PRA Group
PORTFOLIO RECOVERY ASSOCIATES INC (Form: 10-Q, Received: 08/05/2011 16:22:27)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011.

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 000-50058

 

 

Portfolio Recovery Associates, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   75-3078675

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

120 Corporate Boulevard, Norfolk, Virginia   23502
(Address of principal executive offices)   (zip code)

(888) 772-7326

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   x     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   x     NO   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨     NO   x

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of July 29, 2011

Common Stock, $0.01 par value   17,114,586

 

 

 


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

INDEX

 

          Page(s)  

PART I.

  

FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

     3   
  

Consolidated Balance Sheets (unaudited)
as of June 30, 2011 and December 31, 2010

     3   
  

Consolidated Income Statements (unaudited)
For the three and six months ended June 30, 2011 and 2010

     4   
  

Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
For the six months ended June 30, 2011

     5   
  

Consolidated Statements of Cash Flows (unaudited)
For the six months ended June 30, 2011 and 2010

     6   
  

Notes to Consolidated Financial Statements (unaudited)

     7-21   

Item 2.

  

Management’s Discussion and Analysis of Financial
Condition and Results of Operations

     22-55   

Item 3.

  

Quantitative and Qualitative Disclosure About Market Risk

     55   

Item 4.

  

Controls and Procedures

     55   

PART II.

  

OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     55-56   

Item 1A.

  

Risk Factors

     56   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     56   

Item 3.

  

Defaults Upon Senior Securities

     56   

Item 4.

  

(Removed and Reserved)

     56   

Item 5.

  

Other Information

     56   

Item 6.

  

Exhibits

     56   

SIGNATURES

     57   

 

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Table of Contents
Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS

June 30, 2011 and December 31, 2010

(unaudited)

(Amounts in thousands, except per share amounts)

 

     June 30,
2011
     December 31,
2010
 
Assets      

Cash and cash equivalents

   $ 25,481       $ 41,094   

Finance receivables, net

     879,515         831,330   

Accounts receivable, net

     6,683         8,932   

Income taxes receivable

     —           2,363   

Property and equipment, net

     23,810         24,270   

Goodwill

     61,678         61,678   

Intangible assets, net

     15,965         18,466   

Other assets

     8,485         7,775   
  

 

 

    

 

 

 

Total assets

   $ 1,021,617       $ 995,908   
  

 

 

    

 

 

 
Liabilities and Stockholders’ Equity      

Liabilities:

     

Accounts payable

   $ 5,326       $ 3,227   

Accrued expenses and other liabilities

     4,389         4,904   

Income taxes payable

     2,877         —     

Accrued payroll and bonuses

     10,563         15,445   

Net deferred tax liability

     188,142         164,971   

Line of credit

     250,000         300,000   

Long-term debt

     1,856         2,396   
  

 

 

    

 

 

 

Total liabilities

     463,153         490,943   
  

 

 

    

 

 

 

Commitments and contingencies (Note 12)

     

Redeemable noncontrolling interest

     16,068         14,449   
  

 

 

    

 

 

 

Stockholders’ equity:

     

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

     —           —     

Common stock, par value $0.01, 60,000 authorized shares, 17,115 issued and outstanding shares at June 30, 2011, and 30,000 authorized shares, 17,064 issued and outstanding shares at December 31, 2010

     171         171   

Additional paid-in capital

     166,723         163,538   

Retained earnings

     375,502         326,807   
  

 

 

    

 

 

 

Total stockholders’ equity

     542,396         490,516   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 1,021,617       $ 995,908   
  

 

 

    

 

 

 

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

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED INCOME STATEMENTS

For the three and six months ended June 30, 2011 and 2010

(unaudited)

(Amounts in thousands, except per share amounts)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2011     2010     2011     2010  

Revenues:

        

Income recognized on finance receivables, net

   $ 100,303      $ 76,920      $ 196,277      $ 144,871   

Fee income

     14,492        16,109        30,295        31,536   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     114,795        93,029        226,572        176,407   

Operating expenses:

        

Compensation and employee services

     34,815        30,872        68,968        60,513   

Legal collection fees

     5,970        4,131        11,719        8,203   

Legal collection costs

     9,879        6,430        19,218        12,069   

Agent fees

     1,724        2,927        4,362        6,554   

Outside fees and services

     4,066        3,155        7,481        5,984   

Communications

     5,706        4,102        12,020        9,160   

Rent and occupancy

     1,438        1,297        2,835        2,549   

Depreciation and amortization

     3,316        3,206        6,532        5,756   

Other operating expenses

     3,501        2,580        6,353        4,854   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     70,415        58,700        139,488        115,642   

Gain on sale of property

     1,157        —          1,157        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     45,537        34,329        88,241        60,765   

Other income and (expense):

        

Interest income

     —          —          —          35   

Interest expense

     (2,635     (2,177     (5,502     (4,357
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     42,902        32,152        82,739        56,443   

Provision for income taxes

     17,326        12,474        33,454        21,960   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 25,576      $ 19,678      $ 49,285      $ 34,483   

Less net income attributable to redeemable noncontrolling interest

     2        150        590        155   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Portfolio Recovery Associates, Inc.

   $ 25,574      $ 19,528      $ 48,695      $ 34,328   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 1.49      $ 1.15      $ 2.85      $ 2.07   

Diluted

   $ 1.48      $ 1.14      $ 2.83      $ 2.06   

Weighted average number of shares outstanding:

        

Basic

     17,108        16,970        17,100        16,581   

Diluted

     17,225        17,080        17,212        16,641   

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

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the six months ended June 30, 2011

(unaudited)

(Amounts in thousands)

 

                   Additional            Total  
     Common Stock      Paid-in     Retained      Stockholders’  
     Shares      Amount      Capital     Earnings      Equity  

Balance at December 31, 2010

     17,064       $ 171       $ 163,538      $ 326,807       $ 490,516   

Net income attributable to Portfolio Recovery Associates, Inc.

     —           —           —          48,695         48,695   

Exercise of stock options and vesting of nonvested shares

     51         —           149        —           149   

Amortization of share-based compensation

     —           —           4,622        —           4,622   

Income tax benefit from share-based compensation

     —           —           459        —           459   

Adjustment of the noncontrolling interest measurement amount

     —           —           (2,045     —           (2,045
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balance at June 30, 2011

     17,115       $ 171       $ 166,723      $ 375,502       $ 542,396   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

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

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 30, 2011 and 2010

(unaudited)

(Amounts in thousands)

 

     Six Months Ended  
     June 30,  
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 49,285      $ 34,483   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Amortization of share-based compensation

     4,622        2,074   

Depreciation and amortization

     6,532        5,756   

Deferred tax expense

     23,171        21,881   

Gain on sale of property

     (1,157     —     

Changes in operating assets and liabilities:

    

Other assets

     (711     351   

Accounts receivable

     2,249        1,010   

Accounts payable

     2,100        1,337   

Income taxes

     5,240        2,583   

Accrued expenses

     528        325   

Accrued payroll and bonuses

     (4,882     (2,509
  

 

 

   

 

 

 

Net cash provided by operating activities

     86,977        67,291   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (3,682     (4,784

Proceeds from sale of property

     1,267        —     

Acquisition of finance receivables, net of buybacks

     (194,906     (184,874

Collections applied to principal on finance receivables

     146,721        102,730   

Business acquisitions, net of cash acquired

     —          (23,000

Contingent payment made for business acquisition

     —          (104
  

 

 

   

 

 

 

Net cash used in investing activities

     (50,600     (110,032
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of options

     149        57   

Income tax benefit from share-based compensation

     459        113   

Payments of liability-classified contingent consideration

     —          (1,000

Proceeds from line of credit

     2,000        99,000   

Principal payments on line of credit

     (52,000     (128,800

Proceeds from stock offering, net of offering costs

     —          71,688   

Distributions paid to noncontrolling interest

     (2,059     —     

Principal payments on long-term debt

     (539     (332
  

 

 

   

 

 

 

Net cash (used in)/provided by financing activities

     (51,990     40,726   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (15,613     (2,015

Cash and cash equivalents, beginning of year

     41,094        20,265   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 25,481      $ 18,250   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 5,256      $ 4,318   

Cash paid for income taxes

     6,784        73   

Noncash investing and financing activities:

    

Distributions payable to noncontrolling interest

   $ 247      $ —     

Adjustment of the noncontrolling interest measurement amount

     2,045        —     

Common stock issued for acquisition

     —          4,950   

Net unrealized change in fair value of derivative instrument

     —          61   

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

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Organization and Business:

Portfolio Recovery Associates, LLC (“PRA”) was formed on March 20, 1996. Portfolio Recovery Associates, Inc. (“PRA Inc”) was formed in August 2002. On November 8, 2002, PRA Inc completed its initial public offering (“IPO”) of common stock. In connection with the IPO, all of the membership units and warrants of PRA were exchanged on a one to one basis for shares of a single class of common stock of PRA Inc and warrants to purchase shares of PRA Inc common stock, respectively. PRA Inc owns all outstanding membership units of PRA, PRA Holding I, LLC (“PRA Holding I”), PRA Holding II, LLC (“PRA Holding II”), PRA Holding III, LLC (“PRA Holding III”), PRA Receivables Management, LLC (“PRA Receivables Management”), PRA Location Services, LLC (“PLS”) (formerly referred to as “IGS”), PRA Government Services, LLC (d/b/a RDS) (“RDS”) and MuniServices, LLC (d/b/a PRA Government Services) (“MuniServices”). On March 15, 2010, PRA Inc acquired 62% of the membership units of Claims Compensation Bureau, LLC (“CCB”). The business of PRA Inc, a Delaware corporation, and its subsidiaries (collectively, the “Company”) revolves around the detection, collection, and processing of both unpaid and normal-course receivables originally owed to credit grantors, governments, retailers and others. The Company’s primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. These accounts are purchased from sellers of finance receivables. Accounts not in a bankruptcy status upon purchase (referred to as “Core” accounts) are collected by a highly skilled staff whose purpose is to locate and contact customers and arrange payment or resolution of their debts. Purchased bankruptcy accounts are managed through the bankruptcy courts and trustees, which are overseen by the US Trustee Program, a component of the Department of Justice. Trustees collect payments directly from individual debtors per the bankruptcy plan and forward them to the Company. The Company, through its Litigation Department, collects accounts judicially, either by using its own attorneys or by contracting with independent attorneys throughout the country through whom the Company takes legal action to satisfy consumer debts. The Company also services receivables on behalf of clients on either a commission or transaction-fee basis. Clients include entities in the financial services, auto, retail, utility, health care and government sectors. Services provided to these clients include obtaining location information for clients in support of their collection activities (known as skip tracing), and the management of both delinquent and non-delinquent receivables for government entities. In addition, through its CCB subsidiary, the Company provides class action claims settlement recovery services and related payment processing to its corporate clients.

The consolidated financial statements of the Company include the accounts of PRA Inc, PRA, PRA Holding I, PRA Holding II, PRA Holding III, PRA Receivables Management, PLS, RDS, MuniServices and CCB. 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 receivables management, based on similarities among the operating units, including homogeneity of services, service delivery methods and use of technology.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated balance sheet as of June 30, 2011, its consolidated income statements for the three and six months ended June 30, 2011 and 2010, its consolidated statement of changes in stockholders’ equity for the six months ended June 30, 2011, and its consolidated statements of cash flows for the six months ended June 30, 2011 and 2010. The consolidated income statements of the Company for the three and six months ended June 30, 2011 may not be indicative of future results. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed for the year ended December 31, 2010.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

2. Finance Receivables, net:

The Company’s principal business consists of the acquisition and collection of pools of accounts that have experienced deterioration of credit quality between origination and the Company’s acquisition of the accounts. The amount paid for any pool reflects the Company’s determination that it is probable the Company will be unable to collect all amounts due according to an account’s contractual terms. At acquisition, the Company reviews the portfolio both by account and aggregate pool to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that the Company will be unable to collect all amounts due according to the account’s contractual terms. If both conditions exist, the Company determines whether each such account is to be accounted for individually or whether such accounts will be assembled into pools based on common risk characteristics. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio and subsequently aggregates pools of accounts. The Company determines the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference) based on the Company’s proprietary acquisition models. The remaining amount, representing the excess of the pool’s cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the estimated remaining life of the pool (accretable yield).

