PRA Group
PRA GROUP INC (Form: 10-Q, Received: 05/10/2017 06:06:36)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2017
¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 000-50058

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


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES   þ    NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES   þ    NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer   þ    Accelerated filer   ¨    Non-accelerated filer   ¨    Smaller reporting company   ¨ Emerging growth company   ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to h Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES   ¨    NO   þ
The number of shares of the registrant's common stock outstanding as of May 4, 2017 was 46,438,952 .



Table of Contents

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

2



Part I. Financial Information
Item 1. Financial Statements

PRA Group, Inc.
Consolidated Balance Sheets
March 31, 2017 and December 31, 2016
(Amounts in thousands)
 
(unaudited)
 
 
 
March 31,
2017
 
December 31,
2016
Assets
 
 
 
Cash and cash equivalents
$
82,110

 
$
94,287

Investments
74,055

 
68,543

Finance receivables, net
2,366,880

 
2,307,969

Other receivables, net
17,684

 
11,650

Income taxes receivable

 
9,427

Net deferred tax asset
29,090

 
28,482

Property and equipment, net
38,024

 
38,744

Goodwill
506,240

 
499,911

Intangible assets, net
27,393

 
27,935

Other assets
32,373

 
33,808

Assets held for sale

 
43,243

Total assets
$
3,173,849

 
$
3,163,999

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
3,924

 
$
2,459

Accrued expenses
82,594

 
82,699

Income taxes payable
37,960

 
19,631

Net deferred tax liability
259,330

 
258,344

Interest-bearing deposits
78,792

 
76,113

Borrowings
1,708,687

 
1,784,101

Other liabilities
13,344

 
10,821

Liabilities held for sale

 
4,220

Total liabilities
2,184,631

 
2,238,388

Redeemable noncontrolling interest
8,515

 
8,448

Equity:
 
 
 
Preferred stock, par value $0.01, authorized shares, 2,000, issued and outstanding shares, 0

 

Common stock, par value $0.01, authorized shares, 100,000, issued and outstanding shares, 46,439 at March 31, 2017; 100,000 authorized shares, 46,356 issued and outstanding shares at December 31, 2016
464

 
464

Additional paid-in capital
66,293

 
66,414

Retained earnings
1,097,534

 
1,049,367

Accumulated other comprehensive loss
(233,476
)
 
(251,944
)
Total stockholders' equity - PRA Group, Inc.
930,815

 
864,301

Noncontrolling interest
49,888

 
52,862

Total equity
980,703

 
917,163

Total liabilities and equity
$
3,173,849

 
$
3,163,999

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

3



PRA Group, Inc.
Consolidated Income Statements
For the three months ended March 31, 2017 and 2016
(unaudited)
(Amounts in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2017
 
2016
Revenues:
 
 
 
Income recognized on finance receivables, net
$
194,535

 
$
206,507

Fee income
9,858

 
16,266

Other revenue
2,165

 
2,109

Total revenues
206,558

 
224,882

Operating expenses:
 
 
 
Compensation and employee services
68,468

 
66,765

Legal collection expenses
31,728

 
30,132

Agency fees
10,800

 
10,884

Outside fees and services
13,285

 
15,808

Communication
9,137

 
9,882

Rent and occupancy
3,783

 
3,796

Depreciation and amortization
5,215

 
6,070

Other operating expenses
10,885

 
10,651

Total operating expenses
153,301

 
153,988

Income from operations
53,257

 
70,894

Other income and (expense):
 
 
 
Gain on sale of subsidiaries
46,845

 

Interest expense
(21,257
)
 
(19,959
)
Foreign exchange gain/(loss)
2,179

 
(1,850
)
Income before income taxes
81,024

 
49,085

Provision for income taxes
31,409

 
16,232

Net income
49,615

 
32,853

Adjustment for net income attributable to noncontrolling interest
1,448

 
870

Net income attributable to PRA Group, Inc.
$
48,167

 
$
31,983

Net income per common share attributable to PRA Group, Inc.:
 
 
 
Basic
$
1.04

 
$
0.69

Diluted
$
1.03

 
$
0.69

Weighted average number of shares outstanding:
 
 
 
Basic
46,406

 
46,243

Diluted
46,627

 
46,372

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

4



PRA Group, Inc.
Consolidated Statements of Comprehensive Income/(Loss)
For the three months ended March 31, 2017 and 2016
(unaudited)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Net income
$
49,615

 
$
32,853

Other comprehensive income:
 
 
 
Change in foreign currency translation
14,823

 
36,694

Total comprehensive income
64,438

 
69,547

Comprehensive income attributable to noncontrolling interest:
 
 
 
Net income attributable to noncontrolling interest
1,448

 
870

Change in foreign currency translation
(3,645
)
 
3,968

Comprehensive (loss)/income attributable to noncontrolling interest
(2,197
)
 
4,838

Comprehensive income attributable to PRA Group, Inc.
$
66,635

 
$
64,709

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

5



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

 
$
464

 
$
66,414

 
$
1,049,367

 
$
(251,944
)
 
$
52,862

 
$
917,163

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
48,167

 

 
1,888

 
50,055

Foreign currency translation adjustment

 

 

 

 
18,468

 
(4,152
)
 
14,316

Distributions paid to noncontrolling interest

 

 

 

 

 
(710
)
 
(710
)
Vesting of nonvested shares
83

 

 

 

 

 

 

Amortization of share-based compensation

 

 
2,199

 

 

 

 
2,199

Employee stock relinquished for payment of taxes

 

 
(2,320
)
 

 

 

 
(2,320
)
Balance at March 31, 2017
46,439

 
$
464

 
$
66,293

 
$
1,097,534

 
$
(233,476
)
 
$
49,888

 
$
980,703

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

6



PRA Group, Inc.
Consolidated Statements of Cash Flows
For the three months ended March 31, 2017 and 2016
(unaudited)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income
$
49,615

 
$
32,853

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of share-based compensation
2,199

 
3,437

Depreciation and amortization
5,215

 
6,070

Gain on sale of subsidiaries
(46,845
)
 

Amortization of debt discount and issuance costs
3,083

 
2,746

Deferred tax expense
25

 
4,815

Net foreign currency transaction (gain)/loss
(1,723
)
 
305

Other
(1,359
)
 

Changes in operating assets and liabilities:
 
 
 
Other assets
1,837

 
(42,818
)
Other receivables, net
(4,744
)
 
(2,304
)
Accounts payable
648

 
(1,773
)
Income taxes payable, net
27,708

 
5,073

Accrued expenses
(5,526
)
 
(4,374
)
Other liabilities
2,518

 
9,161

Net cash provided by operating activities
32,651

 
13,191

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(2,938
)
 
(6,383
)
Acquisition of finance receivables, net of buybacks
(226,092
)
 
(321,594
)
Collections applied to principal on finance receivables
185,295

 
177,826

Business acquisitions, net of cash acquired

 
(25,018
)
Proceeds from sale of subsidiaries, net
89,077

 

Purchase of investments
(3,569
)
 

Proceeds from sales and maturities of investments
2,907

 
5,568

Net cash provided by/(used in) investing activities
44,680

 
(169,601
)
Cash flows from financing activities:
 
 
 
Proceeds from lines of credit
153,353

 
378,706

Principal payments on lines of credit
(232,108
)
 
(223,117
)
Tax withholdings related to share-based payments
(2,320
)
 
(2,432
)
Distributions paid to noncontrolling interest
(710
)
 
(218
)
Principal payments on long-term debt
(10,012
)
 
(5,000
)
Payments of debt issuance costs

 
(8,477
)
Net increase in interest-bearing deposits
1,473

 
6,238

Net cash (used in)/provided by financing activities
(90,324
)
 
145,700

Effect of exchange rate on cash
816

 
18,780

Net (decrease)/increase in cash and cash equivalents
(12,177
)
 
8,070

Cash and cash equivalents, beginning of period
94,287

 
71,372

Cash and cash equivalents, end of period
$
82,110

 
$
79,442

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
20,257

 
$
16,873

Cash paid for income taxes
4,858

 
6,196

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

7


PRA Group, Inc.
Notes to Consolidated Financial Statements



1. Organization and Business:
Throughout this report, the terms "PRA Group," "the Company," or similar terms refer to PRA Group, Inc. and its subsidiaries.
PRA Group, Inc., a Delaware corporation, and its subsidiaries, is a global financial and business services company with operations in the Americas and Europe. The Company's primary business is the purchase, collection and management of portfolios of nonperforming loans. The Company provides 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. As discussed in Note 11, the Company sold its revenue administration, audit and revenue discovery/recovery business in January 2017.
The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and include the accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Under the guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 280 "Segment Reporting" ("ASC 280"), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and, therefore, it has one reportable segment, accounts receivable management, based on similarities among the operating units including economic characteristics, the nature of the products and services, the nature of the production processes, the types or class of customer for their products and services, the methods used to distribute their products and services and the nature of the regulatory environment.
The following table shows the amount of revenue generated for the three months ended March 31, 2017 and 2016 , respectively, and long-lived assets held at March 31, 2017 and 2016 , respectively, both for the United States, the Company's country of domicile, and outside of the United States (amounts in thousands):
 
