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PRA Group Inc  (NASDAQ:PRAA)
Q3 2018 Earnings Conference Call
Nov. 08, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to the PRA Group Third Quarter 2018 Conference Call. (Operator Instructions) Please note that today's event is being recorded.

And I would now like to turn the conference over to Darby Schoenfeld, Vice President of Investor Relations. Please go ahead.

Darby Schoenfeld -- Director of 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 the 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 Q3 of 2018 and Q3 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, Chief Executive Officer & Director

Well, thank you, Darby, and good afternoon, everyone. Thank you for joining our third quarter 2018 conference call.

In an opinion piece in the Wall Street Journal earlier this year, which is critical of short-term thinking, Jamie Dimon and Warren Buffett said, and I quote companies frequently hold back on technology spending, hiring and research and development to meet quarterly earnings forecasts and the quote continued on. In my 2017 CEO letter, I said in quote, we acknowledge that striking the right balance between today and tomorrow is both necessary and difficult. Throughout our history, we've made decisions to invest in current periods to create value in the future end quote.

This afternoon, I begin the call mentioning these two quotes, because they are germane to what PRA has done for the better part of last two years. This is part of our founding philosophy and our investment in this quarter is no exception. As I see it, the past couple of years has been a story of investment in people, digital, data and legal. Let me tell you what we've done.

Our growth in domestic collectors began in the second half of 2016. Since that time, we have significantly increased the number of FTEs. To put this in perspective, we moved from approximately 1,500 in Q3 of 2016 to over 2,200 in Q3 of 2017 to nearly 3,100 in Q1 of 2018. We now stand at about 2,715. This represents the fast ramp up, and we did this to more optimally align our staffing with our portfolio, a task that became more challenging as we proceeded to purchase the record number of accounts in US Core in 2017 and 2018.

While this expansion allowed us to address our growing inventory of accounts, the speed at which it was done diluted our workforce in terms of productivity. It takes time for collector to gain experience, build negotiation skills, payment plans to become fully productive. Thus having a lot of them in a short period of time is a drag to EPS. We did what we believed needs to be done to maximize net cash flow over future periods.

Concurrently with the operational investment in US, we were also investing in Europe. We had operational challenges in Italy, as we green fielded entry into the market. However, we quickly adapted building in-house operations and bringing the legal collection channel up to speed, all while recording no associated revenue since we placed the portfolios on non-accrual.

We purchased the platform in Poland to allow us to bring operations in-house after we began investing in portfolios there in late 2014. We also improved legal collections operations there and then proceeded to improve our legal collections capabilities in countries such as the UK and Spain.

Next, we launched our improved US digital platform in October 2016 and we didn't stop there. Since then, we've added additional mobile first features such as a slider to create custom payment plans and an option to modify payment plans. And we recently increased our digital channels to include chat servicing, negotiations and collections.

In our European geographies, we continue to make great strides in improving our digital platforms and website capabilities, including launches of new websites in the UK, Germany and Spain, and we are actively redesigning and developing the same for Poland, Italy and the Nordics. Investment in digital across our geographic areas will continue as we seek to meet customers where they want to be met.

Moving on to data and analytics. In 2017, we restructured and consolidated would have been four separate areas across our US operations. We then recruited an experienced leader from outside to run this newly formed Group. This new structure and leadership has proven more successful than I'd hoped. It's driving more transparency, sharing and teamwork than we've ever had before. Levering off this success just last quarter, we completed a full matrix reporting structure across our global platform, which included our data and analytics group in Europe having reporting lines back to the US.

Like the success we've seen domestically, we anticipate this move will create very interesting and productive jobs, and will pave the way for people in the US to better assist those in Europe and importantly we also want our team in Europe to lend fresh eyes and looking at what we do in the Americas, which now brings us to US legal investment, which is a critical component in Q3 and it will also be important for Q4. As we've described over the past few years, we've been experiencing a shift toward more legal, eligible accounts in the US. The build started in 2017 and by the middle of 2018, the size of the US legal eligible inventory had increased significantly.

The build was driven by the substantial number of accounts we purchased, coupled with a change in the nature of the accounts making them more legal eligible, and enhanced by much better account documentation supplied by sellers. Another factor that has also played a role in the build is a general change in consumer phone answering behavior. People are simply picking up the phone less often than they have in the past, a phenomenon that's generally reported industrywide. If you like some third-party collaboration, there is a 2.5 hour joint FTC FCC panel discussion on the matter from March of 2018 that contains a fulsome discussion.

The consumers cannot answer calls when they don't know who's calling. Additionally, the FCC instructed phone companies to actively address what's known as illegal robo calling and to make an effort to block or tag these calls. Unfortunately, there was a little guidance provided on exactly how the carriers and their partners should identify and then subsequently block or tag these calls. To ask such, many legitimate business calls are getting caught up in this scam tagging, including those originating from the collection industry. Fortunately, it appears as though the FCC has recognized this issue and in August asked for public comment to which we responded.

Additionally just this week, Chairman Pai of the FCC sent a letter to the carriers asking them to adopt a call authentication system by next year. It's referred to as SHAKEN and STIR. This will require digital signing and call validation from the carriers hopefully providing us with a permanent solution to being erroneously identified as scam likely. In the meantime, we are pushing in multiple directions to avoid our calls being tied to scam, including working with third-party vendors to white list our numbers and having dialogs with the carriers and their data partners. All of that backdrop from the increased volumes, the changing nature of accounts, more documents and call answering leads us to this discussion related to our legal inventory in our investment and legal costs.