The Company accounts for its investment in finance receivables under the guidance of FASB ASC Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). Under ASC 310-30, static pools of accounts may be established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, payments applied to principal and loss provision. Once a static pool is established for a calendar quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). ASC 310-30 requires that the excess of the contractual cash flows over expected cash flows, based on the Company’s estimates derived from its proprietary collection models, not be recognized as an adjustment of revenue or expense or on the balance sheet. ASC 310-30, utilizing the interest method, initially freezes the yield estimated when the accounts are purchased as the basis for subsequent impairment testing. Significant increases in actual, or expected future cash flows may be recognized prospectively through an upward adjustment of the yield over a portfolio’s remaining life. Any increase to the yield then becomes the new benchmark for impairment testing. Under ASC 310-30, rather than lowering the estimated yield if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current yield and shown as a reduction in revenue in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables, net, on the consolidated balance sheet. Income on finance receivables is accrued quarterly based on each static pool’s effective yield. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. This reduction in carrying value is defined as payments applied to principal (also referred to as finance receivable amortization). Likewise, cash flows that are less than the interest accrual will increase, or “accrete,” the carrying balance. The Company generally does not record accretion in the first six to twelve months of the estimated life of the pool; accordingly, the Company utilizes either the cost recovery method or cash method when necessary to prevent accretion as permitted by ASC 310-30. The yield is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Under the cash method, revenue is recognized as it would be under the interest method up to the amount of cash collections. Additionally, the Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. These cost recovery pools are not aggregated with other portfolios. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above. At June 30, 2011 and 2010, the Company had unamortized purchased principal (purchase price) in pools accounted for under the cost recovery method of $1.2 million and $2.1 million, respectively.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The Company establishes valuation allowances, if necessary, for acquired accounts subject to ASC 310-30 to reflect only those losses incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the accounts. At June 30, 2011 and 2010, the Company had a valuation allowance against its finance receivables of $82,730,000 and $64,445,000, respectively.

The Company implements the accounting for income recognized on finance receivables under ASC 310-30 as follows. The Company creates each accounting pool using its projections of estimated cash flows and expected economic life. The Company then computes the effective yield that fully amortizes the pool to the end of its expected economic life based on the current projections of estimated cash flows using the interest method. As actual cash flow results are recorded, the Company balances those results to the data contained in its proprietary models to ensure accuracy, then reviews each accounting pool watching for trends, actual performance versus projections and curve shape (a graphical depiction of the timing of cash flows), sometimes re-forecasting future cash flows utilizing the Company’s statistical models. The review process is primarily performed by the Company’s finance staff; additionally, the Company’s operational and statistical staffs may also be involved. To the extent there is overperformance, the Company will either increase the yield or release the allowance and consider increasing future cash projections, if persuasive evidence indicates that the overperformance is considered to be a significant betterment. If the overperformance is considered more of an acceleration of cash flows (a timing difference), the Company will adjust estimated future cash flows downward, which effectively extends the amortization period, or take no action at all if the amortization period is reasonable and falls within the pool’s expected economic life. In either case, the yield may or may not be increased due to the time value of money (accelerated cash collections). To the extent there is underperformance, the Company will record an allowance if the underperformance is significant and will also consider revising estimated future cash flows based on current period information, or take no action if the pool’s amortization period is reasonable and falls within the currently projected economic life.

The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of accounts. These fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of the portfolio using the interest method. The balance of the unamortized capitalized fees at June 30, 2011 and 2010 was $3,022,700 and $3,161,505, respectively. During the three and six months ended June 30, 2011, the Company capitalized $130,400 and $386,178, respectively, of these direct acquisition fees. During the three and six months ended June 30, 2010 the Company capitalized $285,210 and $446,831, respectively, of these direct acquisition fees. During the three and six months ended June 30, 2011, the Company amortized $314,405 and $658,993, respectively, of these direct acquisition fees. During the three and six months ended June 30, 2010 the Company amortized $246,305 and $517,252, respectively, of these direct acquisition fees.

The agreements to purchase the aforementioned receivables include general representations and warranties from the sellers covering account holder death or bankruptcy and accounts settled or disputed prior to sale. The representation and warranty period permitting the return of these accounts from the Company to the seller is typically 90 to 180 days. Any funds received from the seller of finance receivables as a return of purchase price are referred to as buybacks. Buyback funds are applied against the finance receivable balance received and are not included in the Company’s cash collections from operations. In some cases, the seller will replace the returned accounts with new accounts in lieu of returning the purchase price. In that case, the old account is removed from the pool and the new account is added.

Changes in finance receivables, net for the three and six months ended June 30, 2011 and 2010 were as follows (amounts in thousands):

 

     Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
     June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  

Balance at beginning of period

   $ 866,992      $ 742,484      $ 831,330      $ 693,462   

Acquisitions of finance receivables, net of buybacks

     88,501        84,608        194,906        184,874   

Cash collections

     (176,281     (128,406     (342,998     (247,601

Income recognized on finance receivables, net

     100,303        76,920        196,277        144,871   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash collections applied to principal

     (75,978     (51,486     (146,721     (102,730
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 879,515      $ 775,606      $ 879,515      $ 775,606   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

9


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

At the time of acquisition, the life of each pool is generally estimated to be between 72 to 96 months based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon current projections, cash collections applied to principal on finance receivables as of June 30, 2011 are estimated to be as follows for the twelve months in the periods ending (amounts in thousands):

 

June 30, 2012

   $ 257,297   

June 30, 2013

     235,331   

June 30, 2014

     204,965   

June 30, 2015

     128,445   

June 30, 2016

     47,192   

June 30, 2017

     6,285   
  

 

 

 
   $ 879,515   
  

 

 

 

During the three and six months ended June 30, 2011, the Company purchased approximately $1.41 billion and $2.90 billion, respectively, in face value of charged-off consumer receivables. During the three and six months ended June 30, 2010, the Company purchased approximately $1.67 billion and $3.56 billion, respectively, in face value of charged-off consumer receivables. At June 30, 2011, the estimated remaining collections (“ERC”) on the receivables purchased in the three and six months ended June 30, 2011 were $173.9 million and $373.6 million, respectively. At June 30, 2011, ERC on the receivables purchased in the three and six months ended June 30, 2010 were $142.9 million and $295.0 million, respectively.

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 to be earned by the Company based on its proprietary buying models. Reclassifications from nonaccretable difference to accretable yield primarily result from the Company’s increase in its estimate of future cash flows. Reclassifications to nonaccretable difference from accretable yield result from the Company’s decrease in its estimates of future cash flows and allowance charges that exceed the Company’s increase in its estimate of future cash flows. Changes in accretable yield for the three and six months ended June 30, 2011 and 2010 were as follows (amounts in thousands):

 

     Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
     June 30, 2011     June 30, 2010     June 30, 2011     June 30, 2010  

Balance at beginning of period

   $ 926,278      $ 793,645      $ 892,188      $ 721,984   

Income recognized on finance receivables, net

     (100,303     (76,920     (196,277     (144,871

Additions

     91,666        105,365        201,168        227,875   

Reclassifications from nonaccretable difference

     18,849        13,813        39,411        30,915   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 936,490      $ 835,903      $ 936,490      $ 835,903   
  

 

 

   

 

 

   

 

 

   

 

 

 

ASC 310-30 requires that a valuation allowance be recorded for significant decreases in expected cash flows or change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. In any given period, the Company may be required to record valuation allowances due to pools of receivables underperforming expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability of purchased pools of defaulted consumer receivables would include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relates to the collection and movement of accounts on both the collection floor of the Company and external channels), as well as decreases in productivity related to turnover and tenure of the Company’s collection staff. The following is a summary of activity within the Company’s valuation allowance account, all of which relates to loans acquired with deteriorated credit quality, for the three and six months ended June 30, 2011 and 2010 (amounts in thousands):

 

     Three Months Ended June 30,  
     2011     2010  
     Core Portfolio  (1)     Purchased Bankruptcy
Portfolio (2)
    Total     Core Portfolio  (1)     Purchased Bankruptcy
Portfolio (2)
    Total  

Valuation allowance - finance receivables:

            

Beginning balance

   $ 71,830      $ 8,617      $ 80,447      $ 53,105      $ 5,020      $ 58,125   

Allowance charges

     2,000        500        2,500        6,375        50        6,425   

Reversal of previous recorded allowance charges

     (200     (17     (217     (50     (55     (105
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net allowance charge

     1,800        483        2,283        6,325        (5     6,320   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 73,630      $ 9,100      $ 82,730      $ 59,430      $ 5,015      $ 64,445   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance receivables, net:

   $ 437,644      $ 441,871      $ 879,515      $ 405,041      $ 370,565      $ 775,606   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

     Six Months Ended June 30,  
     2011     2010  
     Core Portfolio  (1)     Purchased Bankruptcy
Portfolio (2)
    Total     Core Portfolio  (1)     Purchased Bankruptcy
Portfolio (2)
    Total  

Valuation allowance - finance receivables:

            

Beginning balance

   $ 70,030      $ 6,377      $ 76,407      $ 47,580      $ 3,675      $ 51,255   

Allowance charges

     4,850        2,950        7,800        11,900        1,400        13,300   

Reversal of previous recorded allowance charges

     (1,250     (227     (1,477     (50     (60     (110
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net allowance charge

     3,600        2,723        6,323        11,850        1,340        13,190   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 73,630      $ 9,100      $ 82,730      $ 59,430      $ 5,015      $ 64,445   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance receivables, net:

   $ 437,644      $ 441,871      $ 879,515      $ 405,041      $ 370,565      $ 775,606   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

3. Accounts Receivable, net:

Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, the current receivables aging, and current payment patterns. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The balance of the allowance for doubtful accounts at June 30, 2011 and December 31, 2010 was $2.6 million and $2.5 million, respectively. The Company does not have any off balance sheet credit exposure related to its customers.

 

4. Line of Credit:

On December 20, 2010, the Company entered into a credit agreement with Bank of America, N.A., as administrative agent, and a syndicate of lenders named therein (the “Credit Agreement”). Under the terms of the Credit Agreement, the credit facility includes an aggregate principal amount available of $407.5 million which consists of a $50 million fixed rate loan that matures on May 4, 2012, which was transferred from the Company’s then existing credit agreement, and a $357.5 million revolving credit facility that matures on December 20, 2014. The revolving credit facility will be automatically increased by $50 million upon the maturity and repayment of the fixed rate loan. The fixed rate loan bears interest at a rate of 6.8% per annum, payable monthly in arrears. The revolving loans accrue interest, at the option of the Company, at either the base rate plus 1.75% per annum or the Eurodollar rate (as defined in the Credit Agreement) for the applicable term plus 2.75% per annum. The base rate is

 

11


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

the highest of (a) the Federal Funds Rate plus 0.50%, (b) Bank of America’s prime rate, and (c) the Eurodollar rate plus 1.00%. Interest is payable on base rate loans quarterly in arrears and on Eurodollar loans in arrears on the last day of each interest period or, if such interest period exceeds three months, every three months. The Company’s revolving credit facility includes a $20 million swingline loan sublimit and a $20 million letter of credit sublimit. It also contains an accordion loan feature that allows the Company to request an increase of up to $142.5 million in the amount available for borrowing under the revolving credit facility, whether from existing or new lenders, subject to terms of the Credit Agreement. No existing lender is obligated to increase its commitment. The Credit Agreement is secured by a first priority lien on substantially all of the Company’s assets. The Credit Agreement contains restrictive covenants and events of default including the following:

 

   

borrowings may not exceed 30% of the ERC of all its eligible asset pools plus 75% of its eligible accounts receivable;

 

   

the consolidated leverage ratio (as defined in the Credit Agreement) cannot exceed 2.0 to 1.0 as of the end of any fiscal quarter;

 

   

consolidated Tangible Net Worth (as defined in the Credit Agreement) must equal or exceed $309,452,000 plus 50% of positive consolidated net income for each fiscal quarter beginning December 31, 2010, plus 50% of the net proceeds of any equity offering;

 

   

capital expenditures during any fiscal year cannot exceed $20 million;

 

   

cash dividends and distributions during any fiscal year cannot exceed $20 million;

 

   

stock repurchases during the term of the agreement cannot exceed $100 million;

 

   

permitted acquisitions (as defined in the Credit Agreement) during any fiscal year cannot exceed $100 million;

 

   

the Company must maintain positive consolidated income from operations (as defined in the Credit Agreement) during any fiscal quarter; and

 

   

restrictions on changes in control.

