PRA Group
PRA GROUP INC (Form: 10-Q, Received: 11/10/2014 16:15:52)

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, 2014 .
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 000-50058
 
 
 
PRA Group, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
75-3078675
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
120 Corporate Boulevard, Norfolk, Virginia
 
23502
(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 6, 2014
Common Stock, $0.01 par value
 
50,079,501



PRA GROUP, INC.
INDEX
 
 
 
Page(s)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
CONSOLIDATED BALANCE SHEETS
September 30, 2014 and December 31, 2013
(unaudited)
(Amounts in thousands, except per share amounts)
 
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Cash and cash equivalents
$
70,300

 
$
162,004

Finance receivables, net
1,913,710

 
1,239,191

Other receivables, net
18,217

 
12,359

Income taxes receivable
11,506

 
11,710

Net deferred tax asset
4,639

 
1,361

Property and equipment, net
45,969

 
31,541

Goodwill
594,401

 
103,843

Intangible assets, net
12,315

 
15,767

Other assets
86,372

 
23,456

Total assets
$
2,757,429

 
$
1,601,232

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
15,352

 
$
14,819

Accrued expenses and other liabilities
65,294

 
27,655

Income taxes payable
5,547

 

Accrued compensation
21,466

 
27,431

Net deferred tax liability
237,201

 
210,071

Interest-bearing deposits
27,300

 

Borrowings
1,425,409

 
451,780

Total liabilities
1,797,569

 
731,756

Commitments and contingencies (Note 9)

 

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

 

Common stock, par value $0.01, 100,000 authorized shares, 50,077 issued and outstanding shares at September 30, 2014, and 49,840 issued and outstanding shares at December 31, 2013
501

 
498

Additional paid-in capital
141,490

 
135,441

Retained earnings
859,019

 
729,505

Accumulated other comprehensive (loss)/income
(41,150
)
 
4,032

Total stockholders’ equity
959,860

 
869,476

Total liabilities and equity
$
2,757,429

 
$
1,601,232

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

3


PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
CONSOLIDATED INCOME STATEMENTS
For the three and nine months ended September 30, 2014 and 2013
(unaudited)
(Amounts in thousands, except per share amounts)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Income recognized on finance receivables, net
$
224,326

 
$
171,456

 
$
584,814

 
$
494,818

Fee income
12,882

 
26,306

 
43,659

 
55,464

Other revenue
1,765

 

 
1,765

 

Total revenues
238,973

 
197,762

 
630,238

 
550,282

Operating expenses:
 
 
 
 
 
 
 
Compensation and employee services
65,237

 
52,882

 
169,083

 
146,081

Legal collection fees
13,778

 
10,206

 
35,982

 
31,343

Legal collection costs
20,367

 
19,801

 
72,329

 
63,020

Agency fees
5,988

 
1,404

 
8,902

 
4,293

Outside fees and services
17,221

 
8,707

 
40,125

 
24,789

Communications
8,907

 
6,645

 
26,019

 
21,398

Rent and occupancy
3,018

 
1,950

 
7,384

 
5,462

Depreciation and amortization
4,949

 
3,753

 
13,107

 
10,653

Other operating expenses
11,311

 
6,549

 
25,068

 
17,665

Impairment of goodwill

 
6,397

 

 
6,397

Total operating expenses
150,776

 
118,294

 
397,999

 
331,101

Income from operations
88,197

 
79,468

 
232,239

 
219,181

Other income and (expense):
 
 
 
 
 
 
 
Interest income

 

 
2

 

Interest expense
(11,808
)
 
(3,995
)
 
(21,736
)
 
(9,607
)
Foreign exchange gain/(loss)
3,251

 

 
(2,961
)
 

Income before income taxes
79,640

 
75,473

 
207,544

 
209,574

Provision for income taxes
28,473

 
26,262

 
78,030

 
78,432

Net income
$
51,167

 
$
49,211

 
$
129,514

 
$
131,142

Adjustment for net income attributable to redeemable noncontrolling interest

 
1,873

 

 
1,605

Net income attributable to PRA Group, Inc.
$
51,167

 
$
47,338

 
$
129,514

 
$
129,537

Net income per common share attributable to PRA Group, Inc:
 
 
 
 
 
 
 
Basic
$
1.02

 
$
0.94

 
$
2.59

 
$
2.56

Diluted
$
1.01

 
$
0.93

 
$
2.57

 
$
2.54

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
Basic
50,075

 
50,154

 
50,023

 
50,571

Diluted
50,439

 
50,660

 
50,413

 
51,039

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

4


PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months ended September 30, 2014 and 2013
(unaudited)
(Amounts in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
51,167

 
$
49,211

 
$
129,514

 
$
131,142

Other comprehensive (loss)/income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(47,541
)
 
4,425

 
(45,182
)
 
1

Total other comprehensive (loss)/income
(47,541
)
 
4,425

 
(45,182
)
 
1

Comprehensive income
3,626

 
53,636

 
84,332

 
131,143

Comprehensive income attributable to noncontrolling interest

 
1,873

 

 
1,605

Comprehensive income attributable to PRA Group, Inc.
$
3,626

 
$
51,763

 
$
84,332

 
$
129,538

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

5


PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the nine months ended September 30, 2014
(unaudited)
(Amounts in thousands)
 
 
 
 
 
 
 
 
 
 
Accumulated
 
 
 
 
 
 
 
Additional
 
 
 
Other
 
Total
 
Common Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Stockholders’
 
Shares
 
Amount
 
Capital
 
Earnings
 
(Loss)/Income
 
Equity
Balance at December 31, 2013
49,840

 
$
498

 
$
135,441

 
$
729,505

 
$
4,032

 
$
869,476

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Net income attributable to PRA Group, Inc.

 

 

 
129,514

 

 
129,514

Foreign currency translation adjustment

 

 

 

 
(45,182
)
 
(45,182
)
Vesting of nonvested shares
237

 
3

 
(3
)
 

 

 

Amortization of share-based compensation

 

 
9,456

 

 

 
9,456

Income tax benefit from share-based compensation

 

 
4,159

 

 

 
4,159

Employee stock relinquished for payment of taxes

 

 
(7,563
)
 

 

 
(7,563
)
Balance at September 30, 2014
50,077

 
$
501

 
$
141,490

 
$
859,019

 
$
(41,150
)
 
$
959,860

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

6


PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2014 and 2013
(unaudited)
(Amounts in thousands)
 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
129,514

 
$
131,142

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of share-based compensation
9,456

 
10,209

Depreciation and amortization
13,107

 
10,653

Impairment of goodwill

 
6,397

Amortization of debt discount
3,027

 
525

Amortization of debt fair value
(3,595
)
 

Deferred tax expense
31,055

 
2,359

Changes in operating assets and liabilities:
 
 
 
Other assets
1,622

 
(1,147
)
Other receivables
4,225

 
(1,497
)
Accounts payable
(16,507
)
 
