PRA Group (PRAA) Q4 2018 Earnings Conference Call Transcript

PRAA earnings call for the period ending December 31, 2018.

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PRA Group (NASDAQ:PRAA)
Q4 2018 Earnings Conference Call
Feb. 28, 2019 5:00 p.m. ET

Contents:

Prepared Remarks:

Operator

Good day, everyone, and welcome to the PRA Group conference call. [Operator instructions.] And please note that today's event is being recorded. And I would now like to turn the conference over to Darby Schoenfeld. 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 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 Q4 of 2018 and Q4 of 2017 unless otherwise noted. In addition, all results detailed on this call reflect the adjustments made from the change in revenue recognition for certain portfolios as described in the earnings press release. 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 fourth quarter and full-year 2018 conference call. Last quarter I discussed some of the more recent investments we've made. I spoke about growth in our collector headcount and our expansion of our call center footprint in the U.S.

along with our operational improvements in Europe and investments in the legal channel and digital platforms. Looking back at 2018, I'm excited about these investments and want to revisit them a little more deeply. I'll start with the investments I discussed in the last call. Purchasing in Americas Core was a record $657 million, an increase of 23% from the prior year, 2017.

I mention this first because this was a key driver of our investment in new call centers and in the legal collections channel. In addition to the two new centers we opened last year in Burlington, North Carolina, and Henderson, Nevada, we also announced plans to open a third. Thanks to the help and support of state and local officials, our newest call center will be located in Danville, Virginia, just a few hours' drive from our home office and about 40 miles due north of our Burlington office. I plan for these to be sister offices, much like Norfolk and Hampton, which are about 35 miles apart.

We consider many aspects of a region when determining where to locate our centers, and all of them generally relate to a favorable business environment. It's my observation that when people say "favorable business environment," we all tend to think about favorable tax policy, incentives, fair regulation, reasonable amounts of red tape and those are certainly significant parts of the definition. But these favorable environments also include physical infrastructure, workforce availability, higher education and the ecosystem surrounding primary and secondary education, the quality of life and really all the things that create an environment where our people want to live, work and thrive. So this evening I want to send a thanks to all the lawmakers and officials, especially in Virginia and North Carolina.

In each case, many people worked for years to create a great environment. They worked hard, they took risks and created a pathway for us to retain and expand jobs. Broadly in the United States, we often focus on the dysfunction of governments and political systems, but here is a great example of how well it can work across an entire state and across political boundaries. Our investments in these centers gave us the capacity to hire a significant number of domestic collectors to accommodate both old and new portfolios and gives us additional flexibility going forward.

This capacity helped fuel a 16% annual increase and a record year for U.S. call center cash collections. Moving on. The second half of 2018 saw additional investment in the U.S.

legal collection channel. And while still in the early stages, this drove an increase in fourth quarter legal cash collections of 24% compared to the fourth quarter of 2017. At this point we don't expect our level of investment in legal collection costs to decline from the fourth quarter levels. However, it can vary based on the type and nature of accounts we purchase.

Also remember that while the legal costs should hold steady, the cash collections associated with our legal channel should continue to increase throughout 2019. Our digital platforms have delivered more than we had imagined, particularly in the U.S., where we have the most developed site. Full-year 2018 cash collections in the U.S. digital channel have doubled compared to 2017.

We are now live with improved payment portals in the U.S. and four countries in Europe, and we will continue to update our existing sites with increased functionality and ease of use for the consumer. Just having an online payment portal is not enough for true digital engagement. Customers today expect a digital program to improve their experience and deliver enhanced service and features.

I've been in this industry since 1994. I've seen charge-off customers treated in a host of ways, from treating them like a generic security to being aggressively disrespectful. We believe the servicing of nonperforming loans should not be viewed any differently than how a bank would view servicing its active credit card portfolio. Enhancing the digital experience is another way to continue that effort, and we intend to continue to invest resources there.

Additionally and importantly, we plan to continue our dialogue with lawmakers and regulators relating to clearing a path for digital engagement in the U.S. collection space. Regarding European investments, last quarter I spoke of operational improvements across Europe, specifically that we brought more operations in-house in Poland and Italy. We also invested in our legal collection capabilities in certain countries.

Now I know this update will be welcome news to many of you. During the year we returned the Poland portfolios and some of the Italian portfolios to accrual status. These investments along with good portfolio purchasing, particularly in the fourth quarter of 2017 and 2018, produced record cash collections in Europe Core, with a growth of 9% when compared to the full-year 2017. With record cash collections in Americas Core and in Europe Core, it's no surprise that the PRA enterprise generated a record $1.63 billion in cash collections across the globe.

In prior calls I also mentioned older investments that have contributed to our performance. The largest and most extensive investment was the expansion into Europe through the acquisition of Aktiv Kapital. I've been asked often, "Knowing what you know today about the competitive environment and the IRRs over the past several years, would you have still bought Aktiv Kapital?" The answer is yes. Our strategic goal was to diversify our business so that we are not dependent on any one economy, one geography or one product suite to generate value over the long term.