Last quarter, we indicated we plan to ramp up our legal collection expenses in the second half of 2018 in an amount of $20 million over what you saw in the first half of 2018. As we begin to execute this strategy in Q3, we found a favorable environment where our third-party legal attorneys had excess processing capacity. This allowed us to move more accounts into legal this quarter than we had originally projected last quarter. As a result, the increase in Q3 US legal collection expenses were nearly $15 million versus the $10 million that you might have expected based on our Q2 commentary.

We saw an opportunity to invest more than planned and then took advantage of it, and it will accelerate future cash and also completely consistent with our long-term thinking. As with the collector ramp up, it's important to recognize what we did not do and that was hold back collection expenses just because we initially believed we could only invest an incremental $10 million. The system opened the door and the opportunity to intelligently put an additional $5 million to work and we did it.

Believe me, we fully understand that expensing this level of cost is a drag on our current EPS. I talked about this legal investment situations that became public in 2002. We have been and we plan to remain focused on cash flow. I would like to paraphrase my own CEO letter, "Cash flow is the central measuring stick at PRA and sometimes GAAP aligns well with our focus on cash flow and other times it does not." While (inaudible) I was speaking of the revenue recognition process, the same holds true for expensing these costs and the benefit will be in later quarters and years.

So what are the next steps? On the employee front, now that we have most of the backlog from the underworked portfolio have caught up, we started to rationalize the number of domestic collectors and we have a lot of attrition to decrease the employee base by about 300 FTEs during the quarter, although the average was only down about 150. This number will ebb and flow with seasonality, so you should expect us to increase in late Q4 ahead of tax season in the US and then decrease throughout the year unless portfolio investment volumes dictate otherwise.

Moving on to legal. People want more information but we plan to repeat if not increase our legal investment in Q4 to the extent possible given the fluctuating capacity and holiday schedules. It's important to understand what's happening today in the newer vintages in US core. Given the significant legal inventory growth that's happened for all the reasons cited, we believe this is an opportunity to intelligently put significant dollars to work. In fact, we believe that taking this action should drive an uplift to the curves in these vintages.

Now, here's the important concept to understand, and it's one that we have long talked about, and one that we have great data on, account selection. Account selection in the legal channel is critical, because we select incorrect accounts. It damages the legal collection margin. However, as long as we are not overworking the accounts in the call centers and properly selecting them, utilizing what we believe is the most complete 22-year dataset in the US, the legal collection margins should be comparable to that of call centers.

Finally, in Europe, we have begun a new phase improving and automating call centers. We recently implemented a new dialog in some countries and plan to roll it out to more geographies in 2019, and I've already mentioned efforts in our digital channel. The result of these investments will be seen in the coming years by balancing and optimizing US call center with US legal channel, combined with the investment in legal in the second half of 2018, we will likely have an improvement in the cash efficiency ratio from the 2018 numbers as we move through 2019.

It's also possible that our more recent vintages have upside to them based on the potential for collections earlier in the curve and overall uplift from legal. Non-performing loans or NPLs sales volume in the US continues to be significant. Pricing is stable, and because of the amendment to our credit facility, we have significant capital available for portfolio purchases. We are hopeful we'll be able to continue at this level of investment some time to come.

Early in October, we announced a strategic partnership with Banco Bradesco in Brazil, which significantly enhances our Brazilian venture. Bradesco, one of Brazil's largest banks, is taking a majority stake in the servicing operations. PRA will continue our majority stake in the NPL purchasing business, which will be expanded to include new investment vehicles that Bradesco will participate in as a minority investor. The founding partners of RCB will continue to manage the servicing platform and have a stake in the investment vehicles as well.

The transaction is cleared antitrust approval and is pending approval by the Brazilian central banking authority. This partnership is similar to other partnerships that have been created in the Brazilian market between banks and debt buyers and gives us better opportunity to expand our investment capabilities. Our NPL purchases in Brazil had been sporadic recently and this gives us the possibility with this strategic partner to have more stable and sizable buying opportunities than before.

I also believe that the terms of this transaction demonstrates the considerable value that we've built in this enterprise together with our partners in RCB.

In Insolvency, the engine is fine-tuned. And as additional investment opportunities are created, we will be able to easily and quickly leverage additional supply over our current operations and recognize significant economies of scale.

In Europe, we expect that our efforts will not only continue to improve productivity, but also speed up our cash cycles and improve our competitiveness. Additionally, we're in a great capital position there with almost $0.5 billion in capital available for portfolio purchases.

While the market remains very competitive, we have seen a small shift in the pricing environment. For the past two years, we've talked openly about irrational pricing, and for the past few quarters we believed, based on our data, that about 50% to 60% of portfolios are trading in the mid-single-digit returns or lower, many dipping into negative returns. This quarter, we saw things get slightly better. Based on our pricing models, we believe that about 40% of portfolios are trading in the mid-single digit range with few dipping into negative returns. We'll have to wait and see if this is the single quarter's data point or part of a larger trend. We certainly hope for the latter.

In the meantime, we did acquire a reasonable amounts of portfolio during Q3 that met our return requirements. What you've seen from PRA is a passive investment since I took over as CEO. But that road map I followed was one that's long been a hallmark of PRA. These investments are designed to build long-term sustainable value for our shareholders and allow us to be poised for action in each of our markets.

Finally, I'll need to cover quickly our global portfolio investment in the quarter, which was $238 million. Americas Core investment of $170 million was second only to the record we set in Q2. Buying in Americas Insolvency has been muted this year after a record year in 2017 due to a new relationship in an asset class that we've been cultivating since 2012. The 2017 portfolios are performing generally in line with expectations.

After this quarter ended, we closed another transaction with the same seller in the same-asset class. In Europe, we invested $50 million (ph) in portfolios during the quarter, which is the best quarterly investment amount we've had this year. The better news is that we are on track to post an investment amount more than double that in Q4, the bulk of which is located in more mature markets where risk is lower and our data is strong. At the end of the third quarter, we have committed maximum forward flow investment amounts globally of $584 million.