2,237

Income taxes receivable/payable, net
(111
)
 
(5,062
)
Accrued expenses
11,205

 
8,604

Accrued compensation
(13,504
)
 
7,660

Net cash provided by operating activities
169,494

 
172,080

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(16,513
)
 
(9,913
)
Acquisition of finance receivables, net of buybacks
(412,740
)
 
(546,201
)
Collections applied to principal on finance receivables
420,570

 
368,693

Business acquisitions, net of cash acquired
(851,183
)
 

Net cash used in investing activities
(859,866
)
 
(187,421
)
Cash flows from financing activities:
 
 
 
Income tax benefit from share-based compensation
4,159

 
2,742

Proceeds from lines of credit
485,000

 
217,000

Principal payments on lines of credit
(48,500
)
 
(344,000
)
Repurchases of common stock

 
(58,511
)
Cash paid for purchase of portion of noncontrolling interest

 
(1,150
)
Distributions paid to noncontrolling interest

 
(51
)
Principal payments on long-term debt
(7,500
)
 
(4,109
)
Proceeds from long-term debt
169,938

 

Net increase in interest-bearing deposits
51

 

Proceeds from convertible debt, net

 
279,285

Net cash provided by financing activities
603,148

 
91,206

Effect of exchange rate on cash
(4,480
)
 
153

Net (decrease)/increase in cash and cash equivalents
(91,704
)
 
76,018

Cash and cash equivalents, beginning of period
162,004

 
32,687

Cash and cash equivalents, end of period
$
70,300

 
$
108,705

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
21,097

 
$
9,333

Cash paid for income taxes
41,682

 
78,434

Supplemental disclosure of non-cash information:
 
 
 
Adjustment of the redeemable noncontrolling interest measurement amount
$

 
$
393

Distributions payable relating to the redeemable noncontrolling interest

 
1,237

Purchase of redeemable noncontrolling interest

 
9,162

Employee stock relinquished for payment of taxes
(7,563
)
 
(4,103
)
The accompanying notes are an integral part of these consolidated financial statements.


7

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



1.
Organization and Business:
Throughout this report, the terms "PRA Group," "our," "we," "us," the "Company" or similar terms refer to PRA Group, Inc. and its subsidiaries (formerly known as Portfolio Recovery Associates, Inc.).
PRA Group, Inc., a Delaware corporation, and its subsidiaries, is a financial and business service company operating in North America and Europe.  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, provides business tax revenue administration, audit, discovery and recovery services for state and local governments in the U.S. and provides class action claims settlement recovery services and related payment processing to corporate clients.
On July 1, 2014, the Company acquired certain operating assets from Pamplona Capital Management, LLP ("PCM").  These assets include PCM’s IVA ("Individual Voluntary Arrangement") Master Servicing Platform as well as other operating assets associated with PCM’s IVA business. The purchase price of these assets was approximately $5 million and was paid from the Company’s existing cash balances. The Company's consolidated income statements and statements of comprehensive income include the results of operations of PCM for the period from July 1, 2014 through September 30, 2014.
On July 16, 2014, the Company completed the purchase of the outstanding equity of Aktiv Kapital AS (“Aktiv”), a Norway-based company specializing in the acquisition and servicing of non-performing consumer loans throughout Europe and in Canada, for a purchase price of approximately $861.3 million , and assumed approximately $433.7 million of Aktiv’s corporate debt, resulting in an acquisition of estimated total enterprise value of $1.3 billion . The Company's consolidated income statements and statements of comprehensive income include the results of operations of Aktiv for the period from July 16, 2014 through September 30, 2014.
A publicly traded company from 1997 until early 2012 (traded on the Oslo Stock Exchange under the symbol "AIK"), Aktiv has developed a mixed in-house and outsourced collection strategy. This acquisition has provided the Company entry into thirteen new markets, providing additional geographical diversity in portfolio purchasing and collection. Aktiv maintains in-house servicing platforms in eight markets and owns portfolios in fifteen markets. Aktiv has more than 20 years of experience and data in a wide variety of consumer asset classes across an extensive geographic background. Refer to Note 12 "Business Acquisitions" for more information.
The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and include the accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 “Segment Reporting” (“ASC 280”), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and, therefore, it has one reportable segment, accounts receivable management, based on similarities among the operating units including the nature of the products and services, the nature of the production processes, the types or class of customer for their products and services, the methods used to distribute their products, and services and the nature of the regulatory environment.
The following table shows the amount of revenue generated for the three and nine months ended September 30, 2014 and 2013 and long-lived assets held at September 30, 2014 and 2013 for the United States, the Company's country of domicile, and outside of the United States (amounts in thousands):
 
As Of And For The
 
As Of And For The
 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
Revenues
 
Long-Lived Assets
 
Revenues
 
Long-Lived Assets
United States
$
188,134

 
$
35,411

 
$
194,769

 
$
26,289

Outside the United States
50,839

 
10,558

 
2,993

 
1,770

Total
$
238,973

 
$
45,969

 
$
197,762

 
$
28,059

 
 
 
 
 
 
 
 
 
As Of And For The
 
As Of And For The
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
 
Revenues
 
Long-Lived Assets
 
Revenues
 
Long-Lived Assets
United States
$
573,048

 
$
35,411

 
$
542,048

 
$
26,289

Outside the United States
57,190

 
10,558

 
8,234

 
1,770

Total
$
630,238

 
$
45,969

 
$
550,282

 
$
28,059


8

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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. GAAP 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, 2014 , its consolidated income statements and statements of comprehensive income for the three and nine months ended September 30, 2014 and 2013 , its consolidated statement of changes in stockholders’ equity for the nine months ended September 30, 2014 , and its consolidated statements of cash flows for the nine months ended September 30, 2014 and 2013 . The consolidated income statements of the Company for the three and nine months ended September 30, 2014 may not be indicative of future results.  Certain reclassifications have been made to prior year amounts to conform to the current year 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 2013 Annual Report on Form 10-K, filed on February 28, 2014.

