PRA Group
PORTFOLIO RECOVERY ASSOCIATES INC (Form: 10-K, Received: 02/28/2012 16:20:34)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

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

For the fiscal year ended December 31, 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   (I.R.S. Employer
incorporation or organization)   Identification No.)
120 Corporate Boulevard, Norfolk, Virginia   23502
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (888) 772-7326

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, $0.01 par value per share   NASDAQ Global Select Market
(Title of Class)   (Name of Exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES   þ     NO   ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act.     YES   ¨      NO   þ

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     YES   þ      NO   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

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

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES   ¨      NO   þ

The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2011 was $1,420,920,062 based on the $84.79 closing price as reported on the NASDAQ Global Select Market.

The number of shares of the registrant’s Common Stock outstanding as of February 17, 2012 was 17,146,589.

Documents incorporated by reference: Portions of the registrant’s definitive Proxy Statement for our 2012 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

 


Table of Contents

Table of Contents

 

Part I

     

Item 1.

   Business      4   

Item 1A.

   Risk Factors      19   

Item 1B.

   Unresolved Staff Comments      28   

Item 2.

   Properties      28   

Item 3.

   Legal Proceedings      29   

Item 4.

   Mine Safety Disclosure      30   

Part II

     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      30   

Item 6.

   Selected Financial Data      32   

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      35   

Item 7A.

   Quantitative and Qualitative Disclosures about Market Risk      60   

Item 8.

   Financial Statements and Supplementary Data      61   
  

Report of Independent Registered Public Accounting Firm

     62   
   Consolidated Balance Sheets      63   
   Consolidated Income Statements      64   
   Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income      65   
   Consolidated Statements of Cash Flows      66   
   Notes to Consolidated Financial Statements   
   1 – Summary of Significant Accounting Policies      67   
   2 – Finance Receivables, net      72   
   3 – Accounts Receivable, net      75   
   4 – Operating Leases      75   
   5 – Redeemable Noncontrolling Interest      75   
   6 – Goodwill and Intangibles, net      76   
   7 – 401(k) Retirement Plan      77   
   8 – Line of Credit      77   
   9 – Property and Equipment, net      78   
   10– Long-Term Debt      79   
   11– Fair Value Measurements and Disclosures      79   
   12– Share-Based Compensation      80   
   13– Earnings Per Share      82   
   14– Stockholders Equity      82   
   15– Income Taxes      83   
   16– Commitment and Contingencies      86   
   17– Subsequent Events      87   

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      88   

Item 9A.

   Controls and Procedures      88   

Item 9B.

   Other Information      90   

Part III

     

Item 10.

   Directors, Executive Officers and Corporate Governance      90   

Item 11.

   Executive Compensation      90   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      90   

Item 13.

   Certain Relationships and Related Transactions, and Director Independence      90   

Item 14.

   Principal Accountant Fees and Services      90   

Part IV

     

Item 15.

   Exhibits and Financial Statement Schedules      91   

Signatures

        93   

 

2


Table of Contents

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

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

 

   

a prolonged economic recovery or a deterioration in the economic or inflationary environment in the United States or the United Kingdom, 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;

 

   

our ability to replace our defaulted consumer receivables with additional receivables portfolios;

 

   

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

 

   

our ability to successfully acquire receivables of new asset types;

 

   

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;

 

   

the possibility that we could incur goodwill impairment charges;

 

   

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

 

   

our ability to comply with regulations of the collection industry;

 

3


Table of Contents
   

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

 

   

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

 

   

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

 

   

our ability to manage risks associated with our international operations acquired on January 16, 2012;

 

   

the imposition of additional taxes on us;

 

   

changes in interest rates, which could reduce our net income, and the possibility that future hedging strategies may not be successful, which could adversely affect our results of operations and financial condition, as could our failure to comply with hedge accounting principles and interpretations;

 

   

the possibility that we could incur significant allowance charges on our finance receivables;

 

   

our 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 annual 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 “Risk Factors” section beginning on page 19, as well as the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section beginning on page 35 and the “Business” section beginning on page 4.

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.

PART I

 

Item 1. Business.

General

Our business focuses upon the detection, collection, and processing of both unpaid and normal-course accounts receivable originally owed to credit grantors, governments, retailers and others. Our primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. These are the unpaid obligations of individuals to credit originators, which include banks, credit unions, consumer and auto finance companies and retail merchants. We also provide fee-based services, including vehicle location, skip tracing and

 

4


Table of Contents

collateral recovery services for auto lenders, governments and law enforcement via PRA Location Services, LLC (“PLS”), revenue administration, audit and debt discovery/recovery services for local government entities through PRA Government Services, LLC and MuniServices, LLC (collectively “PRA GS”) and class action claims recovery services and related payment processing via Claims Compensation Bureau, LLC (“CCB”). We believe that the strengths of our business are our sophisticated approach to portfolio pricing, segmentation and servicing, our emphasis on developing and retaining our collection personnel, our sophisticated processing systems and procedures and our relationships with many of the largest consumer lenders in the United States.

Subsequent to year end, on January 16, 2012, we acquired 100% of the equity interest of Mackenzie Hall Holdings, Limited, and its subsidiaries (“MHH”). MHH operates in Kilmarnock, Scotland and has approximately 170 employees. MHH is in the accounts receivable management industry that includes collecting on both their owned portfolios and for third party originators on a contingent fee basis.

Definitions

We use the following terminology throughout this document:

 

   

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

 

   

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

 

   

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

 

   

“Cash collections” refers to collections from customers on our owned portfolios.

 

   

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

 

   

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

 

   

“EBITDA” refers to earnings before interest, taxes, depreciation and amortization.

 

   

“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” is recorded on our balance sheet and refers to the purchase price less principal amortization and net allowance charges.

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

5


Table of Contents

Our debt purchase business specializes in receivables that have been charged-off by the credit originator. Because the credit originator and/or other debt servicing companies have unsuccessfully attempted to collect these receivables, we are able to purchase them at a substantial discount to their face value. From our 1996 inception through December 31, 2011, we acquired 2,335 portfolios, representing more than 28 million customer accounts and aggregated into 132 pools for accounting purposes, with a face value of $64.6 billion for a total purchase price of $2.1 billion. The success of our business depends on our ability to purchase portfolios of defaulted consumer receivables at appropriate valuations and to collect on those receivables effectively and efficiently. 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.

We have achieved strong financial results over the past ten years, with cash collections growing from $53.1 million in 2001 to $705.5 million in 2011. Total revenue has grown from $32.3 million in 2001 to $458.9 million in 2011, a compound annual growth rate of 30.4%. Similarly, pro forma net income has grown from $3.5 million in 2001 to net income attributable to Portfolio Recovery Associates, Inc. (“PRA”) of $100.8 million in 2011.

We were initially formed as Portfolio Recovery Associates, L.L.C., a Delaware limited liability company, on March 20, 1996. In connection with our 2002 initial public offering (our “IPO”), all of the membership units of Portfolio Recovery Associates, L.L.C. were exchanged, simultaneously with the effectiveness of our registration statement, for a single class of PRA common stock, a new Delaware corporation formed on August 7, 2002. Accordingly, the members of Portfolio Recovery Associates, L.L.C. became the common stockholders of PRA, which became the parent company of Portfolio Recovery Associates, L.L.C. and its subsidiaries.

PRA maintains an Internet website at the following address: www.portfoliorecovery.com.

We make available on or through our website certain reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934. These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended. We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with or furnish it to the SEC. The information that is filed with the SEC may be read or copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. In addition, information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at: www.sec.gov .

Reports filed with or furnished to the SEC are also available free of charge upon request by contacting our corporate office at:

Portfolio Recovery Associates, Inc.

Attn: Investor Relations

120 Corporate Boulevard, Suite 100

Norfolk, Virginia 23502

Competitive Strengths

We Offer a Compelling Alternative to Debt Owners and Governmental Entities

We offer debt owners the ability to immediately realize value for their charged-off receivables throughout the post charge-off collection cycle, from receivables that have only been processed internally by the debt owner to receivables that have been subject to multiple internal and external collection efforts, whether or not subject to bankruptcy proceedings. This flexibility helps us to meet the needs of debt owners and allows us to become a trusted resource. Also, through our government services business, we have the ability to service state and local government’s receivables in various ways. This includes such services as processing tax payments on behalf of the client and extends to more complicated tax audit and discovery work, as well as additional services that fill the needs of our clients.

 

6


Table of Contents

Disciplined and Proprietary Underwriting Process

One of the key components of our growth has been our ability to price portfolio acquisitions at levels that have generated profitable returns on investment. Since inception, we have been able to consistently collect more than our purchase price over the collection lifecycle of the defaulted consumer receivables portfolios we have acquired. In doing so, we have generated increasing profits and operational cash flow from these portfolio acquisitions, without relying on the resale of portfolios to achieve these results. We have not resold any of our purchased portfolios since 2002, and the portfolios we sold then were primarily in Chapter 13 bankruptcy proceedings. We stopped reselling these portfolios as we began the effort to build our own bankruptcy portfolio buying group which started purchasing bankrupt accounts in 2004.

By holding and collecting the accounts we purchase over the long-term, we create static pool history that we believe is unique among our peers. Our portfolio underwriting process utilizes the collection results, customer data, and account attributes held in our data warehouse. The warehouse contains data from more than 2,300 portfolios representing over 28 million accounts purchased over the last 15 years from large issuers and owners of consumer receivables. Our quantitative modeling continuously evolves as we incorporate new data and develop, test, and adopt new analysis tools that help us improve our underwriting accuracy.

The Core portfolio underwriting process includes both quantitative analytical modeling and qualitative judgment-based analysis that considers the effects of the origination, servicing, and collection history of the portfolios we price. The combination of our deep sample of purchase data, our sophisticated analytical modeling, and the underwriting judgment gained from underwriting thousands of portfolios affords PRA with a significant competitive advantage over our competition.

Ability to Hire, Develop and Retain Productive Collectors

We place considerable focus on our ability to hire, develop, motivate and retain effective collectors who are key to our continued growth and profitability. Several large military bases and numerous telemarketing, customer service and reservation phone centers are located near our headquarters and regional offices in Virginia, providing access to a large pool of eligible personnel. The Hutchinson, Kansas, Las Vegas, Nevada, Birmingham, Alabama, Jackson, Tennessee, Houston, Texas and Fresno, California areas, where we maintain offices, also provide a sufficient potential workforce of eligible personnel. We have found that tenure is an important contributor of our collector effectiveness. We offer our collectors a competitive wage with the opportunity to receive incentive compensation based on performance, as well as an attractive benefits package, a comfortable working environment and the ability to work on a flexible schedule. We have a comprehensive training program for new owned portfolio collectors which are conducted in our five training centers. Recognizing the demands of the job, our management team has endeavored to create a professional and supportive environment for all of our employees.

Established Systems and Infrastructure

We have devoted significant effort to developing our systems, including statistical models, databases and reporting packages, to optimize our portfolio purchases and collection efforts. In addition, we believe that our technology infrastructure is flexible, secure, reliable and redundant, to ensure the protection of our sensitive data and to mitigate exposure to systems failure or unauthorized access. We take data security and collection compliance very seriously. We employ a staff of Quality Control and Compliance employees whose role it is to monitor calls and observe collection system entries. We monitor and research daily exception reports that track significant account status movements and account changes. To enhance this process, we employ sophisticated call and work action recording systems which allow us to better monitor compliance and quality of our customer contacts. We believe that our systems and infrastructure give us meaningful advantages over our competitors. We have developed financial models and systems for pricing portfolio acquisitions, managing the collections process and monitoring operating results. We perform a static pool analysis monthly on each of our portfolios, inputting actual results back into our acquisition models, to enhance their accuracy. We monitor collection results continuously, seeking to identify and resolve negative trends immediately. In addition, we do not sell our purchased defaulted consumer receivables. Instead, we work them over the long-term enhancing our knowledge of a pool’s long-term performance. This combination of hardware, software and proprietary modeling and systems has been developed by our management team through years of experience in this industry and we believe provides us with an important competitive advantage from the acquisition process all the way through collection operations.

 

7


Table of Contents

Strong Relationships with Major Credit Originators

We have done business with most of the largest consumer lenders in the United States. We maintain an extensive marketing effort and our senior management team is in contact on a regular basis with known and prospective credit originators. We believe that we have earned a reputation as a reliable and compliant purchaser of defaulted consumer receivables portfolios and as responsible collectors. Furthermore, from the perspective of the selling credit originator, the failure to close on a negotiated sale of a portfolio consumes valuable time and expense and can have an adverse effect on pricing when the portfolio is re-marketed. Similarly, if a credit originator sells a portfolio to a debt buyer who has a reputation for violating industry standard collecting practices, the reputation of the credit originator can be damaged. We consistently attempt to negotiate reasonable and mutually acceptable contract terms, resulting in a confident and expeditious closing process for both parties. We go to great lengths to collect from consumers in a responsible, professional and legally compliant manner. We believe our strong relationships with major credit originators provide us with access to quality opportunities for portfolio purchases.

Experienced Management Team

We have an experienced management team with considerable expertise in the accounts receivable management industry. Prior to our formation, our founders played key roles in the development and management of a consumer receivables acquisition and divestiture operation of Household Recovery Services, a subsidiary of Household International, now owned by HSBC. As we have grown, the original management team has been expanded substantially to include a group of experienced, seasoned executives, many coming from the largest, most sophisticated lenders in the country.

Portfolio Acquisitions

Our portfolio of defaulted consumer receivables includes a diverse set of accounts that can be categorized by asset type, age and size of account, level of previous collection efforts and geography. To identify attractive buying opportunities, we maintain an extensive marketing effort with our senior officers contacting known and prospective sellers of defaulted consumer receivables. We have acquired receivables of Visa ® , MasterCard ® and other credit cards, private label credit cards, installment loans, lines of credit, bankrupt accounts, deficiency balances of various types, legal judgments, and trade payables, all from a variety of debt owners. These debt owners include major banks, credit unions, consumer finance companies, telecommunication providers, retailers, utilities, insurance companies, medical groups, hospitals, auto finance companies and other debt buyers. In addition, we make periodic visits to the operating sites of debt sellers and attend numerous industry events in an effort to develop account purchase opportunities. We also maintain active relationships with brokers of defaulted consumer receivables.

Portfolios by Type and Geography

The following chart categorizes our life to date owned portfolios as of December 31, 2011 into the major asset types represented (amounts in thousands):

 

Asset Type

   No. of Accounts      %     Life to Date Purchased
Face Value (1)
     %     Original Purchase
Price (2)
     %  

Major Credit Cards

     16,679         60    $ 46,419,560         72    $ 1,617,992         76

Consumer Finance

     5,706         20        6,863,629         11        128,965         6   

Private Label Credit Cards

     5,071         18        7,222,361         11        344,940         16   

Auto Deficiency

     602         2        4,122,531         6        44,805         2   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total:

     28,058         100    $ 64,628,081         100    $ 2,136,702         100 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and has not been reduced by any adjustments, including payments and buybacks and reflects all accounts purchased regardless of whether or not we currently have the ability to collect on the account.

