PRA Group
PRA GROUP INC (Form: 10-K, Received: 03/01/2017 06:10:44)

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

FORM 10-K
ý Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 000-50058

PRA Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
75-3078675
(State or other jurisdiction of incorporation or organization)
 
 
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
120 Corporate Boulevard, Norfolk, Virginia
 
23502
 
(888) 772-7326
(Address of principal executive offices)
 
(Zip Code)
 
(Registrant's Telephone No., including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.01 par value per share
 
NASDAQ Global Select Market
(Title of Class)
 
(Name of Exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES   þ    NO   ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. YES   ¨    NO   þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES   þ    NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES   þ    NO   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
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" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer   þ    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   þ
The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2016 was $1,103,694,825 based on the $24.14 closing price as reported on the NASDAQ Global Select Market.
The number of shares of the registrant's Common Stock outstanding as of February 24, 2017 was 46,409,330 .
Documents incorporated by reference: Portions of the Registrant's definitive Proxy Statement for its 2017 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.



Table of Contents

 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
 
 
 
 
 

2


Table of Contents

continued
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
Item 15.
Item 16.
 
 
 
Signatures
 

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Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:
This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall cash collection trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:
a prolonged economic recovery or a deterioration in the economic or inflationary environment in the Americas or Europe, including the interest rate environment;
changes in the credit or capital markets, which affect our ability to borrow money or raise capital;
our ability to replace our nonperforming loans with additional portfolios;
our ability to purchase nonperforming loans at appropriate prices;
changes in, or interpretations of, federal, state, local, or foreign laws or the administrative practices of various bankruptcy courts, which may impact our ability to collect on our nonperforming loans;
our ability to collect sufficient amounts on our nonperforming loans;
the possibility that we could incur significant allowance charges on our finance receivables;
changes in, or interpretations of, bankruptcy or collection laws that could negatively affect our business, including by causing an increase in certain types of bankruptcy filings involving liquidations, which may cause our collections to decrease;
our ability to manage risks associated with our international operations;
changes in tax laws regarding earnings of our subsidiaries located outside of the United States ("U.S.");
the imposition of additional taxes on us;
the possibility that we could incur goodwill or other intangible asset impairment charges;
adverse effects from the vote by the United Kingdom ("UK") to leave the European Union ("EU");
adverse outcomes in pending litigations or administrative proceedings;
our loss contingency accruals may not be adequate to cover actual losses;
the possibility that class action suits and other litigation could divert our management's attention and increase our expenses;
the possibility that we could incur business or technology disruptions or cyber incidents;
our ability to collect and enforce our finance receivables may be limited under federal, state, local and foreign laws;
our ability to comply with existing and new regulations of the collection industry, the failure of which could result in penalties, fines, litigation, damage to our reputation, or the suspension or termination of or required modification to our ability to conduct our business;
investigations or enforcement actions by governmental authorities, including the Consumer Financial Protection Bureau ("CFPB"), which could result in changes to our business practices; negatively impact our portfolio purchasing volume; make collection of account balances more difficult or expose us to the risk of fines, penalties, restitution payments, and litigation;
the possibility that compliance with foreign and U.S. laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions;
our ability to raise the funds necessary to repurchase the convertible senior notes or to settle conversions in cash;
our ability to maintain, renegotiate or replace our credit facility;
changes in interest or exchange rates, which could reduce our net income, and the possibility that future hedging strategies may not be successful, which could adversely affect our results of operations and financial condition, as could our failure to comply with hedge accounting principles and interpretations; and
the risk factors discussed in our filings with the Securities and Exchange Commission (the "SEC").
You should assume that the information appearing in this Annual Report on Form 10-K (this "Form 10-K") is accurate only as of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date.
You should carefully consider the factors listed above and review the " Risk Factors " section beginning on page 9, as well as the " Management's Discussion and Analysis of Financial Condition and Results of Operations " section beginning on page 23 and the " Business " section beginning on page 5.
Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in, or implied by, this Form 10-K could turn out to be materially different. Except as required by law, we assume no obligation to publicly update or revise our forward-looking statements after the date of this Form 10-K and you should not expect us to do so.

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Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do not selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
PART I
Item 1. Business .
General
Headquartered in Norfolk, Virginia and incorporated in Delaware, we are a global financial and business services company with operations in the Americas and Europe.
Our primary business is the purchase, collection and management of portfolios of nonperforming loans that have been charged-off by the credit grantor. The accounts we acquire are primarily the unpaid obligations of individuals owed to credit grantors, which include banks and other types of consumer, retail, and auto finance companies. We acquire portfolios of nonperforming loans in two broad categories: Core and Insolvency. Our Core operation specializes in purchasing and collecting receivables. Because the credit grantor and/or other debt servicing companies have unsuccessfully attempted to fully collect these receivables, we are able to purchase them at a substantial discount to their face value. Our Insolvency operation consists primarily of purchasing and collecting accounts that are involved in a Chapter 13 bankruptcy proceeding from credit grantors based in the U.S, but also includes the purchasing and collecting of insolvent accounts in Europe and Canada.
We also provide the following fee-based services:
Vehicle location, skip tracing and collateral recovery for auto lenders, government entities and law enforcement;
Revenue administration, audit and revenue discovery/recovery services for local government entities;
Class action claims recovery services and purchases;
Servicing of consumer bankruptcy accounts in the U.S.; and
To a lesser extent, contingent collections of nonperforming loans in Europe and South America.
As discussed in Note 17 to our Consolidated Financial Statements in Item 8 of this Form 10-K ("Note 17"), we sold our revenue administration, audit and revenue discovery/recovery services for government entities business in January 2017.
We have 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 classes of customers for our products and services, the methods used to distribute our products and services, and the nature of the regulatory environment.
We were initially formed as Portfolio Recovery Associates, L.L.C., a Delaware limited liability company, on March 20, 1996. In connection with becoming a publicly-traded company, we formed Portfolio Recovery Associates, Inc. in August 2002 and our common stock began trading on the NASDAQ Global Select Market ("NASDAQ") on November 8, 2002. On July 16, 2014, we acquired Aktiv Kapital AS ("Aktiv"), a Norway-based company specializing in the acquisition and servicing of nonperforming loans throughout Europe and Canada. On October 23, 2014, we changed our legal name from Portfolio Recovery Associates, Inc. to PRA Group, Inc. On August 3, 2015, we acquired 55% of the equity interest in RCB Investimentos S.A. ("RCB"), a servicing platform of nonperforming loans in Brazil, with the remaining 45% of the equity interest owned by the executive team and previous owners of RCB. On April 26, 2016, we completed our public tender offer to purchase 100% of the shares of DTP S.A. ("DTP"), a Polish-based debt collection company.
All references in this Form 10-K to the "PRA Group," "our," "we," "us," the "Company" or similar terms are to PRA Group, Inc. and its subsidiaries.
Nonperforming Loan Portfolio Purchases
Our portfolio of nonperforming loans includes a diverse set of accounts that can be categorized by asset type, age and size of account, level of previous collection efforts, payment history, and geography. To identify buying opportunities, we maintain an extensive marketing effort with our senior officers contacting known and prospective sellers of nonperforming loans. From these sellers, we have purchased a variety of nonperforming loans including Visa ® and MasterCard ® credit cards, private label and other

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credit cards, installment loans, lines of credit, deficiency balances of various types, legal judgments, and trade payables. Sellers of nonperforming loans include major banks, credit unions, consumer finance companies, telecommunication providers, retailers, utilities, automobile finance companies, student loan companies, and other debt owners. The price at which we acquire portfolios depends on the age of the portfolio, its geographic distribution, our historical experience with a certain asset type or credit grantor and similar factors.
We purchase portfolios of accounts that are included in certain types of consumer insolvency proceedings. In the U.S., these insolvency accounts are typically those filed under Chapter 13 of the U.S. Bankruptcy Code, have an associated payment plan that generally ranges from three to five years in duration and can be acquired at any stage in the bankruptcy plan life cycle. Portfolios sold close to the filing of the bankruptcy plan will generally take months to generate cash flow; however, aged portfolios sold years after the filing of the bankruptcy plan will typically generate cash flows immediately. Non-U.S. insolvency accounts may have some slight differences, but generally operate in a similar manner. In Canada, we purchase Consumer Proposal, Consumer Credit Counseling and Bankrupt Accounts. In the UK, we purchase Individual Voluntary Arrangements, Company Voluntary Arrangements, Trust Deeds and Bankrupt Accounts. In Germany, we acquire consumer bankruptcies, which may also consist of small business loans with a personal guarantee.
Nonperforming Loan Portfolio Purchasing Process
We acquire portfolios of nonperforming loans from debt owners through auctions and negotiated sales. In an auction process, the seller will assemble a portfolio of nonperforming loans and will seek purchase prices from specifically invited potential purchasers. In a privately negotiated sale process, the debt owner will contact one or more purchasers directly, receive a bid, and negotiate the terms of sale. In either case, typically, invited purchasers will have already successfully completed a qualification process that can include the owner's reviews of any or all of the following: the purchaser's experience, reputation, financial standing, operating procedures, business practices, and compliance oversight.
We also acquire portfolios of nonperforming loans through either single portfolio transactions, referred to as spot sales, or through the pre-arranged purchase of multiple portfolios over time, referred to as forward flow sales. Under a forward flow contract, we agree to purchase nonperforming loans from a debt owner on a periodic basis, at a price equal to a set percentage of face value of the nonperforming loans over a specified time period, generally from three to twelve months.
Nonperforming Loan Portfolio Collection Operations
Call Center Operations
In higher volume markets, our collection efforts leverage call centers. In some newer markets or in markets that have less consistent debt purchasing patterns, most notably outside the U.S., we may utilize external vendors to do some or all of this work. Whether the accounts are being worked internally or externally, we utilize our proprietary analysis to proportionally direct work efforts to those customers most likely to pay. The analysis driving those decisions relies on various models and variables that have the highest correlation to profitable collection call activity.
Legal Recovery - Core Portfolios
An important component of our collections effort involves our legal recovery departments and the judicial collection of accounts of customers who we believe have the ability, but not the willingness, to resolve their obligations. There are some markets in which the collection process follows a prescribed time-sensitive and sequential set of legal actions, but in the majority of instances, we use models and analysis and select those accounts reflecting a high propensity to pay in a legal environment. Depending on the balance of the receivable and the applicable local collection laws, we determine whether to commence legal action to judicially collect on the receivable. The legal process can take an extended period of time and can be costly, but when accounts are selected properly it also usually generates net cash collections that likely would not have been realized otherwise. We use a combination of internal staff (attorney and support), as well as external attorneys, to pursue legal collections under certain circumstances.
Insolvency Operations
Insolvency Operations in the U.S. manages customer filings under the U.S. Bankruptcy Code on debtor accounts derived from two sources: (1) our purchased pools of bankrupt accounts and (2) our Core purchased pools of nonperforming loans that have filed for bankruptcy or insolvency protection after being acquired by us. We file proofs of claim ("POCs") or claim transfers and actively manage these accounts through the entire life cycle of the insolvency proceeding in order to substantiate our claims and ensure that we participate in any distributions to creditors.