2.
Finance Receivables, net:
Changes in finance receivables, net for the three and nine months ended September 30, 2014 and 2013 were as follows (amounts in thousands):
 

Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
1,219,595

 
$
1,236,859

 
$
1,239,191

 
$
1,078,951

Acquisitions of finance receivables (1)
894,779

 
138,854

 
1,146,947

 
546,201

Foreign currency translation adjustment
(52,247
)
 
1,304

 
(51,858
)
 
363

Cash collections
(372,743
)
 
(291,651
)
 
(1,005,384
)
 
(863,511
)
Income recognized on finance receivables, net
224,326

 
171,456

 
584,814

 
494,818

Cash collections applied to principal
(148,417
)
 
(120,195
)
 
(420,570
)
 
(368,693
)
Balance at end of period
$
1,913,710

 
$
1,256,822

 
$
1,913,710

 
$
1,256,822

(1) Acquisitions of finance receivables are net of buybacks and include certain capitalized acquisition related costs. It also includes the acquisition date finance receivable portfolio that was acquired in connection with the Aktiv acquisition. Refer to Note 12 "Business Acquisitions" for more information.
At the time of acquisition, the life of each pool is generally estimated to be between 80 and 120 months based on projected amounts and timing of future cash collections using the proprietary models of the Company. At September 30, 2014 , the weighted average remaining life of the Company's pools is estimated to be approximately 97 months . Based upon current projections, cash collections applied to principal on finance receivables as of September 30, 2014 are estimated to be as follows for the twelve months in the periods ending (amounts in thousands):
 
September 30, 2015
$
537,091

September 30, 2016
432,202

September 30, 2017
342,063

September 30, 2018
249,614

September 30, 2019
146,023

September 30, 2020
93,697

September 30, 2021
87,561

September 30, 2022
25,459

 
$
1,913,710


9

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


At September 30, 2014 , the estimated remaining collections (“ERC”) on the receivables purchased in the three and nine months ended September 30, 2014 , were $1.86 billion and $2.25 billion , respectively. At September 30, 2014 , the ERC on the receivables purchased in the three and nine months ended September 30, 2013 , were $184.2 million and $676.0 million , respectively. At September 30, 2014 , the Company had unamortized purchased principal (purchase price) in pools accounted for under the cost recovery method of $21.1 million ; at December 31, 2013 , the amount was $26.1 million .
Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield, on portfolios purchased during the period, to be earned by the Company 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, 2014 and 2013 were as follows (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,

2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
1,481,826

 
$
1,400,906

 
$
1,430,067

 
$
1,239,674

Income recognized on finance receivables, net
(224,326
)
 
(171,456
)
 
(584,814
)
 
(494,818
)
Additions (1)
1,172,796

 
122,976

 
1,377,416

 
472,666

Net reclassifications from nonaccretable difference
84,074

 
63,031

 
290,431

 
201,823

Foreign currency translation adjustment
(59,040
)
 
509

 
(57,770
)
 
(3,379
)
Balance at end of period
$
2,455,330

 
$
1,415,966

 
$
2,455,330

 
$
1,415,966

(1) Additions include the acquisition date accretable yield that was acquired in connection with the Aktiv acquisition. Refer to Note 12 "Business Acquisitions" for more information.
A valuation allowance is recorded for significant decreases in expected cash flows or a change in the expected timing of cash flows that 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 previous expectations. Factors that may contribute to the recording of valuation allowances include both external and internal factors. External factors that 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 that 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), and 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, 2014 and 2013 (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Beginning balance
$
86,849

 
$
94,111

 
$
91,101

 
$
93,123

Allowance charges
2,992

 
1,500

 
5,765

 
7,060

Reversal of previous recorded allowance charges
(4,690
)
 
(4,081
)
 
(11,715
)
 
(8,653
)
Net allowance reversals
(1,698
)
 
(2,581
)
 
(5,950
)
 
(1,593
)
Ending balance
$
85,151

 
$
91,530

 
$
85,151

 
$
91,530



10

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


3.
Borrowings:
The Company's borrowings consisted of the following as of the dates indicated (amounts in thousands):
 
September 30, 2014
 
December 31, 2013
Domestic revolving credit
$
436,500

 
$

Domestic term loan
187,500

 
195,000

Seller note payable
169,938

 

Aktiv revolving credit
239,680

 

Aktiv term loan
79,712

 

Aktiv multicurrency term loan bridge facility
22,833

 

Aktiv subordinated loan
29,439

 

Convertible senior notes
287,500

 
287,500

Less: Debt discount
(27,693
)
 
(30,720
)
Total
$
1,425,409

 
$
451,780

Domestic Revolving Credit and Term Loan
On December 19, 2012, the Company entered into a credit facility with Bank of America, N.A., as administrative agent, and a syndicate of lenders named therein (the “Credit Agreement”). The credit facility contained an accordion loan feature that allowed 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. The Credit Agreement was amended and modified during 2013. On April 1, 2014, the Company entered into a Lender Joinder Agreement and Lender Commitment Agreement (collectively, the “Commitment Increase Agreements”) to exercise the accordion feature.  The Commitment Increase Agreements expanded the maximum amount of revolving credit availability under the Credit Agreement by $214.5 million , by elevating the revolving credit commitments of certain lenders and added three new lenders to the Credit Agreement. Giving effect to the $214.5 million increase in the amount of revolving credit availability pursuant to the Commitment Increase Agreements, the total credit facility under the Credit Agreement now includes an aggregate principal amount of $837.5 million (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a fully-funded $187.5 million term loan, (ii) a $630 million domestic revolving credit facility, of which $193.5 million is available to be drawn, and (iii) a $20 million multi-currency revolving credit facility, of which $20 million is available to be drawn. The facilities all mature 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.
Effective June 5, 2014, the Company entered into a Third Amendment to the Credit Agreement to amend a provision of the Credit Agreement to increase a basket for permitted indebtedness for the issuance of senior, unsecured convertible notes or other unsecured financings from an aggregate amount not to exceed $300 million to an aggregate amount not to exceed $500 million (without respect to the Company’s 3.00% Convertible Senior Notes due 2020).
The Credit Agreement is secured by a first priority lien on substantially all of the Company’s assets. The Credit Agreement, as amended and modified, contains restrictive covenants and events of default including the following:
borrowings may not exceed 33% of the ERC of all eligible asset pools plus 75% of 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 $455.1 million 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 $40 million ;
cash dividends and distributions during any fiscal year cannot exceed $20 million ;

