Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017
¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 000-50058

PRA Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
75-3078675
(State or other jurisdiction of incorporation or organization)
 
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
120 Corporate Boulevard, Norfolk, Virginia
 
23502
 
(888) 772-7326
(Address of principal executive offices)
 
(Zip Code)
 
(Registrant's Telephone No., including area code)
 
 
 
 
 
 
 
Not Applicable
 
 
(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  þ   NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  þ   NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨ Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to h Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  ¨   NO  þ
The number of shares of the registrant's common stock outstanding as of November 3, 2017 was 45,169,039.



Table of Contents

 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
Signatures
 

2



Part I. Financial Information
Item 1. Financial Statements

PRA Group, Inc.
Consolidated Balance Sheets
September 30, 2017 and December 31, 2016
(Amounts in thousands)
 
(unaudited)
 
 
 
September 30,
2017
 
December 31,
2016
Assets
 
 
 
Cash and cash equivalents
$
113,754

 
$
94,287

Investments
75,512

 
68,543

Finance receivables, net
2,577,831

 
2,307,969

Other receivables, net
10,919

 
11,650

Income taxes receivable
3,877

 
9,427

Net deferred tax asset
41,183

 
28,482

Property and equipment, net
36,428

 
38,744

Goodwill
538,337

 
499,911

Intangible assets, net
25,527

 
27,935

Other assets
37,409

 
33,808

Assets held for sale

 
43,243

Total assets
$
3,460,777

 
$
3,163,999

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
3,605

 
$
2,459

Accrued expenses
82,445

 
82,699

Income taxes payable
4,069

 
19,631

Net deferred tax liability
237,044

 
258,344

Interest-bearing deposits
96,395

 
76,113

Borrowings
1,963,504

 
1,784,101

Other liabilities
1,213

 
10,821

Liabilities held for sale

 
4,220

Total liabilities
2,388,275

 
2,238,388

Redeemable noncontrolling interest
8,620

 
8,448

Equity:
 
 
 
Preferred stock, $0.01 par value, 2,000 shares authorized, no shares issued and outstanding

 

Common stock, $0.01 par value, 100,000 shares authorized, 45,169 shares issued and outstanding at September 30, 2017; 100,000 shares authorized, 46,356 shares issued and outstanding at December 31, 2016
452

 
464

Additional paid-in capital
52,049

 
66,414

Retained earnings
1,124,762

 
1,049,367

Accumulated other comprehensive loss
(166,397
)
 
(251,944
)
Total stockholders' equity - PRA Group, Inc.
1,010,866

 
864,301

Noncontrolling interest
53,016

 
52,862

Total equity
1,063,882

 
917,163

Total liabilities and equity
$
3,460,777

 
$
3,163,999

The accompanying notes are an integral part of these consolidated financial statements.

3



PRA Group, Inc.
Consolidated Income Statements
For the three and nine months ended September 30, 2017 and 2016
(unaudited)
(Amounts in thousands, except per share amounts)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Income recognized on finance receivables, net
$
197,248

 
$
202,639

 
$
582,626

 
$
613,154

Fee income
2,671

 
17,597

 
18,873

 
56,210

Other revenue
1,091

 
1,748

 
6,401

 
5,958

Total revenues
201,010

 
221,984

 
607,900

 
675,322

Operating expenses:
 
 
 
 
 
 
 
Compensation and employee services
68,541

 
65,898

 
203,780

 
197,456

Legal collection expenses
27,626

 
33,447

 
90,556

 
97,476

Agency fees
7,599

 
12,034

 
27,653

 
34,227

Outside fees and services
15,631

 
14,731

 
46,977

 
46,415

Communication
8,713

 
7,814

 
25,104

 
26,119

Rent and occupancy
3,668

 
3,875

 
10,838

 
11,709

Depreciation and amortization
4,841

 
6,184

 
15,097

 
18,339

Other operating expenses
10,140

 
10,513

 
32,071

 
32,443

Total operating expenses
146,759

 
154,496

 
452,076

 
464,184

Income from operations
54,251

 
67,488

 
155,824

 
211,138

Other income and (expense):
 
 
 
 
 
 
 
Gain on sale of subsidiaries
307

 

 
48,474

 

Interest expense, net
(25,899
)
 
(19,310
)
 
(69,662
)
 
(59,838
)
Foreign exchange (loss)/gain
(1,084
)
 
5,004

 
(1,421
)
 
5,183

Income before income taxes
27,575

 
53,182

 
133,215

 
156,483

Provision for income taxes
10,682

 
16,664

 
52,857

 
50,244

Net income
16,893

 
36,518

 
80,358

 
106,239

Adjustment for net income attributable to noncontrolling interest
1,338

 
2,212

 
4,963

 
3,494

Net income attributable to PRA Group, Inc.
$
15,555

 
$
34,306

 
$
75,395

 
$
102,745

Net income per common share attributable to PRA Group, Inc.:
 
 
 
 
 
 
 
Basic
$
0.34

 
$
0.74

 
$
1.64

 
$
2.22

Diluted
$
0.34

 
$
0.74

 
$
1.64

 
$
2.21

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
Basic
45,168

 
46,343

 
45,838

 
46,307

Diluted
45,286

 
46,434

 
45,991

 
46,403

The accompanying notes are an integral part of these consolidated financial statements.

4



PRA Group, Inc.
Consolidated Statements of Comprehensive Income/(Loss)
For the three and nine months ended September 30, 2017 and 2016
(unaudited)
(Amounts in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
16,893

 
$
36,518

 
$
80,358

 
$
106,239

Other comprehensive income:
 
 
 
 
 
 
 
Change in foreign currency translation
39,548

 
13,721

 
81,393

 
37,435

Total comprehensive income
56,441

 
50,239

 
161,751

 
143,674

Comprehensive income attributable to noncontrolling interest:
 
 
 
 
 
 
 
Net income attributable to noncontrolling interest
1,338

 
2,212

 
4,963

 
3,494

Change in foreign currency translation
1,730

 
(324
)
 
(4,156
)
 
8,462

Comprehensive income attributable to noncontrolling interest
3,068

 
1,888

 
807

 
11,956

Comprehensive income attributable to PRA Group, Inc.
$
53,373

 
$
48,351

 
$
160,944

 
$
131,718

The accompanying notes are an integral part of these consolidated financial statements.

5



PRA Group, Inc.
Consolidated Statement of Changes in Equity
For the nine months ended September 30, 2017
(unaudited)
(Amounts in thousands)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2016
46,356

 
$
464

 
$
66,414

 
$
1,049,367

 
$
(251,944
)
 
$
52,862

 
$
917,163

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
75,395

 

 
5,962

 
81,357

Foreign currency translation adjustment

 

 

 

 
85,547

 
(4,379
)
 
81,168

Distributions paid to noncontrolling interest

 

 

 

 

 
(1,429
)
 
(1,429
)
Equity component of convertible debt

 

 
44,910

 

 

 

 
44,910

Deferred taxes on equity component of convertible debt

 

 
(18,213
)
 

 

 

 
(18,213
)
Vesting of nonvested shares
125

 
1

 
(1
)
 

 

 

 

Repurchase and cancellation of common stock
(1,312
)
 
(13
)
 
(44,896
)
 

 

 

 
(44,909
)
Amortization of share-based compensation

 

 
6,263

 

 

 

 
6,263

Employee stock relinquished for payment of taxes

 

 
(2,428
)
 

 

 

 
(2,428
)
Balance at September 30, 2017
45,169

 
$
452

 
$
52,049

 
$
1,124,762

 
$
(166,397
)
 
$
53,016

 
$
1,063,882

The accompanying notes are an integral part of these consolidated financial statements.

6



PRA Group, Inc.
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2017 and 2016
(unaudited)
(Amounts in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
80,358

 
$
106,239

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of share-based compensation
6,263

 
9,468

Depreciation and amortization
15,097

 
18,339

Gain on sale of subsidiaries
(48,474
)
 

Amortization of debt discount and issuance costs
12,828

 
7,450

Deferred tax benefit
(49,974
)
 
(724
)
Net foreign currency transaction loss/(gain)
1,303

 
(5,489
)
Other
(3,113
)
 

Changes in operating assets and liabilities:
 
 
 
Other assets
(274
)
 
3,531

Other receivables, net
1,342

 
7,181

Accounts payable
1,242

 
(1,479
)
Income taxes payable, net
(10,692
)
 
(13,832
)
Accrued expenses
(7,198
)
 
(12,344
)
Other liabilities
(9,628
)
 
565

Net cash (used in)/provided by operating activities
(10,920
)
 
118,905

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(10,054
)
 
(11,542
)
Acquisition of finance receivables, net of buybacks
(718,553
)
 
(697,794
)
Collections applied to principal on finance receivables
553,713

 
530,081

Business acquisitions, net of cash acquired

 
(66,961
)
Proceeds from sale of subsidiaries, net
93,304

 

Purchase of investments
(3,569
)
 
(380
)
Proceeds from sales and maturities of investments
7,482

 
10,299

Net cash used in investing activities
(77,677
)
 
(236,297
)
Cash flows from financing activities:
 
 
 
Proceeds from lines of credit
905,841

 
858,368

Principal payments on lines of credit
(1,392,176
)
 
(895,161
)
Repurchases of common stock
(44,909
)
 

Tax withholdings related to share-based payments
(2,428
)
 
(2,478
)
Distributions paid to noncontrolling interest
(1,429
)
 
(934
)
Principal payments on long-term debt
(12,515
)
 
(187,264
)
Proceeds from long-term debt
310,000

 
297,893

Payments of debt issuance costs
(18,240
)
 
(17,526
)
Net increase in interest-bearing deposits
10,140

 
40,198

Proceeds from convertible debt
345,000

 

Net cash provided by financing activities
99,284

 
93,096

Effect of exchange rate on cash
8,780

 
44,715

Net increase in cash and cash equivalents
19,467

 
20,419

Cash and cash equivalents, beginning of period
94,287

 
71,372

Cash and cash equivalents, end of period
$
113,754

 
$
91,791

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
60,229

 
$
49,492

Cash paid for income taxes
114,603

 
59,164

The accompanying notes are an integral part of these consolidated financial statements.