What's occurring now in Europe is something we've seen and lived through in the U.S. It does not change our outlook on the past decision nor color our plans for the future. Our plan is to be there for the long term. We will continue to be disciplined investors and good operators.

Another past investment was the purchase of NCM in late 2012. This gave us the platform to expand into a new asset class, Chapter 13 secured auto. We purchased record levels of this asset during 2017, and we also closed on an additional portfolio from the same seller during the fourth quarter of 2018. Finally, we have a couple of other events during the quarter I would like to address.

First, we recognized the gain on the sale of the majority stake in the RCB servicing platform to Banco Bradesco. It's important to make this distinction that we did not change our ownership in any of the existing portfolios. We simply sold the majority stake in the servicer. We believe this transaction is truly a winning combination for us, RCB and Bradesco.

Bradesco saw the value that existed in the servicing platform, and they realized they could leverage it over a larger scale by deploying it for their own loan portfolio. Meanwhile, it gave us an avenue to monetize both our and RCB's hard work and dedication by recognizing almost $40 million in net cash proceeds, giving us additional investment capital for redeployment in Brazil. And on the income statement, this was a $27 million pre-tax gain. Going forward, we believe we are well-positioned in South America's largest economy, partnered with one of Brazil's largest banks.

And as I said earlier, our majority ownership of the portfolios in Brazil did not change, and we will maintain that level of ownership of the portfolio investments in the future. Based on the potential for additional investment through the partnership with Bradesco, our earnings potential is enhanced by this transaction. Additionally, we maintained a minority stake in the servicing platform, which will be utilized significantly more than previously possible. We will continue to use that servicer to service our own portfolios and have essentially shifted fixed costs to variable costs.

The second item was an outsized noncash allowance charge of $21 million in the quarter, primarily related to the 2013, 2014 and 2015 vintages. The incongruent part of this allowance situation is that these vintages are overperforming original expectations. I addressed this last year in my annual letter, when I wrote, and I'll quote, "Cash flow is the essential measuring stick at PRA. Ironically, in the nonperforming loan industry, the GAAP accounting that we are required to use is yield-based methodology.

Sometimes it aligns well with our focus on cash, and other times it does not." End quote. That was a good example of one of those times. Again, it's important to make the distinction that these portfolios are overperforming their original expectations in both IRR and yield multiple. Pete will cover more of that later.

Now let's move on to fourth-quarter highlights. Excluding the third quarter of 2015 when we acquired Aktiv Kapital, the fourth quarter of 2018 delivered a record portfolio investment level of almost $0.5 billion. We believe this level of investment was due in part to our relationships we have with sellers. In both U.S.

and Europe, our client banks frequently tell us that PRA is a preferred buyer due to our financial strength, availability of capital, compliance oversight and high quality of service we deliver before and after the purchase transaction. We are leveraging this goodwill to form strong multinational buying relationships wherever we can and to open doors to new sellers that seek similar benefits. Supply in Americas Core continues to be steady, and we continue to purchase at good returns. The significant portfolio investment in Europe during the quarter boosted our full-year investment to over $300 million, an increase of 26% versus the full year of 2017.

And this investment came in countries where we have extensive data and operational experience. However, the competitive environment in Europe continues to be a challenge. Consistent with last quarter, we are seeing around 40% of deals trading at mid-single-digit to lower returns based on our analysis, with a few still dipping into negative territory. While this is better than early than 2018, it's still nowhere, nowhere close to where we believe the market should be.

Our investment in the fourth quarter also contributed to bringing estimated remaining collections at the end of 2018 to a record $6.14 billion. In the Americas, ERC is $3.7 billion, predominantly in the United States. Our focus in Americas Core encompasses several different areas: collector tenure and productivity, the legal channel, digital engagement and government relations. Since I've already addressed digital engagement, I'll go into more detail on the other three.

We continue to work to increase tenure and production in the U.S. call centers, and one particular area of interest is the effort toward engagement. Every year we have an annual banquet at each site. It's a celebration of our workforce and primarily of the collectors.

And we are currently deep into banquet season, and at this point, I've been to four of the seven ceremonies, and I will attend the next three in the coming months. Some 4,600 people have either attended or signed up to attend these events, and I am pleased that I am able to address this number of employees and their significant others at one time with one single message. And I am equally pleased that they in turn are willing and able to pull me aside and give me feedback. I continue to act on what I learn at these events and also what I learn through a number of other engagement channels.

Moving on. In the legal channel, we are very focused on balancing call center staffing and productivity with legal costs and investment. This dynamic has always been a key to PRA's operation. In 2018 we made the decision to have additional call center staff even as we were ramping up legal investment in the third and fourth quarters.

