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 March 31, 2018
¨ 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 May 4, 2018 was 45,275,197.



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
March 31, 2018 and December 31, 2017
(Amounts in thousands)
 
(unaudited)
 
 
 
March 31,
2018
 
December 31,
2017
Assets
 
 
 
Cash and cash equivalents
$
101,418

 
$
120,516

Investments
87,764

 
78,290

Finance receivables, net
2,767,131

 
2,771,921

Other receivables, net
14,308

 
15,770

Income taxes receivable
10,271

 
21,686

Net deferred tax asset
60,446

 
57,529

Property and equipment, net
53,788

 
49,311

Goodwill
544,293

 
526,513

Intangible assets, net
22,523

 
23,572

Other assets
37,639

 
32,656

Total assets
$
3,699,581

 
$
3,697,764

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
2,330

 
$
4,992

Accrued expenses
85,137

 
85,993

Income taxes payable
23,872

 
10,771

Net deferred tax liability
146,410

 
171,185

Interest-bearing deposits
90,769

 
98,580

Borrowings
2,150,873

 
2,170,182

Other liabilities
15,146

 
9,018

Total liabilities
2,514,537

 
2,550,721

Redeemable noncontrolling interest
9,697

 
9,534

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, 45,275 shares issued and outstanding at March 31, 2018; 100,000 shares authorized, 45,189 shares issued and outstanding at December 31, 2017
453

 
452

Additional paid-in capital
54,271

 
53,870

Retained earnings
1,228,808

 
1,211,632

Accumulated other comprehensive loss
(155,687
)
 
(178,607
)
Total stockholders' equity - PRA Group, Inc.
1,127,845

 
1,087,347

Noncontrolling interest
47,502

 
50,162

Total equity
1,175,347

 
1,137,509

Total liabilities and equity
$
3,699,581

 
$
3,697,764

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

3



PRA Group, Inc.
Consolidated Income Statements
For the three months ended March 31, 2018 and 2017
(unaudited)
(Amounts in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2018
 
2017
Revenues:
 
 
 
Income recognized on finance receivables, net
$
217,699

 
$
194,535

Fee income
5,327

 
9,858

Other revenue
157

 
2,165

Total revenues
223,183

 
206,558

Operating expenses:
 
 
 
Compensation and employee services
81,237

 
68,468

Legal collection expenses
32,912

 
31,728

Agency fees
8,278

 
10,800

Outside fees and services
14,158

 
13,285

Communication
11,557

 
9,137

Rent and occupancy
4,314

 
3,783

Depreciation and amortization
4,929

 
5,215

Other operating expenses
12,184

 
10,885

Total operating expenses
169,569

 
153,301

Income from operations
53,614

 
53,257

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

 
46,845

Interest expense, net
(25,781
)
 
(21,257
)
Foreign exchange gain
1,293

 
2,179

Other
243

 

Income before income taxes
29,369

 
81,024

Provision for income taxes
6,137

 
31,409

Net income
23,232

 
49,615

Adjustment for net income attributable to noncontrolling interests
2,126

 
1,448

Net income attributable to PRA Group, Inc.
$
21,106

 
$
48,167

Net income per common share attributable to PRA Group, Inc.:
 
 
 
Basic
$
0.47

 
$
1.04

Diluted
$
0.47

 
$
1.03

Weighted average number of shares outstanding:
 
 
 
Basic
45,231

 
46,406

Diluted
45,370

 
46,627

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 months ended March 31, 2018 and 2017
(unaudited)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Net income
$
23,232

 
$
49,615

Other comprehensive income:
 
 
 
Change in foreign currency translation
29,941

 
14,823

Total comprehensive income
53,173

 
64,438

Comprehensive income/(loss) attributable to noncontrolling interest:
 
 
 
Net income attributable to noncontrolling interest
2,126

 
1,448

Change in foreign currency translation
7,021

 
(3,645
)
Comprehensive income/(loss) attributable to noncontrolling interest
9,147

 
(2,197
)
Comprehensive income attributable to PRA Group, Inc.
$
44,026

 
$
66,635

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

5



PRA Group, Inc.
Consolidated Statement of Changes in Equity
For the three months ended March 31, 2018
(unaudited)
(Amounts in thousands)
 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income/(Loss)
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2017
45,189

 
$
452

 
$
53,870

 
$
1,211,632

 
$
(178,607
)
 
$
50,162

 
$
1,137,509

Cumulative effect of change in accounting principle - equity securities (1)

 

 

 
(3,930
)
 

 

 
(3,930
)
Balance at January 1, 2018
45,189

 
452

 
53,870

 
1,207,702

 
(178,607
)
 
50,162

 
1,133,579

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
21,106

 

 
2,126

 
23,232

Foreign currency translation adjustment

 

 

 

 
22,920

 
7,021

 
29,941

Distributions paid to noncontrolling interest

 

 

 

 

 
(11,807
)
 
(11,807
)
Vesting of restricted stock
86

 
1

 
(1
)
 

 

 

 

Share-based compensation expense

 

 
2,415

 

 

 

 
2,415

Employee stock relinquished for payment of taxes

 

 
(2,013
)
 

 

 

 
(2,013
)
Balance at March 31, 2018
45,275

 
$
453

 
$
54,271

 
$
1,228,808

 
$
(155,687
)
 
$
47,502

 
$
1,175,347

(1) Relates to the adoption of FASB ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). Refer to Note 3 for further detail.
The accompanying notes are an integral part of these consolidated financial statements.

