PRA Group
PORTFOLIO RECOVERY ASSOCIATES INC (Form: 10-Q, Received: 11/08/2013 16:01:24)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013 .
¨
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
 
 
 
Portfolio Recovery Associates, 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
(Address of principal executive offices)
 
(zip code)
(888) 772-7326
(Registrant’s telephone number, including area code)
 
 
 
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   ý     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   ý     NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨     NO   ý
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding as of November 1, 2013
Common Stock, $0.01 par value
 
49,749,637



PORTFOLIO RECOVERY ASSOCIATES, INC.
INDEX
 
 
 
Page(s)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2013 and December 31, 2012
(unaudited)
(Amounts in thousands, except per share amounts)
 
 
September 30,
2013
 
December 31,
2012
Assets
 
 
 
Cash and cash equivalents
$
108,705

 
$
32,687

Finance receivables, net
1,256,822

 
1,078,951

Accounts receivable, net
12,047

 
10,486

Income taxes receivable
2,708

 

Property and equipment, net
28,059

 
25,312

Goodwill
102,891

 
109,488

Intangible assets, net
16,746

 
20,364

Other assets
20,007

 
11,668

Total assets
$
1,547,985

 
$
1,288,956

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
14,446

 
$
12,155

Accrued expenses and other liabilities
33,023

 
18,953

Income taxes payable
740

 
3,125

Accrued payroll and bonuses
20,454

 
12,804

Net deferred tax liability
200,109

 
185,277

Borrowings
452,229

 
327,542

Total liabilities
721,001

 
559,856

Commitments and contingencies (Note 10)

 

Redeemable noncontrolling interest
10,336

 
20,673

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01, authorized shares, 2,000, issued and outstanding shares - 0

 

Common stock, par value $0.01, 60,000 authorized shares, 49,747 issued and outstanding shares at September 30, 2013, and 50,727 issued and outstanding shares at December 31, 2012
498

 
507

Additional paid-in capital
129,570

 
150,878

Retained earnings
683,728

 
554,191

Accumulated other comprehensive income
2,852

 
2,851

Total stockholders’ equity
816,648

 
708,427

Total liabilities and equity
$
1,547,985

 
$
1,288,956

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

3


PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED INCOME STATEMENTS
For the three and nine months ended September 30, 2013 and 2012
(unaudited)
(Amounts in thousands, except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Income recognized on finance receivables, net
$
171,456

 
$
135,754

 
$
494,818

 
$
392,566

Fee income
26,306

 
14,765

 
55,464

 
45,983

Total revenues
197,762

 
150,519

 
550,282

 
438,549

Operating expenses:
 
 
 
 
 
 
 
Compensation and employee services
52,882

 
41,334

 
146,081

 
123,508

Legal collection fees
10,206

 
8,635

 
31,343

 
25,241

Legal collection costs
19,801

 
15,810

 
63,020

 
57,705

Agent fees
1,404

 
1,545

 
4,293

 
4,495

Outside fees and services
8,707

 
10,131

 
24,789

 
21,575

Communications
7,786

 
6,777

 
24,307

 
22,037

Rent and occupancy
1,950

 
1,786

 
5,462

 
5,053

Depreciation and amortization
3,753

 
3,623

 
10,653

 
10,833

Other operating expenses
5,408

 
3,820

 
14,756

 
12,027

Impairment of goodwill
6,397

 

 
6,397

 

Total operating expenses
118,294

 
93,461

 
331,101

 
282,474

Income from operations
79,468

 
57,058

 
219,181

 
156,075

Other income and (expense):
 
 
 
 
 
 
 
Interest income

 

 

 
8

Interest expense
(3,995
)
 
(2,189
)
 
(9,607
)
 
(7,223
)
Income before income taxes
75,473

 
54,869

 
209,574

 
148,860

Provision for income taxes
26,262

 
21,742

 
78,432

 
58,493

Net income
$
49,211

 
$
33,127

 
$
131,142

 
$
90,367

Adjustment for income/(loss) attributable to redeemable noncontrolling interest
1,873

 
(187
)
 
1,605

 
(424
)
Net income attributable to Portfolio Recovery Associates, Inc.
$
47,338

 
$
33,314

 
$
129,537

 
$
90,791

Net income per common share attributable to Portfolio Recovery Associates, Inc:
 
 
 
 
 
 
 
Basic
$
0.94

 
$
0.66

 
$
2.56

 
$
1.78

Diluted
$
0.93

 
$
0.65

 
$
2.54

 
$
1.77

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
Basic
50,154

 
50,643

 
50,571

 
51,102

Diluted
50,660

 
51,066

 
51,039

 
51,420

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

4


PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months ended September 30, 2013 and 2012
(unaudited)
(Amounts in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
49,211

 
$
33,127

 
$
131,142

 
$
90,367

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
4,425

 
1,792

 
1

 
2,113

Total other comprehensive income
4,425

 
1,792

 
1

 
2,113

Comprehensive income
53,636

 
34,919

 
131,143

 
92,480

Comprehensive income/(loss) attributable to noncontrolling interest
1,873

 
(187
)
 
1,605

 
(424
)
Comprehensive income attributable to Portfolio Recovery Associates, Inc.
$
51,763

 
$
35,106

 
$
129,538

 
$
92,904

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

5


PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the nine months ended September 30, 2013
(unaudited)
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
Total
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Stockholders’
 
Shares
 
Amount
 
Capital
 
Earnings
 
Income
 
Equity
Balance at December 31, 2012
50,727

 
$
507

 
$
150,878

 
$
554,191

 
$
2,851

 
$
708,427

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to Portfolio Recovery Associates, Inc.

 

 

 
129,537

 

 
129,537

Foreign currency translation adjustment

 

 

 

 
1

 
1

Vesting of nonvested shares
223

 
2

 
(2
)
 

 

 

Repurchase and cancellation of common stock
(1,203
)
 
(11
)
 
(58,500
)
 

 

 
(58,511
)
Amortization of share-based compensation

 

 
10,209

 

 

 
10,209

Income tax benefit from share-based compensation

 

 
2,742

 

 

 
2,742

Employee stock relinquished for payment of taxes

 

 
(4,103
)
 

 

 
(4,103
)
Component of convertible debt

 

 
31,308

 

 

 
31,308

Deferred taxes on component of convertible debt

 

 
(12,517
)
 

 

 
(12,517
)
Purchase of noncontrolling interest

 

 
9,162

 

 

 
9,162

Adjustment of the noncontrolling interest measurement amount

 

 
393

 

 

 
393

Balance at September 30, 2013
49,747

 
$
498

 
$
129,570

 
$
683,728

 
$
2,852

 
$
816,648

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

6


PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2013 and 2012
(unaudited)
(Amounts in thousands)
 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
131,142

 
$
90,367

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of share-based compensation
10,209

 
8,361

Depreciation and amortization
10,653

 
10,833

Impairment of goodwill
6,397

 

Deferred tax expense/(benefit)
2,359

 
(7,377
)
Changes in operating assets and liabilities:
 
 
 
Other assets
(1,147
)
 
(353
)
Accounts receivable
(1,497
)
 
1,579

Accounts payable
2,237

 
(856
)
Income taxes
(5,062
)
 
(7,024
)
Accrued expenses
9,129

 
931

Accrued payroll and bonuses
7,660

 
(2,799
)
Net cash provided by operating activities
172,080

 
93,662

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(9,913
)
 
(5,362
)
Acquisition of finance receivables, net of buybacks
(546,201
)
 
(329,444
)
Collections applied to principal on finance receivables
368,693

 
286,907

Business acquisition, net of cash acquired

 
(48,653
)
Net cash used in investing activities
(187,421
)
 
(96,552
)
Cash flows from financing activities:
 
 
 
Income tax benefit from share-based compensation
2,742

 
1,484

Proceeds from line of credit
217,000

 
160,000

Principal payments on line of credit
(344,000
)
 
(130,000
)
Repurchases of common stock
(58,511
)
 
(22,726
)
Cash paid for purchase of portion of noncontrolling interest
(1,150
)
 

Distributions paid to noncontrolling interest
(51
)
 

Principal payments on long-term debt
(4,109
)
 
(572
)
Proceeds from convertible debt, net
279,285

 

Net cash provided by financing activities
91,206

 
8,186

Effect of exchange rate on cash
153

 
(505
)
Net increase in cash and cash equivalents
76,018

 
4,791

Cash and cash equivalents, beginning of period
32,687

 
26,697

Cash and cash equivalents, end of period
$
108,705

 
$
31,488

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
9,333

 
$
7,577

Cash paid for income taxes
78,434

 
71,521

Noncash investing and financing activities:
 
 
 
Adjustment of the noncontrolling interest measurement amount
$
393

 
$
(2,852
)
Distributions payable relating to noncontrolling interest
1,237

 
261

Purchase of noncontrolling interest
9,162

 

Employee stock relinquished for payment of taxes
(4,103
)
 
(2,170
)
The accompanying notes are an integral part of these consolidated financial statements.