Now as we move into 2019, we will begin to balance these according to the needs of the portfolio. Finally, government relations. In April 2018 we hired a new leader and immediately combined it with communications. The plan was to create a new and energetic effort around engaging with lawmakers and regulators at both the federal and state levels.

At its most basic, this new effort is simply focused on being part of the conversation in a much bigger way than we have in the past. And so far, the success of this group has exceeded my expectations. I often think about our 2015 consent order with the CFPB and how those of us under consent orders have been operating under a different set of rules versus the broader market. Just a few quarters ago, I believed that since the two largest market participants in U.S.

are under nearly identical consent orders, that the industry was following those orders as if they were rules. I now doubt that belief. As such, we look forward to the CFPB issuing a notice of proposed rulemaking. We are in full support of the creation and uniform enforcement of one set of rules in order to level the playing field across the industry.

We're actively working with state and federal legislators and regulators to make sure the rules get written, are fair and any unintended consequences will be identified and understood. Our goal is to be consumer friendly while still enforcing the contracts that we own. In Europe, it's been about eight months since we implemented new organizational structures and appointed new leadership, and we are already seeing positive changes. Cash collections in Europe are a record for 2018, and the ERC stands at $2.5 billion.

We are focusing on specific deliverables in local markets and managing these deliverables with new dashboards and enhanced operational insights. The goal is to expand our market share within our geographic footprint. If you look back at the U.S. in 2003, PRA was less than 5% of the market based on industry reported data.

Today we estimate the share of our addressable market is close to 40% in the U.S. And while that's a lofty target, it's at least the direction in which we hope to move in our current European markets. But just know that we'll continue to be vigilant, and we will not sacrifice returns for volume. I'd now like to turn the call over to Pete to go through the financials.

Pete Graham -- Executive Vice President and Chief Financial Officer

Thanks, Kevin. I'll start with a quick overview of our fourth quarter and full-year 2018 GAAP results. In the fourth quarter total revenues were $237 million, net allowance charges were $21 million, operating expenses were $183 million and net income was $15 million, generating $0.33 in diluted earnings per share. For the full year, total revenues were $908 million, net allowance charges were $33 million or 1% of the net finance receivables balance.

Operating expenses were $690 million and net income was $66 million, generating $1.44 in diluted earnings per share. Moving on to cash collections. Americas Core collections in the quarter were $234 million, an increase of $30 million or 15%. This was led by a $15 million or 24% increase in U.S.

legal cash collections and a $14 million or 12% increase in U.S. call center and other cash collections. Full-year Americas Core cash collections were a record $945 million, an increase of $84 million or 10%. This increase was primarily the result of record purchases in 2017 and 2018 as well as increases in call center staffing and investment in the legal channel.

U.S. call center and other cash collections increased $77 million or 16%, while U.S. legal cash collections increased $22 million or 8%. Europe core cash collections in the quarter were $113 million, an increase of $6 million or 6%.

The biggest driver of this increase was portfolio investment in 2018 and the consolidation of a Polish nonperforming loan fund during the third quarter. For the full year of 2018, Europe core cash collections were a record $443 million, an increase of $36 million or 9%. Global insolvency cash collections in the quarter decreased $9 million or 14%, driven primarily by muted investment volumes in the U.S. not offsetting the wind-down of older pools.

For the full year of 2018, global insolvency cash collections decreased $8 million or 3%. During the fourth quarter of 2018, we completed an analysis of contractual terms with our sellers in light of recent interpretations of the rules governing revenue recognition on portfolios that do not qualify for sale accounting. As a result of this analysis, we identified two of our seller contracts in Austria that did not meet this new guidance and as a result, should have applied a different revenue recognition methodology. This conclusion does not impact the economic performance of these Austrian portfolios, only the method used to recognize revenue.

Through the end of 2018 we should have recognized $5 million more revenue than we had done under our level yield process. Of the $5 million increase, $1 million relates to 2018 and the remaining $4 million was spread over a number of prior years, and although not material in any one year, could have been material had we reflected the full change in our 2018 results. We are adjusting the historic financial statements presented in our 2018 10-K and will provide additional footnote disclosure to reconcile these to our historic filings. Net allowance charges were $21 million in the quarter.

The majority of the allowances are in the 2013, 2014 and 2015 U.S. vintages. Similar to the past few quarters, we've experienced cash shortfalls in comparison to the recasted curves in these vintages. These pools, even after these allowance charges, continue to exceed their underwritten purchase price multiples and expected IRRs.

As we've highlighted previously, these pools overperformed early, and we raised yields on the expectation that this overperformance would continue. As time has moved on, it has become clear these pools were negatively impacted by the CFPB consent order, which imposed retroactive requirements on purchases prior to the consent order. Unfortunately, these are events we couldn't have predicted when we underwrote them or as we increased the yields. The current GAAP accounting is asymmetric.