6



PRA Group, Inc.
Consolidated Statements of Cash Flows
For the three months ended March 31, 2018 and 2017
(unaudited)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
23,232

 
$
49,615

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Share-based compensation expense
2,415

 
2,199

Depreciation and amortization
4,929

 
5,215

Gain on sale of subsidiaries

 
(46,845
)
Amortization of debt discount and issuance costs
5,430

 
3,083

Deferred tax (benefit)/expense
(10,138
)
 
25

Net unrealized foreign currency transaction gain
(467
)
 
(1,723
)
Fair value in earnings for equity securities
(409
)
 

Other

 
(1,359
)
Changes in operating assets and liabilities:
 
 
 
Other assets
(5,787
)
 
1,837

Other receivables, net
1,536

 
(4,744
)
Accounts payable
(2,749
)
 
648

Income taxes payable, net
9,984

 
27,708

Accrued expenses
(1,058
)
 
(5,526
)
Other liabilities
6,799

 
2,518

Net cash provided by operating activities
33,717

 
32,651

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(7,917
)
 
(2,938
)
Acquisition of finance receivables, net of buybacks
(165,913
)
 
(226,092
)
Collections applied to principal on finance receivables
208,881

 
185,295

Proceeds from sale of subsidiaries, net

 
89,077

Purchase of investments
(13,924
)
 
(3,569
)
Proceeds from sales and maturities of investments
96

 
2,907

Net cash provided by investing activities
21,223

 
44,680

Cash flows from financing activities:
 
 
 
Proceeds from lines of credit
101,015

 
153,353

Principal payments on lines of credit
(147,980
)
 
(232,108
)
Tax withholdings related to share-based payments
(2,013
)
 
(2,320
)
Distributions paid to noncontrolling interest
(12,464
)
 
(710
)
Principal payments on notes payable and long-term debt
(2,502
)
 
(10,012
)
Payments of origination costs and fees
(380
)
 

Net (decrease)/increase in interest-bearing deposits
(6,314
)
 
1,473

Net cash used in financing activities
(70,638
)
 
(90,324
)
Effect of exchange rate on cash
(3,400
)
 
816

Net decrease in cash and cash equivalents
(19,098
)
 
(12,177
)
Cash and cash equivalents, beginning of period
120,516

 
94,287

Cash and cash equivalents, end of period
$
101,418

 
$
82,110

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
22,833

 
$
20,257

Cash paid for income taxes
12,175

 
4,858

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 months ended March 31, 2018 and 2017, respectively, and long-lived assets held at March 31, 2018 and 2017, 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 March 31, 2018
 
Three Months Ended March 31, 2017
 
Revenues
 
Long-Lived Assets
 
Revenues
 
Long-Lived Assets
United States
$
154,627

 
$
46,439

 
$
143,928

 
$
29,166

United Kingdom
24,919

 
2,225

 
18,428

 
3,083

Other (1)
43,637

 
5,124

 
44,202

 
5,775

Total
$
223,183

 
$
53,788

 
$
206,558

 
$
38,024

(1) None of the countries included in "Other" comprise greater than 10% of the Company's consolidated revenues or long-lived assets.
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 debt purchasing and collection activities, fee-based services and its investments. 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 March 31, 2018, its consolidated income statements and statements of comprehensive income/(loss) for the three months ended March 31, 2018 and 2017, its consolidated statement of changes in equity for the three months ended March 31, 2018, and its consolidated statements of cash flows for the three months ended March 31, 2018 and 2017, have been included. The consolidated income statements of the Company for the three months ended March 31, 2018 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 2017 Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on February 28, 2018.

8


PRA Group, Inc.
Notes to Consolidated Financial Statements


2. Finance Receivables, net:
Changes in finance receivables, net for the three months ended March 31, 2018 and 2017 were as follows (amounts in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Balance at beginning of period
$
2,771,921

 
$
2,307,969

Acquisitions of finance receivables (1)
165,020

 
226,397

Foreign currency translation adjustment
39,071

 
17,809

Cash collections applied to principal and net allowance charges
(208,881
)
 
(185,295
)
Balance at end of period
$
2,767,131

 
$
2,366,880

(1)
Acquisitions of finance receivables are net of buybacks and include certain capitalized acquisition related costs.
During the three months ended March 31, 2018, the Company purchased finance receivables portfolios with a face value of $1.5 billion for $168.3 million. During the three months ended March 31, 2017, the Company purchased finance receivables portfolios with a face value of $1.7 billion for $227.8 million. At March 31, 2018, the estimated remaining collections ("ERC") on the receivables purchased during the three months ended March 31, 2018 and 2017 were $309.3 million and $304.4 million, respectively. At March 31, 2018 and 2017, total ERC were $5.8 billion and $5.1 billion, respectively.
At the time of acquisition and each quarter thereafter, the life of each pool is estimated based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon current projections, cash collections expected to be applied to principal are estimated to be as follows for the years ending March 31, (amounts in thousands):
2019
$
800,078

2020
639,673

2021
493,857

2022
361,017

2023
208,769

2024
118,724

2025
52,008

2026
33,981

2027
16,914

2028
12,037

Thereafter
30,073

Total ERC expected to be applied to principal
$
2,767,131

At March 31, 2018, the Company had aggregate net finance receivables balances in pools accounted for under the cost recovery method of $149.2 million; at December 31, 2017, the amount was $166.6 million.
Accretable yield represents the amount of income on finance receivables the Company can expect to recognize 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 based on its proprietary analytical models. 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 months ended March 31, 2018 and 2017 were as follows (amounts in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Balance at beginning of period
$
2,932,144

 
$
2,740,006

Income recognized on finance receivables, net
(217,699
)
 
(194,535
)
Additions from portfolio purchases
146,832

 
163,395

Reclassifications from nonaccretable difference
112,028

 
47,078

Foreign currency translation adjustment
37,241

 
20,502

Balance at end of period
$
3,010,546

 
$
2,776,446

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 months ended March 31, 2018 and 2017 (amounts in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Beginning balance
$
225,555

 
$
211,465

Allowance charges
6,833

 
2,708

Reversal of previously recorded allowance charges
(5,908
)
 
(29
)
Net allowance charges
925

 
2,679

Foreign currency translation adjustment
495

 
269

Ending balance
$
226,975

 
$
214,413

3. Investments:
Investments consisted of the following at March 31, 2018 and December 31, 2017 (amounts in thousands):
 
March 31, 2018
 
December 31, 2017
Debt securities
 
 
 
Available-for-sale
$
5,464

 
$
5,429

Held-to-maturity
58,181

 
57,204

Equity securities
 
 
 