7

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



1.
Organization and Business:
Portfolio Recovery Associates, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company”) is a financial and business service company operating principally in the United States and the United Kingdom.  The Company’s primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. The Company also services receivables on behalf of clients and provides class action claims settlement recovery services and related payment processing to corporate clients.
On June 10, 2013, the Company's board of directors declared a three-for-one stock split by means of a stock dividend.  The new shares were distributed on August 1, 2013, and the shares began trading on a split-adjusted basis beginning August 2, 2013.  As a result of this action, approximately 33.8 million shares were issued to stockholders.  The par value of the common stock remains at $0.01 per share and, accordingly, approximately $0.3 million was retroactively transferred from additional paid-in capital to common stock for all periods presented.  Earnings per share and weighted average shares outstanding are presented in this Form 10-Q after the effect of the stock split.  The three-for-one stock split is reflected in the share and per share amounts in all periods presented in this Form 10-Q including Note 7 “Share-Based Compensation,” Note 9 “Earnings per Share,” and Note 12 “Stockholders' Equity.”
The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles 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 homogeneity of services, service delivery methods and use of technology.
The following table shows the amount of revenue generated for the three and nine months ended September 30, 2013 and 2012 and long-lived assets held at September 30, 2013 and 2012 by geographical location (amounts in thousands):
 
As Of And For The
 
As Of And For The
 
Three Months Ended September 30, 2013
 
Three Months Ended September 30, 2012
 
Revenues
 
Long-Lived
Assets
 
Revenues
 
Long-Lived
Assets
United States
$
194,769

 
$
26,289

 
$
145,585

 
$
23,596

United Kingdom
2,993

 
1,770

 
4,934

 
1,910

Total
$
197,762

 
$
28,059

 
$
150,519

 
$
25,506

 
 
 
 
 
 
 
 
 
As Of And For The
 
As Of And For The
 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
 
Revenues
 
Long-Lived
Assets
 
Revenues
 
Long-Lived
Assets
United States
$
542,048

 
$
26,289

 
$
424,434

 
$
23,596

United Kingdom
8,234

 
1,770

 
14,115

 
1,910

Total
$
550,282

 
$
28,059

 
$
438,549

 
$
25,506

Revenues are attributed to countries based on the location of the related operations. Long-lived assets consist of net property and equipment.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated balance sheet as of September 30, 2013 , its consolidated income statements and statements of comprehensive income for the three and nine months ended September 30, 2013 and 2012, its consolidated statement of changes in stockholders’ equity for the nine months ended September 30, 2013 , and its consolidated statements of cash flows for the nine months ended September 30, 2013 and 2012. The consolidated income statements of the Company for the three and nine months ended September 30, 2013 may not be indicative of future results. Certain reclassifications have been made to prior year amounts to conform to the current year

8

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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 2012 Annual Report on Form 10-K, filed on February 28, 2013.

2.
Finance Receivables, net:
Changes in finance receivables, net for the three and nine months ended September 30, 2013 and 2012 were as follows (amounts in thousands):
 

Three Months Ended
September 30, 2013
 
Three Months Ended
September 30, 2012
Balance at beginning of period
$
1,236,859

 
$
966,508

Acquisitions of finance receivables, net of buybacks
138,854

 
100,063

Foreign currency translation adjustment
1,304

 
321

Cash collections
(291,651
)
 
(229,052
)
Income recognized on finance receivables, net
171,456

 
135,754

Cash collections applied to principal
(120,195
)
 
(93,298
)
Balance at end of period
$
1,256,822

 
$
973,594

 
 
 
 
 
Nine Months Ended
September 30, 2013
 
Nine Months Ended
September 30, 2012
Balance at beginning of period
$
1,078,951

 
$
926,734

Acquisitions of finance receivables, net of buybacks
546,201

 
333,402

Foreign currency translation adjustment
363

 
365

Cash collections
(863,511
)
 
(679,473
)
Income recognized on finance receivables, net
494,818

 
392,566

Cash collections applied to principal
(368,693
)
 
(286,907
)
Balance at end of period
$
1,256,822

 
$
973,594

 
At the time of acquisition, the life of each pool is generally estimated to be between 60 to 96 months based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon current projections, cash collections applied to principal on finance receivables as of September 30, 2013 are estimated to be as follows for the twelve months in the periods ending (amounts in thousands):
 
September 30, 2014
$
442,007

September 30, 2015
345,369

September 30, 2016
257,244

September 30, 2017
150,698

September 30, 2018
57,070

September 30, 2019
4,434

 
$
1,256,822

During the three and nine months ended September 30, 2013 , the Company purchased approximately $1.79 billion and $6.83 billion , respectively, in face value of charged-off consumer receivables. During the three and nine months ended September 30, 2012 , the Company purchased approximately $1.26 billion and $4.24 billion , respectively, in face value of charged-off consumer receivables. At September 30, 2013 , the estimated remaining collections (“ERC”) on the receivables purchased in the three and nine months ended September 30, 2013 , were $250.4 million and $895.3 million , respectively. At September 30, 2013 , the ERC on the receivables purchased in the three and nine months ended September 30, 2012 , were $140.9 million and $435.8 million , respectively. At September 30, 2013 , the Company had unamortized purchased principal (purchase price) in pools accounted for under the cost recovery method of $27.8 million; at December 31, 2012, the amount was $4.2 million.

9

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield, on portfolios purchased during the period, to be earned by the Company based on its proprietary buying models. Net reclassifications from nonaccretable difference to accretable yield primarily result from the Company’s increase in its estimate of future cash flows. When applicable, net reclassifications to nonaccretable difference from accretable yield result from the Company’s decrease in its estimates of future cash flows and allowance charges that exceed the Company’s increase in its estimate of future cash flows. Changes in accretable yield for the three and nine months ended September 30, 2013 and 2012 were as follows (amounts in thousands):

 
Three Months Ended September 30,
 
Nine Months Ended September 30,

2013
 
2012
 
2013
 
2012
Balance at beginning of period
$
1,400,906

 
$
1,151,653

 
$
1,239,674

 
$
1,026,614

Income recognized on finance receivables, net
(171,456
)
 
(135,754
)
 
(494,818
)
 
(392,566
)
Additions
122,976

 
102,997

 
472,666

 
325,165

Net reclassifications from nonaccretable difference
63,031

 
45,182

 
201,823

 
205,997

Foreign currency translation adjustment
509

 
(104
)
 
(3,379
)
 