And with that, I'd like to turn the call over to Pete to go through the financials.

Peter Graham -- Executive Vice President & Chief Financial Officer

Thanks, Kevin. I'll start with a quick overview of our GAAP results and then we move onto cash operations.

Cash collections were $389 million, an increase of $7 million or 2% over the third quarter of 2017 and total revenues were $226 million, a 11% increase. Operating expenses were $173 million and net income was $10 million, generating $0.22 in diluted earnings per share.

Americas Core collections were $231 million, an increase of $18 million or 9%. This was led by a $14 million or 12% increase in US call center and other cash collections and a $7 million or a 11% increase in US legal cash collections. This was partially offset by the translation impact of the weakening Brazilian real, which drove a decrease of $4 million.

Europe Core cash collections were essentially flat at $103 million. The biggest driver of this was lower levels of investment over the past few quarters. Our portfolios continue to perform well. And as a result, we raised yields in a number of countries.

Global Insolvency cash collections decreased $11 million or 17%, driven primarily by muted investment volumes in the US, not offsetting the wind-down of older pools. Net allowance charges were $8 million in the quarter with $7 million in US Core, almost entirely in the 2013 and 2014 vintages. These pools are the ones most impacted by the CFPB consent order.

Early and significant outperformance prior to 2016 resulted in yield increases on these pools, and they currently bear gross yields of 50% over 70%. We've been adjusting our curves to accommodate these impacts as they occur. However, given the yields were raised so high historically in reaction to the initial overperformance, we continue to incur allowance charges. It's important to understand that these are non-cash charges on over-performing deals. Even though we've incurred these allowance charges, these vintages remain well ahead of their underwritten expectations.

For those of you that follow the industry from Europe, it's important to highlight the GAAP accounting is very different from IFRS. Under IFRS, yields are never changed once the deal is booked. Any changes that estimated remaining collections up or down are reflected in the income statement on a discounted basis in the period of change. GAAP by contrast requires yield raises for upward revisions to ERC, which spreads the incremental revenues over future periods and requires current period recognition of allowance charges per dollar revisions to ERC without regard to any prior yield raises. This results in a situation that we have on these 2013 and 2014 was Core vintages, where we were taking allowance charges on deals that have materially over-performed original underwriting.

Operating expenses were $173 million, an increase of $27 million from the previous year. This is largely due to increases in legal collection expenses and compensation in employee services due to expansion of the US call center staff. Legal collection expenses which combines fees and costs increased $13.6 million, mainly due to the increase in the number of accounts qualifying for the legal channel in the US.

As Kevin stated, we were able to get more accounts through the process in the quarter than we expected, investing about $5 million more than we had originally anticipated. Given the favorable environment we're seeing in both internal and external legal channels in the US, plus the terms Kevin mentioned, we will likely see a build in our legal collection costs in the fourth quarter. Depending on capacity, it's possible that we could spend between $32 million and $36 million in the fourth quarter in legal collection costs. We broke out legal collection costs and fees on the income statement this quarter to help with transparency and this number relates only to the legal collection cost line, which was $30.8 million in the third quarter.

To give you some idea of the payback timing for these legal investments by the end of the second quarter after we make an investment, we're currently collecting in excess of 200% of our initial investment. Means for every dollar invested, we'll collect $2 cumulatively over the next two quarters. This is just an example of the near-term timing for payback, obviously our anticipated total return on investment is much higher.

Compensation and employee services costs have increased as anticipated due to the higher number of collection staff this year compared to the third quarter of 2017. Our cash efficiency ratio was 58.9% from the first nine months of 2018, compared to 60.8% for the full-year 2017. As expected, this has declined due to the increase in investment in the legal collection channel. For the full year, we expect this to be close to 58%.

Below the operating income line, interest expense was $31 million, an increase of $4.7 million due to higher balances outstanding and higher average interest rates. Our effective tax rate for the first nine months of 2018 was 17%, down from 18% expected at the end of the second quarter. For the full year of 2018, the tax rate could still be influenced by additional guidance around US tax reform and by mix of income by jurisdiction. But at this time, 16% to 18% is our best estimate for the full year. Estimated remaining collections were a record $5.81 billion with 59% in the US and 39% in Europe. ERC increased sequentially, primarily due to investment in the Americas.

After the quarter ended, we executed an amendment to our North American credit facility, which increased the revolving portion by $363 million. We also increased the amount available on the accordion from $45 million to $500 million. The term loan portion of the facility as well as the rates and maturity remain unchanged. Concurrently, we reduced our European credit facility by $100 million. These changes allow us to better balance what was excess capacity in Europe with significant opportunity for supply in the US. We appreciate the support from our US and European bank groups in meeting our global funding objectives.

In addition to the substantial cash flow generated by the business, we had capital available for portfolio purchases after the amendment, amounting to $670 million in the Americas, and $452 million in Europe for a total of $1.1 billion globally. Each quarter, we provide a revenue model, which produces a base revenue estimate on our currently owned portfolio. Last quarter that estimate was $212 million. Actual income on finance receivables was $223 million, the difference of $12 million driven primarily by new buying and yield increases. In addition there was $2.1 million in cash from fully amortized pools not accounted for by the model.

This quarter, the same model generates a base estimate of $219 million of finance receivable income. A reminder that there are three items that can impact the base estimate; investments in NPLs in the fourth quarter, yield increases and cash from fully amortized pools not already accounted for by the model.

Operator, we're now ready for questions.