Once we move the yields up from their original level, we can never move them down. This is especially punitive in a case like this, where we take noncash charges on overperforming deals. Also remember that under IFRS, which our European competitors use, we would have recognized a significant gain approximately equal to the present value of the $195 million in the upward revisions to ERC in 2018, which would have more than offset allowance charges we recorded this year. The details of our reclassification of accretable yield will be disclosed in Footnote 2 of our financial statements in the 10-K.

Operating expenses were $183 million, an increase of $33 million from the previous year. This is largely due to increases in legal collection expenses and compensation and employee services expense due to the expansion of U.S. call center staff. Legal collection expenses, which combine fees and costs, increased $16 million, mainly due to the increase in the number of accounts qualifying for the legal channel in the U.S.

Given the favorable environment we're seeing in both internal and external legal channels in the U.S. plus the trends Kevin mentioned, we will likely see legal collections costs in 2019 remain at levels close to the fourth quarter of 2018, somewhere in the range of $30 million to $35 million per quarter, depending on the nature of accounts we purchase. Additionally, it's important to remember that as we collect more through the external legal channel, our legal collection fees will increase proportionately. Our cash efficiency ratio was 58% for the full-year 2018, compared to 60.8% for the full year of 2017.

This decline was anticipated due to the significant increase in accounts placed in the legal collection channel. Over time our goal is to move the cash efficiency ratio back over 60%, and 2019 will be part of that journey as we stabilize legal placement levels, balancing them with call center staffing and continue realizing cash collections on the legal investment. Below the operating income line, interest expense was $34 million, an increase of $5 million due to higher balances outstanding and higher average interest rates, largely in the U.S. Additionally, we had a $4.6 million foreign exchange loss during the quarter due to volatility in exchange rates in Europe.

As Kevin mentioned, the sale of a majority stake in our servicing platform in Brazil resulted in a pre-tax gain of $27 million. This gain is different from the gains we experienced in 2017 from the sale of government services and PLS. Because we haven't sold the business, there's no impact to our core debt-buying operation. We maintain the same majority ownership of both the existing portfolios and future purchases as well as a minority position in the servicing platform.

The transaction gives Bradesco the potential to leverage the servicing platform over a significantly larger base of accounts and gives us a larger portfolio investment opportunity as well as additional capital to invest. Our effective tax rate for 2018 was 15% and for the full year of 2019, a range of 16% to 20% is our best estimate at this point. Estimated remaining collections were a record $6.14 billion, with 57% in the U.S. and 40% in Europe.

ERC increased sequentially, primarily due to investment in Americas Core and Europe Core. In addition to the substantial cash flow generated by the business, we have capital available for portfolio purchases amounting to $548 million in the Americas and $278 million in Europe for a total of $826 million globally. I'm not going to talk about the revenue model this quarter, but you'll continue to find it going forward as an appendix to the quarterly conference call slides. One final point before we open up for questions: the accounting analysis I referenced earlier in my remarks caused unexpected delays in our year end closing process.

As a result, we're not prepared to file our 10-K tomorrow. We plan to file by March 18, as allowed by the SEC rules. We do not anticipate any material changes from the financials we've discussed this evening. Operator, we're now ready for questions. 


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Questions and Answers:

Operator

Thank you. [Operator instructions.] And our first questioner today will be David Scharf with JMP Securities. Please go ahead.

David Scharf -- JMP Securities -- Analyst

Hi there. Good afternoon and thanks for taking my questions as always. Hey, Kevin, maybe just a general open-ended question about the European market and as it relates to such large capital deployment. The question is basically, what's going on over there? Because it seems like every three months, I recheck my notes from 90 days earlier, and it feels like it's not -- the capital deployment isn't necessarily consistent with what I thought the themes coming out of your previous commentary were.

And I'm wondering, were there a couple really large portfolios that one or two banks had to specifically disgorge, or was this more broad-based? Because the tone of your commentary on the market still seems to be very cautious and measured, and it was quite surprising how much capital you put to use.

Kevin Stevenson -- President and Chief Executive Officer

Thanks for the question, David. You're right, and shame on me for not making that clearer, and you're correct. They were a couple large portfolios. And it was not broadly distributed around Europe.

Very localized and, again, large, but in an area that we feel comfortable with. We have good data on it and good operational expertise. Yes, my markets -- my comments on Europe are very broad, though, when I talk about the returns. And I'll get a little matrix of new deals we won, deals we lost, and again, it's based on our analysis.

And I'll look at it, and as I said, it's about 40% of the deals we're looking at, we think traded for, let's just say five IRRs on down through the negative zone. And that 40% is really based on capital to deploy, so purchase price allocation, so not number of accounts, not number of deals. So it's, again, from our perspective, it's a fair read. To your point, it's been very consistent.