 

8


Table of Contents
(2) “Original Purchase Price” represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables.

Since our formation, we have purchased accounts from approximately 150 debt owners. We have acquired portfolios at various price levels, depending on the age of the portfolio, its geographic distribution, our historical experience with a certain asset type or credit originator and similar factors. A typical defaulted consumer receivables portfolio that we acquire ranges from $1 million to $150 million in face value and contains defaulted consumer receivables from diverse geographic locations with average initial individual account balances of $400 to $7,000.

We refer to the groups of charged-off (non-bankrupt) defaulted consumer receivables we purchase as Core portfolios. The age of a Core portfolio (the time since an account has been charged-off) is an important factor in determining the price at which we will purchase the portfolio. Generally, there is an inverse relationship between the age of a Core portfolio and the price at which we will purchase the portfolio. This relationship is due to the fact that older Core portfolio receivables typically liquidate at lower rates. The accounts receivables management industry places Core portfolio receivables into categories depending on the number of collection agencies that have previously attempted to collect on the receivables. Fresh accounts are typically past due 120 to 270 days, charged-off by the credit originator and are either being sold prior to any post-charge-off collection activity or are placed with a third-party for the first time. These accounts typically sell for the highest purchase price. Primary accounts are typically 360 to 450 days past due and charged-off, have been previously placed with one contingent fee servicer and receive a lower purchase price. Secondary and tertiary accounts are typically more than 660 days past due and charged-off, have been placed with two or three contingent fee servicers and receive even lower purchase prices. We also purchase portfolios of accounts previously worked by four or more agencies and these are typically two to three years or more past due and receive an even lower price. In addition, we purchase portfolios of accounts that are included in consumer bankruptcies. These bankrupt accounts are typically filed under Chapter 13 of the U.S. Bankruptcy Code and have an associated payment plan that can range from 3 to 5 years in duration. We purchase portfolios of bankrupt accounts in both forward flow and spot transactions and, consequently, they can be at any age in the bankruptcy plan life cycle.

The following table summarizes our life to date portfolio purchases as of December 31, 2011, into the delinquency categories represented (amounts in thousands).

 

Account Type

   No. of Accounts      %     Life to Date Purchased
Face Value (1)
     %     Original Purchase
Price (2)
     %  

Fresh

     1,756           $ 5,049,048           $ 456,669         21 

Primary

     4,247         15        7,569,342         12        370,850         17   

Secondary

     4,696         17        7,601,026         12        276,834         13   

Tertiary

     4,002         14        5,404,334         8        75,298         4   

BK Trustees

     3,918         14        17,577,895         27        832,855         39   

Other

     9,439         34        21,426,436         33        124,196         6   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total:

     28,058         100    $ 64,628,081         100    $ 2,136,702         100 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and has not been reduced by any adjustments, including payments and buybacks and reflects all accounts purchased regardless of whether or not we currently have the ability to collect on the account.
(2) “Original Purchase Price” represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables.

We also review the geographic distribution of accounts within a portfolio because we have found that state specific laws and rules can have an effect on the collectability of accounts located there. In addition, economic factors and bankruptcy trends vary regionally and are factored into our purchase price equation.

 

9


Table of Contents

The following table summarizes our life to date portfolio purchases as of December 31, 2011, by geographic location (amounts in thousands):

 

Geographic

Distribution

   No. of Accounts      %     Life to Date Purchased
Face Value (1)
     %     Original Purchase
Price (2)
     %  

California

     2,947         11    $ 8,549,724         13    $ 276,219         13 

Texas

     4,193         15        7,329,316         11        191,982         9   

Florida

     2,213         8        6,170,741         10        195,335         9   

New York

     1,609         6        3,897,746         6        117,629         6   

Pennsylvania

     1,013         4        2,403,074         4        78,869         4   

Ohio

     1,214         4        2,350,629         4        89,294         4   

Illinois

     1,063         4        2,247,496         3        81,255         4   

North Carolina

     982         3        2,200,497         3        72,148         3   

Georgia

     909         3        2,148,300         3        83,336         4   

New Jersey

     647         2        1,776,863         3        61,217         3   

Michigan

     738         3        1,735,571         3        65,255         3   

Arizona

     491         2        1,379,268         2        44,830         2   

Virginia

     742         3        1,382,129         2        50,336         2   

Tennessee

     596         2        1,348,878         2        50,415         2   

Massachusetts

     484         2        1,209,030         2        38,966         2   

Indiana

     453         2        1,122,944         2        46,156         2   

Other (3)

     7,764         26        17,375,875         27        593,460         28   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total:

     28,058         100    $ 64,628,081         100    $ 2,136,702         100 
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) “Life to Date Purchased Face Value” represents the original face amount purchased from sellers and has not been reduced by any adjustments, including payments and buybacks and reflects all accounts purchased regardless of whether or not we currently have the ability to collect on the account.
(2) “Original Purchase Price” represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables.
(3) Each state included in “Other” represents less than 2% of the face value of total defaulted consumer receivables.

Purchasing Process

We acquire portfolios from debt owners through auctions and negotiated sales. In an auction process, the seller will assemble a portfolio of receivables and will either broadly offer the portfolio to the market or seek purchase prices from specifically invited potential purchasers. In a privately negotiated sale process, the debt owner will contact known purchasers directly, take bids and negotiate the terms of sale. We also acquire accounts in forward flow contracts. Under a forward flow contract we agree to purchase defaulted consumer receivables from a debt owner on a periodic basis, at a set percentage of face value of the receivables over a specified time period, generally from three to twelve months. These agreements often contain a provision requiring that the attributes and selection criteria of the receivables to be sold will not significantly change each month. If this provision is not adhered to, the contract will typically allow for the early termination of the forward flow contract by the purchaser or other appropriate remedies as mutually agreed upon. Forward flow contracts are a consistent source of defaulted consumer receivables for accounts receivables management providers and provide the debt owner with a reliable source of revenue and a professional resolution of defaulted consumer receivables.

In a typical Core portfolio sale transaction, a debt owner initially distributes a computer data file containing ten to fifteen essential data fields on each receivables account in the portfolio offered for sale. Such fields typically include but are not limited to the customer’s name, address, outstanding balance, date of charge-off, date of last payment and the date the account was opened. Information that is not typically provided includes the original underwriting documentation, charge and payment history prior to charge-off, and collection notations. We perform our initial due diligence on the portfolio by electronically cross-checking the data fields on the computer disk or data tape against the accounts in our owned portfolios and other databases. We compile a variety of portfolio level reports examining all demographic data available.

 

10


Table of Contents

In order to determine a purchase price for a Core portfolio, we use two separate internally developed computer models and one externally developed model. We analyze the portfolio using our proprietary multiple linear regression model, which analyzes the accounts of the portfolio using predictive variables and projects a portfolio liquidation rate. We also analyze the portfolio as a whole using an adjustment model, which uses an appropriate cash flow model that utilizes our collections results from similar portfolios we have previously purchased. We supplement the adjustment model with qualitative background information about the origination, servicing and collection history of the portfolio. Finally, we use a model that creates statistically similar portfolios from our existing accounts across our purchased inventory and develops collection curves for them that are used in our price modeling. From these models we derive our quantitative purchasing analysis which is used to help price transactions. The multiple linear regression model is also used to prioritize collection work efforts subsequent to purchase. With respect to prospective forward flow contracts and other long-term relationships, we obtain a representative file that we use to determine the price of the forward flow agreement. On a go-forward basis, we receive the actual file to be funded, process it through our models, and compare it to the representative file noted above to determine if the delivered file meets the expectations of the initial pricing file. This process allows us to confirm that the accounts we are purchasing are materially consistent with the accounts we agreed to purchase under the forward flow arrangement. When purchasing bankrupt consumer receivables, we follow a similar analytical process but utilize completely separate, specifically designed pricing models.

Our process and portfolio review results in a comprehensive analysis of the proposed Core portfolio. This analysis compares defaulted consumer receivables in the prospective portfolio with our collection history in similar portfolios. We then use our multiple linear regression model to calculate a separate projection of collections. Finally, we use the statistically similar portfolio approach to refine our projected collection curves. Using these three valuation approaches, we determine estimated cash collections over the life of the portfolio. We then compare the results of all three models and project collections, expressed both in dollars and liquidation percentage, and generate a detailed expense projection over the portfolio’s estimated economic life. We use the total projected collections and expenses to determine an appropriate purchase price.

We maintain a detailed static pool analysis on each portfolio that we have acquired, capturing all demographic data and revenue and expense items for further analysis. We use the static pool analysis to refine the underwriting models that we use to price future portfolio purchases. The results of the static pool analysis are input back into our models, increasing the accuracy of the models as the data set increases with every portfolio purchase and each day’s collection efforts. Since we do not sell our purchased defaulted consumer receivables, we work them over the long-term, enhancing our knowledge of a pool’s long-term performance.

The quantitative and qualitative data derived in our due diligence is evaluated together with our knowledge of the current defaulted consumer receivables market and any subjective factors about the portfolio or the debt owner of which management may be aware. A portfolio acquisition approval memorandum is prepared for each prospective portfolio before a purchase price is submitted to the debt owner. This approval memorandum, which outlines the portfolio’s anticipated collectability and purchase structure, is distributed to members of our Investment Committee. The approval by the Investment Committee sets a maximum purchase price for the portfolio.

Once a portfolio purchase has been approved by our Investment Committee and the terms of the sale have been agreed to with the debt owner, the acquisition is documented in an agreement that contains customary terms and conditions. Provisions are typically incorporated for disputed, fraudulent, deceased, bankrupt (in the case of Core portfolio purchases), or other ineligible accounts and typically, the debt owner either agrees to repurchase these accounts or replace them with acceptable replacement accounts within certain time frames.

Owned Portfolio Collection Operations

Call Center Operations – Core Portfolios

Our work flow management system places, recalls and prioritizes accounts, based on our analyses of our accounts and other demographic, credit and customer behavior attributes and prior collection work activities. We use this process to focus our work effort on those customers most likely to pay on their accounts and to rotate to other collectors the non-paying but most likely to pay accounts from which other collectors have been unsuccessful in receiving payment. The majority of our Core portfolio collections occur as a result of telephone contact with customers; however, letters and legal activity also generate meaningful levels of cash collections.

 

11


Table of Contents

The collectability forecast for a newly acquired portfolio will help determine our initial collection strategy. Accounts that are initially determined to have the highest predicted collection probability will be worked immediately, and with greater frequency using either a predictive dialer or manual work efforts. Less collectible accounts may be set aside to be worked with less frequency using the predictive dialer, or another passive, low cost method. After owning an account for a month we begin reassessing the collectability on a daily basis based on a set of observed account characteristics and behaviors. Some accounts may be worked using a letter and/or settlement strategy. We may obtain credit reports for various accounts after the collection process begins.

Our computer system allows each collector to view the scanned documents relating to the account that have been received from the seller, which can include the original account application, payment checks, customer correspondence and other documents.

On the initial contact call, a customer is given a standardized presentation regarding the benefits of resolving his or her account with us. Emphasis is placed on determining the reason for the customer’s default in order to better assess the customer’s situation and create a plan for repayment. The collector is incentivized to have the customer pay the full balance of the account although this occurs very infrequently. If the collector cannot obtain payment of the full balance, the collector will suggest a repayment plan. At times, when determined to be appropriate, and in many cases with management approval, a reduced lump-sum settlement may be agreed upon. If the customer elects to utilize an installment plan, we have developed a system which enables us to make withdrawals from a customer’s bank account, in accordance with the directions of the customer.

If a collector is unable to establish contact with a customer based on information received or stored, the system will supplement the account information by leveraging a series of automated skip tracing procedures. Skip tracing is the process of developing new phone, address, job or asset information on a customer, or verifying the accuracy of such information.

Legal Recovery – Core Portfolios

An important component of our collections effort involves our legal recovery department and the judicial collection of accounts of customers who we believe have the ability, but not the willingness, to resolve their obligations. Accounts for which the customer is not cooperative and for which we can establish garnishable wages or attachable assets are reviewed for legal action. Additionally, we review accounts using a proprietary scoring model and select those accounts reflecting a high propensity to pay in a legal environment. Depending on the balance of the defaulted consumer receivable and the applicable state collection laws, we determine whether to commence legal action to judicially collect on the receivable. The legal process can take an extended period of time, but it also generates cash collections that likely would not have been realized otherwise.

We use a combination of internal staff (attorney and support), as well as external attorneys, to pursue legal collections under certain circumstances. Over the past several years we have focused on developing our internal legal collection capability. We have the capability in all 50 states to initiate lawsuits in amounts up to the jurisdictional limits of the respective courts. Our legal recovery department, using external vendors, also collects claims against estates in cases involving deceased debtors having assets at the time of death. Our legal recovery department oversees our internal legal collections and coordinates a nationwide collections attorney network which is responsible for the preparation and filing of judicial collection proceedings in multiple jurisdictions, determining the suit criteria, and instituting wage garnishments to satisfy judgments. This network currently consists of approximately 50 law firms who work on a contingent fee basis. Legal cash collections generated by both our in house attorneys and outside independent contingent fee attorneys constituted approximately 24% of our total cash collections in 2011. As our portfolio matures, it is likely that a larger number of accounts will be directed to our legal recovery department for judicial collection; consequently, we anticipate that legal cash collections will grow commensurately and comprise a larger percentage of our total Core cash collections.

 

12


Table of Contents

Bankruptcy Operations

Our bankruptcy department manages customer filings under the U.S. Bankruptcy Code on debtor accounts derived from three sources; (1) PRA’s Core purchased pools of charged off accounts that have filed for bankruptcy protection after being acquired by us, (2) our purchased pools of bankrupt accounts, and (3) our third party servicing client relationships. On PRA owned accounts, we file proofs of claim (“POCs”) or claim transfers and actively manage these accounts through the entire life cycle of the bankruptcy proceeding in order to substantiate our claims and ensure that we participate in any distributions to creditors. On accounts managed under a third party relationship, we work on either a full service contingency fee basis or a menu style fee-for-service basis; this is not a significant portion of our bankruptcy operations.

We developed our proprietary Bankruptcy Management System (“BMS”) as a secure and highly automated platform for providing bankruptcy notification services, filing POCs and claim transfers, managing documents, administering our case load, posting and reconciling payments and providing customized reports. BMS is a robust system designed to manage claims processing and case management in a high volume environment. The system is highly flexible and its capacity is easily expanded. Daily processing volumes are managed to meet individual bar dates associated with each bankruptcy case and specific client turnaround times. BMS and its underlying business rules were developed with emphasis first on minimizing risks through strict compliance to the bankruptcy code, and then on maximizing recoveries from automated claim filing and case administration.

Each of our bankruptcy department employees goes through an entry level training program to familiarize them with BMS and the bankruptcy process, including a general overview of how we interact with the courts, debtor’s attorneys and trustees. We also use a tiered process of cross training designed to familiarize advancing employees with a variety of operational assignments and analytical tasks. For example, we utilize specially trained employees to perform advanced data matching and analytics for clients, while others are tasked with resolving objections directly with attorneys and trustees. In rare circumstances, resolution of these objections may need to be effectuated by working through our network of local counsel.