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Fee-for-Service Businesses
In addition to the purchase, collection and management of portfolios of nonperforming loans, we provide fee-based services, including vehicle location, skip tracing and collateral recovery services for auto lenders and governments via PRA Location Services, LLC ("PLS"); revenue administration, audit, and revenue discovery/recovery services for government entities through PRA Government Services, LLC and MuniServices, LLC (collectively "PGS"); class action claims recovery purchasing and servicing through Claims Compensation Bureau, LLC ("CCB"); contingent collection of finance receivables through PRA Group Europe and RCB; and third-party servicing of bankruptcy accounts in the U.S. As discussed in Note 17, we sold our PGS business in January 2017.
Seasonality
Although our business is not impacted significantly by seasonality, cash collections in the Americas tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters of the year; by contrast, cash collections in Europe tend to be higher in the third and fourth quarters of the year. Customer payment patterns are affected by seasonal employment trends, income tax refunds and holiday spending habits geographically.
Competition
We face competition in both markets we serve: nonperforming loan purchasing, collecting and management, and fee-for-service receivables management. Purchased portfolio competition comes from both third-party contingent fee collection agencies and other purchasers of debt that manage their own nonperforming loans or outsource such servicing. Our primary competitors in our fee-for-service business are new and existing providers of outsourced receivables management services. Regulatory complexity and burdens, combined with seller preference for experienced portfolio purchasers create significant barriers to successful entry for new competitors. While both markets remain competitive, the contingent fee industry is more fragmented than the purchased portfolio industry.
We face bidding competition in our acquisition of nonperforming loans and in obtaining placements for our fee-for-service businesses. We also compete on the basis of reputation, industry experience and performance. We believe that our competitive strengths include our disciplined and proprietary underwriting process, the extensive data set we have developed as a result of not reselling portfolios since 2002, our ability to bid on portfolios at appropriate prices, our reputation from previous portfolio purchase transactions, our ability to close transactions in a timely fashion, our strong relationships with grantors of receivables, our team of well-trained collectors who provide quality customer service while complying with applicable collection laws, and our ability to efficiently and effectively collect on various asset types.
Compliance
Our approach to compliance is multifaceted and comprehensive, and includes the following:
our Code of Business Conduct and Ethics, which applies to all directors and employees, including officers, is available at the Investor Relations page of our website at www.pragroup.com ;
compliance and ethics training for our directors, officers and employees;
annual compliance testing;
a confidential telephone hotline and email and web-based portals to report suspected compliance violations, fraud, financial reporting, accounting, and auditing matters and other acts that may be illegal and/or unethical;
regular testing by our compliance department of controls embedded in business processes designed to foster compliance with laws, regulations and internal policy; and
regular evaluation of the legislative and regulatory environment, monitoring of statutory and regulatory changes and relevant case law, so that operations personnel are aware of and in compliance with the laws and judicial decisions that may impact their job duties.
Regulation
We are subject to a variety of federal, state, local, and foreign laws that establish specific guidelines and procedures that debt collectors must follow when collecting customer accounts, including laws relating to the collection, use, retention, security and transfer of personal information. It is our policy to comply with the provisions of all applicable federal, state, local and foreign laws in all of our activities even though there are frequent changes in these laws and regulations, in their interpretation and

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application and inconsistencies from jurisdiction to jurisdiction. Our failure to comply with these laws could result in enforcement action against us, the payment of significant fines and penalties, restrictions upon our operations or our inability to recover amounts owed to us. Significant laws and regulations applicable to our business include the following:
Fair Debt Collection Practices Act ("FDCPA"), which imposes certain obligations and restrictions on the practices of debt collectors, including specific restrictions regarding the time, place and manner of the communications.
Fair Credit Reporting Act ("FCRA"), which obligates credit information providers to verify the accuracy of information provided to credit reporting agencies and investigate consumer disputes concerning the accuracy of such information.
Gramm-Leach-Bliley Act, which requires that certain financial institutions, including collection agencies, develop policies to protect the privacy of consumers' private financial information and provide notices to consumers advising them of their privacy policies.
Electronic Funds Transfer Act, which regulates electronic fund transfer transactions, including a consumer’s right to stop payments on a pre-approved fund transfer and right to receive certain documentation of the transaction.
Telephone Consumer Protection Act ("TCPA"), which, along with similar state laws, places certain restrictions on users of certain automated dialing equipment and pre-recorded messages that place telephone calls to consumers.
Servicemembers Civil Relief Act ("SCRA"), which gives U.S. military service personnel relief from credit obligations they may have incurred prior to entering military service, and may also apply in certain circumstances to obligations and liabilities incurred by a servicemember while serving on active duty.
Health Insurance Portability and Accountability Act, which provides standards to protect the confidentiality of patients' personal healthcare and financial information in the U.S.
U.S. Bankruptcy Code, which prohibits certain contacts with consumers after the filing of bankruptcy petitions and dictates what types of claims will or will not be allowed in a bankruptcy proceeding and how such claims may be discharged.
Americans with Disabilities Act, which requires that telecommunications companies operating in the U.S. take steps to ensure functionally equivalent services are available for their consumers with disabilities, and requires accommodation of consumers with disabilities, such as the implementation of telecommunications relay services.
U.S. Foreign Corrupt Practices Act ("FCPA"), United Kingdom Bribery Act ("UK Bribery Act") and Other Applicable Legislation. Our operations outside the U.S. are subject to the FCPA, which prohibits U.S. companies and their agents and employees from providing anything of value to a foreign official for the purposes of influencing any act or decision of these individuals in order to obtain an unfair advantage or help obtain or retain business. Although similar to the FCPA, the UK Bribery Act is broader in scope and covers bribes given to or received by any person with improper intent.
Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which restructured the regulation and supervision of the financial services industry in the U.S. and created the CFPB. The CFPB has rulemaking, supervisory, and enforcement authority over larger consumer debt collectors. The Dodd-Frank Act, along with the Unfair, Deceptive, or Abusive Acts or Practices ("UDAAP") provisions included therein, and the Federal Trade Commission Act, prohibit unfair, deceptive, and/or abusive acts and practices.
Data Protection and Privacy Laws, which include the United Kingdom Data Protection Act of 1998, the Personal Information Protection and Electronic Documents Act in Canada and the EU Data Protection Directive, which regulates the processing and free movement of personal data within the EU and transfer of such data outside the EU.
Consumer Credit Act 1974 (and its related regulations), Unfair Terms in Consumer Contracts Regulations of 1999 and the Financial Conduct Authority's consumer credit conduct of business rules, which apply to our international operations and govern consumer credit agreements.
In addition, certain of our EU subsidiaries are subject to capital adequacy and liquidity requirements as prescribed by the Swedish Financial Supervisory Authority ("SFSA").
On September 9, 2015, Portfolio Recovery Associates, LLC ("PRA"), our wholly owned subsidiary, entered into a consent order with the CFPB, settling a previously disclosed investigation of certain debt collection practices of PRA (the "Consent Order"). PRA entered into the Consent Order for settlement purposes, without admitting the truth of the allegations, other than the jurisdictional facts. Among other things, the Consent Order required PRA to: (i) vacate 837 judgments obtained after the applicable statute of limitations, refund $860,607 in payments received on account of such judgments and waive the remaining $3.4 million

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in judgment balances; (ii) refund $18.2 million in Litigation Department Calls Restitution, as defined in the Consent Order; and (iii) pay an $8.0 million civil money penalty to the CFPB.
Employees
As of December 31, 2016, we employed 4,019 full-time equivalents globally. We believe that our relations with our employees are generally satisfactory. While none of our North American employees are represented by a union or covered by a collective bargaining agreement, in Europe we work closely with a number of Works Councils, and in countries where it is the customary local practice, such as Finland and Spain, we have collective bargaining agreements.
Available Information
Our website is www.pragroup.com . We make available on or through our website certain reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with or furnish it to the SEC. The information that is filed with the SEC may be read or copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at: www.sec.gov .
The information contained on, or that can be accessed through our website, is not, and shall not be deemed to be, a part of this Form 10-K or incorporated into any other filings we make with the SEC.
Reports filed with or furnished to the SEC are also available free of charge upon request by contacting our corporate office at:
PRA Group, Inc.
Attn: Investor Relations
120 Corporate Boulevard, Suite 100
Norfolk, Virginia 23502
Item 1A. Risk Factors .

An investment in our Company involves risk, including the possibility that the value of the investment could fall substantially. The following are risks that could materially affect our business, results of operations, financial condition, liquidity, cash flows, and the value of, and return on, an investment in our Company.

Risks related to our operations and industry

A prolonged economic recovery or deterioration in the economic or inflationary environment in the Americas or Europe could have an adverse effect on our business and results of operations.

Our performance may be adversely affected by economic or inflationary conditions in any market in which we operate. Economic conditions may be impacted by domestic conditions or by global political and economic conditions such as the sovereign debt crises experienced in several European countries and the uncertainty on the future of the EU. Deterioration in economic conditions, a prolonged economic recovery, or a significant rise in inflation could cause personal bankruptcy and insolvency filings to increase, and the ability of consumers to pay their debts could be adversely affected. This may in turn adversely impact our business and financial results. Deteriorating economic conditions or a prolonged recovery could also adversely impact the businesses and governmental entities to which we provide fee-based services, which could reduce our fee income and cash flow.

If global credit market conditions and the stability of global banks deteriorate, it could negatively impact the generation of comprehensive receivable buying opportunities and our business, financial results, and ability to succeed in foreign markets could be adversely affected. If conditions in major credit markets deteriorate, the amount of consumer or commercial lending and financing could be reduced, thus decreasing the amount of potentially purchasable nonperforming loans that we depend on for our operations.

Other factors associated with the economy that could influence our performance include the financial stability of the lenders on our bank loans and credit facilities and our access to capital and credit. The financial turmoil that adversely affected the banking system and financial markets in recent years resulted in a tightening in the credit markets. Although there has been some

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improvement, a worsening of current conditions could have a number of follow-on effects on our business, including a decrease in the value of our financial investments and the insolvency of lending institutions, including the lenders on our bank loans and credit facilities, resulting in our difficulty in or inability to obtain credit. These and other economic factors could have an adverse effect on our financial condition and results of operations.

We may not be able to continually replace our nonperforming loans with additional portfolios sufficient to operate efficiently and profitably, and/or we may not be able to purchase nonperforming loans at appropriate prices.