7


PRA Group, Inc.
Notes to Consolidated Financial Statements



1. Organization and Business:
As used herein, the terms "PRA Group," "the Company," or similar terms refer to PRA Group, Inc. and its subsidiaries.
PRA Group, Inc., a Delaware corporation, and its subsidiaries, is a global financial and business services company with operations in the Americas and Europe. The Company's primary business is the purchase, collection and management of portfolios of nonperforming loans. The Company also provides the following fee-based services: class action claims recovery services and purchases; servicing of consumer bankruptcy accounts in the United States ("U.S."); and, to a lesser extent, contingent collections of nonperforming loans in Europe and South America.
The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and include the accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Under the guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 280 "Segment Reporting" ("ASC 280"), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and, therefore, it has one reportable segment, accounts receivable management, based on similarities among the operating units, including economic characteristics, the nature of the products and services, the nature of the production processes, the types or class of customer for their products and services, the methods used to distribute their products and services and the nature of the regulatory environment.
The following table shows the amount of revenue generated for the three and nine months ended September 30, 2017 and 2016, respectively, and long-lived assets held at September 30, 2017 and 2016, respectively, both for the U.S., the Company's country of domicile, and outside of the U.S. (amounts in thousands):
 
As Of And For The
 
As Of And For The
 
Three Months Ended September 30, 2017
 
Three Months Ended September 30, 2016
 
Revenues
 
Long-Lived Assets
 
Revenues
 
Long-Lived Assets
United States
$
137,323

 
$
28,585

 
$
153,114

 
$
33,898

Outside the United States
63,687

 
7,843

 
68,870

 
10,456

Total
$
201,010

 
$
36,428

 
$
221,984

 
$
44,354

 
 
 
 
 
 
 
 
 
As Of And For The
 
As Of And For The
 
Nine Months Ended September 30, 2017
 
Nine Months Ended September 30, 2016
 
Revenues
 
Long-Lived Assets
 
Revenues
 
Long-Lived Assets
United States
$
415,761

 
$
28,585

 
$
489,260

 
$
33,898

Outside the United States
192,139

 
7,843

 
186,062

 
10,456

Total
$
607,900

 
$
36,428

 
$
675,322

 
$
44,354

Revenues are attributed to countries based on the location of the related operations. Long-lived assets consist of net property and equipment. The Company reports revenues earned from its debt purchasing and collection activities and its fee-based services. It is impracticable for the Company to report further breakdowns of revenues from external customers by product or service.
The accompanying interim financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes to the consolidated financial statements necessary for a complete presentation of financial position, results of operations, comprehensive income and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the Company's consolidated balance sheet as of September 30, 2017, its consolidated income statements and statements of comprehensive income/(loss) for the three and nine months ended September 30, 2017 and 2016, its consolidated statement of changes in equity for the nine months ended September 30, 2017, and its consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016, have been included. The consolidated income statements of the Company for the three and nine months ended September 30, 2017 may not be indicative of future results. Certain prior period amounts have been reclassified for consistency with the current period presentation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 2016 Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 1, 2017.

8


PRA Group, Inc.
Notes to Consolidated Financial Statements


2. Finance Receivables, net:
Changes in finance receivables, net for the three and nine months ended September 30, 2017 and 2016 were as follows (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
2,520,883

 
$
2,399,949

 
$
2,307,969

 
$
2,202,113

Acquisitions of finance receivables (1)
203,052

 
159,546

 
716,586

 
741,402

Foreign currency translation adjustment
38,482

 
1,974

 
106,989

 
(21,026
)
Cash collections applied to principal and net allowance charges
(184,586
)
 
(169,061
)
 
(553,713
)
 
(530,081
)
Balance at end of period
$
2,577,831

 
$
2,392,408

 
$
2,577,831

 
$
2,392,408

(1)
Acquisitions of finance receivables are net of buybacks and include certain capitalized acquisition related costs. They also include the acquisition date finance receivables portfolios that are acquired in connection with certain business acquisitions.
During the three months ended September 30, 2017, the Company purchased finance receivables portfolios with a face value of $1.4 billion for $210.9 million. During the three months ended September 30, 2016, the Company purchased finance receivables portfolios with a face value of $3.0 billion for $161.3 million. During the nine months ended September 30, 2017, the Company purchased finance receivables portfolios with a face value of $5.1 billion for $734.4 million. During the nine months ended September 30, 2016, the Company purchased finance receivables portfolios with a face value of $8.9 billion for $747.5 million. At September 30, 2017, the estimated remaining collections ("ERC") on the receivables purchased during the three months ended September 30, 2017 and 2016 were $333.2 million and $208.5 million, respectively. At September 30, 2017, the ERC on the receivables purchased during the nine months ended September 30, 2017 and 2016 were $1.1 billion and $975.4 million, respectively. At September 30, 2017 and 2016, total ERC was $5.4 billion and $5.3 billion, respectively.
At the time of acquisition, the life of each pool is estimated based on projected amounts and timing of cash collections. Based upon current projections, cash collections expected to be applied to principal on finance receivables as of September 30, 2017 are estimated to be as follows for the 12 months in the periods ending September 30, (amounts in thousands):
2018
$
734,967

2019
585,527

2020
454,002

2021
366,386

2022
230,393

2023
110,818

2024
42,604

2025
24,762

2026
17,871

2027
10,501

Total ERC expected to be applied to principal
$
2,577,831

At September 30, 2017, the Company had aggregate net finance receivables balances in pools accounted for under the cost recovery method of $109.3 million; at December 31, 2016, the amount was $105.5 million.
Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield, on portfolios purchased during the period, to be earned by the Company. Net reclassifications from nonaccretable difference to accretable yield primarily result from the increase in the Company's estimate of future cash flows. When applicable, net reclassifications to nonaccretable difference from accretable yield result from the decrease in the Company's estimates of future cash flows and allowance charges that together exceed the increase in the Company's estimate of future cash flows.


9


PRA Group, Inc.
Notes to Consolidated Financial Statements


Changes in accretable yield for the three and nine months ended September 30, 2017 and 2016 were as follows (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period
$
2,803,590

 
$
2,931,426

 
$
2,740,006

 
$
2,727,204

Income recognized on finance receivables, net
(197,248
)
 
(202,639
)
 
(582,626
)
 
(613,154
)
Additions
127,829

 
121,643

 
477,018

 
581,583

Reclassifications from nonaccretable difference
68,715

 
5,936

 
93,343

 
95,904

Foreign currency translation adjustment
43,231

 
673

 
118,376

 
65,502

Balance at end of period
$
2,846,117

 
$
2,857,039

 
$
2,846,117

 
$
2,857,039

The following is a summary of activity within the Company's valuation allowance account, all of which relates to loans acquired with deteriorated credit quality, for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Beginning balance
$
218,775

 
$
136,752

 
$
211,465

 
$
114,861

Allowance charges
3,824

 
14,246

 
9,973

 
37,686

Reversal of previously recorded allowance charges
(412
)
 
(1,100
)
 
(561
)
 
(1,722
)
Net allowance charges
3,412

 
13,146

 
9,412

 
35,964

Foreign currency translation adjustment
678

 
(328
)
 
1,988

 
(1,255
)
Ending balance
$
222,865

 
$
149,570

 
$
222,865

 
$
149,570

3. Investments:
Investments consist of the following at September 30, 2017 and December 31, 2016 (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
Available-for-sale
 
 
 
Government bonds and mutual funds
$
3,769

 
$
2,138

Held-to-maturity
 
 
 
Securitized assets
57,031

 
51,407

Other investments
 
 
 
Private equity funds
14,712

 
14,998

Total investments
$
75,512

 
$
68,543

Available-for-Sale
Government bonds and mutual funds: The Company's investments in government bonds and mutual funds are classified as available-for-sale and are stated at fair value. Fair value is determined using quoted market prices. Unrealized gains and losses are included in comprehensive income and reported in equity.
Held-to-Maturity
Investments in securitized assets: The Company holds a majority interest in a closed-end Polish investment fund. The certificates, which provide a preferred return based on the expected net income of the portfolios, are accounted for as a beneficial interest in securitized financial assets and stated at amortized cost. The Company has determined it has the ability and intent to hold these certificates until maturity, which occurs when the fund terminates or liquidates its assets. The preferred return is not a guaranteed return. Income is recognized under FASB ASC Topic 325-40, "Beneficial Interest in Securitized Financial Assets" ("ASC 325-40"). Prior to April 1, 2017, income was recognized using the effective yield method. Effective April 1, 2017, the Company determined that it could not reasonably forecast the timing of future cash flows and accordingly began using the cost recovery method to recognize income.

10


PRA Group, Inc.
Notes to Consolidated Financial Statements


The underlying securities have both known principal repayment terms as well as unknown principal repayments due to potential borrower pre-payments. Accordingly, it is difficult to accurately predict the final maturity date of these investments. Revenues recognized on these investments are recorded in Other Revenue in the consolidated income statements. During the three and nine months ended September 30, 2017, revenues recognized on these investments were $0 and $1.3 million, respectively. During the three and nine months ended September 30, 2016, revenues recognized on these investments were $1.5 million and $4.7 million, respectively.
Other Investments
Investments in private equity funds: Investments in private equity funds represent limited partnerships in which the Company has less than a 3% interest and are carried at cost. Distributions received from the partnerships are included in Other Revenue in the consolidated income statements. Distributions received in excess of the Company's proportionate share of accumulated earnings are applied as a reduction of the cost of the investment. The aggregate carrying amount of cost-method investments for which cost exceeded fair value but for which an impairment loss was not recognized was $14.7 million and $15.0 million at September 30, 2017 and December 31, 2016, respectively. We evaluate the investments based on our estimated allocable share of the expected remaining cash flows of the funds as reported by the investment manager. Distributions received from these investments were $1.2 million and $5.1 million during the three and nine months ended September 30, 2017, respectively. Distributions received from these investments were $0.0 million and $0.6 million during the three and nine months ended September 30, 2016, respectively.
The amortized cost and estimated fair value of available-for sale and held-to-maturity investments at September 30, 2017 and December 31, 2016 were as follows (amounts in thousands):
 
September 30, 2017
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Available-for-sale
 
 
 
 
 
 
 
Government bonds and mutual funds
$
3,783

 
$
37

 
$
51

 
$
3,769

Held-to-maturity
 
 
 
 
 
 
 
Securitized assets
57,031

 

 
14,471

 
42,560

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Estimated Fair Value
Available-for-sale
 
 
 
 
 
 
 
Government bonds and mutual funds
$
2,161

 
$

 
$
23

 
$
2,138

Held-to-maturity
 
 
 
 
 
 
 
Securitized assets
51,407

 
4,147

 

 
55,554

4. Borrowings:
The Company's borrowings consisted of the following as of the dates indicated (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
North American revolving credit
$
275,432

 
$
695,088

Term loans
762,902

 
430,764

European revolving credit
373,758

 
401,780

Convertible senior notes
632,500

 
287,500

Less: Debt discount and issuance costs
(81,088
)
 
(31,031
)
Total
$
1,963,504

 
$
1,784,101


11


PRA Group, Inc.
Notes to Consolidated Financial Statements


The following principal payments are due on the Company's borrowings as of September 30, 2017 for the 12 month periods ending September 30, (amounts in thousands):
2018
$
10,000