11

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


stock repurchases during the term of the agreement cannot exceed $250 million and cannot exceed $100 million in a single fiscal year;
investments in loans and/or capital contributions cannot exceed $950 million to consummate the acquisition of the equity of Aktiv;
permitted acquisitions (as defined in the Credit Agreement) during any fiscal year cannot exceed $250 million except for the fiscal year ending December 31, 2014, during which fiscal year permitted acquisitions (excluding the Aktiv acquisition) cannot exceed $25 million ;
indebtedness in the form of senior, unsecured convertible notes or other unsecured financings cannot exceed $500 million in the aggregate (without respect to the Company’s 3.00% Convertible Senior Notes due 2020);
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 on this credit facility at September 30, 2014 consisted of $187.5 million outstanding on the term loan with an annual interest rate as of September 30, 2014 of 2.65% and $436.5 million outstanding in 30-day Eurodollar rate loans on the revolving facility with a weighted average interest rate of 2.65% . At December 31, 2013, the Company's borrowings on this credit facility consisted of $195.0 million outstanding on the term loan with an annual interest rate as of December 31, 2013 of 2.67% .
Seller Note Payable
In conjunction with the closing of the Aktiv business acquisition on July 16, 2014, the Company entered into a $169.9 million promissory note (the "Seller Note") with an affiliate of the seller. The Seller Note bears interest at the three-month London Interbank Offered Rate (“LIBOR”) plus 3.75% and matures on July 16, 2015. The quarterly interest due can be paid or rolled into the Seller Note balance at the Company's option. On September 30, 2014, the Company paid the first quarterly interest payment that was due of $1.4 million . At September 30, 2014, the balance due on the Seller Note was $169.9 million with an annual interest rate of 3.99% .
Aktiv Revolving Credit
On May 4, 2012, Aktiv entered into a credit agreement with DNB Bank ASA for a Revolving Credit Facility (“the Aktiv Revolving Credit Agreement”). Under the terms of the Aktiv Revolving Credit Agreement the credit facility included an aggregate amount of up to NOK 1,500,000,000 (approximately $232 million ), including an option of NOK 500,000,000 (approximately $77 million ). The Aktiv revolving credit facility accrued interest at the Interbank Offered Rate ("IBOR") plus 3.00% , beared an unused fee of 1.2% per annum, payable monthly in arrears, and matured on October 28, 2014. At maturity, any outstanding balances owed on this facility were automatically transferred to the Multicurrency Revolving Credit Facility Agreement as described in Note 14 "Subsequent Event."
At September 30, 2014, the balance on the Aktiv revolving credit facility was $239.7 million , with an annual interest rate of 3.53% . Due to fluctuations in foreign exchange rates, Aktiv's borrowings under this facility exceeded the facility limit. Aktiv requested and received a waiver from the lender which allowed them to be in excess of the limit until the facility matured on October 28, 2014.
Aktiv Term Loan

On March 29, 2011, Aktiv entered into a credit agreement with DNB Bank ASA for a Term Loan Facility (“the Aktiv Term Loan Credit Agreement”). Under the terms of the Aktiv Term Loan Credit Agreement, the credit facility included an aggregate amount of NOK 2,000,000,000 (approximately $310 million ) in four different currencies. The Aktiv term loan credit facility accrued interest at the IBOR plus 2.25% - 2.75% (as determined by the Borrowing Base Ratio as defined in the Aktiv Term Loan Credit Agreement), and matured on October 28, 2014. At maturity, any outstanding balances owed on this facility were automatically transferred to the Multicurrency Revolving Credit Facility Agreement as described in Note 14 "Subsequent Event."

At September 30, 2014, the balance on the Aktiv term loan credit facility was $79.7 million , with an annual interest rate of 2.66% .

12

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Aktiv Multicurrency Term Loan Bridge Facility
On June 24, 2014, Aktiv entered into a credit agreement with DNB Bank ASA for a Multicurrency Term Loan Bridge Facility (“the Aktiv Bridge Loan Credit Agreement”). Under the terms of the Aktiv Bridge Loan Credit Agreement the credit facility included an aggregate amount of NOK 350,000,000 (approximately $54 million ). The Aktiv bridge loan credit facility accrued interest at the IBOR plus 4% , beared an unused line fee of 0.35% per annum, payable quarterly in arrears, is subordinated to the Aktiv revolving and term loan credit facilities, and matured on October 28, 2014. At maturity, any outstanding balances owed on this facility were automatically transferred to the Multicurrency Revolving Credit Facility Agreement as described in Note 14 "Subsequent Event."

At September 30, 2014, the balance on the Aktiv bridge loan credit facility was $22.8 million , with an annual interest rate of 4.22% .
The Aktiv Revolving Credit Agreement, the Aktiv Term Loan Agreement and the Aktiv Multicurrency Term Loan Bridge Agreement are all secured by i) the shares of most of the subsidiaries of Aktiv ii) all intercompany loans to its subsidiaries and iii) most of the portfolios held by its various subsidiaries. They also contain restrictive covenants and events of default including the following:
borrowing base may not exceed 65% of portfolio book value for portfolios leveraged under the Aktiv Revolving Credit Facility
borrowing base may not exceed 50% of portfolio book value for portfolios leveraged under the Aktiv Term Loan Facility
the debt service-coverage ratio (as defined in the Aktiv Revolving and Term Loan Credit Agreements) must exceed 1.1 to 1.0 as of the end of any fiscal quarter;
the leverage ratio (as defined in the Aktiv Revolving and Term Loan Credit Agreements) cannot exceed 3.5 to 1.0 as of the end of any fiscal quarter;
interest bearing deposits in AK Nordic AB cannot exceed SEK 200,000,000 (approximately $28 million );
cash collections must exceed 100% of Aktiv's IFRS forecast.
Aktiv Subordinated Loan
On December 16, 2011, Aktiv entered into a subordinated loan agreement with Metrogas Holding Inc., an affiliate with Geveran Trading Co. Ltd. Under the terms of the subordinated loan agreement (the “Commitment”), Aktiv is able to drawdown a commitment in the aggregate amount of up to NOK 200,000,000 (approximately $31 million ) for a period of 90 days from the date of the agreement (the “Availability Period”). Aktiv may draw all or a part of the Commitment in the Availability Period, and may utilize the Commitment in up to three drawdowns. The Commitment bears interest at LIBOR plus 3.75% . The maturity date is January 16, 2016. The Commitment does not contain any covenants.

As of September 30, 2014, the balance on the Aktiv subordinated loan was $29.4 million , with an annual interest rate of 3.99% .

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. 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 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

13

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


circumstances pursuant to the Indenture. The Company does not have the right to redeem the Notes prior to maturity. As of September 30, 2014, 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.
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 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.
The balances of the liability and equity components of all of the Notes outstanding were as follows as of the dates indicated (amounts in thousands):
 
 
September 30, 2014
 
December 31, 2013
Liability component - principal amount
 
$
287,500

 
$
287,500

Unamortized debt discount
 
(27,693
)
 
(30,720
)
Liability component - net carrying amount
 
259,807

 
256,780

Equity component
 
$
31,306

 
$
31,306

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 (amounts in thousands):
 
 
Three Months Ended September 30, 2014
 
Three Months Ended September 30, 2013
 
Nine Months Ended September 30, 2014
 
Nine Months Ended September 30, 2013
Interest expense - stated coupon rate
 
$
2,156

 
$
1,150

 
$
6,469

 
$
1,150

Interest expense - amortization of debt discount
 
1,023

 
525

 
3,027

 
525

Total interest expense - convertible notes
 
$
3,179


$
1,675

 
$
9,496

 
$
1,675

The Company was in compliance with all covenants under its financing arrangements as of December 31, 2013. As of September 30, 2014, the Company was in compliance with all covenants under its financing arrangements with the exception of certain of the Aktiv credit agreements, for which the Company requested and received waivers as described above under the caption, Aktiv Revolving Credit, and in Note 14, "Subsequent Event."