Private equity funds
8,824

 
14,248

Mutual funds
15,295

 
1,409

Total investments
$
87,764

 
$
78,290

Debt Securities
Available-for-Sale
Government bonds: The Company's investments in government bonds 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 investment, which provides a preferred return based on the expected net income of the portfolios, is 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. 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 this investment. Revenues recognized on this investment are recorded in the Other Revenue line item in the consolidated income statements. Effective April 1, 2017, the Company determined

10


PRA Group, Inc.
Notes to Consolidated Financial Statements


that it could not reasonably forecast the timing of future cash flows and accordingly began using the cost recovery method to recognize income. During the three months ended March 31, 2018 and 2017, revenues recognized on this investment were $0 and $1.4 million, respectively.
The unrealized loss on this investment was caused by a change in the timing of the estimated cash flows. Total expected cash flows on this investment exceed the carrying amount. Therefore, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2018.
The amortized cost and estimated fair value of investments in debt securities at March 31, 2018 and December 31, 2017 were as follows (amounts in thousands):
 
March 31, 2018
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Aggregate Fair Value
Available-for-sale
 
 
 
 
 
 
 
Government bonds
$
5,624

 
$

 
$
160

 
$
5,464

Held-to-maturity
 
 
 
 
 
 
 
Securitized assets
58,181

 

 
13,004

 
45,177

 
 
 
 
 
 
 
 
 
December 31, 2017
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Aggregate Fair Value
Available-for-sale
 
 
 
 
 
 
 
Government bonds
$
5,452

 
$

 
$
23

 
$
5,429

Held-to-maturity
 
 
 
 
 
 
 
Securitized assets
57,204

 

 
14,249

 
42,955

Equity Securities
Investments in private equity funds: Investments in private equity funds represent limited partnerships in which the Company has less than a 3% interest. In the first quarter of 2018, the Company adopted ASU 2016-01, which requires that investments in equity securities be measured at fair value with changes in unrealized gains and losses reported in earnings. Upon adoption of ASU 2016-01, the investments are carried at the fair value reported by the Fund manager. The Company recorded a cumulative effect adjustment of $3.9 million, net of tax, to beginning retained earnings for the unrealized loss on the investment. Prior to 2018, the investments were carried at cost with income recognized in Other Revenue in the consolidated income statements when distributions, up to reported income, were received from the partnerships. The aggregate carrying amount of cost-method investments for which cost exceeded fair value but for which an impairment loss was not recognized was $14.2 million at December 31, 2017.
Mutual funds: The Company invests certain excess funds held in Brazil in a U.S. dollar denominated mutual fund that invests in foreign currency contracts that hedge the risk in variation of the Brazilian real to the U.S. dollar. The investments are carried at fair value based on quoted market prices.
Unrealized gains and losses: The Company recognized an unrealized gain of $0.4 million for the period ended March 31, 2018 on its equity securities. No securities were sold during the period.
4. 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.

11


PRA Group, Inc.
Notes to Consolidated Financial Statements


The following table represents the changes in goodwill for the three months ended March 31, 2018 and 2017 (amounts in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
Balance at beginning of period:
 
 
 
Goodwill
$
526,513

 
$
506,308

Accumulated impairment loss

 
(6,397
)
 
526,513

 
499,911

Changes:
 
 
 
Foreign currency translation adjustment
17,780

 
6,329

Net change in goodwill
17,780

 
6,329

 
 
 
 
Goodwill
544,293

 
512,637

Accumulated impairment loss

 
(6,397
)
Balance at end of period:
$
544,293

 
$
506,240

The change in the accumulated impairment loss at March 31, 2018 as compared to March 31 2017 was related to the June 2017 sale of PRA Location Services, LLC.
5. Borrowings:
The Company's borrowings consisted of the following as of the dates indicated (amounts in thousands):
 
March 31, 2018
 
December 31, 2017
Revolving credit
$
820,022

 
$
849,815

Term loans
771,463

 
764,830

Convertible senior notes
632,500

 
632,500

 
2,223,985

 
2,247,145

Less: Debt discount and issuance costs
(73,112
)
 
(76,963
)
Total
$
2,150,873

 
$
2,170,182

The following principal payments are due on the Company's borrowings as of March 31, 2018 for the 12 month periods ending March 31, (amounts in thousands):
2019
$
10,000

2020
10,000

2021
1,087,986

2022
10,000

2023
760,999

Thereafter
345,000

Total
$
2,223,985

The Company believes it was in compliance with the covenants of its financing arrangements as of March 31, 2018.
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 $442.5 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 lenders) and also provides

12


PRA Group, Inc.
Notes to Consolidated Financial Statements


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 revolving credit facilities also bear an unused line fee of 0.375% per annum, payable quarterly in arrears. The loans under the North American Credit Agreement mature May 5, 2022. As of March 31, 2018, the unused portion of the North American Credit Agreement was $396.5 million. Considering borrowing base restrictions, as of March 31, 2018, the amount available to be drawn was $365.4 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.
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"). In the first quarter of 2018, the Company entered into the Fourth Amendment and Restatement Agreement (the "Fourth Amendment") to its European Credit Agreement which, among other things, expanded the scope of loan portfolios that constitute Approved Loan Portfolios (as defined in the Fourth Amendment). Additionally, other changes to the European Credit Agreement resulting from the Fourth Amendment include: reduced all applicable margins for the interest payable under the multicurrency revolving credit facility by 15 basis points; reduced all applicable margins for the interest payable under the term loan facility by 50 basis points, subject to the lenders’ right to increase the applicable margin by up to 50 basis points if one or more of the lenders elects to syndicate and/or transfer its commitment under the term loan in accordance with the terms of the Fourth Amendment; reduced the maximum permitted amount of interest bearing deposits in AK Nordic AB from SEK 1.5 billion to SEK 1.2 billion; and revised the definitions of ERC and LTV Ratio. 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 EUR (approximately $329.0 million) is a term loan, accrues interest at the Interbank Offered Rate ("IBOR") plus 2.65% - 3.75% under the revolving facility and 3.75% - 4.00% 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 1.21% per annum, of 35% of the margin, is payable monthly in arrears, and matures 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 March 31, 2018, the unused portion of the European Credit Agreement (including the overdraft facility) was $478.5 million. Considering borrowing base restrictions and other covenants, as of March 31, 2018, the amount available to be drawn under the European Credit Agreement (including the overdraft facility) was $184.6 million.