2019
10,000

2020
297,500

2021
699,160

2022
682,932

Thereafter
345,000

Total
$
2,044,592

The Company believes it was in compliance with the covenants of its material financing arrangements as of September 30, 2017 and December 31, 2016.
North American Revolving Credit and Term Loan
On May 5, 2017, the Company amended and restated its existing credit agreement (as amended, and modified from time to time, the “North American Credit Agreement”) with Bank of America, N.A., as administrative agent, Bank of America, National Association, acting through its Canada branch, as the Canadian administrative agent, and a syndicate of lenders named therein. The total credit facility under the North American Credit Agreement includes an aggregate principal amount of $1.2 billion (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a fully-funded $447.5 million term loan, (ii) a $705.0 million domestic revolving credit facility, and (iii) a $50.0 million Canadian revolving credit facility. The facility includes an accordion feature for up to $45.0 million in additional commitments (at the option of the lender) and also provides for up to $25.0 million of letters of credit and a $25.0 million swingline loan sublimit that would reduce amounts available for borrowing. The term and revolving loans accrue interest, at the option of the Company, at either the base rate or the Eurodollar rate (as defined in the North American Credit Agreement) for the applicable term plus 2.50% per annum in the case of the Eurodollar rate loans and 1.50% in the case of the base rate loans. The base rate is the highest of (a) the Federal Funds Rate (as defined in the North American Credit Agreement) plus 0.50%, (b) Bank of America's prime rate, or (c) the one month Eurodollar rate plus 1.00%. Canadian Prime Rate Loans will bear interest at a rate per annum equal to the Canadian Prime Rate plus 1.50%. The loans under the North American Credit Agreement mature as of May 5, 2022. As of September 30, 2017, the unused portion of the North American Credit Agreement was $479.6 million. Considering borrowing base restrictions, as of September 30, 2017, the amount available to be drawn was $453.5 million.
The North American Credit Agreement is secured by a first priority lien on substantially all of the Company's assets. The North American Credit Agreement contains restrictive covenants and events of default, which are defined in the North American Credit Agreement, including the following:
borrowings under each of the domestic revolving loan facility and the Canadian revolving loan facility are subject to separate borrowing base calculations and may not exceed 35% of the ERC of all domestic or Canadian, as applicable, core eligible asset pools, plus 55% of ERC of domestic or Canadian, as applicable, insolvency eligible asset pools, plus 75% of domestic or Canadian, as applicable, eligible accounts receivable;
the consolidated total leverage ratio cannot exceed 2.75 to 1.0 as of the end of any fiscal quarter;
the consolidated senior secured leverage ratio cannot exceed 2.25 to 1.0 as of the end of any fiscal quarter;
subject to no default or event of default, cash dividends and distributions during any fiscal year cannot exceed $20.0 million;
subject to no default or event of default, stock repurchases during any fiscal year cannot exceed $100.0 million plus 50% of the prior year's net income;
permitted acquisitions during any fiscal year cannot exceed $250.0 million (with a $50.0 million per year sublimit for permitted acquisitions by non-loan parties);
indebtedness in the form of senior, unsecured convertible notes or other unsecured financings cannot exceed $750.0 million in the aggregate (without respect to the 2020 Notes (as defined below));
the Company must maintain positive consolidated income from operations during any fiscal quarter; and
restrictions on changes in control.
The revolving credit facility also bears an unused line fee of 0.375% per annum, payable quarterly in arrears.

12


PRA Group, Inc.
Notes to Consolidated Financial Statements


European Revolving Credit Facility and Term Loan
On October 23, 2014, European subsidiaries of the Company ("PRA Europe") entered into a credit agreement with DNB Bank ASA for a Multicurrency Revolving Credit Facility (such agreement as later amended or modified, the "European Credit Agreement"). Under the terms of the European Credit Agreement, the credit facility includes an aggregate amount of approximately $1.2 billion (subject to the borrowing base), of which 267.0 million EURO (approximately $315.4 million) is a term loan, accrues interest at the Interbank Offered Rate ("IBOR") plus 2.80%-3.90% under the revolving facility and 4.25%-4.50% under the term loan facility (as determined by the loan-to-value ratio ("LTV Ratio") as defined in the European Credit Agreement), bears an unused line fee, currently 1.26% per annum, of 35% of the margin, is payable monthly in arrears, and matures on February 19, 2021. The European Credit Agreement also includes an overdraft facility in the aggregate amount of $40.0 million (subject to the borrowing base), which accrues interest (per currency) at the daily rates as published by the facility agent, bears a facility line fee of 0.125% per quarter, payable quarterly in arrears, and also matures February 19, 2021. As of September 30, 2017, the unused portion of the European Credit Agreement (including the overdraft facility) was $566.2 million. Considering borrowing base restrictions and other covenants, as of September 30, 2017, the amount available to be drawn under the European Credit Agreement (including the overdraft facility) was $165.4 million.
The European Credit Agreement is secured by the shares of most of the Company's European subsidiaries and all intercompany loan receivables in Europe. The European Credit Agreement also contains restrictive covenants and events of default, which are defined in the European Credit Agreement, including the following:
the LTV Ratio cannot exceed 75%;
the gross interest-bearing debt ratio in Europe cannot exceed 3.25 to 1.0 as of the end of any fiscal quarter;
interest bearing deposits in AK Nordic AB cannot exceed SEK 1,500,000,000; and
PRA Europe's cash collections must exceed 95% of PRA Europe's ERC for the same set of portfolios, measured on a quarterly basis.
Convertible Senior Notes due 2020
On August 13, 2013, the Company completed the private offering of $287.5 million in aggregate principal amount of its 3.00% Convertible Senior Notes due 2020 (the "2020 Notes"). The 2020 Notes were issued pursuant to an Indenture, dated August 13, 2013 (the "2013 Indenture"), between the Company and Wells Fargo Bank, National Association, as trustee. The 2013 Indenture contains customary terms and covenants, including certain events of default after which the 2020 Notes may be due and payable immediately. The 2020 Notes are senior unsecured obligations of the Company. Interest on the 2020 Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year, beginning on February 1, 2014. Prior to February 1, 2020, the 2020 Notes will be convertible only upon the occurrence of specified events. On or after February 1, 2020, the 2020 Notes will be convertible at any time. The Company does not have the right to redeem the 2020 Notes prior to maturity. As of September 30, 2017 and December 31, 2016, none of the conditions allowing holders of the 2020 Notes to convert their notes had occurred.
The conversion rate for the 2020 Notes is initially 15.2172 shares per $1,000 principal amount of 2020 Notes, which is equivalent to an initial conversion price of approximately $65.72 per share of the Company's common stock, and is subject to adjustment in certain circumstances pursuant to the 2013 Indenture. Upon conversion, holders of the 2020 Notes will receive cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election. The Company's current intent is to settle conversions through combination settlement (i.e., the 2020 Notes would be converted into cash up to the aggregate principal amount, and shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election, for the remainder). As a result and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds $65.72.
The Company determined that the fair value of the 2020 Notes at the date of issuance was approximately $255.3 million, and designated the residual value of approximately $32.2 million as the equity component. Additionally, the Company allocated approximately $7.3 million of the $8.2 million 2020 Notes issuance cost as debt issuance cost and the remaining $0.9 million as equity issuance cost.
Convertible Senior Notes due 2023
On May 26, 2017, the Company completed the private offering of $345.0 million in aggregate principal amount of its 3.50% Convertible Senior Notes due 2023 (the "2023 Notes" and, together with the 2020 Notes, the "Notes"). The 2023 Notes were issued pursuant to an Indenture, dated May 26, 2017 (the "2017 Indenture"), between the Company and Regions Bank, as trustee. The 2017 Indenture contains customary terms and covenants, including certain events of default after which the 2023 Notes may be

13


PRA Group, Inc.
Notes to Consolidated Financial Statements


due and payable immediately. The 2023 Notes are senior unsecured obligations of the Company. Interest on the 2023 Notes is payable semi-annually, in arrears, on June 1 and December 1 of each year, beginning on December 1, 2017. Prior to March 1, 2023, the 2023 Notes will be convertible only upon the occurrence of specified events. On or after March 1, 2023, the 2023 Notes will be convertible at any time. The Company has the right, at its election, to redeem all or any part of the outstanding notes at any time on or after June 1, 2021 for cash, but only if the last reported sale price (as defined in the 2017 Indenture) exceeds 130% of the conversion price on each of at least 20 trading days during the 30 consecutive trading days ending on and including the trading day immediately before the date the Company sends the related redemption notice. As of September 30, 2017, none of the conditions allowing holders of the 2023 Notes to convert their notes had occurred.
The conversion rate for the 2023 Notes is initially 21.6275 shares per $1,000 principal amount of 2023 Notes, which is equivalent to an initial conversion price of approximately $46.24 per share of the Company's common stock, and is subject to adjustment in certain circumstances pursuant to the 2017 Indenture. Upon conversion, holders of the 2023 Notes will receive cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election. The Company's current intent is to settle conversions through combination settlement (i.e., the 2023 Notes would be converted into cash up to the aggregate principal amount, and shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election, for the remainder). As a result and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds $46.24.
The Company determined that the fair value of the 2023 Notes at the date of issuance was approximately $298.8 million, and designated the residual value of approximately $46.2 million as the equity component. Additionally, the Company allocated approximately $8.3 million of the $9.6 million 2023 Notes issuance cost as debt issuance cost and the remaining $1.3 million as equity issuance cost.
The balances of the liability and equity components of the Notes outstanding were as follows as of the dates indicated (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
Liability component - principal amount
$
632,500

 
$
287,500

Unamortized debt discount
(58,360
)
 
(17,930
)
Liability component - net carrying amount
$
574,140

 
$
269,570

Equity component
$
76,216

 
$
31,306

The debt discount is being amortized into interest expense over the remaining life of the 2020 Notes and the 2023 Notes using the effective interest rate, which is 4.92% and 6.20%, respectively.
Interest expense related to the Notes was as follows for the periods indicated (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Interest expense - stated coupon rate
$
5,175

 
$
2,156

 
$
10,695

 
$
6,468

Interest expense - amortization of debt discount
2,796

 
1,127

 
5,760

 
3,336

Total interest expense - convertible senior notes
$
7,971


$
3,283

 
$
16,455

 
$
9,804

5. Goodwill and Intangible Assets, net:
In connection with the Company's business acquisitions, the Company acquired certain tangible and intangible assets. Intangible assets resulting from these acquisitions include client and customer relationships, non-compete agreements, trademarks and technology. The Company performs an annual review of goodwill as of October 1 of each year or more frequently if indicators of impairment exist.