Fee-for-Service Businesses

Through our subsidiaries, we provide fee-based services, including vehicle location, skip tracing and collateral recovery services for auto lenders, governments and law enforcement via our PLS subsidiary; revenue administration, audit, and debt discovery/recovery services for government entities through our PRA GS business; and class action claims recovery services and related payment processing through our CCB subsidiary.

PLS, through call center operations, performs national skip tracing, asset location and collateral recovery services, principally for auto finance companies, for a fee. In addition, PLS will monitor clients’ inventories with its fleet of cars equipped with license plate recognition cameras for a fee. The amount of fee earned is generally dependent on several different outcomes: whether the debtor was found and a resolution on the account occurred, if the collateral was repossessed or if payment was made by the debtor to the debt owner.

The primary source of income for PRA GS is derived from servicing taxing authorities in several different ways: processing their tax payments and tax forms, collecting delinquent taxes, identifying taxes that are not being paid and auditing tax payments. The processing and collection pieces are standard commission based billings or fee-for-service transactions. When audits are conducted, there are two components. The first is a charge for the hours incurred on conducting the audit, based on a contractual billing rate. The gross billing amount based on the aforementioned billing rate is a component of the line item “Fee income” while the salary expense is included in the line item “Compensation and employee services.” The second item is for expenses incurred while conducting the audit. Most jurisdictions will reimburse us for direct expenses incurred for the audit including such items as travel and meals. The billed amounts are included in the line item “Fee income” and the expense component is included in its appropriate expense category, generally, “Other operating expenses.”

On March 15, 2010, we acquired 62% of the membership units of CCB. CCB was founded in 1996 and is a leading provider of class action claims settlement recovery services and related payment processing to corporate clients. CCB’s process allows clients to maximize settlement recoveries, in many cases participating in settlements they would otherwise not know existed. CCB charges fees for its services and works with clients to identify, prepare and submit claims to class action administrators charged with disbursing class action settlement funds. In addition, PRA purchases the rights to existing and future class action claims identified by CCB.

 

13


Table of Contents

Competition

We face competition in both of the markets we serve — owned portfolio and fee-for-service receivables management — from new and existing providers of outsourced receivables management services, including other purchasers of defaulted consumer receivables portfolios, third-party contingent fee collection agencies and debt owners that manage their own defaulted consumer receivables rather than outsourcing them. The receivables management industry (owned portfolio and contingent fee) remains highly fragmented and competitive. There are few significant barriers for entry to new providers of contingent fee receivables management services and, consequently, the number of agencies serving the contingent fee market may continue to grow. Constrained investment capital, the need for portfolio evaluation expertise sufficient to price portfolios, and compliance with regulations effectively constitute significant barriers for successful entry to new purchased portfolio receivables companies.

We face bidding competition in our acquisition of defaulted consumer receivables and in obtaining placement of fee-for-service receivables. We also compete on the basis of reputation, industry experience and performance. Among the positive factors which we believe influence our ability to compete effectively in this market are our ability to bid on portfolios at appropriate prices, our reputation from previous transactions regarding our ability to close transactions in a timely fashion, our relationships with originators of defaulted consumer receivables, our team of well-trained collectors who provide quality customer service and compliance with applicable collections laws and our ability to efficiently and effectively collect on various asset types. Current or new competitors that have substantially greater financial, personnel and other resources, greater adaptability to changing market needs, longer operating histories, or more established relationships in our industry than we currently have, could influence our ability to compete effectively.

Information Technology

Technology Operating Systems and Server Platform

The architecture and design of our systems provides us with a technology system that is flexible, secure, reliable and redundant to provide for the protection of our sensitive data. We utilize Intel-based servers running Microsoft Windows 2000/2003 operating systems. Our desktop PCs run the Windows XP operating system. In addition, we utilize a blend of purchased and proprietary software systems tailored to the needs of our business. These systems are designed to eliminate inefficiencies in our collections and continue to meet business objectives in a changing environment. Our proprietary software systems are being leveraged to manage location information and operational applications for PRA GS, PLS and CCB.

Network Technology

To provide delivery of our applications, we utilize Intel-based workstations across our entire business operation. The environment is configured to provide speeds of 100 megabytes to the desktops of our collections and administration staff. Our one gigabyte server network architecture supports high-speed data transport. Our network system is designed to be scalable and meet expansion and inter-building bandwidth and quality of service demands.

Database and Software Systems

The ability to access and utilize data is essential to us being able to operate in a cost-effective manner. Our centralized computer-based information systems support the core processing functions of our business under a set of integrated databases and are designed to be scalable to accommodate our internal growth. This integrated approach helps to assure that data sources are processed efficiently. We use these systems for portfolio and client management, skip tracing, check taking, financial and management accounting, reporting, and planning and analysis. We use a combination of Microsoft and Oracle database software to manage our portfolios and financial, customer and sales data. PRA GS, PLS and CCB all maintain unique, proprietary software systems that manage the movement of data, accounts and information throughout these business units.

 

14


Table of Contents

Redundancy, System Backup, Security and Disaster Recovery

Our data centers provide the infrastructure for collection services and uninterrupted support of data, applications and hardware for all of our business units. We believe our facilities and operations include sufficient redundancy, file back-up and security to ensure minimal exposure to systems failure or unauthorized access The preparations in this area include the use of call centers in Virginia, Kansas, Alabama and Tennessee in order to help provide redundancy for data and processes should one site be completely disabled. We have a disaster recovery plan covering our business that is tested on a periodic basis. The combination of our locally distributed call control systems provides enterprise-wide call and data distribution between our call centers for efficient portfolio collection and business operations. In addition to data replication between the sites, incremental backups of both software and databases are performed on a daily basis and a full system backup is performed weekly. Backup data tapes are stored at an offsite location along with copies of schedules and production control procedures, procedures for recovery using an off-site data center, and documentation and other critical information necessary for recovery and continued operation. Our Virginia headquarters has two separate telecommunications feeds, uninterruptible power supplies and natural gas and diesel-generators, all of which provide a level of redundancy should a power outage or interruption occur. We also have generators installed at each of our call centers, as well as our subsidiary locations in Alabama, California and Nevada. We also employ rigorous physical and electronic security to protect our data. Our call centers have restricted card key access and appropriate additional physical security measures. Electronic protections include data encryption, firewalls and multi-level access controls.

Predictive Dialer Technology

The Avaya Proactive Contact Dialer enables our collection staff to focus on certain defaulted consumer receivables according to our specifications. Its predictive technology takes into account all collection campaign and dialing parameters and is able to automatically adjust its dialing pace to match changes in campaign conditions and provide the lowest possible wait times and abandon rates, with the highest volume of outbound calls.

Display Screens for Real Time Data Utilization

We utilize multiple plasma displays at most of our collection facilities to aid in recovery of portfolios. The displays provide real-time business-critical information to our collection personnel for efficient collection efforts such as telephone, production, employee status, goal trending, training and corporate information.

Employees

As of December 31, 2011, we employed 2,641 persons on a full-time basis, including the following number of front line operations employees by business: 2,023 working on our owned portfolios and 262 working in our fee-for-service subsidiaries. None of our employees are represented by a union or covered by a collective bargaining agreement. We believe that our relations with our employees are positive.

Collection Personnel

Our collectors are critical to the success of our debt collection business as a majority of our Core portfolio collection efforts occur as a result of telephone contact with customers. We have found that the tenure and productivity of our collectors are directly related. Therefore, attracting, hiring, training, retaining and motivating our collection personnel is a major focus for us. We pay our collectors competitive wages and offer employees a full benefits program. In addition to a base wage, we provide collectors with the opportunity to receive compensation through an incentive compensation program that pays bonuses above a set monthly base, based upon each collector’s collection and compliance results. This program is designed to ensure that employees are paid based not only on performance, but also on consistency and quality.

We believe that we offer a competitive and, in many cases, a higher base wage than many local employers and therefore have access to a large number of eligible personnel in each of our call center locations. In addition, there are several military bases near our Virginia locations which provide us with an excellent source of employees. As a result, we employ numerous military spouses and retirees.

 

15


Table of Contents

Collections Training

We provide a comprehensive multi-week training program for all new owned portfolio collectors. Our training program begins with lectures on collection techniques, local, state and federal collection laws, systems, negotiation skills, skip tracing and telephone use. These sessions are then followed by additional weeks of practical instruction, including conducting live calls with additional managerial supervision in order to provide employees with confidence and guidance while still contributing to our profitability. Each trainee must successfully pass a comprehensive examination before being assigned to the collection floor, as well as once a year thereafter. Our technology and systems allow us to monitor and record individual employees and then offer additional training in areas of deficiency to increase productivity and ensure compliance.

Each of our bankruptcy department employees goes through an entry level training program to familiarize them with BMS and the bankruptcy process, including a general overview of how we interact with the courts, debtor’s attorneys and trustees. We also use a tiered process of cross training designed to familiarize advancing employees with a variety of operational assignments and analytical tasks. For example, we utilize specially trained employees to perform advanced data matching and analytics for clients, while others are tasked with resolving objections directly with attorneys and trustees. In rare circumstances, resolution of these objections may need to be effectuated by working through our network of local counsel.

Office of General Counsel

Our Office of General Counsel manages general corporate governance; litigation; insurance; corporate and commercial transactions; intellectual property; contract and document preparation and review; compliance with federal securities laws and other regulations and statutes; obtaining and maintaining insurance coverage; business acquistions; and dispute and complaint resolution. As a part of its compliance functions, our Office of General Counsel works with our Director of Internal Audit in the implementation of our Code of Ethics. In that connection, we have implemented companywide ethics training and have established a confidential telephone hotline to report suspected policy violations, fraud, embezzlement, deception in record keeping and reporting, accounting, auditing matters and other acts which are inappropriate, criminal and/or unethical. Our Code of Ethics is available at the Investor Relations page of our website. Our Office of General Counsel also oversees our Quality Control and Compliance department and advises our staff in relevant areas including the Fair Debt Collection Practices Act and other laws and regulations. Our Office of General Counsel recommends guidelines and procedures for collection personnel to follow when communicating with customers, customer’s agents, attorneys and other parties during our recovery efforts. This includes approving all written communications to account debtors. In addition, our Office of General Counsel regularly researches and provides collections personnel and our training department with summaries and updates of changes in federal and state statutes and relevant case law so that they are aware of and in compliance with changing laws and judicial decisions when skip-tracing or collecting accounts.

Regulation

Federal and state statutes establish specific guidelines and procedures which debt collectors must follow when collecting customer accounts. It is our policy to comply with the provisions of all applicable federal laws and corresponding state statutes in all of our recovery activities. Our failure to comply with these laws could have a material adverse effect on us in the event and to the extent that they apply to some or all of our recovery activities. Federal and state consumer protection, privacy and related laws and regulations extensively regulate the relationship between debt collectors and debtors, and the relationship between customers and credit card issuers. Significant federal laws and regulations applicable to our business as a debt collector include the following:

Fair Debt Collection Practices Act. This act imposes certain obligations and restrictions on the practices of debt collectors, including specific restrictions regarding communications with customers, including the time, place and manner of the communications. This act also gives consumers certain rights, including the right to dispute the validity of their obligations and a right to sue debt collectors who fail to comply with its provisions, including the right to recover their attorney fees.

 

16


Table of Contents

Fair Credit Reporting Act. This act places certain requirements on credit information providers regarding the verification of the accuracy of information provided to credit reporting agencies and investigating consumer disputes concerning the accuracy of such information. We provide information concerning our accounts to the three major credit reporting agencies, and it is our practice to correctly report this information and to investigate credit reporting disputes. The Fair and Accurate Credit Transactions Act amended the Fair Credit Reporting Act to include additional duties applicable to data furnishers with respect to information in the consumer’s credit file that the consumer identifies as resulting from identity theft, and requires that data furnishers have procedures in place to prevent such information from being furnished to credit reporting agencies.

Gramm-Leach-Bliley Act. This act requires that certain financial institutions, including collection agencies, develop policies to protect the privacy of consumers’ private financial information and provide notices to consumers advising them of their privacy policies. This act also requires that if private personal information concerning a consumer is shared with another unrelated institution, the consumer must be given an opportunity to opt out of having such information shared. Since we do not share consumer information with non-related entities, except as required by law, or except as needed to collect on the receivables, our consumers are not entitled to any opt-out rights under this act. This act is enforced by the Federal Trade Commission, which has retained exclusive jurisdiction over its enforcement, and does not afford a private cause of action to consumers who may wish to pursue legal action against a financial institution for violations of this act.

Electronic Funds Transfer Act. This act regulates the use of the Automated Clearing House (“ACH”) system to make electronic funds transfers. All ACH transactions must comply with the rules of the National Automated Check Clearing House Association (“NACHA”) and Uniform Commercial Code § 3-402. This act, the NACHA regulations and the Uniform Commercial Code give the consumer, among other things, certain privacy rights with respect to electronic fund transfer transactions, the right to stop payments on a pre-approved fund transfer, and the right to receive certain documentation of the transaction. This act also gives consumers a right to sue institutions which cause financial damages as a result of their failure to comply with its provisions.

Telephone Consumer Protection Act. In the process of collecting accounts, we use automated predictive dialers and pre-recorded messages to communicate with our customers. This act and similar state laws place certain restrictions on users of certain automated dialing equipment and pre-recorded messages who place telephone calls to consumers.

Servicemembers Civil Relief Act. The Soldiers’ and Sailors’ Civil Relief Act of 1940 was amended in December 2003 as the Servicemembers Civil Relief Act (“SCRA”). The SCRA gives U.S. military service personnel relief from credit obligations they may have incurred prior to entering military service, and may also apply in certain circumstances to obligations and liabilities incurred by a servicemember while serving on active duty. The SCRA prohibits creditors from taking specified actions to collect the defaulted accounts of servicemembers. The SCRA impacts many different types of credit obligations, including installment contracts and court proceedings, and tolls the statute of limitations during the time that the servicemember is engaged in active military service. The SCRA also places a cap on interest bearing obligations of servicemembers to an amount not greater than 6% per year, inclusive of all related charges and fees.

Health Insurance Portability and Accountability Act. The Health Insurance Portability and Accountability Act (“HIPAA”) provides standards to protect the confidentiality of patients’ personal healthcare and financial information. Pursuant to HIPAA, business associates of health care providers, such as agencies which collect healthcare receivables, must comply with certain privacy and security standards established by HIPAA to ensure that the information provided will be safeguarded from misuse. This act is enforced by the Department of Health and Human Services and does not afford a private cause of action to consumers who may wish to pursue legal action against an institution for violations of this act.

U.S. Bankruptcy Code. In order to prevent any collection activity with bankrupt debtors by creditors and collection agencies, the U.S. Bankruptcy Code provides for an automatic stay, which prohibits certain contacts with consumers after the filing of bankruptcy petitions. The U.S. Bankruptcy Code also dictates what types of claims will or will not be allowed in a bankruptcy proceeding and how such claims may be discharged.