13


PRA Group, Inc.
Notes to Consolidated Financial Statements


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 1.2 billion; and
PRA Europe's cash collections must exceed 95% of PRA Europe's IFRS 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 Regions Bank, as successor 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 March 31, 2018, the Company does not believe that any of the conditions allowing holders of the 2020 Notes to convert their notes have 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 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 2023 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 March 31, 2018, the Company does not believe that any of the conditions allowing holders of the 2023 Notes to convert their notes have 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

14


PRA Group, Inc.
Notes to Consolidated Financial Statements


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):
 
March 31, 2018
 
December 31, 2017
Liability component - principal amount
$
632,500

 
$
632,500

Unamortized debt discount
(52,660
)
 
(55,537
)
Liability component - net carrying amount
$
579,840

 
$
576,963

Equity component
$
76,216

 
$
76,216

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 March 31,
 
2018
 
2017
Interest expense - stated coupon rate
$
5,175

 
$
2,156

Interest expense - amortization of debt discount
2,877

 
1,155

Total interest expense - convertible senior notes
$
8,052


$
3,311

6. Fair Value:
As defined by 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 ASC Topic 825, "Financial Instruments" ("ASC 825"), the table below summarizes fair value estimates for the Company's financial instruments that are 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.

15


PRA Group, Inc.
Notes to Consolidated Financial Statements


The carrying amounts of the financial instruments in the following table are recorded in the consolidated balance sheets at March 31, 2018 and December 31, 2017 (amounts in thousands):
 
March 31, 2018

December 31, 2017
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
101,418

 
$
101,418

 
$
120,516

 
$
120,516

Held-to-maturity investments
58,181

 
45,177

 
57,204

 
42,955

Finance receivables, net
2,767,131

 
3,082,652

 
2,771,921

 
3,060,907

Financial liabilities:
 
 
 
 
 
 
 
Interest-bearing deposits
90,769

 
90,769

 
98,580

 
98,580

Revolving lines of credit
820,022

 
820,022

 
849,815

 
849,815

Term loans
771,463

 
771,463

 
764,830

 
764,830

Convertible senior notes
579,840

 
649,790

 
576,963

 
620,079

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 financial instruments:
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.
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.
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 senior notes: 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.

16


PRA Group, Inc.
Notes to Consolidated Financial Statements


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 March 31, 2018 and December 31, 2017 (amounts in thousands):
 
Fair Value Measurements as of March 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Available-for-sale investments
 
 
 
 
 
 
 
Government bonds
$
5,464

 
$

 
$

 
$
5,464

Fair value through net income
 
 
 
 
 
 
 
Mutual funds
15,295

 

 

 
15,295

Interest rate swap contracts (recorded in other assets)

 
2,550

 

 
2,550

 
 
 
 
 
 
 
 
 
Fair Value Measurements as of December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Available-for-sale investments
 
 
 
 
 
 
 
Government bonds
$
5,429

 
$

 
$

 
$
5,429

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

 
1,108

 

 
1,108

Available-for-sale
Government bonds: Fair value of the Company's investment in government bonds is estimated using quoted market prices. Accordingly, the Company uses Level 1 inputs.
Fair value through net income
Mutual funds: Fair value of the Company's investment in mutual funds is estimated using quoted market prices. Accordingly, the Company uses Level 1 inputs.
Interest rate swap contracts: The estimated fair value of the interest rate swap contracts 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.
Investments measured using net asset value
Private equity funds: 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 cannot 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 investments are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over 1 to 6 years. The fair value of these private equity funds following the Net Asset Value ("NAV") practical expedient was $8.8 million as of March 31, 2018 and December 31, 2017.
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

17


PRA Group, Inc.
Notes to Consolidated Financial Statements


issued through March 31, 2018. 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 following table provides a reconciliation between the computation of basic EPS and diluted EPS for the three months ended March 31, 2018 and 2017 (amounts in thousands, except per share amounts):
 
For the Three Months Ended March 31,
 
2018
 
2017
 
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
$
21,106

 
45,231

 
$
0.47

 
$
48,167

 
46,406

 
$
1.04

Dilutive effect of nonvested share awards
 
 
139

 

 
 
 
221

 
(0.01
)
Diluted EPS
$
21,106

 
45,370

 
$
0.47

 
$
48,167

 
46,627

 
$
1.03

There were no antidilutive options outstanding for the three months ended March 31, 2018 and 2017.
8. 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.
On May 10, 2017, the Company reached a settlement with the Internal Revenue Service ("IRS") in regards to the assertion that tax revenue recognition using the cost recovery method did not clearly reflect taxable income. 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 amortizes principal and the remaining portion is taxable income. 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 effective with tax year 2017.
On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).  The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to the following provisions which are the most relevant to the Company: (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; (3) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled foreign corporations referred to as Global Intangible Low-Taxed Income (“GILTI”); (5) creating the base erosion anti-abuse tax, a new minimum tax; (6) creating a new limitation on deductible interest expense; and (7) increasing limitations on the deductibility of executive compensation.
The Company had not completed its accounting for the income tax effects of the Tax Act for the tax year ended December 31, 2017, since formal application guidance has not yet been finalized or issued to date. Where the Company has been able to make reasonable estimates of the effects for which its analysis is not yet complete, the Company has recorded provisional amounts in accordance with SEC Staff Accounting Bulletin No. 118.  Where the Company has not yet been able to make reasonable estimates of the impact of certain elements, the Company has not recorded any amounts related to those elements and has continued accounting for them in accordance with ASC 740 on the basis of the tax laws in effect immediately prior to the enactment of the Tax Act.
The Company was able to make reasonable estimates of certain effects and, therefore recorded provisional amounts in 2017 as follows:
Revaluation of deferred tax assets and liabilities:  The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. The Company has evaluated the financial impact and recorded a provisional deferred tax benefit of $73.8 million during the year ended December 31, 2017. The Company is still completing its calculation of the impact in its deferred tax balances.
Transition Tax on unrepatriated foreign earnings:  The Transition Tax on unrepatriated foreign earnings is a tax on previously untaxed accumulated and current earnings and profits (“E&P”) of the Company’s foreign subsidiaries. The