The revolving credit facility also bears an unused commitment fee of 0.375% per annum, payable quarterly in arrears.

At June 30, 2011, the Company’s borrowings under its revolving credit facility consisted of 30-day Eurodollar rate loans with a weighted average annual interest rate equal to 2.94%.

The Company had $250.0 million and $300.0 million of borrowings outstanding on its credit facility as of June 30, 2011 and December 31, 2010, respectively, of which $50 million represented borrowing under the non-revolving fixed rate loan at both dates.

The Company was in compliance with all covenants of its credit facility as of June 30, 2011 and December 31, 2010.

 

5. Long-Term Debt:

On February 6, 2009, the Company entered into a commercial loan agreement to finance computer software and equipment purchases in the amount of $2,036,114. The loan is collateralized by the related computer software and equipment. The loan is a three year loan with a fixed rate of 4.78% with monthly installments, including interest, of $60,823 beginning on March 31, 2009, and it matures on February 28, 2012.

 

12


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

On December 15, 2010, the Company entered into a commercial loan agreement to finance computer software and equipment purchases in the amount of $1,569,016. The loan is collateralized by the related computer software and equipment. The loan is a three year loan with a fixed rate of 3.69% with monthly installments, including interest, of $46,108 beginning on January 15, 2011, and it matures on December 15, 2013.

 

6. Property and Equipment, net:

Property and equipment, at cost, consisted of the following as of the dates indicated (amounts in thousands):

 

     June 30,
2011
    December 31,
2010
 

Software

   $ 23,339      $ 21,014   

Computer equipment

     11,417        10,697   

Furniture and fixtures

     6,184        6,147   

Equipment

     7,557        7,498   

Leasehold improvements

     5,092        4,574   

Building and improvements

     5,701        6,045   

Land

     902        992   

Accumulated depreciation and amortization

     (36,382     (32,697
  

 

 

   

 

 

 

Property and equipment, net

   $ 23,810      $ 24,270   
  

 

 

   

 

 

 

Depreciation and amortization expense relating to property and equipment, for the three and six months ended June 30, 2011 was $2,066,010 and $4,032,019, respectively. Depreciation and amortization expense relating to property and equipment, for the three and six months ended June 30, 2010 was $1,787,866 and $3,500,170, respectively.

The Company, in accordance with the guidance of FASB ASC Topic 350-40 “Internal-Use Software” (“ASC 350-40”), capitalizes qualifying computer software costs incurred during the application development stage and amortizes them over their estimated useful life of three to seven years on a straight-line basis beginning when the project is completed. Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred. The Company’s policy provides for the capitalization of certain direct payroll costs for employees who are directly associated with internal use computer software projects, as well as external direct costs of services associated with developing or obtaining internal use software. Capitalizable personnel costs are limited to the time directly spent on such projects. As of June 30, 2011 and December 31, 2010, the Company has incurred and capitalized $4,748,168 and $4,188,160, respectively, of these direct payroll costs and external direct costs related to software developed for internal use. Of these costs, $862,874 is for projects that are in the development stage and, therefore are a component of “Other Assets.” Once the projects are completed, the costs will be transferred to Software and amortized over their estimated useful life of three to seven years. Amortization expense for the three and six months ended June 30, 2011 was $194,505 and $351,574, respectively. Amortization expense for the three and six months ended June 30, 2010 was $103,297 and $162,829, respectively. The remaining unamortized costs relating to internally developed software at June 30, 2011 and 2010 were $2,859,901 and $2,356,568, respectively.

 

7. Redeemable Noncontrolling Interest:

In accordance with ASC 810, the Company has consolidated all financial statement accounts of CCB in its consolidated balance sheets as of June 30, 2011 and December 31, 2010, and its consolidated income statements for the three and six months ended June 30, 2011 and for the period from March 15, 2010 (the date of acquisition) through June 30, 2010. The redeemable noncontrolling interest amount is separately stated on the consolidated balance sheets and represents the 38% interest in CCB not owned by the Company. In addition, net income attributable to the noncontrolling interest is stated separately in the consolidated income statements for the three and six months ended June 30, 2011 and for the period from March 15, 2010 through June 30, 2010.

 

13


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The Company applies the provisions of FASB ASC Topic 480-10-S99 “Distinguishing Liabilities from Equity” (“ASC 480-10-S99”), which provides guidance on the accounting for equity securities that are subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. The noncontrolling interest “put” arrangement is accounted for under ASC 480-10-S99, as redemption under the “put” arrangement is outside the control of the Company. As such, the redeemable noncontrolling interest is recorded outside of “permanent” equity. The Company measures the redeemable noncontrolling interest at the greater of its ASC 480-10-S99 measurement amount (estimated redemption value of the “put” option embedded in the noncontrolling interest) or its measurement amount under the guidance of ASC 810. The ASC 810 measurement amount includes adjustments for the noncontrolling interest’s pro-rata share of earnings, losses and distributions, pursuant to the limited liability company agreement of CCB. Adjustments to the measurement amount are recorded to stockholders’ equity. The Company used a present value calculation to estimate the redemption value of the “put” option as of the reporting date. As such, for the three and six months ended June 30, 2011, the Company increased the redeemable noncontrolling interest by $1.1 million and $2.0 million, respectively, with a corresponding reduction of stockholders’ equity. If material, the Company adjusts the numerator of earnings per share calculations for the current period change in the excess of the noncontrolling interest’s ASC 480-10-S99 measurement amount over the greater of its ASC 810 measurement amount or the estimated fair value of the noncontrolling interest. Although the noncontrolling interest was redeemable by the Company as of the reporting date, it was not yet redeemable by the holder of the “put” option. The estimated redemption value of the noncontrolling interest, as if it were currently redeemable by the holder of the put option under the terms of the put arrangement, was $22,800,000 as of June 30, 2011 and December 31, 2010.

The following table represents the changes in the redeemable noncontrolling interest for the period from March 15, 2010 (the acquisition date) to June 30, 2011 (amounts in thousands):

 

Acquisition date fair value of redeemable noncontrolling interest

   $ 15,323   

Net income attributable to redeemable noncontrolling interest

     417   

Distributions paid or accrued

     (1,291
  

 

 

 

Redeemable noncontrolling interest at December 31, 2010

     14,449   

Net income attributable to redeemable noncontrolling interest

     590   

Distributions paid or accrued

     (1,016

Adjustment of the noncontrolling interest measurement amount

     2,045   
  

 

 

 

Redeemable noncontrolling interest at June 30, 2011

   $ 16,068   
  

 

 

 

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

 

8. Goodwill and Intangible Assets, net:

In connection with the Company’s business acquisitions, the Company purchased certain tangible and intangible assets. Intangible assets purchased included client and customer relationships, non-compete agreements, trademarks and goodwill. In accordance FASB ASC Topic 350 “Intangibles-Goodwill and Other” (“ASC 350”), the Company is amortizing its intangible assets over their estimated useful lives.

The combined original weighted average amortization period is 8.1 years. The Company reviews these assets at least annually for impairment. Total amortization expense was $1,250,181 and $2,500,362 for the three and six months ended June 30, 2011, respectively. Total amortization expense was $1,418,211 and $2,256,275 for the three and six months ended June 30, 2010, respectively. In addition, pursuant to ASC 350, goodwill is not amortized but rather is reviewed at least annually for impairment. During the fourth quarter of 2010, the Company underwent its annual review of goodwill. Based upon the results of this review, which was conducted as of October 1, 2010, no impairment charges to goodwill or the other intangible assets were necessary as of the date of this review. The Company believes that nothing has occurred since the review was performed through June 30, 2011 that would indicate a triggering event and thereby necessitate an impairment charge to goodwill or the other intangible assets. The Company expects to perform its next annual goodwill review during the fourth quarter of 2011. At June 30, 2011 and December 31, 2010, the carrying value of goodwill was $61.7 million.

 

14


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

9. Share-Based Compensation:

The Company has a stock option and nonvested share plan. The Company created the 2002 Stock Option Plan (the “Plan”) on November 7, 2002. The Plan was amended in 2004 (the “Amended Plan”) to enable the Company to issue nonvested shares of stock to its employees and directors. On March 19, 2010, the Company adopted a 2010 Stock Plan, which was approved by its shareholders at the 2010 Annual Meeting. The 2010 Stock Plan is a further amendment to the Amended Plan, and contains, among other things, specific performance metrics with respect to performance-based stock awards. Up to 2,000,000 shares of common stock may be issued under the 2010 Stock Plan. The 2010 Stock Plan expires on November 7, 2012.

The Company follows the provisions of FASB ASC Topic 718 “Compensation-Stock Compensation” (“ASC 718”). As of June 30, 2011, total future compensation costs related to nonvested awards of nonvested shares (not including nonvested shares granted under the Long-Term Incentive Program (“LTI”)) is estimated to be $3.9 million with a weighted average remaining life for all nonvested shares of 2.2 years (not including nonvested shares granted under the LTI Programs). As of June 30, 2011, there are no future compensation costs related to stock options and there are no remaining vested stock options to be exercised. Based upon historical data, the Company used an annual forfeiture rate of 14% for stock options and 15-40% for nonvested shares for most of the employee grants. Grants made to key employees and directors of the Company were assumed to have no forfeiture rates associated with them due to the historically low turnover among this group.

Total share-based compensation expense was $2,008,017 and $4,622,218 for the three and six months ended June 30, 2011, respectively. Total share-based compensation expense was $1,194,006 and $2,073,886 for the three and six months ended June 30, 2010, respectively. Tax benefits resulting from tax deductions in excess of share-based compensation expense recognized under the provisions of ASC 718 (windfall tax benefits) are credited to additional paid-in capital in the Company’s Consolidated Balance Sheets. Realized tax shortfalls, if any, are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense. The total tax benefit realized from share-based compensation was $506,973 and $1,475,609 for the three and six months ended June 30, 2011, respectively. The total tax benefit realized from share-based compensation was $343,799 and $467,586 for the three and six months ended June 30, 2010, respectively.

Stock Options

All options issued under the Amended Plan vest ratably over five years. Granted options expire seven years from the applicable grant date. Options granted to a single person cannot exceed 200,000 in a single year. All of the stock options which have been granted under the Amended Plan were granted to employees of the Company, except for 40,000 which were granted to non-employee directors. The Company granted no options during the three or months ended June 30, 2011 and 2010. The total intrinsic value of options exercised during the three and six months ended June 30, 2011 was approximately $224,000. The total intrinsic value of options exercised during the three and six months ended June 30, 2010 was approximately $76,640. At June 30, 2011, 895,000 options had been granted under the Amended Plan, all of which have either been cancelled, expired or exercised. There were no antidilutive options outstanding for the three and six months ended June 30, 2011 and 2010, respectively.