(1,236
)
Balance at end of period
$
1,415,966

 
$
1,163,974

 
$
1,415,966

 
$
1,163,974


A valuation allowance is recorded for significant decreases in expected cash flows or a change in the expected timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. In any given period, the Company may be required to record valuation allowances due to pools of receivables underperforming expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently on the overall profitability of purchased pools of defaulted consumer receivables would include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relate to the collection and movement of accounts on both the collection floor of the Company and external channels), as well as decreases in productivity related to turnover and tenure of the Company’s collection staff. The following is a summary of activity within the Company’s valuation allowance account, all of which relates to loans acquired with deteriorated credit quality, for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):

 
Three Months Ended September 30, 2013
 
Three Months Ended September 30, 2012
 
Core Portfolio  (1)
 
Purchased Bankruptcy
Portfolio 
(2)
 
Total
 
Core Portfolio  (1)
 
Purchased Bankruptcy
Portfolio 
(2)
 
Total
Valuation allowance - finance receivables:

 

 

 
 
 
 
 
 
Beginning balance
$
70,350

 
$
23,761

 
$
94,111

 
$
75,850

 
$
13,419

 
$
89,269

Allowance charges

 
1,500

 
1,500

 
1,850

 
945

 
2,795

Reversal of previous recorded allowance charges
(3,970
)
 
(111
)
 
(4,081
)
 
(1,150
)
 
(82
)
 
(1,232
)
Net allowance (reversals)/charges
(3,970
)
 
1,389

 
(2,581
)
 
700

 
863

 
1,563

Ending balance
$
66,380

 
$
25,150

 
$
91,530

 
$
76,550

 
$
14,282

 
$
90,832

Finance Receivables, net:
$
699,742

 
$
557,080

 
$
1,256,822

 
$
493,192

 
$
480,402

 
$
973,594


10

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
 
Core Portfolio  (1)
 
Purchased Bankruptcy
Portfolio 
(2)
 
Total
 
Core Portfolio  (1)
 
Purchased Bankruptcy
Portfolio 
(2)
 
Total
Valuation allowance - finance receivables:
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
$
74,500

 
$
18,623

 
$
93,123

 
$
76,580

 
$
9,991

 
$
86,571

Allowance charges
300

 
6,760

 
7,060

 
4,000

 
4,620

 
8,620

Reversal of previous recorded allowance charges
(8,420
)
 
(233
)
 
(8,653
)
 
(4,030
)
 
(329
)
 
(4,359
)
Net allowance (reversals)/charges
(8,120
)
 
6,527

 
(1,593
)
 
(30
)
 
4,291

 
4,261

Ending balance
$
66,380

 
$
25,150

 
$
91,530

 
$
76,550

 
$
14,282

 
$
90,832

Finance Receivables, net:
$
699,742

 
$
557,080

 
$
1,256,822

 
$
493,192

 
$
480,402

 
$
973,594

(1)
“Core” accounts or portfolios refer to accounts or portfolios that are defaulted consumer receivables and are not in a bankrupt status upon purchase. For this table, the Core Portfolio also includes accounts purchased in the United Kingdom. These accounts are aggregated separately from purchased bankruptcy accounts.
(2)
“Purchased bankruptcy” accounts or portfolios refer to accounts or portfolios that are in bankruptcy status when purchased, and as such, are purchased as a pool of bankrupt accounts.

3.
Borrowings:
The Company's borrowings consisted of the following as of the dates indicated (in thousands):
 
September 30,
2013
 
December 31,
2012
Line of credit, revolver
$

 
$
127,000

Line of credit, term loan
196,250

 
200,000

Equipment loan
183

 
542

Convertible notes
287,500

 

Less: Debt discount
(31,704
)
 

Total
$
452,229

 
$
327,542

The following principal payments are due on the Company's borrowings as of September 30, 2013 for the twelve month periods ending (amounts in thousands):
September 30, 2014
$
8,933

September 30, 2015
13,750

September 30, 2016
18,750

September 30, 2017
35,000

September 30, 2018
120,000

Thereafter
287,500

Total
$
483,933

Revolving Credit and Term Loan Facility
On December 19, 2012, the Company entered into a credit agreement with Bank of America, N.A., as administrative agent, and a syndicate of lenders named therein (the “Credit Agreement”). On August 6, 2013, the Company entered into a First Amendment (the “First Amendment”) to the Credit Agreement. The First Amendment amended and restated certain provisions to clarify the permitted indebtedness basket for the issuance of senior, unsecured convertible notes in an aggregate amount not to exceed $300,000,000 .  On August 21, 2013, the Company entered into a Lender Joinder Agreement and Lender Commitment Agreement, and Consented to a Master Assignment and Assumption  (collectively, the “Loan Modification Agreements”), which together modified the Credit Agreement. The Loan Modification Agreements, among other things, increased by $35.5 million the amount of revolving credit availability under the Credit Agreement. Under the terms of the Credit Agreement as amended and modified,

11

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


the credit facility includes an aggregate principal amount available of $631.8 million (subject to the borrowing base and applicable debt covenants) which consists of a $196.3 million floating rate term loan that amortizes and matures on December 19, 2017 and a $435.5 million revolving credit facility that matures on December 19, 2017. 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 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 Credit Agreement) plus 0.50% , (b) Bank of America’s prime rate, and (c) the Eurodollar rate plus 1.00% . The Company’s revolving credit facility includes a $20 million swingline loan sublimit, a $20 million letter of credit sublimit and a $20 million alternative currency equivalent sublimit. The credit facility contains an accordion loan feature that allows the Company to request an increase of up to $214.5 million in the amount available for borrowing under the facility, whether from existing or new lenders, subject to terms of the Credit Agreement. No existing lender is obligated to increase its commitment. The Credit Agreement is secured by a first priority lien on substantially all of the Company’s assets. The Credit Agreement contains restrictive covenants and events of default including the following:
borrowings may not exceed 30% of the ERC of all its eligible asset pools plus 75% of its eligible accounts receivable;
the consolidated leverage ratio (as defined in the Credit Agreement) cannot exceed 2.0 to 1.0 as of the end of any fiscal quarter;
consolidated tangible net worth (as defined in the Credit Agreement) must equal or exceed $455,091,200 plus 50% of positive cumulative consolidated net income for each fiscal quarter beginning with the quarter ended December 31, 2012, plus 50% of the cumulative net proceeds of any equity offering;
capital expenditures during any fiscal year cannot exceed $30 million ;
cash dividends and distributions during any fiscal year cannot exceed $20 million ;
stock repurchases during the term of the agreement cannot exceed $250 million and cannot exceed $100 million in a single fiscal year;
permitted acquisitions (as defined in the Credit Agreement) during any fiscal year cannot exceed $250 million ;
the Company must maintain positive consolidated income from operations (as defined in the Credit Agreement) during any fiscal quarter; and
restrictions on changes in control.
The revolving credit facility also bears an unused line fee of 0.375%  per annum, payable quarterly in arrears.
The Company's borrowings outstanding on its credit facility at September 30, 2013 consisted of $196.3 million outstanding on the term loan with an annual interest rate as of September 30, 2013 of 2.68% . At December 31, 2012, the Company's borrowings on its credit facility consisted of $122.0 million in 30-day Eurodollar rate loans and $5.0 million in base rate loans with a weighted average interest rate of 2.74% . In addition, the Company had $200.0 million outstanding on the term loan at December 31, 2012 with an annual interest rate as of December 31, 2012 of 2.71% .
Equipment Loan
On December 15, 2010, the Company entered into a commercial loan agreement to finance computer software and equipment purchases in the amount of approximately $1.6 million . The loan is collateralized by the related computer software and equipment. The loan term is 3 years with a fixed rate of 3.69% with monthly installments, including interest, of $46,108 beginning on January 15, 2011, and it matures on December 15, 2013 . The balance of the equipment loan at September 30, 2013 and December 31, 2012 was $0.2 million and $0.5 million , respectively.
Convertible Senior Notes
On August 13, 2013, the Company completed the private offering of $287.5 million in aggregate principal amount of the Company’s 3.00% Convertible Senior Notes due 2020 (the “Notes”). The Notes were issued pursuant to an Indenture, dated August 13, 2013 (the "Indenture") between the Company and Wells Fargo Bank, National Association, as trustee. The Indenture contains customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately. The Notes are senior unsecured obligations of the Company. Interest on the 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 Notes will be convertible only upon the occurrence of specified events. On or after February 1, 2020, the Notes will be convertible at any time. Upon conversion, the Notes may be settled, at the Company’s option, in cash, shares of the Company’s common stock, or any combination thereof. Holders of the Notes have the right to require the Company to repurchase all or some of their Notes at 100% of their principal amount, plus any accrued and unpaid interest, upon the occurrence of a fundamental change (as defined in the Indenture). In addition, upon the occurrence of a make-whole fundamental change (as defined in the Indenture), the Company may, under certain circumstances, be required to increase the conversion rate for the Notes converted in connection with such a