18


PRA Group, Inc.
Notes to Consolidated Financial Statements


Company was able to make a reasonable estimate of the Transition Tax and has provisionally recorded no Transition Tax expense.
GILTI:  The Tax Act creates a new requirement that certain income (i.e., GILTI) earned by foreign subsidiaries must be included currently in the gross income of the U.S. shareholder.  Due to the complexity of the new GILTI tax rules, the Company is continuing to evaluate the provision of the Tax Act and the application of ASC 740. The Company’s accounting for this element of the Tax Act is subject to change since formal application guidance has not yet been finalized or issued to date. As a result, the Company has not recorded any amounts related to potential GILTI tax in its financial statements and has not yet made a policy decision regarding whether to record deferred taxes on GILTI.
The Company has evaluated the impact of the other most relevant Tax Act provisions and determined the impact to be insignificant.
At March 31, 2018, 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 may 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 $80.7 million and $106.0 million as of March 31, 2018 and December 31, 2017, respectively.
9. 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 March 31, 2018, estimated future compensation under these agreements was approximately $21.8 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 $21.8 million total above.
Leases:
The Company is party to various operating leases with respect to its facilities and equipment. Future minimum lease payments at March 31, 2018 totaled approximately $49.2 million.
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 March 31, 2018 was approximately $351.3 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. The potential refunds as of the balance sheet date are not considered to be significant.
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.

19


PRA Group, Inc.
Notes to Consolidated Financial Statements


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 March 31, 2018, where the range of loss can be estimated, 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. During the year ended December 31, 2017, the Company recorded $4.0 million in potential recoveries under the Company's insurance policies or third-party indemnities which is included in other receivables, net at March 31, 2018 and December 31, 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. The range of loss, if any, cannot be estimated at this time.
Iris Pounds v. Portfolio Recovery Associates, LLC
On November 21, 2016, Iris Pounds filed suit against the Company in Durham County, North Carolina alleging violations of the North Carolina Prohibited Practices by Collection Agencies Act. The purported class consists of all individuals against whom the Company had obtained a judgment by default in North Carolina on or after October 1, 2009. The Company removed the matter to the United States District Court for the Middle District of North Carolina (the "District Court"), and has filed a motion to dismiss. The District Court has entered an order remanding the matter to the North Carolina state court, which order the Company has appealed to the Fourth Circuit Court of Appeals. The range of loss, if any, cannot be estimated at this time due to the uncertainty surrounding liability, class certification and the interpretation of statutory damages.
10. 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 sold its government services businesses: PRA Government Services, LLC; MuniServices, LLC; and PRA Professional Services, LLC on January 24, 2017, for $91.5 million in cash plus additional consideration for certain balance sheet items. The pre-tax gain on sale was $46.8 million, and was recorded in the first quarter of 2017.
11. 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

20


PRA Group, Inc.
Notes to Consolidated Financial Statements


reporting period presented or as a cumulative-effect adjustment as of the date of adoption, with early application not permitted.  The Company determined that the revenue generated by its subsidiary Claims Compensation Bureau, LLC ("CCB") is within the scope of this standard. The Company adopted ASU 2014-09 in the first quarter of 2018 which had no material impact on its consolidated financial statements.
In January 2016, FASB issued ASU 2016-01, as amended by ASU 2018-03, "Financial Instruments-Overall: Technical Corrections and Improvements", issued in February 2018, which revises the classification and measurement of investments in equity securities. ASU 2016-01 requires that equity investments, except those accounted for under the equity method of accounting, be measured at fair value and changes in fair value are recognized in net income. However, for equity investments that do not have readily determinable fair values and don’t qualify for the existing practical expedient to estimate fair value using the NAV per share (or its equivalent) of the investment, the guidance provides a new measurement alternative. Entities may choose to measure those investments at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company adopted ASU 2016-01 in the first quarter of 2018, which resulted in a cumulative effect adjustment of $3.9 million, net of tax, to retained earnings for the unrealized loss on its equity 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 $49.2 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 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. 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 adopted ASU 2016-16 in the first quarter of 2018 which had no material 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

21


PRA Group, Inc.
Notes to Consolidated Financial Statements


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.
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. The new guidance is effective for interim and annual periods beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2017-09 in the first quarter of 2018 which had no material impact on its 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.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02”). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income (loss) are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income (loss) to retained earnings (accumulated deficit) for stranded income tax effects resulting from the 2017 Tax Cuts and Jobs Act. The amendments in this ASU also require certain disclosures about stranded income tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption in any period is permitted. The Company’s provisional adjustments recorded during the year ended December 31, 2017 to account for the impact of the Tax Act did not result in stranded tax effects. The Company does not anticipate the adoption of this standard will have a material impact 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.

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 portfolios of 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 impact of the Tax Cuts and Jobs Act, including interpretations and determinations by tax authorities;
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 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 nonperforming loans 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;
the possibility that the adoption of future accounting standards could negatively impact our business; 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, 2017, filed with the SEC on February 28, 2018 ("2017 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

23



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.
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:
"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.
"Cash receipts" refers to collections on our owned finance receivables portfolios plus fee income.
"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.
"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.
"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.