As Of And For The
 
As Of And For The
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 
Revenues
 
Long-Lived Assets
 
Revenues
 
Long-Lived Assets
United States
$
143,928

 
$
29,166

 
$
170,507

 
$
37,316

Outside the United States
62,630

 
8,858

 
54,375

 
10,469

Total
$
206,558

 
$
38,024

 
$
224,882

 
$
47,785

Revenues are attributed to countries based on the location of the related operations. Long-lived assets consist of net property and equipment. The Company reports revenues earned from its debt purchasing and collection activities and its fee-based services. It is impracticable for the Company to report further breakdowns of revenues from external customers by product or service.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC") and, therefore, do not include all information and disclosures required by GAAP for complete financial statements. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's consolidated balance sheet as of March 31, 2017 , its consolidated income statements and statements of comprehensive income/(loss) for the three months ended March 31, 2017 and 2016 , its consolidated statement of changes in equity for the three months ended March 31, 2017 , and its consolidated statements of cash flows for the three months ended March 31, 2017 and 2016 . The consolidated income statements of the Company for the three months ended March 31, 2017 may not be indicative of future results. Certain prior period amounts have been reclassified for consistency with the current period presentation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 2016 Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 28, 2017 (the "2016 Form 10-K").

8


PRA Group, Inc.
Notes to Consolidated Financial Statements


2. Finance Receivables, net:
Changes in finance receivables, net for the three months ended March 31, 2017 and 2016 were as follows (amounts in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Balance at beginning of period
$
2,307,969

 
$
2,202,113

Acquisitions of finance receivables (1)
226,397

 
336,379

Foreign currency translation adjustment
17,809

 
16,411

Cash collections applied to principal and net allowance charges
(185,295
)
 
(177,826
)
Balance at end of period
$
2,366,880

 
$
2,377,077

(1)
Acquisitions of finance receivables are net of buybacks and include certain capitalized acquisition related costs. They also include the acquisition date finance receivables portfolios that are acquired in connection with certain business acquisitions.
During the three months ended March 31, 2017 , the Company purchased finance receivables portfolios with a face value of  $1.7 billion  for  $227.8 million . During the three months ended March 31, 2016 , the Company purchased finance receivables portfolios with a face value of  $3.6 billion  for  $336.8 million . At March 31, 2017 , the estimated remaining collections ("ERC") on the receivables purchased during the three months ended March 31, 2017 and 2016 were  $383.7 million  and  $484.3 million , respectively. At March 31, 2017 and 2016 , total ERC was $5.1 billion and $5.3 billion , respectively.
At the time of acquisition, the life of each pool is estimated based on projected amounts and timing of future cash collections. Based upon current projections, cash collections expected to be applied to principal on finance receivables as of March 31, 2017 are estimated to be as follows for the twelve months in the periods ending March 31, (amounts in thousands):
2018
$
657,272

2019
548,346

2020
424,891

2021
333,705

2022
215,134

2023
103,021

2024
38,099

2025
17,412

2026
15,290

2027
13,034

Thereafter
676

Total ERC expected to be applied to principal
$
2,366,880

At March 31, 2017 , the Company had aggregate net finance receivables balances in pools accounted for under the cost recovery method of $110.7 million ; at December 31, 2016 , the amount was $105.5 million .
Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield, on portfolios purchased during the period, to be earned by the Company. Net reclassifications from nonaccretable difference to accretable yield primarily result from the increase in the Company's estimate of future cash flows. When applicable, net reclassifications to nonaccretable difference from accretable yield result from the decrease in the Company's estimates of future cash flows and allowance charges that together exceed the increase in the Company's estimate of future cash flows.


9


PRA Group, Inc.
Notes to Consolidated Financial Statements


Changes in accretable yield for the three months ended March 31, 2017 and 2016 were as follows (amounts in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Balance at beginning of period
$
2,740,006

 
$
2,727,204

Income recognized on finance receivables, net
(194,535
)
 
(206,507
)
Additions
163,395

 
260,249

Reclassifications from/(to) nonaccretable difference
47,078

 
(1,035
)
Foreign currency translation adjustment
20,502

 
99,839

Balance at end of period
$
2,776,446

 
$
2,879,750

The following is a summary of activity within the Company's valuation allowance account, all of which relates to loans acquired with deteriorated credit quality, for the three months ended March 31, 2017 and 2016 (amounts in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Beginning balance
$
211,465

 
$
114,861

Allowance charges
2,708

 
10,018

Reversal of previously recorded allowance charges
(29
)
 
(120
)
Net allowance charges
2,679

 
9,898

Foreign currency translation adjustment
269

 
(171
)
Ending balance
$
214,413

 
$
124,588

3. Investments:
Investments consist of the following at March 31, 2017 and December 31, 2016 (amounts in thousands):
 
March 31, 2017
 
December 31, 2016
Available-for-sale
 
 
 
Government bonds and mutual funds
$
3,613

 
$
2,138

Held-to-maturity
 
 
 
Securitized assets
55,978

 
51,407

Other investments
 
 
 
Private equity funds
14,464

 
14,998

Total investments
$
74,055

 
$
68,543

Available-for-Sale
Government bonds and mutual funds : The Company's investments in government bonds and mutual funds are classified as available-for-sale and are stated at fair value. Fair value is determined using quoted market prices. Unrealized gains and losses are included in comprehensive income and reported in equity.
Held-to-Maturity
Investments in securitized assets : The Company holds a majority interest in a closed-end Polish investment fund. The certificates, which provide a preferred return based on the expected net income of the portfolios, are accounted for as a beneficial interest in securitized financial assets and stated at amortized cost. The Company has determined it has the ability and intent to hold these certificates until maturity, which occurs when the fund terminates or liquidates its assets. The preferred return is not a guaranteed return. Income is recognized under FASB ASC Topic 325-40, "Beneficial Interest in Securitized Financial Assets" ("ASC 325-40"). Income is recognized using the effective yield method. The Company adjusts the yield for changes in estimated cash flows prospectively through earnings.
The underlying securities have both known principal repayment terms as well as unknown principal repayments due to potential borrower pre-payments. Accordingly, it is difficult to accurately predict the final maturity date of these investments.

10


PRA Group, Inc.
Notes to Consolidated Financial Statements


Revenues recognized on these investments are recorded in the Other Revenue line item in the income statement. During the three months ended March 31, 2017 and 2016, revenues recognized on these investments were $1.4 million and $1.6 million , respectively.
Other Investments
Investments in private equity funds : Investments in private equity funds represent limited partnerships in which the Company has less than a 3% interest and are carried at cost. Distributions received from the partnerships are included in other revenue. Distributions received in excess of the Company's proportionate share of accumulated earnings are applied as a reduction of the cost of the investment. Distributions received from investments carried at cost were $2.9 million and $0.2 million during the three months ended March 31, 2017 and 2016, respectively.
The amortized cost and estimated fair value of available-for sale and held-to-maturity investments at March 31, 2017 and December 31, 2016 were as follows (amounts in thousands):
 
March 31, 2017
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Aggregate Fair Value
Available-for-sale
 
 
 
 
 
 
 
Government bonds and mutual funds
$
3,610

 
$
5

 
$
2

 
$
3,613

Held-to-maturity
 
 
 
 
 
 
 
Securitized assets
55,978

 
4,187

 

 
60,165

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

 
$

 
$
23

 
$
2,138

Held-to-maturity
 
 
 
 
 
 
 
Securitized assets
51,407

 
4,147

 

 
55,554

4 . Borrowings:
The Company's borrowings consisted of the following as of the dates indicated (amounts in thousands):
 
March 31, 2017
 
December 31, 2016
North American revolving credit
$
643,004

 
$
695,088

Term loans
425,199

 
430,764

European revolving credit
382,359

 
401,780

Convertible senior notes
287,500

 
287,500

Less: Debt discount and issuance costs
(29,375
)
 
(31,031
)
Total
$
1,708,687

 
$
1,784,101

The following principal payments are due on the Company's borrowings as of March 31, 2017 for the twelve month periods ending March 31, (amounts in thousands):
2018
$
198,605

2019
10,000

2020
10,000

2021
1,519,457

2022

Total
$
1,738,062

The Company believes it was in compliance with the covenants of its material financing arrangements as of March 31, 2017 and December 31, 2016 .