12

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


make-whole fundamental change. The conversion rate for the Notes is initially 15.2172 shares per $1,000 principal amount of 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 Indenture. The Company does not have the right to redeem the Notes prior to maturity. As of September 30, 2013, none of the conditions allowing holders of the Notes to convert their Notes had occurred.
As noted above, upon conversion, holders of the 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. However, the Company’s current intent is to settle conversions through combination settlement (i.e ., the Notes will 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 net proceeds from the sale of the Notes were approximately $279.3 million , after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses payable by the Company. The Company used $174.0 million of the net proceeds from this offering to repay the outstanding balance on its revolving credit facility and used $50.0 million to repurchase shares of its common stock.
The Company determined that the fair value of the 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 original Notes issuance cost as debt issuance cost and the remaining $0.9 million as equity issuance cost.
ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”), requires that, for convertible debt instruments that may be settled fully or partially in cash upon conversion, issuers must separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively.
The balances of the liability and equity components of all of the Notes outstanding were as follows as of the dates indicated(in thousands):
 
 
September 30,
2013
 
December 31,
2012
Liability component - principal amount
 
$
287,500

 
$

Unamortized debt discount
 
(31,704
)
 

Liability component - net carrying amount
 
255,796

 

Equity component
 
$
31,308

 
$

The debt discount is being amortized into interest expense over the remaining life of the Notes using the effective interest rate, which is 4.92% .
Interest expense related to the Notes was as follows for the periods indicated (in thousands):
 
 
Three Months Ended September 30, 2013
 
Three Months Ended September 30, 2012
 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
Interest expense - stated coupon rate
 
$
1,150

 
$

 
$
1,150

 
$

Interest expense - amortization of debt discount
 
525

 

 
525

 

Total interest expense - convertible notes
 
$
1,675


$

 
$
1,675

 
$

The Company was in compliance with all covenants under its financing arrangements as of September 30, 2013 and December 31, 2012.



13

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


4.
Property and Equipment, net:
Property and equipment, at cost, consisted of the following as of the dates indicated (amounts in thousands):
 
 
September 30,
2013
 
December 31,
2012
Software
$
33,683

 
$
29,467

Computer equipment
16,033

 
14,129

Furniture and fixtures
7,753

 
7,220

Equipment
9,742

 
8,674

Leasehold improvements
8,017

 
7,231

Building and improvements
7,012

 
7,014

Land
1,269

 
1,269

Accumulated depreciation and amortization
(55,450
)
 
(49,692
)
Property and equipment, net
$
28,059

 
$
25,312

Depreciation and amortization expense relating to property and equipment for the three and nine months ended September 30, 2013, was $2.6 million and $7.1 million , respectively. Depreciation and amortization expense relating to property and equipment for the three and nine months ended September 30, 2012, was $2.2 million and $6.5 million , respectively.
The Company, in accordance with the guidance of FASB ASC Topic 350-40 “Internal-Use Software” (“ASC 350-40”), capitalizes qualifying computer software costs incurred during the application development stage and amortizes them over their estimated useful life of three to seven years on a straight-line basis beginning when the project is completed. Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred. The Company’s policy provides for the capitalization of certain direct payroll costs for employees who are directly associated with internal use computer software projects, as well as external direct costs of services associated with developing or obtaining internal use software. Capitalizable personnel costs are limited to the time directly spent on such projects. As of September 30, 2013 and December 31, 2012, the Company incurred and capitalized approximately $9.7 million and $7.8 million , respectively, of these direct payroll costs and external direct costs related to software developed for internal use. Of these costs, at September 30, 2013 and December 31, 2012, approximately $1.3 million and $1.3 million , respectively, was for projects that were in the development stage and, therefore are a component of “Other Assets.” Once the projects are completed, the costs are transferred to Software and amortized over their estimated useful life. Amortization expense for the three and nine months ended September 30, 2013 , was approximately $0.4 million and $1.1 million , respectively.  Amortization expense for the three and nine months ended September 30, 2012, was approximately $0.3 million and $0.9 million , respectively. The remaining unamortized costs relating to internally developed software at September 30, 2013 and December 31, 2012 were approximately $4.7 million and $3.9 million , respectively.
 
5.
Redeemable Noncontrolling Interest:
In accordance with ASC 810, the Company has consolidated all financial statement accounts of Claims Compensation Bureau, LLC (“CCB”) in its consolidated balance sheets and its consolidated income statements. The redeemable noncontrolling interest amount is separately stated on the consolidated balance sheets and represents the 19% and 38% interest in CCB not owned by the Company at September 30, 2013 and December 31, 2012, respectively. In addition, net income/loss attributable to the noncontrolling interest is stated separately in the consolidated income statements.
Effective January 31, 2013, the Company purchased one-half of the then remaining interest in CCB for a purchase price of $1.1 million . The purchase price was derived from the formula stipulated in the contractual agreement and was based on prior levels of earnings before interest, taxes, depreciation and amortization ("EBITDA").
The maximum redemption value of the noncontrolling interest, as if it were currently redeemable by the holder of the put option under the terms of the put arrangement, was $11.4 million at September 30, 2013.
The Company has the right through February 28, 2015 to purchase the remaining 19% of CCB at certain pre-determined multiples of EBITDA.

14

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


On September 27, 2013, the Company exercised its right, subject to a review period ended October 15, 2013, to purchase the remainder of the noncontrolling interest for a purchase price of approximately $4.5 million . The purchase price was derived from the formula stipulated in the contractual agreement and was based on prior levels of EBITDA. The closing occurred on October 31, 2013.
The following table represents the changes in the redeemable noncontrolling interest for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Balance at beginning of period
$
10,336

 
$
19,381

 
$
20,673

 
$
17,831

Net income/(loss) attributable to redeemable noncontrolling interest
1,873

 
(187
)
 
1,605

 
(424
)
Distributions payable
(1,235
)
 

 
(1,237
)
 
(261
)
Purchase of portion of noncontrolling interest

 

 
(10,312
)
 

Adjustment of the noncontrolling interest measurement amount
(638
)
 
804

 
(393
)
 
2,852

Balance at end of period
$
10,336

 
$
19,998

 
$
10,336

 
$
19,998

In accordance with the limited liability company agreement of CCB, distributions due to the members of CCB are accrued each quarter and are payable as soon as reasonably possible subsequent to each quarter end.