Dodd-Frank Wall Street Reform and Consumer Protection Act . On July 21, 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) became law. The Dodd-Frank Act restructured the regulation and supervision of the financial services industry and created the Consumer Financial Protection Bureau (the CFPB”). The CFPB has rulemaking and enforcement authority over “non-banks”

 

17


Table of Contents

including debt collectors. On February 16, 2012, the CFPB released a proposed rule which, if adopted, would enable it to supervise and examine debt collectors with annual receipts of more than $10 million. Many of the provisions of the Dodd-Frank Act have extended implementation periods and delayed effective dates and will require extensive rulemaking. As a result, the ultimate impact of the Dodd-Frank Act on our business cannot be determined at this time.

Additionally, there are some state statutes and regulations comparable to the above federal laws, and specific licensing requirements which affect our operations. State laws may also limit credit account interest rates and fees, as well as limit the time frame in which judicial and non-judicial actions may be initiated to collect consumer accounts.

Although we are not a credit originator, some of the following laws, which apply principally to credit originators, may occasionally affect our operations because our receivables were originated through credit transactions:

 

   

Truth in Lending Act;

 

   

Fair Credit Billing Act; and

 

   

Equal Credit Opportunity Act.

Federal laws which regulate credit originators require, among other things, that credit card issuers disclose to consumers the interest rates, fees, grace periods and balance calculation methods associated with their credit card accounts. Consumers are entitled under current laws to have payments and credits applied to their accounts promptly, to receive prescribed notices and to require billing errors to be resolved promptly. Some laws prohibit discriminatory practices in connection with the extension of credit. Federal statutes further provide that, in some cases, consumers cannot be held liable for, or their liability is limited with respect to, charges to the credit card account that were a result of an unauthorized use of the credit card. These laws, among others, may give consumers a legal cause of action against us, or may limit our ability to recover amounts owing with respect to the receivables, whether or not we committed any wrongful act or omission in connection with the account. If the credit originator fails to comply with applicable statutes, rules and regulations, it could create claims and rights for consumers that could reduce or eliminate their obligations to repay the account and have a possible material adverse effect on us.

Accordingly, when we acquire defaulted consumer receivables, typically we contractually require credit originators to indemnify us against any losses caused by their failure to comply with applicable statutes, rules and regulations relating to the receivables before they are sold to us.

The U.S. Congress and several states have enacted legislation concerning identity theft. Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement of and recovery on consumer credit card or installment accounts. Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to recover the receivables. In addition, our failure to comply with these requirements could adversely affect our ability to enforce the receivables.

We cannot assure you that some of our receivables were not established as a result of identity theft or unauthorized use of a credit card. In the event that a receivable was established as a result of identity theft or unauthorized use, we could not recover the amount of the defaulted consumer receivables. As a purchaser of defaulted consumer receivables, we may acquire receivables subject to legitimate defenses on the part of the consumer. Typically our account purchase contracts allow us to return to the debt owners certain defaulted consumer receivables that may not be collectible, due to these and other circumstances. Upon return, the debt owners are required to replace the receivables with similar receivables or repurchase the receivables. These provisions limit to some extent our losses on such accounts.

In addition to our obligation to comply with applicable federal, state and local laws and regulations, we are also obligated to comply with judicial decisions reached in court cases involving legislation passed by any such governmental bodies.

 

18


Table of Contents

I tem 1A. Risk Factors.

The following are risks related to our business.

A prolonged economic recovery or a deterioration in the economic or inflationary environment in the United States or the United Kingdom may have an adverse effect on our collections, results of operations, revenue and stock price.

Our performance may be affected by economic or inflationary conditions in the United States and the United Kingdom. Economic conditions in the United States and the United Kingdom may be impacted by domestic conditions or by global economic conditions such as those currently being experienced in Europe. Deterioration in economic conditions, a prolonged economic recovery, or a significant rise in inflation could cause personal bankruptcy filings to increase, and the ability of consumers to pay their debts could be adversely affected. This may in turn adversely impact our financial condition, results of operations, revenue and stock price. Deteriorating economic conditions or a prolonged recovery could also adversely impact businesses and governmental entities to which we provide fee-based services, which could reduce our fee income and cash flow and thereby adversely impact our financial condition, results of operations, revenue and stock price. Other factors associated with the economy that could influence our performance include the financial stability of the lenders on our line of credit, our access to credit, and financial factors affecting consumers.

The financial turmoil which affected the banking system and financial markets in recent years has resulted in a tightening in credit markets. There could be a number of follow-on effects from the financial turmoil on our business, including a decrease in the value of our financial investments and the insolvency of lending institutions, including the lenders on our line of credit, resulting in our inability to obtain credit. These and other economic factors could have a material adverse effect on our financial condition and results of operations.

We may not be able to purchase defaulted consumer receivables at appropriate prices, and a decrease in our ability to purchase portfolios of receivables could adversely affect our ability to generate revenue.

If we are unable to purchase defaulted receivables from debt owners at appropriate prices, or one or more debt owners stop selling defaulted receivables to us, we could lose a potential source of cash flow and income and our business may be harmed. The availability of receivables portfolios at prices which generate an appropriate return on our investment depends on a number of factors both within and outside of our control, including the following:

 

   

the continuation of high levels of consumer debt obligations;

 

   

sales of defaulted receivables portfolios by debt owners; and

 

   

competitive factors affecting potential purchasers and credit originators of receivables.

Moreover, there can be no assurance that our existing or potential clients will continue to sell their defaulted consumer receivables at recent levels or at all, or that we will be able to continue to offer competitive bids for defaulted consumer receivables portfolios. If we are unable to develop and expand our business or adapt to changing market needs as well as our current or future competitors are able to do, we may experience reduced access to defaulted consumer receivables portfolios at appropriate prices and reduced profitability.

Because of the length of time involved in collecting defaulted consumer receivables on acquired portfolios and the volatility in the timing of our collections, we may not be able to identify trends and make changes in our purchasing strategies in a timely manner.

 

19


Table of Contents

We may not be able to continually replace our defaulted consumer receivables with additional receivables portfolios sufficient to operate efficiently and profitably.

To operate profitably, we must acquire and service a sufficient amount of defaulted consumer receivables to generate revenue that exceeds our expenses. Fixed costs such as salaries and lease or other facility costs constitute a significant portion of our overhead and, if we do not replace the defaulted consumer receivables portfolios we service with additional portfolios, we may have to reduce the number of our collection personnel. We would then have to rehire collection staff as we obtain additional defaulted consumer receivables portfolios. These practices could lead to:

 

   

low employee morale;

 

   

fewer experienced employees;

 

   

higher training costs;

 

   

disruptions in our operations;

 

   

loss of efficiency; and

 

   

excess costs associated with unused space in our facilities.

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

A portion of our collections depends on success in individual lawsuits. Additionally, in pursuing legal collections, we may be unable to obtain accurate and authentic account documents for accounts that we purchase, and despite our quality control measures, we cannot be certain that all of the documents that we provide are error free.

A portion of our collections on accounts is achieved through the legal channel. We anticipate that legal collections as a proportion of our Core cash collections will increase in the future. Accordingly, a percentage of our future collections is dependent on success in individual lawsuits, and a portion of those are dependent on the success of third party attorney firms. In addition, when we collect accounts judicially, courts in certain jurisdictions require that a copy of certain account documents such as account statements be attached to the pleadings in order to obtain a judgment against the account debtors. If we are unable to produce accurate and authentic account documents, these courts will deny our claims. We rely on the seller of accounts that we purchase to fulfill its contractual obligation, if applicable, to provide account documents to us in an accurate and timely fashion. Additionally, we rely on our employees to produce accurate and authentic documents. Our inability to obtain these documents from the seller, or our own errors in producing account documents, may negatively impact the liquidation rate on such accounts that are subject to judicial collections. Additionally, our ability to collect non-judicially may be negatively impacted by state laws which require that certain types of account documentation be in our possession prior to the institution of any collection activities.

We may not be able to collect sufficient amounts on our defaulted consumer receivables to fund our operations.

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

 

20


Table of Contents

We may not be successful at acquiring receivables of new asset types.

We may pursue the acquisition of receivables portfolios of asset types in which we have little current experience. We may not be successful in completing any acquisitions of receivables of these asset types and our limited experience in these asset types may impair our ability to collect on these receivables. This may cause us to pay too much for these receivables and, consequently, we may not generate a profit from these receivables portfolio acquisitions.

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

Various economic trends and potential changes to existing legislation may contribute to an increase in the amount of personal bankruptcy filings. Under certain bankruptcy filings a debtor’s assets may be sold to repay creditors, but because the defaulted consumer receivables we service are generally unsecured we often would not be able to collect on those receivables. We cannot ensure that our collections would not decline with an increase in personal bankruptcy filings or a change in bankruptcy regulations or practices. If our actual collection experience with respect to a defaulted bankrupt consumer receivables portfolio is significantly lower than we projected when we purchased the portfolio, our financial condition and results of operations could deteriorate.

Our ability to collect on portfolios of bankrupt consumer receivables may be impacted by changes in federal laws or changes in the administrative practices of the various bankruptcy courts.

We collect on consumer receivables in which consumers have filed for bankruptcy protection under available U.S. bankruptcy laws. We collect on such consumer receivables after we acquired them, and we also purchase accounts that are currently in bankruptcy proceedings. Our ability to collect on portfolios of bankrupt consumer receivables may be impacted by changes in federal laws or changes in administrative practices of the various bankruptcy courts.

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

The businesses conducted by PRA’s operating subsidiaries are subject to licensing and regulation by governmental and regulatory bodies in the many jurisdictions in which we operate and conduct our business. Federal and state laws may limit our ability to collect and enforce our defaulted consumer receivables regardless of any act or omission on our part. Some laws and regulations applicable to credit issuers may preclude us from collecting on defaulted consumer receivables we purchase if the credit issuer previously failed to comply with applicable laws in generating or servicing those receivables. Collection laws and regulations also directly apply to our business. Such laws and regulations are extensive and subject to change. Additional consumer protection and privacy protection laws may be enacted that would impose additional requirements on the enforcement of and collection on consumer credit receivables. Any new laws, rules or regulations that may be adopted, as well as existing consumer protection and privacy protection laws, may adversely affect our ability to collect on our defaulted consumer receivables and may harm our business. In addition, federal and state governmental bodies are considering, and may consider in the future, legislative proposals that would regulate the collection of our defaulted consumer receivables. Further, certain tax laws could negatively impact our ability to collect or cause us to incur additional expenses. Although we cannot predict if or how any future legislation would impact our business, our failure to comply with any current or future laws or regulations applicable to us could limit our ability to collect on our defaulted consumer receivables, which could reduce our profitability and harm our business.

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

The collections industry is governed by various U.S. federal and state laws and regulations. Many states regulate our business and require us to be a licensed debt collector. Our industry is also at times investigated by regulators and offices of state attorneys general, which could lead to enforcement actions, fines and penalties, or the assertion of private claims and law suits against us. The Federal Trade Commission has the authority to investigate consumer complaints against debt collection companies and to recommend enforcement actions and seek monetary penalties. If we fail to comply with applicable laws and regulations, such failure could result in

 

21


Table of Contents

penalties, litigation losses and expenses, damage to our reputation, or the suspension or termination of our ability to conduct collections, which would materially adversely affect our results of operations, financial condition and stock price. In addition, new federal and state laws or regulations or changes in the ways that existing rules or laws are interpreted or enforced could limit our activities in the future or significantly increase the cost of compliance. Furthermore, judges or regulatory bodies could interpret current rules or laws differently than the way we do, leading to such adverse consequences described above. The resolution of such matters may require considerable time and expense, and if not resolved in our favor, may result in fines or damages, and possibly an adverse effect on our financial condition.

Changes in governmental laws and regulations could increase our costs and liabilities or impact our operations.

Changes in laws and regulations or the manner in which they are interpreted or applied may alter our business environment. This could affect our results of operations or increase our liabilities. These negative impacts could result from changes in collection laws, laws related to credit reporting, consumer bankruptcy, accounting standards, taxation requirements, employment laws and communications laws, among others. For example, we know that both federal and state governments are currently reviewing existing law related to debt collection, in order to determine if any changes are needed. Additionally, in July 2010, the Dodd-Frank Act became law. The Dodd-Frank Act restructures the regulation and supervision of the financial services industry. The Dodd-Frank Act created a new independent regulator, the Consumer Financial Protection Bureau, which will have rulemaking, supervisory, and enforcement authority over federal consumer financial protection laws. If we become subject to additional costs or liabilities in the future resulting from changes in laws and regulations, that could adversely affect our results of operations and financial condition.

We may make business acquisitions that prove unsuccessful or strain or divert our resources.

Through acquisitions, we may enter markets in which we have no or limited experience. Further, acquisitions may place additional constraints on our resources by diverting the attention of our management team from other business concerns. Moreover, any acquisition may result in a potentially dilutive issuance of equity securities or may result in the incurrence of additional debt and amortization expenses of related intangible assets, which could reduce our profitability and harm our business.

We intend to consider acquisitions of companies that could complement our business, including the acquisition of entities offering greater access and expertise in other asset types and markets that are related but that we do not currently serve. We may not be able to successfully operate future acquired entities, or integrate these businesses with our own, and we may be unable to maintain our standards, controls and policies.

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

In the first quarter of 2012, we acquired MHH, a United Kingdom debt collection and purchase group. We have limited operating experience in international markets. In addition to risks described elsewhere in this section, our international operations expose us to numerous risks and uncertainties, including the following:

 

   

Changes in local political, economic, social and labor conditions in the United Kingdom,

 

   

Foreign exchange controls that might prevent us from repatriating cash earned in countries outside the United States,

 

   

Currency exchange rate fluctuations and our ability to manage these fluctuations through a foreign exchange risk management program,

 

   

Different employee/employer relationships, laws and regulations and existence of employment tribunals,

 

   

Laws and regulations governing data security, sharing and transfer, and

 

   

Logistical, communications and other challenges caused by distance and cultural differences, making it harder to do business in certain jurisdictions.

 

22


Table of Contents

In addition, compliance with complex foreign and U.S. laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions. These laws and regulations include anti-corruption laws such as the Foreign Corrupt Practices Act, the UK Bribery Act of 2010 and other local laws prohibiting corrupt payments to governmental officials, and those related to taxation. Violations of these laws and regulations could result in fines and penalties; criminal sanctions against us, our officers, or our employees; prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries, and could also materially affect our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors or agents will not violate our policies.

Furthermore, since we conduct business in currencies other than U.S. dollars but report our financial results in U.S. dollars, we face exposure to fluctuations in currency exchange rates. As a result, significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our net income. We may or may not implement a hedging program related to currency exchange rate fluctuations. Additionally, if implemented, such hedging programs are inherently risky and could expose us to additional risks that could adversely affect our financial condition and results of operations.

Goodwill impairment could negatively impact our net income and stockholders’ equity.