To operate profitably, we must acquire and service a sufficient amount of nonperforming loans to generate revenue that exceeds our expenses. Fixed costs such as salaries and other compensation expense constitute a significant portion of our overhead and, if we do not replace the nonperforming loan portfolios we service with additional portfolios, we may have to reduce the number of our collection personnel. We would then have to rehire collection staff if we subsequently obtain additional portfolios. These practices could lead to:
low employee morale;
fewer experienced employees;    
higher training costs;    
disruptions in our operations;    
loss of efficiency; and    
excess costs associated with unused space in our facilities.
    
The availability of nonperforming loans portfolios at prices that generate an appropriate return on our investment depends on a number of factors both within and outside of our control, including the following:
the continuation of high levels of consumer debt obligations;
sales of nonperforming loan portfolios by debt owners; and
competitive factors affecting potential purchasers and credit grantors of receivables.

Furthermore, heightened regulation of the credit card and consumer lending industry or changing credit origination strategies may result in decreased availability of credit to consumers, potentially leading to a future reduction in nonperforming loans available for purchase from debt owners. We cannot predict how our ability to identify and purchase receivables and the quality of those receivables would be affected if there were a shift in lending practices, whether caused by changes in the regulations or accounting practices applicable to debt owners, a sustained economic downturn or otherwise.

Moreover, there can be no assurance that debt owners will continue to sell their nonperforming loans consistent with recent levels or at all, or that we will be able to continue to offer competitive bids for those portfolios. Because of the length of time involved in collecting on acquired portfolios and the variability in the timing of our collections, we may not be able to identify trends and make changes in our purchasing strategies in a timely manner. If we are unable to maintain our business or adapt to changing market needs as well as our current or future competitors, we may experience reduced access to nonperforming loan portfolios at appropriate prices and, therefore, reduced profitability.

Currently, a number of large banks that historically sold nonperforming loans in the U.S. are not selling such debt. This includes sellers of bankrupt accounts, some of whom have elected to stop selling such accounts because they believe that regulatory guidance concerning sales of bankruptcy accounts is ambiguous. Should these conditions worsen, it could negatively impact our ability to replace our receivables with additional portfolios sufficient to operate profitably.

We may not be able to collect sufficient amounts on our nonperforming loans to fund our operations.

Our principal business consists of acquiring and liquidating nonperforming loans that consumers or others have failed to pay and that the credit grantor has deemed uncollectible and has charged-off. The debt owners have typically made numerous attempts to recover on their receivables, often using a combination of in-house recovery efforts and third-party collection agencies. These nonperforming loans are difficult to collect, and we may not collect a sufficient amount to cover our investment and the costs of running our business.


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For financial reporting purposes, we utilize the interest method of revenue recognition for determining our income recognized on finance receivables, which is based on an analysis of projected cash flows that may prove to be less than anticipated and could lead to reductions in future revenues or the incurrence of allowance charges.

We utilize the interest method to determine income recognized on finance receivables under the guidance of Financial Accounting Standards Board ("FASB") Accounting Standards Codification 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). Under this method, pools of receivables we acquire are modeled upon their projected cash flows. A yield is then established which, when applied to the unamortized purchase price of the receivables, results in the recognition of income at a constant yield relative to the remaining balance in the pool. Each pool is analyzed regularly to assess the actual performance compared to that derived from our models. Under ASC 310-30, rather than lowering the estimated yield if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current yield and is shown as a reduction in revenue in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables, net, on the consolidated balance sheets. As a result, if the accuracy of the modeling process deteriorates or there is a significant decline in anticipated future cash flows, we could incur reductions in future revenues resulting from additional allowance charges, which could reduce our profitability in a given period.

Our collections may decrease if certain types of insolvency proceedings and bankruptcy filings involving liquidations increase.

Various economic trends and potential changes to existing legislation may contribute to an increase in the amount of personal bankruptcy and insolvency filings. Under certain of these filings, a debtor's assets may be sold to repay creditors, but because most of the receivables we collect through our collections operations are unsecured, we typically would not be able to collect on those receivables. Although our insolvency collections business could benefit from an increase in personal bankruptcies and insolvencies, we cannot ensure that our operations collections business would not decline with an increase in personal insolvencies or bankruptcy filings or changes in related regulations or practices. If our actual collection experience with respect to a nonperforming or insolvent bankrupt receivables portfolio is significantly lower than the total amount we projected when we purchased the portfolio, our financial condition and results of operations could be adversely impacted.

Our international operations expose us to risks which could harm our business, operating results, and financial condition.

A significant portion of our operations is conducted outside the U.S. This could expose us to increased adverse economic and industry conditions that may have a negative impact on our ability to manage our existing operations or pursue alternative strategic transactions, which could have a negative effect on our business, results of operations and financial condition.

The global nature of our operations expands the risks and uncertainties described elsewhere in this section, including the following:    
changes in local political, economic, social and labor conditions in the markets in which we operate, including Europe, Brazil and Canada;
foreign exchange controls on currency conversion and the transfer of funds that might prevent us from repatriating cash earned in countries outside the U.S. in a tax-efficient manner;
currency exchange rate fluctuations, currency restructurings, inflation or deflation, and our ability to manage these fluctuations through a foreign exchange risk management program;
different employee/employer relationships, laws and regulations and existence of employment tribunals and Works Councils;
laws and regulations imposed by foreign governments, including those relating to governing data security, sharing and transfer;
potentially adverse tax consequences resulting from changes in tax laws in the foreign jurisdictions in which we operate or challenges to our interpretations and application of complex international tax laws;
logistical, communications and other challenges caused by distance and cultural and language differences, each making it harder to do business in certain jurisdictions;
risks related to crimes, strikes, riots, civil disturbances, terrorist attacks, wars and natural disasters in a variety of new geographical locations;
volatility of global credit markets and the availability of consumer credit and financing in our international markets

11


uncertainty as to the enforceability of contract and intellectual property rights under local laws;
the potential of forced nationalization of certain industries, or the impact on creditors' rights, consumer disposable income levels, flexibility and availability of consumer credit, and the ability to enforce and collect aged or charged-off debts stemming from foreign governmental actions, whether through austerity or stimulus measures or initiative, intended to control or influence macroeconomic factors such as wages, unemployment, national output or consumption, inflation, investment, credit, finance, taxation or other economic drivers;
the presence of varying levels of business corruption in international markets and the effect of various anti-corruption and other laws on our foreign operations;
the impact on our day-to-day operations and our ability to staff our international operations given our high employee turnover rates, changing labor conditions and long-term trends towards higher wages in developed and emerging international markets as well as the potential impact of union organizing efforts;
potential damage to our reputation due to non-compliance with foreign and local laws; and
the complexity and necessity of using non-U.S. representatives and consultants.
Furthermore, our future effective tax expense could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. The determination of the provision for income taxes and other tax liabilities regarding our global operations requires significant judgment. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may adversely affect our financial results in the period or periods for which such determination is made.
Our tax filings are subject to audit by domestic and foreign tax authorities. These audits may result in assessments of additional taxes, adjustments to the timing of taxable income or deductions, or re-allocations of income among tax jurisdictions.
Any one of these factors could adversely affect our business, results of operations and financial condition.
Goodwill or other intangible asset impairment could negatively impact our net income and stockholders' equity.
We have recorded a significant amount of goodwill as a result of our acquisitions. Goodwill is not amortized, but is tested for impairment at the reporting unit level. Goodwill is required to be tested for impairment annually and between annual tests if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. There are numerous risks that may cause the fair value of a reporting unit to fall below its carrying amount, which could lead to the recognition of goodwill impairment. These risks include, but are not limited to, adverse changes in macroeconomic conditions, the business climate, or the market for the entity's products or services; significant variances between actual and expected financial results; negative or declining cash flows; lowered expectations of future results; failure to realize anticipated synergies from acquisitions; significant expense increases; a more likely-than-not expectation of selling or disposing all or a portion of a reporting unit; the loss of key personnel; an adverse action or assessment by a regulator; and a sustained decrease in the Company's share price.
Our goodwill impairment testing involves the use of estimates and the exercise of judgment, including judgments regarding expected future business performance and market conditions. Significant changes in our assessment of such factors, including the deterioration of market conditions, could affect our assessment of the fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period.
Other intangible assets, such as client and customer relationships, non-compete agreements and trademarks, are amortized. Risks such as those that could lead to the recognition of goodwill impairment, could also lead to the recognition of other intangible asset impairment.
The vote by the United Kingdom to leave the EU, and the ultimate exit of the United Kingdom from the EU, could adversely impact our business, results of operations and financial condition.

On June 23, 2016, UK voted to leave the EU. Although the vote had no binding legal effect, it adversely impacted global markets and resulted in a decline in the value of the British pound as compared to the U.S. dollar and other currencies. The UK’s actual exit from the EU, or Brexit, could take several years because the UK must first give notice to the EU of its intention to leave and the parties have two years from the date the notice is given to complete exit negotiations. However, perceptions concerning the impact of the UK’s withdrawal from the EU may adversely affect business activity, political stability and economic conditions

12


in the UK, the EU and globally, which could in turn adversely affect European or worldwide political, regulatory, economic and financial market conditions.

As of December 31, 2016 , the total estimated remaining collections ("ERC") of our UK portfolios constituted approximately 15% of our consolidated ERC. We expect volatility in exchange rates in the short term as the UK negotiates its exit from the EU. A weaker British pound compared to the U.S. dollar during a reporting period could cause local currency results of our UK operations to be translated into fewer U.S. dollars. In the longer term, any impact from Brexit on our business, results of operations and financial condition will depend on the final terms negotiated by the UK and the EU, including arrangements concerning taxes and financial services regulation.

Our use of the cost recovery method of accounting for finance receivables has been challenged by the Internal Revenue Service ("IRS") and an adverse determination could result in our amending prior year tax returns and the payment of deferred taxes, interest and penalties.

For tax purposes, we utilize the cost recovery method of accounting for our finance receivables. The IRS has challenged our use of this method of accounting for tax purposes, and as described in Note 13 and Note  14 to our Consolidated Financial Statements included in Item 8 of this Form 10-K ("Note 14"), we are involved in related litigation. If we are unsuccessful in the litigation related to our method of accounting, we may ultimately be required to pay the related deferred taxes, and possibly interest and penalties. This could adversely impact our results of operations and liquidity, and could require additional financing from other sources. Deferred tax liabilities related to this item were $239.3 million at December 31, 2016 . Our estimate of the potential federal and state interest is $112.0 million as of December 31, 2016 .

Our loss contingency accruals may not be adequate to cover actual losses.

