- Analyst

OK. And then the last question on the legal collection process. My understanding has always been that the bulk, if not all, of legal collections is basically default judgments, the debtor doesn't show up in court. Just given all the ... whether the CFPB actions in recent years, just education and so forth, is there any change to the behavioral element of the rate of default judgments? Did you find more cases actually being contested or is it pretty similar to the way it's always been?

Kevin Stevenson -- President and Chief Executive Officer

Another good question. I have not heard much about that. I think unless someone stops me after the call and tell me I'm not listening to what they are telling me, I haven't heard anybody talking about more people showing up at courts. I think the CFPB specifically and the OCC, they have done a good job in this area, by the way, of requiring sellers to provide documents.

Again, I think it's much-improved process and I feel great about it and I think if consumers get this stuff, I think the same propensity to show up or not show up is probably still there. So, I don't know of any short answer to your question. I don't know of any increased appearances in courts. Again, I'll reiterate that I think the CFPB has done a nice job with laying out the geography of what needs be presented to a judge.

David Scharf -- JMP Securities -- Analyst

Got it. All right, thanks very much.

Operator

The next question comes from Mark Hughes with SunTrust. Please go ahead.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

I'm curious the impact of the increased legal spend, assuming it does translate into the legal collections, how does that influence the yield? You clearly have a forecast about the future collection. Do you need the legal collections in order to drive the yields higher? If you do get the legal flowing through, it boosts collections but how much does it influence revenue?

Pete Graham -- Chief Financial Officer

Yes, it certainly is part of the mix. Generally, when we're underwriting to buy the portfolios, we have a view on what the strategies that will be employed are and there will be a legal component to that. And what we're seeing now is just sort of manifestation of what we have purchased in the past and that translating now into an inventory that's going to move through that channel but certainly the expectation for cash collections coming from these suits that we're going to put in process is key to us realizing the investment value that we anticipated would be there.

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Kevin Stevenson for any closing remarks.

Kevin Stevenson -- President and Chief Executive Officer

Thank you, operator, and thanks, everyone for listening to our call today. We appreciate your attention. We certainly look forward to speaking with you next quarter. Operator, you may disconnect.

Operator

[Operator signoff]

Duration: 48 minutes

Call Participants:

Darby Schoenfeld -- Vice President Investor Relations

Kevin Stevenson -- President and Chief Executive Officer

Pete Graham -- Chief Financial Officer

David Scharf -- JMP Securities -- Analyst

Bob Napoli -- William Blair & Company -- Analyst

Eric Hagen -- Keefe, Bruyette & Woods -- Analyst

Mark Hughes -- SunTrust Robinson Humphrey -- Analyst

Robert Dodd -- Raymond James --- Analyst

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