Questions and Answers:

Operator

Thank you. And we will now begin the question and answer session. (Operator Instructions) And today's first question will be Leslie Vandegrift with Raymond James. Please go ahead.

Leslie Vandegrift -- Raymond James -- Analyst

Hi, good afternoon and thank you for taking my question.

Kevin Stevenson -- President, Chief Executive Officer & Director

You're welcome.

Leslie Vandegrift -- Raymond James -- Analyst

So in your first slide when in the prepared remarks, you were discussing investment costs, recent focuses on increasing capacity on data and analytics and the digital platform over the next 12 months, fourth quarter of this year kind of to the end of 2019, so five quarters. Now, what are you looking at for costs for similar investments continuing restructuring analytics, the digital platform all of that, what kind of cost you're looking at there?

Kevin Stevenson -- President, Chief Executive Officer & Director

I guess, broadly I would say the digital expansions likely going to be CapEx as opposed to material current period expense. Data and analytics. I think largely the people build around that is fully baked in our current -- our current OpEx. And then legal collections, again, that's going to vary depending on what we see coming in the portfolio. We broadcast an estimate for our legal investment for the fourth quarter. I guess barring anything else, you could take that and run rate it for the year.

Peter Graham -- Executive Vice President & Chief Financial Officer

And if I can also add to that. Our goal, I talked a little bit about rebalancing and rationalizing the mix between your collector headcount and legal expenses. So just know that our goal is to push that cash efficiency ratio to improve it, as we get into 2019.

Leslie Vandegrift -- Raymond James -- Analyst

Okay. And then on that point on the collectors and you talked about seasonality in the prepared remarks with them leading lesson toward the end of the year, more tax season or post-tax season, but in the past you discussed the amount of time, the ramp-up of collector takes and the efficiency of third quarter when I first start versus maybe at year-end. So, can you discuss that with balancing out seasonally adjusting your headcount?

Kevin Stevenson -- President, Chief Executive Officer & Director

Sure. Sure. So let me give you some numbers, these are just ballpark number. So as we -- as we were entering Q4 of last year, we were at around somewhere in the average of 2,500 people and then we moved up to 3,100 in Q1 and stayed there and again, this is for collector FTEs and stayed there for our Q2 as well and then moved down to about 27 (ph) today. These are kind of at the margin and it's one of those things where as you look at the mix of portfolio coming in coupled with all the things I talked about, I'm Just trying to balance that number.

And so the margins, there's plus a couple of hundred people minus a couple of hundred people. The big difference was, I know Raymond James has been around for a while, watching our stuff, but if you look back into 2016, we are like 1,600 people part of the collectors goal. Those ramp ups are significant and again a drag on EPS. Moving a couple hundred people around the margins probably won't have a dramatic impact for you. I'm just trying to lighten up the burden on the salary line while I can.

Leslie Vandegrift -- Raymond James -- Analyst

Okay. And then -- but on to the part of that question of balancing the fact that a new collector as you ramp up and the seasons you needed is probably not anywhere near sufficient is one that's been there the whole year?

Kevin Stevenson -- President, Chief Executive Officer & Director

No. No. you're absolutely right. And we've recently put some more -- with the technology in place, a little more coaching guidance in place that's helping that along the way and we're popping more screens up to help people and we're buffering some of that, but at the end of the day, you're right from a cash posted perspective per person, they're not as efficient.

Pete, do you have something to say?

Peter Graham -- Executive Vice President & Chief Financial Officer

Yes, I think other point to just to reiterate what we said previously is the level of attrition we have in the call centers, we're constantly hiring to maintain a (inaudible), so we are constantly going to have new people in that mix that are less efficient. It's all about timing of those hiring spurts if you will, as to how we manage. It's not like we're going to go in and lay off tenured fully productive collectors in order to manage a headcount number, it's more just sort of stemming that tide of natural attrition in the call centers.

Kevin Stevenson -- President, Chief Executive Officer & Director

That's great point, Pete, thank you. And I'm going -- and open this topic up anyway, just because I'm hoping someone will ask me. The issue -- one year ago, I talked about attrition and I talked about turnover and I told you guys one of my goals to move that downward and largely. That's not happened and so turnover is about where it was last year and it's a little frustrating to me and I'm -- we have a few more ideas to try to help that, but Pete's explanation is completely correct and just know that the turnover rates still about where it was a year ago.

Leslie Vandegrift -- Raymond James -- Analyst

Okay. And on the allowance charge in the quarter, you gave some color in the prepared remarks, you said about a $7 million of that was on the 2013 and 2014 vintage US core portfolios, is that correct?

Kevin Stevenson -- President, Chief Executive Officer & Director

That's correct.

Leslie Vandegrift -- Raymond James -- Analyst

And then you mentioned the CFPB consent order that those were largely impacted by that. What changed in this quarter for those portfolios having to do with that, that led to this charge?

Kevin Stevenson -- President, Chief Executive Officer & Director

(multiple speakers) Sorry, I didn't mean to cut you off. It's necessarily a change in this quarter. If you actually look at the details in the 10-Q, you can see that we've had a continuing trend of allowance charges on these particular pools. Just in prior quarters, we had some -- some reversals and other things that were sort of dampening the total impact that we better didn't have to repeat this quarter.

Leslie Vandegrift -- Raymond James -- Analyst

Okay. But I guess what I'm saying is, what between the end of 2Q and the 3Q, what changed to result in the additional $7 million there?

Kevin Stevenson -- President, Chief Executive Officer & Director

Yes, that's -- maybe I wasn't clear if there's nothing changed quarter-over-quarter. These pools have been suffering shortfalls in terms of anticipated cash collection versus the yields that they're currently booked out for a number of periods and we've continued to sort of chip away the allowance charges as we see the impact of those shortfalls. So nothing materially changed with regards to these two vintages quarter-over-quarter, just other areas of the portfolio did not have reversals that offset the total.