11


PRA Group, Inc.
Notes to Consolidated Financial Statements


North American Revolving Credit and Term Loan
On December 19, 2012, the Company entered into a credit facility with Bank of America, N.A., as administrative agent, and a syndicate of lenders named therein (such agreement as later amended or modified, the "North American Credit Agreement"). The total credit facility under the North American Credit Agreement includes an aggregate principal amount of $938.0 million (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a fully-funded $140.0 million term loan, (ii) a $748 million domestic revolving credit facility, and (iii) a $50 million Canadian revolving credit facility. The facility includes an optional increase in commitments for a  $125.0 million  accordion feature (at the option of the lenders) and also provides for up to  $20 million  of letters of credit that would reduce amounts available for borrowing. The term and revolving loans accrue interest, at the option of the Company, at either the base rate or the Eurodollar rate (as defined in the North American Credit Agreement) for the applicable term plus 2.50% per annum in the case of the Eurodollar rate loans and 1.50% in the case of the base rate loans. The base rate is the highest of (a) the Federal Funds Rate (as defined in the Credit Agreement) plus 0.50% , (b) Bank of America's prime rate, or (c) the Eurodollar rate plus 1.00% . Of the $938.0 million total principal amount of the credit facility, $207.5 million matures on December 19, 2017, and the remainder matures on the earlier of December 21, 2020 or 91 days prior to the maturity of the Company's Convertible Senior Notes due 2020 (the "Notes"). As of March 31, 2017, the unused portion of the North American Credit Agreement was  $155.0 million . Considering borrowing base restrictions, as of March 31, 2017, the amount available to be drawn was  $127.8 million .
The North American Credit Agreement is secured by a first priority lien on substantially all of the Company's assets. The North American Credit Agreement contains restrictive covenants and events of default, including the following as of March 31, 2017:
borrowings may not exceed 35% of the ERC of all eligible asset pools plus 75% of eligible accounts receivable;
the consolidated leverage ratio (as defined in the North American Credit Agreement) cannot exceed 2.25 to 1.0 as of the end of any fiscal quarter;
cash dividends and distributions during any fiscal year cannot exceed $20 million ;
stock repurchases during any fiscal year cannot exceed $100 million plus 50% of the prior year's net income;
permitted acquisitions (as defined in the North American Credit Agreement) during any fiscal year cannot exceed $250 million ;
indebtedness in the form of senior, unsecured convertible notes or other unsecured financings cannot exceed $500 million in the aggregate (without respect to the Notes);
the Company must maintain positive consolidated income from operations (as defined in the North American Credit Agreement) during any fiscal quarter; and
restrictions on changes in control.
The revolving credit facility also bears an unused line fee of 0.375%  per annum, payable quarterly in arrears.

Information on the outstanding balances and weighted average interest rates by type of borrowing under the North American Credit Agreement as of the dates indicated (dollar amounts in thousands):
 
March 31, 2017
 
December 31, 2016
 
Amount Outstanding
 
Weighted Average Interest Rate
 
Amount Outstanding
 
Weighted Average Interest Rate
Term loan
$
140,000

 
3.48
%
 
$
150,000

 
3.27
%
Revolving facility
$
643,004

 
3.50
%
 
$
695,088

 
3.28
%
European Revolving Credit Facility and Term Loan
On October 23, 2014, the Company entered into a credit agreement with DNB Bank ASA for a Multicurrency Revolving Credit Facility (such agreement as later amended or modified, the "European Credit Agreement"). Under the terms of the European Credit Agreement, the credit facility includes an aggregate amount of approximately $1.2 billion (subject to the borrowing base), of which approximately $300 million is a term loan, accrues interest at the Interbank Offered Rate ("IBOR") plus 2.80% - 3.90% under the revolving facility and 4.25% - 4.50% under the term loan facility (as determined by the loan-to-value ratio ("LTV Ratio") as defined in the European Credit Agreement), bears an unused line fee, currently 1.26% per annum, of 35% of the margin, payable monthly in arrears, and matures on February 19, 2021. The European Credit Agreement also includes an Overdraft Facility in the aggregate amount of $40 million (subject to the borrowing base), which accrues interest (per currency) at the daily rates as published by the facility agent, bears a facility line fee of 0.125% per annum, payable quarterly in arrears, and also matures February 19, 2021. As of March 31, 2017, the unused portion of the European Credit Agreement (including the Overdraft Facility) was $557.6

12


PRA Group, Inc.
Notes to Consolidated Financial Statements


million . Considering borrowing base restrictions and other covenants, as of March 31, 2017, the amount available to be drawn under the European Credit Agreement (including the Overdraft Facility) was $157.9 million .
The European Credit Agreement is secured by the shares of most of the Company's European subsidiaries and all intercompany loan receivables in Europe. The European Credit Agreement also contains restrictive covenants and events of default including the following:
the LTV Ratio (as defined in the European Credit Agreement) cannot exceed 75% ;
the GIBD Ratio (as defined in the European Credit Agreement) in Europe cannot exceed 3.5 to 1.0 as of the end of any fiscal quarter until March 31, 2017 and 3.25 :1.0 thereafter;
interest bearing deposits in AK Nordic AB cannot exceed SEK 1,500,000,000 ;
PRA Europe's cash collections must exceed 95% of Europe's ERC for the same set of portfolios, measured on a quarterly basis.
Information on the outstanding balances and weighted average interest rates by type of borrowing under the European Credit Agreement as the dates indicated (dollar amounts in thousands):
 
March 31, 2017
 
December 31, 2016
 
Amount Outstanding
 
Weighted Average Interest Rate
 
Amount Outstanding
 
Weighted Average Interest Rate
Term loan
$
285,199

 
4.25
%
 
$
280,764

 
4.25
%
Revolving facility
$
382,359

 
3.99
%
 
$
401,780

 
4.06
%
Convertible Senior Notes due 2020
On August 13, 2013, the Company completed the private offering of $287.5 million in aggregate principal amount of the Company's 3.00% Notes. The Notes were issued pursuant to an Indenture, dated August 13, 2013 (the "Indenture") between the Company and Wells Fargo Bank, National Association, as trustee. The Indenture contains customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately. The Notes are senior unsecured obligations of the Company. Interest on the Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year, beginning on February 1, 2014. Prior to February 1, 2020, the Notes will be convertible only upon the occurrence of specified events. On or after February 1, 2020, the Notes will be convertible at any time. The Company does not have the right to redeem the Notes prior to maturity. As of March 31, 2017 and December 31, 2016, none of the conditions allowing holders of the Notes to convert their Notes had occurred.
The conversion rate for the Notes is initially 15.2172 shares per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $65.72 per share of the Company's common stock, and is subject to adjustment in certain circumstances pursuant to the Indenture. Upon conversion, holders of the Notes will receive cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election. The Company's current intent is to settle conversions through combination settlement (i.e ., the Notes would be converted into cash up to the aggregate principal amount, and shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election, for the remainder). As a result and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds  $65.72 .
The Company determined that the fair value of the Notes at the date of issuance was approximately $255.3 million , and designated the residual value of approximately $32.2 million as the equity component. Additionally, the Company allocated approximately $7.3 million of the $8.2 million original Notes issuance cost as debt issuance cost and the remaining $0.9 million as equity issuance cost.

13


PRA Group, Inc.
Notes to Consolidated Financial Statements


The balances of the liability and equity components of the Notes outstanding were as follows as of the dates indicated (amounts in thousands):
 
March 31, 2017
 
December 31, 2016
Liability component - principal amount
$
287,500

 
$
287,500

Unamortized debt discount
(16,775
)
 
(17,930
)
Liability component - net carrying amount
$
270,725

 
$
269,570

Equity component
$
31,306

 
$
31,306

The debt discount is being amortized into interest expense over the remaining life of the Notes using the effective interest rate, which is 4.92% .
Interest expense related to the Notes was as follows for the periods indicated (amounts in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Interest expense - stated coupon rate
$
2,156

 
$
2,156

Interest expense - amortization of debt discount
1,155

 
1,100

Total interest expense - convertible senior notes
$
3,311


$
3,256

5. Goodwill and Intangible Assets, net:
In connection with the Company's business acquisitions, the Company acquired certain tangible and intangible assets. Intangible assets resulting from these acquisitions include client and customer relationships, non-compete agreements, trademarks and technology. The Company performs an annual review of goodwill on October 1 of each year or more frequently if indicators of impairment exist.
The following table represents the changes in goodwill for the three months ended March 31, 2017 and 2016 (amounts in thousands):
 
Three Months Ended March 31,
 
2017
 
2016
Balance at beginning of period:
 
 
 
Goodwill
$
506,308

 
$
501,553

Accumulated impairment loss
(6,397
)
 
(6,397
)
 
499,911

 
495,156

Changes:
 
 
 
Acquisitions

 
4,742

Foreign currency translation adjustment
6,329

 
24,972

Net change in goodwill
6,329

 
29,714

 
 
 
 
Goodwill
512,637

 
531,267

Accumulated impairment loss
(6,397
)
 
(6,397
)
Balance at end of period:
$
506,240

 
$
524,870


The $4.7 million addition to goodwill during the three months ended March 31, 2016, was mainly attributable to the acquisition of Recovery Management Systems Corporation ("RMSC") in addition to a purchase price adjustment from a previous acquisition. The goodwill recognized from the RMSC acquisition is expected to be deductible for U.S. income tax purposes.