The following summarizes all option related transactions from December 31, 2009 through June 30, 2011 (amounts in thousands, except per share amounts):

 

     Options
Outstanding
    Weighted-Average
Exercise Price  Per Share
     Weighted-Average
Fair Value  Per Share
 

December 31, 2009

     7      $ 29.41       $ 2.70   

Exercised

     (2     28.45         2.92   
  

 

 

   

 

 

    

 

 

 

December 31, 2010

     5        29.79         2.62   

Exercised

     (5     29.79         2.62   
  

 

 

   

 

 

    

 

 

 

June 30, 2011

     —        $ —         $ —     
  

 

 

   

 

 

    

 

 

 

 

15


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The Company utilizes the Black-Scholes option pricing model to calculate the value of the stock options when granted. This model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options. In addition, changes to the subjective input assumptions can result in materially different fair market value estimates. Therefore, the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options.

Nonvested Shares

With the exception of the awards made pursuant to the LTI Program and a few employee and director grants, the terms of the nonvested share awards are similar to those of the stock option awards, wherein the nonvested shares vest ratably over five years and are expensed over their vesting period.

The following summarizes all nonvested share transactions (excluding shares granted under the LTI Programs) from December 31, 2009 through June 30, 2011 (amounts in thousands, except per share amounts):

 

     Nonvested Shares
Outstanding
    Weighted-Average
Price at Grant  Date
 

December 31, 2009

     81      $ 40.24   

Granted

     57        53.06   

Vested

     (37     41.46   

Cancelled

     (10     39.61   
  

 

 

   

 

 

 

December 31, 2010

     91        47.89   

Granted

     43        76.11   

Vested

     (45     56.80   

Cancelled

     (3     42.19   
  

 

 

   

 

 

 

June 30, 2011

     86      $ 57.48   
  

 

 

   

 

 

 

The total grant date fair value of shares vested during the three and six months ended June 30, 2011 was $853,978 and $2,577,130, respectively. The total grant date fair value of shares vested during the three and six months ended June 30, 2010 was $566,754 and $890,322, respectively.

Long-Term Incentive Programs

Pursuant to the Amended Plan, on January 20, 2009, January 14, 2010 and January 14, 2011, the Compensation Committee approved the grant of 108,720, 53,656 and 73,914 performance and market based nonvested shares, respectively. All shares granted under the LTI Programs were granted to key employees of the Company. The 2009 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon diluted earnings per share (“EPS”) totals for 2009,

 

16


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

the return on owners’ equity for the three year period beginning on January 1, 2009 and ending December 31, 2011, and the relative total shareholder return as compared to a peer group for the same three year period. For each component, the number of shares vested can double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2009. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome. The EPS component of the 2009 plan was not achieved and therefore no compensation expense was recognized relative to this component.

The 2010 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon diluted EPS totals for 2010, the return on owners’ equity for the three year period beginning on January 1, 2010 and ending December 31, 2012, and the relative total shareholder return as compared to a peer group for the same three year period. For each component, the number of shares vested can double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The EPS component of the 2010 plan was achieved at 190% and these shares will vest at 50% on both December 31, 2011 and December 31, 2012. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2010. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome.

The 2011 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) for 2011, the return on owners’ equity for the three year period beginning on January 1, 2011 and ending December 31, 2013, and the relative total shareholder return as compared to a peer group for the same three year period. For each component, the number of shares vested can double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2011. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome.

At June 30, 2011, total future compensation costs, assuming the current estimated levels are achieved, related to nonvested share awards granted under the 2009, 2010 and 2011 LTI Programs are estimated to be approximately $8.6 million. The Company assumed a 7.5% forfeiture rate for this grant and the remaining shares have a weighted average life of 1.5 years at June 30, 2011.

 

10. Income Taxes:

The Company follows the guidance of FASB ASC Topic 740 “Income Taxes” (“ASC 740”) as it relates to the provision for income taxes and uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. There were no unrecognized tax benefits at both June 30, 2011 and 2010.

The Company was notified on June 21, 2007 that it was being examined by the Internal Revenue Service for the 2005 calendar year. The IRS concluded the audit and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes, for tax years ended December 31, 2007, 2006 and 2005. The IRS has asserted that cost recovery for tax revenue recognition does not clearly reflect taxable income and that unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current deduction. On April 22, 2009, the Company filed a formal protest of the findings contained in the examination report prepared by the IRS. The Company believes it has sufficient support for the technical merits of its positions and that it is more-likely-than-not these positions will ultimately be sustained; therefore, a reserve for uncertain tax positions is not necessary for these tax positions. The company has two courses of action if it is unsuccessful in its appeal with the IRS. With the first course, the Company can pay the assessed tax and interest and file a refund suit in US District Court. Alternatively, the Company can file a petition in Tax Court, which does not require a payment up front of the assessed tax and

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

interest. If the Company is unsuccessful in either course, it can appeal to the federal Circuit Court of Appeals. Payment of the assessed taxes and interest could possibly require additional financing from other sources. On April 6, 2011, the Company was notified verbally by the IRS that the audit period will be expanded to include the tax years ended December 31, 2009 and 2008.

At June 30, 2011, the tax years subject to examination by the major taxing jurisdictions, including the Internal Revenue Service, are 2003, 2005 and subsequent years. The 2003 tax year remains open to examination because of a net operating loss that originated in that year but was not fully utilized until the 2005 tax year. The examination periods for the 2007, 2006 and 2005 tax years are extended through December 31, 2011.

ASC 740 requires the recognition of interest, if the tax law would require interest to be paid on the underpayment of taxes, and recognition of penalties, if a tax position does not meet the minimum statutory threshold to avoid payment of penalties. No interest or penalties were accrued or reversed in the first three or six months of 2011 or 2010.

 

11. Earnings per Share:

Basic EPS are computed by dividing net income available to common shareholders of PRA 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 stock options and nonvested share awards. Share-based awards that are contingent upon the attainment of performance goals are not included in the computation of diluted EPS until the performance goals have been attained. The dilutive effect of stock options and nonvested shares is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options and vesting of nonvested shares would be used to purchase common shares at the average market price for the period. The assumed proceeds include the windfall tax benefit that would be received upon assumed exercise. The following tables provide a reconciliation between the computation of basic EPS and diluted EPS for the three and six months ended June 30, 2011 and 2010 (amounts in thousands, except per share amounts):

 

     For the three months ended June 30,  
            2011                    2010         
     Net Income      Weighted Average
Common Shares
     EPS      Net Income      Weighted Average
Common Shares
     EPS  

Basic EPS

   $ 25,574         17,108       $ 1.49       $ 19,528         16,970       $ 1.15   

Dilutive effect of stock options and nonvested share awards

        117               110      
     

 

 

          

 

 

    

Diluted EPS

   $ 25,574         17,225       $ 1.48       $ 19,528         17,080       $ 1.14   
     

 

 

          

 

 

    
     For the six months ended June 30,  
            2011                    2010         
     Net Income      Weighted Average
Common Shares
     EPS      Net Income      Weighted Average
Common Shares
     EPS  

Basic EPS

   $ 48,695         17,100       $ 2.85       $ 34,328         16,581       $ 2.07   

Dilutive effect of stock options and nonvested share awards

        112               60      
     

 

 

          

 

 

    

Diluted EPS

   $ 48,695         17,212       $ 2.83       $ 34,328         16,641       $ 2.06   
     

 

 

          

 

 

    

There were no antidilutive options outstanding for the three or six months ended June 30, 2011 and 2010.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

12. Commitments and Contingencies:

Employment Agreements:

The Company has employment agreements, most of which expire on December 31, 2011, with all of its executive officers and with several members of its senior management group. Such agreements provide for base salary payments as well as bonuses which are based on the attainment of specific management goals. Future compensation under these agreements is approximately $8.7 million. The agreements also contain confidentiality and non-compete provisions.

Leases:

The Company is party to various operating and capital leases with respect to its facilities and equipment. For further discussion of these leases please refer to the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed for the year ended December 31, 2010.

Forward Flow Agreements:

The Company is party to several forward flow agreements that allow for the purchase of defaulted consumer receivables at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at June 30, 2011 is approximately $160.5 million.

Redeemable Noncontrolling Interest:

In connection with the Company’s acquisition of 62% of the membership units of CCB on March 15, 2010, the Company acquired the right to purchase the remaining 38% of the membership units of CCB not held by the Company at a predetermined price within the next four years. Also, Class Action Holdings, Inc. (formerly known as Claims Compensation Bureau, Inc.), the holder of the remaining 38% interest in CCB, can require the Company to purchase its interest during the period beginning on March 1, 2012 and ending on February 28, 2018. While the actual amount or timing of any future payment is unknown at this time, the maximum amount of consideration to be paid for such 38% interest is $22.8 million.

Litigation:

The Company is from time to time subject to routine legal claims and proceedings, most of which are incidental to the ordinary course of its business. The Company initiates lawsuits against customers and are occasionally countersued by them in such actions. Also, customers, either individually, as members of a class action, or through a governmental entity on behalf of customers, may initiate litigation against 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. While it is not expected that these or any other legal proceedings or claims in which the Company is involved will, either individually or in the aggregate, have a material adverse impact on the Company’s results of operations, liquidity or financial condition, it is possible that, due to unexpected future developments, an unfavorable resolution of a legal proceeding or claim could occur which may be material to the Company’s results of operations for a particular period. The matters described below fall outside of the normal parameters of the Company’s routine legal proceedings.

The Attorney General for the State of Missouri filed a purported enforcement action against PRA in 2009 that seeks relief for Missouri customers that have allegedly been injured as a result of certain collection practices of PRA. PRA has vehemently denied any wrongdoing herein and in 2010, the complaint was dismissed with prejudice. In April 2011, the Missouri Court of Appeals Eastern District affirmed the prior dismissal. The State of Missouri has since asked the appellate court for a rehearing on the matter, or alternatively to have the matter transferred to the Missouri Supreme Court. Based on the foregoing, it is not possible at this time to estimate the possible loss, if any.

The Company has been named as defendant in the following five putative class action cases, each of which alleges that the Company violated the Telephone Consumer Protection Act (“TCPA”) by calling consumers’ cellular

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

phones without their prior express consent: Allen v. Portfolio Recovery Associates, Inc. , Case No. 10-cv-2658, instituted in the United States District Court for the Southern District of California on December 23, 2010; Meyer v. Portfolio Recovery Associates, LLC , Case No. 37-2011-00083047, instituted in the Superior Court of California, San Diego County on January 3, 2011; Frydman v. Portfolio Recovery Associates, LLC , Case No. 11-cv-524, instituted in the United States District Court for the Northern District of Illinois on January 31, 2011; Bartlett v. Portfolio Recovery Associates, LLC , Case No. 11-cv-0624, instituted in the United States District Court for the Northern District of Georgia on March 1, 2011; and Harvey v. Portfolio Recovery Associates, LLC , Case No. 11-cv-00582, instituted in the United States District Court for the Middle District of Florida on April 8, 2011. Each of the complaints seeks monetary damages under the TCPA, injunctive relief and other relief, including attorney fees. Two of these actions, Allen and Frydman purport to have been brought on behalf of a national class of plaintiffs. The Company intends to vigorously defend against the allegations in each of these cases. It is not possible at this time to estimate the possible loss, if any.