14


PRA Group, Inc.
Notes to Consolidated Financial Statements


The following table represents the changes in goodwill for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Balance at beginning of period:
 
 
 
 
 
 
 
Goodwill
$
516,165

 
$
550,734

 
$
506,308

 
$
501,553

Accumulated impairment loss

 
(6,397
)
 
(6,397
)
 
(6,397
)
 
516,165

 
544,337

 
499,911

 
495,156

Changes:
 
 
 
 
 
 
 
Acquisitions

 
1,193

 

 
28,711

Foreign currency translation adjustment
22,172

 
14,975

 
38,426

 
36,638

Net change in goodwill
22,172

 
16,168

 
38,426

 
65,349

 
 
 
 
 
 
 
 
Goodwill
538,337

 
566,902

 
538,337

 
566,902

Accumulated impairment loss

 
(6,397
)
 

 
(6,397
)
Balance at end of period:
$
538,337

 
$
560,505

 
$
538,337

 
$
560,505

The change in accumulated impairment loss during the nine months ended September 30, 2017, is related to the June 2017 sale of PRA Location Services, LLC ("PLS"), the goodwill of which was fully impaired during 2013.
The $1.2 million addition to goodwill during the three months ended September 30, 2016, was attributable to an immaterial acquisition. The goodwill recognized from this acquisition is expected to be deductible for tax purposes.
The $28.7 million addition to goodwill during the nine months ended September 30, 2016, was mainly attributable to the acquisition of DTP S.A. ("DTP") during the second quarter of 2016 and the acquisition of Recovery Management Systems Corporation ("RMSC") in the first quarter of 2016. The goodwill recognized from the DTP acquisition is not expected to be deductible for tax purposes while the goodwill recognized from the RMSC acquisition is expected to be deductible for tax purposes.
6. Income Taxes:
The Company follows the guidance of FASB ASC Topic 740 "Income Taxes" ("ASC 740") as it relates to the provision for income taxes and uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
For tax purposes, the Company utilized the cost recovery method of accounting through December 31, 2016. Under the cost recovery method, collections on finance receivables are applied first to principal to reduce the finance receivables balance to zero before taxable income is recognized. The Internal Revenue Service ("IRS") examined the Company's 2005 through 2012 tax returns and asserted that tax revenue recognition using the cost recovery method did not clearly reflect taxable income and therefore issued Notices of Deficiency to the Company for tax years ended December 31, 2005 through 2012 (the "Notices"). In response to the Notices, the Company filed petitions in the U.S. Tax Court (the “Tax Court”) challenging the deficiencies and the Tax Court set the trial to begin on May 15, 2017. On May 10, 2017, the Company reached a settlement with the IRS in regards to the Notices. Under the settlement, both parties agreed that no amounts were due for years 2005 through 2012 and the Tax Court entered decisions to that effect on June 22, 2017. Also, under the settlement, the Company will utilize a new tax accounting method to recognize net finance receivables revenue effective with tax year 2017. Under the new method, a portion of the annual collections amortize principal and the remaining portion is taxable income. The Company will not be required to pay any interest or penalties related to the prior periods. The deferred tax liability related to the difference in timing between the new method and the cost recovery method will be incorporated evenly into the Company’s tax filings over four years with no associated interest.
At September 30, 2017, the tax years subject to examination by the major federal, state and international taxing jurisdictions are 2013 and subsequent years.
The Company intends for predominantly all foreign earnings to be indefinitely reinvested in its foreign operations. If foreign earnings were repatriated, the Company would need to accrue and pay taxes, although foreign tax credits may be available to partially reduce U.S. income taxes. The amount of cash on hand related to foreign operations with indefinitely reinvested earnings was $95.3 million and $73.6 million as of September 30, 2017 and December 31, 2016, respectively.

15


PRA Group, Inc.
Notes to Consolidated Financial Statements


7. Earnings per Share:
Basic earnings per share ("EPS") are computed by dividing net income available to common stockholders of PRA Group, Inc. by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of the Notes and nonvested share awards, if dilutive. For the Notes, only the conversion spread is included in the diluted EPS calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds $65.72 for the 2020 Notes or $46.24 for the 2023 Notes, neither of which occurred during the respective periods from which the Notes were issued through September 30, 2017. Share-based awards that are contingent upon the attainment of performance goals are included in the computation of diluted EPS if the effect is dilutive. The dilutive effect of nonvested shares is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the vesting of nonvested shares would be used to purchase common shares at the average market price for the period. The assumed proceeds include the tax benefit that would be realized upon assumed exercise.
The following table provides a reconciliation between the computation of basic EPS and diluted EPS for the three and nine months ended September 30, 2017 and 2016 (amounts in thousands, except per share amounts):
 
For the Three Months Ended September 30,
 
2017
 
2016
 
Net income attributable to PRA Group, Inc.
 
Weighted
Average
Common Shares
 
EPS
 
Net income attributable to PRA Group, Inc.
 
Weighted
Average
Common Shares
 
EPS
Basic EPS
$
15,555

 
45,168

 
$
0.34

 
$
34,306

 
46,343

 
$
0.74

Dilutive effect of nonvested share awards
 
 
118

 

 
 
 
91

 

Diluted EPS
$
15,555

 
45,286

 
$
0.34

 
$
34,306

 
46,434

 
$
0.74

 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
Net income attributable to PRA Group, Inc.
 
Weighted
Average
Common Shares
 
EPS
 
Net income attributable to PRA Group, Inc.
 
Weighted
Average
Common Shares
 
EPS
Basic EPS
$
75,395

 
45,838

 
$
1.64

 
$
102,745

 
46,307

 
$
2.22

Dilutive effect of nonvested share awards
 
 
153

 

 
 
 
96

 
(0.01
)
Diluted EPS
$
75,395

 
45,991

 
$
1.64

 
$
102,745

 
46,403

 
$
2.21

There were no antidilutive options outstanding for the three and nine months ended September 30, 2017 and 2016.
8. Commitments and Contingencies:
Employment Agreements:
The Company has entered into employment agreements with all of its U.S. executive officers and with several members of its U.S. senior management group. Such agreements provide for base salary payments as well as potential discretionary bonuses that are based on the attainment of a combination of financial and management goals. At September 30, 2017, estimated future compensation under these agreements was approximately $11.8 million. The agreements also contain confidentiality and non-compete provisions. Outside the U.S., employment agreements are in place with employees pursuant to local country regulations. Generally, these agreements do not have expiration dates and therefore it is impractical to estimate the amount of future compensation under these agreements. Accordingly, the future compensation under these agreements is not included in the $11.8 million total above.
Leases:
The Company is party to various operating leases with respect to its facilities and equipment. The future minimum lease payments at September 30, 2017 totaled approximately $43.8 million.

16


PRA Group, Inc.
Notes to Consolidated Financial Statements


Forward Flow Agreements:
The Company is party to several forward flow agreements that allow for the purchase of nonperforming loans at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at September 30, 2017 was approximately $413.6 million.
Finance Receivables:
Certain agreements for the purchase of finance receivables portfolios contain provisions that may, in limited circumstances, require the Company to refund a portion or all of the collections subsequently received by the Company on particular accounts.
Litigation and Regulatory Matters:
The Company is from time to time subject to routine legal claims, proceedings and regulatory matters, most of which are incidental to the ordinary course of its business. The Company initiates lawsuits against customers and is occasionally countersued by them in such actions. Also, customers, either individually, as members of a class action, or through a governmental entity on behalf of customers, may initiate litigation against the Company in which they allege that the Company has violated a state or federal law in the process of collecting on an account. From time to time, other types of lawsuits are brought against the Company. Additionally, the Company receives subpoenas and other requests or demands for information from regulators or governmental authorities who are investigating the Company's debt collection activities.
The Company accrues for potential liability arising from legal proceedings and regulatory matters when it is probable that such liability has been incurred and the amount of the loss can be reasonably estimated. This determination is based upon currently available information for those proceedings in which the Company is involved, taking into account the Company's best estimate of such losses for those cases for which such estimates can be made. The Company's estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the number of unresolved issues in many of the proceedings (including issues regarding class certification and the scope of many of the claims), and the related uncertainty of the potential outcomes of these proceedings. In making determinations of the likely outcome of pending litigation, the Company considers many factors, including, but not limited to, the nature of the claims, the Company's experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative mechanisms, the matter's current status and the damages sought or demands made. Accordingly, the Company's estimate will change from time to time, and actual losses could be more than the current estimate.
The Company believes that the estimate of the aggregate range of reasonably possible losses in excess of the amount accrued for its legal proceedings outstanding at September 30, 2017 was not material.
In certain legal proceedings, the Company may have recourse to insurance or third-party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. Loss estimates and accruals for potential liability related to legal proceedings are typically exclusive of potential recoveries, if any, under the Company's insurance policies or third-party indemnities. The Company had not recorded any potential recoveries under the Company's insurance policies or third-party indemnities as of September 30, 2017.
The matters described below fall outside of the normal parameters of the Company's routine legal proceedings.
Multi-State Investigation
The Company previously received Civil Investigative Demands from multiple state Attorneys General offices broadly relating to its debt collection practices in the U.S. The Company, which has fully cooperated with the investigation, has discussed potential resolution of the investigation with this coalition of Attorneys General, which could include penalties, restitution and/or the adoption of new practices and controls in the conduct of the Company's business. In these discussions, the state Attorneys General offices have taken positions with which the Company disagrees. If the Company is unable to resolve its differences with this multi-state coalition, it is possible that individual state Attorneys General offices may file claims against the Company.
Internal Revenue Service Audit
The IRS examined the Company's 2005 through 2012 tax returns and asserted that tax revenue recognition using the cost recovery method did not clearly reflect taxable income and therefore issued Notices of Deficiency to the Company for tax years ended December 31, 2005 through 2012 (the "Notices"). In response to the Notices, the Company filed petitions in the Tax Court challenging the deficiencies and the Tax Court set the trial to begin on May 15, 2017. On May 10, 2017, the Company reached a settlement with the IRS in regards to the Notices. Under the settlement, both parties agreed that no amounts were due for years 2005 through 2012 and the Tax Court entered decisions to that effect on June 22, 2017. Also, under the settlement, the Company

17


PRA Group, Inc.
Notes to Consolidated Financial Statements


agreed to utilize a new tax accounting method to recognize net finance receivables revenue effective with tax year 2017. Under the new method, a portion of the annual collections will amortize principal and the remaining portion will be considered taxable income. The Company will not be required to pay any interest or penalties related to the prior periods. The deferred tax liability related to the difference in timing between the new method and the prior method will be incorporated evenly into the Company’s tax filings over four years with no associated interest.
9. Fair Value:
As defined by FASB ASC Topic 820, "Fair Value Measurements and Disclosures" ("ASC 820"), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values.
Those levels of input are summarized as follows:
Level 1: Quoted prices in active markets for identical assets and liabilities.
Level 2: Observable inputs other than Level 1 quoted prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Unobservable inputs that are supported by little or no market activity. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Financial Instruments Not Required To Be Carried at Fair Value
In accordance with the disclosure requirements of FASB ASC Topic 825, "Financial Instruments" ("ASC 825"), the table below summarizes fair value estimates for the Company's financial instruments not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.
The carrying amounts of the financial instruments in the following table are recorded in the consolidated balance sheets at September 30, 2017 and December 31, 2016 (amounts in thousands):
 
September 30, 2017
 
December 31, 2016
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
113,754

 
$
113,754

 
$
94,287

 
$
94,287

Held-to-maturity investments
57,031

 
42,559

 
51,407

 
55,554

Other investments
14,712

 
9,709

 
14,998

 
12,573

Finance receivables, net
2,577,831

 
2,884,171

 
2,307,969

 
2,708,582

Financial liabilities:
 
 
 
 
 
 
 
Interest-bearing deposits
96,395

 
96,395

 
76,113

 
76,113

Revolving lines of credit
649,190

 
649,190

 
1,096,868

 
1,096,868

Term loans
762,902

 
762,902

 
430,764

 
430,764

Convertible senior notes
574,140

 
579,764

 
269,570

 
270,825

Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The carrying amount and estimates of the fair value of the Company's debt obligations outlined above do not include any related debt issuance costs associated with the debt obligations. The Company uses the following methods and assumptions to estimate the fair value of the financial instruments in the above table:
Cash and cash equivalents: The carrying amount approximates fair value and quoted prices for identical assets can be found in active markets. Accordingly, the Company estimates the fair value of cash and cash equivalents using Level 1 inputs.