It's improved a little bit in the past couple of quarters. But we've been talking about this, I think, since late '16, somewhere in there. So the other question is what's going on in Europe? I don't know.

David Scharf -- JMP Securities -- Analyst

Well, you pretty much just answered it.

Kevin Stevenson -- President and Chief Executive Officer

Yeah.

David Scharf -- JMP Securities -- Analyst

It sounds like it's a consistent theme. And I guess the follow-up on that would be are there still regulatory capital actions that are going to force this bank partner or some others that you're close with to have to disgorge on a lot of NPLs in the first quarter? Or do you get a sense that there was a lot of kind of end of 2018 actions by sellers?

Kevin Stevenson -- President and Chief Executive Officer

Well, it's very lumpy in Europe. We've talked about that for years, and the last couple of years, it's gotten to be really lumpy in Q4. More broadly, I guess I'll share with you, we are seeing a lot of deal activity right now in Europe, even as we sit here today. So I don't know exactly -- I can't tell you exactly what's driving that, but we are seeing increased deal activity.

David Scharf -- JMP Securities -- Analyst

Got it, got it. Hey, shifting to maybe just a little help in how to think about revenue this year, we just do a simple gross yield calculation on the whole consolidated portfolio. And obviously, it's come down sequentially, partly due to the allowance charge, and I suspect partly due to just how large the Q4 capital deployment was, since you're probably booking that recent vintage a little more cautiously. Should we be thinking -- based on taking everything into consideration, should we be thinking about yields throughout this year being close to where you ended 2018 at? Or is there anything that you'd put any more downward pressure on that?

Kevin Stevenson -- President and Chief Executive Officer

Yes, again, I don't think -- the revenue model that we've posted doesn't, obviously, forecast allowance charges, so I think that's a good proxy for the run rate level in the business. That's probably the best guidance I could give you.

David Scharf -- JMP Securities -- Analyst

OK. And then just last question on -- I know it's sort of lumpy, but you've highlighted a few times the investment in sort of the Chapter 13, the auto deficiencies. Are more of these -- is this just one seller that you've been purchasing from over the last 18 months or so when they've come to market, or are you starting to see more of these being bid out?

Kevin Stevenson -- President and Chief Executive Officer

Well, I wish I saw a lot more of them being offered on the market. That would be -- I'd like to buy them all. Generally, though, this is a single seller, however, that we're purchasing from. But again, we're marketing hard.

I think it's a big asset class. It's something we really like. We know it really well. I think to your point, I'd like to see more sellers get it off their books.

David Scharf -- JMP Securities -- Analyst

Got it. OK. Thank you.

Operator

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

Eric Hagen -- KBW -- Analyst

Thanks. Good afternoon. So a follow-up on Europe and I guess the general question of what's going on over there. Who is it exactly that's actually buying portfolios for a single-digit or even a negative yield? I guess the way I think about capital markets transactions like this generally is that the market will soon correct or readjust to a level that would allow financial buyers to essentially turn effectively a better profit for somewhat of a risky business.

Can you just help me bridge the gap between what's creating the better yield for you and who exactly is buying those single-digit yields?

Kevin Stevenson -- President and Chief Executive Officer

I'll be happy to field the question. I'm not going to say who's buying the yields, though, who's doing that. The -- so let me start somewhere. So first of all, our read of the 40% low-single-digit, negative, that's from our perspective, and I always make that disclaimer.

Someone could have some data that we don't have; I have to be fair about that. I think we're pretty good collectors over there, so it's at least directional. I could probably keep you busy for an hour, just throwing different ideas around, but I feel like the accounting over there, especially, is -- you can use it in different ways than you can in the States. So as Pete put out in his prepared comments, you can actually book gains on upward revisions of ERC.

And it's a powerful tool. And again, they have it in Europe. They've had it for years. You could, again theoretically -- again, I'm not saying anybody's doing this -- but theoretically, you could have a curve that has a thick rear end on it, a tail like a hockey stick, and overperform early, book some gains and then -- at some point, though, to your point, it has to stop.

And so I guess my narrative is either that's going on or we need to learn something, and both of those things are possible. And we're, as I said in my prepared comments, we are running hard to make sure that we are a great collector over there and we know what we're doing. But that's my read on it right now.

Eric Hagen -- KBW -- Analyst

Got it, yes. The accounting, OK, that makes sense. The multiple on those purchases in the Europe Core, I'm calculating it as slightly less than one and a half, 150%. Can you just confirm that or either lead me in a different direction if I'm incorrect?

Kevin Stevenson -- President and Chief Executive Officer

Yes, no. So one of the things we do -- I'm getting a little bit of echo on my speakers here. Some of the deals we're purchasing, especially some of the larger ones, are -- they're still charged-off debt, but they've got some payment history behind them, so to speak. And so they trade a little more closely to, say, a piece of insolvency debt than they do a piece of plain old nonperforming loan debt.