 

13. Fair Value Measurements and Disclosures:

Disclosures about Fair Value of Financial Instruments:

In accordance with the disclosure requirements of FASB ASC Topic 825, “Financial Instruments” (“ASC 825”), the table below summarizes fair value estimates for the Company’s financial instruments. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company. The carrying amounts in the table are recorded in the consolidated balance sheet under the indicated captions (amounts in thousands):

 

     June 30, 2011      December 31, 2010  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial assets:

           

Cash and cash equivalents

   $ 25,481       $ 25,481       $ 41,094       $ 41,094   

Finance receivables, net

     879,515         1,210,625         831,330         1,126,340   

Financial liabilities:

           

Line of credit

   $ 250,000       $ 250,000       $ 300,000       $ 300,000   

Long-tern debt

     1,856         1,856         2,396         2,396   

Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments:

Cash and cash equivalents: The carrying amount approximates fair value.

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.

Line of credit: The carrying amount approximates fair value due to the short-term nature of the interest rate periods.

Long-term debt: The carrying amount approximates fair value, as the interest rates approximate the rate currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers.

As of June 30, 2011, and December 31, 2010, the Company did not account for any financial assets or financial liabilities at fair value.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

14. Recent Accounting Pronouncements:

In December 2010, the FASB issued ASU 2010-28, “Intangibles—Goodwill and Other” (Topic 350): “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts, a consensus of the FASB Emerging Issues Task Force (Issue No. 10-A)” . ASU 2010-28 modifies Step 1 of the goodwill impairment test under ASC Topic 350 for reporting units with zero or negative carrying amounts to require an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are adverse qualitative factors, including the examples provided in ASC paragraph 350-20-35-30, in determining whether an interim goodwill impairment test between annual test dates is necessary. ASU 2010-28 allows an entity to use either the equity or enterprise valuation premise to determine the carrying amount of a reporting unit, and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company adopted ASU 2010-28 on January 1, 2011 which had no material effect on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS”. The amendments in ASU 2011-04 generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). The provisions of ASU 2011-04 are effective prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is prohibited. The Company does not expect ASU 2011-04 to have a material effect on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income” (Topic 220) to amend its accounting guidance on the presentation of other comprehensive income (“OCI”) in an entity’s financial statements. The amended guidance eliminates the option to present the components of OCI as part of the statement of changes in shareholders equity and provides two options for presenting OCI: in a statement included in the income statement or in a separate statement immediately following the income statement. The amendments do not change the guidance for the items that have to be reported in OCI or when an item of OCI has to be moved into net income. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently evaluating which option it will utilize to present items of net income and other comprehensive income, neither of which is expected to have a material effect on the Company.

 

15. Stockholders’ Equity:

At the Company’s 2011 Annual Meeting of Shareholders on June 10, 2011, the Company’s shareholders approved an amendment of the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s Common Stock from 30 million to 60 million.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:

This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:

 

   

deterioration in the economic or inflationary environment in the United States, including the interest rate environment, that may have an adverse effect on our collections, results of operations, revenue and stock price or on the stability of the financial system as a whole;

 

   

our ability to purchase defaulted consumer receivables at appropriate prices and to replace our defaulted consumer receivables with additional receivables portfolios;

 

   

our ability to obtain account documents relating to accounts that we acquire and the possibility that account documents that we obtain could contain errors;

 

   

our ability to successfully acquire receivables of new asset types or implement a new pricing structure;

 

   

changes in the business practices of credit originators in terms of selling defaulted consumer receivables;

 

   

changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables;

 

   

changes in or interpretation of tax laws or adverse results of tax audits;

 

   

changes in bankruptcy or collection laws that could negatively affect our business, including by causing an increase in certain types of bankruptcy filings involving liquidations, which may cause our collections to decrease;

 

   

our ability to employ and retain qualified employees, especially collection personnel, and our senior management team;

 

   

our work force could become unionized in the future, which could adversely affect the stability of our production and increase our costs;

 

   

changes in the credit or capital markets, which affect our ability to borrow money or raise capital;

 

   

the degree and nature of our competition;

 

   

our ability to retain existing clients and obtain new clients for our fee-for-service businesses;

 

   

our ability to obtain necessary account documents from sellers of defaulted consumer receivables, which could negatively impact our collections;

 

   

our ability to comply with regulations of the collection industry;

 

   

our ability to successfully operate and/or integrate new business acquisitions;

 

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our ability to maintain, renegotiate or replace our credit facility;

 

   

our ability to satisfy the restrictive covenants in our debt agreements;

 

   

the imposition of additional taxes on us;

 

   

the possibility that we could incur significant valuation allowance charges;

 

   

our ability to manage growth successfully;

 

   

the possibility that we could incur business or technology disruptions, or not adapt to technological advances;

 

   

the possibility that we or our industry could experience negative publicity or reputational attacks;

 

   

the sufficiency of our funds generated from operations, existing cash and available borrowings to finance our current operations; and

 

   

the risk factors listed from time to time in our filings with the Securities and Exchange Commission (the “SEC”).

You should assume that the information appearing in this quarterly report is accurate only as of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date.

For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the discussion of “Business” and “Risk Factors” described in our 2010 Annual Report on Form 10-K, filed on February 25, 2011.

Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. We have no obligation to publicly update or revise our forward-looking statements after the date of this report and you should not expect us to do so.

Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do not, by policy, selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

Overview

Portfolio Recovery Associates is a specialized financial and business services company. We are a leading company in the business of purchasing and collecting defaulted consumer receivables. Those finance receivables fall into two general categories: bankruptcy portfolios and charged-off “Core” portfolios. Revenue for this part of our business consists of cash collections received less amounts applied to principal on the Company’s owned finance receivables.

Through our subsidiaries, we provide a broad range of fee-based business services. Those services include collateral location services to credit originators through our PRA Location Services subsidiary; revenue administration, discovery, and compliance services to governmental entities through our Government Services subsidiaries; and class action claims recovery services through our CCB subsidiary.

 

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Portfolio Recovery Associates is headquartered in Norfolk, Virginia, and employs approximately 2,500 team members. The shares of Portfolio Recovery Associates are traded on the NASDAQ Global Select Market under the symbol “PRAA.”

Earnings Summary

During the second quarter of 2011, net income attributable to Portfolio Recovery Associates, Inc. was $25.6 million, or $1.48 per diluted share, compared with $19.5 million, or $1.14 per diluted share, in the second quarter of 2010. Total revenue was $114.8 million in the second quarter of 2011, up 23.4% from the same quarter one year earlier. Revenues in the recently completed quarter consisted of $100.3 million in income recognized on finance receivables, net of allowance charges, and $14.5 million in fee income. Income recognized on finance receivables, net of allowance charges, increased $23.4 million, or 30.4%, over the same period in 2010, primarily as a result of a significant increase in cash collections. Cash collections were $176.3 million in the second quarter of 2011, up 37.3% or $47.9 million as compared to the second quarter of 2010. During the quarter, the Company recorded $2.3 million in net allowance charges, compared with $6.3 million in the comparable quarter of 2010. The Company’s performance has been positively impacted by operational efficiencies surrounding the cash collections process, including the continued refinement of dialer technology and account scoring analytics. Additionally, the Company has continued to develop its internal legal collection staff resources, which enables us to place accounts into that channel that otherwise would have been prohibitively expensive for legal action.

Fee income decreased from $16.1 million in the second quarter of 2010 to $14.5 million in the second quarter of 2011 mainly due to a decline in fee income generated by our PRA Location Services business, partially offset by an increase in fee income generated by our Government Services subsidiaries. The decline was due primarily to the continued adverse impact of the economic slowdown on general business growth.

Operating expenses were $70.4 million in the second quarter of 2011, up 20.0% over the second quarter of 2010, due primarily to increases in compensation expense, legal collection fees, legal collection costs and communications expense. Compensation expense increased primarily as a result of larger staff sizes as well as increased share-based compensation expense related to our Long-Term Incentive Programs. Legal collection fees and legal collection costs increased from $10.6 million in the second quarter of 2010 to $15.8 million in the second quarter of 2011. This increase was the result of several factors, including growth in the size of our owned debt portfolios, expansion of our internal legal collection resources, and refinement of our internal scoring methodology that expanded our account selections for legal action. The communications expense increase was mainly due to a growth in mailings resulting from an increase in special letter campaigns and higher telephone expenses driven by a greater number of finance receivables to work, as well as a significant expansion of our dialer capacity and a resulting increase in the number of calls generated by the dialer.

Results of Operations

The results of operations include the financial results of Portfolio Recovery Associates, Inc. and all of our subsidiaries, all of which are in the receivables management business. Under the guidance of the FASB ASC Topic 280 “Segment Reporting” (“ASC 280”) , we have determined that we have several operating segments that meet the aggregation criteria of ASC 280, and therefore, we have one reportable segment, receivables management, based on similarities among the operating units including homogeneity of services, service delivery methods and use of technology.

 

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The following table sets forth certain operating data as a percentage of total revenues for the periods indicated:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2011     2010     2011     2010  

Revenues:

        

Income recognized on finance receivables, net

     87.4     82.7     86.6     82.1

Fee income

     12.6     17.3     13.4     17.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100.0     100.0     100.0     100.0

Operating expenses:

        

Compensation and employee services

     30.3     33.2     30.4     34.3

Legal collection fees

     5.2     4.4     5.2     4.7

Legal collection costs

     8.6     6.9     8.5     6.8

Agent fees

     1.5     3.1     1.9     3.7

Outside fees and services

     3.5     3.4     3.3     3.4

Communications

     5.0     4.4     5.3     5.2

Rent and occupancy

     1.3     1.4     1.3     1.4

Depreciation and amortization

     2.9     3.4     2.9     3.3

Other operating expenses

     3.0     2.8     2.8     2.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     61.3     63.1     61.6     65.6

Gain on sale of property

     1.0     0.0     0.5     0.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     39.7     36.9     38.9     34.4

Other income and (expense):

        

Interest income

     0.0     0.0     0.0     0.0

Interest expense

     (2.3 %)      (2.3 %)      (2.4 %)      (2.5 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     37.4     34.6     36.5     31.9

Provision for income taxes

     15.1     13.4     14.8     12.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     22.3     21.2     21.7     19.5

Less net income attributable to redeemable noncontrolling interest

     (0.0 %)      (0.2 %)      (0.3 %)      (0.1 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Portfolio Recovery Associates, Inc.

     22.3     21.0     21.4     19.4
  

 

 

   

 

 

   

 

 

   

 

 

 

We use the following terminology throughout our reports:

 

 

“Allowance charges” refers to a reduction in income recognized on finance receivables on pools of finance receivables whose cash collection estimates are not received or projected to not be received.

 

 

“Amortization rate” refers to cash collections applied to principal on finance receivables as a percentage of total cash collections.

 

 

“Buybacks” refers to purchase price refunded by the seller due to the return of non-compliant accounts.

 

 

“Cash collections” refers to collections on our owned portfolios only, exclusive of fee income.

 

 

“Cash receipts” refers to collections on our owned portfolios plus fee income.

 

 

“Core” accounts or portfolios refer to accounts or portfolios that are defaulted consumer receivables and are not in a bankrupt status upon purchase. These accounts are aggregated separately from purchased bankruptcy accounts.

 

 

“Estimated remaining collections” refers to the sum of all future projected cash collections on our owned portfolios.

 

 

“Fee income” refers to revenues generated from our fee-for-service subsidiaries.

 

 

“Income recognized on finance receivables” refers to income derived from our owned debt portfolios.

 

 

“Income recognized on finance receivables, net” refers to income derived from our owned debt portfolios and is shown net of allowance charges.

 

 

“Net finance receivable balance” refers to the purchase price less amortization and allowance charges over the life of the portfolio.

 

 

“Principal amortization” refers to cash collections applied to principal on finance receivables.

 

 

“Purchase price” refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain capitalized costs, less buybacks.

 

 

“Purchased bankruptcy” accounts or portfolios refer to accounts or portfolios that are in bankruptcy when we purchase them and as such are purchased as a pool of bankrupt accounts.

 

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“Total estimated collections” refers to the actual cash collections, including cash sales, plus estimated remaining collections.