18


PRA Group, Inc.
Notes to Consolidated Financial Statements


Held-to-maturity investments: Fair value of the Company's investment in the certificates of a closed-end Polish investment fund is estimated using proprietary pricing models that the Company utilizes to make portfolio purchase decisions. Accordingly, the Company estimates the fair value of its held-to-maturity investments using Level 3 inputs as there is little observable market data available and management is required to use significant judgment in its estimates.
Other investments: This class of investments consists of private equity funds that invest primarily in loans and securities including single-family residential debt; corporate debt products; and financially-oriented, real-estate-rich and other operating companies in the Americas, Western Europe, and Japan. These investments are subject to certain restrictions regarding transfers and withdrawals. The investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through the liquidation of the underlying assets of the fund. The fair value of the Company's interest is valued by the fund managers; accordingly, the Company estimates the fair value of these investments using Level 3 inputs. The investments are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over 1 to 4 years.
Finance receivables, net: The Company computed the estimated fair value of these receivables using proprietary pricing models that the Company utilizes to make portfolio purchase decisions. Accordingly, the Company's fair value estimates use Level 3 inputs as there is limited observable market data available and management is required to use significant judgment in its estimates.
Interest-bearing deposits: The carrying amount approximates fair value due to the short-term nature of the deposits and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
Revolving lines of credit: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
Term loans: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
Convertible notes: The Notes are carried at historical cost, adjusted for the debt discount. The fair value estimates for the Notes incorporate quoted market prices which were obtained from secondary market broker quotes which were derived from a variety of inputs including client orders, information from their pricing vendors, modeling software, and actual trading prices when they occur. Accordingly, the Company uses Level 2 inputs for its fair value estimates. Furthermore, in the table above, carrying amount represents the portion of the Notes classified as debt, while estimated fair value pertains to the face amount of the Notes.
Financial Instruments Required To Be Carried At Fair Value
The carrying amounts in the following table are measured at fair value on a recurring basis in the accompanying consolidated balance sheets at September 30, 2017 and December 31, 2016 (amounts in thousands):
 
Fair Value Measurements as of September 30, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Available-for-sale investments
$
3,769

 
$

 
$

 
$
3,769

Liabilities:
 
 
 
 
 
 
 
Interest rate swap contracts (recorded in accrued expenses)

 
701

 

 
701

 
 
 
 
 
 
 
 
 
Fair Value Measurements as of December 31, 2016
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Available-for-sale investments
$
2,138

 
$

 
$

 
$
2,138

Liabilities:
 
 
 
 
 
 
 
Interest rate swap contracts (recorded in accrued expenses)

 
2,825

 

 
2,825

Available-for-sale investments: Fair value of the Company's investment in government bonds and mutual funds is estimated using quoted market prices. Accordingly, the Company uses Level 1 inputs.

19


PRA Group, Inc.
Notes to Consolidated Financial Statements


Interest rate swap contracts: The interest rate swap contracts are carried at fair value which is determined by using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves and other factors. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
10. Recent Accounting Pronouncements:
In May 2014, FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09") that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance specifically excludes revenue received for servicing finance receivables. ASU 2014-09 also amends the required disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, with early application not permitted. The Company believes that the revenue generated by its subsidiary Claims Compensation Bureau, LLC ("CCB") is within the scope of this standard. Based on the Company's evaluation, the Company believes the new standard will not impact the accounting for revenue generated by CCB.
In January 2016, FASB issued ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), which provides new guidance on the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain provisions. Under this standard, changes in fair value of the Company's investments currently classified as available-for-sale will be reported in earnings rather than as an adjustment to Other Comprehensive Income/(Loss). The Company is currently in the process of evaluating the impact of adoption of 2016-01 on its Other Investments.
In February 2016, FASB issued ASU 2016-02, "Leases (Topic 842) Section A - Leases: Amendments to the FASB Account Standards Codification" ("ASU 2016-02"). ASU 2016-02 requires that a lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. It is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-02 on its consolidated financial statements. The Company has approximately $43.8 million in operating lease obligations as disclosed in its contractual obligations table in Part I, Item 2 of this Quarterly Report on Form 10-Q and is in the process of evaluating those contracts as well as other existing arrangements to determine if they qualify for lease accounting under the new standard. The Company does not plan to adopt the standard early.
In March 2016, FASB issued ASU 2016-06, "Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments" ("ASU 2016-06"). Topic 815 requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met, including the "clearly and closely related" criterion. ASU 2016-06 clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments in ASU 2016-06 apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. For public entities, this update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted ASU 2016-06 in the first quarter of 2017 which had no material impact on its consolidated financial statements.
In March 2016, FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). The guidance eliminates additional paid in capital ("APIC") pools and requires companies to recognize all excess tax benefits and tax deficiencies in the income statement when the awards vest or are settled. It also addresses the presentation of excess tax benefits and employee taxes paid on the statement of cash flows. Further, the new guidance eliminates the requirement to estimate forfeitures during the vesting period. Instead, companies can elect to account for actual forfeitures as they occur and record any previously unrecognized compensation expense for estimated forfeitures up to the period of adoption as a retrospective adjustment to beginning retained earnings. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company prospectively adopted ASU 2016-09 in the first quarter of 2017, which increased its provision for income taxes by $0.9 million during the nine months ended September 30, 2017, as a result of the recognition of all excess tax benefits and tax deficiencies in its income statement. ASU 2016-09 requires that excess tax benefits be presented as an operating activity in the statement of cash

20


PRA Group, Inc.
Notes to Consolidated Financial Statements


flows, so with its prospective adoption, prior periods have not been restated. The Company also elected to use an estimated forfeiture rate, based on historical data, to record its share-based compensation expense, which is consistent with its previous accounting treatment with respect to forfeitures. None of the other provisions of ASU 2016-09 had a material impact on its consolidated financial statements.
In June 2016, FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13"). ASU 2016-13 requires the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and allows for early adoption as of the beginning of an interim or annual reporting period beginning after December 15, 2018. ASU 2016-13 supersedes ASC Topic 310-30, which the Company currently follows to account for revenue on its finance receivables. ASU 2016-13 could have a significant impact on how the Company measures and records net revenue on its finance receivables. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-13 on its consolidated financial statements.
In August 2016, FASB issued ASU 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)" ("ASU 2016-15"). ASU 2016-15 reduces diversity in practice of how certain transactions are classified in the statement of cash flows. The new guidance clarifies the classification of cash activity related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions received from equity-method investments, and beneficial interests in securitization transactions. The guidance also describes a predominance principle in which cash flows with aspects of more than one class that cannot be separated should be classified based on the activity that is likely to be the predominant source or use of cash flow. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period, but requires all elements of the amendments to be adopted at once rather than individually. The new standard must be adopted using a retrospective transition method. The Company is currently in the process of evaluating the impact of adoption of ASU 2016-15 on its consolidated financial statements.
In October 2016, FASB issued ASU 2016-16, "Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year. The new standard must be adopted using a modified retrospective transition method which is a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company has determined the adoption of this standard will not have a significant impact on its consolidated financial statements.
In January 2017, FASB issued ASU-2017-01, "Business Combinations - Clarifying the Definition of a Business (Topic 805)" ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is expected to reduce the number of transactions that need to be further evaluated as businesses. The guidance applies to transactions that occur on or after an entity’s adoption date, the earliest of which is January 1, 2017. The Company has not completed a business combination in 2017.
In January 2017, FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 eliminates Step 2 of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is currently in the process of evaluating the impact of adoption of ASU 2017-04 on its consolidated financial statements.
In May 2017, FASB issued ASU No. 2017-09, “Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting” (ASU 2017-09"). ASU 2017-09 clarifies when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award.

21


PRA Group, Inc.
Notes to Consolidated Financial Statements


The new guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. This new guidance is not expected to have an impact on the Company's consolidated financial statements.
In August 2017, FASB issued ASU No. 2017-12, "Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"). ASU 2017-12 modifies the presentation and disclosure of hedging results. Further, it provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in income. The amendments in ASU 2017-12 are effective for fiscal years beginning after December 15, 2018 and for interim periods therein. The Company is currently in the process of evaluating the impact of adoption of ASU 2017-12 on its consolidated financial statements.
The Company does not expect that any other recently issued accounting pronouncements will have a material effect on its consolidated financial statements.
11. Sale of Subsidiaries:
As part of the Company’s strategy to focus on its primary business, the purchase, collection and management of portfolios of nonperforming loans, the Company decided in the fourth quarter of 2016 to sell its government services businesses: PRA Government Services, LLC; MuniServices, LLC; and PRA Professional Services, LLC. On January 24, 2017, the Company completed the sale of its government services businesses for $91.5 million in cash plus additional consideration for certain balance sheet items. The impact of the transaction was reported in the first quarter of 2017. The gain on sale was approximately $46.8 million.
During the second quarter of 2017, the Company sold its vehicle location, skip tracing and collateral recovery business, PLS, for $4.5 million which resulted in a gain on sale of approximately $1.6 million.
The assets and liabilities of the businesses that were sold during 2017 consisted of the following (amounts in thousands):
 
Nine Months Ended September 30, 2017
Other receivables, net
$
8,277

Property and equipment, net
4,559

Goodwill
29,683

Intangible assets, net
1,711

Other assets
772

Total assets
$
45,002

 
 