So that's why the ratio is lower. And correspondingly, the expense ratio is lower associated with those as well.

Eric Hagen -- KBW -- Analyst

Oh, OK. OK, yes, that's helpful. And then on the U.S. side, just the allowance charge.

You mentioned it was CFPB consent order related, but can you just give us a little color around exactly what is driving that?

Kevin Stevenson -- President and Chief Executive Officer

Yes, so the consent order that we and the other large market participant here in the United States signed generally makes the rules, the requirements in that consent order retroactive to deals we bought prior to the consent order. And so it kind of changed the way requests are taken care of. It changes the way we deal with accounts. Again, it just kind of changed the playing field, so to speak, and it caused -- it just caused a drop in collections, and I could go into it further.

But you can probably download the consent order and take a look at it yourself and just imagine -- it really did change the landscape. So as we got -- as we moved further away from the consent order time and again, these deals that overperformed so strongly out of the gate and they had their yields raised, when we found that the consent order was impacting the cash, we had to take these allowance charges. And if you think about it from the IRR perspective, because that cash was so accelerated, the IRRs are really, really strong on those deals. So without getting into too much detail about the consent order itself, that's the general landscape.

And then I guess I'll add, for the sake of -- unless you're still there -- I'll add for the sake of the audience to visit -- once we got past that, the deals past the consent order all took that stuff into consideration, so that's a different -- everything's fine with those deals.

Eric Hagen -- KBW -- Analyst

That's helpful color on the back end. Thank you. That's helpful. Thanks.

Operator

And the next questioner today will be Brian Hogan with William Blair. Please go ahead.

Brian Hogan -- William Blair -- Analyst

Good afternoon. I'm going to start on the commentary on the 2019 cash efficiency ratio. Again, I understand that I heard your commentary correctly. Did you say it's supposed to move back toward the 60%, so not exactly there in 60% in 2019? Was that your commentary? Or is it -- did you say it was going to be 60% in 2019?

Pete Graham -- Executive Vice President and Chief Financial Officer

No, hey, it's Pete here. What I said was our goal was to move it over 60%, and 2019 be part of that journey. So we're moving in that direction. You know, a lot of things affect the cash efficiency ratio, a mix of portfolio we buy and so on.

So it will be a general trend, but we're not going to give you a point estimate.

Brian Hogan -- William Blair -- Analyst

Sure. And then what is your purchase outlook for the year? Do you expect to buy more in 2019 than 2018? And you obviously have forward flow agreements and you have some insight in that, and some of them are lumpy, especially in Europe, and actually I can appreciate your uncertainty around that, but what are your overall expectations for the year?

Kevin Stevenson -- President and Chief Executive Officer

Well, we always want to buy more. And just like I was talking about in Europe, I'd like to buy more over there, and I'd certainly like to buy more Chapter 13 secured auto as well. But we don't provide any guidance on that projection, because we could make it whatever number you wanted. We've talked about that for a long time.

I could buy, I could deploy as much capital as I wanted to, but you might not like the returns. So again, we always strive to buy more year after year after year.

Brian Hogan -- William Blair -- Analyst

Are you seeing enough opportunities at those acceptable and attractive returns that you could do that?

Kevin Stevenson -- President and Chief Executive Officer

Yes. So in the U.S., we talked about it. The U.S. has good supply, the U.S.

has good returns and I think, as I've mentioned on the past number of calls, is that we've got a pretty rational buying environment here in the States. It's healthy, it's competitive, we've got good competitors, and it's just, again, it's just a healthy environment, I think, for everybody. The Brazil transaction is going to be interesting to watch to see how much volume we can increase there. And then I think I talked about Europe at great length, and Europe's very lumpy, so it's kind of an unpredictable market for us.

Brian Hogan -- William Blair -- Analyst

Yes. What exactly did you buy in Europe? Was it -- which markets did you focus on? And I think you said it was kind of early days paying paper, so obviously, a lower yield. But where did you ...

Kevin Stevenson -- President and Chief Executive Officer

Yes. So the big transactions were in the U.K., again, a market we know really well, and we had a smattering of deals around different places in Europe as well. But the real needle movers was the U.K.

Brian Hogan -- William Blair -- Analyst

Does that include that SME paper, or is it just strictly consumer?

Kevin Stevenson -- President and Chief Executive Officer

Yes, not SME paper, no. Again, that's a great question, though. I'd love to be the expert at SME paper. We're looking at it.

We're trying to figure out how to be the experts at it. Steve Roberts is spending a lot of time over in Europe with Martin, and it's one of their goals. But no. Primarily this was U.K.

paper, and as I explained earlier, it has some payment patterns to it. So we call it paying, but it's still charged off.

Brian Hogan -- William Blair -- Analyst

All right. And I heard your earlier commentary on the regulatory, how you're working with the regulators and what-have-you and having those conversations. But do you see anything on the regulatory front that gives you any concern? Are you seeing anything? Just overall commentary on that regulatory environment.