24



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.
We are headquartered in Norfolk, Virginia, and as of March 31, 2018 employ 5,639 full time equivalents. Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol "PRAA."
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 March 31,
 
2018
 
2017
Revenues:
 
 
 
 
 
Income recognized on finance receivables, net
$
217,699

97.5
 %
 
$
194,535

94.2
 %
Fee income
5,327

2.4

 
9,858

4.8

Other revenue
157

0.1

 
2,165

1.0

Total revenues
223,183

100.0

 
206,558

100.0

Operating expenses:
 
 
 
 
 
Compensation and employee services
81,237

36.4

 
68,468

33.1

Legal collection expenses
32,912

14.7

 
31,728

15.4

Agency fees
8,278

3.7

 
10,800

5.2

Outside fees and services
14,158

6.4

 
13,285

6.5

Communication
11,557

5.2

 
9,137

4.4

Rent and occupancy
4,314

1.9

 
3,783

1.8

Depreciation and amortization
4,929

2.2

 
5,215

2.5

Other operating expenses
12,184

5.5

 
10,885

5.3

Total operating expenses
169,569

76.0

 
153,301

74.2

Income from operations
53,614

24.0

 
53,257

25.8

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



46,845

22.7

Interest expense, net
(25,781
)
(11.6
)
 
(21,257
)
(10.3
)
Foreign exchange gain
1,293

0.6

 
2,179

1.1

Other
243

0.1

 


Income before income taxes
29,369

13.1

 
81,024

39.3

Provision for income taxes
6,137

2.7

 
31,409

15.2

Net income
23,232

10.4

 
49,615

24.1

Adjustment for net income attributable to noncontrolling interests
2,126

1.0

 
1,448

0.7

Net income attributable to PRA Group, Inc.
$
21,106

9.4
 %
 
$
48,167

23.4
 %

25



Three Months Ended March 31, 2018 Compared To Three Months Ended March 31, 2017
Revenues
Total revenues were $223.2 million for the three months ended March 31, 2018, an increase of $16.6 million, or 8.0%, compared to total revenues of $206.6 million for the three months ended March 31, 2017.
A summary of how our revenues were generated during the three months ended March 31, 2018 and 2017 is as follows (amounts in thousands):
 
For the Three Months Ended March 31,
 
2018
 
2017
Cash collections
$
426,580

 
$
379,830

Principal amortization
(207,956
)
 
(182,616
)
Net allowance charges
(925
)
 
(2,679
)
Income recognized on finance receivables, net
217,699

 
194,535

Fee income
5,327

 
9,858

Other revenue
157

 
2,165

Total revenues
$
223,183

 
$
206,558

Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net was $217.7 million for the three months ended March 31, 2018, an increase of $23.2 million, or 11.9%, compared to $194.5 million for the three months ended March 31, 2017. The increase was primarily the result of overperformance on select Americas Core and European Core portfolios which resulted in yield increases on certain pools, a decline in net allowance charges, and the impact of elevated buying in 2017. This was partially offset by a decline in income generated by our Americas Insolvency portfolios due primarily to lower volume of purchasing during fiscal years 2014 to 2016.
Cash collections were $426.6 million in the three months ended March 31, 2018, up $46.8 million, or 12.3%, as compared to the three months ended March 31, 2017. The increase was primarily attributable to record collections in our Americas Core and European Core portfolios, which increased $19.3 million and $20.0 million, respectively. Additionally, our Americas Insolvency and European Insolvency collections increased $5.5 million and $1.9 million, respectively. Cash collections on fully amortized pools were $15.6 million in the three months ended March 31, 2018, an increase of $2.1 million or 15.6%, compared to $13.5 million in the three months ended March 31, 2017. Cash collections on pools on cost recovery were $17.5 million in the three months ended March 31, 2018, an increase of $8.9 million or 103.5%, compared to $8.6 million in the three months ended March 31, 2017.
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 March 31, 2018, we recorded net allowance charges of $0.9 million, consisting of net allowance reversals of $0.7 million on our Americas Core portfolios and net allowance charges of $0.2 million and $1.4 million on our Americas Insolvency and our European Core portfolios, respectively. For the three months ended March 31, 2017, we recorded net allowance charges of $2.7 million, consisting of $1.0 million and $0.1 million on our Americas Core and Americas Insolvency portfolios, respectively, and $1.5 million on our European Core portfolios.
During the three months ended March 31, 2018, we reclassified $112.0 million from nonaccretable difference to accretable yield primarily due to increased cash collection forecasts relating to certain Americas Core and European Core pools. During the three months ended March 31, 2017, we reclassified $47.1 million from nonaccretable difference to accretable yield primarily due to increased cash collection forecasts relating to pools acquired from 2013-2016.
Fee Income
Fee income was $5.3 million in the three months ended March 31, 2018, a decrease of $4.6 million or 46.5%, compared to $9.9 million in the three months ended March 31, 2017. This was primarily due to the sale of our government services businesses in January 2017 and the sale of PRA Location Services, LLC ("PLS") in June 2017, partially offset by an increase in fee income generated by Claims Compensation Bureau, LLC ("CCB").

26



Other Revenue
Other revenue decreased to $0.2 million in the three months ended March 31, 2018 from $2.2 million in the three months ended March 31, 2017, primarily due to a decrease in revenue generated by our investments.
Operating Expenses
Total operating expenses were $169.6 million for the three months ended March 31, 2018, an increase of $16.3 million or 10.6%, compared to operating expenses of $153.3 million for the three months ended March 31, 2017.
Compensation and Employee Services
Compensation and employee services expenses were $81.2 million for the three months ended March 31, 2018, an increase of $12.7 million, or 18.5%, compared to $68.5 million for the three months ended March 31, 2017. 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. As part of our strategy to expand our domestic collector workforce, in the U.S., we have hired approximately 1,100 new collectors, net of attrition, since March 31, 2017. Total full-time equivalents increased to 5,639 as of March 31, 2018, compared to 4,205 as of March 31, 2017.
Legal Collection Expenses
Legal collection expenses primarily consist of costs paid to courts where a lawsuit is filed and contingent fees incurred for the cash collections generated by our independent third-party attorney network. Legal collection expenses were $32.9 million for the three months ended March 31, 2018, an increase of $1.2 million or 3.8%, compared to legal collection expenses of $31.7 million for the three months ended March 31, 2017. The increase was primarily due to an increase in costs paid to courts where a lawsuit is filed, mainly due to an increase in the number of accounts brought into the legal collection process in the Americas. Our costs paid to courts were $22.0 million for the three months ended March 31, 2018, an increase of $2.0 million or 10.0% compared to $20.0 million for the three months ended March 31, 2017. This was partially offset by a decrease in legal collection expenses paid to third-party attorneys. Our costs paid to third-party attorneys were $10.7 million for the three months ended March 31, 2018, a decrease of $0.6 million or 5.3% compared to $11.3 million for the three months ended March 31, 2017.
Agency Fees
Agency fees primarily represent third-party collection fees, primarily outside the U.S. Prior to the sale of PLS in June of 2017, agency fees also included costs paid to repossession agents to repossess vehicles. Agency fees were $8.3 million for the three months ended March 31, 2018, a decrease of $2.5 million or 23.1%, compared to $10.8 million for the three months ended March 31, 2017. The decrease was primarily due to the impact of the sale of PLS in June 2017.
Outside Fees and Services
Outside fees and services expenses were $14.2 million for the three months ended March 31, 2018, an increase of $0.9 million or 6.8%, compared to outside fees and services expenses of $13.3 million for the three months ended March 31, 2017.
Communication
Communication expenses were $11.6 million for the three months ended March 31, 2018, an increase of $2.5 million or 27.5%, compared to communication expenses of $9.1 million for the three months ended March 31, 2017. This increase was primarily due to a $1.5 million increase in postage expenses and a $1.0 million increase in telephone related expenses. These increases are primarily the result of increased letter and call volume associated with record portfolio purchases in Americas Core in 2017.
Rent and Occupancy
Rent and occupancy expenses were $4.3 million for the three months ended March 31, 2018, an increase of $0.5 million or 13.2%, compared to rent and occupancy expense of $3.8 million for the three months ended March 31, 2017. The increase was primarily due to the opening of two new call centers in the U.S. in the fourth quarter of 2017.
Depreciation and Amortization
Depreciation and amortization expenses were $4.9 million for the three months ended March 31, 2018, a decrease of $0.3 million, or 5.8%, compared to depreciation and amortization expenses of $5.2 million for the three months ended March 31, 2017. 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.