We are involved in judicial, regulatory, and arbitration proceedings or investigations concerning matters arising from our business activities. We believe that we have adopted reasonable compliance procedures and believe we have meritorious defenses in all material litigation pending against us; however, there can be no assurance as to the ultimate outcome. We establish accruals 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. We may still incur legal costs for a matter even if we have not accrued a liability. In addition, actual losses may be higher than the amount accrued for a certain matter, or in the aggregate. An unfavorable resolution of a legal proceeding or claim could adversely impact our business, financial condition, results of operations, or liquidity. For more information, refer to the " Litigation and Regulatory Matters " section of Note 14 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.

Class action suits and other litigation could divert our management's attention from operating our business and increase our expenses.

Grantors, nonperforming loan purchasers and third-party collection agencies and attorneys in the consumer credit industry are frequently subject to putative class action lawsuits and other litigation. Claims include failure to comply with applicable laws and regulations and improper or deceptive origination and servicing practices. An unfavorable outcome in a class action suit or other litigation could adversely affect our results of operations, financial condition, cash flows and liquidity. Even when we prevail or the basis for the litigation is groundless, considerable time, energy and resources may be needed to respond, and such class action lawsuits or other litigation could adversely affect our results of operations, financial condition and cash flows.

The occurrence of cyber incidents, or a deficiency in our cyber-security, could negatively impact our business by disrupting our operations, compromising or corrupting our confidential information or damaging our image, all of which could negatively impact our business and financial results.

Our business is highly dependent on our ability to process and monitor a large number of transactions across markets and in multiple currencies. As our geographical reach expands, maintaining the security of our systems and infrastructure becomes more significant. Privacy laws in the U.S., Europe and elsewhere govern the collection and transmission of personal data. As our reliance on technology has increased, so have the risks posed to our systems, both internal and those we have outsourced. Our three primary risks that could directly result from the occurrence of a cyber incident are operational interruption, damage to our image, and private data exposure. Private data may include customer information, our employees' personally identifiable information, or proprietary business information such as underwriting and collections methodologies. We have implemented solutions, processes, and procedures to help mitigate these risks, but these measures, as well as our organization's increased awareness of our risk of a cyber incident do not guarantee that our business, reputation or financial results will not be negatively impacted by such an incident. To date, interruptions of our systems have been infrequent and have not had a material impact on our operations. However, should

13


such a cyber incident occur, we may be required to expend significant additional resources to notify affected consumers, modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to fines, penalties, litigation costs and settlements and financial losses that may not be fully covered by our cyber insurance.

Risks associated with governmental regulation and laws

Our ability to collect and enforce our finance receivables may be limited under federal, state and foreign laws, regulations and policies.

The businesses conducted by our operating subsidiaries are subject to licensing and regulation by governmental and regulatory bodies in the many jurisdictions in which we operate and conduct our business. Federal and state laws and the laws and regulations of the foreign countries in which we operate may limit our ability to collect and enforce our finance receivables regardless of any act or omission on our part. Some laws and regulations applicable to credit issuers may preclude us from collecting on nonperforming loans we purchase if the credit issuer previously failed to comply with applicable laws in generating or servicing those receivables. Collection laws and regulations also directly apply to our business. Such laws and regulations are extensive and subject to change. A variety of federal, state and international laws and regulations govern the collection, use, retention, transmission, sharing and security of consumer data. Consumer protection and privacy protection laws, changes in the ways that existing rules or laws are interpreted or enforced and any procedures that may be implemented as a result of regulatory consent orders may adversely affect our ability to collect on our finance receivables and may harm our business. Our failure to comply with laws or regulations applicable to us could limit our ability to collect on our receivables, which could reduce our profitability and harm our business.

Failure to comply with government regulation of the collections industry could result in penalties, fines, litigation, damage to our reputation or the suspension or termination of our ability to conduct our business.

The collections industry throughout the markets in which we operate is governed by various laws and regulations, many of which require us to be a licensed debt collector. Our industry is also at times investigated by regulators and offices of state attorneys general, and subpoenas and other requests or demands for information may be issued by governmental authorities who are investigating debt collection activities. These investigations may result in enforcement actions, fines and penalties, or the assertion of private claims and lawsuits. If any such investigations result in findings that we or our vendors have failed to comply with applicable laws and regulations, we could be subject to penalties, litigation losses and expenses, damage to our reputation, or the suspension or termination of, or required modification to, our ability to conduct collections, which would adversely affect our business, results of operations and financial condition.

In a number of jurisdictions, we must maintain licenses to perform debt recovery services and must satisfy related bonding requirements. Our failure to comply with existing licensing requirements, changing interpretations of existing requirements, or adoption of new licensing requirements, could restrict our ability to collect in certain jurisdictions, subject us to increased regulation, increase our costs, or adversely affect our ability to collect our receivables.

Some laws, among other things, also may limit the interest rate and the fees that a credit grantor may impose on our consumers, limit the time in which we may file legal actions to enforce consumer accounts, and require specific account information for certain collection activities. In addition, local requirements and court rulings in various jurisdictions also may affect our ability to collect.

Regulations and statutes applicable to our industry further provide that, in some cases, consumers cannot be held liable for, or their liability may be limited with respect to, charges to their debt or credit card accounts that resulted from unauthorized use of their credit. These laws, among others, may limit our ability to recover amounts owing with respect to the receivables, whether or not we committed any wrongful act or omission in connection with the account.

If we fail to comply with any applicable laws and regulations discussed above, such failure could result in penalties, litigation losses and expenses, damage to our reputation, or otherwise impact our ability to conduct collections efforts, which could adversely affect our business, results of operations and financial condition.

Investigations or enforcement actions by governmental authorities may result in changes to our business practices; negatively impact our receivables portfolio purchasing volume; make collection of receivables more difficult; or expose us to the risk of fines, penalties, restitution payments and litigation .

Our debt collection activities and business practices are subject to review from time to time by various governmental authorities and regulators, including the CFPB, which may commence investigations or enforcement actions or reviews targeted at businesses in the financial services industry. These reviews may involve governmental authority consideration of individual consumer

14


complaints, or could involve a broader review of our debt collection policies and practices. Such investigations could lead to assertions by governmental authorities that we are not complying with applicable laws or regulations. In such circumstances, authorities may request or seek to impose a range of remedies that could involve potential compensatory or punitive damage claims, fines, restitution payments, sanctions or injunctive relief, that if agreed to or granted, could require us to make payments or incur other expenditures that could have an adverse effect on our financial position. The CFPB has the authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief), recover costs, and impose monetary penalties (ranging from $5,000 per day to over $1 million per day, depending on the nature and gravity of the violation). In addition, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented thereunder, the Dodd-Frank Act empowers state Attorneys General and other state regulators to bring civil actions to remedy violations under state law. Government authorities could also request or seek to require us to cease certain of our practices or institute new practices. Negative publicity relating to investigations or proceedings brought by governmental authorities could have an adverse impact on our reputation, could harm our ability to conduct business with industry participants, and could result in financial institutions reducing or eliminating sales of receivables portfolios to us which would harm our business and negatively impact our results of operations. Moreover, changing or modifying our internal policies or procedures, responding to governmental inquiries and investigations and defending lawsuits or other proceedings could require significant efforts on the part of management and result in increased costs to our business. In addition, such efforts could divert management's full attention from our business operations. All of these factors could have an adverse effect on our business, results of operations, and financial condition.

The CFPB has issued civil investigative demands to many companies that it regulates, and is currently examining practices regarding the collection of consumer debt. In September 2015, we entered into the Consent Order with the CFPB, which resulted in the payment of $19 million in consumer refunds and an $8 million penalty. In addition, we were required to cease collection of approximately $3 million of consumer debt and modify some of our collections practices. Although we have implemented the requirements of the Consent Order, there can be no assurance that additional litigation or new industry regulations currently under consideration by the CFPB would not have an adverse effect on our business, results of operations, and financial condition. In addition, the CFPB monitors our compliance with the Consent Order and could make a determination that we have failed to adhere to our obligations. Such a determination could result in additional inquiries, penalties or liabilities, which could have an adverse effect on our business, results of operations, and financial condition.

Compliance with complex and evolving foreign and U.S. laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions.

We operate on a global basis with offices and activities in a number of jurisdictions throughout the U.S., Europe, Canada and Brazil. We face increased exposure to risks inherent in conducting business internationally, including compliance with complex foreign and U.S. laws and regulations that apply to our international operations, which could increase our cost of doing business in international jurisdictions. These laws and regulations include those related to taxation and anti-corruption laws such as the FCPA, the UK Bribery Act and other local laws prohibiting corrupt payments to governmental officials. Given the complexity of these laws, there is a risk that we may inadvertently breach certain provisions of these laws, such as through the negligent behavior of an employee or our failure to comply with certain formal documentation requirements. Violations of these laws and regulations by us, any of our employees or our third-party vendors, either inadvertently or intentionally, could result in fines and penalties, criminal sanctions, restrictions on our operations and limits on our ability to offer our products and services in one or more countries. Violations of these laws could also adversely affect our business, brand, international expansion efforts, ability to attract and retain employees and results of operations.

Risks associated with indebtedness

We utilize bank loans, credit facilities and convertible notes to finance our business activities, which could negatively impact our liquidity and business operations if we are unable to retain, renegotiate, expand or replace our bank loans and credit facilities or raise the necessary funds to repurchase the convertible notes.

As described in Note 6 to our Consolidated Financial Statements included in Item 8 of this Form 10-K, our sources of financing include a North American credit facility, a European multicurrency revolving credit facility and convertible senior notes. The credit facilities contain financial and other restrictive covenants, including restrictions on how we operate our business and our ability to pay dividends to our stockholders. Failure to satisfy any one of these covenants could result in negative consequences including the following:    
acceleration of outstanding indebtedness;
exercise by our lenders of rights with respect to the collateral pledged under certain of our outstanding indebtedness;

15


our inability to continue to purchase nonperforming loans needed to operate our business; or
our inability to secure alternative financing on favorable terms, if at all.

If we are unable to retain, renegotiate, expand or replace our credit facilities, including as a result of failure to satisfy the restrictive covenants contained in them, our liquidity and business operations could be impacted negatively.

We have additional indebtedness in the form of Convertible Senior Notes due 2020 (the "Notes") and may not have the ability to raise the funds necessary to repurchase the Notes upon a fundamental change or to settle conversions in cash. Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including the Notes, or to make cash payments in connection with any conversion of the Notes depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at that time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, in the event the conditional conversion feature of the Notes is triggered, holders of the Notes are entitled to convert the Notes at any time during specified periods at their option. Upon conversion, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional shares of our common stock), we will be required to make cash payments in respect of the Notes. However, we may not have enough available cash or be able to obtain financing at the time we are required to repurchase Notes surrendered to settle conversions in cash, and our ability to repurchase the Notes or pay cash upon conversion may be limited by law.
Changes in interest rates could increase our interest expense and reduce our net income.
Our revolving credit facilities bear interest at variable rates. Increases in interest rates could increase our interest expense which would, in turn, lower our earnings. From time to time, we may enter into hedging transactions to mitigate our interest rate risk on all or a portion of our debt. Hedging strategies rely on assumptions and projections. If these assumptions and projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates, we may experience volatility in our earnings that could adversely affect our results of operations and financial condition.
Item 1B. Unresolved Staff Comments.
None.