6.
Goodwill and Intangible Assets, net:
In connection with the Company’s previous business acquisitions, the Company acquired certain tangible and intangible assets. Intangible assets purchased included client and customer relationships, non-compete agreements, trademarks and goodwill. Pursuant to ASC 350, goodwill is not amortized but rather is reviewed at least annually for impairment. During the fourth quarter of 2012, the Company underwent its annual review of goodwill. Based upon the results of this review, which was conducted as of October 1, 2012, no impairment charges to goodwill or the other intangible assets were necessary as of the date of that review. During the three months ended September 30, 2013, the Company further evaluated the goodwill associated with one if its reporting units, which had experienced a revenue and profitability decline, recent net losses, and the loss of a significant client during the quarter. In its evaluation, the Company used a present value calculation of future cash flows and earnings to determine the fair value of the reporting unit. Based on this evaluation, the Company recorded a $6.4 million impairment of goodwill in the third quarter of 2013. This non-cash charge represents the full amount of goodwill previously recorded for the Company’s subsidiary PRA Location Services, LLC ("PLS"). All other intangible assets related to PLS were fully amortized as of September 30, 2013.
Total impairment losses during the three and nine months ended September 30, 2013 were $6.4 million . There were no impairment losses during the three or nine months ended September 30, 2012. The Company expects to perform its next annual goodwill review during the fourth quarter of 2013. At September 30, 2013 and December 31, 2012, the carrying value of goodwill was $102.9 million and $109.5 million , respectively. The following table represents the changes in goodwill for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Balance at beginning of period
$
106,953

 
$
99,384

 
$
109,488

 
$
61,678

Acquisition of MHH

 

 

 
34,270

Adjustment to provisional amount

 
(549
)
 

 
2,511

Impairment of goodwill
(6,397
)
 

 
(6,397
)
 

Foreign currency translation adjustment
2,335

 
1,621

 
(200
)
 
1,997

Balance at end of period
$
102,891

 
$
100,456

 
$
102,891

 
$
100,456


15

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Intangible assets, excluding goodwill, consist of the following at September 30, 2013 and December 31, 2012 (amounts in thousands):
 
September 30, 2013
 
December 31, 2012
 
Gross Amount
 
Accumulated
Amortization
 
Gross Amount
 
Accumulated
Amortization
Client and customer relationships
$
40,647

 
$
25,540

 
$
40,698

 
$
22,516

Non-compete agreements
3,876

 
3,692

 
3,880

 
3,581

Trademarks
3,471

 
2,016

 
3,477

 
1,594

Total
$
47,994

 
$
31,248

 
$
48,055

 
$
27,691

Total intangible asset amortization expense for the three and nine months ended September 30, 2013 was $1.2 million and $3.5 million , respectively. Total intangible asset amortization expense for the three and nine months ended September 30, 2012 was $1.5 million and $4.4 million , respectively. The Company reviews these intangible assets for possible impairment upon the occurrence of a triggering event.
 
7.
Share-Based Compensation:
The Company has an Omnibus Incentive Plan to assist the Company in attracting and retaining selected individuals to serve as employees and directors, who are expected to contribute to the Company's success and to achieve long-term objectives that will benefit stockholders of the Company. The 2013 Omnibus Incentive Plan (the “Plan”) was approved by the Company's stockholders at the 2013 Annual Meeting.  The Plan enables the Company to award shares of the Company's common stock to select employees and directors, as described in the Plan, not to exceed 5,400,000 shares as authorized by the Plan. The Plan replaced the 2010 Stock Plan.
As of September 30, 2013, total future compensation costs related to nonvested awards of nonvested shares (not including nonvested shares granted under the Long-Term Incentive ("LTI") Program) is estimated to be $4.9 million with a weighted average remaining life for all nonvested shares of 1.7 years (not including nonvested shares granted under the LTI program). As of September 30, 2013, there are no future compensation costs related to stock options and there are no remaining vested stock options to be exercised.
Total share-based compensation expense was $3.5 million and $10.2 million for the three and nine months ended September 30, 2013, respectively. Total share-based compensation expense was $2.8 million and $8.4 million for the three and nine months ended September 30, 2012, respectively. Tax benefits resulting from tax deductions in excess of share-based compensation expense (windfall tax benefits) recognized under the provisions of ASC Topic 718 "Compensation-Stock Compensation" ("ASC 718") are credited to additional paid-in capital in the Company's Consolidated Balance Sheets. Realized tax shortfalls, if any, are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense. The total tax benefit realized from share-based compensation was approximately $0.1 million and $5.0 million for the three and nine months ended September 30, 2013, respectively. The total tax benefit realized from share-based compensation was approximately $0.2 million and $3.0 million for the three and nine months ended September 30, 2012, respectively.
All share amounts presented in this Note 7 have been adjusted to reflect the three-for-one stock split by means of a stock dividend declared by the Company's board of directors on June 10, 2013.
Nonvested Shares
With the exception of the awards made pursuant to the LTI program and a few employee and director grants, the nonvested shares vest ratably over three to five years and are expensed over their vesting period.

16

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


The following summarizes all nonvested share transactions, excluding those related to the LTI program, from December 31, 2011 through September 30, 2013 (share amounts in thousands):
 
Nonvested Shares
Outstanding
 
Weighted-Average
Price at Grant Date
December 31, 2011
243

 
$
19.77

Granted
159

 
22.00

Vested
(102
)
 
19.79

Cancelled
(12
)
 
23.31

December 31, 2012
288

 
20.84

Granted
109

 
37.14

Vested
(138
)
 
19.47

Cancelled
(26
)
 
20.73

September 30, 2013
233

 
$
29.28

The total grant date fair value of shares vested during the three and nine months ended September 30, 2013, was $0.2 million and $2.7 million , respectively. The total grant date fair value of shares vested during the three and nine months ended September 30, 2012, was $0.2 million and $1.8 million , respectively.
Long-Term Incentive Program
Pursuant to the Plan, the Compensation Committee may grant time-vested and performance based nonvested shares. All shares granted under the LTI program were granted to key employees of the Company. The following summarizes all LTI program share transactions from December 31, 2011 through September 30, 2013 (share amounts in thousands):
 
Nonvested LTI Shares
Outstanding
 
Weighted-Average
Price at Grant Date
December 31, 2011
548

 
$
17.01

Granted at target level
197

 
20.73

Adjustments for actual performance
121

 
18.00

Vested
(354
)
 
12.58

Cancelled
(15
)
 
22.55

December 31, 2012
497

 
21.71

Granted at target level
124

 
34.59

Adjustments for actual performance
106

 
17.87

Vested
(160
)
 
16.24

Cancelled
(5
)
 
25.17

September 30, 2013
562

 
$
25.18

The total grant date fair value of shares vested during the three and nine months ended September 30, 2013, was $0.0 million and $2.6 million , respectively. The total grant date fair value of shares vested during the three and nine months ended September 30, 2012, was $0.0 million and $2.0 million , respectively.
At September 30, 2013, total future compensation costs, assuming the current estimated performance levels are achieved, related to nonvested share awards granted under the LTI program are estimated to be approximately $7.9 million . The Company assumed a 7.5% forfeiture rate for these grants and the remaining shares have a weighted average life of 1.1 years at September 30, 2013.

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. There were no unrecognized tax benefits at September 30, 2013 and 2012.