Accrued expenses
$
3,123

Total liabilities
$
3,123


22



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements:
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall cash collection trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:
a prolonged economic recovery or a deterioration in the economic or inflationary environment in the Americas or Europe, including the interest rate environment;
changes in the credit or capital markets, which affect our ability to borrow money or raise capital;
our ability to replace our nonperforming loans with additional portfolios;
our ability to purchase nonperforming loans at appropriate prices;
changes in, or interpretations of, federal, state, local, or foreign laws or the administrative practices of various bankruptcy courts, which may impact our ability to collect on our nonperforming loans;
our ability to collect sufficient amounts on our nonperforming loans;
the possibility that we could incur significant allowance charges on our finance receivables;
changes in, or interpretations of, bankruptcy or collection laws that could negatively affect our business, including by causing an increase in certain types of bankruptcy filings involving liquidations, which may cause our collections to decrease;
our ability to manage risks associated with our international operations;
changes in tax laws regarding earnings of our subsidiaries located outside of the United States ("U.S.");
the possibility that we could incur goodwill or other intangible asset impairment charges;
adverse effects from the vote by the United Kingdom ("UK") to leave the European Union ("EU");
adverse outcomes in pending litigations or administrative proceedings;
our loss contingency accruals may not be adequate to cover actual losses;
the possibility that class action suits and other litigation could divert our management's attention and increase our expenses;
the possibility that we could incur business or technology disruptions or cyber incidents;
our ability to collect and enforce our finance receivables may be limited under federal, state, local and foreign laws;
our ability to comply with existing and new regulations of the collection industry, the failure of which could result in penalties, fines, litigation, damage to our reputation, or the suspension or termination of or required modification to our ability to conduct our business;
investigations or enforcement actions by governmental authorities, including the Consumer Financial Protection Bureau ("CFPB"), which could result in changes to our business practices; negatively impact our portfolio purchasing volume; make collection of account balances more difficult or expose us to the risk of fines, penalties, restitution payments, and litigation;
the possibility that compliance with foreign and U.S. laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions;
our ability to raise the funds necessary to repurchase the convertible senior notes or to settle conversions in cash;
our ability to maintain, renegotiate or replace our credit facilities;
changes in interest or exchange rates, which could reduce our net income, and the possibility that future hedging strategies may not be successful, which could adversely affect our results of operations and financial condition, as could our failure to comply with hedge accounting principles and interpretations; and
the risk factors discussed in our filings with the Securities and Exchange Commission (the "SEC").
You should assume that the information appearing in this Quarterly Report is accurate only as of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date.
You should carefully consider the factors listed above and review the following "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as the "Risk Factors" section and "Business" section of our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 1, 2017 ("2016 Form 10-K").
Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in, or implied by, this Quarterly Report could turn out to be materially different. Except as required by law, we assume no obligation to publicly update or revise our forward-looking statements after the date of this Quarterly Report and you should not expect us to do so.

23



Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do not, by policy, selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Frequently Used Terms
We use the following terminology throughout this Quarterly Report:
"Allowance charges" refers to a reduction in income recognized on finance receivables on pools of finance receivables due to a decrease in cash collection estimates or a delay in the expected timing of the cash collections.
"Amortization rate" refers to cash collections applied to principal on finance receivables as a percentage of total cash collections.
"Buybacks" refers to purchase price refunded by the seller due to the return of ineligible accounts.
"Cash collections" refers to collections on our owned finance receivables portfolios.
"Core" accounts or portfolios refer to accounts or portfolios that are nonperforming loans and are not in an insolvent status upon purchase. These accounts are aggregated separately from insolvency accounts.
"Estimated remaining collections" or "ERC" refers to the sum of all future projected cash collections on our owned finance receivables portfolios.
"Fee income" refers to revenues generated from our fee-for-service businesses.
"Income recognized on finance receivables" refers to income derived from our owned finance receivables portfolios.
"Income recognized on finance receivables, net" refers to income derived from our owned finance receivables portfolios and is shown net of allowance charges/reversals.
"Insolvency" accounts or portfolios refer to accounts or portfolios of receivables that are in an insolvent status when we purchase them and as such are purchased as a pool of insolvent accounts. These include Individual Voluntary Arrangements ("IVAs"), Trust Deeds in the UK, Consumer Proposals in Canada and bankruptcy accounts in the U.S., Canada, Germany and the UK.
"Net finance receivable balance" is recorded on our balance sheet and refers to the purchase price less principal amortization and net allowance charges/reversals.
"Nonperforming loans" refers to the loans that we purchase, which consist generally of defaulted, unpaid obligations of individuals that have been charged-off by the credit grantor.
"Principal amortization" refers to cash collections applied to principal on finance receivables.
"Purchase price" refers to the cash paid to a seller to acquire nonperforming loans, plus certain capitalized costs, less buybacks.
"Purchase price multiple" refers to the total estimated collections (as defined below) on owned finance receivables portfolios divided by purchase price.
"Total estimated collections" or "TEC" refers to actual cash collections, including cash sales, plus estimated remaining collections on our finance receivables portfolios.
All references in this Quarterly Report to "PRA Group," "our," "we," "us," the "Company" or similar terms are to PRA Group, Inc. and its subsidiaries.
Overview
We are a global financial and business services company with operations in the Americas and Europe. Our primary business is the purchase, collection and management of portfolios of nonperforming loans. As discussed in Note 11, we sold our government services businesses in January 2017 and PLS in June 2017.
We are headquartered in Norfolk, Virginia, and as of September 30, 2017 employ 4,555 full time equivalents. Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol "PRAA."

24



Earnings Summary
During the three months ended September 30, 2017, net income attributable to PRA Group, Inc. was $15.6 million, or $0.34 per diluted share, compared with $34.3 million, or $0.74 per diluted share, in the three months ended September 30, 2016. Total revenues decreased 9.5% to $201.0 million in the three months ended September 30, 2017, compared to the three months ended September 30, 2016. Revenues in the three months ended September 30, 2017 consisted of $197.2 million in income recognized on finance receivables, net; $2.7 million in fee income; and $1.1 million in other revenue. Revenues in the three months ended September 30, 2016 consisted of $202.6 million in income recognized on finance receivables, net; $17.6 million in fee income; and $1.7 million in other revenue. Income recognized on finance receivables, net, in the three months ended September 30, 2017 decreased $5.4 million, or 2.7%, over the three months ended September 30, 2016, primarily due to a reduction in revenue generated by our Americas Insolvency portfolio which has declined due to lower volumes of purchasing during fiscal years 2014 to 2016. Cash collections were $381.8 million in the three months ended September 30, 2017, up 2.7%, or $10.1 million, as compared to the three months ended September 30, 2016.
A summary of the sources of our revenue during the three months ended September 30, 2017 and 2016 is presented below (amounts in thousands):
 
For the Three Months Ended September 30,
 
2017
 
2016
Cash collections
$
381,834

 
$
371,700

Principal amortization
(181,174
)
 
(155,915
)
Net allowance charges
(3,412
)
 
(13,146
)
Income recognized on finance receivables, net
197,248

 
202,639

Fee income
2,671

 
17,597

Other revenue
1,091

 
1,748

Total revenues
$
201,010

 
$
221,984

Operating expenses were $146.8 million for the three months ended September 30, 2017, a decrease of $7.7 million or 5.0%, as compared to the three months ended September 30, 2016. This decrease was primarily due to a decrease in legal collection expenses, mainly due to a reduction in the number of accounts brought into the legal collection process in the Americas, in addition to a decrease in agency fees, due primarily to the sale of PLS in June 2017, as well as a decrease in third-party collection fees incurred by our foreign operations.
During the three months ended September 30, 2017 and 2016, we acquired finance receivables portfolios at a cost of $210.9 million and $161.3 million, respectively.  In any period, we acquire nonperforming loans that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase prices relative to face value for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can increase or decrease pricing, irrespective of other quality fluctuations. As a result, the average purchase price paid relative to face value for any given period can fluctuate dramatically. However, regardless of the average purchase price, we intend to target a similar net income margin in pricing our portfolio acquisitions during any given period. Therefore, the price paid relative to face value is not necessarily indicative of profitability.

25



Results of Operations
The results of operations include the financial results of the Company and all of its subsidiaries. The following table sets forth consolidated income statement amounts as a percentage of total revenues for the periods indicated:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Income recognized on finance receivables, net
98.1
 %
 
91.3
 %
 
95.8
 %
 
90.8
 %
Fee income
1.3
 %
 
7.9
 %
 
3.1
 %
 
8.3
 %
Other revenue
0.6
 %
 
0.8
 %
 
1.1
 %
 
0.9
 %
Total revenues
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Operating expenses:
 
 
 
 
 
 
 
Compensation and employee services
34.1
 %
 
29.7
 %
 
33.5
 %
 
29.2
 %
Legal collection expenses
13.7
 %
 
15.1
 %
 
14.9
 %
 
14.4
 %
Agency fees
3.8
 %
 
5.4
 %
 
4.5
 %
 
5.1
 %
Outside fees and services
7.9
 %
 
6.6
 %
 
7.8
 %
 
6.9
 %
Communication
4.3
 %
 
3.5
 %
 
4.1
 %
 
3.9
 %
Rent and occupancy
1.8
 %
 
1.7
 %
 
1.8
 %
 
1.7
 %
Depreciation and amortization
2.4
 %
 
2.8
 %
 
2.5
 %
 
2.7
 %
Other operating expenses
5.0
 %
 
4.7
 %
 
5.3
 %
 
4.8
 %
Total operating expenses
73.0
 %
 
69.6
 %
 
74.4
 %
 
68.7
 %
Income from operations
27.0
 %
 
30.4
 %
 
25.6
 %
 
31.3
 %
Other income and (expense):
 
 
 
 
 
 
 
Gain on sale of subsidiaries
0.2
 %

 %
 
8.0
 %
 
 %
Interest expense, net
(12.9
)%
 
(8.7
)%
 
(11.5
)%
 
(8.9
)%
Foreign exchange (loss)/gain
(0.6
)%
 
2.3
 %
 
(0.2
)%
 
0.8
 %
Income before income taxes
13.7
 %
 
24.0
 %
 
21.9
 %
 
23.2
 %
Provision for income taxes
5.3
 %
 
7.5
 %
 
8.7
 %
 
7.4
 %
Net income
8.4
 %
 
16.5
 %
 
13.2
 %
 
15.7
 %
Adjustment for net income attributable to noncontrolling interest
0.7
 %
 
1.0
 %
 
0.8
 %
 
0.5
 %
Net income attributable to PRA Group, Inc.
7.7
 %
 
15.5
 %
 
12.4
 %
 
15.2
 %
Three Months Ended September 30, 2017 Compared To Three Months Ended September 30, 2016
Revenues
Total revenues were $201.0 million for the three months ended September 30, 2017, a decrease of $21.0 million, or 9.5%, compared to total revenues of $222.0 million for the three months ended September 30, 2016.
Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net was $197.2 million for the three months ended September 30, 2017, a decrease of $5.4 million, or 2.7%, compared to income recognized on finance receivables, net, of $202.6 million for the three months ended September 30, 2016. The decrease was due to a variety of factors. Income generated by our Americas Insolvency portfolios declined due primarily to lower volumes of purchasing during fiscal years 2014 to 2016. Income generated by our European portfolios declined due primarily to the impact of the current competitive pricing environment which has resulted in lower yields on new portfolios. Also, elevated allowance charges incurred during 2016 reduced the income-earning principal balances of our portfolios, particularly the Americas Core portfolios. This was offset by overperformance on select Americas Core and European Core portfolios which resulted in yield increases on certain pools, as well as a decline in net allowance charges, which were $3.4 million for the three months ended September 30, 2017, compared to $13.1 million for the three months ended September 30, 2016.