16



Item 2. Properties.
Our corporate headquarters and primary domestic operations facility are located in Norfolk, Virginia. In addition, we have operational centers, all of which are leased except the facilities in Kansas and Tennessee, in the following locations in the Americas and Europe:
Americas
 
- Baton Rouge, Louisiana
 
- Jackson, Tennessee
 
 
- Birmingham, Alabama
 
- Lake Forest, California
 
 
- Conshohocken, Pennsylvania
 
- London, Ontario, Canada
 
 
- Duluth, Georgia
 
- Montgomery, Alabama
 
 
- Folsom, California
 
- North Richland Hills, Texas
 
 
- Fresno, California
 
- Rosemont, Illinois
 
 
- Hampton, Virginia
 
- San Diego, California
 
 
- Houston, Texas
 
- São Paulo, Brazil
 
 
- Hutchinson, Kansas
 
 
 
Europe
 
- Bromley, United Kingdom
 
- Madrid, Spain
 
 
- Duisburg, Germany
 
- Oslo, Norway
 
 
- Eisenstadt, Austria
 
- Padova, Italy
 
 
- Helsinki, Finland
 
- Uppsala, Sweden
 
 
- Kilmarnock, United Kingdom
 
- Warsaw, Poland
 
 
- London, United Kingdom
 
- Zug, Switzerland
 
 
- Luxembourg, Luxembourg
 
 
 
We also lease several less significant facilities in various locations throughout the Americas and Europe, which are not listed above. We do not consider any specific leased or owned facility to be material to our operations. We believe that equally suitable alternative facilities are available throughout our geographic market areas.
Item 3. Legal Proceedings.
We and our subsidiaries are from time to time subject to a variety of routine legal and regulatory claims, inquiries and proceedings, most of which are incidental to the ordinary course of our business. We initiate lawsuits against customers and are 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 us in which they allege that we have 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 us.
Refer to Note 14 for information regarding legal proceedings in which we are involved.
Item 4. Mine Safety Disclosures.
Not applicable.

17


PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Price Range of Common Stock
Our common stock is traded on NASDAQ under the symbol "PRAA." The following table sets forth the high and low sales price for our common stock, as reported by the NASDAQ, for the periods indicated.
 
2016
 
2015
 
High
 
Low
 
High
 
Low
Quarter ended March 31,
$35.98
 
$20.00
 
$58.42
 
$47.84
Quarter ended June 30,
$34.15
 
$22.51
 
$64.24
 
$52.92
Quarter ended September 30,
$34.99
 
$21.93
 
$64.82
 
$50.03
Quarter ended December 31,
$39.70
 
$23.15
 
$56.00
 
$32.49
Based on information provided by our transfer agent and registrar, as of February 15, 2017, there were 71 holders of record and 40,134 beneficial owners of our common stock.
Stock Performance
The following graph and subsequent table compares from December 31, 2011 to December 31, 2016 , the cumulative stockholder returns assuming an initial investment of $100 in our common stock ( PRAA ), the stocks comprising the NASDAQ Financial 100 ( IXF ), and the stocks comprising the NASDAQ Global Market Composite Index ( NQGM ) at the beginning of the period. Any dividends paid during the five year period are assumed to be reinvested.

PRAA-201612_CHARTX52029.JPG
 
Ticker
 
2011
 
2012
 
2013
 
2014
 
2015
 
2016
PRA Group, Inc.
PRAA
 
$
100

 
$
158

 
$
235

 
$
257

 
$
154

 
$
174

NASDAQ Financial 100
IXF
 
$
100

 
$
116

 
$
166

 
$
174

 
$
185

 
$
234

NASDAQ Global Market Composite Index
NQGM
 
$
100

 
$
116

 
$
192

 
$
204

 
$
204

 
$
196

The comparisons of stock performance shown above are not intended to forecast or be indicative of possible future performance of our common stock. We do not make or endorse any predictions as to our future stock performance.

18



Dividend Policy
Our board of directors sets our dividend policy. We do not currently pay regular dividends on our common stock and did not pay dividends in the three years ended December 31, 2016 ; however, our board of directors may determine in the future to declare or pay dividends on our common stock. Under the terms of our credit facilities, cash dividends may not exceed $20 million in any fiscal year without the consent of our lenders. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our results of operations, financial condition, contractual restrictions, capital requirements, business prospects and other factors that our board of directors may consider relevant.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
For information regarding securities authorized for issuance under equity compensation plans see Note 9 to our Consolidated Financial Statements included in Item 8 of this Form 10-K.
Share Repurchase Programs
On October 22, 2015 , our board of directors authorized a share repurchase program to purchase up to $125 million of our outstanding shares of common stock.
During the fourth quarter of 2015, we purchased $80 million of our common stock under this program. No shares were purchased during 2016 . As of December 31, 2016, the maximum remaining amount available for share repurchases under this program was $45 million .

19



Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this Form 10-K and our Consolidated Financial Statements and the related notes thereto included in Item 8 of this Form 10-K . Certain prior year amounts have been reclassified for consistency with the current period presentation.
Consolidated Income Statement, Operating and Other Financial Data
Amounts in thousands, except per share amounts
 
Years Ended December 31,
Income Statement Data:
2016
 
2015
 
2014
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
 
 
Income recognized on finance receivables, net
$
745,119

 
$
865,122

 
$
807,474

 
$
663,546

 
$
530,635

Fee income
77,381

 
64,383

 
65,675

 
71,532

 
62,164

Other revenue
8,080

 
12,513

 
7,820

 
57

 
2

Total revenues
830,580

 
942,018

 
880,969

 
735,135

 
592,801

Operating expenses:
 
 
 
 
 
 
 
 
 
Compensation and employee services
258,846

 
268,345

 
234,531

 
192,474

 
168,356

Legal collection expenses
132,202

 
129,456

 
139,161

 
124,551

 
106,718

Agency fees
44,922

 
32,188

 
16,399

 
5,901

 
5,906

Outside fees and services
63,098

 
65,155

 
55,821

 
31,615

 
28,867

Communication
33,771

 
33,113

 
33,085

 
28,161

 
25,225

Rent and occupancy
15,710

 
14,714

 
11,509

 
8,311

 
7,498

Depreciation and amortization
24,359

 
19,874

 
18,414

 
14,417

 
14,515

Other operating expenses
39,466

 
68,829

 
29,981

 
25,781

 
19,661

Impairment of goodwill

 

 

 
6,397

 

Total operating expenses
612,374

 
631,674

 
538,901

 
437,608

 
376,746

Income from operations
218,206

 
310,344

 
342,068

 
297,527

 
216,055

Other income and (expense):
 
 
 
 
 
 
 
 
 
Interest expense
(80,864
)
 
(60,336
)
 
(35,226
)
 
(14,466
)
 
(9,031
)
Impairment of investments
(5,823
)
 

 

 

 

Foreign exchange gain/(loss)
2,564

 
7,514

 
(5,829
)
 
4

 
9

Income before income taxes
134,083

 
257,522

 
301,013

 
283,065

 
207,033

Provision for income taxes
43,191

 
89,391

 
124,508

 
106,146

 
80,934

Net income
90,892

 
168,131

 
176,505

 
176,919

 
126,099

Adjustment for net income/(loss) attributable to noncontrolling interest
5,795

 
205

 

 
1,605

 
(494
)
Net income attributable to PRA Group, Inc.
$
85,097

 
$
167,926

 
$
176,505

 
$
175,314

 
$
126,593

Net income per common share attributable to PRA Group, Inc.:
 
 
 
 
 
 
 
 
 
Basic
$1.84
 
$3.49
 
$3.53
 
$3.48
 
$2.48
Diluted
$1.83
 
$3.47
 
$3.50
 
$3.45
 
$2.46
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
46,316

 
48,128

 
49,990

 
50,366

 
50,991

Diluted
46,388

 
48,405

 
50,421

 
50,873

 
51,369

Operating and Other Financial Data:
 
 
 
 
 
 
 
 
 
Cash receipts
$
1,569,367

 
$
1,603,878

 
$
1,444,487

 
$
1,213,969

 
$
970,848

Operating expenses to cash receipts
39
%
 
39
%
 
37
%
 
36
%
 
39
%
Return on equity (1)
10
%
 
20
%
 
19
%
 
22
%
 
20
%
Acquisitions of finance receivables, at cost (2)
$
947,331

 
$
963,811

 
$
1,432,764

 
$
656,785

 
$
542,451

Full-time equivalents at period end
4,019

 
3,799

 
3,880

 
3,543

 
3,221

(1)
Calculated by dividing net income attributable to PRA Group, Inc. for each year by average monthly stockholders' equity - PRA Group, Inc. for the same year.
(2)
Represents cash paid for finance receivables through the ordinary course of business as well as the acquisition date finance receivable portfolios that were acquired through our various business acquisitions.