17

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


The Company was notified on June 21, 2007 that it was being examined by the Internal Revenue Service ("IRS") for the 2005 calendar year. The IRS concluded the audit and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes, for tax years ended December 31, 2007, 2006 and 2005. The IRS has asserted that tax revenue recognition using the cost recovery method does not clearly reflect taxable income, and that unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current deduction. The Company believes it has sufficient support for the technical merits of its positions and that it is more likely than not they will ultimately be sustained; therefore, a reserve for uncertain tax positions is not required. For domestic income tax purposes, the Company recognizes revenue using the cost recovery method with respect to its debt purchasing business. The Company believes cost recovery to be an appropriate tax revenue recognition method for companies in the bad debt purchasing industry. Under this method, for tax purposes, collections on finance receivables are applied first to principal to reduce the finance receivables to zero before any taxable income is recognized.  On April 22, 2009, the Company filed a formal protest of the findings contained in the examination report prepared by the IRS. On August 26, 2011, the IRS issued a Notice of Deficiency for the tax years ended December 31, 2007, 2006, and 2005.  On November 2, 2011, the Company filed a petition in the United States Tax Court. If the Company is unsuccessful in the United States Tax Court, it can appeal to the federal Circuit Court of Appeals.  Payment of the assessed taxes and possibly interest and penalties, could have an adverse affect on the Company’s financial condition, be material to the Company’s results of operations, and may require additional financing from other sources.  In accordance with the Internal Revenue Code, underpayments of federal tax accrue interest, compounded daily, at the applicable federal short term rate plus three percentage points.  An additional two percentage points applies to large corporate underpayments of $100,000 or more to periods after the applicable date as defined in the Internal Revenue Code.  The Company files taxes in multiple state jurisdictions; therefore, any underpayment of state tax will accrue interest in accordance with the respective state statute. On June 30, 2011, the Company was notified by the IRS that the audit period will be expanded to include the tax years ended December 31, 2009 and 2008.
At September 30, 2013, the tax years subject to examination by the major taxing jurisdictions, including the IRS, are 2003, 2005 and subsequent years. The 2003 tax year remains open to examination because of a net operating loss that originated in that year but was not fully utilized until the 2005 tax year. The examination periods for the 2007, 2006 and 2005 tax years were extended through December 31, 2011; however, because the IRS issued the Notice of Deficiency prior to December 31, 2011, the period for assessment is suspended until a decision of the Tax Court becomes final. The statute of limitations for the 2008, 2009 and 2010 tax years has been extended to September 26, 2014.
ASC 740 requires the recognition of interest if the tax law would require interest to be paid on the underpayment of taxes, and recognition of penalties if a tax position does not meet the minimum statutory threshold to avoid payment of penalties. No interest or penalties were accrued or reversed in the three or nine month periods ended September 30, 2013 or 2012.
 
9.
Earnings per Share:
Basic earnings per share (“EPS”) are computed by dividing net income available to common stockholders of Portfolio Recovery Associates, 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 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 , which did not occur during the period from which the Notes were issued on August 13, 2013 through September 30, 2013. The Notes were not outstanding during the three or nine months ending September 30, 2012. Share-based awards that are contingent upon the attainment of performance goals are not included in the computation of diluted EPS until the performance goals have been attained. The dilutive effect of nonvested shares is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the vesting of nonvested shares would be used to purchase common shares at the average market price for the period. The assumed proceeds include the windfall tax benefit that would be received upon assumed exercise.

18

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


The following tables provide reconciliation between the computation of basic EPS and diluted EPS for the three and nine months ended September 30, 2013 and 2012 (amounts in thousands, except per share amounts):
 
For the Three Months Ended September 30,
 
2013
 
2012
 
Net Income
attributable to  Portfolio
Recovery  Associates, Inc.
 
Weighted  Average
Common  Shares
 
EPS
 
Net Income
attributable to  Portfolio
Recovery  Associates, Inc.
 
Weighted  Average
Common  Shares
 
EPS
Basic EPS
$
47,338

 
50,154

 
$
0.94

 
$
33,314

 
50,643

 
$
0.66

Dilutive effect of nonvested share awards
 
 
506

 
 
 
 
 
423

 
 
Diluted EPS
$
47,338

 
50,660

 
$
0.93

 
$
33,314

 
51,066

 
$
0.65

 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
Net Income
attributable to  Portfolio
Recovery  Associates, Inc.
 
Weighted  Average
Common  Shares
 
EPS
 
Net Income
attributable to  Portfolio
Recovery  Associates, Inc.
 
Weighted  Average
Common  Shares
 
EPS
Basic EPS
$
129,537

 
50,571

 
$
2.56

 
$
90,791

 
51,102

 
$
1.78

Dilutive effect of nonvested share awards
 
 
468

 
 
 
 
 
318

 
 
Diluted EPS
$
129,537

 
51,039

 
$
2.54

 
$
90,791

 
51,420

 
$
1.77

All share amounts presented in this Note 9 have been adjusted to reflect the three-for-one stock split by means of a stock dividend declared by the Company's board of directors on June 10, 2013.
There were no antidilutive options outstanding for the three or nine months ended September 30, 2013 and 2012.

10.
Commitments and Contingencies:
Employment Agreements:
The Company has employment agreements, most of which expire on December 31, 2014 , with all of its executive officers and with several members of its senior management group. Such agreements provide for base salary payments as well as bonuses which are based on the attainment of specific management goals. At September 30, 2013, the estimated future compensation under these agreements is approximately $12.9 million . The agreements also contain confidentiality and non-compete provisions.
Leases:
The Company is party to various operating leases with respect to its facilities and equipment. The future minimum lease payments at September 30, 2013 total approximately $29.6 million .
Forward Flow Agreements:
The Company is party to several forward flow agreements that allow for the purchase of defaulted consumer receivables at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at September 30, 2013 is approximately $161.9 million .
Redeemable Noncontrolling Interest:
In connection with the Company’s acquisition of 62% of the membership units of CCB on March 15, 2010, the Company acquired the right through February 28, 2015 to purchase, at a predetermined price, the remaining 38% of the membership units of CCB not held by the Company. Effective as of January 31, 2013, the Company exercised its right to acquire one-half of the then outstanding noncontrolling interest resulting in ownership of 81% of the membership units as of September 30, 2013.
On September 27, 2013, the Company exercised its right to purchase the remainder of the noncontrolling interest for a purchase price of approximately $4.5 million . The purchase price was derived from the formula stipulated in the contractual agreement and was based on prior levels of EBITDA. The closing occurred on October 31, 2013.

19

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Contingent Purchase Price:
The asset purchase agreement entered into in connection with the acquisition of certain finance receivables and certain operating assets of National Capital Management, LLC ("NCM") in 2012, includes an earn-out provision whereby the sellers are able to earn additional cash consideration for achieving certain cash collection thresholds over a five year period. The maximum amount of earn-out during the period is $15.0 million . As of September 30, 2013, the Company has recorded an estimated present fair value amount for this liability of $9.4 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:
The Company is from time to time subject to routine legal claims and proceedings, most of which are incidental to the ordinary course of its business. The Company initiates lawsuits against customers and is occasionally countersued by them in such actions. Also, customers, either individually, as members of a class action, or through a governmental entity on behalf of customers, may initiate litigation against the Company in which they allege that the Company has violated a state or federal law in the process of collecting on an account.  From time to time, other types of lawsuits are brought against the Company. Additionally, the Company receives subpoenas and other requests or demands for information from regulators or governmental authorities who are investigating the Company's debt collection activities. The Company makes every effort to respond appropriately to such requests.
The Company accrues for potential liability arising from legal proceedings 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.
Subject to the inherent uncertainties involved in such proceedings, the Company believes, based upon its current knowledge and after consultation with counsel, that the legal proceedings currently pending against it, including those that fall outside of the Company's routine legal proceedings, should not, either individually or in the aggregate, have a material adverse impact on the Company's financial condition.  However, it is possible in light of the uncertainties involved in such proceedings or due to unexpected future developments, that an unfavorable resolution of a legal proceeding or claim could occur which may be material to the Company's financial condition, results of operations, or cash flows for a particular period.
Excluding the matters described below and other putative class action suits which the Company believes are not material, the high end of the range of potential litigation losses in excess of the amount accrued is estimated by management to be less than $1,000,000 as of September 30, 2013.  Notwithstanding our attempt to estimate a range of possible losses in excess of the amount accrued based on current information, actual future losses may exceed both the Company's accrual and the range of potential litigation losses disclosed above.
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 exclusive of potential recoveries, if any, under the Company's insurance policies or third party indemnities. The Company has not recorded any potential recoveries under the Company's insurance policies or third party indemnities.
The matters described below fall outside of the normal parameters of the Company’s routine legal proceedings.

20

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Telephone Consumer Protection Act Litigation
The Company has been named as defendant in a number of putative class action cases, each alleging that the Company violated the Telephone Consumer Protection Act by calling consumers' cellular telephones without their prior express consent.  On December 21, 2011, the United States Judicial Panel on Multi-District Litigation entered an order transferring these matters into one consolidated proceeding in the United States District Court for the Southern District of California.  On November 14, 2012, the putative class plaintiffs filed their amended consolidated complaint in the matter, now styled as In re Portfolio Recovery Associates, LLC Telephone Consumer Protection Act Litigation, case No. 11-md-02295 (the “MDL action”).  The Company has filed a motion to dismiss the amended consolidated complaint.
On October 12, 2012, the United States Court of Appeals for the Ninth Circuit, affirmed the decision of the United States District Court for the Southern District of California in the matter of Meyer v. Portfolio Recovery Associates, LLC, Case No. 11-cv-01008 ("Meyer"), which imposed a preliminary injunction prohibiting the Company from using its Avaya Proactive Contact Dialer to place calls to cellular telephones with California area codes that were obtained through skip-tracing.  On December 28, 2012, the United States Court of Appeals for the Ninth Circuit denied the Company's petition seeking a rehearing en banc. Thereafter, the Company filed a Petition for Writ of Certiorari with the United States Supreme Court on March 28, 2013. On May 13, 2013 the United States Supreme Court denied the Company's petition.   Meyer is one of the cases included in the MDL action listed above. Both Meyer and the MDL action are ongoing and no final determination on the merits in either has been made.
Internal Revenue Service Audit
The IRS examined the Company's tax returns for the 2005 calendar year. The IRS concluded the audit and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes, for tax years ended December 31, 2007, 2006 and 2005. The IRS has asserted that tax revenue recognition using the cost recovery method does not clearly reflect taxable income, and that unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current deduction. The Company believes it has sufficient support for the technical merits of its positions and that it is more likely than not these positions will ultimately be sustained; therefore, a reserve for uncertain tax positions is not required. On April 22, 2009, the Company filed a formal protest of the findings contained in the examination report prepared by the IRS. On August 26, 2011, the IRS issued a Notice of Deficiency for the tax years ended December 31, 2007, 2006, and 2005.  The Company subsequently filed a petition in the United States Tax Court to which the IRS responded on January 12, 2012. If the Company is unsuccessful in the United States Tax Court, it can appeal to the federal Circuit Court of Appeals.  Refer to Note 8 “Income Taxes” for additional information.

11.
Fair Value Measurements and Disclosures:
In accordance with the disclosure requirements of FASB ASC Topic 825, “Financial Instruments” (“ASC 825”), the table below summarizes fair value estimates for the Company’s financial instruments. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company. The carrying amounts in the table are recorded in the consolidated balance sheet at September 30, 2013 and December 31, 2012, under the indicated captions (amounts in thousands):
 
September 30, 2013
 
December 31, 2012
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
108,705

 
$
108,705

 
$
32,687

 
$
32,687

Finance receivables, net
1,256,822

 
1,757,515

 
1,078,951

 
1,776,049

Financial liabilities:
 
 
 
 
 
 
 
Revolving credit

 

 
127,000

 
127,000

Long-term debt
196,433

 
196,433

 
200,542

 
200,542

Convertible debt
255,796

 
331,809

 

 

As of September 30, 2013, and December 31, 2012, the Company did not account for any financial assets or financial liabilities at fair value. As defined by FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values. Those levels of input are summarized as follows:

21

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



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.
Disclosure of the estimated fair values of financial instruments often requires the use of estimates. 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.
Finance receivables, net: The Company records purchased receivables at cost, which represents a significant discount from the contractual receivable balances due. 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 little observable market data available and management is required to use significant judgment in its estimates.
Revolving 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.
Long-term debt: 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 debt: The Notes are carried at historical cost, adjusted for debt discount. The fair value estimate for these Notes incorporates 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.

12.
Stockholders' Equity:
On February 2, 2012, the Board of Directors of the Company authorized a share repurchase program of up to $100 million of the Company’s outstanding shares of common stock on the open market. During the three and nine months ended September 30, 2013, the Company repurchased and retired 989,200 and 1,203,412 shares at an average price of $50.55 and $48.62 per share(including acquisition costs), respectively. At September 30, 2013, the maximum remaining amount authorized by the Board of Directors of the Company for share repurchases under the plan is approximately $18.8 million.

13.
Recent Accounting Pronouncements:
In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” to amend the accounting guidance on intangible asset impairment testing. The ASU permits entities to perform an optional qualitative assessment for determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company adopted ASU 2012-02 in the first quarter of 2013 which had no material impact on its consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income," which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income, by component. In addition, entities are required to present, either on the face of

22

Table of Contents
PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. Generally Accepted Accounting Principles ("U.S. GAAP") to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail on these amounts. The Company adopted ASU 2013-02 in the first quarter of 2013 which had no material impact on its consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity," which defines the treatment of the release of cumulative translation adjustments upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted and prior periods should not be adjusted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.


23

Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:
This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, 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 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 United States or the European Union, particularly the United Kingdom, including the interest rate environment, may have an adverse effect on our collections, results of operations, revenue and stock price or on the stability of the financial system as a whole;
changes in the credit or capital markets, which affect our ability to borrow money or raise capital;
our ability to purchase defaulted consumer receivables at appropriate prices;
our ability to replace our defaulted consumer receivables with additional receivables portfolios;
our ability to obtain accurate and authentic account documents relating to accounts that we acquire and the possibility that documents that we provide could contain errors;
our ability to successfully acquire receivables of new asset types;
our ability to collect sufficient amounts on our defaulted consumer receivables;
changes in tax laws regarding earnings of our subsidiaries located outside of the United States;
changes in 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;
changes in state or federal laws or the administrative practices of various bankruptcy courts, which may impact our ability to collect on our defaulted receivables;
our ability to collect and enforce our finance receivables may be limited under federal and state laws;
our ability to employ and retain qualified employees, especially collection personnel, and our senior management team;
our work force could become unionized in the future, which could adversely affect the stability of our production and increase our costs;
the degree, nature, and resources of our competition;
the possibility that we could incur goodwill or other intangible asset impairment charges;
our ability to retain existing clients and obtain new clients for our fee-for-service businesses;
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 our ability to conduct our business;
changes in governmental laws and regulations which could increase our costs and liabilities or impact our operations;
the possibility that new business acquisitions prove unsuccessful or strain or divert our resources;
our ability to maintain, renegotiate or replace our credit facility;
our ability to satisfy the restrictive covenants in our debt agreements;
our ability to manage risks associated with our international operations;
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;
the imposition of additional taxes on us;
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 we could incur significant allowance charges on our finance receivables;
our loss contingency accruals may not be adequate to cover actual losses;
our ability to manage growth successfully;
the possibility that we could incur business or technology disruptions or cyber incidents, or not adapt to technological advances;
the possibility that we or our industry could experience negative publicity or reputational attacks; and
the risk factors listed from time to time 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.

24

Table of Contents

For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the discussion of “Business” and “Risk Factors” described in our 2012 Annual Report on Form 10-K, filed on February 28, 2013.
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 this report could turn out to be materially different. Except as required by law, we assume no obligation to publicly update or revise our forward-looking statements after the date of this 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, stockholders 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.
Definitions
We use the following terminology throughout this document:
“Allowance charges” refers to a reduction in income recognized on finance receivables on pools of finance receivables whose cash collection estimates are not received or projected to not be received.
“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 non-compliant accounts.
“Cash collections” refers to collections on our owned portfolios.
“Cash receipts” refers to collections on our owned portfolios plus fee income.
“Core” accounts or portfolios refer to accounts or portfolios that are defaulted consumer receivables and are not in a bankrupt status upon purchase. These accounts are aggregated separately from purchased bankruptcy accounts. Unless otherwise noted, Core accounts do not include the accounts we purchase in the United Kingdom.
“EBITDA” refers to earnings before interest, taxes, depreciation and amortization.
“Estimated remaining collections” or "ERC" refers to the sum of all future projected cash collections on our owned portfolios.
“Fee income” refers to revenues generated from our fee-for-service businesses.
“Income recognized on finance receivables” refers to income derived from our owned debt portfolios.
“Income recognized on finance receivables, net” refers to income derived from our owned debt portfolios and is shown net of allowance charges.
“Net finance receivable balance” is recorded on our balance sheet and refers to the purchase price less principal amortization and net allowance charges.
“Principal amortization” refers to cash collections applied to principal on finance receivables.
“Purchase price” refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain capitalized costs, less buybacks.
“Purchase price multiple” refers to the total estimated collections on owned debt portfolios divided by purchase price.
“Purchased bankruptcy” accounts or portfolios refer to accounts or portfolios that are in bankruptcy when we purchase them and as such are purchased as a pool of bankrupt accounts.
“Total estimated collections” refers to the actual cash collections, including cash sales, plus estimated remaining collections.