14


PRA Group, Inc.
Notes to Consolidated Financial Statements


6. Income Taxes:
The Company follows the guidance of FASB ASC Topic 740 "Income Taxes" ("ASC 740") as it relates to the provision for income taxes and uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
For tax purposes, the Company utilizes the cost recovery method of accounting. Under the cost recovery method, collections on finance receivables are applied first to principal to reduce the finance receivables to zero before taxable income is recognized. The Internal Revenue Service ("IRS") examined the Company's 2005 through 2012 tax returns and has asserted that tax revenue recognition using the cost recovery method does not clearly reflect taxable income. The Company believes it has sufficient support for the technical merits of its position, and believes cost recovery to be an acceptable tax revenue recognition method for the Company's industry. The Company has received Notices of Deficiency for tax years ended December 31, 2005 through 2012. The proposed deficiencies relate to the cost recovery method of tax accounting. In response to the notices, the Company filed petitions in the U.S. Tax Court (the "Tax Court") challenging the deficiencies. On July 10, 2015 and July 21, 2015, the IRS filed Motions for Summary Judgment for tax years 2008 through 2012 and 2005 through 2007, respectively. On November 12, 2015 the Tax Court denied the IRS's Motions for Summary Judgment and set this matter for trial to begin on September 19, 2016. On July 5, 2016, the Tax Court granted the IRS’s Motion for Continuance filed on June 28, 2016. On July 14, 2016, the Tax Court set the trial to begin on May 15, 2017.
If the Company is unsuccessful in the Tax Court and any potential appeals, it may be required to pay the related deferred taxes, and possibly interest and penalties. At March 31, 2017 and December 31, 2016, deferred tax liabilities related to this matter were $241.9 million and $239.3 million , respectively. Any adverse determination on this matter could result in the Company amending state tax returns for prior years, increasing its taxable income in those states. The Company files tax returns in multiple state jurisdictions; therefore, any underpayment of state tax will accrue interest in accordance with the respective state statute. At March 31, 2017 and December 31, 2016 , the Company's estimate of the potential federal and state interest was $117.6 million and $112.0 million , respectively.
ASC 740 requires the recognition of interest if the tax law would require interest to be paid on the underpayment of taxes, and recognition of penalties if a tax position does not meet the minimum statutory threshold to avoid payment of penalties. The Company believes it has sufficient support for the technical merits of its position and that it is more likely than not this position will be sustained. Accordingly, the Company has not accrued for interest or penalties on any of its tax positions, including the cost recovery matter.
At March 31, 2017 , the tax years subject to examination by the major federal, state and international taxing jurisdictions are 2003, 2005 and subsequent years. The 2003 tax year remains open to examination because of a net operating loss that originated in that year but was not fully utilized until the 2005 tax year. The examination periods for the 2005 through 2012 tax years are suspended until a decision of the Tax Court becomes final.
The Company intends to permanently reinvest predominantly all foreign earnings in its foreign operations. If foreign earnings were repatriated, the Company would need to accrue and pay taxes, although foreign tax credits may be available to partially reduce U.S. income taxes. The amount of cash on hand related to foreign operations with permanently reinvested earnings was $69.6 million and $73.6 million as of March 31, 2017 and December 31, 2016 , respectively.
7. Earnings per Share:
Basic earnings per share ("EPS") are computed by dividing net income available to common stockholders of PRA Group, Inc. by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of the Notes and nonvested share awards, if dilutive. For the Notes, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds  $65.72 , which did not occur during the period from which the Notes were issued on August 13, 2013 through March 31, 2017 . Share-based awards that are contingent upon the attainment of performance goals are included in the computation of diluted EPS if the effect is dilutive. The dilutive effect of nonvested shares is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the vesting of nonvested shares would be used to purchase common shares at the average market price for the period. The assumed proceeds include the tax benefit that would be realized upon assumed exercise.

15


PRA Group, Inc.
Notes to Consolidated Financial Statements


The following table provides a reconciliation between the computation of basic EPS and diluted EPS for the three months ended March 31, 2017 and 2016 (amounts in thousands, except per share amounts):
 
For the Three Months Ended March 31,
 
2017
 
2016
 
Net income attributable to PRA Group, Inc.
 
Weighted
Average
Common Shares
 
EPS
 
Net income attributable to PRA Group, Inc.
 
Weighted
Average
Common Shares
 
EPS
Basic EPS
$
48,167

 
46,406

 
$
1.04

 
$
31,983

 
46,243

 
$
0.69

Dilutive effect of nonvested share awards
 
 
221

 
(0.01
)
 
 
 
129

 

Diluted EPS
$
48,167

 
46,627

 
$
1.03

 
$
31,983

 
46,372

 
$
0.69

There were no antidilutive options outstanding for the three months ended March 31, 2017 and 2016 .
8. Commitments and Contingencies:
Employment Agreements:
The Company has entered into employment agreements, most of which expire on December 31, 2017 , with all of its U.S. executive officers and with several members of its U.S. senior management group. Such agreements provide for base salary payments as well as bonuses that are based on the attainment of specific management goals. At March 31, 2017 , estimated future compensation under these agreements is approximately $8.0 million . The agreements also contain confidentiality and non-compete provisions. Outside the United States, employment agreements are in place with employees pursuant to local country regulations. Generally, these agreements do not have expiration dates and therefore it is impractical to estimate the amount of future compensation under these agreements. Accordingly, the future compensation under these agreements is not included in the $8.0 million total above.
Leases:
The Company is party to various operating leases with respect to its facilities and equipment. The future minimum lease payments at March 31, 2017 total approximately $44.3 million .
Forward Flow Agreements:
The Company is party to several forward flow agreements that allow for the purchase of nonperforming loans at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at March 31, 2017 is approximately $437.7 million .
Finance Receivables:
Certain agreements for the purchase of finance receivables portfolios contain provisions that may, in limited circumstances, require the Company to refund a portion or all of the collections subsequently received by the Company on particular accounts. The potential refunds as of the balance sheet date are not considered to be significant.
Litigation and Regulatory Matters:
The Company is from time to time subject to routine legal claims, proceedings and regulatory matters, most of which are incidental to the ordinary course of its business. The Company initiates lawsuits against customers and is occasionally countersued by them in such actions. Also, customers, either individually, as members of a class action, or through a governmental entity on behalf of customers, may initiate litigation against the Company in which they allege that the Company has violated a state or federal law in the process of collecting on an account. From time to time, other types of lawsuits are brought against the Company. Additionally, the Company receives subpoenas and other requests or demands for information from regulators or governmental authorities who are investigating the Company's debt collection activities.
The Company accrues for potential liability arising from legal proceedings and regulatory matters when it is probable that such liability has been incurred and the amount of the loss can be reasonably estimated. This determination is based upon currently available information for those proceedings in which the Company is involved, taking into account the Company's best estimate of such losses for those cases for which such estimates can be made. The Company's estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the number of unresolved issues in many of the proceedings (including issues regarding class certification and the scope of many of the claims),

16


PRA Group, Inc.
Notes to Consolidated Financial Statements


and the related uncertainty of the potential outcomes of these proceedings. In making determinations of the likely outcome of pending litigation, the Company considers many factors, including, but not limited to, the nature of the claims, the Company's experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative mechanisms, the matter's current status and the damages sought or demands made. Accordingly, the Company's estimate will change from time to time, and actual losses could be more than the current estimate.
The Company believes that the estimate of the aggregate range of reasonably possible losses in excess of the amount accrued for its legal proceedings outstanding at March 31, 2017, excluding the potential interest associated with the IRS matter described below, is not material.
In certain legal proceedings, the Company may have recourse to insurance or third-party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. Loss estimates and accruals for potential liability related to legal proceedings are typically exclusive of potential recoveries, if any, under the Company's insurance policies or third-party indemnities. The Company has not recorded any potential recoveries under the Company's insurance policies or third-party indemnities as of March 31, 2017.
The matters described below fall outside of the normal parameters of the Company's routine legal proceedings.
Telephone Consumer Protection Act Litigation
As previously reported in the 2016 Form 10-K, the Company was named as defendant in a number of putative class action cases, each alleging that the Company violated the Telephone Consumer Protection Act ("TCPA") by calling consumers' cellular telephones without their prior express consent. In January 2016, the parties reached a settlement agreement in principle ("the Settlement Agreement") under which the parties agreed to seek court approval of class certification and the proposed settlement. As required by the Settlement Agreement, which received final court approval in December 2016, the Company paid $18 million in the second quarter of 2016 to resolve the matter.
Internal Revenue Service Audit
The IRS examined the Company's 2005 through 2012 tax returns and has asserted that tax revenue recognition using the cost recovery method does not clearly reflect taxable income. The Company believes it has sufficient support for the technical merits of its position, and believes cost recovery to be an acceptable tax revenue recognition method for the Company's industry. The Company has received Notices of Deficiency for tax years ended December 31, 2005 through 2012. The proposed deficiencies relate to the cost recovery method of tax accounting for finance receivables. In response to the notices, the Company filed petitions in the Tax Court challenging the deficiencies. On July 10, 2015 and July 21, 2015, the IRS filed Motions for Summary Judgment for tax years 2008 through 2012 and 2005 through 2007, respectively. On November 12, 2015, the Tax Court denied the IRS's Motions for Summary Judgment and set this matter for trial to begin on September 19, 2016. On July 5, 2016, the Tax Court granted the IRS’s Motion for Continuance filed on June 28, 2016. On July 14, 2016, the Tax Court set the trial to begin on May 15, 2017. If the Company is unsuccessful in the Tax Court and any potential appeals, it may ultimately be required to pay the related deferred taxes, and possibly interest and penalties. Deferred tax liabilities related to this matter were $241.9 million at March 31, 2017 . Any adverse determination on this matter could result in the Company amending state tax returns for prior years, increasing its taxable income in those states. The Company files tax returns in multiple state jurisdictions; therefore, any underpayment of state tax will accrue interest in accordance with the respective state statute. The Company's estimate of the potential federal and state interest is $117.6 million as of March 31, 2017 , which has not been accrued.
Portfolio Recovery Associates, LLC v. Guadalupe Mejia
As previously reported in the Company’s 2016 Form 10-K, the Company reached a settlement in principle in February 2017 to resolve this matter. As of December 31, 2016, the Company had fully accrued for the settlement amount, which it paid in April 2017.
9. Fair Value:
As defined by FASB ASC Topic 820, "Fair Value Measurements and Disclosures" ("ASC 820"), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values.