 

 

“Total estimated collections to purchase price” refers to the total estimated collections divided by the purchase price.

Three Months Ended June 30, 2011 Compared To Three Months Ended June 30, 2010

Revenues

Total revenues were $114.8 million for the three months ended June 30, 2011, an increase of $21.8 million, or 23.4%, compared to total revenues of $93.0 million for the three months ended June 30, 2010.

Income Recognized on Finance Receivables, net

Income recognized on finance receivables, net was $100.3 million for the three months ended June 30, 2011, an increase of $23.4 million, or 30.4%, compared to income recognized on finance receivables, net of $76.9 million for the three months ended June 30, 2010. The increase was primarily due to an increase in cash collections on our finance receivables to $176.3 million for the three months ended June 30, 2011, from $128.4 million for the three months ended June 30, 2010, an increase of $47.9 million or 37.3%. During the three months ended June 30, 2011, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $1.41 billion at a cost of $89.5 million. During the three months ended June 30, 2010, we acquired defaulted consumer receivable portfolios with an aggregate face value of $1.67 billion at a cost of $86.8 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of the average purchase price and for similar time frames, we intend to target a similar internal rate of return, after direct expenses, in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to the estimated profitability of a period’s buying.

Income recognized on finance receivables, net is shown net of changes in valuation allowances recognized under FASB ASC Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), which requires that a valuation allowance be 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 June 30, 2011, we recorded net allowance charges of $2.3 million, of which $2.0 million related to non-bankruptcy portfolios acquired in 2008 offset by an allowance charge reversal of $0.2 million on non-bankruptcy portfolios purchased in 2005. The remaining $0.5 million mainly related to bankruptcy portfolios acquired in 2008. For the three months ended June 30, 2010, we recorded net allowance charges of $6.3 million, the majority of which related to non-bankruptcy portfolios acquired from 2005 through 2008. In any given period, we may be required to record valuation allowances due to pools of receivables underperforming our expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability, of purchased pools of defaulted consumer receivables include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability, of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relates to the collection and movement of accounts on both our collection floor and external channels), as well as decreases in productivity related to turnover and tenure of our collection staff.

Fee Income

Fee income was $14.5 million for the three months ended June 30, 2011, a decrease of $1.6 million, or 9.9%, compared to fee income of $16.1 million for the three months ended June 30, 2010. Fee income decreased primarily due to a decline in revenue generated by our PRA Location Services business as a result of the continued adverse impact of the economic slowdown on general business growth. This was partially offset by an increase in revenues generated by our government services businesses.

 

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Operating Expenses

Total operating expenses were $70.4 million for the three months ended June 30, 2011, an increase of $11.7 million or 19.9% compared to total operating expenses of $58.7 million for the three months ended June 30, 2010. Total operating expenses were 36.9% of cash receipts for the three months ended June 30, 2011 compared to 40.6% for the same period in 2010.

Compensation and Employee Services

Compensation and employee services expenses were $34.8 million for the three months ended June 30, 2011, an increase of $3.9 million, or 12.6%, compared to compensation and employee services expenses of $30.9 million for the three months ended June 30, 2010. This increase is mainly due to an overall increase in our collection staff as well as the hiring of non-collection personnel. Compensation and employee services expenses increased as total employees grew 5.3% to 2,504 as of June 30, 2011, from 2,377 as of June 30, 2010. Compensation and employee services expenses as a percentage of cash receipts decreased to 18.3% for the three months ended June 30, 2011, from 21.4% of cash receipts for the same period in 2010.

Legal Collection Fees

Legal collection fees represent the contingent fees for the cash collections generated by our independent third party attorney network. Legal collection fees were $6.0 million for the three months ended June 30, 2011, an increase of $1.9 million, or 46.3%, compared to legal collection fees of $4.1 million for the three months ended June 30, 2010. This increase was the result of an increase in our external legal collections which increased $8.5 million or 45.2%, from $18.8 million for the three months ended June 30, 2010 to $27.3 million for the three months ended June 30, 2011. Legal collection fees for the three months ended June 30, 2011 were 21.8% of external legal cash collections, compared to 21.9% for the three months ended June 31, 2010.

Legal Collection Costs

Legal collection costs are costs paid to courts where a lawsuit is filed. It also includes the cost of documents received from sellers of defaulted consumer receivables. Legal collection costs were $9.9 million for the three months ended June 30, 2011, an increase of $3.5 million, or 54.7%, compared to legal collection costs of $6.4 million for the three months ended June 30, 2010. The increase was attributable to an increase in legal collection costs resulting from accounts referred to both our in-house attorneys and outside independent contingent fee attorneys due to the refinement of our internal scoring methodology that expanded our account selections for legal action. In addition, the growth in the size of our owned debt portfolios resulted in additional document costs related to the filing of more lawsuits. These legal collection costs represent 22.8% and 21.3% of our total legal collections for the three month periods ended June 30, 2011 and 2010, respectively.

Agent Fees

Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $1.7 million for the three months ended June 30, 2011, a decrease of $1.2 million, or 41.4%, compared to agent fees of $2.9 million for the three months ended June 30, 2010. The decrease was mainly due to a decline in agent fees related to reduced business activity associated with PRA Location Services.

Outside Fees and Services

Outside fees and services expenses were $4.1 million for the three months ended June 30, 2011, an increase of $0.9 million or 28.1% compared to outside fees and services expenses of $3.2 million for the three months ended June 30, 2010. The $0.9 million increase was attributable to an increase in corporate legal expense and other outside fees and services.

 

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Communications

Communications expenses were $5.7 million for the three months ended June 30, 2011, an increase of $1.6 million, or 39%, compared to communications expenses of $4.1 million for the three months ended June 30, 2010. The increase was mainly due to a growth in mailings resulting from an increase in special letter campaigns. The remaining increase was attributable to higher telephone expenses driven by a greater number of finance receivables to work, as well as a significant expansion of our dialer capacity and a resulting increase in the number of calls generated by the dialer. Mailings were responsible for 93.8% or $1.5 million of this increase, while the remaining 6.2% or $0.1 million was attributable to increased call volumes.

Rent and Occupancy

Rent and occupancy expenses were $1.4 million for the three months ended June 30, 2011, an increase of $0.1 million, or 7.7%, compared to rent and occupancy expenses of $1.3 million for the three months ended June 30, 2010. The increase was due to the expansion of our Hampton, Virginia call center and other renewals and expansions, as well as increased utility charges.

Depreciation and Amortization

Depreciation and amortization expenses were $3.3 million for the three months ended June 30, 2011, an increase of $0.1 million or 3.1% compared to depreciation and amortization expenses of $3.2 million for the three months ended June 30, 2010. The increase is the result of continued capital expenditures on equipment, software and computers related to our growth and systems upgrades.

Other Operating Expenses

Other operating expenses were $3.5 million for the three months ended June 30, 2011, an increase of $0.9 million or 34.6% compared to other operating expenses of $2.6 million for the three months ended June 30, 2010. Of the $0.9 million increase, $0.4 million was attributable to an increase in gross receipts tax expense mainly due to the general growth of the company as well as changes in state tax laws which required additional gross receipt tax expenses to be incurred. No other individual item represents a significant portion of the overall increase.

Gain on Sale of Property

Gain on sale of property was $1.2 million for the three months ended June 30, 2011, compared to $0 for the three months ended June 30, 2010. The increase is the result of the sale of a parcel of land adjacent to our Norfolk headquarters during the second quarter of 2011.

Interest Income

Interest income was $0 for both the three months ended June 30, 2011 and 2010.

Interest Expense

Interest expense was $2.6 million for the three months ended June 30, 2011, an increase of $0.4 million compared to interest expense of $2.2 million for the three months ended June 30, 2010. The increase was mainly due to an increase in our weighted average interest rate, which increased to 3.7% for the three months ended June 30, 2011, compared to 2.4% for the three months ended June 30, 2010, partially offset by a decrease in our average borrowings under our revolving credit facility for the three months ended June 30, 2011 compared to the same period in 2010.

Provision for Income Taxes

Income tax expense was $17.3 million for the three months ended June 30, 2011, an increase of $4.8 million, or 38.4%, compared to income tax expense of $12.5 million for the three months ended June 30, 2010. The increase is mainly due to an increase of 33.4% in income before taxes for the three months ended June 30, 2011, compared to the same period in 2010, as well as an increase in the effective tax rate to 40.4% for the three months ended June 30,

 

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2011, compared to an effective tax rate of 38.8% for the same period in 2010. The increase in the effective tax rate is primarily attributable to an increase in the state effective rate due to a change in the mix of income apportionment between various states.

Six Months Ended June 30, 2011 Compared To Six Months Ended June 30, 2010

Revenues

Total revenues were $226.6 million for the six months ended June 30, 2011, an increase of $50.2 million, or 28.5%, compared to total revenues of $176.4 million for the six months ended June 30, 2010.

Income Recognized on Finance Receivables, net

Income recognized on finance receivables, net was $196.3 million for the six months ended June 30, 2011, an increase of $51.4 million, or 35.5%, compared to income recognized on finance receivables, net of $144.9 million for the six months ended June 30, 2010. The increase was primarily due to an increase in cash collections on our finance receivables to $343.0 million for the six months ended June 30, 2011, from $247.6 million for the six months ended June 30, 2010, an increase of $95.4 million or 38.5%. During the six months ended June 30, 2011, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $2.9 billion at a cost of $197.4 million. During the six months ended June 30, 2010, we acquired defaulted consumer receivable portfolios with an aggregate face value of $3.6 billion at a cost of $189.4 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of the average purchase price and for similar time frames, we intend to target a similar internal rate of return, after direct expenses, in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to the estimated profitability of a period’s buying.

Income recognized on finance receivables, net is shown net of changes in valuation allowances recognized under FASB ASC Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), which requires that a valuation allowance be 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 six months ended June 30, 2011, we recorded net allowance charges of $6.3 million, of which $3.6 million related to non-bankruptcy portfolios acquired from 2005 through 2008. The remaining $2.7 million mainly related to bankruptcy portfolios acquired in 2007 and 2008. For the six months ended June 30, 2010, we recorded net allowance charges of $13.2 million, the majority of which related to non-bankruptcy portfolios acquired from 2005 through 2007. In any given period, we may be required to record valuation allowances due to pools of receivables underperforming our expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability, of purchased pools of defaulted consumer receivables include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability, of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relates to the collection and movement of accounts on both our collection floor and external channels), as well as decreases in productivity related to turnover and tenure of our collection staff.

Fee Income

Fee income was $30.3 million for the six months ended June 30, 2011, a decrease of $1.2 million, or 3.8%, compared to fee income of $31.5 million for the six months ended June 30, 2010. Fee income decreased primarily due to a decline in revenue generated by our PRA Location Services business as a result of the continued adverse impact of the economic slowdown on general business growth. This decrease was partially offset by increases in fee income generated by CCB, in which we acquired a majority interest on March 15, 2010, and increases in revenues generated by our government services businesses during the six months ended June 30, 2011, compared to the prior year period.

 

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Operating Expenses

Total operating expenses were $139.5 million for the six months ended June 30, 2011, an increase of $23.9 million or 20.7% compared to total operating expenses of $115.6 million for the six months ended June 30, 2010. Total operating expenses were 37.4% of cash receipts for the six months ended June 30, 2011 compared to 41.4% for the same period in 2010.

Compensation and Employee Services

Compensation and employee services expenses were $69.0 million for the six months ended June 30, 2011, an increase of $8.5 million, or 14.0%, compared to compensation and employee services expenses of $60.5 million for the six months ended June 30, 2010. This increase is mainly due to an overall increase in our collection staff as well as the hiring of non-collection personnel. Compensation and employee services expenses increased as total employees grew 5.3% to 2,504 as of June 30, 2011, from 2,377 as of June 30, 2010. Compensation and employee services expenses as a percentage of cash receipts decreased to 18.5% for the six months ended June 30, 2011, from 21.7% of cash receipts for the same period in 2010.