27



Other Operating Expenses
Other operating expenses were $12.2 million for the three months ended March 31, 2018, an increase of $1.3 million, or 11.9%, compared to other operating expenses of $10.9 million for the three months ended March 31, 2017. The increase was primarily due to a $0.9 million increase in repairs and maintenance and a $0.8 million increase in general office expenses. This was partially offset by a $1.0 million decrease in expense related to a prior acquisition that was incurred during the three months ended March 31, 2017. None of the remaining variance was attributable to any significant identifiable items.
Gain on Sale of Subsidiaries
Pre-tax gain on sale of subsidiaries was $46.8 million for the three months ended March 31, 2017 as the direct result of our sale of the government services businesses on January 24, 2017.
Interest Expense, Net
Interest expense, net was $25.8 million during the three months ended March 31, 2018, an increase of $4.5 million or 21.1%, compared to $21.3 million for the three months ended March 31, 2017. The increase was primarily due to higher levels of average borrowings outstanding, increases in interest rates, and increases to deferred financing costs related to our financing activities during the three months ended March 31, 2018. This was partially offset by changes in fair value on our interest rate swap agreements.
Interest expense, net consisted of the following for the three months ended March 31, 2018 and 2017 (amounts in thousands):
 
Three Months Ended March 31,
 
2018
 
2017
 
Change
Stated interest on debt obligations and unused line fees
$
20,043

 
$
17,327

 
$
2,716

Coupon interest on convertible debt
5,175

 
2,156

 
3,019

Amortization of convertible debt discount
2,877

 
1,155

 
1,722

Amortization of loan fees and other loan costs
2,553

 
1,928

 
625

Change in fair value on interest rate swap agreements
(3,673
)
 
158

 
(3,831
)
Interest income
(1,194
)
 
(1,467
)
 
273

Interest expense, net
$
25,781

 
$
21,257

 
$
4,524

Net Foreign Currency Transaction Gains
Net foreign currency transaction gains were $1.3 million and $2.2 million for the three months ended March 31, 2018 and 2017, respectively. In any given period, we may incur foreign currency transactions gains or losses from transactions in currencies other than the functional currency.
Other Income
Other Income was $0.2 million and $0 during the three months ended March 31, 2018 and March 31, 2017, respectively.
Provision for Income Taxes
Provision for income taxes was $6.1 million for the three months ended March 31, 2018, a decrease of $25.3 million, or 80.6%, compared to provision for income taxes of $31.4 million for the three months ended March 31, 2017. The decrease was primarily due to a $51.6 million decrease in income before income taxes for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017, coupled with a decrease in our effective tax rate. During the three months ended March 31, 2018, our effective tax rate was 20.9%, compared to 38.8% for the three months ended March 31, 2017. The decrease was due to the effects of U.S. tax reform, primarily the reduction of the U.S. Federal income tax rate from 35% to 21%, changes in the mix of projected taxable income between tax jurisdictions and a decrease in the estimated blended rate for U.S. state deferred taxes.

28



Supplemental Performance Data
Finance Receivables Portfolio Performance
The following tables show certain data related to our Americas and European Core and Insolvency portfolios. 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.
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 to comply with bankruptcy/insolvency rules and procedures; however, for accounting purposes, these accounts remain in the original Core portfolio. Insolvency accounts may be dismissed voluntarily or involuntarily subsequent to our purchase of the 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 original 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 paper.
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 nonperforming loans. 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 estimated remaining collections of the portfolios held by the closed-end Polish investment fund, expected to be received by us, was $74.9 million at March 31, 2018.


29



Purchase Price Multiples
as of March 31, 2018 
Amounts in thousands
Purchase Period
Purchase Price (1)(2)
Net Finance Receivables (3)
ERC-Historical Period Exchange Rates (4)
Total Estimated Collections (5)
ERC-Current Period Exchange Rates (6)
Current Estimated Purchase Price Multiple
Original Estimated Purchase Price Multiple (7)
Americas-Core
 
 
 
 
 
 
 