17


PRA Group, Inc.
Notes to Consolidated Financial Statements


Those levels of input are summarized as follows:
Level 1: Quoted prices in active markets for identical assets and liabilities.
Level 2: Observable inputs other than Level 1 quoted prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Unobservable inputs that are supported by little or no market activity. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Financial Instruments Not Required To Be Carried at Fair Value
In accordance with the disclosure requirements of FASB ASC Topic 825, "Financial Instruments" ("ASC 825"), the table below summarizes fair value estimates for the Company's financial instruments not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.
The carrying amounts of the financial instruments in the following table are recorded in the consolidated balance sheets at March 31, 2017 and December 31, 2016 (amounts in thousands):
 
March 31, 2017
 
December 31, 2016
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
82,110

 
$
82,110

 
$
94,287

 
$
94,287

Held-to-maturity investments
55,978

 
60,165

 
51,407

 
55,554

Other investments
14,464

 
11,557

 
14,998

 
12,573

Finance receivables, net
2,366,880

 
2,764,081

 
2,307,969

 
2,708,582

Financial liabilities:
 
 
 
 
 
 
 
Interest-bearing deposits
78,792

 
78,792

 
76,113

 
76,113

Revolving lines of credit
1,025,363

 
1,025,363

 
1,096,868

 
1,096,868

Term loans
425,199

 
425,199

 
430,764

 
430,764

Convertible senior notes
270,725

 
261,421

 
269,570

 
270,825

Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The carrying amount and estimates of the fair value of the Company's debt obligations outlined above do not include any related debt issuance costs associated with the debt obligations. The Company uses the following methods and assumptions to estimate the fair value of the financial instruments in the above table:
Cash and cash equivalents: The carrying amount approximates fair value and quoted prices for identical assets can be found in active markets. Accordingly, the Company estimates the fair value of cash and cash equivalents using Level 1 inputs.
Held-to-maturity investments: Fair value of the Company's investment in Series B certificates of a closed-end Polish investment fund is estimated using proprietary pricing models that the Company utilizes to make portfolio purchase decisions. Accordingly, the Company estimates the fair value of its held-to-maturity investments using Level 3 inputs as there is little observable market data available and management is required to use significant judgment in its estimates.
Other investments: This class of investments consists of private equity funds that invest primarily in loans and securities including single-family residential debt; corporate debt products; and financially-oriented, real-estate-rich and other operating companies in the Americas, Western Europe, and Japan. These investments are subject to certain restrictions regarding transfers and withdrawals. The investments can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through the liquidation of the underlying assets of the fund. The fair value of the Company's interest is valued by the fund managers; accordingly, the Company estimates the fair value of these investments using Level 3 inputs. The

18


PRA Group, Inc.
Notes to Consolidated Financial Statements


investments are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over 1 to 4 years.
Finance receivables, net: The Company records purchased receivables at cost, which represents a significant discount from the contractual receivable balances due. The Company computed the estimated fair value of these receivables using proprietary pricing models that the Company utilizes to make portfolio purchase decisions. Accordingly, the Company's fair value estimates use Level 3 inputs as there is little observable market data available and management is required to use significant judgment in its estimates.
Interest-bearing deposits: The carrying amount approximates fair value due to the short-term nature of the deposits and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
Revolving lines of credit: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
Term loans: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
Convertible notes: The Notes are carried at historical cost, adjusted for the debt discount. The fair value estimates for these Notes incorporates quoted market prices which were obtained from secondary market broker quotes which were derived from a variety of inputs including client orders, information from their pricing vendors, modeling software, and actual trading prices when they occur. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
Financial Instruments Required To Be Carried At Fair Value
The carrying amounts in the following table are measured at fair value on a recurring basis in the accompanying consolidated balance sheets at March 31, 2017 and December 31, 2016 (amounts in thousands):
 
Fair Value Measurements as of March 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Available-for-sale investments
$
3,613

 
$

 
$

 
$
3,613

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

 
3,021

 

 
3,021

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

 
$

 

 
$
2,138

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

 
2,825

 

 
2,825

Available-for-sale investments: Fair value of the Company's investment in government bonds and mutual funds is estimated using quoted market prices. Accordingly, the Company uses Level 1 inputs.
Interest rate swap contracts: The interest rate swap contracts are carried at fair value which is determined by using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves and other factors. Accordingly, the Company uses Level 2 inputs for its fair value estimates.

19


PRA Group, Inc.
Notes to Consolidated Financial Statements


10. Recent Accounting Pronouncements:
In May 2014, FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09") that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also amends the required disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, with early application not permitted. The Company believes that the revenue it classifies as Fee Income is within the scope of this standard. The Company's fee income consists of revenue generated by its Claims Compensation Bureau, LLC ("CCB"), PRA Location Services, LLC ("PLS"), and PRA Government Services, LLC ("PGS") subsidiaries. Based on the Company's evaluation, the Company does not believe the new standard will impact the accounting for its CCB and PLS revenue. The Company sold its PGS business in January 2017.
In January 2016, FASB issued ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), which provides new guidance on the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain provisions. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements.
In February 2016, FASB issued ASU 2016-02, "Leases (Topic 842) Section A - Leases: Amendments to the FASB Account Standards Codification" ("ASU 2016-02"). ASU 2016-02 requires that a lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. It is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements. The Company currently discloses approximately $44.3 million in operating lease obligations in its contractual obligations table in Part I, Item 2 of this Quarterly Report and will evaluate those contracts as well as other existing arrangements to determine if they qualify for lease accounting under the new standard. The Company does not plan to adopt the standard early.
In March 2016, FASB issued ASU 2016-06, "Derivatives and Hedging (Topic 815) , Contingent Put and Call Options in Debt Instruments" ("ASU 2016-06"). Topic 815 requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met, including the "clearly and closely related" criterion. ASU 2016-06 clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments in ASU 2016-06 apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. For public entities, this update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted ASU 2016-06 in the first quarter of 2017 which had no material impact on its Consolidated Financial Statements.
In March 2016, FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). The guidance eliminates additional paid in capital ("APIC") pools and requires companies to recognize all excess tax benefits and tax deficiencies in the income statement when the awards vest or are settled. It also addresses the presentation of excess tax benefits and employee taxes paid on the statement of cash flows. Further, the new guidance eliminates the requirement to estimate forfeitures during the vesting period. Instead, companies can elect to account for actual forfeitures as they occur and record any previously unrecognized compensation expense for estimated forfeitures up to the period of adoption as a retrospective adjustment to beginning retained earnings. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company prospectively adopted ASU 2016-09 in the first quarter of 2017, which increased its provision for income taxes by $1.0 million as a result of the recognition of all excess tax benefits and tax deficiencies in its income statement. The ASU requires that excess tax benefits be presented as an operating activity in the statement of cash flows, so with its prospective adoption, prior periods have not been restated. The Company also elected to use an estimated forfeiture rate, based on historical data, to record its share-based compensation expense, which is consistent with its previous accounting treatment with respect to forfeitures. None of the other provisions of the ASU had a material impact on its Consolidated Financial Statements.
In June 2016, FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13"). ASU 2016-13 requires the measurement of expected credit losses for financial instruments held at the reporting date based on historical