Legal Collection Fees

Legal collection fees represent the contingent fees for the cash collections generated by our independent third party attorney network. Legal collection fees were $11.7 million for the six months ended June 30, 2011, an increase of $3.5 million, or 42.7%, compared to legal collection fees of $8.2 million for the six months ended June 30, 2010. This increase was the result of an increase in our external legal collections which increased $15.6 million or 42.0%, from $37.1 million for the six months ended June 30, 2010 to $52.7 million for the six months ended June 30, 2011. Legal collection fees for the six months ended June 30, 2011 were 22.2% of external legal cash collections, compared to 22.1% for the six months ended June 31, 2010.

Legal Collection Costs

Legal collection costs are costs paid to courts where a lawsuit is filed. It also includes the cost of documents received from sellers of defaulted consumer receivables. Legal collection costs were $19.2 million for the six months ended June 30, 2011, an increase of $7.1 million, or 58.7%, compared to legal collection costs of $12.1 million for the six months ended June 30, 2010. The increase was attributable to an increase in legal collection costs resulting from accounts referred to both our in-house attorneys and outside independent contingent fee attorneys due to the refinement of our internal scoring methodology that expanded our account selections for legal action. In addition, growth in the size of our owned debt portfolios resulted in additional document costs related to filing of more lawsuits. These legal collection costs represent 22.8% and 20.4% of our total legal collections for the six month periods ended June 30, 2011 and 2010, respectively.

Agent Fees

Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $4.4 million for the six months ended June 30, 2011, a decrease of $2.2 million, or 33.3%, compared to agent fees of $6.6 million for the six months ended June 30, 2010. The decrease was mainly due to a decline in agent fees related to reduced business activity associated with PRA Location Services.

Outside Fees and Services

Outside fees and services expenses were $7.5 million for the six months ended June 30, 2011, an increase of $1.5 million or 25.0% compared to outside fees and services expenses of $6.0 million for the six months ended June 30, 2010. The $1.5 million increase was attributable to an increase in corporate legal expense and other outside fees and services.

 

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Communications

Communications expenses were $12.0 million for the six months ended June 30, 2011, an increase of $2.8 million, or 30.4%, compared to communications expenses of $9.2 million for the six months ended June 30, 2010. The increase was mainly due to a growth in mailings resulting from an increase in special letter campaigns. The remaining increase was attributable to higher telephone expenses driven by a greater number of finance receivables to work, as well as a significant expansion of our dialer capacity and a resulting increase in the number of calls generated by the dialer. Mailings were responsible for 92.9% or $2.6 million of this increase, while the remaining 7.1% or $0.2 million was attributable to increased call volumes.

Rent and Occupancy

Rent and occupancy expenses were $2.8 million for the six months ended June 30, 2011, an increase of $0.3 million, or 12.0%, compared to rent and occupancy expenses of $2.5 million for the six months ended June 30, 2010. The increase was due to the expansion of our Hampton, Virginia call center, the additional space resulting from our acquisition of a 62% controlling interest in CCB on March 15, 2010, and other renewals and expansions, as well as increased utility charges.

Depreciation and Amortization

Depreciation and amortization expenses were $6.5 million for the six months ended June 30, 2011, an increase of $0.7 million or 12.1% compared to depreciation and amortization expenses of $5.8 million for the six months ended June 30, 2010. The increase is mainly due to additional expenses incurred related to the depreciation and amortization of the tangible and intangible assets acquired in the acquisition of a 62% controlling interest in CCB on March 15, 2010. Additional increases are the result of continued capital expenditures on equipment, software and computers related to our growth and systems upgrades.

Other Operating Expenses

Other operating expenses were $6.4 million for the six months ended June 30, 2011, an increase of $1.5 million or 30.6% compared to other operating expenses of $4.9 million for the six months ended June 30, 2010. Of the $1.5 million increase, $0.5 million was attributable to an increase in gross receipts tax expense mainly due to the general growth of the company as well as changes in state tax laws which required additional gross receipt tax expenses to be incurred. No other individual item represents a significant portion of the overall increase.

Gain on Sale of Property

Gain on sale of property was $1.2 million for the six months ended June 30, 2011, compared to $0 for the six months ended June 30, 2010. The increase is the result of the sale of a parcel of land adjacent to our Norfolk headquarters during the second quarter of 2011.

Interest Income

Interest income was $0 for the six months ended June 30, 2011, compared to $35,000 of interest income for the six months ended June 30, 2010. The decrease is the result of the interest earned on the refund received on the overpayment of federal income tax during the six months ended June 30, 2010.

Interest Expense

Interest expense was $5.5 million for the six months ended June 30, 2011, an increase of $1.1 million compared to interest expense of $4.4 million for the six months ended June 30, 2010. The increase was mainly due to an increase in our weighted average interest rate, which increased to 3.7% for the six months ended June 30, 2011, compared to 2.4% for the six months ended June 30, 2010, partially offset by a decrease in our average borrowings under our revolving credit facility for the six months ended June 30, 2011, compared to the same period in 2010.

 

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Provision for Income Taxes

Income tax expense was $33.5 million for the six months ended June 30, 2011, an increase of $11.5 million, or 52.3%, compared to income tax expense of $22.0 million for the six months ended June 30, 2010. The increase is mainly due to an increase of 46.6% in income before taxes for the six months ended June 30, 2011, compared to the same period in 2010, as well as an increase in the effective tax rate to 40.4% for the six months ended June 30, 2011, compared to an effective tax rate of 38.9% for the same period in 2010. The increase in the effective tax rate is primarily attributable to an increase in the state effective rate due to a change in the mix of income apportionment between various states.

 

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Below are certain key financial data and ratios for the periods indicated:

 

FINANCIAL HIGHLIGHTS    Three Months Ended
          Six Months Ended
       
     June 30,     %     June 30,     %  

(dollars in thousands)

   2011     2010     Change     2011     2010     Change  

EARNINGS

            

Income recognized on finance receivables, net

   $ 100,303      $ 76,920        30   $ 196,277      $ 144,871        35

Fee income

     14,492        16,109        -10     30,295        31,536        -4

Total revenues

     114,795        93,029        23     226,572        176,407        28

Operating expenses

     70,415        58,700        20     139,488        115,642        21

Income from operations

     45,537        34,329        33     88,241        60,765        45

Net interest expense

     2,635        2,177        21     5,502        4,322        27

Net income

     25,576        19,678        30     49,285        34,483        43

Net income attributable to Portfolio Recovery Associates, Inc.

     25,574        19,528        31     48,695        34,328        42

PERIOD-END BALANCES

            

Cash and cash equivalents

   $ 25,481      $ 18,250        40   $ 25,481      $ 18,250        40

Finance receivables, net

     879,515        775,606        13     879,515        775,606        13

Goodwill and intangible assets, net

     77,643        83,090        -7     77,643        83,090        -7

Total assets

     1,021,617        915,021        12     1,021,617        915,021        12

Line of credit

     250,000        289,500        -14     250,000        289,500        -14

Total liabilities

     463,153        451,214        3     463,153        451,214        3

Total equity

     542,396        448,727        21     542,396        448,727        21

FINANCE RECEIVABLE COLLECTIONS

            

Cash collections

   $ 176,281      $ 128,406        37   $ 342,998      $ 247,601        39

Principal amortization without allowance charges

     73,695        45,166        63     140,398        89,540        57

Principal amortization with allowance charges

     75,978        51,486        48     146,721        102,730        43

Principal amortization w/ allowance charges as % of cash collections:

            

Including fully amortized pools

     43.1     40.1     7     42.8     41.5     3

Excluding fully amortized pools

     45.7     43.5     5     45.5     44.7     2

Estimated remaining collections - core

   $ 1,072,777      $ 929,144        15   $ 1,072,777      $ 929,144        15

Estimated remaining collections - bankruptcy

     743,228        682,365        9     743,228        682,365        9

Estimated remaining collections - total

     1,816,005        1,611,509        13     1,816,005        1,611,509        13

ALLOWANCE FOR FINANCE RECEIVABLES

            

Balance at period-end

   $ 82,730      $ 64,445        28   $ 82,730      $ 64,445        28

Allowance charge

   $ 2,283      $ 6,320        -64   $ 6,323      $ 13,190        -52

Allowance charge to period-end net finance receivables

     0.26     0.81     -68     0.72     1.70     -58

Allowance charge to net finance receivable income

     2.28     8.22     -72     3.22     9.10     -65

Allowance charge to cash collections

     1.30     4.92     -74     1.84     5.33     -65

PURCHASES OF FINANCE RECEIVABLES

            

Purchase price - core

   $ 52,323      $ 42,277        24   $ 113,617      $ 73,315        55

Face value - core

     1,034,898        885,321        17     2,043,655        1,478,460        38

Purchase price - bankruptcy

     37,204        44,505        -16     83,811        116,087        -28

Face value - bankruptcy

     378,051        781,976        -52     860,993        2,080,084        -59

Purchase price - total

     89,527        86,782        3     197,428        189,402        4

Face value - total

     1,412,949        1,667,297        -15     2,904,648        3,558,544        -18

Number of portfolios - total

     76        78        -3     155        162        -4

PER SHARE DATA

            

Net income per common share - diluted

   $ 1.48      $ 1.14        30   $ 2.83      $ 2.06        37

Weighted average number of shares outstanding - diluted

     17,225        17,080        1     17,212        16,641        3

Closing market price

   $ 84.79      $ 66.78        27   $ 84.79      $ 66.78        27

RATIOS AND OTHER DATA

            

Return on average equity (1)

     19.20     17.86     7     18.74     16.53     13

Return on revenue (2)

     22.28     21.15     5     21.75     19.55     11

Operating margin (3)

     39.67     36.90     7     38.95     34.45     13

Operating expense to cash receipts (4)

     36.91     40.62     -9     37.37     41.43     -10

Debt to equity (5)

     46.43     64.78     -28     46.43     64.78     -28

Cash collections per collector hour paid:

            

Core cash collections

   $ 154      $ 127        21   $ 158      $ 113        40

Total cash collections

   $ 243      $ 188        29   $ 242      $ 145        67

Excluding external legal collections

   $ 205      $ 160        28   $ 205      $ 157        31

Excluding bankruptcy and external legal collections

   $ 116      $ 100        16   $ 121      $ 103        17

Number of collectors

     1,517        1,384        10     1,517        1,384        10

Number of employees

     2,504        2,377        5     2,504        2,377        5

Cash receipts (4)

   $ 190,773      $ 144,515        32   $ 373,292      $ 279,137        34

Line of credit - unused portion at period end

     157,500        75,500        109     157,500        75,500        109

Notes:

(1) Calculated as annualized net income divided by average equity for the period
(2) Calculated as net income divided by total revenues
(3) Calculated as income from operations divided by total revenues
(4) “Cash receipts” is defined as cash collections plus fee income
(5) For purposes of this ratio, “debt” equals the line of credit balance plus long-term debt

 

 

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FINANCIAL HIGHLIGHTS    For the Quarter Ended  

(dollars in thousands)

   June 30
2011
    March 31
2011
    December 31
2010
    September 30
2010
    June 30
2010
 

EARNINGS

          

Income recognized on finance receivables, net

   $ 100,303      $ 95,974      $ 84,783      $ 80,026      $ 76,920   

Fee income

     14,492        15,803        15,972        15,518        16,109   

Total revenues

     114,795        111,777        100,755        95,544        93,029   

Operating expenses

     70,415        69,072        64,480        62,721        58,700   

Income from operations

     45,537        42,705        36,275        32,823        34,329   

Net interest expense

     2,635        2,867        2,488        2,178        2,177   

Net income

     25,576        23,709        20,631        18,757        19,678   

Net income attributable to Portfolio Recovery Associates, Inc.