Goodwill is not amortized, but is tested for impairment at the reporting unit level. Goodwill is required to be tested for impairment annually and between annual tests if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. There are numerous risks that may cause the fair value of a reporting unit to fall below its carrying amount, which could lead to the recognition of goodwill impairment. These risks include, but are not limited to, adverse changes in macroeconomic conditions, the business climate, or the market for the entity’s products or services; significant variances between actual and expected financial results; lowered expectations of future results; failure to realize anticipated synergies from acquisitions; a more likely-than-not expectation of selling or disposing all or a portion of a reporting unit; the loss of key personnel; a sustained decline in the Company’s market capitalization; and an adverse action or assessment by a regulator. The Company had $61.7 million of goodwill recorded on its balance sheet as of December 31, 2011.

The loss of customers in our fee-for-service businesses could negatively affect our operations.

Our fee-for-service customers, in general, may terminate their relationship with us on 30 to 90 days’ prior notice. In the event a customer or customers terminate or significantly cut back any relationship with us, it could reduce our profitability and harm our business. Additionally, with respect to the acquisitions of our fee businesses a significant portion of the valuation of such business was attributed to existing client and customer relationships. Therefore, a loss of customers in these businesses could give rise to an impairment charge related to intangible assets specifically ascribed to existing client and customer relationships.

Our senior management team is important to our continued success and the loss of one or more members of senior management could negatively affect our operations.

The loss of the services of one or more of our key executive officers or key employees could disrupt our operations. We have employment agreements with Steve Fredrickson, our president, chief executive officer and chairman of our board of directors, Kevin Stevenson, our executive vice president and chief financial and administrative officer, and most of our other senior executives. The current agreements contain non-compete provisions that survive termination of employment. However, these agreements do not and will not assure the continued services of these officers and we cannot ensure that the non-compete provisions will be enforceable. Our success depends on the continued service and performance of our key executive officers, and we cannot guarantee that we will be able to retain those individuals.

 

23


Table of Contents

Our work force could become unionized in the future, which could adversely affect the stability of our operations and increase our costs.

Currently, none of our employees are represented by unions. However, our employees have the right at any time under the National Labor Relations Act to form or affiliate with a union. If some or all of our workforce were to become unionized and the terms of the collective bargaining agreement were significantly different from our current compensation arrangements, it could adversely affect the stability of our work force and increase our costs.

We experience high employee turnover rates and we may not be able to hire and retain enough sufficiently trained employees to support our operations.

The receivables management industry is very labor intensive and, similar to other companies in our industry, we typically experience a high rate of employee turnover. We experience higher productivity with more seasoned collectors. Our annual turnover rate for the past several years for collectors who complete our multi-week training program has ranged between 39% and 59%. We compete for qualified personnel with companies in our industry and in other industries. Our growth requires that we continually hire and train new collectors. A higher turnover rate among our collectors will increase our recruiting and training costs and limit the number of experienced collection personnel available to service our defaulted consumer receivables. If this were to occur, we would not be able to service our defaulted consumer receivables effectively and this would reduce our ability to continue our growth and operate profitability.

We may not be able to retain, renegotiate or replace our existing credit facility.

Our 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, and a $357.5 million revolving facility that matures on December 20, 2014. The revolving facility will be automatically increased by $50 million upon maturity and repayment of the fixed rate loan. If we are unable to retain, renegotiate or replace our credit facility, our growth could be adversely affected, which could negatively impact liquidity, our business operations and the price of our common stock.

We may not be able to continue to satisfy the restrictive covenants in our debt agreements.

Our debt agreements impose a number of restrictive covenants on how we operate our business. Failure to satisfy any one of these covenants could result in all or any of the following consequences, each of which could have a material adverse effect on our ability to conduct business:

 

   

acceleration of outstanding indebtedness;

 

   

exercise by our lenders of rights with respect to the collateral pledged under [certain of] our outstanding indebtedness;

 

   

our inability to continue to purchase receivables needed to operate our business; or

 

   

our inability to secure alternative financing on favorable terms, if at all.

Changes in interest rates could increase our interest expense and reduce our net income. Our future hedging strategies may not be successful in mitigating our risks associated with changes in interest rates and could adversely affect our results of operations and financial condition, as could our failure to comply with hedge accounting principles and interpretations.

Our revolving credit facility bears interest at a variable rate. Increases in interest rates could increase our interest expense which would, in turn, lower our earnings. From time to time, we may enter into hedging transactions to mitigate our interest rate risk on a portion of our credit facility. Our hedging strategies rely on assumptions and projections. If these assumptions and projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates, we may experience volatility in our earnings that could adversely affect our results of operations and financial condition. We had no interest rate hedge contracts at December 31, 2011.

In addition, hedge accounting in accordance with FASB ASC Topic 815 “Derivatives and Hedging” requires the application of significant subjective judgments to a body of accounting concepts that is complex and for which the interpretations have continued to evolve within the accounting profession and among the standard-setting bodies. Our failure to comply with hedge accounting principles and interpretations in the future could result in the loss of the applicability of hedge accounting which could adversely affect our results of operations and financial condition.

 

24


Table of Contents

Additional taxes levied on us could harm our financial results.

PRA is subject to taxes in the U.S. and, beginning in the first quarter of 2012, the United Kingdom. PRA’s future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. Any of these changes could have a material adverse effect on PRA’s profitability. The determination of the worldwide provision for income taxes and other tax liabilities requires significant judgment. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

Our tax filings are subject to audit by domestic and foreign tax authorities. These audits may result in assessments of additional taxes, adjustments to the timing of taxable income or deductions or allocations of income among tax jurisdictions. If any such challenges are made and are not resolved in our favor, they could have an adverse effect on our financial condition and results of operations.

We file domestic income tax returns using the cost recovery method for tax revenue recognition as it relates to our debt purchasing business. The Internal Revenue Service (“IRS”) has audited and issued a Notice of Deficiency for the tax years ended December 31, 2007, 2006 and 2005. They have 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. We have filed a petition in United States Tax Court and believe we have sufficient support for the technical merits of our positions and that it is more-likely-than-not that these positions will ultimately be sustained; therefore, a reserve for uncertain tax positions is not necessary for these tax positions. If we are unsuccessful in tax court, we can appeal to the federal Circuit Court of Appeals. If judicial appeals prove unsuccessful, we may ultimately be required to pay the related deferred taxes, any potential interest, and penalties, possibly requiring additional financing from other sources. The deferred tax liability related to revenue recognition on our debt purchasing business is $195.3 million at December 31, 2011. On June 30, 2011, we were notified by the IRS that the audit period was expanded to include the tax years ended December 31, 2009 and 2008.

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

We utilize the interest method to determine income recognized on finance receivables under the guidance of Financial Accounting Standards Board Accounting Standards Codification 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). Under this method, static pools of receivables we acquire are modeled upon their projected cash flows. A yield is then established which, when applied to the unamortized purchase price of the receivables, results in the recognition of income at a constant yield relative to the remaining balance in the pool. Each static pool is analyzed monthly to assess the actual performance compared to that expected by the model. Significant increases in actual or projected future cash flows are recognized prospectively, through an upward adjustment of the yield, over a pool’s estimated remaining life. Any increase to the yield then becomes the new benchmark for future impairment testing for the pool. Under ASC 310-30, rather than lowering the estimated yield for significant decreases in actual or projected future cash flows, an allowance charge is recorded to reduce the carrying value of a pool to maintain the then current yield and is shown as a reduction in revenues in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables, net, on the consolidated balance sheets. As a result, if the accuracy of the modeling process deteriorates or there is a significant decline in anticipated future cash flows, we could incur reductions in future revenues resulting from additional allowance charges, which could reduce our profitability in a given period and negatively impact our stock price.

 

25


Table of Contents

We may not be able to successfully anticipate, manage or adopt technological advances within our industry.

Our business relies on computer and telecommunications technologies and our ability to integrate these technologies into our business is essential to our competitive position and our success. Computer and telecommunications technologies are evolving rapidly and are characterized by short product life cycles. We may not be successful in anticipating, managing or adopting technological changes on a timely basis, which could reduce our profitability or disrupt our operations and harm our business.

While we believe that our existing information systems are sufficient to meet our current demands and continued expansion, our future growth may require additional investment in these systems. We depend on having the capital resources necessary to invest in new technologies to acquire and service defaulted consumer receivables. We cannot ensure that adequate capital resources will be available to us at the appropriate time.

We rely on our systems and employees, and certain failures or disruptions could adversely affect the continuity of our business operations.

We may be subject to disruptions of our operating systems arising from events that are not entirely within our control. Those events may include, for example, terrorist attacks, war and the outcome of war and threats of attacks; computer viruses; electrical or telecommunications outages; natural disasters; computer hacking attacks; malicious employee acts; other intentional destructive human acts; and disease pandemics. Any or all of these occurrences could have a material adverse effect on our results of operations, financial condition and stock price.

Additionally, our success depends in large part on sophisticated telecommunications and computer systems. The temporary or permanent loss of our computer and telecommunications equipment and software systems, through casualty or operating malfunction, could disrupt our operations. In the normal course of our business, we must record and process significant amounts of data quickly and accurately to access, maintain and expand the databases we use for our collection activities. Any failure of our information systems or software and our backup systems would interrupt our business operations and harm our business. Our headquarters are located in a region that is susceptible to hurricane damage, which may increase the risk of disruption of information systems and telephone service for sustained periods.

Further, our business depends heavily on services provided by various local and long distance telephone companies. A significant increase in telephone service costs or any significant interruption in telephone services could reduce our profitability or disrupt our operations and harm our business.

We serve markets that are highly competitive, and we may be unable to compete with businesses that may have greater resources than we have.

We face competition in the markets we serve from new and existing providers of outsourced receivables management services, including other purchasers of defaulted consumer receivables portfolios, third-party contingent fee collection agencies and debt owners that manage their own defaulted consumer receivables rather than outsourcing them. The receivables management industry is highly fragmented and competitive, consisting of thousands of consumer and commercial agencies, most of which compete in the contingent fee business.

We face bidding competition in our acquisition of defaulted consumer receivables and in our placement of fee based receivables, and we also compete on the basis of reputation, industry experience and performance. Some of our current competitors and possible new competitors may have substantially greater financial, personnel and other resources, greater adaptability to changing market needs, longer operating histories and more established relationships in our industry than we currently have. In the future, we may not have the resources or ability to compete successfully. As there are few significant barriers for entry to new providers of fee based receivables management services, there can be no assurance that additional competitors with greater resources than ours will not enter the market.

 

26


Table of Contents

We may not be able to manage our growth effectively.

We have expanded significantly since our formation and we intend to maintain our focus on growth. However, our growth will place additional demands on our resources and we cannot ensure that we will be able to manage our growth effectively. In order to successfully manage our growth, we may need to:

 

   

expand and enhance our administrative infrastructure;

 

   

continue to improve our management, financial and information systems and controls; and

 

   

recruit, train, manage and retain our employees effectively.

Continued growth could place a strain on our management, operations and financial resources. We cannot ensure that our infrastructure, facilities and personnel will be adequate to support our future operations or to effectively adapt to future growth. If we cannot manage our growth effectively, our results of operations may be adversely affected.

The market price of our shares of common stock could fluctuate significantly.

Wide fluctuations in the trading price or volume of our shares of common stock could be caused by many factors, including factors relating to our company or to investor perception of our company (including changes in financial estimates and recommendations by research analysts), but also factors relating to (or relating to investor perception of) the receivables management industry or the economy in general.

Negative publicity or reputational attacks could damage our reputation.

From time to time there are negative news stories about our industry or company, especially with respect to alleged conduct in collecting debt from customers. Negative public opinion about our alleged or actual debt collection practices or about the debt collection industry, especially those expressed via social media such as blogs, websites or newsletters, could adversely impact our stock price and our ability to retain and attract customers and employees.

Our certificate of incorporation, by-laws and Delaware law contain provisions that may prevent or delay a change of control or that may otherwise be in the best interest of our stockholders.

Our certificate of incorporation and by-laws contain provisions that may make it more difficult, expensive or otherwise discourage a tender offer or a change in control or takeover attempt by a third-party, even if such a transaction would be beneficial to our stockholders. The existence of these provisions may have a negative impact on the price of our common stock by discouraging third-party investors from purchasing our common stock. In particular, our certificate of incorporation and by-laws include provisions that:

 

   

classify our board of directors into three groups, each of which will serve for staggered three-year terms;

 

   

permit a majority of the stockholders to remove our directors only for cause;

 

   

permit our directors, and not our stockholders, to fill vacancies on our board of directors;

 

   

require stockholders to give us advance notice to nominate candidates for election to our board of directors or to make stockholder proposals at a stockholders’ meeting;

 

   

permit a special meeting of our stockholders to be called only by approval of a majority of the directors, the chairman of the board of directors, the chief executive officer, the president or the written request of holders owning at least 30% of our common stock;

 

   

permit our board of directors to issue, without approval of our stockholders, preferred stock with such terms as our board of directors may determine;

 

   

permit the authorized number of directors to be changed only by a resolution of the board of directors; and

 

   

require the vote of the holders of a majority of our voting shares for stockholder amendments to our by-laws.

 

27


Table of Contents

In addition, we are subject to Section 203 of the Delaware General Corporation Law which provides certain restrictions on business combinations between us and any party acquiring a 15% or greater interest in our voting stock other than in a transaction approved by our board of directors and, in certain cases, by our stockholders. These provisions of our certificate of incorporation, our by-laws and Delaware law could delay or prevent a change in control, even if our stockholders support such proposals. Moreover, these provisions could diminish the opportunities for stockholders to participate in certain tender offers, including tender offers at prices above the then-current market value of our common stock, and may also inhibit increases in the trading price of our common stock that could result from takeover attempts or speculation.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our principal executive offices and primary operations facility are located in approximately 100,000 square feet of leased space in three adjacent buildings in Norfolk, Virginia. One of our call centers is also located within this space. This site can currently accommodate approximately 1,000 employees. We own a perpetual easement on a parcel of land adjacent to our headquarters which we developed into a parking lot for use by our employees.

We lease an additional 9,000 square foot facility in Norfolk, Virginia, which primarily houses our accounting operations staff. This facility can accommodate approximately 70 employees.

We own an approximately 22,000 square foot facility in Hutchinson, Kansas, comprised of two buildings, and contiguous parcels of land which are used primarily for employee parking. The Hutchinson site can currently accommodate approximately 250 employees. This facility contains one of our call centers.

We lease a call center facility located in approximately 32,000 square feet of space in Hampton, Virginia which can accommodate approximately 430 employees.

We lease a property located in Las Vegas, Nevada which houses the employees of our PLS business as well as certain owned portfolio call center operations. The leased space is approximately 30,000 square feet and can accommodate approximately 300 employees.

We lease three facilities in Birmingham, Alabama totaling approximately 35,000 square-feet which can accommodate approximately 360 employees. The Birmingham facility houses some of the employees of our PRA GS subsidiary as well as PRA call center employees.