1996-2007
$
638,460

$
7,015

$
30,278

$
2,046,593

$
30,278

321
%
240
%
2008
166,434

3,603

14,173

374,917

14,173

225
%
220
%
2009
125,155

865

27,803

458,854

27,803

367
%
252
%
2010
148,204

4,985

46,845

536,785

46,845

362
%
247
%
2011
209,625

12,606

66,779

725,666

66,779

346
%
245
%
2012
254,247

23,753

97,231

679,874

97,231

267
%
226
%
2013
391,247

70,571

220,876

980,948

220,876

251
%
211
%
2014
405,653

117,573

322,221

985,160

318,909

243
%
204
%
2015
444,516

173,302

399,613

967,727

401,173

218
%
205
%
2016
455,595

254,573

560,793

1,007,980

565,577

221
%
201
%
2017
536,130

466,780

880,523

1,060,591

879,773

198
%
193
%
2018
131,849

130,415

260,311

266,947

260,311

202
%
202
%
Subtotal
3,907,115

1,266,041

2,927,446

10,092,042

2,929,728

 
 
Americas-Insolvency
 
 
 
 
 
 
1996-2007
132,917


494

197,106

494

148
%
148
%
2008
108,549


517

168,662

517

155
%
163
%
2009
155,989


1,769

470,653

1,769

302
%
214
%
2010
208,947


3,215

547,333

3,215

262
%
184
%
2011
180,447


947

368,231

947

204
%
155
%
2012
251,433


1,375

388,349

1,375

154
%
136
%
2013
227,905

3,920

18,342

354,844

18,342

156
%
133
%
2014
148,720

20,772

33,630

211,087

33,583

142
%
124
%
2015
63,199

28,113

35,834

82,204

35,834

130
%
125
%
2016
92,290

46,194

55,800

111,922

55,887

121
%
123
%
2017
276,637

216,719

268,797

342,254

268,797

124
%
125
%
2018
13,588

13,587

17,012

17,100

17,012

126
%
126
%
Subtotal
1,860,621

329,305

437,732

3,259,745

437,772

 
 
Total Americas
5,767,736

1,595,346

3,365,178

13,351,787

3,367,500

 
 
Europe-Core
 
 
 
 
 
 
 
2012
20,426


2,319

38,398

1,998

188
%
187
%
2013
20,358

442

1,477

23,682

1,248

116
%
119
%
2014
797,539

312,494

1,038,365

2,121,937

966,698

266
%
208
%
2015
422,595

238,428

474,480

743,376

465,341

176
%
160
%
2016
348,857

282,181

442,083

578,493

483,364

166
%
167
%
2017
250,089

239,234

331,287

363,123

351,038

145
%
144
%
2018
17,913

17,562

25,449

25,935

25,449

145
%
145
%
Subtotal
1,877,777

1,090,341

2,315,460

3,894,944

2,295,136

 
 
Europe-Insolvency
 
 
 
 
 
 
2014
10,876

1,765

4,880

18,234

4,786

168
%
129
%
2015
19,408

7,696

14,038

28,829

13,261

149
%
139
%
2016
42,215

27,141

38,073

60,340

40,977

143
%
130
%
2017
38,836

39,405

46,996

49,742

49,731

128
%
128
%
2018
5,454

5,437

6,521

6,546

6,521

120
%
120
%
Subtotal
116,789

81,444

110,508

163,691

115,276

 
 
Total Europe
1,994,566

1,171,785

2,425,968

4,058,635

2,410,412

 
 
Total PRA Group
$
7,762,302

$
2,767,131

$
5,791,146

$
17,410,422

$
5,777,912

 
 
(1)
The amount reflected in the Purchase Price also includes the acquisition date finance receivables portfolios that were acquired through our various business acquisitions.
(2)
For our international amounts, Purchase Price is presented at the exchange rate at the end of the quarter in which the pool was purchased. In addition, any purchase price adjustments that occur throughout the life of the pool are presented at the period-end exchange rate for the respective quarter of purchase.
(3)
For our international amounts, Net Finance Receivables are presented at the March 31, 2018 exchange rate.
(4)
For our international amounts, ERC-Historical Period Exchange Rates is presented at the period-end exchange rate for the respective quarter of purchase.
(5)
For our international amounts, TEC is presented at the period-end exchange rate for the respective quarter of purchase.
(6)
For our international amounts, ERC-Current Period Exchange Rates is presented at the March 31, 2018 exchange rate.
(7)
The Original Purchase Price Multiple represents the purchase price multiple at the end of the year of acquisition.

30



Portfolio Financial Information
Year-to-date as of March 31, 2018
Amounts in thousands
Purchase Period
Purchase Price (1)(2)
Cash
Collections
(3)
Gross Revenue (3)
Amortization (3)
Allowance (3)
Net Revenue (3)
Net Finance Receivables as of March 31, 2018(4)
Americas-Core
 
 
 
 
 
 
 
1996-2007
$
638,460

$
2,922

$
2,259

$
663

$
(460
)
$
2,719

$
7,015

2008
166,434

1,403

627

776


627

3,603

2009
125,155

2,431

2,361

70

125

2,236

865

2010
148,204

3,266

2,417

849

(2,325
)
4,742

4,985

2011
209,625

6,539

5,388

1,151

(570
)
5,958

12,606

2012
254,247

8,664

5,129

3,535

(2,000
)
7,129

23,753

2013
391,247

16,915

12,005

4,910

1,945

10,060

70,571

2014
405,653

25,535

17,251

8,284

1,925

15,326

117,573

2015
444,516

39,516

20,877

18,639


20,877

173,302

2016
455,595

59,875

31,913

27,962

316

31,597

254,573

2017
536,130

72,534

41,712

30,822

380

41,332

466,780

2018
131,849

6,637

5,003

1,634


5,003

130,415

Subtotal
3,907,115

246,237

146,942

99,295

(664
)
147,606

1,266,041

Americas-Insolvency
 
 
 
 
 
 
1996-2007
132,917

48

48



48


2008
108,549

72

72



72


2009
155,989

238

238



238


2010
208,947

441

441



441


2011
180,447

482

482



482


2012
251,433

1,704

1,704



1,704


2013
227,905

8,532

4,833

3,699


4,833

3,920

2014
148,720

7,609

1,554

6,055


1,554

20,772

2015
63,199

4,941

830

4,111


830

28,113

2016
92,290

6,761

1,193

5,568

210

983

46,194

2017
276,637

24,364

4,335

20,029


4,335

216,719

2018
13,588

88

88



88

13,587

Subtotal
1,860,621

55,280

15,818

39,462

210

15,608