     25,574        23,121        20,645        18,481        19,528   

PERIOD-END BALANCES

          

Cash and cash equivalents

   $ 25,481      $ 35,443      $ 41,094      $ 20,297      $ 18,250   

Finance receivables, net

     879,515        866,992        831,330        807,239        775,606   

Goodwill and intangible assets, net

     77,643        78,893        80,144        81,610        83,090   

Total assets

     1,021,617        1,020,099        995,908        947,737        915,021   

Line of credit

     250,000        290,000        300,000        288,500        289,500   

Total liabilities

     463,153        489,136        490,943        464,781        451,214   

Total equity

     542,396        515,710        490,516        468,425        448,727   

FINANCE RECEIVABLE COLLECTIONS

          

Cash collections

   $ 176,281      $ 166,717      $ 144,363      $ 137,377      $ 128,406   

Principal amortization without allowance

     73,695        66,703        54,139        50,830        45,166   

Principal amortization with allowance

     75,978        70,743        59,580        57,351        51,486   

Principal amortization w/ allowance as % of cash collections:

          

Including fully amortized pools

     43.1     42.4     41.3     41.7     40.1

Excluding fully amortized pools

     45.7     45.3     44.3     44.7     43.5

Estimated remaining collections - core

   $ 1,072,777      $ 1,040,140      $ 974,108      $ 934,942      $ 929,144   

Estimated remaining collections - bankruptcy

     743,228        753,130        749,410        734,632        682,365   

Estimated remaining collections - total

     1,816,005        1,793,270        1,723,518        1,669,574        1,611,509   

ALLOWANCE FOR FINANCE RECEIVABLES

          

Balance at period-end

   $ 82,730      $ 80,447      $ 76,407      $ 70,965      $ 64,445   

Allowance charge

   $ 2,283      $ 4,040      $ 5,442      $ 6,520      $ 6,320   

Allowance charge to period-end net finance receivables

     0.26     0.47     0.65     0.81     0.81

Allowance charge to net finance receivable income

     2.28     4.21     6.42     8.15     8.22

Allowance charge to cash collections

     1.30     2.42     3.77     4.75     4.92

PURCHASES OF FINANCE RECEIVABLES

          

Purchase price - core

   $ 52,323      $ 61,294      $ 44,852      $ 31,831      $ 42,277   

Face value - core

     1,034,898        1,008,758        1,357,301        588,551        885,321   

Purchase price - bankruptcy

     37,204        46,607        40,671        60,687        44,505   

Face value - bankruptcy

     378,051        482,941        511,588        788,967        781,976   

Purchase price - total

     89,527        107,901        85,523        92,518        86,782   

Face value - total

     1,412,949        1,491,699        1,868,889        1,377,518        1,667,297   

Number of portfolios - total

     76        79        75        68        78   

PER SHARE DATA

          

Net income per common share - diluted

   $ 1.48      $ 1.34      $ 1.20      $ 1.08      $ 1.14   

Weighted average number of shares outstanding - diluted

     17,225        17,199        17,165        17,093        17,080   

Closing market price

   $ 84.79      $ 85.13      $ 75.20      $ 64.66      $ 66.78   

RATIOS AND OTHER DATA

          

Return on average equity (1)

     19.20     18.25     17.09     16.04     17.86

Return on revenue (2)

     22.28     21.21     20.48     19.63     21.15

Operating margin (3)

     39.67     38.21     36.00     34.35     36.90

Operating expense to cash receipts (4)

     36.91     37.84     40.22     41.02     40.62

Debt to equity (5)

     46.43     56.64     61.65     61.80     64.78

Cash collections per collector hour paid:

          

Core cash collections

   $ 154      $ 162      $ 129      $ 127      $ 127   

Total cash collections

   $ 243      $ 241      $ 204      $ 200      $ 188   

Excluding external legal collections

   $ 205      $ 204      $ 174      $ 170      $ 160   

Excluding bankruptcy and external legal collections

   $ 116      $ 125      $ 98      $ 97      $ 100   

Number of collectors

     1,517        1,486        1,472        1,422        1,384   

Number of employees

     2,504        2,482        2,473        2,421        2,377   

Cash receipts (4)

   $ 190,773      $ 182,520      $ 160,335      $ 152,895      $ 144,515   

Line of credit - unused portion at period end

     157,500        117,500        107,500        76,500        75,500   

Notes:

 

(1) Calculated as annualized net income divided by average equity for the period
(2) Calculated as net income divided by total revenues
(3) Calculated as income from operations divided by total revenues
(4) “Cash receipts” is defined as cash collections plus fee income
(5) For purposes of this ratio, “debt” equals the line of credit balance plus long-term debt

 

34


Table of Contents

Supplemental Performance Data

Owned Portfolio Performance:

The following tables show certain data related to our owned portfolio. These tables describe the purchase price, actual cash collections and future estimates of cash collections, income recognized on finance receivables (gross and net of allowance charges), principal amortization, allowance charges, finance receivable, net balances and related multiples. Further, these tables disclose our entire portfolio, as well as its subsets; the portfolio of purchased bankrupt accounts and our Core portfolio which are further broken down into quarter-to-date, year-to-date and life-to-date tables. The accounts represented in the purchased bankruptcy tables are those portfolios of accounts that were bankrupt at the time of purchase. This contrasts with accounts that file bankruptcy after we purchase them, which continue to be tracked in their corresponding Core portfolio.

The purchase price multiples from 2005 through the second quarter of 2011 described in the table below are lower than historical multiples in previous years. This trend is primarily, but not entirely related to pricing competition. When competition increases, and/or supply decreases so that pricing becomes negatively impacted on a relative basis (total lifetime collections in relation to purchase price), yields tend to trend lower. The opposite occurs when pricing trends are favorable.

To the extent that lower purchase price multiples are the ultimate result of more competitive pricing and lower yields, this will generally lead to higher amortization rates (payments applied to principal as a percentage of cash collections), lower operating margins and ultimately lower profitability. As portfolio pricing becomes more favorable on a relative basis, our profitability will tend to increase. It is important to consider, however, that to the extent we can improve our collection operations by collecting additional cash from a discreet quantity and quality of accounts, and/or by collecting cash at a lower cost structure, we can positively impact the collection to purchase price ratio and operating margins. We continue to make significant enhancements to our analytical abilities, management personnel and capabilities, all with the intent to collect more cash at lower cost.

Additionally, however, the processes we employ to initially book newly acquired pools of accounts and forecast future estimated collections for any given portfolio of accounts has evolved over the years due to a number of factors including economic conditions. Our revenue recognition under ASC 310-30 is driven by estimates of the ultimate magnitude of estimated lifetime collections as well as the timing of those collections. We have progressed towards booking new portfolio purchases using a higher confidence level for both estimated collection amounts and timing. Subsequent to the initial booking, as we gain collection experience and comfort with a pool of accounts, we continuously update estimated remaining collections (“ERC”). These processes, along with the aforementioned operational enhancements, have tended to cause the ratio of collections, including ERC, to purchase price for any given year of buying to gradually increase over time. As a result, our estimate of lifetime collections to purchase price has generally, but not always, shown relatively steady increases 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 say a pool that was just two years from purchase.

 

35


Table of Contents

Life-to-Date

Entire Portfolio

 

$00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000
      Inception through June 30, 2011     As of June 30, 2011  
($ in thousands)          Actual Cash     Income                 Income     Net Finance                    
           Collections     Recognized                 Recognized     Receivables     Estimated     Total     Total Estimated  
Purchase    Purchase     Including Cash     on Finance     Principal     Allowance     on Finance     Balance at     Remaining     Estimated     Collections to  

Period

   Price     Sales     Receivables     Amortization     Charges     Receivables, Net     June 30, 2011     Collections     Collections     Purchase Price  

1996

   $ 3,080      $ 10,108      $ 6,985      $ 3,123      $ 0      $ 6,985      $ 0      $ 75      $ 10,183        331

1997

     7,685        25,229        17,126        8,103        0        17,126        0        258        25,487        332

1998

     11,089        36,789        25,801        10,988        0        25,801        0        414        37,203        335

1999

     18,898        67,698        48,524        19,174        0        48,524        0        1,252        68,950        365

2000

     25,020        112,216        87,019        25,197        0        87,019        0        3,063        115,279        461

2001

     33,481        168,858        134,506        34,352        0        134,506        0        4,230        173,088        517

2002

     42,325        187,667        145,342        42,325        0        145,342        0        5,012        192,679        455

2003

     61,448        248,330        186,882        61,448        0        186,882        0        8,101        256,431        417

2004

     59,177        183,432        125,455        57,977        1,200        124,255        0        8,433        191,865        324

2005

     143,169        280,311        170,172        110,139        17,055        153,117        15,976        29,892        310,203        217

2006

     107,705        179,297        112,695        66,602        19,315        93,380        21,788        39,094        218,391        203

2007

     258,381        372,501        211,900        160,601        18,715        193,185        79,060        134,603        507,104        196

2008

     275,141        317,577        194,854        122,723        26,445        168,409        125,937        213,765        531,342        193

2009

     281,425        330,310        212,715        117,595        0        212,715        163,829        402,929        733,239        261

2010

     359,235        194,466        115,580        78,886        0        115,580        280,349        591,253        785,719        219

2011

     197,702        16,815        11,702        5,113        0        11,702        192,576        373,631        390,446        197
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,884,961      $ 2,731,604      $ 1,807,258      $ 924,346      $ 82,730      $ 1,724,528      $ 879,515      $ 1,816,005      $ 4,547,609        241
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Purchased Bankruptcy Portfolio

 

$00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000
      Inception through June 30, 2011     As of June 30, 2011  
($ in thousands)         Actual Cash     Income                 Income     Net Finance                    
          Collections     Recognized                 Recognized     Receivables     Estimated     Total     Total Estimated  
Purchase   Purchase     Including Cash     on Finance     Principal     Allowance     on Finance     Balance at     Remaining     Estimated     Collections to  

Period

  Price     Sales     Receivables     Amortization     Charges     Receivables, Net     June 30, 2011     Collections     Collections     Purchase Price  

1996-2003

  $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0        0

2004

    7,468        14,243        7,975        6,268        1,200        6,775        0        130        14,373        192

2005

    29,301        43,065        14,636        28,429        790        13,846        83        214        43,279        148

2006

    17,648        29,935        13,710        16,225        1,300        12,410        123        1,350        31,285        177

2007

    78,551        88,114        32,463        55,651        4,010        28,453        18,891        22,889        111,003        141

2008

    108,613        105,998        54,612        51,386        1,800        52,812        55,426        77,601        183,599        169

2009

    156,062        147,753        98,291        49,462        0        98,291        106,599        213,048        360,801        231

2010

    209,693        86,796        54,094        32,702        0        54,094        176,991        299,122        385,918        184

2011

    83,808        1,769        1,718        51        0        1,718        83,757        128,874        130,643        156
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 691,144      $ 517,673      $ 277,499      $ 240,174      $ 9,100      $ 268,399      $ 441,870      $ 743,228      $ 1,260,901        182
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core Portfolio

 

$00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000 $00,000,000
          Inception through June 30, 2011     As of June 30, 2011  
($ in thousands)         Actual Cash     Income                 Income     Net Finance                    
          Collections     Recognized                 Recognized     Receivables     Estimated     Total     Total Estimated  
Purchase   Purchase     Including Cash     on Finance     Principal     Allowance     on Finance     Balance at     Remaining     Estimated     Collections to  

Period

  Price     Sales     Receivables     Amortization     Charges     Receivables, Net     June 30, 2011     Collections     Collections     Purchase Price  

1996

  $ 3,080      $ 10,108      $ 6,985      $ 3,123      $ 0      $ 6,985      $ 0      $ 75      $