We lease a 34,000 square foot building and a nine-acre parcel of land in Jackson, Tennessee, which PRA originally purchased in 2006 and subsequently conveyed to the Industrial Development Board of the City of Jackson. We lease back the property from the Industrial Board under a long term Master Industrial Lease Agreement and have the option to re-purchase the property at any time during the term of the lease. This facility can accommodate approximately 430 employees. This facility contains one of our call centers.

We lease approximately 32,000 square feet of office space in several offices around the country which house a portion of our government services subsidiary workforce, the majority of which is located in Fresno, California. These offices can accommodate approximately 170 employees.

We lease approximately 11,000 square feet of space in Rosemont, Illinois which can accommodate approximately 30 employees. Certain of our Information Technology Department employees are located in this facility.

We lease approximately 2,500 square feet of space in Conshohocken, Pennsylvania which can accommodate approximately 20 employees. This facility houses the employees of our CCB subsidiary.

We do not consider any specific leased or owned facility to be material to our operations. We believe that equally suitable alternative facilities are available in all areas where we currently do business.

 

28


Table of Contents

Item 3. Legal Proceedings.

We are from time to time subject to routine legal claims and proceedings, most of which are incidental to the ordinary course of our business. We initiate lawsuits against customers and are occasionally countersued by them in such actions. Also, customers, either individually, as members of a class action, or through a governmental entity on behalf of customers, may initiate litigation against us in which they allege that we have violated a state or federal law in the process of collecting on an account. From time to time, other types of lawsuits are brought against us.

We accrue for potential liability arising from legal proceedings when it is probable that such liability has been incurred and the amount of the loss can be reasonably estimated. This determination is based upon currently available information for those proceedings in which we are involved, taking into account our best estimate of such losses for those cases for which such estimates can be made. Our estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the number of unresolved issues in many of the proceedings (including issues regarding class certification and the scope of many of the claims), and the related uncertainty of the potential outcomes of these proceedings. In making determinations of the likely outcome of the pending litigation disclosed below, we consider many factors, including, but not limited to, the nature of the claims, our experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative mechanisms, the matter’s current status and the damages sought or demands made. Accordingly, our estimate will change from time to time, and actual losses may be more than the current estimate.

We believe, based upon our current knowledge and after consultation with counsel, that the legal proceedings currently pending against us should not, either individually or in the aggregate, have a material adverse impact on our financial condition. However, it is possible, in light of the uncertainties involved in such proceedings or due to unexpected future developments, that an unfavorable resolution of a legal proceeding or claim could occur which may be material to our results of operations for a particular period. The matters described below fall outside of the normal parameters of our routine legal proceedings.

On December 6, 2011, the Missouri Supreme Court declined to hear the Missouri Attorney General’s appeal of an earlier dismissal by the Missouri Court of Appeals of a lawsuit brought by the Missouri Attorney General against PRA’s subsidiary, Portfolio Recovery Associates, LLC. As a result, this matter is now concluded.

We have been named as defendant in the following five putative class action cases, each of which alleges that we violated the Telephone Consumer Protection Act (“TCPA”) by calling consumers’ cellular telephones 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 foregoing complaints allege violations of the TCPA, and seek damages, injunctive relief and attorneys’ fees. On December 21, 2011, the United States District Panel on Multi-District Litigation entered an order transferring these matters into one consolidated proceeding in the United States District Court for the Southern District of California, Case No. 11-md-02295.

These matters have only recently been consolidated, no litigation has proceeded on whether or not to certify a class or on the merits of the allegations, and no demand has been made. Further, even if a class is ultimately certified, further discovery must take place in order to determine its size. Therefore; any potential loss for these and other similar matters, cannot be estimated at this time; however, in the event that a class is eventually certified and we neither settle nor prevail on these matters, our damages, when aggregated, could potentially fall within a range which could be in excess of our established liability, and could be material to our financial condition, results of operations or cash flows for any particular reporting period.

 

29


Table of Contents

Excluding the above TCPA matter and other matters, the high end of the range of potential litigation losses in excess of our established liability is currently estimated by management to be less than $1,000,000. Notwithstanding our attempt to estimate a range of possible losses in excess of our established liability based on current information, actual future losses may exceed both our established liability and the range of potential litigation losses disclosed in this item.

Item 4. Mi ne Safety Disclosures.

Not applicable.

P ART II

Item 5. Market for Registrant’s Com mon Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Price Range of Common Stock

Our common stock (“Common Stock”) began trading on the NASDAQ Global Select Market under the symbol “PRAA” on November 8, 2002. Prior to that time there was no public trading market for our common stock. The following table sets forth the high and low sales price for the Common Stock, as reported by the NASDAQ Global Select Market, for the periods indicated.

 

$000000000000 $000000000000
     High    Low

2010

     

Quarter ended March 31, 2010

   $ 58.12    $ 41.50

Quarter ended June 30, 2010

   $ 72.80    $ 54.34

Quarter ended September 30, 2010

   $ 71.98    $ 58.82

Quarter ended December 31, 2010

   $ 78.00    $ 62.31

 

$000000000000 $000000000000
     High    Low

2011

     

Quarter ended March 31, 2011

   $ 86.89    $ 68.29

Quarter ended June 30, 2011

   $ 90.95    $ 77.64

Quarter ended September 30, 2011

   $ 89.67    $ 56.76

Quarter ended December 31, 2011

   $ 73.63    $ 58.29

As of February 3, 2012, there were 55 holders of record of the Common Stock. Based on information provided by our transfer agent and registrar, we believe that there are approximately 23,784 beneficial owners of the Common Stock as of January 31, 2012.

Stock Performance

The following graph compares from December 31, 2006, to December 31, 2011, the cumulative stockholder returns assuming an initial investment of $100 in PRA’s Common Stock at the beginning of the period, the stocks comprising the NASDAQ Global Market Composite Index, the NASDAQ Market Index (U.S.) and the stocks comprising a peer group index consisting of six peers which includes Encore Capital Group, Inc., Asset Acceptance Capital Corp., Asta Funding, Inc., Compucredit Holdings Corporation, FTI Consulting Inc. and EPIQ Systems Inc. Any dividends paid during the five year period are assumed to be reinvested.

 

 

30


Table of Contents

LOGO

ASSUMES $100 INVESTED ON JAN. 01, 2007

 

$0000000 $0000000 $0000000 $0000000 $0000000 $0000000

As of December 31,

   2006      2007      2008      2009      2010      2011  

Portfolio Recovery Associates, Inc.

   $  100       $ 86       $  74       $  98       $  164       $  147   

NASDAQ Market Index (U.S.)

   $ 100       $  109       $ 64       $ 93       $ 107       $ 108   

NASDAQ Global Market Composite Index

   $ 100       $ 104       $ 51       $ 73       $ 88       $ 76   

Custom Peer Group

   $ 100       $ 96       $ 65       $ 70       $ 66       $ 65   

The comparisons of stock performance shown above are not intended to forecast or be indicative of possible future performance of PRA’s common stock. PRA does not make or endorse any predictions as to its future stock performance.

Dividend Policy

Our board of directors sets our dividend policy. We do not currently pay regular dividends on our Common Stock and did not pay dividends in 2011 or 2010; however, our board of directors may determine in the future to declare or pay dividends on our Common Stock. Under the terms of our credit facility, cash dividends may not exceed $20 million in any fiscal year without the consent of our lenders. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors that our board of directors may consider relevant.

 

31


Table of Contents

Item 6. Selecte d Financial Data.

The following selected financial data should be read in conjunction with the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section below, the audited consolidated financial statements and the notes to the audited consolidated financial statements.

 

     Years Ended December 31,  
     2011     2010     2009     2008     2007  

INCOME STATEMENT DATA:

          

(In thousands, except per share data)

          

Revenues:

          

Income recognized on finance receivables, net

   $ 401,895      $ 309,680      $ 215,612      $ 206,486      $ 184,705   

Fee income

     57,040        63,026        65,479        56,789        36,043   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     458,935        372,706        281,091        263,275        220,748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Compensation and employee services

     138,202        124,077        106,388        88,073        69,022   

Legal collection fees

     23,621        17,599        14,872        20,610        20,233   

Legal collection costs

     38,659        31,330        16,462        16,194        10,487   

Agent fees

     7,653        12,012        15,644        16,065        9,467   

Outside fees and services

     19,310        12,554        9,570        8,883        7,287   

Communications

     23,372        17,226        14,773        10,304        8,531   

Rent and occupancy

     5,891        5,313        4,761        3,908        3,105   

Depreciation and amortization

     12,943        12,437        9,213        7,424        5,517   

Other operating expenses

     12,416        10,296        8,799        6,977        5,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     282,067        242,844        200,482        178,438        139,564   

Gain on sale of property

     1,157        —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     178,025        129,862        80,609        84,837        81,184   

Interest income

     7        65        3        60        419   

Interest expense

     (10,569     (9,052     (7,909     (11,151     (3,704
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     167,463        120,875        72,703        73,746        77,899   

Provision for income taxes

     66,319        47,004        28,397        28,384        29,658   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 101,144      $ 73,871      $ 44,306      $ 45,362      $ 48,241   

Less net income attributable to redeemable noncontrolling interest

     (353     (417     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Portfolio Recovery Associates, Inc.

   $ 100,791      $ 73,454      $ 44,306      $ 45,362      $ 48,241   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

          

Basic

   $ 5.89      $ 4.37      $ 2.87      $ 2.98      $ 3.08   

Diluted

   $ 5.85      $ 4.35      $ 2.87      $ 2.97      $ 3.06   

Weighted average number of shares outstanding:

          

Basic

     17,110        16,820        15,420        15,229        15,646   

Diluted

     17,230        16,885        15,454        15,292        15,779   

OPERATING AND OTHER FINANCIAL DATA:

          

(Dollars in thousands)

          

Cash receipts

   $ 762,530      $ 592,367      $ 433,482      $ 383,488      $ 298,209   

Operating expenses to cash receipts

     37     41     46     47     47

Return on equity (1)

     18     17     14     17     20

Acquisitions of finance receivables, at cost (2)

   $ 408,408      $ 367,443      $ 288,889      $ 280,336      $ 263,809   

Acquisitions of finance receivables, at face value

   $ 9,792,356      $ 6,804,952      $ 8,109,694      $ 4,588,234      $ 11,113,830   

Employees at period end:

          

Total employees

     2,641        2,473        2,213        2,032        1,677   

Ratio of collection personnel to total employees (3)

     87     86     86     87     88

 

(1) Calculated by dividing net income for each year by average monthly stockholders’ equity for the same year.
(2) Represents cash paid for finance receivables. It does not include certain capitalized costs or buybacks.
(3) Includes all collectors and first-line collection supervisors at December 31.

Below are listed certain key balance sheet data for the periods presented:

 

     As of December 31,  
     2011      2010      2009      2008      2007  
(Dollars in thousands)                                   

BALANCE SHEET DATA:

              

Cash and cash equivalents

   $ 26,697       $ 41,094       $ 20,265       $ 13,901       $ 16,730   

Finance receivables, net

     926,734         831,330         693,462         563,830         410,297   

Total assets

     1,071,123         995,908         794,433         657,840         476,307   

Long-term debt

     1,246         2,396         1,499         —           —     

Total debt, including obligations under capital lease and line of credit

     221,246         302,396         320,799         268,305         168,103   

Total stockholders’ equity

     595,488         490,516         335,480         283,863         235,280   

 

32


Table of Contents

Below are listed the quarterly consolidated income statements for the years ended December 31, 2011 and 2010:

 

     For the Quarter Ended  
     Dec. 31,
2011
    Sept. 30,
2011
    June 30,
2011
    Mar. 31,
2011
    Dec. 31,
2010
    Sept. 30,
2010
    June 30,
2010
    Mar. 31,
2010
 
(In thousands, except per share data)                                                 

INCOME STATEMENT DATA:

                

Revenues:

                

Income recognized on finance receivables, net

   $ 102,743      $ 102,875      $ 100,303      $ 95,974      $ 84,783      $ 80,026      $ 76,920      $ 67,951   

Fee income

     15,344        11,401        14,492        15,803        15,972        15,518        16,109        15,427   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     118,087        114,276        114,795        111,777        100,755        95,544        93,029        83,378   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

                

Compensation and employee services

     35,759        33,475        34,815        34,153        32,350        31,213        30,872        29,642   

Legal collection fees

     5,940        5,962        5,970        5,749        4,819        4,577        4,131        4,073   

Legal collection costs

     9,711        9,731        9,879        9,338        9,932        9,329        6,430        5,638   

Agent fees

     1,647        1,643        1,724        2,639        2,616        2,842        2,927        3,627   

Outside fees and services

     5,608        6,222        4,066        3,414        3,100        3,470        3,155        2,829   

Communications

     5,488        5,865        5,706        6,313        4,066        4,000        4,102        5,058   

Rent and occupancy

     1,538        1,517        1,438        1,398        1,402        1,362        1,297        1,252   

Depreciation and amortization

     3,188        3,223        3,316        3,216        3,387        3,294        3,206        2,550   

Other operating expenses

     3,255        2,808        3,501        2,852        2,808        2,634        2,580        2,274   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     72,134        70,446        70,415        69,072        64,480        62,721        58,700        56,943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gain on sale of property

     —          —          1,157        —          —          —          —          —     

Income from operations

     45,953        43,830        45,537        42,705        36,275        32,823        34,329        26,435   

Interest income

     —          7        —          —          29        —          —          36   

Interest expense

     (2,512     (2,555     (2,635     (2,867     (2,517     (2,178     (2,177     (2,180
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     43,441        41,282        42,902        39,838        33,787        30,645        32,152        24,291   

Provision for income taxes

     16,775        16,089        17,326        16,129        13,156        11,888        12,474        9,486   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 26,666      $ 25,193      $ 25,576      $ 23,709      $ 20,631      $ 18,757      $ 19,678      $ 14,805   

Less net income/(loss) attributable to redeemable noncontrolling interest

     76        (313     2        588        (14     276        150        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Portfolio Recovery Associates, Inc.