26



Cash collections were $381.8 million in the three months ended September 30, 2017, up $10.1 million, or 2.7%, as compared to the three months ended September 30, 2016. The increase in cash collections was mainly caused by increases in our European Core and Americas Core portfolio collections, which increased $6.7 million and $2.2 million, respectively. Cash collections on fully amortized pools were $14.1 million in the three months ended September 30, 2017, up $6.4 million or 83.1%, compared to $7.7 million in the three months ended September 30, 2016. Cash collections on pools on cost recovery were $8.1 million in the three months ended September 30, 2017, up $1.4 million or 20.9%, compared to $6.7 million in the three months ended September 30, 2016.
Income recognized on finance receivables, net, is shown net of changes in valuation allowances which are recorded for significant decreases in expected cash flows or a change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the three months ended September 30, 2017, we recorded net allowance charges of $3.4 million, consisting of $2.4 million on our Americas portfolios and $1.0 million on our European portfolios. For the three months ended September 30, 2016, we recorded net allowance charges of $13.1 million, consisting of $12.4 million on our Americas portfolios and $0.7 million on our European portfolios.
During the three months ended September 30, 2017, we reclassified $68.7 million from nonaccretable difference to accretable yield primarily due to increased cash collection forecasts relating mainly to certain Americas Core and European Core pools. During the three months ended September 30, 2016, we reclassified $5.9 million from nonaccretable difference to accretable yield primarily due to increased cash collection forecasts relating mainly to certain European Core pools, partially offset by decreases in cash collection forecasts relating mainly to certain Americas Core pools.
Fee Income
Fee income was $2.7 million in the three months ended September 30, 2017, a decrease of $14.9 million or 84.7%, compared to $17.6 million in the three months ended September 30, 2016. This was primarily due to a decrease in fee income resulting from the sale of our government services businesses in January 2017 and the sale of PLS in June 2017.
Other Revenue
Other revenue decreased to $1.1 million in the three months ended September 30, 2017 from $1.7 million in the three months ended September 30, 2016, primarily due to a decrease in revenue generated by our investments.
Operating Expenses
Total operating expenses were $146.8 million for the three months ended September 30, 2017, a decrease of $7.7 million or 5.0%, compared to operating expenses of $154.5 million for the three months ended September 30, 2016.
Compensation and Employee Services
Compensation and employee services expenses were $68.5 million for the three months ended September 30, 2017, an increase of $2.6 million, or 3.9%, compared to compensation and employee services expenses of $65.9 million for the three months ended September 30, 2016. Compensation expense increased primarily as a result of larger average staff sizes, partially offset by a decrease resulting from the sale of our government services businesses in January 2017 and the sale of PLS in June 2017. In the U.S., we have hired approximately 700 net new collectors since September 30, 2016. Total full-time equivalents increased to 4,555 as of September 30, 2017, compared to 3,859 as of September 30, 2016.
Legal Collection Expenses
Legal collection expenses represent costs paid to courts where a lawsuit is filed, contingent fees incurred for the cash collections generated for us by independent third-party attorneys, and the cost of documents paid to sellers of portfolios. Legal collection expenses were $27.6 million for the three months ended September 30, 2017, a decrease of $5.8 million or 17.4%, compared to legal collection expenses of $33.4 million for the three months ended September 30, 2016. The decrease was primarily due to a decrease in costs paid to courts where a lawsuit is filed, mainly due to a decrease in the number of accounts brought into the legal collection process in the Americas. Our costs paid to courts were $17.3 million for the three months ended September 30, 2017, a decrease of $6.1 million or 26.1% compared to $23.4 million for the three months ended September 30, 2016. Additionally, our costs paid to sellers of nonperforming loans for documents were $0.3 million for the three months ended September 30, 2017, a decrease of $0.4 million or 57.1% compared to $0.7 million for the three months ended September 30, 2016. The decrease was primarily the result of sellers providing more account documents to us when we purchase portfolios, mainly as a result of regulatory requirements. This was partially offset by an increase in legal collection expenses paid to third-party attorneys. Our costs paid to third-party attorneys were $10.1 million for the three months ended September 30, 2017, an increase of $0.8 million or 8.6% compared to $9.3 million for the three months ended September 30, 2016.

27



Agency Fees
Agency fees primarily represent third-party collection fees and costs paid to repossession agents to repossess vehicles. Agency fees were $7.6 million for the three months ended September 30, 2017, compared to $12.0 million for the three months ended September 30, 2016. The decrease was primarily due to the impact of the sale of PLS in June 2017 in addition to a decrease in third-party collection fees incurred by our foreign operations.
Outside Fees and Services
Outside fees and services expenses were $15.6 million for the three months ended September 30, 2017, an increase of $0.9 million, or 6.1%, compared to outside fees and services expenses of $14.7 million for the three months ended September 30, 2016. This increase was primarily due to a $1.7 million increase in consulting fees, partially offset by a $0.8 million decrease in corporate legal and other professional fees.
Communication
Communication expenses were $8.7 million for the three months ended September 30, 2017, an increase of $0.9 million or 11.5%, compared to communication expenses of $7.8 million for the three months ended September 30, 2016. This increase was primarily due to a $1.0 million increase in postage expenses. This was partially offset by a $0.1 million decrease in telephone expense.
Rent and Occupancy
Rent and occupancy expenses were $3.7 million for the three months ended September 30, 2017, a decrease of $0.2 million or 5.1%, compared to rent and occupancy expense of $3.9 million for the three months ended September 30, 2016. The decrease was primarily due to the impact of the sale of our government services businesses in January 2017 and the sale of PLS in June 2017.
Depreciation and Amortization
Depreciation and amortization expenses were $4.8 million for the three months ended September 30, 2017, a decrease of $1.4 million, or 22.6%, compared to depreciation and amortization expenses of $6.2 million for the three months ended September 30, 2016. The decrease was primarily due to the impact of the sale of our government services businesses in January 2017 and the sale of PLS in June 2017.
Other Operating Expenses
Other operating expenses were $10.1 million for the three months ended September 30, 2017, a decrease of $0.4 million, or 3.8%, compared to other operating expenses of $10.5 million for the three months ended September 30, 2016.
Gain on Sale of Subsidiaries
Gain on sale of subsidiaries was $0.3 million for the three months ended September 30, 2017 compared to $0 for the three months ended September 30, 2016. The amount relates to a purchase price true-up on the sale of PLS.
Interest Expense, Net
Interest expense, net was $25.9 million during the three months ended September 30, 2017, an increase of $6.6 million or 34.2%, compared to $19.3 million for the three months ended September 30, 2016. The increase was primarily due to the additional interest incurred as a result of the issuance of our new convertible senior notes, which we issued and sold on May 26, 2017, as well as increases in interest rates and unused line fees. This was partially offset by a decrease in interest expense caused by our interest rate swaps and a decrease in the average borrowings outstanding on our revolving credit facilities and term loans.






28



Interest expense, net consisted of the following for the three months ended September 30, 2017 and 2016 (amounts in thousands):
 
Three Months Ended September 30,
 
2017
 
2016
 
Change
Stated interest on debt obligations and unused line fees
$
17,945

 
$
16,600

 
$
1,345

Coupon interest on convertible debt
5,175

 
2,156

 
3,019

Amortization of convertible debt discount
2,796

 
1,127

 
1,669

Amortization of loan fees and other loan costs
2,505

 
1,647

 
858

Interest rate swap agreements
(1,025
)
 
(669
)
 
(356
)
Interest income
(1,497
)
 
(1,551
)
 
54

Interest expense, net
$
25,899

 
$
19,310

 
$
6,589

Net Foreign Currency Transaction (Losses)/Gains
Net foreign currency transaction losses were $1.1 million for the three months ended September 30, 2017 compared to net foreign currency transaction gains of $5.0 million for the three months ended September 30, 2016. In any given period, our foreign entities conduct operations in currencies different from their functional currency which generate foreign currency transaction gains and losses.
Provision for Income Taxes
Provision for income taxes was $10.7 million for the three months ended September 30, 2017, a decrease of $6.0 million, or 35.9%, compared to provision for income taxes of $16.7 million for the three months ended September 30, 2016. The decrease was primarily due to a $25.6 million decrease in income before income taxes for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, partially offset by an increase in our effective tax rate. During the three months ended September 30, 2017, our effective tax rate was 38.7%, compared to 32.2% for full-year 2016. The increase was due primarily to changes in the mix of projected taxable income between tax jurisdictions and an increase in the estimated blended rate for U.S. state taxes.  The blended rate for U.S. state taxes increase was due to changes in the mix of earnings, dispositions of subsidiaries, and other factors.
Nine Months Ended September 30, 2017 Compared To Nine Months Ended September 30, 2016
Revenues
Total revenues were $607.9 million for the nine months ended September 30, 2017, a decrease of $67.4 million, or 10.0%, compared to total revenues of $675.3 million for the nine months ended September 30, 2016.
Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net was $582.6 million for the nine months ended September 30, 2017, a decrease of $30.6 million, or 5.0%, compared to income recognized on finance receivables, net, of $613.2 million for the nine months ended September 30, 2016. The decrease was due to a variety of factors. Income generated by our Americas Insolvency portfolios declined due primarily to lower volumes of purchasing during fiscal years 2014 to 2016. Income generated by our European portfolios declined due primarily to the impact of the current competitive pricing environment which has resulted in lower yields on new portfolios. Also, elevated allowance charges incurred during 2016 reduced the income-earning principal balances of our portfolios, particularly the Americas Core portfolios. This was offset by overperformance on select Americas Core and European Core portfolios which resulted in yield increases on certain pools, as well as a decline in net allowance charges, which were $9.4 million for the nine months ended September 30, 2017, compared to $36.0 million for the nine months ended September 30, 2016.
Cash collections were $1,136.3 million for the nine months ended September 30, 2017, compared to $1,143.2 million for the nine months ended September 30, 2016, a decrease of $6.9 million, or 0.6%. The decrease in cash collections was mainly caused by a decrease in our Americas Insolvency portfolio collections, which decreased $33.4 million or 17.0%, due primarily to lower volumes of purchasing during 2014 to 2016. This was partially offset by increases in our Americas Core and European cash collections. Cash collections on fully amortized pools were $40.2 million in the nine months ended September 30, 2017, up $15.1 million or 60.2%, compared to $25.1 million in the nine months ended September 30, 2016. Cash collections on pools on cost recovery were $25.0 million in the nine months ended September 30, 2017, up $3.2 million or 14.7%, compared to $21.8 million in the nine months ended September 30, 2016.