20


PRA Group, Inc.
Notes to Consolidated Financial Statements


experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and allows for early adoption as of the beginning of an interim or annual reporting period beginning after December 15, 2018. This ASU supersedes ASC Topic 310-30, which the Company currently follows to account for revenue on its finance receivables. This ASU could have a significant impact on how the Company measures and records revenue on its finance receivables. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements.
In August 2016, FASB issued ASU 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)" ("ASU 2016-15"). ASU 2016-15 reduces diversity in practice of how certain transactions are classified in the statement of cash flows. The new guidance clarifies the classification of cash activity related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions received from equity-method investments, and beneficial interests in securitization transactions. The guidance also describes a predominance principle in which cash flows with aspects of more than one class that cannot be separated should be classified based on the activity that is likely to be the predominant source or use of cash flow. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period, but requires all elements of the amendments to be adopted at once rather than individually. The new standard must be adopted using a retrospective transition method. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements.
In October 2016, the FASB issued ASU 2016-16, "Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year. The new standard must be adopted using a modified retrospective transition method which is a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements.
In January 2017, FASB issued ASU-2017-01, "Business Combinations - Clarifying the Definition of a Business (Topic 805)" ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is expected to reduce the number of transactions that need to be further evaluated as businesses. The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for certain types of transactions.
In January 2017, FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 eliminates Step 2 of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements.
The Company does not expect that any other recently issued accounting pronouncements will have a material effect on its Consolidated Financial Statements.
11 . Sale of Subsidiaries:
As part of the Company’s strategy to focus on businesses with greater global growth potential, the Company decided in the fourth quarter of 2016 to sell its government services businesses: PRA Government Services, LLC; MuniServices, LLC; and PRA Professional Services, LLC. On January 24, 2017, the Company completed the sale of its government services businesses for $91.5 million in cash plus additional consideration for certain balance sheet items. The impact of the transaction was reported in the first quarter of 2017. The gain on sale before income taxes was $46.8 million .

21


PRA Group, Inc.
Notes to Consolidated Financial Statements


The assets and liabilities of the businesses that were sold consisted of the following at January 24, 2017 (amounts in thousands):
 
January 24, 2017
Other receivables, net
$
7,399

Property and equipment, net
3,168

Goodwill
29,683

Intangible assets, net
1,711

Other assets
525

Total assets
$
42,486

 
 
Accrued expenses
$
2,927

Total liabilities
$
2,927

12. Subsequent Event:
On May 5, 2017, the Company amended and restated the North American Credit Agreement (the “Amended and Restated North American Credit Facility”). The Amended and Restated North American Credit Facility increased the total facility size to $1.2 billion , consisting of a $450 million term loan and a $755 million revolving credit facility, and matures on May 5, 2022. The $207.5 million that was to mature on December 19, 2017 was repaid at closing and the non-extended lenders were removed from the new facility. The interest rates and unused line fee under the new facility remained unchanged.

22



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements:
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall 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 facilities;
changes in interest or exchange rates, which could reduce our net income, and the possibility that future hedging strategies may not be successful, which could adversely affect our results of operations and financial condition, as could our failure to comply with hedge accounting principles and interpretations; and
the risk factors discussed in our filings with the Securities and Exchange Commission (the "SEC").
You should assume that the information appearing in this Quarterly Report is accurate only as of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date.
You should carefully consider the factors listed above and review the following "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as the "Risk Factors" section and "Business" section of our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 28, 2017 ("2016 Form 10-K").
Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in, or implied by, this Quarterly Report could turn out to be materially different. Except

23



as required by law, we assume no obligation to publicly update or revise our forward-looking statements after the date of this Quarterly Report and you should not expect us to do so.
Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do not, by policy, selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, 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.
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.
All references in this Quarterly Report to "PRA Group," "our," "we," "us," the "Company" or similar terms are to PRA Group, Inc. and its subsidiaries.

24



Overview
We are a global financial and business services company with operations in the Americas and Europe. Our primary business is the purchase, collection and management of portfolios of nonperforming loans. We 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. As discussed in Note 11, we sold our revenue administration, audit and revenue discovery/recovery business in January 2017.
We are headquartered in Norfolk, Virginia, and as of March 31, 2017 employ 4,205 full time equivalents. Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol "PRAA."
Earnings Summary
During the three months ended March 31, 2017 , net income attributable to PRA Group, Inc. was $48.2 million , or $1.03 per diluted share, compared with $32.0 million , or $0.69 per diluted share, in the three months ended March 31, 2016 . Total revenues decreased 8.1% to $206.6 million in the three months ended March 31, 2017 , compared to the three months ended March 31, 2016 . Revenues in the three months ended March 31, 2017 consisted of $194.5 million in income recognized on finance receivables, net; $9.9 million in fee income; and $2.2 million in other revenue. Income recognized on finance receivables, net, in the three months ended March 31, 2017 decreased $12.0 million , or 5.8% , over the three months ended March 31, 2016 , primarily as a result of a $4.5 million decrease in cash collections and a $14.7 million increase in principal amortization. This was partially offset by a $7.2 million decrease in net allowance charges. During the three months ended March 31, 2017 , we incurred $2.7 million in net allowance charges, compared with $9.9 million in the three months ended March 31, 2016 . Our finance receivables amortization rate, including net allowance charges/reversals, was 48.8% for the three months ended March 31, 2017 compared to 46.3% for the three months ended March 31, 2016 . Our finance receivables amortization rate, excluding net allowance charges/reversals, was 48.1% for the three months ended March 31, 2017 compared to 43.7% for the three months ended March 31, 2016 . Cash collections, which drive our finance receivables income, were $379.8 million in the three months ended March 31, 2017 , down 1.2% , or $4.5 million , as compared to the three months ended March 31, 2016 .
A summary of the sources of our revenue during the three months ended March 31, 2017 and 2016 is presented below (amounts in thousands):
 
For the Three Months Ended March 31,
 
2017
 
2016
Cash collections
$
379,830

 
$
384,333

Principal amortization
(182,616
)
 
(167,928
)
Net allowance charges
(2,679
)
 
(9,898
)
Income recognized on finance receivables, net
194,535

 
206,507

Fee income
9,858

 
16,266

Other revenue
2,165

 
2,109

Total revenues
$
206,558

 
$
224,882

Operating expenses were $153.3 million for the three months ended March 31, 2017 , a decrease of $0.7 million or 0.5% , as compared to the three months ended March 31, 2016 .
During the three months ended March 31, 2017 and 2016 , we acquired finance receivables portfolios at a cost of $227.8 million and $336.8 million , respectively.  In any period, we acquire nonperforming loans that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase prices relative to face value for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can increase or decrease pricing, irrespective of other quality fluctuations. As a result, the average purchase price paid relative to face value for any given period can fluctuate dramatically. However, regardless of the average purchase price, we intend to target a similar 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.

25



Results of Operations
The results of operations include the financial results of the Company and all of its subsidiaries. The following table sets forth certain operating data as a percentage of total revenues for the periods indicated:
 
For the Three Months Ended March 31,
 
2017
 
2016
Revenues:
 
 
 
Income recognized on finance receivables, net
94.2
 %
 
91.8
 %
Fee income
4.8
 %
 
7.2
 %
Other revenue
1.0
 %
 
1.0
 %
Total revenues
100.0
 %
 
100.0
 %
Operating expenses:
 
 
 
Compensation and employee services
33.1
 %
 
29.7
 %
Legal collection expenses
15.4
 %
 
13.4
 %
Agency fees
5.2
 %
 
4.8
 %
Outside fees and services
6.5
 %
 
7.0
 %
Communication
4.4
 %
 
4.4
 %
Rent and occupancy
1.8
 %
 
1.7
 %
Depreciation and amortization
2.5
 %
 
2.7
 %
Other operating expenses
5.3
 %
 
4.7
 %
Total operating expenses
74.2
 %
 
68.4
 %
Income from operations
25.8
 %
 
31.6
 %
Other income and (expense):
 
 
 
Gain on sale of subsidiaries
22.7
 %

 %
Interest expense
(10.3
)%
 
(8.9
)%
Foreign exchange gain/(loss)
1.1
 %
 
(0.8
)%
Income before income taxes
39.3
 %
 
21.9
 %
Provision for income taxes
15.2
 %
 
7.2
 %
Net income
24.1
 %
 
14.7
 %
Adjustment for net income attributable to noncontrolling interest
0.7
 %
 
0.4
 %
Net income attributable to PRA Group, Inc.
23.4
 %
 
14.3
 %
Three Months Ended March 31, 2017 Compared To Three Months Ended March 31, 2016
Revenues
Total revenues were $206.6 million for the three months ended March 31, 2017 , a decrease of $18.3 million , or 8.1% , compared to total revenues of $224.9 million for the three months ended March 31, 2016 .
Income Recognized on Finance Receivables, net
Income recognized on finance receivables, net was $194.5 million for the three months ended March 31, 2017 , a decrease of $12.0 million , or 5.8% , compared to income recognized on finance receivables, net, of $206.5 million for the three months ended March 31, 2016 . The decrease was primarily a result of a $4.5 million decrease in cash collections and a $14.7 million increase in principal amortization. This was partially offset by a $7.2 million decrease in net allowance charges. Cash collections, which drive our finance receivable income, were $379.8 million in the three months ended March 31, 2017 , down $4.5 million , or 1.2% , as compared to the three months ended March 31, 2016 . During the three months ended March 31, 2017 , we incurred $2.7 million in net allowance charges, compared with $9.9 million in the three months ended March 31, 2016 . Our finance receivables amortization rate, including net allowance charges, was 48.8% for the three months ended March 31, 2017 compared to 46.3% for the three months ended March 31, 2016 . Our finance receivables amortization rate, excluding net allowance charges, was 48.1% for the three months ended March 31, 2017 compared to 43.7% for the three months ended March 31, 2016 .