   $ 26,590      $ 25,506      $ 25,574      $ 23,121      $ 20,645      $ 18,481      $ 19,528      $ 14,800   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

                

Basic

   $ 1.55      $ 1.49      $ 1.49      $ 1.35      $ 1.21      $ 1.08      $ 1.15      $ 0.91   

Diluted

   $ 1.54      $ 1.48      $ 1.48      $ 1.34      $ 1.20      $ 1.08      $ 1.14      $ 0.91   

Weighted average number of shares outstanding:

                

Basic

     17,121        17,117        17,108        17,092        17,063        17,058        16,970        16,191   

Diluted

     17,269        17,228        17,225        17,199        17,165        17,093        17,080        16,203   

 

Below are listed the quarterly consolidated balance sheets for the years ended December 31, 2011 and 2010:

 

     Quarter Ended as of:  
(Dollars in thousands)    Dec. 31,
2011
     Sept. 30,
2011
     June 30,
2011
     Mar. 31,
2011
     Dec. 31,
2010
     Sept. 30,
2010
    June 30,
2010
    Mar. 31,
2010
 

BALANCE SHEET DATA:

                     

Assets

                     

Cash and cash equivalents

   $ 26,697       $ 30,035       $ 25,481       $ 35,443       $ 41,094       $ 20,297      $ 18,250      $ 23,006   

Finance receivables, net

     926,734         919,478         879,515         866,992         831,330         807,239        775,606        742,484   

Accounts receivable, net

     7,862         6,462         6,683         7,369         8,932         7,789        8,159        8,752   

Income taxes receivable

     —           —           —           —           2,363         2,603        1,877        1,439   

Property and equipment, net

     25,727         22,975         23,810         24,469         24,270         22,794        23,230        21,925   

Goodwill

     61,678         61,678         61,678         61,678         61,678         61,665        61,665        49,053   

Intangible assets, net

     14,596         14,748         15,965         17,215         18,466         19,945        21,425        30,018   

Other assets

     7,829         8,728         8,485         6,933         7,775         5,405        4,809        5,773   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 1,071,123       $ 1,064,104       $ 1,021,617       $ 1,020,099       $ 995,908       $ 947,737      $ 915,021      $ 882,450   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Liabilities and Equity

                     

Liabilities

                     

Accounts payable

   $ 7,439       $ 5,148       $ 5,326       $ 7,498       $ 3,227       $ 5,739      $ 5,445      $ 5,079   

Accrued expenses

     6,076         5,856         4,389         2,620         4,904         6,922        6,227        6,264   

Income taxes payable

     13,109         2,651         2,877         1,577         —           —          —          —     

Accrued compensation

     16,036         11,409         10,563         6,300         15,445         10,447        9,124        8,298   

Net deferred tax liability

     193,898         192,298         188,142         179,043         164,971         151,638        139,111        126,234   

Line of credit

     220,000         260,000         250,000         290,000         300,000         288,500        289,500        296,300   

Long-term debt

     1,246         1,553         1,856         2,098         2,396         998        1,167        1,334   

Derivative instrument

     —           —           —           —           —           537        640        809   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities

     457,804         478,915         463,153         489,136         490,943         464,781        451,214        444,318   

Redeemable noncontrolling interest

     17,831         16,884         16,068         15,253         14,449         14,531        15,080        15,328   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Stockholders’ equity

                     

Common stock

     171         171         171         171         171         171        170        170   

Additional paid in capital

     167,719         167,126         166,723         165,611         163,538         162,418        161,267        154,975   

Retained earnings

     427,598         401,008         375,502         349,928         326,807         306,164        287,681        268,153   

Accumulated other comprehensive (loss), net of taxes

     —           —           —           —           —           (328     (391     (494
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     595,488         568,305         542,396         515,710         490,516         468,425        448,727        422,804   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 1,071,123       $ 1,064,104       $ 1,021,617       $ 1,020,099       $ 995,908       $ 947,737      $ 915,021      $ 882,450   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

33


Table of Contents

Below are certain key financial data and ratios as of and for the years ended December 31, 2011, 2010 and 2009:

FINANCIAL HIGHLIGHTS

 

    

Year Ended

December 31,

 

(dollars in thousands)

   2011     2010     2009  

EARNINGS

      

Income recognized on finance receivables, net

   $ 401,895      $ 309,680      $ 215,612   

Fee income

     57,040        63,026        65,479   

Total revenues

     458,935        372,706        281,091   

Operating expenses

     282,067        242,844        200,482   

Income from operations

     178,025        129,862        80,609   

Net interest expense

     10,562        8,987        7,906   

Net income

     101,144        73,871        44,306   

Net income attributable to Portfolio Recovery Associates, Inc.

     100,791        73,454        44,306   
  

 

 

   

 

 

   

 

 

 

PERIOD-END BALANCES

      

Cash and cash equivalents

   $ 26,697      $ 41,094      $ 20,265   

Finance receivables, net

     926,734        831,330        693,462   

Goodwill and intangible assets, net

     76,274        80,144        40,055   

Total assets

     1,071,123        995,908        794,433   

Line of credit

     220,000        300,000        319,300   

Total liabilities

     457,804        490,943        458,953   

Total equity

     595,488        490,516        335,480   
  

 

 

   

 

 

   

 

 

 

FINANCE RECEIVABLE COLLECTIONS

      

Cash collections

   $ 705,490      $ 529,342      $ 368,003   

Principal amortization without allowance charges

     293,431        194,510        124,756   

Principal amortization with allowance charges

     303,595        219,662        152,391   

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

      

Including fully amortized pools

     43.0     41.5     41.4

Excluding fully amortized pools

     45.4     44.8     44.7

Estimated remaining collections—core

   $ 1,159,086      $ 974,108      $ 893,716   

Estimated remaining collections—bankruptcy

     794,262      $ 749,410      $ 521,730   

Estimated remaining collections—total

     1,953,348      $ 1,723,518      $ 1,415,446   
  

 

 

   

 

 

   

 

 

 

ALLOWANCE FOR FINANCE RECEIVABLES

      

Balance at period-end

   $ 86,571      $ 76,407      $ 51,255   

Allowance charge

   $ 10,164      $ 25,152      $ 27,635   

Allowance charge to period-end net finance receivables

     1.10     3.03     3.99

Allowance charge to net finance receivable income

     2.53     8.12     12.82

Allowance charge to cash collections

     1.44     4.75     7.51
  

 

 

   

 

 

   

 

 

 

PURCHASES OF FINANCE RECEIVABLES

      

Purchase price—core

   $ 213,389      $ 149,998      $ 126,334   

Face value—core

     7,900,761        3,424,313        4,435,068   

Purchase price—bankruptcy

     195,019        217,445        162,470   

Face value—bankruptcy

     1,891,595        3,380,639        3,674,626   

Purchase price—total

     408,408        367,443        288,804   

Face value—total

     9,792,356        6,804,952        8,109,694   

Number of portfolios—total

     333        305        407   
  

 

 

   

 

 

   

 

 

 

PER SHARE DATA

      

Net income per common share—diluted

   $ 5.85      $ 4.35      $ 2.87   

Weighted average number of shares outstanding—diluted

     17,230        16,885        15,454   

Closing market price

   $ 67.52      $ 75.20      $ 44.85   
  

 

 

   

 

 

   

 

 

 

RATIOS AND OTHER DATA

      

Return on average equity (1)

     18.5     16.6     14.2

Return on revenue (2)

     22.0     19.8     15.8

Operating margin (3)

     38.8     34.8     28.7

Operating expense to cash receipts

     37.0     41.0     46.3

Debt to equity (4)

     37.2     61.6     95.6

Cash collections per collector hour paid:

      

Core cash collections

   $ 151      $ 129      $ 113   

Total cash collections

   $ 240      $ 194      $ 145   

Excluding external legal collections

   $ 204      $ 165      $ 119   

Excluding bankruptcy and external legal collections

   $ 114      $ 100      $ 87   

Number of collectors

     1,658        1,472        1,325   

Number of employees

     2,641        2,473        2,213   

Cash receipts

   $ 762,530      $ 592,368      $ 433,482   

Line of credit—unused portion at period end

     187,500        107,500        45,700   
  

 

 

   

 

 

   

 

 

 

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) For purposes of this ratio, "debt" equals the line of credit balance plus long-term debt

 

34


Table of Contents

Item 7. M anagement’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

PRA is a specialized financial and business service company. Our primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. We also service receivables on behalf of clients on either a commission or transaction-fee basis as well as providing class action claims settlement recovery services and related payment processing to our corporate clients.

PRA is headquartered in Norfolk, Virginia, and employs approximately 2,640 team members. The shares of PRA are traded on the NASDAQ Global Select Market under the symbol “PRAA.”

On January 16, 2012, we acquired 100% of the equity interest in MHH, a United Kingdom debt collection and purchase group. Based in Kilmarnock, Scotland, MHH employs approximately 170 people and offers outsourced and contingent consumer debt recovery on behalf of banks, credit providers and debt purchasers, as well as distressed and dormant niche portfolio purchasing.

Earnings Summary

For the year ended December 31, 2011, net income attributable to PRA was $100.8 million, or $5.85 per diluted share, compared with $73.5 million, or $4.35 per diluted share, for the year ended December 31, 2010. Total revenues were $458.9 million for the year ended December, 31, 2011, up 23.1% from the same year ago period. Revenues during the year ended December 31, 2011 consisted of $401.9 million in income recognized on finance receivables, net of allowance charges, and $57.0 million in fee income. Income recognized on finance receivables, net of allowance charges, increased $92.2 million, or 29.8%, over 2010, primarily as a result of a significant increase in cash collections. Cash collections were $705.5 million during the year ended December 31, 2011, up 33.3% over $529.3 million in the same year ago period. During the year ended December 31, 2011, PRA recorded $10.2 million in net allowance charges, compared with $25.2 million in the comparable year ago period. Our performance has been positively impacted by operational efficiencies surrounding the cash collections process, including the continued refinement of dialer processes and technology and continued refinement of our account scoring analytics as it relates to both legal and non-legal collection channels. Additionally, we have continued to develop our internal legal collection staff resources, which enables us to place accounts into that channel that otherwise would have been cost prohibitive for legal action and to collect these accounts more efficiently and profitably.

Fee income decreased from $63.0 million for the year ended December 31, 2010 to $57.0 million in 2011, mainly as a result of lower revenues generated from PLS due primarily to the adverse impact of the economic slowdown on automobile financing and related collateral recovery activities.

A summary of how our revenue was generated during the year ended December 31, 2011, 2010 and 2009 is as follows:

 

     For the Years Ended  
     December 31,  
($ in thousands)    2011     2010     2009  

Cash collections

   $ 705,490      $ 529,342      $ 368,003   

Principal amortization

     (293,431     (194,510     (124,756

Net allowance charges

     (10,164     (25,152     (27,635
  

 

 

   

 

 

   

 

 

 

Income recognized on finance receivables, net

     401,895        309,680        215,612   

Fee income

     57,040        63,026        65,479   
  

 

 

   

 

 

   

 

 

 

Total revenues

   $ 458,935      $ 372,706      $ 281,091   
  

 

 

   

 

 

   

 

 

 

Operating expenses were $282.1 million for the year ended December, 31, 2011, up 16.2% as compared to the same period in 2010, due primarily to increased compensation and employee services expense, legal collections fees and costs, outside fees and services and communication expenses. Compensation and employee

 

35


Table of Contents

services expense increased primarily as a result of larger staff sizes and an increase in share-based compensation expense. Legal fees and costs increased from $48.9 million for the year ended December 31, 2010 to $62.3 million for the year ended December, 31, 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. Outside fees and services expense increased mainly due to an increase in our corporate legal expense and communication expense increased mainly as a result of a growth in mailings due to an increase in special letter campaigns.

Results of Operations

The results of operations include the financial results of PRA 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.

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

 

     2011     2010     2009  

Revenues:

            

Income recognized on finance receivables, net

   $ 401,895        87.6   $ 309,680        83.1   $ 215,612        76.7

Fee income

     57,040        12.4        63,026        16.9        65,479        23.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     458,935        100.0        372,706        100.0        281,091        100.0   

Operating expenses:

            

Compensation and employee services

     138,202        30.1        124,077        33.3        106,388        37.8   

Legal collection fees

     23,621        5.1        17,599        4.7        14,872        5.3   

Legal collection costs

     38,659        8.4        31,330        8.4        16,462        5.9   

Agent fees

     7,653        1.7        12,012        3.2        15,644        5.6   

Outside fees and services

     19,310        4.2        12,554        3.4        9,570        3.4   

Communications

     23,372        5.1        17,226        4.6        14,773        5.3   

Rent and occupancy

     5,891        1.3        5,313        1.4        4,761        1.7   

Depreciation and amortization

     12,943        2.8        12,437        3.3        9,213        3.3   

Other operating expenses

     12,416        2.7        10,296        2.8        8,799        3.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     282,067        61.4        242,844        65.2        200,482        71.3   

Gain on sale of property

     1,157        0.3        —          0.0        —          0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     178,025        38.9        129,862        34.8        80,609        28.7   

Interest income

     7        0.0        65        0.0        3        0.0   

Interest expense

     (10,569     (2.3     (9,052     (2.4     (7,909     (2.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     167,463        36.6        120,875        32.4        72,703        25.9   

Provision for income taxes

     66,319        14.5        47,004        12.6        28,397        10.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 101,144        22.1   $ 73,870        19.8   $ 44,306        15.8

Less net income attributable to redeemable noncontrolling interest

     (353     (0.1     (417     (0.1     —          0.0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Portfolio Recovery Associates, Inc.

   $ 100,791        22.0   $ 73,454        19.7   $ 44,306        15.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

Revenues

Total revenues were $458.9 million for the year ended December 31, 2011, an increase of $86.2 million or 23.1% compared to total revenues of $372.7 million for the year ended December 31, 2010.

Income Recognized on Finance Receivables, net

Income recognized on finance receivables, net was $401.9 million for the year ended December 31, 2011, an increase of $92.2 million or 29.8% compared to income recognized on finance receivables, net of $309.7 million for the year ended December 31, 2010. The increase was primarily due to an increase in our cash collections on our owned finance receivables to $705.5 million for the year ended December 31, 2011 compared to $529.3 million for the year ended December 31, 2010, an increase of $176.2 million or 33.3%. Our finance receivables amortization rate, including allowance charges, was 43.0% for the year ended December 31, 2011 compared to 41.5% for the year ended December 31, 2010. During the year ended December 31, 2011, we acquired finance

 

36


Table of Contents

receivables portfolios with an aggregate face value amount of $9.8 billion at a cost of $408.4 million. During the year ended December 31, 2010, we acquired finance receivable portfolios with an aggregate face value of $6.8 billion at a cost of $367.4 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 year ended December 31, 2011, we recorded net allowance charges of $10.2 million, $6.6 million of which related to core portfolios acquired mainly in 2005 through 2008 and $3.6 million of which related to purchased bankruptcy portfolios acquired mainly in 2007 through 2008. For the year ended December 31, 2010, we recorded net allowance charges of $25.2 million, the majority of which related to non-bankruptcy portfolios acquired in 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 relate 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 $57.0 million for the year ended December 31, 2011, a decrease of $6.0 million or 9.5% compared to fee income of $63.0 million for the year ended December 31, 2010. Fee income declined as a result of a decrease in revenue generated by our PLS fee-for-service business, partially offset by an increase in revenue generated by our PRA GS government processing and collection business. The decline at PRA Location Services was due primarily to a decrease in volume related to a continued decline in automobile financing activity nationwide.

Operating Expenses

Total operating expenses were $282.1 million for the year ended December 31, 2011, an increase of $39.3 million or 16.2% compared to total operating expenses of $242.8 million for the year ended December 31, 2010. Total operating expenses were 37.0% of cash receipts for the year ended December 31, 2011 compared with 41.0% for the same period in 2010.