20



Key Balance Sheet Data
Amounts in thousands
 
As of December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
Cash and cash equivalents
$
94,287

 
$
71,372

 
$
39,661

 
$
162,004

 
$
32,687

Finance receivables, net
2,307,969

 
2,202,113

 
2,001,790

 
1,239,191

 
1,078,951

Total assets
3,163,999

 
2,990,567

 
2,778,751

 
1,601,232

 
1,288,956

Borrowings
1,784,101

 
1,717,129

 
1,482,456

 
451,780

 
327,542

Total equity
917,163

 
839,747

 
902,215

 
869,476

 
708,427

Quarterly Income Statement Data
Amounts in thousands, except per share amounts
 
Dec 31, 2016
 
Sep 30, 2016
 
Jun 30, 2016
 
Mar 31, 2016
 
Dec 31, 2015
 
Sep 30, 2015
 
Jun 30, 2015
 
Mar 31, 2015
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income recognized on finance receivables, net
$
131,965

 
$
202,639

 
$
204,008

 
$
206,507

 
$
208,471

 
$
208,184

 
$
220,064

 
$
228,403

Fee income
21,171

 
17,597

 
22,347

 
16,266

 
19,649

 
17,803

 
13,878

 
13,053

Other revenue
2,122

 
1,748

 
2,101

 
2,109

 
2,065

 
3,443

 
3,255

 
3,750

Total revenues
155,258

 
221,984

 
228,456

 
224,882

 
230,185

 
229,430

 
237,197

 
245,206

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Compensation and employee services
61,390

 
65,898

 
64,793

 
66,765

 
68,670

 
66,084

 
68,320

 
65,271

Legal collection expenses
34,726

 
33,447

 
33,897

 
30,132

 
28,647

 
32,594

 
33,670

 
34,545

Agency fees
10,695

 
12,034

 
11,309

 
10,884

 
8,182

 
7,961

 
7,784

 
8,261

Outside fees and services
16,683

 
14,731

 
15,876

 
15,808

 
27,309

 
12,583

 
12,466

 
12,797

Communication
7,652

 
7,814

 
8,423

 
9,882

 
6,601

 
8,021

 
8,073

 
10,418

Rent and occupancy
4,001

 
3,875

 
4,038

 
3,796

 
3,991

 
3,684

 
3,479

 
3,560

Depreciation and amortization
6,020

 
6,184

 
6,085

 
6,070

 
4,935

 
5,413

 
4,916

 
4,610

Other operating expenses
7,023

 
10,513

 
11,279

 
10,651

 
10,678

 
38,963

 
9,610

 
9,578

Total operating expenses
148,190

 
154,496

 
155,700

 
153,988

 
159,013

 
175,303

 
148,318

 
149,040

Income from operations
7,068

 
67,488

 
72,756

 
70,894

 
71,172

 
54,127

 
88,879

 
96,166

Other income and (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(21,026
)
 
(19,310
)
 
(20,569
)
 
(19,959
)
 
(15,321
)
 
(16,787
)
 
(13,452
)
 
(14,776
)
Impairment of investments
(5,823
)
 

 

 

 

 

 

 

Foreign exchange (loss)/gain
(2,619
)
 
5,004

 
2,029

 
(1,850
)
 
301

 
(3,160
)
 
3,584

 
6,789

(Loss)/income before income taxes
(22,400
)
 
53,182

 
54,216

 
49,085

 
56,152

 
34,180

 
79,011

 
88,179

Provision for income taxes
(7,053
)
 
16,664

 
17,348

 
16,232

 
15,164

 
16,597

 
27,586

 
30,044

Net (loss)/income
(15,347
)
 
36,518

 
36,868

 
32,853

 
40,988

 
17,583

 
51,425

 
58,135

Adjustment for net income attributable to noncontrolling interests
2,301

 
2,212

 
412

 
870

 
18

 
187

 

 

Net (loss)/income attributable to PRA Group, Inc.
$
(17,648
)
 
$
34,306

 
$
36,456

 
$
31,983

 
$
40,970

 
$
17,396

 
$
51,425

 
$
58,135

Net (loss)/income per common share attributable to PRA Group, Inc.:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
(0.38
)
 
$
0.74

 
$
0.79

 
$
0.69

 
$
0.87

 
$
0.36

 
$
1.06

 
$
1.19

Diluted
$
(0.38
)
 
$
0.74

 
$
0.79

 
$
0.69

 
$
0.86

 
$
0.36

 
$
1.06

 
$
1.19

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
46,346

 
46,343

 
46,333

 
46,243

 
47,197

 
48,265

 
48,325

 
48,724

Diluted
46,346

 
46,434

 
46,402

 
46,372

 
47,539

 
48,498

 
48,529

 
49,052


21



Quarterly Balance Sheet Data
Amounts in thousands
 
Dec 31, 2016
 
Sep 30, 2016
 
Jun 30, 2016
 
Mar 31, 2016
 
Dec 31, 2015
 
Sep 30, 2015
 
Jun 30, 2015
 
Mar 31, 2015
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
94,287

 
$
91,791

 
$
117,071

 
$
79,442

 
$
71,372

 
$
69,111

 
$
56,811

 
$
40,542

Investments
68,543

 
67,050

 
66,560

 
71,413

 
73,799

 
75,985

 
88,295

 
91,470

Finance receivables, net
2,307,969

 
2,392,408

 
2,399,949

 
2,377,077

 
2,202,113

 
2,167,178

 
2,012,552

 
1,954,772

Other receivables, net
11,650

 
24,299

 
30,079

 
33,555

 
30,771

 
24,648

 
18,443

 
16,834

Income taxes receivable
9,427

 
10,673

 
13,871

 

 
1,717

 
12,840

 
1,580

 

Net deferred tax asset
28,482

 
19,453

 
15,713

 
15,571

 
13,068

 
831

 
125

 
5,771

Property and equipment, net
38,744

 
44,354

 
46,852

 
47,785

 
45,394

 
46,105

 
46,215

 
46,855

Goodwill
499,911

 
560,505

 
544,337

 
524,870

 
495,156

 
502,383

 
503,001

 
496,653

Intangible assets, net
27,935

 
31,539

 
32,655

 
32,154

 
23,788

 
24,458

 
9,450

 
10,042

Other assets
33,808

 
37,275

 
38,509

 
86,966

 
33,389

 
61,011

 
47,284

 
37,674

Assets held for sale
43,243

 

 

 

 

 

 

 

Total assets
$
3,163,999

 
$
3,279,347

 
$
3,305,596

 
$
3,268,833

 
$
2,990,567

 
$
2,984,550

 
$
2,783,756

 
$
2,700,613

Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
2,459

 
$
2,808

 
$
3,719

 
$
2,377

 
$
4,190

 
$
3,693

 
$
3,933

 
$
7,838

Accrued expenses
82,699

 
86,531

 
79,202

 
95,049

 
95,380

 
97,123

 
77,007

 
69,250

Income taxes payable
19,631

 
20,242

 
20,888

 
28,114

 
21,236

 
9,534

 
9,758

 
22,120

Net deferred tax liability
258,344

 
271,152

 
276,360

 
269,201

 
261,498

 
267,587

 
252,638

 
265,661

Interest-bearing deposits
76,113

 
88,719

 
58,041

 
55,349

 
46,991

 
46,277

 
33,248

 
32,439

Borrowings
1,784,101

 
1,816,600

 
1,912,283

 
1,896,424

 
1,717,129

 
1,654,457

 
1,503,363

 
1,479,262

Other liabilities
10,821

 
5,317

 
19,922

 
13,577

 
4,396

 
4,460

 
5,933

 
6,725

Liabilities held for sale
4,220

 

 

 

 

 

 

 

Total liabilities
2,238,388

 
2,291,369

 
2,370,415

 
2,360,091

 
2,150,820

 
2,083,131

 
1,885,880

 
1,883,295

Redeemable noncontrolling interest
8,448

 

 

 

 

 

 

 

Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred stock

 

 

 

 

 

 

 

Common stock
464

 
463

 
463

 
463

 
462

 
482

 
483

 
483

Additional paid-in capital
66,414

 
70,112

 
66,838

 
64,287

 
64,622

 
31,344

 
35,360

 
31,339

Retained earnings
1,049,367

 
1,067,015

 
1,032,709

 
996,253

 
964,270

 
1,032,966

 
1,015,570

 
964,145

Accumulated other comprehensive loss
(251,944
)
 
(199,888
)
 
(213,933
)
 
(196,135
)
 
(228,861
)
 
(201,275
)
 
(153,537
)
 
(178,649
)
Total stockholders' equity - PRA Group, Inc.
864,301

 
937,702

 
886,077

 
864,868

 
800,493

 
863,517

 
897,876

 
817,318

Noncontrolling interest
52,862

 
50,276

 
49,104

 
43,874

 
39,254

 
37,902

 

 

Total equity
917,163

 
987,978

 
935,181

 
908,742

 
839,747

 
901,419

 
897,876

 
817,318

Total liabilities and equity
$
3,163,999

 
$
3,279,347

 
$
3,305,596

 
$
3,268,833

 
$
2,990,567

 
$
2,984,550

 
$
2,783,756

 
$
2,700,613


22



Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .
Overview
We are a global financial and business services company with operations in the Americas and Europe. Our primary business is the purchase, collection and management of portfolios of nonperforming loans. We also provide the following fee-based services: vehicle location, skip tracing and collateral recovery for auto lenders, government entities and law enforcement; class action claims recovery services and purchases; servicing of consumer bankruptcy accounts in the U.S.; and, to a lesser extent, contingent collections of nonperforming loans in Europe and South America. We also provided revenue administration, audit and revenue discovery/recovery services for local government entities through our PGS business which, as discussed in Note 17, we sold in January 2017. The gain on sale before income taxes is expected to be approximately $47 million.
On July 16, 2014, we completed the purchase of the outstanding equity of Aktiv, a Norway-based company specializing in the acquisition and servicing of nonperforming loans in Europe and Canada, for a purchase price of approximately $861.3 million, and assumed approximately $433.7 million of Aktiv's corporate debt, resulting in an enterprise acquisition value of approximately $1.3 billion.
On August 3, 2015, we acquired 55% of the equity interest in RCB. The remaining 45% of the equity interest in RCB is owned by the executive team and previous owners of RCB. RCB is a leading master servicing platform for nonperforming loans in Brazil. Our investment for the 55% ownership of RCB was approximately $55.2 million. As part of the investment and call option agreements, we have the right to purchase the remaining 45% of RCB at certain multiples of earnings before interest, taxes, depreciation and amortization ("EBITDA") beginning August 3, 2019 and ending August 3, 2021.
On April 26, 2016, we completed our public tender offer to purchase 100% of the shares of DTP, a Polish-based debt collection company, for approximately $44.9 million .
Frequently Used Terms
We use the following terminology throughout this document:
"Allowance charges" refers to a reduction in income recognized on finance receivables on pools of finance receivables due to a decrease in cash collection estimates or a delay in the expected timing of the cash collections.
"Amortization rate" refers to cash collections applied to principal on finance receivables as a percentage of total cash collections.
"Buybacks" refers to purchase price refunded by the seller due to the return of ineligible accounts.
"Cash collections" refers to collections on our owned finance receivables portfolios.
"Cash receipts" refers to collections on our owned finance receivables portfolios plus fee income.
"Core" accounts or portfolios refer to accounts or portfolios that are nonperforming loans and are not in an insolvent status upon purchase. These accounts are aggregated separately from insolvency accounts.
"Estimated remaining collections" or "ERC" refers to the sum of all future projected cash collections on our owned finance receivables portfolios.
"Fee income" refers to revenues generated from our fee-for-service businesses.
"Income recognized on finance receivables" refers to income derived from our owned finance receivables portfolios.
"Income recognized on finance receivables, net" refers to income derived from our owned finance receivables portfolios and is shown net of allowance charges/reversals.
"Insolvency" accounts or portfolios refer to accounts or portfolios of receivables that are in an insolvent status when we purchase them and as such are purchased as a pool of insolvent accounts. These include Individual Voluntary Arrangements ("IVAs"), Trust Deeds in the UK, Consumer Proposals in Canada and bankruptcy accounts in the U.S., Canada, Germany and the UK.
"Net finance receivable balance" is recorded on our balance sheet and refers to the purchase price less principal amortization and net allowance charges/reversals.
"Nonperforming loans" refers to the loans that we purchase, which consist generally of defaulted, unpaid obligations of individuals that have been charged-off by the credit grantor.
"Principal amortization" refers to cash collections applied to principal on finance receivables.
"Purchase price" refers to the cash paid to a seller to acquire nonperforming loans, plus certain capitalized costs, less buybacks.
"Purchase price multiple" refers to the total estimated collections (as defined below) on owned finance receivables portfolios divided by purchase price.
"Total estimated collections" or "TEC" refers to actual cash collections, including cash sales, plus estimated remaining collections on our finance receivables portfolios.