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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. 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. During the three months ended March 31, 2017 , we reclassified $47.1 million from nonaccretable difference to accretable yield primarily due to increased cash collection forecasts relating to pools acquired from 2013-2016. During the three months ended March 31, 2016, we reclassified $1.0 million to nonaccretable difference from accretable yield primarily due to a decrease in cash collection forecasts. When applicable, net reclassifications to nonaccretable difference from accretable yield result from the 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 three months ended March 31, 2017 , we recorded net allowance charges of $2.7 million . On our domestic Core and Insolvency portfolios, we recorded net allowance charges of $0.5 million. and $0.1 million, respectively. We also recorded allowance charges of $1.5 million on our European portfolios, $0.3 million on our Canadian portfolios and $0.2 million on our Brazilian portfolios.
For the three months ended March 31, 2016, we recorded net allowance charges of $9.9 million . On our domestic Core portfolios, we recorded net allowance charges of $7.1 million on portfolios purchased mainly in 2012 and 2013. On our Insolvency portfolios, we recorded allowance charges of $0.3 million on our domestic portfolios. We also recorded allowance charges of $2.2 million on our European portfolios, and $0.3 million on our Canadian portfolios.
Fee Income
Fee income was $9.9 million in the three months ended March 31, 2017 , a decrease of $6.4 million or 39.3% , compared to $16.3 million in the three months ended March 31, 2016 . This was primarily due to a decrease in fee income generated by our government services business, which we sold in January 2017.
Other Revenue
Other revenue increased to $2.2 million in the three months ended March 31, 2017 from $2.1 million in the three months ended March 31, 2016 .
Operating Expenses
Total operating expenses were $153.3 million for the three months ended March 31, 2017 , a decrease of $0.7 million or 0.5% , compared to operating expenses of $154.0 million for the three months ended March 31, 2016 . Operating expenses were 39.3% of cash receipts for the three months ended March 31, 2017 compared to 38.4% for the three months ended March 31, 2016 .
Compensation and Employee Services
Compensation and employee services expenses were $68.5 million for the three months ended March 31, 2017 , an increase of $1.7 million , or 2.5% , compared to compensation and employee services expenses of $66.8 million for the three months ended March 31, 2016 . Compensation expense increased primarily as a result of larger average staff sizes and increased bonus expense, partially offset by decreases in normal incentive compensation and share-based compensation. Additionally, compensation and employee services expense was impacted by the sale of the government services business, which occurred in January 2017.  Regular compensation and employee services expense declined by $3.0 million due to the sale of the business; this was partially offset by $2.1 million in one-time compensation expense incurred during the three months ended March 31, 2017 directly related to the sale. Total full-time equivalents increased to 4,205 as of March 31, 2017 , compared to 3,748 as of March 31, 2016 .
Legal Collection Expenses
Legal collection expenses represent costs paid to courts where a lawsuit is filed, contingent fees incurred for the cash collections generated by our independent third-party attorney network, and the cost of documents paid to sellers of nonperforming loans. Legal collection expenses were $31.7 million for the three months ended March 31, 2017 , compared to legal collection expenses of $30.1 million for the three months ended March 31, 2016 . The increase was primarily due to additional court costs

27



related to the expansion of the number of accounts brought into the legal channel in Europe during the three months ended March 31, 2017 . Our costs paid to courts were $20.0 million for the three months ended March 31, 2017 , an increase of $4.5 million or 29.0% compared to $15.5 million for the three months ended March 31, 2016 .  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 $11.3 million for the three months ended March 31, 2017 , a decrease of $1.7 million or 13.1% compared to $13.0 million for the three months ended March 31, 2016 . Our costs paid to sellers of nonperforming loans for documents were $0.4 million for the three months ended March 31, 2017 , a decrease of $1.3 million or 76.5% compared to $1.7 million for the three months ended March 31, 2016 .
Agency Fees
Agency fees primarily represent third-party collection fees and costs paid to repossession agents to repossess vehicles. Agency fees were $10.8 million for the three months ended March 31, 2017 , compared to $10.9 million for the three months ended March 31, 2016 .
Outside Fees and Services
Outside fees and services expenses were $13.3 million for the three months ended March 31, 2017 , a decrease of $2.5 million , or 15.8% , compared to outside fees and services expenses of $15.8 million for the three months ended March 31, 2016 . This decrease was primarily due to a $1.8 million decrease in corporate legal expenses and a $0.7 million decrease in professional fees.
Communication
Communication expenses were $9.1 million for the three months ended March 31, 2017 , a decrease of $0.8 million or 8.1% , compared to communication expenses of $9.9 million for the three months ended March 31, 2016 . This decrease was primarily due to a $0.7 million decrease in bulk postage expenses.
Rent and Occupancy
Rent and occupancy expenses were $3.8 million for the both the three months ended March 31, 2017 and 2016.
Depreciation and Amortization
Depreciation and amortization expenses were $5.2 million for the three months ended March 31, 2017 , a decrease of $0.9 million , or 14.8% , compared to depreciation and amortization expenses of $6.1 million for the three months ended March 31, 2016 . The decrease was primarily due to the impact of the sale of our government services business in January 2017.
Other Operating Expenses
Other operating expenses were $10.9 million for the three months ended March 31, 2017 , a decrease of $0.2 million , or 1.9% , compared to other operating expenses of $10.7 million for the three months ended March 31, 2016 .
Gain on Sale of Subsidiaries
Gain on sale of subsidiaries was $46.8 million for the three months ended March 31, 2017 compared to $0 for the three months ended March 31, 2016 . As part of our strategy to focus on businesses with greater global growth potential, we decided in the fourth quarter of 2016 to sell our government services businesses. On January 24, 2017, we completed the sale which resulted in a gain of $46.8 million . We also incurred approximately $2.1 million of additional compensation expense related to the sale that is not reflected in this gain.
Interest Expense
Interest expense was $21.3 million during the three months ended March 31, 2017 , an increase of $1.3 million or 6.5% , compared to $20.0 million for the three months ended March 31, 2016 . The increase was primarily due to increases in interest rates and unused line fees during the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This was partially offset by a decrease in interest expenses incurred on our interest rate swaps and a decrease in the average borrowings outstanding during the three months ended March 31, 2017 compared to the three months ended March 31, 2016.
Net Foreign Currency Transaction Gains/(Losses)
Net foreign currency transaction gains were $2.2 million for the three months ended March 31, 2017 compared to net foreign currency transaction losses of $1.9 million for the three months ended March 31, 2016 . In any given period, our foreign entities

28



conduct operations in currencies different from their functional currency which generate foreign currency transaction gains and losses.
Provision for Income Taxes
Provision for income taxes was $31.4 million for the three months ended March 31, 2017 , an increase of $15.2 million , or 93.8% , compared to provision for income taxes of $16.2 million for the three months ended March 31, 2016 . The increase was primarily due to a $31.9 million increase in income before taxes for the three months ended March 31, 2017 being predominantly taxed in higher tax jurisdictions, compared to the three months ended March 31, 2016 . During the three months ended March 31, 2017 , our effective tax rate was 38.8% , compared to 33.1% for the three months ended March 31, 2016 . The increase was due primarily to changes in the mix of earnings, which was impacted by the sale of our government services businesses, and the adoption of ASU 2016-09 in the first quarter of 2017 which increased our provision for income taxes by $1.0 million .