14

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


The following principal payments are due on the Company's borrowings as of September 30, 2014 for the twelve month periods ending (amounts in thousands):
September 30, 2015
$
555,352

September 30, 2016
18,750

September 30, 2017
35,000

September 30, 2018
556,500

September 30, 2019

Thereafter
287,500

Total
$
1,453,102


4.
Property and Equipment, net:
Property and equipment, at cost, consisted of the following as of the dates indicated (amounts in thousands):
 
 
September 30,
2014
 
December 31,
2013
Software
$
52,377

 
$
34,108

Computer equipment
21,365

 
17,072

Furniture and fixtures
10,937

 
8,616

Equipment
13,606

 
10,351

Leasehold improvements
13,497

 
11,147

Building and improvements
7,044

 
7,026

Land
1,269

 
1,269

Accumulated depreciation and amortization
(74,126
)
 
(58,048
)
Property and equipment, net
$
45,969

 
$
31,541

Depreciation and amortization expense relating to property and equipment for the three and nine months ended September 30, 2014 , was $3.6 million and $9.5 million , respectively. 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.
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 lives 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, 2014 and December 31, 2013, the Company incurred and capitalized approximately $12.5 million and $10.3 million , respectively, of these direct payroll costs and external direct costs related to software developed for internal use. Of these costs, at September 30, 2014 and December 31, 2013, approximately $2.1 million and $1.7 million , respectively, were 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 lives. Amortization expense relating to these projects for the three and nine months ended September 30, 2014 , was approximately $0.5 million and $1.4 million , respectively.  Amortization expense relating to these projects for the three and nine months ended September 30, 2013 , was approximately $0.4 million and $1.1 million , respectively. The remaining unamortized costs relating to internally developed software at September 30, 2014 and December 31, 2013 were approximately $4.9 million and $4.4 million , respectively.
 


15

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


5.
Goodwill and Intangible Assets, net:
In connection with the Company’s 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. The Company underwent its annual review of goodwill on October 1, 2013. Based upon the results of this review, no impairment charges to goodwill or other intangible assets were necessary. The Company believes that no events have occurred or circumstances have changed that would more likely than not reduce the fair value of a reporting unit below its carrying amount since the review was performed, and thereby necessitate further evaluation of goodwill or other intangible assets. The Company expects to perform its next annual goodwill review during the fourth quarter of 2014.
At September 30, 2014 and December 31, 2013, the carrying value of goodwill was $594.4 million and $103.8 million , respectively. The following table represents the changes in goodwill for the three and nine months ended September 30, 2014 and 2013 (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
105,122

 
$
106,953

 
$
103,843

 
$
109,488

Acquisition of Aktiv and PCM
512,049

 

 
512,049

 

Impairment of goodwill

 
(6,397
)
 

 
(6,397
)
Foreign currency translation adjustment
(22,770
)
 
2,335

 
(21,491
)
 
(200
)
Balance at end of period
$
594,401

 
$
102,891

 
$
594,401

 
$
102,891

Goodwill recognized from the acquisitions of Aktiv and PCM represents, among other things, a significant dataset, portfolio modeling, an established workforce, the future economic benefits arising from expected synergies and expanded geographical diversity. The acquired goodwill is not deductible for U.S. income tax purposes. Refer to Note 12 "Business Acquisitions" for more information.
Intangible assets, excluding goodwill, consisted of the following at September 30, 2014 and December 31, 2013 (amounts in thousands):
 
September 30, 2014
 
December 31, 2013
 
Gross Amount
 
Accumulated
Amortization
 
Gross Amount
 
Accumulated
Amortization
Client and customer relationships
$
35,683

 
$
24,346

 
$
40,870

 
$
26,581

Non-compete agreements
627

 
546

 
3,880

 
3,723

Trademarks
3,474

 
2,577

 
3,491

 
2,170

Total
$
39,784

 
$
27,469

 
$
48,241

 
$
32,474

In accordance with ASC 350, the Company amortizes intangible assets over their estimated useful lives. Total intangible asset amortization expense for the three and nine months ended September 30, 2014 was $1.3 million and $3.5 million , respectively. Total intangible asset amortization expense for the three and nine months ended September 30, 2013 was $1.2 million and $3.5 million , respectively. The Company reviews these intangible assets for possible impairment if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount and thereby necessitate further evaluation of these intangible assets.
 


16

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


6.
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 of Stockholders.  The Plan enables the Company to award shares of the Company's common stock to select employees and directors, not to exceed 5,400,000 shares, as described in and authorized by the Plan. The Plan replaced the 2010 Stock Plan.
As of September 30, 2014, 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 $11.7 million with a weighted average remaining life for all nonvested shares of 1.9 years (not including nonvested shares granted under the LTI program).
Total share-based compensation expense was $4.0 million and $9.5 million for the three and nine months ended September 30, 2014 , respectively. Total share-based compensation expense was $3.5 million and $10.2 million for the three and nine months ended September 30, 2013 , 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 $0.3 million and $7.9 million for the three and nine months ended September 30, 2014 , respectively. 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.
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.
The following summarizes all nonvested share transactions, excluding those related to the LTI program, from December 31, 2012 through September 30, 2014 (share amounts in thousands):
 
Nonvested Shares
Outstanding
 
Weighted-Average
Price at Grant Date
December 31, 2012
288

 
$
20.84

Granted
110

 
37.31

Vested
(143
)
 
19.75

Cancelled
(29
)
 
20.57

December 31, 2013
226

 
29.58

Granted
212

 
56.07

Vested
(112
)
 
29.33

Cancelled
(2
)
 
24.76

September 30, 2014
324

 
$
47.03

The total grant date fair value of shares vested during the three and nine months ended September 30, 2014 , was $0.2 million and $3.3 million , respectively. 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.
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, 2012 through September 30, 2014 (share amounts in thousands):

17

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


 
Nonvested LTI Shares
Outstanding
 
Weighted-Average
Price at Grant Date
December 31, 2012
497

 
$
21.71

Granted at target level
124

 
34.59

Adjustments for actual performance
108

 
17.91

Vested
(279
)
 
19.10

Cancelled
(16
)
 
25.01

December 31, 2013
434

 
25.79

Granted at target level
111

 
49.6

Adjustments for actual performance
95

 
25.17

Vested
(225
)
 
25.17

September 30, 2014
415

 
$
32.35

The total grant date fair value of shares vested during the three and nine months ended September 30, 2014 , was $0.0 million and $5.7 million , respectively. 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.
At September 30, 2014 , 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 $7.1 million . The Company assumed a 7.5% forfeiture rate for these grants and the remaining shares have a weighted average life of 1.0 year at September 30, 2014 .

7.
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.