Leslie Vandegrift -- Raymond James -- Analyst

Okay. And then my last question for you guys this afternoon, you discussed the issue with phone carriers and you guys possibly getting constant with the blocking for -- what that people use for scams and what percentage of your accounts that you attempt to collect on whether it's first attempt from you guys or the tenth, what percentage of that do you not get on the phone because of these kind of issues? How big of an impact is this?

Kevin Stevenson -- President, Chief Executive Officer & Director

Yes, it's a good question. First thing is first, I'd love just one more time to recommend that everyone listening either live or recorded later, go watch that FTC FCC panel discussion. I know it's a long 2.5 hours, but you can kind of run it at your background. It's a -- again it's a fulsome discussion and it covers a lot of turf. So this issue is tough to throw sound by that, so -- and it depends on whether you're calling landline, cellphone, it depends on what kind of -- depends a lot of different things, geography and similar. So what I think about is that, the best thing for me to do here is instead of slapping a number on it, just the average number, just understand that really in all of our areas, we are experiencing some of these lower contract rates, and they're at the margins, but it's not worth mentioning. I think it's something that is worth mentioning and it's something that's contributing some volume to the legal channel. So again, I really don't want to generalize a rate across our entire portfolio.

Leslie Vandegrift -- Raymond James -- Analyst

Okay, thank you for taking my question.

Kevin Stevenson -- President, Chief Executive Officer & Director

Thank you.

Operator

And the next questioner today will be Mark Hughes with SunTrust. Please go ahead.

Mark Douglas Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thank you, and good afternoon. As we had same sort of question, do you think it's -- in fact the people aren't picking up their phones is that, is that been a headwind on collections, has that led to disappointment in terms of the collections relative to expectations?

Kevin Stevenson -- President, Chief Executive Officer & Director

It would be certainly a part of that equation. But again, it's kind of on the margins, but to the extent you see some kind of contact rate or right party contact rate or something like that trending downward, on otherwise well valued accounts. And that's what -- that's what we're seeing. And that's at least a part of what we did in Q3 and moving people into the legal channel sooner.

Mark Douglas Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

And that I assume that's been incorporated into your underwriting and so your pricing is now reflective of that dynamic?

Peter Graham -- Executive Vice President & Chief Financial Officer

We'll certainly. But again, I spent some time talking about legal channel. It's really -- it's important for people to understand that as long as our selection engine is doing good job, it's just a secondary form of repayment and it's from a margin perspective, it's a good-margin business. So the mistake that can be made in legal is to put -- is to choose poorly. And so, I think we have a great track record of not doing that. So they've gotten -- so I'm sure you have more questions.

Mark Douglas Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

Yes. The legal collections cost of $32 million to $36 million in the fourth quarter, could you correlate that with the original $20 million expectation? You're already at $15 million through the third quarter. How much incremental for the year when you take into account your fourth quarter thoughts?

Kevin Stevenson -- President, Chief Executive Officer & Director

Pete's pulling some data out.

Peter Graham -- Executive Vice President & Chief Financial Officer

Yes. I had to pull out a sheet here. So for the US, in the first quarter we split --

Mark Douglas Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

Just say it, what was $20 million is now, what total for Q3 and Q4?

Peter Graham -- Executive Vice President & Chief Financial Officer

We'll probably be -- I'd say we had originally said $20 million, it will probably going to be $35 million -- $30 million to $35 million depending on capacity in the channel in the fourth quarter.

Mark Douglas Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

You have used 58% number. Was that the efficiency ratio, was that the expectation for 2018?

Peter Graham -- Executive Vice President & Chief Financial Officer

Yes. Full-year 2018 cash efficiency, again driven down by the increased level of legal expense.

Mark Douglas Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

And then likely to improve -- are targeted to improve next year?

Peter Graham -- Executive Vice President & Chief Financial Officer

Yes. That's right.

Mark Douglas Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

And then final question, the rate of growth in charge-offs has slowed a bit. I think you suggested supply was still healthy, you said you anticipate you can stick with this level for the foreseeable future. Have you seen any change in behavior and willingness to sell anything like that, related to the broader environment?

Kevin Stevenson -- President, Chief Executive Officer & Director

No, we've not. I think it's been pretty -- and I can say that it's been a healthy environment with fairly steady pricing.

Mark Douglas Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

Thank you.

Kevin Stevenson -- President, Chief Executive Officer & Director

Great. Thanks.

Operator

And the next questioner today will be Eric Hagen with KBW. Please go ahead.

Eric J. Hagen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great, thanks. You mentioned irrational pricing in Europe. Can you maybe identify which markets are kind of on the spectrum of the most irrational?

Kevin Stevenson -- President, Chief Executive Officer & Director

Sure. It is again -- it's, generally speaking, and we addressed this a couple times in the past, but not every quarter. Generally, where there is more regulation, little more seasoned market (inaudible) UK would have less of that, maybe in the Nordics you'd have lesser than of that and you have more toward Italy and Spain and other markets like that. So that's a generalization.

Eric J. Hagen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay.

Kevin Stevenson -- President, Chief Executive Officer & Director

And it depends on the competitors and all that, but that's in general what we think.

Eric J. Hagen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay, great. That's helpful. And then, I guess I'll stick with the Europe theme. For the curves in Europe, I mean even if we expect the multiple to stay, somewhat sluggish in the portfolio, I guess sluggish was the best word I could think of. Can you identify any catalysts that would really kind of steepen the curve itself? What should we be looking at to maybe drive some incremental kind of value even if the multiples staying sort of weak?

Peter Graham -- Executive Vice President & Chief Financial Officer

You said -- steepen it upward in the future. Is that your question?