29



For the nine months ended September 30, 2017, we recorded net allowance charges of $9.4 million, consisting of $4.8 million on our Americas Core portfolios and $1.1 million on our Americas Insolvency portfolios. We also recorded net allowance charges of $3.5 million on our European portfolios. For the nine months ended September 30, 2016, we recorded net allowance charges of $36.0 million, consisting of $32.3 million on our Americas Core portfolios and $0.3 million on our Americas Insolvency portfolios. We also recorded net allowance charges of $3.4 million on our European portfolios.
During the nine months ended September 30, 2017 and 2016, the Company reclassified $93.3 million and $95.9 million, respectively, from nonaccretable difference to accretable yield due primarily to increased cash collection forecasts relating mainly to certain Americas Core pools, Americas Insolvency pools and European Core pools during the nine months ended September 30, 2017, and certain Americas Insolvency pools and European Core pools during the nine months ended September 30, 2016.
Fee Income
Fee income was $18.9 million in the nine months ended September 30, 2017, a decrease of $37.3 million or 66.4%, compared to $56.2 million in the nine months ended September 30, 2016. This was primarily due to a decrease in fee income resulting from the sale of our government services businesses in January 2017 and the sale of PLS in June 2017.
Other Revenue
Other revenue increased to $6.4 million in the nine months ended September 30, 2017 from $6.0 million in the nine months ended September 30, 2016, primarily due to an increase in revenue generated by our investments.
Operating Expenses
Operating expenses were $452.1 million for the nine months ended September 30, 2017, a decrease of $12.1 million or 2.6%, compared to operating expenses of $464.2 million for the nine months ended September 30, 2016.
Compensation and Employee Services
Compensation and employee services expenses were $203.8 million for the nine months ended September 30, 2017, an increase of $6.3 million, or 3.2% compared to compensation and employee services expenses of $197.5 million for the nine months ended September 30, 2016. Compensation expense increased primarily as a result of larger average staff sizes, partially offset by a decrease resulting from the sale of our government services businesses in January 2017 and the sale of PLS in June 2017. In the U.S., we have hired approximately 700 net new collectors since September 30, 2016. Total full-time equivalents increased to 4,555 as of September 30, 2017, compared to 3,859 as of September 30, 2016.
Legal Collection Expenses
Legal collection expenses were $90.6 million for the nine months ended September 30, 2017, a decrease of $6.9 million, or 7.1%, compared to legal collection expenses of $97.5 million for the nine months ended September 30, 2016. The decrease was primarily due to a decrease in legal collection expenses paid to third-party attorneys, primarily as a result of a decrease in domestic external legal collections. Our costs paid to third-party attorneys were $33.3 million for the nine months ended September 30, 2017, a decrease of $4.1 million or 11.0% compared to $37.4 million for the nine months ended September 30, 2016. Additionally, our costs paid to sellers of nonperforming loans for documents were $1.0 million for the nine months ended September 30, 2017, a decrease of $3.0 million or 75.0% compared to $4.0 million for the nine months ended September 30, 2016. The decrease was primarily the result of sellers providing more account documents to us when we purchase portfolios, mainly as a result of regulatory requirements. This was offset by an increase in costs paid to courts where a lawsuit is filed mainly related to the expansion of the number of accounts brought into the legal channel in Europe during the nine months ended September 30, 2017. Our costs paid to courts were $56.3 million for the nine months ended September 30, 2017, an increase of $0.2 million or 0.4% compared to $56.1 million for the nine months ended September 30, 2016.
Agency Fees
Agency fees were $27.7 million for the nine months ended September 30, 2017, compared to $34.2 million for the nine months ended September 30, 2016. The decrease was primarily due to the impact of the sale of PLS in June 2017 and a decrease in third-party collection fees incurred by our foreign operations.
Outside Fees and Services
Outside fees and services expenses were $47.0 million for the nine months ended September 30, 2017, an increase of $0.6 million, or 1.3%, compared to outside fees and services expenses of $46.4 million for the nine months ended September 30,

30



2016. The increase was primarily the result of a $1.1 million increase in payment processing fees and database fees. This was partially offset by a $0.5 million decrease in consulting and other outside professional fees.
Communication
Communication expenses were $25.1 million for the nine months ended September 30, 2017, a decrease of $1.0 million, or 3.8%, compared to communication expenses of $26.1 million for the nine months ended September 30, 2016. This decrease was primarily due to the impact of the sale of our government services businesses in January 2017.
Rent and Occupancy
Rent and occupancy expenses were $10.8 million for the nine months ended September 30, 2017, a decrease of $0.9 million, or 7.7%, compared to rent and occupancy expenses of $11.7 million for the nine months ended September 30, 2016. The decrease was primarily due to the impact of the sale of our government services businesses in January 2017 and the sale of PLS in June 2017.
Depreciation and Amortization
Depreciation and amortization expenses were $15.1 million for the nine months ended September 30, 2017, a decrease of $3.2 million, or 17.5%, compared to depreciation and amortization expenses of $18.3 million for the nine months ended September 30, 2016. The decrease was primarily due to the impact of the sale of our government services businesses in January 2017.
Other Operating Expenses
Other operating expenses were $32.1 million for the nine months ended September 30, 2017, a decrease of $0.3 million, or 0.9%, compared to other operating expenses of $32.4 million for the nine months ended September 30, 2016.
Gain on Sale of Subsidiaries
Gain on sale of subsidiaries was $48.5 million for the nine months ended September 30, 2017 compared to $0 for the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we sold our government services businesses and PLS which resulted in gains of $46.9 million and $1.6 million, respectively.
Interest Expense, Net
Interest expense, net was $69.7 million for the nine months ended September 30, 2017, an increase of $9.9 million or 16.6%, compared to $59.8 million for the nine months ended September 30, 2016. The increase was primarily due to the additional interest incurred as a result of the issuance of our new convertible senior notes, which we issued and sold on May 26, 2017, as well as increases in interest rates and unused line fees. This was partially offset by a decrease in interest expense caused by our interest rate swaps and a decrease in the average borrowings outstanding on our revolving credit facilities and term loans.

Interest expense, net consisted of the following for the nine months ended September 30, 2017 and 2016 (amounts in thousands):
 
Nine months ended September 30,
 
2017
 
2016
 
Change
Stated interest on debt obligations and unused line fees
$
52,863

 
$
45,429

 
$
7,434

Coupon interest on convertible debt
10,695

 
6,468

 
4,227

Amortization of convertible debt discount
5,760

 
3,336

 
2,424

Amortization of loan fees and other loan costs
7,068

 
6,187

 
881

Interest rate swap agreements
(2,445
)
 
2,287

 
(4,732
)
Interest income
(4,279
)
 
(3,869
)
 
(410
)
Interest expense, net
$
69,662

 
$
59,838

 
$
9,824


31



Net Foreign Currency Transaction (Losses)/Gains
Net foreign currency transaction losses were $1.4 million for the nine months ended September 30, 2017 compared to net foreign currency transaction gains of $5.2 million for the nine months ended September 30, 2016. In any given period, our foreign entities conduct operations in currencies different from their functional currency which generate foreign currency transaction gains and losses.
Provision for Income Taxes
Provision for income taxes was $52.9 million for the nine months ended September 30, 2017, an increase of $2.7 million, or 5.4%, compared to provision for income taxes of $50.2 million for the nine months ended September 30, 2016. The increase was primarily due to an increase in our effective tax rate. During the nine months ended September 30, 2017, our effective tax rate was 39.7%, compared to 32.2% for full year 2016. The increase was due primarily to changes in the mix of projected taxable income between tax jurisdictions caused in large part by gains on sales of subsidiaries and to an increase in the estimated blended rate for U.S. state taxes which was caused by changes in the mix of earnings, dispositions of subsidiaries, and other factors. This was partially offset by a decrease in income before income taxes of $23.3 million, or 14.9%, for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016.

32



Supplemental Performance Data
Finance Receivables Portfolio Performance
The following tables show certain data related to our finance receivables portfolio. Certain adjustments, as noted in the footnotes to these tables, have been made to reduce the impact of foreign currency fluctuations on ERC and purchase price multiples.
These tables disclose our Americas and European Core and Insolvency portfolios. The accounts represented in the Insolvency tables are those portfolios of accounts that were in an insolvency status at the time of purchase. This contrasts with accounts in our Core portfolios that file for bankruptcy/insolvency protection after we purchase them, which continue to be tracked in their corresponding Core portfolio. Core customers sometimes file for bankruptcy/insolvency protection subsequent to our purchase of the related Core portfolio. When this occurs, we adjust our collection practices accordingly to comply with bankruptcy/insolvency rules and procedures; however, for accounting purposes, these accounts remain in the related Core portfolio. Conversely, Insolvency accounts may be dismissed voluntarily or involuntarily subsequent to our purchase of the related Insolvency portfolio. Dismissal occurs when the terms of the bankruptcy are not met by the petitioner. When this occurs, we are typically free to pursue collection outside of bankruptcy procedures; however, for accounting purposes, these accounts remain in the related Insolvency pool.
Purchase price multiples can vary over time due to a variety of factors, including pricing competition, supply levels, age of the receivables purchased, and changes in our operational efficiency. For example, increased pricing competition during the 2005 to 2008 period negatively impacted purchase price multiples of our Core portfolio compared to prior years. Conversely, during the 2009 to 2011 period, pricing disruptions occurred as a result of the economic downturn. This created unique and advantageous purchasing opportunities, particularly within the Insolvency market, relative to the prior four years. Purchase price multiples can also vary among types of finance receivables. For example, we generally incur lower collection costs on our Insolvency portfolio compared with our Core portfolio. This allows us, in general, to pay more for an Insolvency portfolio and experience lower purchase price multiples, while generating similar net income margins when compared with a Core portfolio.
When competition increases and/or supply decreases, pricing often becomes negatively impacted relative to expected collections, and yields tend to trend lower. The opposite tends to occur when competition decreases and/or supply increases.
Within a given portfolio type, to the extent that lower purchase price multiples are the result of more competitive pricing and lower yields, this will generally lead to higher amortization rates and lower profitability. As portfolio pricing becomes more favorable on a relative basis, our profitability will tend to increase. Profitability within given Core portfolio types may also be impacted by the age and quality of the receivables, which impact the cost to collect those accounts. Fresher accounts, for example, typically carry lower associated collection expenses, while older accounts and lower balance accounts typically carry higher costs and as a result require higher purchase price multiples to achieve the same net profitability as fresher accounts.
Revenue recognition under Financial Accounting Standards Board ("FASB") Accounting Standards Codification 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30") is driven by estimates of total collections as well as the timing of those collections. We record new portfolio purchases based on our best estimate of the cash flows expected at acquisition, which reflects the uncertainties inherent in the purchase of nonperforming loans and the results of our underwriting process. Subsequent to the initial booking, as we gain collection experience and confidence with a pool of accounts, we regularly update ERC. As a result, our estimate of total collections has often increased as pools have aged. These processes have tended to cause the ratio of ERC to purchase price for any given year of buying to gradually increase over time. Thus, all factors being equal in terms of pricing, one would typically tend to see a higher collection to purchase price ratio from a pool of accounts that was six years from purchase than a pool that was just two years from purchase.
The numbers presented in the following tables represent gross cash collections and do not reflect any costs to collect; therefore, they may not represent relative profitability. Due to all the factors described above, readers should be cautious when making comparisons of purchase price multiples among periods and between types of receivables.
We hold a majority interest in a closed-end Polish investment fund that purchases and services finance receivables. Our investment in this fund is classified in our consolidated balance sheets as "Investments" and as such is not included in the following tables. The equivalent of the estimated remaining collections of the portfolios, expected to be received by us, was $61.3 million at September 30, 2017.


33



Purchase Price Multiples
as of September 30, 2017 
Amounts in thousands
Purchase Period
Purchase Price (1)(3)
Net Finance Receivables (4)
ERC-Historical Period Exchange Rates (5)