23



Earnings Summary
For the year ended December 31, 2016 , net income attributable to PRA Group was $85.1 million , or $1.83 per diluted share, compared with $167.9 million , or $3.47 per diluted share, for the year ended December 31, 2015 . Total revenues were $830.6 million for the year ended December 31, 2016 , down 11.8% from the same year ago period. Revenues during the year ended December 31, 2016 consisted of $745.1 million in income recognized on finance receivables, net, $77.4 million in fee income and $8.1 million in other revenue. Income recognized on finance receivables, net, for the year ended December 31, 2016 decreased $120.0 million , or 13.9% , over the year ended December 31, 2015 , primarily due to an increase in net allowance charges on our finance receivables to $98.5 million for the year ended December 31, 2016, compared to $29.4 million for the year ended December 31, 2015, an increase of $69.1 million or 235.0% . Our cash collections on our finance receivables decreased to $1,492.0 million for the year ended December 31, 2016 compared to $1,539.5 million for the year ended December 31, 2015 , a decrease of $47.5 million or 3.1% .
Our finance receivables amortization rate, including net allowance charges, was 50.1% for the year ended December 31, 2016 compared to 43.8% for the year ended December 31, 2015 . Our finance receivables amortization rate, excluding net allowance charges, was 43.5% for the year ended December 31, 2016 compared to 41.9% for the year ended December 31, 2015 .
Fee income increase d from $64.4 million for the year ended December 31, 2015 to $77.4 million in 2016 , primarily due to an increase in revenues generated by PLS, PGS, Recovery Management Systems Corporation ("RMSC"), CCB and RCB. This was offset by a decrease in fee income from PRA Europe, due primarily to an expected decline in the amount of contingent fee services provided by us for debt owners.
A summary of how our revenue was generated during the years ended December 31, 2016 , 2015 and 2014 is as follows (amounts in thousands):
 
2016
 
2015
 
2014
Cash collections
$
1,491,986

 
$
1,539,495

 
$
1,378,812

Amortization of investment
(648,388
)
 
(645,004
)
 
(576,273
)
Net allowance reversals/(charges)
(98,479
)
 
(29,369
)
 
4,935

Income recognized on finance receivables, net
745,119

 
865,122

 
807,474

Fee income
77,381

 
64,383

 
65,675

Other revenue
8,080

 
12,513

 
7,820

Total revenues
$
830,580

 
$
942,018

 
$
880,969

Operating expenses were $612.4 million for the year ended December 31, 2016 , a decrease of $19.3 million or 3.1% from the year ended December 31, 2015 . The decrease was due in part to $28.8 million in other operating expenses incurred during the year ended December 31, 2015 relating to the Consent Order entered into with the CFPB.
As a result of expanding our international footprint into many countries with various currencies throughout Europe and the Americas, we are exposed to foreign currency fluctuations between and among the U.S. dollar and each of the other currencies in which we operate. As a result, for the year ended December 31, 2016 , we recorded a net foreign currency transaction gain of $2.6 million in our consolidated income statement, as compared to a gain of $7.5 million in the prior year, and we recorded a foreign currency translation adjustment of $(23.1) million for the year ended December 31, 2016, as compared to an adjustment of $(112.9) million for the year ended December 31, 2015.
During the years ended December 31, 2016 , 2015 and 2014 , we acquired finance receivables portfolios at an approximate cost of $947.3 million , $963.8 million and $1,432.8 million , respectively. The figures for 2014 include the acquisition-date fair value of the Aktiv portfolios. In any period, we acquire nonperforming loans that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase prices relative to face value for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can increase or decrease pricing, irrespective of other quality fluctuations. As a result, the average purchase price paid relative to face value for any given period can fluctuate dramatically. However, regardless of the average purchase price, we intend to target a similar internal rate of return, after direct expenses, in pricing our portfolio acquisitions during any given period. Therefore, the price paid relative to face value is not necessarily indicative of profitability.


24



Results of Operations
The results of operations include the financial results of PRA Group and all of our subsidiaries, which are in the receivables management business. Under the guidance of the FASB ASC Topic 280 "Segment Reporting" ("ASC 280"), we have determined that we have several operating segments that meet the aggregation criteria of ASC 280, and therefore, we have one reportable segment, accounts receivables management, based on similarities among the operating units, including economic characteristics, the nature of the products and services, the nature of the production processes, the types or class of customer for their products and services, the methods used to distribute their products and services and the nature of the regulatory environment.
The following table sets forth certain operating data as a percentage of total revenues for the years indicated (dollars in thousands):
 
2016
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Income recognized on finance receivables, net
$
745,119

 
89.7
 %
 
$
865,122

 
91.8
 %
 
$
807,474

 
91.7
 %
Fee income
77,381

 
9.3

 
64,383

 
6.8

 
65,675

 
7.5

Other revenue
8,080

 
1.0

 
12,513

 
1.4

 
7,820

 
0.8

Total revenues
830,580

 
100.0

 
942,018

 
100.0

 
880,969

 
100.0

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Compensation and employee services
258,846

 
31.2

 
268,345

 
28.5

 
234,531

 
26.6

Legal collection expenses
132,202

 
15.9

 
129,456

 
13.8

 
139,161

 
15.8

Agency fees
44,922

 
5.4

 
32,188

 
3.4

 
16,399

 
1.9

Outside fees and services
63,098

 
7.6

 
65,155

 
6.9

 
55,821

 
6.3

Communication
33,771

 
4.1

 
33,113

 
3.5

 
33,085

 
3.8

Rent and occupancy
15,710

 
1.9

 
14,714

 
1.6

 
11,509

 
1.3

Depreciation and amortization
24,359

 
2.9

 
19,874

 
2.1

 
18,414

 
2.1

Other operating expenses
39,466

 
4.8

 
68,829

 
7.3

 
29,981

 
3.4

Total operating expenses
612,374

 
73.8

 
631,674

 
67.1

 
538,901

 
61.2

Income from operations
218,206

 
26.2

 
310,344

 
32.9

 
342,068

 
38.8

Other income and (expense):
 
 
 
 
 
 
 
 
 
 
 
Interest expense
(80,864
)
 
(9.7
)
 
(60,336
)
 
(6.4
)
 
(35,226
)
 
(4.0
)
Impairment of investments
(5,823
)
 
(0.7
)
 

 

 

 

Foreign exchange gain/(loss)
2,564

 
0.3

 
7,514

 
0.8

 
(5,829
)
 
(0.7
)
Income before income taxes
134,083

 
16.1

 
257,522

 
27.3

 
301,013

 
34.1

Provision for income taxes
43,191

 
5.2

 
89,391

 
9.5

 
124,508

 
14.1

Net income
90,892

 
10.9

 
168,131

 
17.8

 
176,505

 
20.0

Adjustment for net income attributable to noncontrolling interests
5,795

 
0.7

 
205

 

 

 

Income attributable to PRA Group, Inc.
$
85,097

 
10.2
 %
 
$
167,926

 
17.8
 %
 
$
176,505

 
20.0
 %

25



Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Revenues
Total revenues were $830.6 million for the year ended December 31, 2016 , a decrease of $111.4 million or 11.8% compared to total revenues of $942.0 million for the year ended December 31, 2015 .
Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net, was $745.1 million for the year ended December 31, 2016 , a decrease of $120.0 million or 13.9% compared to income recognized on finance receivables, net, of $865.1 million for the year ended December 31, 2015 . The decrease was primarily due to an increase in net allowance charges on our finance receivables to $98.5 million for the year ended December 31, 2016 compared to $29.4 million for the year ended December 31, 2015, an increase of $69.1 million or 235.0% . In addition, our cash collections on our finance receivables decreased to $1,492.0 million for the year ended December 31, 2016 , compared to $1,539.5 million for the year ended December 31, 2015 , a decrease of $47.5 million or 3.1% .
Our finance receivables amortization rate, including net allowance charges, was 50.1% for the year ended December 31, 2016 compared to 43.8% for the year ended December 31, 2015 . Our finance receivables amortization rate, excluding net allowance charges, was 43.5% for the year ended December 31, 2016 compared to 41.9% for the year ended December 31, 2015 .
Accretable yield represents the amount of income recognized on finance receivables we can expect to generate over the remaining life of our existing portfolios based on estimated future cash flows as of the balance sheet date. Additions from portfolio purchases represent the original expected accretable yield, on portfolios purchased during the period, to be earned by us. Net reclassifications from nonaccretable difference to accretable yield primarily result from an increase in our estimate of future cash flows. Increases in future cash flows may occur as portfolios age and actual cash collections exceed those originally expected. If those cash flows are determined to be incremental to the portfolio's original forecast, future projections of cash flows are generally increased resulting in higher expected revenue and hence increases in accretable yield. During the year ended December 31, 2016 , we reclassified $41.1 million from nonaccretable difference to accretable yield due primarily to increased cash collection forecasts related to portfolios in Europe partially offset by reductions in cash collection forecasts on our domestic portfolios. During the year ended December 31, 2015, we reclassified $502.7 million from nonaccretable difference to accretable yield due primarily to increased cash collection forecasts related to domestic portfolios primarily acquired from 2011-2014. When applicable, net reclassifications to nonaccretable difference from accretable yield result from a decrease in our estimates of future cash flows and allowance charges that together exceed the increase in our estimate of future cash flows.
Income recognized on finance receivables, net, is shown net of changes in valuation allowances which are recorded for significant decreases in expected cash flows or a change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the year ended December 31, 2016 , we recorded net allowance charges of $98.5 million . On our domestic Core portfolios, we recorded allowance charges of $89.3 million on portfolios purchased between 2005 and 2016, offset by allowance reversals of $0.8 million on portfolios primarily purchased between 2010 and 2011. During 2016, we made downward adjustments to projections of future cash collections and we adjusted amortization periods for many of our Core portfolios. This was done in response to recent trends of cash collections being lower than expected. We have attributed this under-performance to a variety of regulatory and operational factors that we believe adversely impacted our calling efforts and therefore cash collected. We also recorded net allowance charges of $9.4 million on our foreign portfolios, primarily on certain Spanish, UK and Italian portfolios. On our Insolvency portfolios, we recorded net allowance charges of $0.6 million on our domestic portfolios. For the year ended December 31, 2015 , we recorded net allowance charges of $29.4 million . On our domestic Core portfolios, we recorded net allowance charges of $23.3 million on portfolios purchased between 2010 and 2013, offset by allowance reversals of $1.4 million on portfolios primarily purchased between 2005 and 2008. We also recorded a net allowance charge of $7.5 million on our portfolios in the UK and $0.1 million on our Denmark portfolios. On our Insolvency portfolios, we recorded net allowance reversals of $0.2 million on our domestic portfolios.
Fee Income
Fee income was $77.4 million for the year ended December 31, 2016 , an increase of $13.0 million or 20.2% compared to fee income of $ 64.4 million for the year ended December 31, 2015 . Fee income increase d primarily due to an increase in revenues generated by PLS, PGS, CCB, RMSC and RCB. This was offset by a decrease in fee income from PRA Europe, due primarily to an expected decline in the amount of contingent fee services provided by us for debt owners.