Eric J. Hagen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Yes. Steepen it upward.

Peter Graham -- Executive Vice President & Chief Financial Officer

So obviously, we're not expecting as we didn't book it. But a couple of things on that, with the type of paper we are buying in Europe, generally a stuff that we know pretty well, there is a fair component of paying as we call -- it's still charged off-paper, but they've got payment plans wrapped around them. So they got a longer flatter curve than kind of what we all think of as more traditional charge-off curve. And so, that's that. I would also say that the digital platform is something that we're pretty optimistic about. Europe is significantly ahead of the United States in terms of digital currency and transactions. And like I said in my script, we are really, really pushing that hard. Steve Roberts and Martin Sjolund are -- it's all hands on deck on that. So I think digital has some potential for uplift. And then, add those legal, again we always -- we like to say we're great collectors, but we never say we're the best. And our digital arm -- I'm sorry, our legal channel new work and we did it, and we're continuing to improve that. So there could be some uplift there as well.

Eric J. Hagen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. It's quite interesting. Thank you. And then, Pete, I guess I'm glad you talked about the differences between GAAP and IFRS have got me thinking about CISO (ph) and the -- and I guess the mandatory requirement to move over to that in 2020. I guess, a two-part question; one, I mean have you guys thought about in early adoption period for CISO; and number two, in the period in which you make the change and move over to CISO, what -- can you just walk me through the accounting. I know that ERC, I guess, will stay the same. But maybe you can just kind of shed some light on what that accounting would look like. Thanks.

Peter Graham -- Executive Vice President & Chief Financial Officer

Yeah, I'll caveat it with -- we are still awaiting final guidance from the TRG, the resource group at the FASB that's working on implementation guidance for the standard. And as you can imagine, it's very voluminous standard that was written primarily for the banks, and not necessarily focused on our part of the credit spectrum. But in broad terms, we think what's going to happen in that transition is that we will reset yields in the portfolio based on our outstanding NFR balance and our ERC curve at the initial transition. And then once that said, that won't change. And then any changes going forward in ERC or estimates of future collections, whether up or down, would come through as the current period charge. Very similar to the profile of how IFRS currently works. That's about as far as I can go because it's sort of broad conceptual framework for us at this point. We don't have the exact mechanics of how that's going to actually work.

Eric J. Hagen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

When you say a reset and yield, do you mean to the original yield? And when you say the word reset, I guess just --

Kevin Stevenson -- President, Chief Executive Officer & Director

No, I think just to simply taking the portfolio at the inception date -- or implementation date. So in this example, 01/01 of 2020. You've got a fixed balance in terms of your NFR balance, and you've got an estimated future collections curve and you've got yields set a targeted ending amortization period. So, for all intents and purposes, 10 years and whatever the yield is would be a (inaudible) for in terms of setting a revenue yield or resetting a revenue yield on the portfolio. That's again -- we're working through implementation guidance, but as of right now, that's simply how we're thinking about it.

Eric J. Hagen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Great. That's helpful. Thank you very much.

Operator

And the next questioner today will be Colin Ducharme with Sterling Capital. Please go ahead.

Colin Ducharme -- Sterling Capital -- Analyst

Yes, hi, thanks guys. I'm just curious if you could give us some comments on the competitive environment over in Europe?

Kevin Stevenson -- President, Chief Executive Officer & Director

Sure. I can recap. I talked about a little bit in my script, what we saw -- what we saw this quarter was a little bit of a relaxation in pricing. Again, I always say one quarter does not a trend make but we did see instead of 50% to 60% of portfolios again in our estimation trading for mid-to-low single digits or lower, and a lot of them trading for negative. We saw more like 40% in that range and fewer of them trading for negative. So again, I hope that continues. Because if you think about it, what we really need is a whole shift of that pricing spectrum and so we'll certainly update you next quarter on what we think about it.

Colin Ducharme -- Sterling Capital -- Analyst

Can you just characterize, just to add a little bit more color there. If your bid percentage up or are you bidding fairly consistently and just your win percentages up, I'm just trying to better understand the positive ramp up, which is certainly welcome?

Kevin Stevenson -- President, Chief Executive Officer & Director

Well, that's a good question. So a lot of obviously what we're talking about we lost. And I would say we're not -- we are not changing dramatically any kind of expectation shift. We're not really built much of anything into it, so I would say we're fairly consistent. I'm just kind of running through my head. I think -- I really do think it's a bit of a crack this quarter. Now whether it continues or not, I don't know.

Colin Ducharme -- Sterling Capital -- Analyst

Okay, thanks. And then final question is just domestically. Can you just characterize the amount of fresh paper and its contribution over time to your efficiency ratio improvement next year? Thank you.

Kevin Stevenson -- President, Chief Executive Officer & Director

Do you have just what percentage we bought?

Peter Graham -- Executive Vice President & Chief Financial Officer

(multiple speakers)

Kevin Stevenson -- President, Chief Executive Officer & Director

We'll see if we can dig that percentage of fresh paper we bought this year in this quarter. First paper though to kind of drill down on your question is certainly paper we like is obviously tends to be more legal eligible and not yet again, for all those reasons, that's something we definitely like and I think that does ultimately improve our ratios -- cash collection into expense ratios and Darby or Pete will dig that up and they'll announce it once we get it.

Operator

Okay. And our next question or two with Brian Hogan with William Blair. Please go ahead.

Brian Hogan -- William Blair -- Analyst

Hello.

Kevin Stevenson -- President, Chief Executive Officer & Director

Hi, Brian.