Compensation and Employee Services

Compensation and employee services expenses were $138.2 million for the year ended December 31, 2011, an increase of $14.1 million or 11.4% compared to compensation and employee services expenses of $124.1 million for the year ended December 31, 2010. This increase was mainly due to an overall increase in our owned portfolio collection staff as well as an increase in share-based compensation expense. Compensation and employee services expenses increased as total employees grew 6.8% to 2,641 as of December 31, 2011 from 2,473 as of December 31, 2010. Additionally, existing employees received normal salary increases. Compensation and employee services expenses as a percentage of cash receipts decreased to 18.1% for the year ended December 31, 2011 from 21.0% of cash receipts for the same period in 2010.

 

37


Table of Contents

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 $23.6 million for the year ended December 31, 2011, an increase of $6.0 million, or 34.1%, compared to legal collection fees of $17.6 million for the year ended December 31, 2010. This increase was the result of an increase in our external legal collections which increased $27.5 million or 35.0%, from $78.8 million for the year ended December 31, 2010 to $106.3 million for the year ended December 31, 2011. Legal collection fees for the year ended December 31, 2011 were 3.1% of cash receipts, compared to 3.0% for the year ended December 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 $38.7 million for the year ended December 31, 2011, an increase of $7.4 million, or 23.6%, compared to legal collection costs of $31.3 million for the year ended December 31, 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 portfolio growth and 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 4.6% and 4.9% of cash receipts for the years ended December 31, 2011 and 2010, respectively.

Agent Fees

Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $7.7 million for the year ended December 31, 2011, a decrease of $4.3 million, or 35.8%, compared to agent fees of $12.0 million for the year ended December 31, 2010. The decrease was mainly due to a decline in agent fees related to reduced business activity associated with PLS.

Outside Fees and Services

Outside fees and services expenses were $19.3 million for the year ended December 31, 2011, an increase of $6.7 million or 53.2% compared to outside legal and other fees and services expenses of $12.6 million for the year ended December 31, 2010. Of the $6.7 million increase, $4.5 million was attributable to an increase in our corporate legal expenses while the remaining $2.2 million increase was due to increases in other outside fees and services and accounting fees.

Communications

Communications expenses were $23.4 million for the year ended December 31, 2011, an increase of $6.2 million or 36.0% compared to communications expenses of $17.2 million for the year ended December 31, 2010. The increase was mainly due to a growth in mailings due to 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 related calls that are generated by the dialer. Mailings were responsible for 90.3% or $5.6 million of this increase, while the remaining 9.7% or $0.6 million was attributable to increased call volumes.

Rent and Occupancy

Rent and occupancy expenses were $5.9 million for the year ended December 31, 2011, an increase of $0.6 million or 11.3% compared to rent and occupancy expenses of $5.3 million for the year ended December 31, 2010. The increase was due to several new leases being entered into in the latter part of 2010 and in 2011, 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.

 

38


Table of Contents

Depreciation and Amortization

Depreciation and amortization expenses were $12.9 million for the year ended December 31, 2011, an increase of $0.5 million or 4.0% compared to depreciation and amortization expenses of $12.4 million for the year ended December 31, 2010. The increase was mainly due to the continued capital expenditures on equipment, software and computers related to our growth and systems upgrades.

Other Operating Expenses

Other operating expenses were $12.4 million for the year ended December 31, 2011, an increase of $2.1 million or 20.4% compared to other operating expenses of $10.3 million for the year ended December 31, 2010. The increase was mainly due to increases in various expenses related to general growth of PRA. No individual item represents a significant portion of the overall increase.

Interest Income

Interest income was $7,000 for the year ended December 31, 2011, a decrease of $58,000 compared to interest income of $65,000 for the year ended December 31, 2010. This decrease was the result of interest earned and a refund received on the overpayment of federal and state income taxes in 2010 that did not occur in 2011.

Interest Expense

Interest expense was $10.6 million for the year ended December 31, 2011, an increase of $1.5 million or 16.5% compared to interest expense of $9.1 million for the year ended December 31, 2010. The increase was mainly due to an increase in our weighted average interest rate which increased to 3.71% for the year ended December 31, 2011 from 2.46% for the year ended December 31, 2010, partially offset by a decrease in our average variable rate borrowings to $213.2 million for the year ended December 31, 2011 compared to $244.2 million for the year ended December 31, 2010.

Provision for Income Taxes

Income tax expense was $66.3 million for the year ended December 31, 2011, an increase of $19.3 million or 41.1% compared to income tax expense of $47.0 million for the year ended December 31, 2010. The increase was mainly due to an increase of 38.5% in income before taxes for the year ended December 31, 2011 when compared to the same period in 2010 as well as an increase in the effective tax rate of 39.6% for the year ended December 31, 2011 compared to 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.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

Revenues

Total revenues were $372.7 million for the year ended December 31, 2010, an increase of $91.6 million or 32.6% compared to total revenues of $281.1 million for the year ended December 31, 2009.

Income Recognized on Finance Receivables, net

Income recognized on finance receivables, net was $309.7 million for the year ended December 31, 2010, an increase of $94.1 million or 43.6% compared to income recognized on finance receivables, net of $215.6 million for the year ended December 31, 2009. The increase was primarily due to an increase in our cash collections on our owned finance receivables to $529.3 million for the year ended December 31, 2010 compared to $368.0

 

39


Table of Contents

million for the year ended December 31, 2009, an increase of $161.3 million or 43.8%. Our finance receivables amortization rate, including allowance charges, was 41.5% for the year ended December 31, 2010 compared to 41.4% for the year ended December 31, 2009. During the year ended December 31, 2010, we acquired finance receivables portfolios with an aggregate face value amount of $6.8 billion at a cost of $367.4 million. During the year ended December 31, 2009, we acquired finance receivable portfolios with an aggregate face value of $8.1 billion at a cost of $288.9 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 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 year ended December 31, 2010, we recorded net allowance charges of $25.2 million, the majority of which related to non-bankruptcy portfolios acquired in 2005 through 2007. For the year ended December 31, 2009, we recorded net allowance charges of $27.6 million, the majority of which related to non-bankruptcy portfolios acquired in 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 relate 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 $63.0 million for the year ended December 31, 2010, a decrease of $2.5 million or 3.8% compared to fee income of $65.5 million for the year ended December 31, 2009. Fee income declined as a result of a decrease in revenue generated by our MuniServices government processing and collection business and our IGS fee-for-service business, partially offset by an increase in revenue generated by our RDS government processing and collection business as well as revenue generated through the acquisition of a 62% controlling interest in CCB on March 15, 2010. IGS revenues were negatively affected by reduced levels of automotive financings. MuniServices revenues were negatively impacted by declines in sales and use tax volumes in California and by reductions in municipal budgets.

Operating Expenses

Total operating expenses were $242.8 million for the year ended December 31, 2010, an increase of $42.3 million or 21.1% compared to total operating expenses of $200.5 million for the year ended December 31, 2009. Total operating expenses were 41.0% of cash receipts for the year ended December 31, 2010 compared with 46.3% for the same period in 2009.

Compensation and Employee Services

Compensation and employee services expenses were $124.1 million for the year ended December 31, 2010, an increase of $17.7 million or 16.6% compared to compensation and employee services expenses of $106.4 million for the year ended December 31, 2009. This increase was mainly due to an overall increase in our owned portfolio collection staff. Compensation and employee services expenses increased as total employees grew 11.7% to 2,473 as of December 31, 2010 from 2,213 as of December 31, 2009. Additionally, existing employees received normal salary increases. Compensation and employee services expenses as a percentage of cash receipts decreased to 21.0% for the year ended December 31, 2010 from 24.5% of cash receipts for the same period in 2009.

 

40


Table of Contents

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 $17.6 million for the year ended December 31, 2010, an increase of $2.7 million, or 18.1%, compared to legal collection fees of $14.9 million for the year ended December 31, 2009. This increase was the result of an increase in our external legal collections which increased $13.7 million or 21.0%, from $65.1 million for the year ended December 31, 2009 to $78.8 million for the year ended December 31, 2010. Legal collection fees for the year ended December 31, 2010 were 3.0% of cash receipts, compared to 3.4% for the year ended December 31, 2009.

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 $31.3 million for the year ended December 31, 2010, an increase of $14.8 million, or 89.7%, compared to legal collection costs of $16.5 million for the year ended December 31, 2009. 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 4.9% and 3.8% of cash receipts for the years ended December 31, 2010 and 2009, respectively.

Agent Fees

Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $12.0 million for the year ended December 31, 2010, a decrease of $3.6 million, or 23.1%, compared to agent fees of $15.6 million for the year ended December 31, 2009. 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 $12.6 million for the year ended December 31, 2010, an increase of $3.0 million or 31.3% compared to outside legal and other fees and services expenses of $9.6 million for the year ended December 31, 2009. Of the $3.0 million increase, $1.3 million was attributable to an increase in our corporate legal expenses while the remaining $1.7 million increase was due to increases in other outside fees and services and accounting fees.

Communications

Communications expenses were $17.2 million for the year ended December 31, 2010, an increase of $2.4 million or 16.2% compared to communications expenses of $14.8 million for the year ended December 31, 2009. The increase was mainly due to a growth in mailings due to 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 related calls that are generated by the dialer. Mailings were responsible for 87.5% or $2.1 million of this increase, while the remaining 12.5% or $0.3 million was attributable to increased call volumes.

Rent and Occupancy

Rent and occupancy expenses were $5.3 million for the year ended December 31, 2010, an increase of $0.5 million or 10.4% compared to rent and occupancy expenses of $4.8 million for the year ended December 31, 2009. 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, the relocation of our IGS business to another location during 2009 and other renewals and expansions, as well as increased utility charges.

 

41


Table of Contents

Depreciation and Amortization

Depreciation and amortization expenses were $12.4 million for the year ended December 31, 2010, an increase of $3.2 million or 34.8% compared to depreciation and amortization expenses of $9.2 million for the year ended December 31, 2009. The increase was 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 $10.3 million for the year ended December 31, 2010, an increase of $1.5 million or 17.0% compared to other operating expenses of $8.8 million for the year ended December 31, 2009. The increase was mainly due to increases in various expenses related to general growth of PRA. No individual item represents a significant portion of the overall increase.

Interest Income

Interest income was $65,000 for the year ended December 31, 2010, an increase of $62,000 compared to interest income of $3,000 for the year ended December 31, 2009. This increase was the result of interest earned and a refund received on the overpayment of federal and state income taxes

Interest Expense

Interest expense was $9.1 million for the year ended December 31, 2010, an increase of $1.2 million or 15.2% compared to interest expense of $7.9 million for the year ended December 31, 2009. The increase was mainly due to an increase in our average borrowings for the year ended December 31, 2010 compared to the same period in 2009, and the termination of our interest rate swap during the fourth quarter of 2010, both of which were partially offset by a decrease in our weighted average variable interest rate which decreased to 2.46% for the year ended December 31, 2010 as compared to 2.62% for the year ended December 31, 2009.

Provision for Income Taxes

Income tax expense was $47.0 million for the year ended December 31, 2010, an increase of $18.6 million or 65.5% compared to income tax expense of $28.4 million for the year ended December 31, 2009. The increase was mainly due to an increase of 66.3% in income before taxes for the year ended December 31, 2010 when compared to the same period in 2009. This was offset by a slight decrease in the effective tax rate of 38.9% for the year ended December 31, 2010 compared to 39.1% for the same period in 2009.

 

42


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, net finance receivable 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 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 for bankruptcy after we purchase them, which continue to be tracked in their corresponding Core portfolio.

Core customers sometimes file for bankruptcy protection subsequent to our purchase of the related Core portfolio. When this occurs, we adjust our collection practices accordingly to comply with bankruptcy procedures; however, for accounting purposes, these accounts remain in the related Core portfolio. Conversely, bankrupt accounts may be dismissed voluntarily or involuntarily subsequent to our purchase of the related bankrupt portfolio. Dismissal occurs when the terms of the bankruptcy are not met by the petitioner. When this occurs, we are typically free to pursue collection outside of bankruptcy procedures; however, for accounting purposes, these accounts remain in the related bankruptcy pool.

The purchase price multiples from 2005 through 2011 described in the tables below are lower than 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.

 

43


Table of Contents

Portfolio Data – Life-to-Date

Entire Portfolio

 

$000,000 $000,000 $000,000 $000,000 $000,000 $000,000 $000,000 $000,000 $000,000 $000,000
            Inception through December 31, 2011      As of December 31, 2011
($ in thousands)      Actual
Cash
Collections

Including Cash
Sales
     Income
Recognized

on Finance
Receivables
     Principal
Amortization
     Allowance
Charges
     Income
Recognized

on Finance
Receivables, Net
     Net  Finance
Receivables
Balance
     Estimated
Remaining
Collections
     Total
Estimated
Collections
     Total Estimated
Collections
to Purchase
Price

Purchase
Period

   Purchase
Price
                            
1996    $ 3,080       $ 10,144       $ 7,021       $ 3,123       $ 0       $ 7,021       $ 0       $ 99       $ 10,243       333%
1997      7,685         25,310         17,206         8,104         0         17,206         0         181         25,491       332%
1998      11,089         36,938         25,952         10,986         0         25,952         0         432         37,370       337%
1999      18,898         68,162         48,988         19,174         0         48,988         0         983         69,145       366%
2000      25,020         113,388         88,192         25,196         0         88,192         0         2,652         116,040       464%
2001      33,481         170,464         136,112         34,352         0         136,112         0         3,173         173,637       519%
2002      42,325         190,276         147,951         42,325         0         147,951         0         4,480         194,756       460%
2003      61,448         252,397         190,949         61,448         0         190,949         0         7,061         259,458       422%
2004      59,177         187,150         129,173         57,978         1,200         127,973         0         7,289         194,439       329%
2005      143,169         287,884         173,928         113,956         17,946         155,982         11,267         21,329         309,213       216%
2006      107,696         187,156         117,379         69,776         20,415         96,964         17,505         30,268         217,424       202%
2007      258,382         402,226         225,511         176,715         19,465         206,046         62,197         106,207         508,433       197%
2008      275,154         358,932         214,866         144,066         27,545         187,321         103,508         171,675         530,607       193%
2009      281,436         421,864         272,129         149,735         0         272,129         131,700         357,973         779,837       277%
2010      358,185         304,614         175,416         129,198         0         175,416         229,011         500,512         805,126       225%
2011      402,803         77,190         45,945         31,244         0         45,945         371,546         739,034         816,224       203%

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Total    $ 2,089,028       $ 3,094,095       $ 2,016,718       $ 1,077,376       $ 86,571       $ 1,930,147       $ 926,734       $ 1,953,348       $ 5,047,443       242%

 

  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

Purchased Bankruptcy Portfolio

 

            Inception through December 31, 2011      As of December 31, 2011
($ in thousands)      Actual  Cash
Collections

Including Cash
Sales
     Income
Recognized

on Finance
Receivables
     Principal
Amortization
     Allowance
Charges
     Income
Recognized

on Finance
Receivables, Net
     Net  Finance
Receivables
Balance
     Estimated
Remaining
Collections
     Total
Estimated
Collections
     Total Estimated
Collections
to Purchase
Price

Purchase
Period

   Purchase
Price
                            
1996-2003    $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       $ 0       0%
2004      7,468         14,294         8,026         6,268         1,200         6,826         0         90