The income tax expense recognized for the three and nine months ended September 30, 2014 and 2013 is comprised of the following (amounts in thousands):
 
Three Months Ended September 30,
 
2014
 
2013
 
Federal
 
State
 
Foreign
 
Total
 
Federal
 
State
 
Foreign
 
Total
Current tax expense
$
9,355

 
$
1,659

 
$
1,025

 
$
12,039

 
$
22,612

 
$
3,329

 
$
454

 
$
26,395

Deferred tax expense/(benefit)
10,853

 
337

 
5,244

 
16,434

 
3,707

 
(2,769
)
 
(1,071
)
 
(133
)
Total income tax expense/(benefit)
$
20,208

 
$
1,996

 
$
6,269

 
$
28,473

 
$
26,319

 
$
560

 
$
(617
)
 
$
26,262

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
 
2014
 
2013
 
Federal
 
State
 
Foreign
 
Total
 
Federal
 
State
 
Foreign
 
Total
Current tax expense/(benefit)
$
38,279

 
$
7,002

 
$
375

 
$
45,656

 
$
64,591

 
$
11,755

 
$
(269
)
 
$
76,077

Deferred tax expense/(benefit)
23,446

 
3,684

 
5,244

 
32,374

 
5,264

 
(2,018
)
 
(891
)
 
2,355

Total income tax expense/(benefit)
$
61,725

 
$
10,686

 
$
5,619

 
$
78,030

 
$
69,855

 
$
9,737

 
$
(1,160
)
 
$
78,432


18

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


The Company has recognized a net deferred tax liability of $232.6 million and $208.7 million as of September 30, 2014 and December 31, 2013, respectively. The components of the net deferred tax liability are as follows (amounts in thousands):
 
 
September 30, 2014
 
December 31, 2013
Deferred tax assets:
 
 
 
 
Employee compensation
 
$
8,075

 
$
9,365

Allowance for doubtful accounts
 
332

 
236

State tax credit carryforward
 
879

 
879

Net operating loss carryforward - International
 
70,938

 

Other
 
4,900

 
240

Accrued liabilities
 
4,643

 
4,642

Guaranteed payments
 

 
890

Intangible assets and goodwill
 
183

 
930

Depreciation expense
 
590

 
 
Leases
 
840

 
531

Acquisition costs
 
384

 
687

Total deferred tax assets
 
91,764

 
18,400

 
 
 
 
 
Deferred tax liabilities:
 
 
 
 
Depreciation expense
 
4,888

 
4,250

Prepaid expenses
 
1,392

 
1,604

Convertible debt
 
10,731

 
11,931

Other
 
339

 

Finance receivable revenue recognition - International
 
38,375

 

Use of cost recovery for income tax purposes - U.S.
 
234,985

 
209,325

Total deferred tax liability
 
290,710

 
227,110

Valuation allowance
 
33,616

 

Net deferred tax liability
 
$
232,562


$
208,710

A reconciliation of the Company’s expected tax expense at the statutory federal tax rate to actual tax expense for the three and nine months ended September, 2014 and 2013 is as follows (amounts in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Expected tax expense at statutory federal rates
$
27,874

 
$
26,415

 
$
72,641

 
$
73,351

State tax expense, net of federal tax benefit
2,139

 
2,412

 
7,217

 
8,138

Other
(1,540
)
 
(2,565
)
 
(1,828
)
 
(3,057
)
Total income tax expense
$
28,473

 
$
26,262

 
$
78,030

 
$
78,432

For tax purposes, the Company utilizes the cost recovery method of accounting. Under the cost recovery method, collections on finance receivables are applied first to principal to reduce the finance receivables to zero before any taxable income is recognized.  The Internal Revenue Service ("IRS") examined the Company's 2005 tax return and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes, for tax years ended December 31, 2005 through 2007. The IRS has asserted that tax revenue recognition using the cost recovery method does not clearly reflect taxable income. The Company believes it has sufficient support for the technical merits of its position, and believes cost recovery to be an acceptable tax revenue recognition method for companies in the bad debt purchasing industry.  On April 22, 2009, the Company filed a formal protest of the IRS’s assessment. On August 26, 2011, the IRS issued a Notice of Deficiency for the tax years ended December 31, 2005 through 2007.  The Company subsequently filed a petition in the United States Tax Court.   If the Company is unsuccessful in the United States Tax Court, it can appeal to

19

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


the federal Circuit Court of Appeals. 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, 2008 and 2009.  On July 7, 2014, the Company received a Notice of Deficiency for tax years ended December 31, 2008 through 2012.  The proposed deficiencies relate to the cost recovery method of tax accounting. In response to this notice, the company filed a petition in the United States Tax Court on October 3, 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.  The Company believes it has sufficient support for the technical merits of its position and that it is more likely than not this position will be sustained. Accordingly, the Company has not accrued for interest or penalties on any of its tax positions, including the cost recovery matter.
If the Company is unsuccessful in the United States Tax Court and any potential appeals to the federal Circuit Court of Appeals, it may be required to pay interest. 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. The Company's estimate of the potential federal and state interest is $75.0 million as of September 30, 2014. Payment of the assessed taxes and interest could have an adverse effect on the Company’s financial condition, be material to the Company’s results of operations, and possibly require additional financing from other sources.
At September 30, 2014, the tax years subject to examination by the major federal, state and international taxing jurisdictions 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 2005 through 2012 tax years are suspended until a decision of the Tax Court becomes final.

The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets. A valuation allowance for deferred tax assets was not recorded at December 31, 2013 since management believed it was more likely than not that the deferred tax assets would be realized. A valuation allowance has been recorded at September 30, 2014 because as part of the acquisition of Aktiv Kapital, the Company acquired a deferred tax asset of approximately $33.6 million related to tax losses in Norway which the Company believes does not meet the more likely than not requirement for realization. Because the valuation allowance was recorded in relation to the purchase accounting process, there is no impact to the current quarter earnings. In the event that all or part of the deferred tax assets are determined not to be realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. Similarly, if the Company subsequently realizes deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period such determination is made.

There were no repatriations of unremitted earnings during the three or nine months ended September 30, 2014. The Company intends for predominantly all foreign earnings to be indefinitely reinvested in its foreign operations and, therefore, the recording of deferred tax liabilities for such unremitted earnings is not required. It is impracticable to determine the total amount of unrecognized deferred taxes with respect to these permanently reinvested earnings; however, foreign tax credits would be available to partially reduce U.S. income taxes in the event of a distribution.

8.
Earnings per Share:
Basic earnings per share (“EPS”) are computed by dividing net income available to common stockholders of PRA Group, Inc. by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of the Notes and nonvested share awards, if dilutive. For the Notes, only the conversion spread is included in the diluted 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, 2014 . 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 realized upon assumed exercise.

20

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


The following tables reconcile the computation of basic EPS and diluted EPS for the three and nine months ended September 30, 2014 and 2013 (amounts in thousands, except per share amounts):
 
For the Three Months Ended September 30,
 
2014
 
2013
 
Net Income
attributable to  PRA Group, Inc.
 
Weighted  Average
Common  Shares
 
EPS
 
Net Income
attributable to  PRA Group, Inc.
 