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Other Revenue
Other revenue was $8.1 million for the year ended December 31, 2016 , a decrease of $4.4 million or 35.2% compared to $12.5 million for the year ended December 31, 2015 . The decrease is primarily due to a decrease in revenue earned on our investments.
Operating Expenses
Total operating expenses were $612.4 million for the year ended December 31, 2016 , a decrease of $19.3 million or 3.1% compared to total operating expenses of $631.7 million for the year ended December 31, 2015 . Total operating expenses were 39.0% of cash receipts for the year ended December 31, 2016 compared with 39.4% for the year ended December 31, 2015 .
Compensation and Employee Services
Compensation and employee service expenses were $258.8 million for the year ended December 31, 2016 , a decrease of $9.5 million or 3.5% compared to compensation and employee service expenses of $268.3 million for the year ended December 31, 2015 . Compensation and employee services expenses decrease d primarily due to a decrease in discretionary bonus and other incentive compensation expenses, including share-based compensation expenses offset by increases in normal salary expenses caused by an increase in employee headcount. Total full-time equivalents increased 5.8% to 4,019 as of December 31, 2016 from 3,799 as of December 31, 2015 .
Legal Collection Expenses
Legal collection expenses represent costs paid to courts where a lawsuit is filed, contingent fees incurred for the cash collections generated by our independent third-party attorney network, and the cost of documents paid to sellers of nonperforming loans. Legal collection expenses were $132.2 million for the year ended December 31, 2016 , an increase of $2.7 million or 2.1% compared to $129.5 million for the year ended December 31, 2015 . The increase was primarily due to additional court costs related to the expansion of the number of accounts brought into the legal channel in Europe during the year ended December 31, 2016. Our costs paid to courts were $79.8 million for the year ended December 31, 2016, an increase of $9.0 million or 12.7% compared to $70.8 million for the year ended December 31, 2015.  This was partially offset by a decrease in legal collection expenses paid to third-party attorneys, primarily as a result of a decrease in domestic external legal collections. Our costs paid to third-party attorneys were $47.7 million for the year ended December 31, 2016, a decrease of $5.7 million or 10.7% compared to $53.4 million for the year ended December 31, 2015. Our costs paid to sellers of nonperforming loans for documents were $4.7 million for the year ended December 31, 2016, a decrease of $0.5 million or 9.6% compared to $5.2 million for the year ended December 31, 2015.
Agency Fees
Agency fees primarily represent third-party collection fees and also include costs paid to repossession agents to repossess vehicles. Agency fees were $44.9 million for the year ended December 31, 2016 , compared to $32.2 million for the year ended and December 31, 2015 , an increase of $12.7 million or 39.4% . This increase was mainly attributable to third-party collection fees incurred by our international operations where we utilize third-party agencies.
Outside Fees and Services
Outside fees and services expenses were $63.1 million for the year ended December 31, 2016 , a decrease of $2.1 million or 3.2% compared to outside fees and services expenses of $65.2 million for the year ended December 31, 2015 . The decrease was primarily due to a $6.6 million decrease in corporate legal expenses during the year ended December 31, 2016, mainly as a result of increased corporate legal expenses incurred in 2015 as a result of outstanding litigation and regulatory matters. This was partially offset by an increase of $4.1 million in consulting fees during the year ended December 31, 2016, as compared to the prior year period.
Communication
Communication expenses were $33.8 million for the year ended December 31, 2016 , an increase of $ 0.7 million or 2.1% compared to communication expenses of $33.1 million for the year ended December 31, 2015 . None of the increase was attributable to any significant identifiable items.
Rent and Occupancy
Rent and occupancy expenses were $15.7 million for the year ended December 31, 2016 , an increase of $1.0 million or 6.8% compared to rent and occupancy expenses of $14.7 million for the year ended December 31, 2015 . The increase was primarily

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due to additional rental expenses incurred as a result of our acquisitions of RCB, RMSC and DTP as well as the additional rent expense associated with the expansion of our headquarters in Norfolk, Virginia.
Depreciation and Amortization
Depreciation and amortization expense was $24.4 million for the year ended December 31, 2016 , an increase of $4.5 million or 22.6% compared to depreciation and amortization expenses of $19.9 million for the year ended December 31, 2015 . The increase was primarily due to the amortization expense incurred on intangible assets acquired in connection with the acquisitions of RCB and RMSC.
Other Operating Expenses
Other operating expenses were $39.5 million for the year ended December 31, 2016 , a decrease of $29.3 million or 42.6% compared to other operating expenses of $68.8 million for the year ended December 31, 2015 . The decrease was primarily due to the $28.8 million in expenses incurred during 2015 relating to the Consent Order entered into with the CFPB.
Interest Expense
Interest expense was $80.9 million for the year ended December 31, 2016 , an increase of $20.6 million or 34.2% compared to interest expense of $60.3 million for the year ended December 31, 2015 . The increase was primarily the result of higher average borrowings outstanding during 2016 compared to 2015, as well as an increase in the interest rates charged on our variable rate borrowings.
Impairment of Investments
Impairment of investments were $5.8 million for the year ended December 31, 2016 , compared to $0.0 million for the year ended December 31, 2015 . During 2016, the net portfolio collections on our investments in a closed-end Polish investment fund significantly underperformed expectations. As a result, in 2016 we recorded an other-than-temporary impairment charge $5.8 million. For more information, refer to Note 3 to our Consolidated Financial Statements included in Item 8 of this Form 10-K ("Note 3").
Net Foreign Currency Transaction Gain
Net foreign currency transaction gains were $2.6 million and $7.5 million for the years ended December 31, 2016 and 2015, respectively. In any given period, we are exposed to foreign currency transactions gains or losses from transactions in currencies other than the functional currency.
Provision for Income Taxes
Income tax expense was $43.2 million for the year ended December 31, 2016 , a decrease of $46.2 million or 51.7% compared to income tax expense of $89.4 million for the year ended December 31, 2015 . The decrease was due to a decrease of 47.9% in income before taxes. In addition, the effective tax rate decreased to 32.2% for the year ended December 31, 2016 compared to 34.7% for the year ended December 31, 2015 . The decrease was caused by a variety of factors, including changes in the mix of earnings, provision-to-return adjustments, and non-deductible penalties incurred during 2016, all of which caused the rate to decrease.  The impact of these factors was partially offset by tax rate changes in Europe and tax expense on a one-time intercompany transaction in 2016.  Our effective tax rate will vary from period to period due to these types of items.

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Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Revenues
Total revenues were $942.0 million for the year ended December 31, 2015 , an increase of $61.0 million or 6.9% compared to total revenues of $881.0 million for the year ended December 31, 2014 .
Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net, was $865.1 million for the year ended December 31, 2015 , an increase of $57.6 million or 7.1% compared to income recognized on finance receivables, net, of $807.5 million for the year ended December 31, 2014 . The increase was primarily due to an increase in cash collections on our finance receivables to $1.5 billion for the year ended December 31, 2015 compared to $1.4 billion for the year ended December 31, 2014 , an increase of $100.0 million or 7.1% . This increase was largely due to the inclusion of Aktiv's cash collections for the full year in 2015 as compared to the prior year period from July 16, 2014 to December 31, 2014.
Our finance receivables amortization rate, including net allowance charges, was 43.8% for the year ended December 31, 2015 compared to 41.4% for the year ended December 31, 2014 .
During the years ended December 31, 2015 and 2014 , we reclassified $502.7 million and $390.3 million , respectively, from nonaccretable difference to accretable yield due primarily to increased cash collection forecasts related to pools primarily acquired from 2011-2014.
For the year ended December 31, 2015 , we recorded net allowance charges of $29.4 million . On our domestic Core portfolios, we recorded net allowance charges of $23.3 million on portfolios purchased between 2010 and 2013, offset by net allowance reversals of $1.4 million on portfolios primarily purchased between 2005 and 2008. We also recorded a net allowance charge of $7.5 million on our portfolios in the UK and $0.1 million on our Denmark portfolios. On our Insolvency portfolios, we recorded net allowance reversals of $0.2 million on our domestic portfolios. For the year ended December 31, 2014, we recorded net allowance reversals of $4.9 million. On our domestic Core portfolios, we recorded net allowance reversals of $10.9 million on portfolios purchased between 2005 and 2008, offset by allowance charges of $6.0 million on portfolios primarily purchased in 2010 and 2011. On our Insolvency portfolios, we recorded net allowance reversals of $1.7 million on our domestic portfolios primarily purchased in 2007 and 2008, offset by net allowance charges of $1.1 million on Canadian portfolios purchased in 2014. We also recorded a net allowance charge of $0.5 million on our portfolios in the UK.
Fee Income
Fee income was $64.4 million for the year ended December 31, 2015 , a decrease of $1.3 million or 2.0% compared to fee income of $ 65.7 million for the year ended December 31, 2014 . Fee income decreased primarily due to a decrease in revenues generated by CCB and PRA Europe. The decrease in revenue from CCB is due primarily to smaller distributions of class action settlements. The decline in fee income from PRA Europe is due primarily to a decline in the amount of contingent fee work provided by us for debt owners, which was partially offset by higher fee income generated by PLS, PGS and our operations in Brazil.
Other Revenue
Other revenue was $12.5 million for the year ended December 31, 2015 , an increase of $4.7 million or 60.3% compared to $7.8 million for the year ended December 31, 2014 . The increase is due primarily to an increase in revenue generated from our Series B Poland investment. For more information, refer to Note 3.
Operating Expenses
Total operating expenses were $631.7 million for the year ended December 31, 2015 , an increase of $92.8 million or 17.2% compared to total operating expenses of $538.9 million for the year ended December 31, 2014 . Total operating expenses were 39.4% of cash receipts for the year ended December 31, 2015 compared with 37.3% for the year ended December 31, 2014 .
Compensation and Employee Services
Compensation and employee service expenses were $268.3 million for the year ended