Brian Hogan -- William Blair -- Analyst

Just on the bankruptcy collections, actually, and I understand the buying trends, less buying this year than it was in the past but am I understanding the bankruptcy trends, you're buying a cash flow stream, right? I just a little confused about the -- maybe the magnitude of the decline quarter-over-quarter. Can you just kind of discuss the bankruptcy trends?

Kevin Stevenson -- President, Chief Executive Officer & Director

Sure. So first of all, we did have a record year last year and it was very front-half weighted. Most of the buying was in the first half of 2017. And what everybody has to remember -- I know it's been a while since we talked about bankruptcy, but to the extent you buy a piece of freshly filed unsecured bankruptcy, you have kind of a flat spot in the curve, then it then it ramps up over time as the secured tend to payout. So it looks like a very different curve even though we're all priced at the same way.

Conversely, much like we did especially in 2012, you can buy paper that's deep into its flow and almost, if you think about a hill, maybe ski slope, you could be coming down off that, you could buy it at any point, you can buy it at the point of filing, which is really early, you can buy going up the hill or you can buy coming down the hill. And so, it just depends on where that's out in that curve, you're right that you're buying a piece of cash flow. What we had was, it was a little bit more flowing paper in a secured asset class last year, early in the year and that's really the dynamics you saw.

Brian Hogan -- William Blair -- Analyst

Okay. And then, did I hear you correct that you from the same seller of last year bought another secured BK portfolio in the fourth quarter, is that what I heard?

Kevin Stevenson -- President, Chief Executive Officer & Director

Yes.

Brian Hogan -- William Blair -- Analyst

And do you care to share the magnitude?

Kevin Stevenson -- President, Chief Executive Officer & Director

No. You'll find out in Q4. It was -- but we did secure (multiple speakers) I'm sorry I was talking over you. What did you say?

Brian Hogan -- William Blair -- Analyst

Similar to last year?

Peter Graham -- Executive Vice President & Chief Financial Officer

Again, let's wait (inaudible). We'll leave something in the back-pocket to surprise you guys in the quarter. We might have an answer on the fresh paper, can you hold on, Brian for a second?

Brian Hogan -- William Blair -- Analyst

Sure.

Peter Graham -- Executive Vice President & Chief Financial Officer

Don't hang up yet.

Kevin Stevenson -- President, Chief Executive Officer & Director

Yes. The fresh -- (inaudible).

Peter Graham -- Executive Vice President & Chief Financial Officer

Okay. Go ahead Brian. They'll make sure you get that right.

Brian Hogan -- William Blair -- Analyst

All right. So the amortization rate, excluding fully amortized collections and excluding impairments, is lowest I've seen since early 2016. I'm just kind of thinking of all your legal investment that you've been doing and I was thinking obviously mix shift to less bankruptcy collections. I guess the amortization rate we saw in the quarter kind of good one to think about going forward, as we think about your legal spend and investments in pulling forward and raising those yields and what have you as you talked about in your prepared remarks?

Kevin Stevenson -- President, Chief Executive Officer & Director

Yes. I wouldn't necessarily take one quarter's amortization rate and run rate it, but I will tell you that moving the amortization rate in the quarter is driven by yield increases both in the US as well as in Europe.

Peter Graham -- Executive Vice President & Chief Financial Officer

And then I guess I would add that, you're right Brian, it's nice to see that rate come down, and also to the extent that some of those legal investment, I think you alluded to it does end up lifting the multiple of the more recent deals as I talked about in my script that would also have downward pressure on that rate as well.

Brian Hogan -- William Blair -- Analyst

Shifting to Brazil real quick, with your deal with Banco Bradesco -- are you only buying from them now with the -- given a new agreement or are you still allowed -- still go out with all of debt buyer or sellers as well? I'm just trying to understand.

Kevin Stevenson -- President, Chief Executive Officer & Director

That's a great question. So, yes, we can -- so if you listen to my script -- so the investment vehicles that exist today. We still own and there are new ones created, and so we'll be able to again -- we hopefully would buy paper from Bradesco and -- but also we can also whatever is in the market, we can either buy it in that fleet or into an existing one. So we have a lot of flexibility on where we can go and where we put that investment.

Brian Hogan -- William Blair -- Analyst

All right. And just to be clear on geography as all the revenue streams show up, obviously you got the NPL collections filling up on your core collections or what have you -- and so then your minority stake comes through that non-controlling interest in that. Is that --

Kevin Stevenson -- President, Chief Executive Officer & Director

In the future, we'll deconsolidate. Once this deal closes, we'll deconsolidate the servicing operation and that will come through as sort of another income line item like in the same sort of (inaudible) fee income. We have material servicing income in that entity that's not related to our -- some of our own portfolio and that will be additional revenue there.

Brian Hogan -- William Blair -- Analyst

Great. Have you seen any changes in consumer behavior, any improvement in recovery rates or vis-a-vis the other way? Just what is your view on the consumer?

Kevin Stevenson -- President, Chief Executive Officer & Director

You know, I don't -- we don't see any unforeseen changes. I talked about picking the phone up less often, but other than that from a payment standpoint, I should say conversion rates are improving. So maybe that is a -- I'm thinking of the cuff, right now. We call them conversion rates. Once you get some on the phone, how often do you convert them into payers, and that has been moving up for a while. So I guess you could extend that to say there is a healthy view of the consumer.

Brian Hogan -- William Blair -- Analyst

Right. And last one, or maybe a couple more, but the European purchases, did I hear you double. I guess repeat what you said on your European production outlook?

Kevin Stevenson -- President, Chief Executive Officer & Director

Yes. So we put about $50 million to work in Q3 and we believe that number is going to be about double that for Q4.