Weighted  Average
Common  Shares
 
EPS
Basic EPS
$
51,167

 
50,075

 
$
1.02

 
$
47,338

 
50,154

 
$
0.94

Dilutive effect of nonvested share awards
 
 
364

 
 
 
 
 
506

 
 
Diluted EPS
$
51,167

 
50,439

 
$
1.01

 
$
47,338

 
50,660

 
$
0.93

 
 
 
 
 
 
 
 
 
 
 
 
 
For the Nine Months Ended September 30,
 
2014
 
2013
 
Net Income
attributable to  PRA Group, Inc.
 
Weighted  Average
Common  Shares
 
EPS
 
Net Income
attributable to  PRA Group, Inc.
 
Weighted  Average
Common  Shares
 
EPS
Basic EPS
$
129,514

 
50,023

 
$
2.59

 
$
129,537

 
50,571

 
$
2.56

Dilutive effect of nonvested share awards
 
 
390

 
 
 
 
 
468

 
 
Diluted EPS
$
129,514

 
50,413

 
$
2.57

 
$
129,537

 
51,039

 
$
2.54

There were no antidilutive options outstanding for the three or nine months ended September 30, 2014 and 2013.

9.
Commitments and Contingencies:
Employment Agreements:
The Company has employment agreements, most of which expire on December 31, 2014 , with all of its U.S. executive officers and with several members of its U.S. senior management group. Such agreements provide for base salary payments as well as bonuses that are based on the attainment of specific management goals. At September 30, 2014, the estimated future compensation under these agreements is approximately $5.2 million . The agreements also contain confidentiality and non-compete provisions.  Outside the U.S., employment agreements are in place with employees pursuant to local country regulations.  Generally, these agreements do not have expiration dates and therefore it is impractical to estimate the amount of future compensation under these agreements. Accordingly, the future compensation under these agreements is not included in the $5.2 million total above.  
Leases:
The Company is party to various operating leases with respect to its facilities and equipment. The future minimum lease payments at September 30, 2014 total approximately $39.8 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, 2014 is approximately $622.9 million .
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 . The Company paid the year one earn-out during December 2013 in the amount of $6.2 million . As of September 30, 2014, the Company has recorded a present value amount for the expected remaining liability of $4.6 million .

21

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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 that 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, 2014 .  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.

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 ("TCPA") 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 (the "Court").  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”). 

22

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


On May 20, 2014, the Court stayed this litigation until such time as the United States Federal Communications Commission has ruled on various petitions concerning the TCPA.

Internal Revenue Service Audit

The Internal Revenue Service ("IRS") examined the Company's 2005 tax return and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes, for tax years ended December 31, 2005 through 2007. The IRS has asserted that tax revenue recognition using the cost recovery method does not clearly reflect taxable income. The Company believes it has sufficient support for the technical merits of its position, and believes cost recovery to be an acceptable tax revenue recognition method for companies in the bad debt purchasing industry.  On April 22, 2009, the Company filed a formal protest of the IRS’s assessment   On August 26, 2011, the IRS issued a Notice of Deficiency for the tax years ended December 31, 2005 through 2007.  The Company subsequently 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. 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, 2008 and 2009.  On July 7, 2014, the Company received a Notice of Deficiency for tax years ended December 31, 2008 through 2012.  The proposed deficiencies relate to the cost recovery method of tax accounting. In response to this notice, the company filed a petition in the United States Tax Court on October 3, 2014.  Refer to Note 7 “Income Taxes” for additional information.

10.
Fair Value Measurements and Disclosures:
As defined by FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values. Those levels of input are summarized as follows:

Level 1 - Quoted prices in active markets for identical assets and liabilities.
 
Level 2 - Observable inputs other than level 1 quoted prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 - Unobservable inputs that are supported by little or no market activity. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

23

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Financial Instruments Not Required To Be Carried at Fair Value
In accordance with the disclosure requirements of FASB ASC Topic 825, “Financial Instruments” (“ASC 825”), the table below summarizes fair value estimates for the Company’s financial instruments. 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 sheets at September 30, 2014 and December 31, 2013 (amounts in thousands):
 
September 30, 2014
 
December 31, 2013
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
70,300

 
$
70,300

 
$
162,004

 
$
162,004

Finance receivables, net
1,913,710

 
2,362,165

 
1,239,191

 
1,722,100

Financial liabilities:
 
 
 
 
 
 
 
Revolving lines of credit
676,180

 
676,180

 

 

Term loans
290,045

 
290,045

 
195,000

 
195,000

Notes and loans payable
199,377

 
199,377

 

 

Interest-bearing deposits
27,300

 
27,300

 

 

Convertible debt
259,807

 
315,859

 
256,780

 
316,857

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 lines of credit: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses level 2 inputs for its fair value estimates.
Term loans: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses level 2 inputs for its fair value estimates.
Notes and loans payable: The carrying amount approximates fair value due to the short-term nature of the loan terms and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses level 2 inputs for its fair value estimates.
Interest-bearing deposits: The carrying amount approximates fair value due to the short-term nature of the deposits and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses level 2 inputs for its fair value estimates.
Convertible debt: The Notes are carried at historical cost, adjusted for the debt discount. The fair value estimates 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.


24

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Financial Instruments Required To Be Carried At Fair Value
The carrying amounts in the following table are measured at fair value on a recurring basis in the accompanying consolidated balance sheets at September 30, 2014 (amounts in thousands):
 
Fair Value Measurements as of September 30, 214
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments (recorded in other assets)
$

 
$

 
$
61,951

 
$
61,951

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

 
$
2,836

 
$

 
$
2,836

Investments: The Company's investments are carried at fair value which is determined by using models for valuing similar assets. The Company’s fair value estimates use level 3 inputs as there is little observable market data available.
Interest rate swap contracts: The interest rate swap contracts are carried at fair value which is determined by using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves and other factors. Accordingly, the Company uses level 2 inputs for its fair value estimates.
There were no assets or liabilities measured at fair value on a recurring basis in the accompanying consolidated balance sheet at December 31, 2013.

11.
Recent Accounting Pronouncements:
In March 2013, 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," ("ASU 2013-05") 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. ASU 2013-05 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 adopted ASU 2013-05 in the first quarter of 2014, and it had no material impact on the Company's Consolidated Financial Statements.

In April 2014, FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" (“ASU 2014-08”) that amends the requirements for reporting discontinued operations. ASU 2014-08 requires the disposal of a component of an entity or a group of components of an entity to be reported in discontinued operations if the disposal represents a strategic shift that will have a major effect on the entity’s operations and financial results. ASU 2014-08 also requires additional disclosures about discontinued operations and disclosures about the disposal of a significant component of an entity that does not qualify as a discontinued operation. ASU 2014-08 is effective prospectively for reporting periods beginning after December 15, 2014, with early adoption permitted. The Company is evaluating the potential impacts of the new standard.

In May 2014, FASB issued ASU 2014-09, "Revenue from Contracts with Customers" (“ASU 2014-09”) that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also amends the required disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, with early application not permitted. The Company is evaluating its implementation approach and the potential impacts of the new standard on its existing revenue recognition policies and procedures.