Overview
The Company is a financial and business services company. Our primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. We also service receivables on behalf of clients on either a commission or transaction-fee basis and provide class action claims settlement recovery services and related payment processing to corporate clients.
The Company is headquartered in Norfolk, Virginia, and employs approximately 3,223 team members. The Company's shares of common stock are traded on the NASDAQ Global Select Market under the symbol “PRAA.”
Earnings Summary
During the third quarter of 2013, net income attributable to the Company was $47.3 million, or $0.93 per diluted share, compared with $33.3 million, or $0.65 per diluted share, in the third quarter of 2012. Total revenue was $197.8 million in the third quarter of 2013, up 31.4% from the third quarter of 2012. Revenues in the recently completed quarter consisted of $171.5 million in income recognized on finance receivables, net of allowance charges, and $26.3 million in fee income. Income recognized on

25

Table of Contents

finance receivables, net of allowance charges, in the third quarter of 2013 increased $35.7 million, or 26.3%, over the third quarter of 2012, primarily as a result of a significant increase in cash collections. Cash collections, which drives our finance receivable income, were $291.7 million in the third quarter of 2013, up 27.3%, or $62.6 million, as compared to the third quarter of 2012. During the third quarter of 2013, $2.6 million in net allowance charge reversals were incurred, compared with $1.6 million of net allowance charges in the third quarter of 2012. Our performance has been positively impacted by operational efficiencies surrounding the cash collections process, including the continued refinement of account scoring analytics as it relates to both legal and non-legal collection channels. Additionally, we have continued to develop our internal legal collection staff resources, which enables us to place accounts into that channel that otherwise would have been prohibitively expensive for legal action and to collect these accounts more efficiently and profitably.
Fee income increased to $26.3 million in the third quarter of 2013 from $14.8 million in the third quarter of 2012, primarily due to higher fee income generated by Claims Compensation Bureau, LLC ("CCB") largely related to income from a single case. This was partially offset by lower fee income generated in the third quarter of 2013 by Mackenzie Hall Holdings, Limited, ("MHH") and PRA Location Services (“PLS”) when compared to the prior year period.
A summary of how our income was generated during the three months ended September 30, 2013 and 2012 is as follows:
 
 
For the Three Months Ended
September 30,
($ in thousands)
2013
 
2012
Cash collections
$
291,651

 
$
229,052

Amortization of finance receivables
(122,776
)
 
(91,735
)
Net allowance reversals/(charges)
2,581

 
(1,563
)
Finance receivable income
171,456

 
135,754

Fee income
26,306

 
14,765

Total revenue
$
197,762

 
$
150,519

Operating expenses were $118.3 million in the third quarter of 2013, up 26.6% over the third quarter of 2012, due primarily to increases in compensation expense, legal collection fees and costs, other operating expenses and impairment of goodwill. Compensation expense increased primarily as a result of larger staff sizes in addition to increases in incentive and share based compensation. Compensation and employee services expenses increased as total employees grew 3.9% to 3,223 as of September 30, 2013 , from 3,103 as of September 30, 2012 . Legal collection costs increased from $15.8 million in the third quarter of 2012 to $19.8 million in the third quarter of 2013, an increase of $4.0 million, or 25.3%.  This increase was the result of our continued expansion of the accounts brought into the legal collection process. Legal collection fees increased from $8.6 million in the third quarter of 2012 to $10.2 million in the third quarter of 2013, an increase of $1.6 million, or 18.6%.  This increase was the result of an increase in cash collections from outside attorneys from $39.9 million in the third quarter of 2012 to $48.3 million for the third quarter of 2013, an increase of $8.4 million, or 21.1%. Other operating expenses increased primarily as a result of an increase in accrued estimated contingent payments related to a previous acquisition. During the three months ended September 30, 2013, we further evaluated the goodwill associated with one of our reporting units, which had experienced a revenue and profitability decline, recent net losses and the loss of a significant client during the quarter. Based on this evaluation, we recorded a $6.4 million impairment of goodwill in the third quarter of 2013. This non-cash charge represents the full amount of goodwill previously recorded for our subsidiary PLS.
During the three months ended September 30, 2013 , we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $1.79 billion at a cost of $141.9 million. During the three months ended September 30, 2012 , excluding the initial investment in the MHH portfolio, we acquired defaulted consumer receivable portfolios with an aggregate face value of $1.26 billion at a cost of $103.0 million. During the nine months ended September 30, 2013 , we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $6.83 billion at a cost of $557.3 million. During the nine months ended September 30, 2012 , excluding the initial investment in the MHH portfolio, we acquired defaulted consumer receivable portfolios with an aggregate face value of $4.25 billion at a cost of $339.4 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. Regardless of the average purchase price and for similar time frames, however, we intend to target a similar internal rate of return, after direct expenses, in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to the estimated profitability of a period's buying.


26

Table of Contents

Results of Operations
The results of operations include the financial results of the Company and all of our subsidiaries.

The following table sets forth certain operating data as a percentage of total revenues for the periods indicated:
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Income recognized on finance receivables, net
86.7
%
 
90.2
 %
 
89.9
%
 
89.5
 %
Fee income
13.3
%
 
9.8
 %
 
10.1
%
 
10.5
 %
Total revenues
100.0
%
 
100.0
 %
 
100.0
%
 
100.0
 %
Operating expenses:
 
 
 
 
 
 
 
Compensation and employee services
26.7
%
 
27.5
 %
 
26.5
%
 
28.2
 %
Legal collection fees
5.2
%
 
5.7
 %
 
5.7
%
 
5.8
 %
Legal collection costs
10.0
%
 
10.5
 %
 
11.5
%
 
13.2
 %
Agent fees
0.7
%
 
1.0
 %
 
0.8
%
 
1.0
 %
Outside fees and services
4.4
%
 
6.7
 %
 
4.5
%
 
4.9
 %
Communication expenses
3.9
%
 
4.5
 %
 
4.4
%
 
5.0
 %
Rent and occupancy
1.0
%
 
1.2
 %
 
1.0
%
 
1.2
 %
Depreciation and amortization
1.9
%
 
2.4
 %
 
1.9
%
 
2.5
 %
Other operating expenses
2.7
%
 
2.5
 %
 
2.7
%
 
2.7
 %
Impairment of goodwill
3.2
%
 
 %
 
1.2
%
 
 %
Total operating expenses
59.7
%
 
62.0
 %
 
60.2
%
 
64.5
 %
Income from operations
40.2
%
 
38.0
 %
 
39.8
%
 
35.5
 %
Other expense:
 
 
 
 
 
 
 
Interest expense
2.0
%
 
1.5
 %
 
1.7
%
 
1.6
 %
Income before income taxes
38.2
%
 
36.5
 %
 
38.1
%
 
33.9
 %
Provision for income taxes
13.3
%
 
14.4
 %
 
14.3
%
 
13.3
 %
Net income
24.9
%
 
22.1
 %
 
23.8
%
 
20.6
 %
Adjustment for income/(loss) attributable to redeemable noncontrolling interest
0.9
%
 
(0.1