Kevin Stevenson -- President and Chief Executive Officer

Well, on the regulatory environment, we're, as I said in my script, we're really -- we're thinking about proposed rules. I think about the web of rules we have around the country, from federal rules to state rules and sometimes city rules. And it would be really wonderful to have one uniform set. I don't know what the odds are pre-emption.

Again, I'm not an expert at some of these things. But the most important thing, I think, is uniform rules and, again, uniform enforcement of them across all market participants.

Brian Hogan -- William Blair -- Analyst

All right. Then have you seen any impact from the, should I say slower tax season to date on your business? Or how would you describe that?

Kevin Stevenson -- President and Chief Executive Officer

No, I would say that it's kind of like clockwork. You're talking about the delay of the earned income tax credit and the child care tax credit. But I think the government said they were going to release them yesterday, and we saw the impact. So it's like clockwork, and so it's a big deal.

I think this whole industry, it's folks that have, that enter difficulty have these kind of things, and we closed the day yesterday, and it was a big day for us.

Brian Hogan -- William Blair -- Analyst

Sure. And then one last one. Can you talk broadly about your plans for a CECL implementation come 2020 and its impact?

Pete Graham -- Executive Vice President and Chief Financial Officer

Yes, this is Pete. I'll take that one. We have been making pretty good progress as an industry, both with the two big publicly traded companies as well as some of the private companies and moving with our auditors and advisors around an accounting model there. We all submitted comments to the FASB on their exposure draft for recoveries.

They had a meeting just this week on Wednesday, where they made some comments that wouldn't necessarily be favorable to the accounting model we were pushing forward. So we're regrouping as an industry and anticipate going and talking to them in the near future.

Brian Hogan -- William Blair -- Analyst

Thank you.

Operator

And our next questioner today will be Robert Dodd with Raymond James. Please go ahead.

Robert Dodd -- Raymond James -- Analyst

Hi. Just on the allowance charge again, you meant -- obviously, tied to the consent decree, but that, in honesty, that occurred a while ago. So what really happened? Because obviously, you review these, the collectability, etc., on a quarterly basis. What really was the decision to take that charge in Q4? Was there something that happened in the fourth quarter, an assessment, or is it more related to the fact that it's year-end audit and you do a double scrub of the numbers?

Pete Graham -- Executive Vice President and Chief Financial Officer

We've continued to have cash shortfalls in these vintages over the course of this year, and we've taken allowance charges along the way, and it was just a full assessment of the cash projections on these curves, including a pretty level of robust analysis as a result of it being kind of the final time before we file our 10-K. So again, it's the best view that we've got on these portfolios as we sit right now, and again, they're overperforming original. They're fairly high yield, so they are generating a significant amount of revenue that we're booking as well. So this is just an adjustment within the accounting framework that we've got here on deals that are otherwise performing very well.

Robert Dodd -- Raymond James -- Analyst

OK, fair enough. On Europe, and again, not the purchases, obviously, which were very strong. But operationally, I would say about half of your ERC in Europe's now in the U.K., and I asked a competitor of yours this yesterday. But Brexit may or may not occur a month from now.

So what have you got in hand, or is there any additional complications operationally or consumer-wise in the U.K. that you think could come up or be exacerbated depending on what happens?

Kevin Stevenson -- President and Chief Executive Officer

Yes, right. So we've obviously been watching the same thing that you've been watching. So we think about things. We spend a lot of time looking at portfolio stresses.

I saw some work that our guys in Europe did, because the important thing to remember is that while we entered Europe in 2014 by purchasing Aktiv Kapital, they've been there a long time. And so we've got a bunch of data, and so we were looking at, like, stresses from the global financial crisis in Europe and trying to figure out what kind of impact it might have. So we're rummaging around that. We talk about FX volatility.

That's going to be an issue, but hopefully, Pete and his team have a good handle on that, protecting us from some of those fluctuations. Clearly within the E.U., data can move fairly freely around the E.U. if there's certainly a hard Brexit as well. You know, it's going to create difficulty in moving data around.

I don't know how material that's going to be, but it's a thing, for sure. There's some push and pulls around how it might affect the economy. It may make it more difficult for people to move in and out across borders, and so that could have both a positive or a negative impact on at least our client base, our customer base in the U.K., so I could probably spin it one way and say it's actually positive for our client base, or I could say it's negative. So it's high on our radar screen, and those are just some things we're thinking about.

Robert Dodd -- Raymond James -- Analyst

OK. I appreciate it. Thank you.

Operator

And our next questioner today will be a follow-up from David Scharf with JMP Securities. Please go ahead.