29



Supplemental Performance Data
Finance Receivables Portfolio Performance
The following tables show certain data related to our finance receivables portfolio. Certain adjustments, as noted in the footnotes to these tables, have been made to reduce the impact of foreign currency fluctuations on purchase price multiples.
Further, these tables disclose our Americas and European Core and Insolvency portfolios. The accounts represented in the Insolvency tables are those portfolios of accounts that were in an insolvency status at the time of purchase. This contrasts with accounts in our Core portfolios that file for bankruptcy/insolvency protection after we purchase them, which continue to be tracked in their corresponding Core portfolio. Core customers sometimes file for bankruptcy/insolvency protection subsequent to our purchase of the related Core portfolio. When this occurs, we adjust our collection practices accordingly to comply with bankruptcy/insolvency rules and procedures; however, for accounting purposes, these accounts remain in the related Core portfolio. Conversely, Insolvency accounts may be dismissed voluntarily or involuntarily subsequent to our purchase of the related Insolvency portfolio. Dismissal occurs when the terms of the bankruptcy are not met by the petitioner. When this occurs, we are typically free to pursue collection outside of bankruptcy procedures; however, for accounting purposes, these accounts remain in the related Insolvency pool.
Purchase price multiples can vary over time due to a variety of factors, including pricing competition, supply levels, age of the receivables purchased, and changes in our operational efficiency. For example, increased pricing competition during the 2005 to 2008 period negatively impacted purchase price multiples of our Core portfolio compared to prior years. Conversely, during the 2009 to 2011 period, pricing disruptions occurred as a result of the economic downturn. This created unique and advantageous purchasing opportunities, particularly within the Insolvency market, relative to the prior four years. Purchase price multiples can also vary among types of finance receivables. For example, we generally incur lower collection costs on our Insolvency portfolio compared with our Core portfolio. This allows us, in general, to pay more for an Insolvency portfolio and experience lower purchase price multiples, while generating similar internal rates of return, net of expenses, when compared with a Core portfolio.
When competition increases and/or supply decreases, pricing often becomes negatively impacted relative to expected collections, and yields tend to trend lower. The opposite tends to occur when competition decreases and/or supply increases.
Within a given portfolio type, to the extent that lower purchase price multiples are the result of more competitive pricing and lower yields, this will generally lead to higher amortization rates and lower profitability. As portfolio pricing becomes more favorable on a relative basis, our profitability will tend to increase. Profitability within given Core portfolio types may also be impacted by the age and quality of the receivables, which impact the cost to collect those accounts. Fresher accounts, for example, typically carry lower associated collection expenses, while older accounts and lower balance accounts typically carry higher costs and as a result require higher purchase price multiples to achieve the same net profitability as fresher accounts.
Revenue recognition under Financial Accounting Standards Board ("FASB") Accounting Standards Codification 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30") is driven by estimates of total collections as well as the timing of those collections. We record new portfolio purchases based on our best estimate of the cash flows expected at acquisition, which reflects the uncertainties inherent in the purchase of nonperforming loans and the results of our underwriting process. Subsequent to the initial booking, as we gain collection experience and confidence with a pool of accounts, we regularly update ERC. These processes have tended to cause the ratio of ERC to purchase price for any given year of buying to gradually increase over time. As a result, our estimate of total collections has often increased as pools have aged. Thus, all factors being equal in terms of pricing, one would typically tend to see a higher collection to purchase price ratio from a pool of accounts that was six years from purchase than a pool that was just two years from purchase.
The numbers presented in the following tables represent gross cash collections and do not reflect any costs to collect; therefore, they may not represent relative profitability. Due to all the factors described above, readers should be cautious when making comparisons of purchase price multiples among periods and between types of receivables.
We hold a majority interest in a closed-end Polish investment fund that purchases and services finance receivables. Our investment in this fund is classified in our Consolidated Balance Sheets as "Investments" and as such is not included in the following tables. The equivalent of the estimated remaining collections of the portfolios, expected to be received by us, is $62.7 million at March 31, 2017 .


30



Purchase Price Multiples
as of March 31, 2017  
Amounts in thousands
Purchase Period
Purchase Price (3)
Net Finance Receivables (4)
ERC-Historical Period Exchange Rates (5)
Total Estimated Collections (6)
ERC-Current Period Exchange Rates (7)
Current Estimated Purchase Price Multiple
Original Estimated Purchase Price Multiple (2)
Americas-Core
 
 
 
 
 
 
 
1996-2006
$
458,636

$
3,927

$
21,008

$
1,605,823

$
21,008

350
%
246
%
2007
179,832

6,124

26,386

445,595

26,386

248
%
227
%
2008
166,479

6,519

20,112

375,162

20,112

225
%
220
%
2009
125,169

2,040

41,330

462,071

41,330

369
%
252
%
2010
148,217

7,158

63,049

538,967

63,049

364
%
247
%
2011
209,725

17,719

92,826

723,228

92,826

345
%
245
%
2012
254,591

35,799

131,761

677,723

131,761

266
%
226
%
2013
391,520

95,067

282,842

970,750

282,842

248
%
211
%
2014 (1)
406,181

151,074

416,988

973,591

411,629

240
%
204
%
2015
446,754

256,606

543,201

943,421

546,368

211
%
205
%
2016
458,288

369,988

730,522

937,082

737,666

204
%
201
%
2017 YTD
116,389

115,773

229,062

233,726

229,062

201
%
201
%
Subtotal
3,361,781

1,067,794

2,599,087

8,887,139

2,604,039

 
 
Americas-Insolvency
 
 
 
 
 
 
1996-2006
54,396


504

91,172

504

168
%
145
%
2007
78,524

125

385

106,044

385

135
%
150
%
2008
108,578

567

1,211

169,039

1,211

156
%
163
%
2009
155,998


4,756

472,272

4,756

303
%
214
%
2010
208,971


6,760

548,761

6,760

263
%
184
%
2011
180,586


1,479

366,064

1,479

203
%
155
%
2012
251,733

5,198

15,306

382,250

15,306

152
%
136
%
2013
228,036

31,420

49,512

343,008

49,512

150
%
133
%
2014 (1)
148,934

47,808

66,907

209,143

66,815

140
%
124
%
2015
64,000

45,465

55,398

81,372

55,398

127
%
125
%
2016
94,121

72,644

88,054

115,025

87,671

122
%
123
%
2017 YTD
66,451

66,450

83,932

84,143

83,932

127
%
127
%
Subtotal
1,640,328

269,677

374,204

2,968,293

373,729

 
 
Total Americas
5,002,109

1,337,471

2,973,291

11,855,432

2,977,768

 
 
Europe-Core
 
 
 
 
 
 
 
2012
20,457


67

33,548

52

164
%
187
%
2013
20,370

809

1,561

22,123

1,176

109
%
119
%
2014 (1)
797,876

368,473

1,244,100

2,077,970

1,030,923

260
%
208
%
2015
423,670

261,171

550,910

727,222

481,992

172
%
160
%
2016
351,499

306,747

524,318

584,620

512,551

166
%
167
%
2017 YTD
39,537

38,942

62,965

64,050

62,965

162
%
162
%
Subtotal
1,653,409

976,142

2,383,921

3,509,533

2,089,659

 
 
Europe-Insolvency
 
 
 
 
 
 
2014
10,876

3,185

8,582

18,501

7,366

170
%
129
%
2015
19,420

10,279

19,658

28,913

16,464

149
%
139
%
2016
43,093

33,749

46,663

56,099

44,375

130
%
130
%
2017 YTD
6,069

6,054

7,737

7,763

7,737

128
%
128
%
Subtotal
79,458

53,267

82,640

111,276

75,942

 
 
Total Europe
1,732,867

1,029,409

2,466,561

3,620,809

2,165,601

 
 
Total PRA Group
$
6,734,976

$
2,366,880

$
5,439,852

$
15,476,241

$
5,143,369

 
 
(1)
The amount reflected in the Purchase Price also includes the acquisition date finance receivables portfolios that were acquired through our various business acquisitions.
(2)
The Original Purchase Price Multiple represents the purchase price multiple at the end of the year of acquisition.
(3)
For our international amounts, Purchase Price is presented at the exchange rate at the end of the quarter in which the pool was purchased. In addition, any purchase price adjustments that occur throughout the life of the pool are presented at the period-end exchange rate for the respective quarter of purchase.
(4)
For our international amounts, Net Finance Receivables are presented at the March 31, 2017 exchange rate.
(5)
For our international amounts, ERC-Historical Period Exchange Rates is presented at the period-end exchange rate for the respective quarter of purchase.
(6)
For our international amounts, TEC is presented at the period-end exchange rate for the respective quarter of purchase.
(7)
For our international amounts, ERC-Current Period Exchange Rates is presented at the March 31, 2017 exchange rate.

31



Portfolio Financial Information
Year-to-date as of March 31, 2017
Amounts in thousands
Purchase Period
Purchase Price (3)
Cash
Collections
(2)
Gross Revenue (2)
Amortization (2)
Allowance (2)
Net Revenue (2)
Net Finance Receivables as of March 31, 2017 (4)
Americas-Core
 
 
 
 
 
 
 
1996-2006
$
458,636

$
2,370

$
1,840

$
530

$

$
1,840

$
3,927

2007
179,832

1,688

1,077

611


1,077

6,124

2008
166,479

1,741

992

749

75

917

6,519

2009
125,169

3,115

2,328

787

200

2,128

2,040

2010
148,217

4,831

3,505

1,326


3,505

7,158

2011
209,725

10,045

7,675

2,370


7,675

17,719

2012
254,591

12,025

7,626

4,399


7,626

35,799

2013
391,520

23,631

15,904

7,727

235

15,669

95,067

2014 (1)
406,181

34,542

22,262

12,280

217

22,045

151,074

2015
446,754

56,350

26,085

30,265

297

25,788

256,606

2016
458,288

71,889

37,859

34,030


37,859

369,988

2017 YTD
116,389

4,679

4,069

610


4,069

115,773

Subtotal
3,361,781

226,906

131,222

95,684

1,024

130,198

1,067,794

Americas-Insolvency
 
 
 
 
 
 
1996-2006
54,396

39

39



39


2007