Colin Ducharme -- Sterling Capital -- Analyst

Okay. That's what I heard there. And then I guess, looking at longer term, pulling way back and what is growth at PRA look like, is it -- I mean you're targeting 15% growth-ish in earnings and that's driven by, what type of revenue growth and margin expansion, if you will, or just kind of what does the overall model look like?

Kevin Stevenson -- President, Chief Executive Officer & Director

So we've been public since 2002. We don't give any guidance. So, I'll have to do my best to give you a feel on strategy, I guess around that question.

Peter Graham -- Executive Vice President & Chief Financial Officer

Yes. That's essentially up.

Kevin Stevenson -- President, Chief Executive Officer & Director

First things first, is that we've been -- we've been growing the core business, and it's the bankruptcy asset class that has been the real issue for the past several years. You go back to -- back to 2015. So 2015, 2016, each of those years we faced about $100 million of year-over-year decrease in cash collections and bankruptcy. I think 2017 was somewhere in the $30 million range. And again for folks who have been around a while, that bankruptcy asset class -- once you get that engine humming, it's got a very low cost to collect. So you just got to affect that by amortization, and that's pretty much what goes down to the income before taxes. So that's a significant headwind we dealt with in the past few years. So clearly, my goal would be to continue to buy more insolvency especially in United States and having a flat spot like we had in the back half of '17 and '18 doesn't help that effort. So that's job one. Job one is to shake lose (ph) more volume in that bankruptcy asset class and lever the platform.

Two, it would be Europe. We want to make sure that we've got a platform that is one of the best in each country we're in. I don't have to be the best, but I want to be one of the Top 3 buyers in a different area, so each area. So I'd like to do that. And I think as I -- as the other caller asked me, I think digital and our legal expertise is going to help us do that. We're a fairly small player in some of the markets we're in.

And then of course United States, we want to see right now -- we don't see those buying volumes continue and I want to get my share of it. We've got some really good competitors in United States and that's the good news and it's -- I like to say no -- rational competitors are something that is great for everybody, it's great for us, it's great for the banks and dump money is the hardest thing to deal with.

Colin Ducharme -- Sterling Capital -- Analyst

All right. Thanks for your time.

Kevin Stevenson -- President, Chief Executive Officer & Director

Okay. Thanks.

Operator

And the next questioner today will be Dominick Gabriele with Oppenheimer. Please go ahead.

Dominick Gabriele -- Oppenheimer & Co., Inc. -- Analyst

Hi, thank you so much for taking my question. I just wanted to make sure that I heard right in the prepared remarks. Is it -- did you say that between $35 million and maybe $40 million a quarter as a run rate for both total legal costs. And if that's correct, is that $10 million in other legal that you've broken out, is that the right run rate number as the seasonality there as well? Thank you so much.

Peter Graham -- Executive Vice President & Chief Financial Officer

What I said in the remarks was for the fourth quarter. We thought we'd spend somewhere between $32 million and $36 million. And don't have necessarily a view on the quarters for next year, but I would anticipate a similar level based on the build of the portfolio we've had. And so as we continue to buy portfolio that meet the same criteria, we'll continue to put a similar amount to work. The other component of -- the other component of legal collection expenses is the fees that are more like, you don't think about it as a feature that to the external firm that they take with regards to collections as they come in. So as that legal collections amount grows, that fee amount will grow in some proportion in relation to that.

Dominick Gabriele -- Oppenheimer & Co., Inc. -- Analyst

Okay, great. Thank you so much.

Kevin Stevenson -- President, Chief Executive Officer & Director

I would also (multiple speakers) -- commentary on that. Pete's talking about raw numbers and get me if I'm wrong, so hopefully what we're doing is actually producing a lot of cash and that ratio will probably normalize back to where it was in the past. Do you see (ph) that's fair?

Peter Graham -- Executive Vice President & Chief Financial Officer

Yes, I think again, we're in the early stage of this ramp in legal investments. So we're making that investment well in advance of getting uplift in terms of cash collections. And once we get into next year, our expectation is that will start to normalize out. We'll have sort of steady run rate of legal investment each quarter, but we'll also have uplift in the top line and so the ratio will start to normalize.

Dominick Gabriele -- Oppenheimer & Co., Inc. -- Analyst

And then I guess, just to make sure I still understand correctly, is there still something around a six-month lag time where that revenue does start to ramp, does that kind of still what you're thinking is somewhere around that range?

Peter Graham -- Executive Vice President & Chief Financial Officer

Again, it's kind of six months or two quarters after the initial investments when we start to get payback of that initial invested amount, and so that plus the ultimate amount of collections that we would expect based on our return hurdles would be coming in those future periods and start to layer on top of each other with each quarterly investment.

Dominick Gabriele -- Oppenheimer & Co., Inc. -- Analyst

Great. Thank you so much for taking my questions.

Operator

And this will conclude our question and answer session. I would now like to turn the conference back over to Kevin Stevenson for any closing remarks.

Kevin Stevenson -- President, Chief Executive Officer & Director

Great. Well, thank you everyone for listening to our call this evening and we look forward to speaking to you next quarter. Operator, you may disconnect.

Operator

The conference is now concluded. Thank you for attending today's presentation and you may now disconnect your lines.

Duration: 62 minutes

Call participants:

Darby Schoenfeld -- Director of Investor Relations

Kevin Stevenson -- President, Chief Executive Officer & Director

Peter Graham -- Executive Vice President & Chief Financial Officer

Leslie Vandegrift -- Raymond James -- Analyst

Mark Douglas Hughes -- SunTrust Robinson Humphrey, Inc. -- Analyst

Eric J. Hagen -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Colin Ducharme -- Sterling Capital -- Analyst

Brian Hogan -- William Blair -- Analyst

Dominick Gabriele -- Oppenheimer & Co., Inc. -- Analyst

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