David Scharf -- JMP Securities -- Analyst

I just wanted to follow up on the previous question regarding CECL. Pete, my understanding was that CECL would have, upon implementation, arguably gotten rid of the asymmetry between writing up yields, taking the revenue over time, but then also being able to no longer have allowance charges and taking the lower yield over time. Is that the industry's position that you said FASB isn't embracing, or is there some other, or is it their value accounting they're embracing?

Pete Graham -- Executive Vice President and Chief Financial Officer

No, it's really more a nuanced point around how to get to the final accounting answer. Our expectation is that that sort of symmetry that's present in the income statement on an IFRS 9 basis is likely where we'll end up under U.S. GAAP. It's really just working through the process of how we get there and some of the comments that were made in this, it was a televised FASB board meeting that accountants like to watch on YouTube because it's riveting.

But we need to regroup as an industry with our advisors and go talk to them about it.

David Scharf -- JMP Securities -- Analyst

Got it, got it. And OK, so it sounds like on 2020, we'll finally be spared of all these allowances. But in terms of the issue of getting there, is that more upon whether there's a book value hit upon conversion at the end?

Pete Graham -- Executive Vice President and Chief Financial Officer

No, again, the transition provisions to CECL sort of anticipate -- think about it like a yield reset in the book. Whatever our book value is at the end of the year and whatever our ERC curve is at the end of the year, the yield would be reset accordingly. And then from that point forward, increases in cash estimates or decreases in cash estimates would be done on a present value basis through an adjustment to the allowance. Again, it's just a -- as we sit right now, we thought we had a pretty clear path to how we got to the final accounting conclusion, and the FASB in their deliberation threw a little bit of a wrench into that, that we need to spend some time to digest and figure out how we perhaps go as an industry and have a discussion with them to plead our case.

Or if that's not fruitful, then what's our alternative approach? One more money point is our date either way.

David Scharf -- JMP Securities -- Analyst

All right. OK. perfect.

Operator

And the next questioner today will be Hugh Miller with Buckingham. Please go ahead.

Hugh Miller -- Buckingham Research -- Analyst

Thanks for taking my questions and I apologize for any background noise here. But I just had one quick one on the impact to revenue and earnings. So should we be thinking about it in terms of the sale of the servicing business in Brazil? If you could give some color there, it would be very helpful.

Pete Graham -- Executive Vice President and Chief Financial Officer

Yes, as we tried to highlight in the prepared remarks, no impact to the revenue profile. In fact, we think it's enhanced. So we sold a majority stake in the master servicing platform, but we didn't change any of the ownership of the investment portfolio we already have there. And the new portfolio structures that we'll buy, make new investments through, we maintain the same ownership percentage of those as well.

So it's really all about creating value in the servicing platform that has a greater value to Bradesco, as they'll be able to leverage that over a larger NPL base, and then having additional potential investment opportunity through this strategic relationship with Banco Bradesco. So again, we think it's a revenue enhancer for the company.

Hugh Miller -- Buckingham Research -- Analyst

OK, I understand that you still have portfolios that you still own and that you can still deploy capital in the markets. Was there servicing revenue that you guys were providing to certain clients that you now will no longer will be accruing revenue for? Or is that not the case and just a function of the buyers buying it and going to leverage the servicing asset across their own assets?

Pete Graham -- Executive Vice President and Chief Financial Officer

No, when we first entered into the joint venture, the RCB team did have some third-party servicing. But over time, as we and they expanded the debt-buying operation, we had wound that part of the operation down, and RCB was solely servicing our own portfolio, which they will continue to do. And as Kevin said, we've essentially shifted fixed costs to variable costs. And then we do maintain a minority ownership position in the master servicers.

So as they expand the use of that, we'll pick up some economics there, but it remains to be seen what that will look like.

Hugh Miller -- Buckingham Research -- Analyst

OK, that's very helpful. And then so just in terms of then, I assume we should be thinking about it in terms of now you're using an external servicer for your own portfolio. Is there any difference, then, in terms of the margin profile of future purchases by doing it external versus in-house?

Pete Graham -- Executive Vice President and Chief Financial Officer

No, technically, it's an external, but we own the majority -- a minority share in that servicer, and it's part of a strategic relationship between us, Bradesco and the original founders of RCB. So the rates that we'll be paying for servicing our own portfolios is similar to the rates that we had been paying.

Hugh Miller -- Buckingham Research -- Analyst

Got it. That's helpful. Thanks for the color.

Operator

[Operator signoff]

Duration: 58 minutes

Call Participants:

Darby Schoenfeld -- Vice President, Investor Relations

Kevin Stevenson -- President and Chief Executive Officer

Pete Graham -- Executive Vice President and Chief Financial Officer

David Scharf -- JMP Securities -- Analyst

Eric Hagen -- KBW -- Analyst

Brian Hogan -- William Blair -- Analyst

Robert Dodd -- Raymond James -- Analyst

Hugh Miller -- Buckingham Research -- Analyst

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