In June 2014, FASB issued ASU 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period" (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance

25

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the potential impacts of the new standard on its existing stock-based compensation awards.

The Company does not expect that any other recently issued accounting pronouncements will have a material effect on its financial statements.

12.
Business Acquisitions:

Aktiv Kapital, A.S. Acquisition

On July 16, 2014, the Company completed the purchase of the outstanding equity of Aktiv, for a purchase price of approximately $861.3 million , and assumed approximately $433.7 million of Aktiv’s corporate debt, resulting in an acquisition of estimated total enterprise value of $1.3 billion . The Company financed the transaction with cash of $206.4 million , $169.9 million in financing from an affiliate of the seller (which bears interest at a variable rate equal to LIBOR plus 3.75% per annum and matures on July 16, 2015), and $485.0 million from the Company’s domestic, revolving credit facility.

The Company incurred transaction costs of approximately $5.9 million and $14.3 million during the three and nine months ended September 30, 2014, respectively. Additionally, the Company recorded a foreign currency transaction loss as a result of entering into foreign currency exchange rate forward contracts during the second quarter of 2014 to acquire 518 million Euros in anticipation of closing the acquisition of Aktiv.  As a result of the strengthening U.S. dollar relative to the Euro, the Company incurred losses of $2.0 million and $8.2 million on the forward contracts during the three and nine months ended September 30, 2014, respectively.

The Company accounted for this purchase in accordance with ASC Topic 805, “Business Combinations.” Under this guidance, an entity is required to recognize the assets acquired, liabilities assumed and the consideration given at their fair value on the acquisition date. The following tables summarize the fair value of the consideration given for Aktiv, as well as the fair value of the assets acquired and liabilities assumed as of the July 16, 2014 acquisition date.

Recognized amounts of identifiable assets and liabilities are as follows (amounts in thousands):

Purchase price
$
861,331

Cash
(15,624
)
Other receivables, net
(10,087
)
Finance receivables, net
(727,688
)
Property and equipment, net
(7,715
)
Net deferred tax asset
(33,426
)
Other assets
(64,626
)
Accounts payable
15,862

Accrued expenses
27,714

Income tax payable
5,859

Net deferred tax liability
21,967

Borrowings
404,823

Interest bearing deposits
28,858

Goodwill
$
507,248


The Company has recorded provisional amounts for the assets acquired and liabilities assumed in its consolidated financial statements and will adjust the allocations relative to the fair value of the assets and liabilities, as necessary, during the remainder of the one-year measurement period.


26

Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Aktiv Results

The Company's results for the third quarter and first nine months of 2014 include the operations of Aktiv from the acquisition date of July 16, 2014 through September 30, 2014.
    
The table below presents the estimated impact of the Aktiv acquisition on our revenue and income from continuing operations, net of tax for the third quarter and first nine months of 2014. The table also includes condensed pro forma information on our combined results of operations as they may have appeared assuming the Aktiv acquisition had been completed on January 1, 2013. These amounts include certain corporate expenses, transaction costs or merger related expenses that resulted from the acquisition and are therefore not representative of the actual results of the operations of these businesses on a stand-alone basis. As we continue to integrate this business into our existing operations over the remainder of the year, it may become impracticable to separately identify and to estimate these operating results.

Included in the combined pro forma results are adjustments to reflect the impact of certain purchase accounting adjustments, including adjustments to Income recognized on finance receivables, net, Outside fees and services, Depreciation and amortization, and Interest expense.

The pro forma condensed combined financial information is presented for illustrative purposes only and does not indicate the actual combined financial results had the closing of the Aktiv acquisition been completed on January 1, 2013 nor does it reflect the benefits obtained through the integration of business operations realized since acquisition. Furthermore, the information is not indicative of the results of operations in future periods. The pro forma condensed combined financial information does not reflect the impact of possible business model changes nor does it consider any potential impacts of market conditions, expense efficiencies or other factors.
 
 
Aktiv Impact
 
Combined Pro Forma Results
 
 
From July 16, 2014 through September 30, 2014
 
Three months ended September 30,
 
Nine months ended September 30,
(amounts in thousands)
 
 
2014
 
2013
 
2014
 
2013
Revenue
 
$
47,605

 
$
250,407

 
$
256,665

 
$
769,503

 
$
724,084

Net Income attributable to PRA Group, Inc.
 
17,085

 
49,377

 
86,207

 
172,956

 
201,590


Pamplona Capital Management, LLP Acquisition

On July 1, 2014, the Company acquired certain operating assets from PCM.  These assets include PCM’s IVA Master Servicing Platform as well as other operating assets associated with PCM’s IVA business.  The purchase price of these assets was approximately $5 million and was paid from the Company’s existing cash balances. Due to immateriality, no effect of this acquisition is included in the pro forma results and adjustments described above.

13.
Derivatives:

The Company’s activities are subject to various financial risks including market risk, currency and interest rate risk, credit risk, liquidity risk and cash flow risk. The Company’s overall financial risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the Company’s financial performance. The Company may periodically enter into derivative financial instruments, typically interest rate swap agreements, to reduce its exposure to fluctuations in interest rates on variable-rate debt and their impact on earnings and cash flows. The Company does not utilize derivative financial instruments with a level of complexity or with a risk greater than the exposure to be managed nor does it enter into or hold derivatives for trading or speculative purposes. The Company periodically reviews the creditworthiness of the swap counterparty to assess the counterparty’s ability to honor its obligation.  Counterparty default would expose the Company to fluctuations in variable interest rates. Based on the guidance of FASB ASC Topic 815 “Derivatives and Hedging” (“ASC 815”), the Company records derivative financial instruments at fair value on the consolidated balance sheet.

The financing of portfolio investments is generally drawn in the same currencies as the underlying expected future cash flow from the portfolios. The interest rate risk related to the loan is reduced through the use of a combination of interest rate swaps in

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Table of Contents
PRA GROUP, INC.
(Formerly known as Portfolio Recovery Associates, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


CAD, EUR, GBP, SEK and NOK. At September 30, 2014, approximately 75% of the net borrowing was hedged, reducing the related interest rate risk.

The Company’s financial derivative instruments are not designated as hedging instruments under ASC 815 and therefore the gain or loss on such hedge and the change in fair value of the derivative is recorded in interest (income)/expense in its consolidated financial statements. During both the three and nine months ended September 30, 2014, the Company recorded $0.7 million in interest (income)/expense in its consolidated income statements. There were no derivatives outstanding during the three or nine months ended September 30, 2013.

The following table sets forth the fair value amounts of the derivative instruments held by the Company as of the dates indicated (amounts in thousands):
 
 
September 30, 2014
Derivatives not designated as hedging instruments under ASC 815
 
Asset Derivatives
 
Liability Derivatives
Interest rate swap contracts
 
$

 
$
2,836

Liability derivatives are recorded in accrued expenses in the accompanying consolidated balance sheets.

14.
Subsequent Event: