PRA Group
PORTFOLIO RECOVERY ASSOCIATES INC (Form: 10-Q, Received: 11/06/2009 16:11:58)
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
     
o   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)
(888) 772-7326
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES þ       NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
     Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o  
YES o       NO o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o       NO þ
The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
         
                      Class   Outstanding as of October 19, 2009
Common Stock, $0.01 par value
    15,491,725  
 
 

 


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
INDEX
         
    Page(s)
PART I. FINANCIAL INFORMATION
       
 
Item 1. Financial Statements
       
 
Consolidated Balance Sheets (unaudited) as of September 30, 2009 and December 31, 2008
    3  
 
Consolidated Income Statements (unaudited) For the three and nine months ended September 30, 2009 and 2008
    4  
 
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income (unaudited) For the nine months ended September 30, 2009
    5  
 
Consolidated Statements of Cash Flows (unaudited) For the nine months ended September 30, 2009 and 2008
    6  
 
Notes to Consolidated Financial Statements (unaudited)
    7-21  
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    22-45  
 
Item 3. Quantitative and Qualitative Disclosure About Market Risk
    45  
 
Item 4. Controls and Procedures
    45  
 
PART II. OTHER INFORMATION
       
 
Item 1. Legal Proceedings
    45-46  
 
Item 1A. Risk Factors
    46  
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    46  
 
Item 3. Defaults Upon Senior Securities
    46  
 
Item 4. Submission of Matters to a Vote of the Security Holders
    46  
 
Item 5. Other Information
    46  
 
Item 6. Exhibits
    46  
 
SIGNATURES
    47  

2


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2009 and December 31, 2008
(unaudited)
(Amounts in thousands, except per share amounts)
                 
    September 30,     December 31,  
    2009     2008  
Assets
               
Cash and cash equivalents
  $ 19,874     $ 13,901  
Finance receivables, net
    660,879       563,830  
Accounts receivable, net
    6,909       8,278  
Income taxes receivable
    5,893       3,587  
Property and equipment, net
    22,093       23,884  
Goodwill
    29,299       27,546  
Intangible assets, net
    11,425       13,429  
Other assets
    3,310       3,385  
 
           
 
               
Total assets
  $ 759,682     $ 657,840  
 
           
 
               
Liabilities and Stockholders’ Equity
               
 
               
Liabilities:
               
Accounts payable
  $ 3,957     $ 3,438  
Accrued expenses
    3,463       4,314  
Accrued payroll and bonuses
    11,294       9,850  
Deferred tax liability
    110,333       88,070  
Line of credit
    306,300       268,300  
Long-term debt
    1,663        
Obligations under capital lease
          5  
Derivative instrument
    566        
 
           
Total liabilities
    437,576       373,977  
 
           
 
               
Commitments and contingencies (Note 12)
               
Stockholders’ equity:
               
Preferred stock, par value $0.01, authorized shares, 2,000, issued and outstanding shares — 0
           
Common stock, par value $0.01, authorized shares, 30,000, 15,573 issued and 15,491 outstanding shares at September 30, 2009, and 15,398 issued and 15,286 outstanding shares at December 31, 2008
    155       153  
Additional paid-in capital
    81,358       74,574  
Retained earnings
    240,939       209,047  
Accumulated other comprehensive (loss)/income, net of tax
    (346 )     89  
 
           
Total stockholders’ equity
    322,106       283,863  
 
           
 
               
Total liabilities and stockholders’ equity
  $ 759,682     $ 657,840  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

3


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED INCOME STATEMENTS
For the three and nine months ended September 30, 2009 and 2008
(unaudited)
(Amounts in thousands, except per share amounts)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
Revenues:
                               
Income recognized on finance receivables, net
  $ 54,336     $ 52,738     $ 159,650     $ 158,412  
Commissions
    14,229       15,831       48,225       37,874  
 
                       
 
                               
Total revenues
    68,565       68,569       207,875       196,286  
 
                               
Operating expenses:
                               
Compensation and employee services
    26,844       22,983       79,940       64,983  
Legal and agency fees and costs
    11,296       14,386       34,460       39,530  
Outside fees and services
    2,284       2,323       6,854       6,870  
Communications
    3,472       2,263       11,157       7,535  
Rent and occupancy
    1,270       1,123       3,515       2,830  
Other operating expenses
    2,341       1,912       6,565       4,863  
Depreciation and amortization
    2,269       2,162       6,874       5,138  
 
                       
 
                               
Total operating expenses
    49,776       47,152       149,365       131,749  
 
                       
 
                               
Income from operations
    18,789       21,417       58,510       64,537  
 
                               
Other income and (expense):
                               
Interest income
          34       3       67  
Interest expense
    (1,964 )     (3,066 )     (5,891 )     (8,215 )
 
                       
 
                               
Income before income taxes
    16,825       18,385       52,622       56,389  
 
                               
Provision for income taxes
    6,729       6,930       20,730       21,638  
 
                       
 
                               
Net income
  $ 10,096     $ 11,455     $ 31,892     $ 34,751  
 
                       
 
                               
Net income per common share:
                               
Basic
  $ 0.65     $ 0.75     $ 2.07     $ 2.28  
Diluted
  $ 0.65     $ 0.75     $ 2.07     $ 2.27  
Weighted average number of shares outstanding:
                               
Basic
    15,466       15,267       15,392       15,210  
Diluted
    15,502       15,336       15,428       15,280  
The accompanying notes are an integral part of these consolidated financial statements.

4


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME
For the nine months ended September 30, 2009
(unaudited)
(Amounts in thousands)
                                         
            Additional             Accumulated Other     Total  
    Common     Paid-in     Retained     Comprehensive     Stockholders’  
    Stock     Capital     Earnings     (Loss)/Income     Equity  
Balance at December 31, 2008
  $ 153     $ 74,574     $ 209,047     $ 89     $ 283,863  
 
                                       
Net income
                31,892             31,892  
Net unrealized change in:
                                       
Interest rate swap derivative, net of tax
                      (435 )     (435 )
 
                                     
Comprehensive income
                                    31,457  
 
                                     
Exercise of stock options and vesting of nonvested shares
    2       1,628                   1,630  
Issuance of common stock for acquisition
          1,170                   1,170  
Amortization of share-based compensation
          3,240                   3,240  
Income tax benefit from share-based compensation
          746                   746  
 
                             
 
                                       
Balance at September 30, 2009
  $ 155     $ 81,358     $ 240,939     $ (346 )   $ 322,106  
 
                             
The accompanying notes are an integral part of these consolidated financial statements.

5


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2009 and 2008
(unaudited)
(Amounts in thousands)
                 
    Nine Months Ended  
    September 30,  
    2009     2008  
Cash flows from operating activities:
               
Net income
  $ 31,892     $ 34,751  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Amortization of share-based compensation
    3,240       442  
Depreciation and amortization
    6,874       5,138  
Deferred tax expense
    22,000       23,771  
Changes in operating assets and liabilities:
               
Other assets
    (14 )     182  
Accounts receivable
    1,369       (77 )
Accounts payable
    520       (77 )
Income taxes
    (2,306 )     (513 )
Accrued expenses
    (851 )     567  
Accrued payroll and bonuses
    1,443       1,875  
 
           
 
Net cash provided by operating activities
    64,167       66,059  
 
           
Cash flows from investing activities:
               
Purchases of property and equipment
    (3,079 )     (4,041 )
Acquisition of finance receivables, net of buybacks
    (210,116 )     (214,172 )
Collections applied to principal on finance receivables
    113,067       89,039  
Company acquisitions, including acquisition costs and net of cash acquired
    (100 )     (25,791 )
 
           
 
Net cash used in investing activities
    (100,228 )     (154,965 )
 
           
Cash flows from financing activities:
               
Proceeds from exercise of options
    1,630       594  
Income tax benefit from share-based compensation
    746       368  
Proceeds from line of credit
    84,500       146,300  
Principal payments on line of credit
    (46,500 )     (47,000 )
Proceeds from long-term debt
    2,036        
Principal payments on long-term debt
    (373 )      
Principal payments on capital lease obligations
    (5 )     (80 )
 
           
 
Net cash provided by financing activities
    42,034       100,182  
 
           
 
Net increase in cash and cash equivalents
    5,973       11,276  
 
Cash and cash equivalents, beginning of period
    13,901       16,730  
 
           
 
Cash and cash equivalents, end of period
  $ 19,874     $ 28,006  
 
           
Supplemental disclosure of cash flow information:
               
Cash paid for interest
  $ 6,028     $ 8,272  
Cash paid for income taxes
  $ 321     $ 3  
 
Noncash investing and financing activities:
               
Common stock issued for acquisition
  $ 1,170     $ 1,847  
Net unrealized change in fair value of derivative instrument
  $ (655 )   $  
The accompanying notes are an integral part of these consolidated financial statements.

6


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Business:
     Portfolio Recovery Associates, LLC (“PRA”) was formed on March 20, 1996. Portfolio Recovery Associates, Inc. (“PRA Inc”) was formed in August 2002. On November 8, 2002, PRA Inc completed its initial public offering (“IPO”) of common stock. As a result, all of the membership units and warrants of PRA were exchanged on a one to one basis for warrants and shares of a single class of common stock of PRA Inc. PRA Inc owns all outstanding membership units of PRA, PRA Holding I, LLC (“PRA Holding I”), PRA Holding II, LLC (“PRA Holding II”), PRA Receivables Management, LLC (formerly d/b/a Anchor Receivables Management) (“Anchor”), PRA Location Services, LLC (d/b/a IGS Nevada) (“IGS”), PRA Government Services, LLC (d/b/a RDS) (“RDS”) and MuniServices, LLC (“MuniServices”). PRA Inc, a Delaware corporation, and its subsidiaries (collectively, the “Company”) are full-service providers of outsourced receivables management and related services. The Company is engaged in the business of purchasing, managing and collecting portfolios of defaulted consumer receivables, as well as offering a broad range of accounts receivable management services. The majority of the Company’s business activities involve the purchase, management and collection of defaulted consumer receivables. These are purchased from sellers of finance receivables and collected by a highly skilled staff whose purpose is to locate and contact customers and arrange payment or resolution of their debts. The Company, through its Litigation Department, collects accounts judicially, either by using its own attorneys, or by contracting with independent attorneys throughout the country through whom the Company takes legal action to satisfy consumer debts. The Company also services receivables on behalf of clients on either a commission or transaction-fee basis. Clients include entities in the financial services, auto, retail, utility, health care and government sectors. Services provided to these clients include standard collection services on delinquent accounts, obtaining location information for clients in support of their collection activities (known as skip tracing), and the management of both delinquent and non-delinquent receivables for government entities.
     The consolidated financial statements of the Company include the accounts of PRA Inc, PRA, PRA Holding I, PRA Holding II, Anchor, IGS, RDS and MuniServices. Under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 “Segment Reporting” (“ASC 280”), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and therefore, it has one reportable segment, accounts receivable management, based on similarities among the operating units including homogeneity of services, service delivery methods and use of technology.
     The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated balance sheet as of September 30, 2009, its consolidated income statements for the three and nine months ended September 30, 2009 and 2008, its consolidated statement of changes in stockholders’ equity and comprehensive income for the nine months ended September 30, 2009, and its consolidated statements of cash flows for the nine months ended September 30, 2009 and 2008. The consolidated income statements of the Company for the three and nine months ended September 30, 2009 may not be indicative of future results. Certain reclassifications have been made to prior year amounts to conform to the current year presentation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed for the year ended December 31, 2008.
2. Finance Receivables, net:
     The Company’s principal business consists of the acquisition and collection of pools of accounts that have experienced deterioration of credit quality between origination and the Company’s acquisition of the accounts. The amount paid for any pool reflects the Company’s determination that it is probable the Company will be unable to collect all amounts due according to an account’s contractual terms. At acquisition, the Company reviews the portfolio both by account and aggregate pool to determine whether there is evidence of deterioration of credit quality

7


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
since origination and if it is probable that the Company will be unable to collect all amounts due according to the account’s contractual terms. If both conditions exist, the Company determines whether each such account is to be accounted for individually or whether such accounts will be assembled into pools based on common risk characteristics. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio and subsequently aggregates pools of accounts. The Company determines the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference) based on the Company’s proprietary acquisition models. The remaining amount, representing the excess of the pool’s cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining life of the pool (accretable yield).
     The Company accounts for its investment in finance receivables under the guidance of FASB ASC Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). Under ASC 310-30, static pools of accounts may be established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). ASC 310-30 requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. ASC 310-30 initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased as the basis for subsequent impairment testing. Significant increases in actual, or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Effective for fiscal years beginning after December 15, 2004 under ASC 310-30, rather than lowering the estimated IRR if the collection estimates are not received or projected to be received (as was permitted under the prior accounting guidance), the carrying value of a pool would be written down to maintain the then current IRR and is shown as a reduction in revenue in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables, net, on the consolidated balance sheet. Income on finance receivables is accrued quarterly based on each static pool’s effective IRR. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. This reduction in carrying value is defined as payments applied to principal (also referred to as finance receivable amortization). Likewise, cash flows that are less than the interest accrual will accrete the carrying balance. The Company generally does not allow accretion in the first six to twelve months; accordingly, the Company utilizes either the cost recovery method or cash method when necessary to prevent accretion as permitted by ASC 310-30. The IRR is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Under the cash method, revenue is recognized as it would be under the interest method up to the amount of cash collections. Additionally, the Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. These pools are not aggregated with other portfolios. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above. At September 30, 2009 and 2008, the Company had unamortized purchased principal (purchase price) in pools accounted for under the cost recovery method of $3,619,322 and $3,546,509, respectively.
     The Company establishes valuation allowances for all acquired accounts subject to ASC 310-30 to reflect only those losses incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the accounts. At September 30, 2009 and 2008, the Company had an allowance against its finance receivables of $41,770,000 and $14,755,000, respectively. Prior to January 1, 2005, in the event that a reduction of the yield to as low as zero in conjunction with estimated future cash collections that were inadequate to amortize the carrying balance, an allowance charge would be taken with a corresponding write-off of the receivable balance.

8


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
     The Company implements the accounting for income recognized on finance receivables under ASC 310-30 as follows. The Company creates each accounting pool using its projections of estimated cash flows and expected economic life. The Company then computes the effective yield that fully amortizes the pool to the end of its expected economic life based on the current projections of estimated cash flows. As actual cash flow results are recorded, the Company balances those results to the data contained in its proprietary models to ensure accuracy, then reviews each accounting pool watching for trends, actual performance versus projections and curve shape, sometimes re-forecasting future cash flows utilizing the Company’s statistical models. The review process is primarily performed by the Company’s finance staff; however, the Company’s operational and statistical staffs may also be involved depending upon actual cash flow results achieved. To the extent there is overperformance, the Company will either increase the yield or release the allowance, if persuasive evidence indicates that the overperformance is considered to be a significant betterment, or, if the overperformance is considered more of an acceleration of cash flows (a timing difference), adjust future cash flows downward which effectively extends the amortization period, or take no action at all if the amortization period is reasonable and falls within the pools’ expected economic life. To the extent there is underperformance, the Company will book an allowance if the underperformance is significant and will also consider revising future cash flows based on current period information, or take no action if the pool’s amortization period is reasonable and falls within the currently projected economic life.
     The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of accounts. These fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of the portfolio using the interest method. The balance of the unamortized capitalized fees at September 30, 2009 and 2008 was $3,262,929 and $3,013,671, respectively. During the three and nine months ended September 30, 2009, the Company capitalized $156,248 and $805,962, respectively, of these direct acquisition fees. During the three and nine months ended September 30, 2008, the Company capitalized $198,257 and $1,065,786, respectively, of these direct acquisition fees. During the three and nine months ended September 30, 2009, the Company amortized $206,270 and $621,593, respectively, of these direct acquisition fees. During the three and nine months ended September 30, 2008, the Company amortized $153,391 and $487,031, respectively, of these direct acquisition fees.
     The agreements to purchase the aforementioned receivables include general representations and warranties from the sellers covering account holder death or bankruptcy and accounts settled or disputed prior to sale. The representation and warranty period permitting the return of these accounts from the Company to the seller is typically 90 to 180 days. Any funds received from the seller of finance receivables as a return of purchase price are referred to as buybacks. Buyback funds are simply applied against the finance receivable balance received and are not included in the Company’s cash collections from operations. In some cases, the seller will replace the returned accounts with new accounts in lieu of returning the purchase price. In that case, the old account is removed from the pool and the new account is added.
     Changes in finance receivables, net for the three and nine months ended September 30, 2009 and 2008 are as follows (amounts in thousands):
                                 
    Three Months Ended     Three Months Ended     Nine Months Ended     Nine Months Ended  
    September 30, 2009     September 30, 2008     September 30, 2009     September 30, 2008  
Balance at beginning of period
  $ 624,592     $ 515,367     $ 563,830     $ 410,297  
Acquisitions of finance receivables, net of buybacks
    74,318       50,333       210,116       214,172  
 
                               
Cash collections
    (92,367 )     (83,008 )     (272,717 )     (247,451 )
Income recognized on finance receivables, net
    54,336       52,738       159,650       158,412  
 
                       
Cash collections applied to principal
    (38,031 )     (30,270 )     (113,067 )     (89,039 )
 
                       
 
                               
Balance at end of period
  $ 660,879     $ 535,430     $ 660,879     $ 535,430  
 
                       

9


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
     At the time of acquisition, the life of each pool is generally estimated to be between 84 to 96 months based on projected amounts and timing of future cash receipts using the proprietary models of the Company. As of September 30, 2009, the Company had $660,879,132 in net finance receivables. Based upon current projections, cash collections applied to principal are estimated to be as follows for the twelve months in the periods ending (amounts in thousands):
         
September 30, 2010
  $ 136,625  
September 30, 2011
    162,067  
September 30, 2012
    161,128  
September 30, 2013
    122,993  
September 30, 2014
    51,970  
September 30, 2015
    21,598  
September 30, 2016
    4,028  
September 30, 2017
    470  
 
     
 
  $ 660,879  
 
     
     During the three and nine months ended September 30, 2009, the Company purchased approximately $1.75 billion and $6.09 billion, respectively, in face value of charged-off consumer receivables. During the three and nine months ended September 30, 2008, the Company purchased approximately $857.2 million and $3.28 billion, respectively, in face value of charged-off consumer receivables. At September 30, 2009, the estimated remaining collections (“ERC”) on the receivables purchased in the three months ended September 30, 2009 and 2008 were $165.3 million and $82.6 million, respectively. At September 30, 2009, the estimated remaining collections (“ERC”) on the receivables purchased in the nine months ended September 30, 2009 and 2008 were $453.8 million and $294.4 million, respectively.
     Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of September 30, 2009 and 2008. Reclassifications from nonaccretable difference to accretable yield primarily result from the Company’s increase in its estimate of future cash flows. Reclassifications to nonaccretable difference from accretable yield results from the Company’s decrease in its estimates of future cash flows and allowance charges that exceed the Company’s increase in its estimate of future cash flows. Changes in accretable yield for the three and nine months ended September 30, 2009 and 2008 were as follows (amounts in thousands):
                                 
    Three Months Ended     Three Months Ended     Nine Months Ended     Nine Months Ended  
    September 30, 2009     September 30, 2008     September 30, 2009     September 30, 2008  
Balance at beginning of period
  $ 613,392     $ 549,716     $ 551,735     $ 492,269  
Income recognized on finance receivables, net
    (54,336 )     (52,738 )     (159,650 )     (158,412 )
Additions
    106,359       57,184       303,195       220,573  
Reclassifications (to)/from nonaccretable difference
    5,618       (4,592 )     (24,247 )     (4,860 )
 
                       
Balance at end of period
  $ 671,033     $ 549,570     $ 671,033     $ 549,570  
 
                       
     The Company recorded allowance charges on pools that had underperformed the Company’s most recent expectations during the three and nine months ended September 30, 2009 and 2008 as follows:
                                 
    Three Months Ended     Three Months Ended     Nine Months Ended     Nine Months Ended  
    September 30, 2009     September 30, 2008     September 30, 2009     September 30, 2008  
Balance at beginning of period
  $ 33,760     $ 10,975     $ 23,620     $ 4,230  
Allowance charges recorded
    8,395       3,985       19,305       10,870  
Reversal of previously recorded allowance charges
    (385 )     (205 )     (1,155 )     (345 )
 
                       
Change in allowance charge
    8,010       3,780       18,150       10,525  
 
                       
Balance at end of period
  $ 41,770     $ 14,755     $ 41,770     $ 14,755  
 
                       

10


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
3. Accounts Receivable, net:
     Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The balance of the allowance for doubtful accounts at September 30, 2009 and December 31, 2008 was $2.7 million and $2.0 million, respectively. The Company does not have any off balance sheet credit exposure related to its customers.
4. Line of Credit:
     On November 29, 2005, the Company entered into a Loan and Security Agreement for a revolving line of credit. The agreement has been amended six times to add additional lenders and ultimately increase the total availability of credit under the line to $365 million. The agreement is a line of credit in an amount equal to the lesser of $365 million or 30% of the Company’s ERC of all its eligible asset pools. Borrowings under the revolving credit facility bear interest at a floating rate equal to the one month LIBOR Market Index Rate plus 1.40%, which was 1.65% at September 30, 2009, and the facility expires on May 2, 2011. The Company also pays an unused line fee equal to three-tenths of one percent, or 30 basis points, on any unused portion of the line of credit. The loan is collateralized by substantially all the tangible and intangible assets of the Company. The agreement provides as follows:
    monthly borrowings may not exceed 30% of ERC;
 
    funded debt to EBITDA (defined as net income, less income or plus loss from discontinued operations and extraordinary items, plus income taxes, plus interest expense, plus depreciation, depletion, amortization (including finance receivable amortization) and other non-cash charges) ratio must be less than 2.0 to 1.0 calculated on a rolling twelve-month average;
 
    tangible net worth must be at least 100% of tangible net worth reported at September 30, 2005, plus 25% of cumulative positive net income since the end of such fiscal quarter, plus 100% of the net proceeds from any equity offering without giving effect to reductions in tangible net worth due to repurchases of up to $100,000,000 of the Company’s common stock; and
 
    restrictions on change of control.
     As of September 30, 2009 and 2008, outstanding borrowings under the facility totaled $306,300,000 and $267,300,000, respectively, of which $50,000,000 was part of the non-revolving fixed rate sub-limit which bears interest at 6.80% and expires on May 4, 2012. As of September 30, 2009, the Company is in compliance with all of the covenants of the agreement.
5. Derivative Instruments :
     The Company may periodically enter into derivative financial instruments, typically interest rate swap agreements, to reduce its exposure to fluctuations in interest rates on variable-rate debt and their impact on earnings and cash flows. The Company does not utilize derivative financial instruments with a level of complexity or with a risk greater than the exposure to be managed nor does it enter into or hold derivatives for trading or speculative purposes. The Company periodically reviews the creditworthiness of the swap counterparty to assess the counterparty’s ability to honor its obligation. Counterparty default would expose the Company to fluctuations in variable interest rates. Based on the guidance of FASB ASC Topic 815 “Derivatives and Hedging” (“ASC 815”), the Company records derivative financial instruments at fair value.

11


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
     On December 16, 2008, the Company entered into an interest rate forward rate swap transaction (the “Swap”) with J.P. Morgan Chase Bank, National Association pursuant to an ISDA Master Agreement which contains customary representations, warranties and covenants. The Swap has an effective date of January 1, 2010, with an initial notional amount of $50,000,000. Under the Swap, the Company will receive a floating interest rate based on 1-month LIBOR Market Index Rate and will pay a fixed interest rate of 1.89% through maturity of the Swap on May 1, 2011. Notwithstanding the terms of the Swap, the Company is ultimately obligated for all amounts due and payable under the credit facility.
     The Company’s financial derivative instrument is designated and qualifies as a cash flow hedge, and the effective portion of the gain or loss on such hedge is reported as a component of other comprehensive income in the consolidated financial statements. To the extent that the hedging relationship is not effective, the ineffective portion of the change in fair value of the derivative is recorded in other income (expense). The hedge was considered effective for the period from December 16, 2008 through December 31, 2008 and for the three and nine months ended September 30, 2009. Therefore, no amount has been recorded in the consolidated income statements related to the hedge’s ineffectiveness during 2008 or the three and nine months ended September 30, 2009. Hedges that receive designated hedge accounting treatment are evaluated for effectiveness at the time that they are designated, as well as throughout the hedging period.
     The following table sets forth the fair value amounts of derivative instruments held by the Company as of the dates indicated (amounts in thousands):
                                 
    September 30, 2009     December 31, 2008  
    Asset Derivatives     Liability Derivatives     Asset Derivatives     Liability Derivatives  
Derivatives designated as hedging instruments under ASC 815:
                               
Interest rate swap contracts
  $     $ 566     $ 89     $  
 
                               
 
                       
Total derivatives
  $     $ 566     $ 89     $  
 
                       
     Liability and asset derivatives are recorded in the liability and other asset section of the accompanying consolidated balance sheets, respectively.
     The following table sets forth the gain (loss) recorded in Accumulated Other Comprehensive Income (“AOCI”), net of tax, for the three and nine months ended September 30, 2009, for derivatives held by the Company as well as any gain (loss) reclassified from AOCI into income (amounts in thousands):
                         
    For the three months ended September 30, 2009  
    Amount of Gain or (Loss)              
    Recognized in Other     Location of Gain or (Loss)     Amount of Gain or (Loss)  
    Comprehensive Income     Reclassified from     Reclassified from  
    on Derivatives     AOCI into Income     AOCI into Income  
    (Effective Portion)     (Effective Portion)     (Effective Portion)  
Derivatives designated as hedging instruments under ASC 815:
                       
 
Interest rate swap contracts
  $ (214 )   interest income/(expense)     $  
 
                       
 
                   
Total derivatives
  $ (214 )           $  
 
                   
                         
    For the nine months ended September 30, 2009  
    Amount of Gain or (Loss)              
    Recognized in Other     Location of Gain or (Loss)     Amount of Gain or (Loss)  
    Comprehensive Income     Reclassified from     Reclassified from  
    on Derivatives     AOCI into Income     AOCI into Income  
    (Effective Portion)     (Effective Portion)     (Effective Portion)  
Derivatives designated as hedging instruments under ASC 815:
                       
 
Interest rate swap contracts
  $ (435 )   interest income/(expense)     $  
 
                       
 
                   
Total derivatives
  $ (435 )           $  
 
                   

12


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
     Amounts in accumulated other comprehensive income (loss) will be reclassified into earnings under certain situations; for example, if the occurrence of the transaction is no longer probable or no longer qualifies for hedge accounting. The Company expects to reclassify approximately $467,000 currently included in other accumulated other comprehensive income (loss) into interest expense within the next 12 months.
6. Long-Term Debt:
     On February 6, 2009, the Company entered into a commercial loan agreement to finance computer software and equipment purchases in the amount of $2,036,114. The loan is collateralized by the related computer software and equipment. The loan is a three year loan with a fixed rate of 4.78% with monthly installments, including interest, of $60,823 beginning on March 31, 2009, and it matures on February 28, 2012.
7. Property and Equipment, net:
     Property and equipment, at cost, consist of the following as of the dates indicated (amounts in thousands):
                 
    September 30,     December 31,  
    2009     2008  
Software
  $ 15,648     $ 14,380  
Computer equipment
    8,665       7,951  
Furniture and fixtures
    5,531       5,150  
Equipment
    5,928       5,370  
Leasehold improvements
    3,205       3,449  
Building and improvements
    5,979       5,948  
Land
    992       992  
Accumulated depreciation and amortization
    (23,855 )     (19,356 )
 
           
Property and equipment, net
  $ 22,093     $ 23,884  
 
           
     Depreciation and amortization expense, relating to property and equipment, for the three and nine months ended September 30, 2009 was $1,600,764 and $4,869,540, respectively. Depreciation and amortization expense, relating to property and equipment, for the three and nine months ended September 30, 2008 was $1,462,637 and $3,715,492, respectively.
     Beginning in July 2006 upon initiation of certain internally developed software projects, in accordance with the guidance of FASB ASC Topic 350-40 “Internal-Use Software” (“ASC 350-40”), the Company began capitalizing qualifying computer software costs incurred during the application development stage and amortizing them over their estimated useful life of three to seven years on a straight-line basis beginning when the project is completed. Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred. The Company’s policy provides for the capitalization of certain direct payroll costs for employees who are directly associated with internal use computer software projects, as well as external direct costs of services associated with developing or obtaining internal use software. Capitalizable personnel costs are limited to the time directly spent on such projects. As of September 30, 2009, the Company has incurred and capitalized $2,273,069 of these direct payroll costs and external direct costs related to software developed for internal use. Of these costs, $1,570,493 is for projects that are in the development stage and, therefore are a component of Other Assets. Once the projects are completed, the costs will be transferred to Software and amortized over their estimated useful life of three to seven years. Amortization expense for the three and nine months ended September 30, 2009 was $25,229 and $69,501, respectively. Amortization expense for the three and nine months ended September 30, 2008 was $22,136 and $66,408, respectively. The remaining unamortized costs relating to internally developed software at September 30, 2009 and 2008 were $523,079 and $410,995, respectively.

13


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
8. Goodwill and Intangible Assets, net:
     With the acquisition of IGS on October 1, 2004, RDS on July 29, 2005, The Palmer Group on July 25, 2007, MuniServices on July 1, 2008, and Broussard Partners and Associates, Inc. (“BPA”) on August 1, 2008, the Company purchased certain tangible and intangible assets. Intangible assets purchased included client and customer relationships, non-compete agreements, trademarks and goodwill. In accordance FASB ASC Topic 350 “Intangibles-Goodwill and Other” (“ASC 350”), the Company is amortizing the following intangible assets over the estimated useful lives as indicated:
                         
    Customer Relationships   Non-Compete Agreements   Trademarks
IGS
  7 years   3 years      
RDS
  10 years   3 years      
The Palmer Group
  2.4 years            
MuniServices
  11 years   3 years   14 years
BPA
  10 years   2.4 years      
     The combined original weighted average amortization period is 9.14 years. The Company reviews these relationships at least annually for impairment. Total amortization expense was $668,277 and $2,004,831 for the three and nine months ended September 30, 2009, respectively. Total amortization expense was $699,598 and $1,422,938 for the three and nine months ended September 30, 2008, respectively. In addition, goodwill, pursuant to ASC 350, is not amortized but rather is reviewed at least annually for impairment. During the fourth quarter of 2008, the Company underwent its annual review of goodwill. Based upon the results of this review, which was conducted as of October 1, 2008, no impairment charges to goodwill or the other intangible assets were necessary as of the date of this review. The Company believes that nothing has occurred since the review was performed through September 30, 2009 that would indicate a triggering event and thereby necessitate an impairment charge to goodwill or the other intangible assets. The Company will undergo its annual goodwill review during the fourth quarter of 2009. At September 30, 2009 and December 31, 2008, the carrying value of goodwill was $29,298,717 and $27,545,582, respectively. The $1,753,135 increase in the carrying value of goodwill during the nine months ended September 30, 2009 relates to additional purchase price relating to the acquisition of BPA on August 1, 2008 and MuniServices on July 1, 2008.
9. Share-Based Compensation:
     The Company has a stock option and nonvested share plan. The Company created the 2002 Stock Option Plan (the “Plan”) on November 7, 2002. The Plan was amended in 2004 (the “Amended Plan”) to enable the Company to issue nonvested shares of stock to its employees and directors. The Amended Plan was approved by the Company’s shareholders at its Annual Meeting on May 12, 2004. Up to 2,000,000 shares of common stock may be issued under the Amended Plan. The Amended Plan expires November 7, 2012.
     Effective January 1, 2006, the Company adopted the provisions of FASB ASC Topic 718 “Compensation-Stock Compensation” (“ASC 718”), using the modified prospective approach. The adoption had no material impact on the Company’s Consolidated Income Statement or on previously reported interim periods. As of September 30, 2009, total future compensation costs related to nonvested awards of nonvested shares (not including nonvested shares granted under the Long-Term Incentive Program) is estimated to be $2.8 million with a weighted average remaining life of 2.5 years (not including nonvested shares granted under the Long-Term Incentive Programs). As of September 30, 2009, there is no future compensation costs related to stock options and the remaining vested stock options have a weighted average remaining life of 0.9 years. Based upon historical data, the Company used an annual forfeiture rate of 14% for stock options and 15-40% for nonvested shares for most of the employee grants. Grants made to key employee hires and directors of the Company were assumed to have no forfeiture rates associated with them due to the historically low turnover among this group. In addition, commensurate with the adoption of the guidance, all previous references to “restricted” stock are now referred to as “nonvested” shares.

14


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
     Total share-based compensation expense was $588,595 and $3,240,301 for the three and nine months ended September 30, 2009, respectively. Total share-based compensation expense (benefit) was ($720,587) and $442,014 for the three and nine months ended September 30, 2008, respectively. The Company, in conjunction with the renewal of employment agreements with its Named Executive Officers and other senior executives, awarded nonvested shares which vested on January 1, 2009. As a result of the vesting of these shares, the Company recorded stock-based compensation expense in connection with these shares, in the amount of approximately $1.4 million during the first quarter of 2009. Tax benefits resulting from tax deductions in excess of share-based compensation expense recognized under the fair value recognition provisions of ASC 718 (windfall tax benefits) are credited to additional paid-in capital in the Company’s Consolidated Balance Sheets. Realized tax shortfalls are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense. The total tax benefit realized from share-based compensation was $731,867 and $1,923,946 for the three and nine months ended September 30, 2009, respectively. The total tax benefit realized from share-based compensation was $404,965 and $857,782 for the three and nine months ended September 30, 2008, respectively.
Stock Options
     All options issued under the Amended Plan vest ratably over five years. Granted options expire seven years from grant date. Expiration dates range between November 7, 2009 and January 16, 2011. Options granted to a single person cannot exceed 200,000 in a single year. At September 30, 2009, 895,000 options have been granted under the Amended Plan, of which 118,955 have been cancelled. There were 0 and 33,000 antidilutive options outstanding for the three and nine months ended September 30, 2009, respectively. There were no antidilutive options outstanding for the three and nine months ended September 30, 2008.
     The Company granted no options during the three and nine months ended September 30, 2009 and 2008. All of the stock options which have been granted under the Amended Plan were granted to employees of the Company except for 40,000 which were granted to non-employee directors. The total intrinsic value of options exercised during the three and nine months ended September 30, 2009 was approximately $1,199,000 and $2,306,000, respectively. The total intrinsic value of options exercised during the three and nine months ended September 30, 2008 was approximately $345,000 and $895,000, respectively.
     The following summarizes all option related transactions from December 31, 2007 through September 30, 2009 (amounts in thousands, except per share amounts):
                         
    Options     Weighted-Average     Weighted-Average  
    Outstanding     Exercise Price     Fair Value  
December 31, 2007
    163     $ 16.97     $ 3.25  
Exercised
    (38 )     15.87       3.31  
Cancelled
    (2 )     21.50       4.60  
 
                 
December 31, 2008
    123       17.24       3.21  
Exercised
    (102 )     15.92       3.29  
 
                 
September 30, 2009
    21     $ 23.79     $ 2.78  
 
                 
     The following information is as of September 30, 2009 (amounts in thousands, except per share amounts):
                                                         
    Options Outstanding   Options Exercisable
                    Weighted-Average                   Weighted-    
Exercise   Number   Average Remaining   Exercise Price Per   Aggregate   Number   Average Exercise   Aggregate
Prices   Outstanding   Contractual Life   Share   Intrinsic Value   Exercisable   Price Per Share   Intrinsic Value
$13.00
    7       0.1     $ 13.00     $ 216       7     $ 13.00     $ 216  
$28.45 - $29.79
    14       1.3       28.93       229       14       28.93       229  
     
Total as of September 30, 2009
    21       0.9     $ 23.79     $ 445       21     $ 23.79     $ 445  
     

15


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
     The Company utilizes the Black-Scholes option pricing model to calculate the value of the stock options when granted. This model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options. In addition, changes to the subjective input assumptions can result in materially different fair market value estimates. Therefore, the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options.
Nonvested Shares
     With the exception of the awards made pursuant to the Long-Term Incentive Program and a few employee and director grants, the terms of the nonvested share awards are similar to those of the stock option awards, wherein the nonvested shares vest ratably over five years and are expensed over their vesting period. In addition, in conjunction with the renewal of their employment agreements, the Company’s Named Executive Officers and other senior executives were awarded nonvested shares which vested on January 1, 2009. As a result of the vesting of these shares, the Company recorded stock-based compensation expense in connection with these shares, in the amount of approximately $1.4 million during the first quarter of 2009.
     The following summarizes all nonvested share transactions from December 31, 2007 through September 30, 2009 (amounts in thousands, except per share amounts):
                 
    Nonvested Shares   Weighted-Average
    Outstanding   Price at Grant Date
     
December 31, 2007
    123     $ 41.72  
Granted
    27       37.47  
Vested
    (37 )     39.55  
Cancelled
    (15 )     40.05  
     
December 31, 2008
    98       41.60  
Granted
    69       33.93  
Vested
    (73 )     36.85  
Cancelled
    (5 )     41.91  
     
September 30, 2009
    89     $ 39.57  
     
     The total grant date fair value of shares vested during the three and nine months ended September 30, 2009 was $593,806 and $2,687,986, respectively. The total grant date fair value of shares vested during the three and nine months ended September 30, 2008 was $598,382 and $1,278,168, respectively.
Long-Term Incentive Programs
     Pursuant to the Amended Plan, on March 30, 2007, January 4, 2008 and January 20, 2009, the Compensation Committee approved the grant of 96,550, 80,000 and 108,720 performance-based nonvested shares, respectively. The shares were granted to key employees of the Company. For both the 2007 and 2008 grants, no estimated compensation costs have been accrued because the achievements of the performance targets of the programs were deemed unlikely to be achieved. In the future, if the Company believes that the performance targets of the programs will be achieved, an adjustment to the expense will be made at that time based on the probable outcome. The 2009 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon diluted earnings per share (“EPS”) totals for 2009, the return on owners’ equity for the three year period beginning on January 1, 2009 and ending December 31, 2011, and the relative total shareholder return as compared to a peer group, for the same three year period. The number of shares vested can double if the financial goals are exceeded or no shares can vest if the financial goals are not met. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2009. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome. At September 30, 2009, no

16


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
compensation expense relating to the EPS goal has been accrued as the achievement of the EPS goal is not likely to be achieved. At September 30, 2009, total future compensation costs related to nonvested share awards granted under the 2009 Long-Term Incentive Program are estimated to be approximately $1.4 million. The Company assumed a 7.5% forfeiture rate for this grant and the remaining shares have a weighted average life of 2.25 years at September 30, 2009.
10. Income Taxes:
     On July 13, 2006, the FASB issued accounting guidance on accounting for uncertainty in income taxes. This guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB ASC Topic 740 “Income Taxes” (“ASC 740”). The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with the guidance is a two-step process. The first step is recognition: the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
     The Company adopted the guidance with respect to all of its tax positions as of January 1, 2007. Total unrecognized tax benefits at September 30, 2009 and 2008 were $0 and $180,000, respectively. On September 15, 2008, the 2004 tax year closed and is no longer subject to examination by major taxing jurisdictions, including the Internal Revenue Service. As a result, the remaining unrecognized tax benefits balance of $180,000 was reversed. The reversal was an adjustment to additional paid-in-capital and did not affect the annual effective tax rate.
     The Company was notified on June 21, 2007 that it was being examined by the Internal Revenue Service for the 2005 calendar year. The IRS has concluded its audit and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes for tax years ending December 31, 2007, 2006 and 2005. The IRS has proposed that cost recovery for tax revenue recognition does not clearly reflect income and that unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current deduction. On April 22, 2009, the Company filed a formal protest of the findings contained in the examination report prepared by the IRS. The Company believes it has sufficient support for the technical merits of its positions and that it is more-likely-than-not these positions will ultimately be sustained; therefore, a reserve for uncertain tax positions is not necessary. If the Company is unsuccessful in its appeal, it might be required to pay the related deferred taxes and any potential interest in the near-term, possibly requiring additional financing from other sources.
     At September 30, 2009, the tax years that remain subject to examination by the major taxing jurisdictions, including the Internal Revenue Service, are 2003 and 2005 and subsequent years. The 2003 tax year is still open to examination because of the net operating loss that originated in that year but was not fully utilized until the 2005 tax year.
     ASC 740 requires the recognition of interest, if the tax law would require interest to be paid on the underpayment of taxes, and recognition of penalties, if a tax position does not meet the minimum statutory threshold to avoid payment of penalties. Penalties and interest may be classified as either penalties and interest expense or

17


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
income tax expense. Management has elected to classify accrued penalties and interest as income tax expense. Accrued penalties and interest as of January 1, 2007, in the amount of $77,000, were recorded to beginning of year retained earnings at the date of adoption. Since January 1, 2007, the Company has accrued additional interest of approximately $34,000. Due to the approved application for change in accounting method, the balance of accrued penalties and interest was reduced by $67,000 during 2007. As a result of the lapse in the statute of limitations, the 2004 tax year closed as of September 15, 2008 resulting in the reversal of the remaining $44,000 of accrued interest. No interest or penalties were accrued or reversed in 2009.
11. Earnings per Share:
     Basic EPS are computed by dividing income available to common shareholders by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of stock options and nonvested share awards. Share-based awards that are contingent upon the attainment of performance goals are not included in the computation of diluted EPS until the performance goals have been attained. The following tables provide a reconciliation between the computation of basic EPS and diluted EPS for the three and nine months ended September 30, 2009 and 2008 (amounts in thousands, except per share amounts):
                                                 
    For the three months ended September 30,
    2009   2008
            Weighted Average                   Weighted Average    
    Net Income   Common Shares   EPS   Net Income   Common Shares   EPS
     
Basic EPS
  $ 10,096       15,466     $ 0.65     $ 11,455       15,267     $ 0.75  
Dilutive effect of stock options and nonvested share awards
            36                       69          
 
                                               
Diluted EPS
  $ 10,096       15,502     $ 0.65     $ 11,455       15,336     $ 0.75  
 
                                               
                                                 
    For the nine months ended September 30,
    2009   2008
            Weighted Average                   Weighted Average    
    Net Income   Common Shares   EPS   Net Income   Common Shares   EPS
     
Basic EPS
  $ 31,892       15,392     $ 2.07     $ 34,751       15,210     $ 2.28  
Dilutive effect of stock options and nonvested share awards
            36                       70          
 
                                               
Diluted EPS
  $ 31,892       15,428     $ 2.07     $ 34,751       15,280     $ 2.27  
 
                                               
     There were 0 and 33,000 antidilutive options outstanding for the three and nine months ended September 30, 2009. There were no antidilutive options outstanding for the three and nine months ended September 30, 2008.
12. Commitments and Contingencies:
Employment Agreements:
     The Company has employment agreements with all of its executive officers and with several members of its senior management group, most of which expire on December 31, 2011. Such agreements provide for base salary payments as well as bonuses which are based on the attainment of specific management goals. Future compensation under these agreements is approximately $8.5 million. The agreements also contain confidentiality and non-compete provisions.
Leases:
     The Company is party to various operating and capital leases with respect to its facilities and equipment. For further discussion of these leases please refer to the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed for the year ended December 31, 2008.

18


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Forward Flow Agreements:
     The Company is party to several forward flow agreements that allow for the purchase of defaulted consumer receivables at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at September 30, 2009 is approximately $73.9 million.
Litigation:
     The Company is from time to time subject to routine legal claims and proceedings, most of which are incidental to the ordinary course of its business. The Company initiates lawsuits against consumers and is occasionally countersued by them in such actions. Also, consumers, either individually, as a member of a class action, or through a governmental entity on behalf of consumers, may initiate litigation against the Company, in which they allege that the Company has violated a state or federal law in the process of collecting on an account. From time to time, other types of lawsuits are brought against the Company. While it is not expected that these or any other legal proceedings or claims in which the Company is involved will, either individually or in the aggregate, have a material adverse impact on the Company’s results of operations, liquidity or its financial condition, the matter described below falls outside of the normal parameters of the Company’s routine legal proceedings.
     PRA is currently a defendant in a purported class action counterclaim entitled PRA v. Barkwell, 4:09-cv-00113-CDL, which was originally filed in the Superior Court of Muscogee County, Georgia. The counterclaim, which was filed against PRA, the National Arbitration Forum (“NAF”) and MBNA American Bank, N.A., on July 29, 2009, has since been removed to the United States District Court for the Middle District of Georgia, where it is currently pending. The counterclaim alleges that in pursuing arbitration claims against Barkwell and other consumer debtors, pursuant to the terms and conditions of their respective cardholder agreements, PRA breached a duty of good faith and fair dealing and made negligent misrepresentations concerning its “arbitration practices.” The plaintiffs are seeking, among other things, to vacate the arbitration awards that PRA has obtained before NAF and have PRA disgorge the amounts collected with respect to such awards. It is not possible at this time to accurately estimate the possible loss, if any. PRA believes it has meritorious defenses to the allegations made in this counterclaim and intends to defend itself vigorously against them.
13. Estimated Fair Value of Financial Instruments:
     The accompanying consolidated financial statements include various estimated fair value information as of September 30, 2009, as required by FASB ASC Topic 825 “Financial Instruments” (“ASC 825”). ASC 825 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 825 also requires the consideration of differing levels of inputs in the determination of fair values. Based upon the fact there are no quoted prices in active markets or other observable market data, the Company used unobservable inputs for computation of the fair value of finance receivables, net. Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments.
      Cash and cash equivalents: The carrying amount approximates fair value.
      Finance receivables, net: The Company records purchased receivables at cost, which represents a significant discount from the contractual receivable balances due. The cost of the receivables is reduced as cash is received based upon the guidance of ASC 310-30. The carrying amount of finance receivables, net, as of September 30, 2009 was approximately $661 million. The Company computed the fair value of these receivables using proprietary pricing models that the Company utilizes to make portfolio purchase decisions. As of September 30, 2009, using the aforementioned methodology, the Company computed the approximate fair value to be $767 million.
      Long-term debt: The carrying amount approximates fair value, as the interest rates approximate the rate currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers.

19


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
      Line of credit: The carrying amount approximates fair value, as the interest rates approximate the rate currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers.
      Derivative instrument : The interest rate swap is recorded at fair value, which is determined using pricing models developed based on the LIBOR swap rate and other observable market data, adjusted for nonperformance risk of both the counterparty and the Company.
14. Recent Accounting Pronouncements:
     In December 2007, the FASB issued guidance which clarifies the accounting for business combinations in accordance with FASB ASC Topic 805 “Business Combinations” (“ASC 805”). The guidance establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. It also provides guidance for recognizing and measuring the goodwill acquired in the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. The guidance is effective for acquisitions consummated in fiscal years beginning after December 15, 2008. The Company adopted the guidance on January 1, 2009, which had no material impact on its consolidated financial statements.
     In December 2007, the FASB issued guidance on noncontrolling interests in consolidated financial statements. This guidance requires that the noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interest and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between the interests of the controlling and noncontrolling owners. The guidance is effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company adopted the guidance on January 1, 2009, which had no material impact on its consolidated financial statements.
     In March 2008, the FASB issued disclosure requirements regarding derivative instruments and hedging activities. Entities must now provide enhanced disclosures on an interim and annual basis regarding how and why the entity uses derivatives; how derivatives and related hedged items are accounted for, and how derivatives and related hedged items affect the entity’s financial position, financial results and cash flow. The guidance is effective for periods beginning on or after November 15, 2008. The Company adopted the guidance effective January 1, 2009 and has added the required narrative and tabular disclosure in Note 5 of its consolidated financial statements.
     In April 2008, the FASB issued guidance regarding the determination of the useful life of intangible assets. In developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. The guidance is effective for fiscal years beginning after December 15, 2008. The Company adopted the guidance on January 1, 2009, which had no material impact on its consolidated financial statements.
     In April 2009, the FASB issued guidance on determining fair value when the volume and level of activity for an asset or liability has significantly decreased, and in identifying transactions that are not orderly. Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value. The guidance was effective on a prospective basis for interim and annual periods ending after June 15, 2009. The Company adopted the guidance during the second quarter of 2009, which had no material impact on its consolidated financial statements.
     In April 2009, the FASB issued additional requirements regarding interim disclosures about the fair value of financial instruments which were previously only disclosed on an annual basis. Entities are now required to disclose the fair value of financial instruments which are not recorded at fair value in the financial statements in both their

20


 

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
interim and annual financial statements. The standard is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted these requirements during the second quarter of 2009, and has added the required disclosure in Note 13 of its consolidated financial statements.
     In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments on investments in debt securities. If an entity’s management asserts that it does not have the intent to sell a debt security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, then an entity may separate other-than-temporary impairments into two components: 1) the amount related to credit losses (recorded in earnings), and 2) all other amounts (recorded in other comprehensive income). The guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and will be applied to all existing and new investments in debt securities. The Company adopted the guidance during the second quarter of 2009, which had no material impact on its consolidated financial statements.
     In May 2009, the FASB issued guidance on subsequent events which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. This guidance, which falls under ASC Topic 855 “Subsequent Events”, provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The Company adopted the guidance during the second quarter of 2009, and its application had no impact on the Company’s consolidated financial statements. The Company evaluated subsequent events through the date the accompanying financial statements were issued, which was November 6, 2009.
     In June 2009, the FASB issued guidance on accounting for transfers of financial to improve the reporting for the transfer of financial assets. The guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company believes the guidance will have no material impact on its consolidated financial statements.
     In June 2009, the FASB issued guidance on consolidation of variable interest entities to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company believes the guidance will have no material impact on its consolidated financial statements.
     In June 2009, the FASB issued The FASB Accounting Standards Codification (“Codification”). The Codification became the single source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification is non-authoritative. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the Codification for the quarter ending September 30, 2009. There was no impact to its consolidated financial statements as this change is disclosure-only in nature.

21


 

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:
     This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:
    continued deterioration of the economic environment including the stability of the financial system;
 
    our ability to purchase defaulted consumer receivables at appropriate prices;
 
    changes in the business practices of credit originators in terms of selling defaulted consumer receivables or outsourcing defaulted consumer receivables to third-party contingent fee collection agencies;
 
    changes in government regulations that affect our ability to collect sufficient amounts on our acquired or serviced receivables;
 
    changes in income tax laws or challenges by taxing authorities could have an adverse effect on our financial condition and results of operations;
 
    deterioration in economic conditions in the United States that may have an adverse effect on our collections, results of operations, revenue and stock price;
 
    changes in bankruptcy or collection agency laws that could negatively affect our business;
 
    our ability to employ and retain qualified employees, especially collection and information technology personnel;
 
    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 to purchase or service defaulted consumer receivables;
 
    the degree and nature of our competition;
 
    our ability to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder;
 
    our ability to retain existing clients and obtain new clients for our fee-for-service businesses;
 
    the sufficiency of our funds generated from operations, existing cash and available borrowings to finance our current operations; and
 
    the risk factors listed from time to time in our filings with the Securities and Exchange Commission (the “SEC”).
     You should assume that the information appearing in this quarterly report is accurate only as of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date.
     For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as the discussion of “Business” and “Risk Factors” described in our 2008 Annual Report on Form 10-K, filed on February 27, 2009.
     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.

22


 

     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.
Results of Operations
     We are a full service provider of outsourced receivables management and related services. The results of operations include the financial results of Portfolio Recovery Associates, Inc. and all of our subsidiaries who are all in the accounts receivable management business. Under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 “Segment Reporting” (“ASC 280”) , we have determined that we have several operating segments that meet the aggregation criteria of ASC 280, and therefore, we have one reportable segment, accounts receivable 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 periods indicated:
                                 
    For the Three Months   For the Nine Months
    Ended September 30,   Ended September 30,
    2009   2008   2009   2008
Revenues:
                               
Income recognized on finance receivables, net
    79.2 %     76.9 %     76.8 %     80.7 %
Commissions
    20.8 %     23.1 %     23.2 %     19.3 %
 
                               
Total revenues
    100.0 %     100.0 %     100.0 %     100.0 %
Operating expenses:
                               
Compensation and employee services
    39.2 %     33.5 %     38.5 %     33.1 %
Legal and agency fees and costs
    16.5 %     21.0 %     16.6 %     20.2 %
Outside fees and services
    3.3 %     3.4 %     3.3 %     3.5 %
Communications
    5.1 %     3.3 %     5.4 %     3.8 %
Rent and occupancy
    1.9 %     1.6 %     1.7 %     1.4 %
Other operating expenses
    3.4 %     2.8 %     3.1 %     2.5 %
Depreciation and amortization
    3.3 %     3.2 %     3.3 %     2.6 %
 
                               
Total operating expenses
    72.7 %     68.8 %     71.9 %     67.1 %
 
                               
Income from operations
    27.3 %     31.2 %     28.1 %     32.9 %
Other income and (expense):
                               
Interest income
    0.0 %     0.1 %     0.1 %     0.0 %
Interest expense
    (2.9 %)     (4.5 %)     (2.8 %)     (4.2 %)
 
                               
Income before income taxes
    24.4 %     26.8 %     25.4 %     28.7 %
Provision for income taxes
    9.8 %     10.1 %     10.0 %     11.0 %
 
                               
Net income
    14.6 %     16.7 %     15.4 %     17.7 %
 
                               
     We use the following terminology throughout our reports: “Cash Receipts” refers to all collections of cash, regardless of the source. “Cash Collections” refers to collections on our owned portfolios only, exclusive of commission income and sales of finance receivables. “Cash Sales of Finance Receivables” refers to the sales of our owned portfolios. “Commissions” refers to fee income generated from our wholly-owned contingent fee and fee-for-service subsidiaries.

23


 

Three Months Ended September 30, 2009 Compared To Three Months Ended September 30, 2008
Revenues
     Total revenues were $68.6 million for the three months ended September 30, 2009 and 2008.
Income Recognized on Finance Receivables, net
     Income recognized on finance receivables, net was $54.3 million for the three months ended September 30, 2009, an increase of $1.6 million or 3.0% compared to income recognized on finance receivables, net of $52.7 million for the three months ended September 30, 2008. The increase was due to an increase in our cash collections on our owned defaulted consumer receivables to $92.4 million for the three months ended September 30, 2009 compared to $83.0 million for the three months September 30, 2008. This was offset by an increase in our finance receivables amortization rate, including the allowance charge, to 41.2% for the three months ended September 30, 2009, compared to 36.5% for the three months ended September 30, 2008. During the three months ended September 30, 2009, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $1.75 billion at a cost of $76.7 million. During the three months ended September 30, 2008, we acquired defaulted consumer receivable portfolios with an aggregate face value of $857.2 million at a cost of $52.3 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectibility. 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 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 change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the three months ended September 30, 2009, we recorded net allowance charges of $8,010,000. For the three months ended September 30, 2008, we recorded net allowance charges of $3,780,000. 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 would include: overall market pricing for pools of consumer receivables (which is driven by both supply and demand), new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relates to the collection and movement of accounts on both our collection floor and external channels), as well as decreases in productivity related to turnover and tenure of our collection staff. Due to the extraordinary deterioration of the U.S. economy beginning in the fourth quarter of 2008, our collection efforts have become more challenging, which has exacerbated the typical effects of these external and internal factors. These combined factors have contributed to the valuation allowances that we have recorded during the three months ended September 30, 2009.
Commissions
     Commissions were $14.2 million for the three months ended September 30, 2009, a decrease of $1.6 million or 10.1% compared to commissions of $15.8 million for the three months ended September 30, 2008. Commissions decreased as a result of a decrease in revenue generated by our IGS fee-for-service business and MuniServices government revenue enhancement and services business, partially offset by an increase in revenue generated by our RDS government processing and collection business as compared to the prior year period.

24


 

Operating Expenses
     Total operating expenses were $49.8 million for the three months ended September 30, 2009, an increase of $2.6 million or 5.5% compared to total operating expenses of $47.2 million for the three months ended September 30, 2008. Total operating expenses, including compensation and employee services expenses, were 46.7% of cash receipts for the three months ended September 30, 2009 compared to 47.7% for the same period in 2008.
Compensation and Employee Services
     Compensation and employee services expenses were $26.8 million for the three months ended September 30, 2009, an increase of $3.8 million or 16.5% compared to compensation and employee services expenses of $23.0 million for the three months ended September 30, 2008. This increase is mainly due to an overall increase in our owned portfolio collection staff. Compensation and employee services expenses increased as total employees grew 10.8% to 2,146 as of September 30, 2009 from 1,937 as of September 30, 2008. In addition, during the third quarter of 2008, we reversed $1.4 million of estimated share-based compensation costs that had been accrued in 2007 and 2008 relating to the 2007 Long Term Incentive Program. Compensation and employee services expenses as a percentage of cash receipts increased to 25.2% for the three months ended September 30, 2009 from 23.3% of cash receipts for the same period in 2008.
Legal and Agency Fees and Costs
     Legal and agency fees and costs expenses were $11.3 million for the three months ended September 30, 2009, a decrease of $3.1 million or 21.5% compared to legal and agency fees and costs of $14.4 million for the three months ended September 30, 2008. Of the $3.1 million decrease, $2.5 million was attributable to a decrease in legal fees and costs incurred resulting from accounts referred to both our in house attorneys and outside independent contingent fee attorneys. The remaining $0.6 million decrease was attributable to a decrease in agency fees mainly incurred by our IGS subsidiary. Total outside legal expenses paid to independent contingent fee attorneys for the three months ended September 30, 2009 were 47.7% of legal cash collections generated by independent contingent fee attorneys compared to 43.0% for the three months ended September 30, 2008. Outside legal fees and costs paid to independent contingent fee attorneys decreased from $9.3 million for the three months ended September 30, 2008 to $7.3 million, a decrease of $2.0 million or 21.5%, for the three months ended September 30, 2009. Additionally, as disclosed previously, we also effectuate legal collections using our own in-house attorneys. Total legal expenses incurred by our in-house attorneys for the three months ended September 30, 2009 were 6.9% of legal cash collections generated by our in-house attorneys compared to 45.8% for the three months ended September 30, 2008. Legal fees and costs incurred by our in-house attorneys decreased from $1.0 million for the three months ended September 30, 2008 to $0.4 million, a decrease of $0.6 million or 60.0%, for the three months ended September 30, 2009.
Outside Fees and Services
     Outside fees and services expenses were $2.3 million for the three months ended September 30, 2009 and 2008.
Communications
     Communications expenses were $3.5 million for the three months ended September 30, 2009, an increase of $1.2 million or 52.2% compared to communications expenses of $2.3 million for the three months ended September 30, 2008. The increase was mainly due to a growth in mailings due to an increase in special letter campaigns which increased by $1.2 million for the three months ended September 30, 2009 when compared to the year ago period.
Rent and Occupancy
     Rent and occupancy expenses were $1,270,000 for the three months ended September 30, 2009, an increase of $147,000 or 13.1% compared to rent and occupancy expenses of $1,123,000 for the three months ended September 30, 2008. The increase was primarily due to relocation of our IGS business to another location, as well as increased utility charges.

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Other Operating Expenses
     Other operating expenses were $2.3 million for the three months ended September 30, 2009, an increase of $0.4 million or 21.1% compared to other operating expenses of $1.9 million for the three months ended September 30, 2008. The increase was mainly due to increases in various expenses when compared to the prior year period. No individual item represents a significant portion of the overall increase.
Depreciation and Amortization
     Depreciation and amortization expenses were $2.3 million for the three months ended September 30, 2009, an increase of $0.1 million or 4.5% compared to depreciation and amortization expenses of $2.2 million for the three months ended September 30, 2008. The increase is mainly the result of continued capital expenditures on equipment, software, and computers related to our growth and systems upgrades.
Interest Income
     Interest income was $0 for the three months ended September 30, 2009, a decrease of $34,000 compared to interest income of $34,000 for the three months ended September 30, 2008. This decrease is the result of lower average invested cash and cash equivalents balances during the three months ended September 30, 2009 compared to the same period in 2008.
Interest Expense
     Interest expense was $2.0 million for the three months ended September 30, 2009, a decrease of $1.1 million compared to interest expense of $3.1 million for the three months ended September 30, 2008. The decrease was mainly due to a decrease in our weighted average variable interest rate which decreased to 2.56% for the three months ended September 30, 2009 as compared to 4.57% for the three months ended September 30, 2008, partially offset by an increase in our average borrowings for the three months ended September 30, 2009 compared to the same period in 2008.
Provision for Income Taxes
     Income tax expense was $6.7 million for the three months ended September 30, 2009, a decrease of $0.2 million or 2.9% compared to income tax expense of $6.9 million for the three months ended September 30, 2008. The decrease is mainly due to a decrease of 8.5% in income before taxes for the three months ended September 30, 2009 when compared to the same period in 2008 which was offset by an increase in the effective tax rate for the three months ended September 30, 2009, which was 40.0% compared to 37.7% for the same period in 2008.
Nine Months Ended September 30, 2009 Compared To Nine Months Ended September 30, 2008
Revenues
     Total revenues were $207.9 million for the nine months ended September 30, 2009, an increase of $11.6 million or 5.9% compared to total revenues of $196.3 million for the nine months ended September 30, 2008.
Income Recognized on Finance Receivables, net
     Income recognized on finance receivables, net was $159.7 million for the nine months ended September 30, 2009, an increase of $1.3 million compared to income recognized on finance receivables, net of $158.4 million for the nine months ended September 30, 2008. The increase was due to an increase in our cash collections on our owned defaulted consumer receivables to $272.7 million for the nine months ended September 30, 2009 compared to $247.5 million for the nine months ended September 30, 2008. This was offset by an increase in our finance receivables amortization rate, including the allowance charge, to 41.5% for the nine months ended September 30, 2009, compared to 36.0% for the nine months ended September 30, 2008. During the nine months ended September 30, 2009, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $6.09 billion at a cost of $213.8 million. During the nine months ended September 30, 2008, we acquired defaulted

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consumer receivable portfolios with an aggregate face value of $3.28 billion at a cost of $218.8 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectibility. 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 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 change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the nine months ended September 30, 2009, we recorded net allowance charges of $18,150,000. For the nine months ended September 30, 2008, we recorded net allowance charges of $10,525,000. 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 would include: overall market pricing for pools of consumer receivables (which is driven by both supply and demand), new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relates to the collection and movement of accounts on both our collection floor and external channels), as well as decreases in productivity related to turnover and tenure of our collection staff. Due to the extraordinary deterioration of the U.S. economy beginning in the fourth quarter of 2008, our collection efforts have become more challenging, which has exacerbated the typical effects of these external and internal factors. These combined factors have contributed to the $7,625,000 increase in valuation allowances for the nine months ended September 30, 2009 as compared to the prior year period.
Commissions
     Commissions were $48.2 million for the nine months ended September 30, 2009, an increase of $10.3 million or 27.2% compared to commissions of $37.9 million for the nine months ended September 30, 2008. Commissions grew as a result of the acquisitions of MuniServices on July 1, 2008 and BPA on August 1, 2008, as well as an increase in revenue generated by our RDS government processing and collection business, partially offset by a decrease in revenue generated by our IGS fee-for-service business and our Anchor contingent fee business, which ceased operations in the second quarter of 2008, as compared to the prior year period.
Operating Expenses
     Total operating expenses were $149.4 million for the nine months ended September 30, 2009, an increase of $17.7 million or 13.4% compared to total operating expenses of $131.7 million for the nine months ended September 30, 2008. Total operating expenses, including compensation and employee services expenses, were 46.5% of cash receipts for the nine months ended September 30, 2009 compared to 46.2% for the same period in 2008.
Compensation and Employee Services
     Compensation and employee services expenses were $79.9 million for the nine months ended September 30, 2009, an increase of $14.9 million or 22.9% compared to compensation and employee services expenses of $65.0 million for the nine months ended September 30, 2008. This increase is mainly due to the acquisition of MuniServices as well as an overall increase in our owned portfolio collection staff. In addition, in conjunction with the renewal of their employment agreements, our Named Executive Officers and other senior executives were awarded nonvested shares which vested on January 1, 2009. As a result of the vesting of these shares, we recorded stock-based compensation expense in connection with these shares, in the amount of approximately $1.4 million during the first quarter of 2009. This was offset by a reversal $1.4 million of estimated share-based compensation

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costs in the third quarter of 2008, that had been accrued in 2007 and 2008 relating to the 2007 Long Term Incentive Program. Compensation and employee services expenses increased as total employees grew 10.8% to 2,146 as of September 30, 2009 from 1,937 as of September 30, 2008. Compensation and employee services expenses as a percentage of cash receipts increased to 24.9% for the nine months ended September 30, 2009 from 22.8% of cash receipts for the same period in 2008.
Legal and Agency Fees and Costs
     Legal and agency fees and costs expenses were $34.5 million for the nine months ended September 30, 2009, a decrease of $5.0 million or 12.7% compared to legal and agency fees and costs of $39.5 million for the nine months ended September 30, 2008. Of the $5.0 million decrease, $4.9 million was attributable to a decrease in legal fees and costs incurred resulting from accounts referred to both our in house attorneys and outside independent contingent fee attorneys. The remaining $0.1 million decrease was attributable to a decrease in agency fees mainly incurred by our IGS subsidiary. Total outside legal expenses paid to independent contingent fee attorneys for the nine months ended September 30, 2009 were 41.0% of legal cash collections generated by independent contingent fee attorneys compared to 38.5% for the nine months ended September 30, 2008. Outside legal fees and costs paid to independent contingent fee attorneys decreased from $25.4 million for the nine months ended September 30, 2008 to $20.3 million, a decrease of $5.1 million or 20.1%, for the nine months ended September 30, 2009. Additionally, as disclosed previously, we also effectuate legal collections using our own in-house attorneys. Total legal expenses incurred by our in-house attorneys for the nine months ended September 30, 2009 were 18.4% of legal cash collections generated by our in-house attorneys compared to 40.6% for the nine months ended September 30, 2008. Legal fees and costs incurred by our in-house attorneys increased from $2.4 million for the nine months ended September 30, 2008 to $2.6 million, an increase of $0.2 million or 8.3%, for the nine months ended September 30, 2009.
Outside Fees and Services
     Outside fees and services expenses were $6.9 million for the nine months ended September 30, 2009 and 2008.
Communications
     Communications expenses were $11.2 million for the nine months ended September 30, 2009, an increase of $3.7 million or 49.3% compared to communications expenses of $7.5 million for the nine months ended September 30, 2008. The increase was mainly due to a growth in mailings due to an increase in special letter campaigns which increased by $3.3 million for the nine months ended September 30, 2009 when compared to the year ago period. The remaining increase was attributable to higher telephone expenses driven by a greater number of defaulted consumer receivables to work, as well as a significant expansion of our automated dialer seats and related calls that are generated by the dialer.
Rent and Occupancy
     Rent and occupancy expenses were $3.5 million for the nine months ended September 30, 2009, an increase of $0.7 million or 25.0% compared to rent and occupancy expenses of $2.8 million for the nine months ended September 30, 2008. The increase was primarily due to the acquisition of MuniServices and the relocation of our IGS business to another location, as well as increased utility charges.
Other Operating Expenses
     Other operating expenses were $6.6 million for the nine months ended September 30, 2009, an increase of $1.7 million or 34.7% compared to other operating expenses of $4.9 million for the nine months ended September 30, 2008. The increase was due to increases in various expenses mainly as a result of the addition of MuniServices and BPA when compared to the prior year period. No individual item represents a significant portion of the overall increase.

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Depreciation and Amortization
     Depreciation and amortization expenses were $6.9 million for the nine months ended September 30, 2009, an increase of $1.8 million or 35.3% compared to depreciation and amortization expenses of $5.1 million for the nine months ended September 30, 2008. The increase is mainly due to additional expenses incurred related to the depreciation and amortization of the tangible and intangible assets acquired in the acquisition of MuniServices and the acquisition of the assets of BPA.
Interest Income
     Interest income was $3,000 for the nine months ended September 30, 2009, a decrease of $64,000 compared to interest income of $67,000 for the nine months ended September 30, 2008. This decrease is the result of lower average invested cash and cash equivalents balances during the nine months ended September 30, 2009 compared to the same period in 2008.
Interest Expense
     Interest expense was $5.9 million for the nine months ended September 30, 2009, a decrease of $2.3 million compared to interest expense of $8.2 million for the nine months ended September 30, 2008. The decrease was mainly due to a decrease in our weighted average variable interest rate which decreased to 2.67% for the nine months ended September 30, 2009 as compared to 4.77% for the nine months ended September 30, 2008 partially offset by an increase in our average borrowings for the nine months ended September 30, 2009 compared to the same period in 2008.
Provision for Income Taxes
     Income tax expense was $20.7 million for the nine months ended September 30, 2009, a decrease of $0.9 million or 4.2% compared to income tax expense of $21.6 million for the nine months ended September 30, 2008. The decrease is mainly due to a decrease of 6.7% in income before taxes for the nine months ended September 30, 2009 when compared to the same period in 2008. The effective tax rate for the nine months ended September 30, 2009 was 39.4% compared to 38.4% for the same period in 2008.

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Supplemental Performance Data
Owned Portfolio Performance:
     The following tables show certain data related to our owned portfolio. These tables describe the purchase price, cash collections and related multiples. Further, these tables disclose our entire portfolio, the portfolio of purchased bankrupt accounts and our entire portfolio less the impact of our purchased bankrupt accounts. The accounts represented in the purchased bankruptcy tables are those portfolios of accounts that were bankrupt at the time of purchase. This contrasts with accounts that file bankruptcy after we purchase them.
     The purchase price multiples for 2005 through 2008 described in the table below are lower than historical multiples in previous years. This trend is primarily, but not entirely related to pricing competition. When competition increases, and or supply decreases so that pricing becomes negatively impacted on a relative basis (total lifetime collections in relation to purchase price), internal rates of return (“IRRs”) tend to trend lower. This was the situation during 2005-2007 and this situation also extended into 2008 to the extent that deals purchased in 2008 were part of forward flow agreements priced in earlier periods.
     Additionally however, the way we initially book newly acquired pools of accounts and how we forecast future estimated collections for any given portfolio of accounts has evolved over the years due to a number of factors including the current economic situation. Since our revenue recognition under ASC 310-30 is driven by both 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 collection amount and pace. Subsequent to the initial booking, as we gain collection experience and comfort with a pool of accounts, we continuously update estimated remaining collections (“ERC”) as time goes on. Since our inception, these processes have tended to cause the ratio of collections to purchase price multiple for any given year of buying to gradually increase over time. As a result, our estimate of lifetime collections to purchase price has shown relatively steady increases as pools have aged. Thus, all factors being equal in terms of pricing, one would naturally tend to see a higher collection to purchase price ratio from a pool of accounts that were six years from purchase than say a pool that was just two years from purchase.
     To the extent that lower purchase price multiples are the ultimate result of more competitive pricing and lower IRRs, 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 expand. It is important to consider, however, that to the extent we can improve our collection operations by extracting additional cash from a discreet quantity and quality of accounts, and/or by extracting cash at a lower cost structure, we can put upward pressure on the collection to purchase price ratio and also on our operating margins. During 2008 and continuing through the first three quarters of 2009, we made significant enhancements in our analytical abilities, management personnel and automated dialing capabilities, all with the intent to collect more cash at lower cost.
Entire Portfolio ($ in thousands)
                                                                         
                    Percentage of   Unamortized   Percentage of Reserve   Actual Cash                
            Life to Date   Reserve   Purchase Price   Allowance to Unamortized   Collections   Estimated           Total Estimated
Purchase   Purchase   Reserve   Allowance to   Balance at   Purchase Price and   Including Cash   Remaining   Total Estimated   Collections to
Period   Price (1)   Allowance (2)   Purchase Price (3)   September 30, 2009 (4)   Reserve Allowance (5)   Sales   Collections (6)   Collections (7)   Purchase Price (8)
1996
  $ 3,080     $ 0       0 %   $ 0       0 %   $ 9,961     $ 36     $ 9,997       325 %
1997
  $ 7,685     $ 0       0 %   $ 0       0 %   $ 24,872     $ 102     $ 24,974       325 %
1998
  $ 11,089     $ 0       0 %   $ 0       0 %   $ 36,139     $ 174     $ 36,313       327 %
1999
  $ 18,898     $ 0       0 %   $ 0       0 %   $ 65,741     $ 615     $ 66,356       351 %
2000
  $ 25,020     $ 0       0 %   $ 0       0 %   $ 107,353     $ 1,735     $ 109,088       436 %
2001
  $ 33,481     $ 0       0 %   $ 0       0 %   $ 161,155     $ 2,973     $ 164,128       490 %
2002
  $ 42,325     $ 0       0 %   $ 4       0 %   $ 176,479     $ 4,116     $ 180,595       427 %
2003
  $ 61,449     $ 120       0 %   $ 338       26 %   $ 230,266     $ 9,239     $ 239,505       390 %
2004
  $ 59,179     $ 1,385       2 %   $ 2,400       37 %   $ 165,896     $ 15,279     $ 181,175       306 %
2005
  $ 143,174     $ 8,565       6 %   $ 39,325       18 %   $ 240,054     $ 79,080     $ 319,134       223 %
2006
  $ 107,762     $ 11,150       10 %   $ 43,432       20 %   $ 140,377     $ 83,637     $ 224,014       208 %
2007
  $ 258,384     $ 10,705       4 %   $ 157,986       6 %   $ 231,094     $ 282,762     $ 513,856       199 %
2008
  $ 275,302     $ 9,845       4 %   $ 213,338       4 %   $ 145,476     $ 398,339     $ 543,815       198 %
YTD 2009
  $ 213,791     $ 0       0 %   $ 204,056       0 %   $ 29,123     $ 453,825     $ 482,948       226 %

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Purchased Bankruptcy Portfolio ($ in thousands)
                                                                         
                    Percentage of   Unamortized   Percentage of Reserve   Actual Cash                
            Life to Date   Reserve   Purchase Price   Allowance to Unamortized   Collections   Estimated           Total Estimated
Purchase   Purchase   Reserve   Allowance to   Balance at   Purchase Price and   Including Cash   Remaining   Total Estimated   Collections to
Period   Price (1)   Allowance (2)   Purchase Price (3)   September 30, 2009 (4)   Reserve Allowance (5)   Sales   Collections (6)   Collections (7)   Purchase Price (8)
1996
  $ 0     $ 0       0 %   $ 0       0 %   $ 0     $ 0     $ 0       0 %
1997
  $ 0     $ 0       0 %   $ 0       0 %   $ 0     $ 0     $ 0       0 %
1998
  $ 0     $ 0       0 %   $ 0       0 %   $ 0     $ 0     $ 0       0 %
1999
  $ 0     $ 0       0 %   $ 0       0 %   $ 0     $ 0     $ 0       0 %
2000
  $ 0     $ 0       0 %   $ 0       0 %   $ 0     $ 0     $ 0       0 %
2001
  $ 0     $ 0       0 %   $ 0       0 %   $ 0     $ 0     $ 0       0 %
2002
  $ 0     $ 0       0 %   $ 0       0 %   $ 0     $ 0     $ 0       0 %
2003
  $ 0     $ 0       0 %   $ 0       0 %   $ 0     $ 0     $ 0       0 %
2004
  $ 7,469     $ 1,285       17 %   $ 73       95 %   $ 13,906     $ 160     $ 14,066       188 %
2005
  $ 29,302     $ 700       2 %   $ 1,819       28 %   $ 40,752     $ 2,538     $ 43,290       148 %
2006
  $ 17,643     $ 1,410       8 %   $ 1,265       53 %   $ 25,104     $ 4,193     $ 29,297       166 %
2007
  $ 78,933     $ 0       0 %   $ 49,589       0 %   $ 50,461     $ 66,803     $ 117,264       149 %
2008
  $ 108,648     $ 0       0 %   $ 89,819       0 %   $ 41,061     $ 142,297     $ 183,358       169 %
YTD 2009
  $ 117,349     $ 0       0 %   $ 116,731       0 %   $ 6,206     $ 243,169     $ 249,375       213 %
Entire Portfolio Less Purchased Bankruptcy Portfolio ($ in thousands)
                                                                         
                    Percentage of   Unamortized   Percentage of Reserve   Actual Cash                
            Life to Date   Reserve   Purchase Price   Allowance to Unamortized   Collections   Estimated           Total Estimated
Purchase   Purchase   Reserve   Allowance to   Balance at   Purchase Price and   Including Cash   Remaining   Total Estimated   Collections to
Period   Price (1)   Allowance (2)   Purchase Price (3)   September 30, 2009 (4)   Reserve Allowance (5)   Sales   Collections (6)   Collections (7)   Purchase Price (8)
1996
  $ 3,080     $ 0       0 %   $ 0       0 %   $ 9,961     $ 36     $ 9,997       325 %
1997
  $ 7,685     $ 0       0 %   $ 0       0 %   $ 24,872     $ 102     $ 24,974       325 %
1998
  $ 11,089     $ 0       0 %   $ 0       0 %   $ 36,139     $ 174     $ 36,313       327 %
1999
  $ 18,898     $ 0       0 %   $ 0       0 %   $ 65,741     $ 615     $ 66,356       351 %
2000
  $ 25,020     $ 0       0 %   $ 0       0 %   $ 107,353     $ 1,735     $ 109,088       436 %
2001
  $ 33,481     $ 0       0 %   $ 0       0 %   $ 161,155     $ 2,973     $ 164,128       490 %
2002
  $ 42,325     $ 0       0 %   $ 4       0 %   $ 176,479     $ 4,116     $ 180,595       427 %
2003
  $ 61,449     $ 120       0 %   $ 338       26 %   $ 230,266     $ 9,239     $ 239,505       390 %
2004
  $ 51,710     $ 100       0 %   $ 2,327       4 %   $ 151,990     $ 15,119     $ 167,109       323 %
2005
  $ 113,872     $ 7,865       7 %   $ 37,506       17 %   $ 199,302     $ 76,542     $ 275,844       242 %
2006
  $ 90,119     $ 9,740       11 %   $ 42,167       19 %   $ 115,273     $ 79,444     $ 194,717       216 %
2007
  $ 179,451     $ 10,705       6 %   $ 108,397       9 %   $ 180,633     $ 215,959     $ 396,592       221 %
2008
  $ 166,654     $ 9,845       6 %   $ 123,519       7 %   $ 104,415     $ 256,042     $ 360,457       216 %
YTD 2009
  $ 96,442     $ 0       0 %   $ 87,325       0 %   $ 22,917     $ 210,656     $ 233,573       242 %
 
(1)   Purchase price refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain capitalized costs, less the purchase price refunded by the seller due to the return of non-compliant accounts (also defined as buybacks). Non-compliant refers to the contractual representations and warranties provided for in the purchase and sale contract between the seller and us. These representations and warranties from the sellers generally cover account holders’ death or bankruptcy and accounts settled or disputed prior to sale. The seller can replace or repurchase these accounts.
 
(2)   Life to date reserve allowance refers to the total amount of allowance charges incurred on our owned portfolios net of any reversals.
 
(3)   Percentage of reserve allowance to purchase price refers to the total amount of allowance charges incurred on our owned portfolios net of any reversals, divided by the purchase price.
 
(4)   Unamortized purchase price balance refers to the purchase price less finance receivable amortization over the life of the portfolio.
 
(5)   Percentage of reserve allowance to unamortized purchase price and reserve allowance refers to the total amount of allowance charges incurred on our owned portfolios net of any reversals, divided by the sum of the unamortized purchase price and the life to date reserve allowance.
 
(6)   Estimated remaining collections refers to the sum of all future projected cash collections on our owned portfolios.
 
(7)   Total estimated collections refers to the actual cash collections, including cash sales, plus estimated remaining collections.
 
(8)   Total estimated collections to purchase price refers to the total estimated collections divided by the purchase price.

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     The following table shows our net valuation allowances booked since we began accounting for our investment in finance receivables under the guidance of ASC 310-30.
                                                                                         
($ in thousands)
Allowance   Purchase Period
Period   (1)   1996-2000   2001   2002   2003   2004   2005   2006   2007   2008   YTD 2009   Total
 
Q1 05
  $     $     $     $     $     $     $     $     $     $     $  
Q2 05
                                                              $  
Q3 05
                                                              $  
Q4 05
          200                                                     $ 200  
Q1 06
                                  175                             $ 175  
Q2 06
          75                         125                             $ 200  
Q3 06
          200                         75                             $ 275  
Q4 06
                                  450                             $ 450  
Q1 07
          (245 )                       610                             $ 365  
Q2 07
          70             20                                         $ 90  
Q3 07
          50             150       320       660                             $ 1,180  
Q4 07
                      190       150       615       340                       $ 1,295  
Q1 08
                      120       650       910       1,105                       $ 2,785  
Q2 08
          (140 )           400       720             2,330       650                 $ 3,960  
Q3 08
          (30 )           (60 )     60       325       1,135       2,350                 $ 3,780  
Q4 08
          (75 )           (325 )     (140 )     1,805       2,600       4,380       620           $ 8,865  
Q1 09
          (105 )           (120 )     35       1,150       910       2,300       2,050           $ 6,220  
Q2 09
                      (230 )     (220 )     495       765       685       2,425           $ 3,920  
Q3 09
                      (25 )     (190 )     1,170       1,965       340       4,750           $ 8,010  
 
Total
  $     $     $     $ 120     $ 1,385     $ 8,565     $ 11,150     $ 10,705     $ 9,845     $     $ 41,770  
 
 
(1)   Allowance period represents the quarter in which we recorded valuation allowances, net of any (reversals).
     The following graph shows the purchase price of our owned portfolios by year beginning in 1996 and includes the year to date acquisition amount for the nine months ended September 30, 2009. The purchase price number represents the cash paid to the seller to acquire defaulted consumer receivables, plus certain capitalized costs, less the purchase price refunded by the seller due to the return of non-compliant accounts.
Portfolio Purchases by Year
(BAR CHART)

32


 

     We utilize a long-term approach to collecting our owned pools of receivables. This approach has historically caused us to realize significant cash collections and revenues from purchased pools of finance receivables years after they are originally acquired. As a result, we have in the past been able to reduce our level of current period acquisitions without a corresponding negative current period impact on cash collections and revenue.
     The following table, which excludes any proceeds from cash sales of finance receivables, demonstrates our ability to realize significant multi-year cash collection streams on our owned pools:
Cash Collections By Year, By Year of Purchase — Entire Portfolio
                                                                                                                                 
($ in thousands)
Purchase   Purchase   Cash Collection Period   YTD    
Period   Price   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   Total
 
1996
  $ 3,080     $ 548     $ 2,484     $ 1,890     $ 1,348     $ 1,025     $ 730     $ 496     $ 398     $ 285     $ 210     $ 237     $ 102     $ 83     $ 63     $ 9,899  
1997
    7,685             2,507       5,215       4,069       3,347       2,630       1,829       1,324       1,022       860       597       437       346       182     $ 24,365  
1998
    11,089                   3,776       6,807       6,398       5,152       3,948       2,797       2,200       1,811       1,415       882       616       309     $ 36,111  
1999
    18,898                         5,138       13,069       12,090       9,598       7,336       5,615       4,352       3,032       2,243       1,533       1,043     $ 65,049  
2000
    25,020                               6,894       19,498       19,478       16,628       14,098       10,924       8,067       5,202       3,604       2,498     $ 106,891  
2001
    33,481                                     13,048       28,831       28,003       26,717       22,639       16,048       10,011       6,164       4,202     $ 155,663  
2002
    42,325                                           15,073       36,258       35,742       32,497       24,729       16,527       9,772       5,870     $ 176,468  
2003
    61,449                                                 24,308       49,706       52,640       43,728       30,695       18,818       10,371     $ 230,266  
2004
    59,179                                                       18,019       46,475       40,424       30,750       19,339       10,884     $ 165,891  
2005
    143,174                                                             18,968       75,145       69,862       49,576       26,502     $ 240,053  
2006
    107,762                                                                   22,971       53,192       40,560       23,653     $ 140,376  
2007
    258,384                                                                         42,263       115,011       73,820     $ 231,094  
2008
    275,302                                                                               61,277       84,197     $ 145,474  
YTD
2009
    213,791                                                                                     29,123     $ 29,123  
 
Total
  $ 1,260,619     $ 548     $ 4,991     $ 10,881     $ 17,362     $ 30,733     $ 53,148     $ 79,253     $ 117,052     $ 153,404     $ 191,376     $ 236,393     $ 262,166     $ 326,699     $ 272,717     $ 1,756,723  
 
Cash Collections By Year, By Year of Purchase — Purchased Bankruptcy only Portfolio
 
($ in thousands)
Purchase   Purchase   Cash Collection Period   YTD    
Period   Price   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   Total
 
1996
  $     $     $     $     $     $     $     $     $     $     $     $     $     $     $     $  
1997
                                                                                            $  
1998
                                                                                            $  
1999
                                                                                            $  
2000
                                                                                            $  
2001
                                                                                            $  
2002
                                                                                            $  
2003
                                                                                            $  
2004
    7,469                                                       743       4,554       3,956       2,777       1,455       421     $ 13,906  
2005
    29,302                                                             3,777       15,500       11,934       6,845       2,696     $ 40,752  
2006
    17,643                                                                   5,608       9,455       6,522       3,519     $ 25,104  
2007
    78,933                                                                         2,850       27,972       19,639     $ 50,461  
2008
    108,648                                                                               14,024       27,036     $ 41,060  
YTD
2009
    117,349                                                                                     6,205     $ 6,205  
 
Total
  $ 359,344     $     $     $     $     $     $     $     $     $ 743     $ 8,331     $ 25,064     $ 27,016     $ 56,818     $ 59,516     $ 177,488  
 
Cash Collections By Year, By Year of Purchase — Entire Portfolio less Purchased Bankruptcy Portfolio
 
($ in thousands)
Purchase   Purchase   Cash Collection Period   YTD    
Period   Price   1996   1997   1998   1999   2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   Total
 
1996
  $ 3,080     $ 548     $ 2,484     $ 1,890     $ 1,348     $ 1,025     $ 730     $ 496     $ 398     $ 285     $ 210     $ 237     $ 102     $ 83     $ 63     $ 9,899  
1997
    7,685             2,507       5,215       4,069       3,347       2,630       1,829       1,324       1,022       860       597       437       346       182     $ 24,365  
1998
    11,089                   3,776       6,807       6,398       5,152       3,948       2,797       2,200       1,811       1,415       882       616       309     $ 36,111  
1999
    18,898                         5,138       13,069       12,090       9,598       7,336       5,615       4,352       3,032       2,243       1,533       1,043     $ 65,049  
2000
    25,020                               6,894       19,498       19,478       16,628       14,098       10,924       8,067       5,202       3,604       2,498     $ 106,891  
2001
    33,481                                     13,048       28,831       28,003       26,717       22,639       16,048       10,011       6,164       4,202     $ 155,663  
2002
    42,325                                           15,073       36,258       35,742       32,497       24,729       16,527       9,772       5,870     $ 176,468  
2003
    61,449                                                 24,308       49,706       52,640       43,728       30,695       18,818       10,371     $ 230,266  
2004
    51,710                                                       17,276       41,921       36,468       27,973       17,884       10,463     $ 151,985  
2005
    113,872                                                             15,191       59,645       57,928       42,731       23,806     $ 199,301  
2006
    90,119                                                                   17,363       43,737       34,038       20,134     $ 115,272  
2007
    179,451                                                                         39,413       87,039       54,181     $ 180,633  
2008
    166,654                                                                               47,253       57,161     $ 104,414  
YTD 2009
    96,442                                                                                     22,918     $ 22,918  
 
Total
  $ 901,275     $ 548     $ 4,991     $ 10,881     $ 17,362     $ 30,733     $ 53,148     $ 79,253     $ 117,052     $ 152,661     $ 183,045     $ 211,329     $ 235,150     $ 269,881     $ 213,201     $ 1,579,235  
 

33


 

     When we acquire a new pool of finance receivables, our estimates typically result in an 84 - 96 month projection of cash collections. The following chart shows our historical cash collections (including cash sales of finance receivables) in relation to the aggregate of the total estimated collection projections made at the time of each respective pool purchase, adjusted for buybacks.
(CHART)
Owned Portfolio Personnel Performance:
     We measure the productivity of each collector each month, breaking results into groups of similarly tenured collectors. The following two tables display various productivity measures that we track.
Collector by Tenure
                                                 
Collector FTE at:   12/31/05   12/31/06   12/31/07   12/31/08   09/30/08   09/30/09
One year + 1
    327       340       327       452       410       604  
Less than one year 2
    364       375       553       739       631       585  
Total 2
    691       715       880       1,191       1,041       1,189  
 
1   Calculated based on actual employees (collectors) with one year of service or more.
 
2   Calculated using total hours worked by all collectors, including those in training to produce a full time equivalent “FTE”.
YTD Cash Collections per Hour Paid 1
                                                 
Average performance YTD   12/31/05   12/31/06   12/31/07   12/31/08   09/30/08   09/30/09
Total cash collections
  $ 133.39     $ 146.03     $ 135.77     $ 131.29     $ 134.23     $ 144.69  
Non-legal cash collections 2
  $ 89.25     $ 99.06     $ 91.93     $ 96.95     $ 98.10     $ 117.75  
Non-bk cash collections 3
  $ 128.02     $ 132.15     $ 123.10     $ 109.82     $ 113.89     $ 115.02  
 
1   Cash collections (assigned and unassigned) divided by total hours paid (including holiday, vacation and sick time) to all collectors (including those in training).
 
2   Represents total cash collections less legal cash collections.
 
3   Represents total cash collections less bankruptcy cash collections. 2008 statistics are slightly different than those reported previously as a result of a change in the computation methodology.

34


 

     Cash collections have substantially exceeded revenue in each quarter since our formation. The following chart illustrates the consistent excess of our cash collections on our owned portfolios over the income recognized on finance receivables, net on a quarterly basis. The difference between cash collections and income recognized is referred to as payments applied to principal. It is also referred to as finance receivable amortization. This finance receivable amortization is the portion of cash collections that is used to recover the cost of the portfolio investment represented on the balance sheet.
(CHART)
 
(1)   Includes cash collections on finance receivables only. Excludes commission fees and cash proceeds from sales of defaulted consumer receivables.
Seasonality
     We depend on the ability to collect on our owned and serviced defaulted consumer receivables. Cash collections tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters of the year, due to consumer payment patterns in connection with seasonal employment trends, income tax refunds and holiday spending habits. Historically, our growth has partially masked the impact of this cash collections seasonality.
(CHART)
 
(1)   Includes cash collections on finance receivables only. Excludes commission fees and cash proceeds from sales of defaulted consumer receivables.

35


 

     The following table displays our quarterly cash collections by source, for the periods indicated.
                                                                         
Cash Collection Source ($ in thousands)   Q32009   Q22009   Q12009   Q42008   Q32008   Q22008   Q12008   Q42007   Q32007
 
Call Center & Other Collections
  $ 48,590     $ 50,052     $ 50,914     $ 41,268     $ 43,949     $ 46,892     $ 44,883     $ 35,551     $ 36,001  
External Legal Collections
    15,330       16,527       17,790       18,424       21,590       22,471       21,880       20,861       21,384  
Internal Legal Collections
    6,196       4,263       3,539       2,652       2,106       1,947       1,819       1,443       1,449  
Purchased Bankruptcy Collections
    22,251       19,637       17,628       16,904       15,362       13,732       10,820       7,245       6,317  
     The following table shows the changes in finance receivables, including the amounts paid to acquire new portfolios (amounts in thousands).
                                 
    Three Months     Three Months     Nine Months     Nine Months  
    Ended     Ended     Ended     Ended  
    September 30,     September 30,     September 30,     September 30,  
    2009     2008     2009     2008  
Balance at beginning of period
  $ 624,592     $ 515,367     $ 563,830     $ 410,297  
Acquisitions of finance receivables, net of buybacks (1)
    74,318       50,333       210,116       214,172  
 
Cash collections applied to principal on finance receivables (2)
    (38,031 )     (30,270 )     (113,067 )     (89,039 )
 
                       
 
                               
Balance at end of period
  $ 660,879     $ 535,430     $ 660,879     $ 535,430  
 
                       
 
                               
Estimated Remaining Collections (“ERC”) (3)
  $ 1,331,912     $ 1,085,000     $ 1,331,912     $ 1,085,000  
 
                       
 
(1)   Agreements to purchase receivables typically include general representations and warranties from the sellers covering account holders’ death or bankruptcy and accounts settled or disputed prior to sale. The seller can replace or repurchase these accounts. We refer to repurchased accounts as buybacks. We also capitalize certain acquisition related costs.
 
(2)   Cash collections applied to principal (also referred to as finance receivable amortization) on finance receivables consists of cash collections less income recognized on finance receivables, net.
 
(3)   Estimated Remaining Collections refers to the sum of all future projected cash collections on our owned portfolios. ERC is not a balance sheet item; however, it is provided here for informational purposes.
     The following table categorizes our life to date owned portfolios at September 30, 2009 into the major asset types represented (amounts in thousands):
                                 
                    Life to Date Purchased Face    
                    Value of Defaulted Consumer    
Asset Type   No. of Accounts   %   Receivables (1)   %
 
Major Credit Cards
    12,979       60.5 %   $ 34,140,315       74.2 %
Consumer Finance
    5,101       23.8 %     5,002,391       10.9 %
Private Label Credit Cards
    2,901       13.5 %     3,784,354       8.2 %
Auto Deficiency
    487       2.2 %     3,088,991       6.7 %
     
 
                               
Total:
    21,468       100.0 %     46,016,051       100.0 %
     
 
(1)   The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks.

36


 

The following chart shows details of our life to date buying activity as of September 30, 2009 (amounts in thousands). We actively seek to purchase both bankrupt and non-bankrupt accounts at any point in the delinquency cycle.
                                 
                    Life to Date Purchased Face    
                    Value of Defaulted    
Account Type   No. of Accounts   %   Consumer Receivables (1)   %
 
Fresh
    984       4.6 %   $ 3,384,438       7.4 %
Primary
    3,017       14.1 %     5,102,274       11.1 %
Secondary
    3,444       16.0 %     5,413,437       11.8 %
Tertiary
    3,740       17.4 %     4,740,919       10.3 %
BK Trustees
    2,653       12.4 %     11,205,983       24.4 %
Other
    7,630       35.5 %     16,169,000       35.0 %
     
 
                               
Total:
    21,468       100.0 %   $ 46,016,051       100.0 %
     
 
(1)   The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks.
     We also review the geographic distribution of accounts within a portfolio because we have found that certain states have more debtor-friendly laws than others and, therefore, are less desirable from a collectibility perspective. In addition, economic factors and bankruptcy trends vary regionally and are factored into our maximum purchase price equation.
     The following chart sets forth our overall life to date portfolio of defaulted consumer receivables geographically at September 30, 2009 (amounts in thousands):
                                                 
                    Life to Date Purchased Face           Original Purchase Price    
                  Value of Defaulted           of Defaulted Consumer    
Geographic Distribution   No. of Accounts   %   Consumer Receivables (1)   %   Receivables (2)   %
 
California
    2,158       10 %   $ 5,749,050       12 %   $ 144,129       11 %
Texas
    3,573       17 %     5,631,815       12 %     128,027       10 %
Florida
    1,661       8 %     4,389,764       10 %     110,182       9 %
New York
    1,289       6 %     2,971,177       6 %     78,511       6 %
Pennsylvania
    745       3 %     1,793,011       4 %     52,582       4 %
North Carolina
    747       3 %     1,611,960       4 %     44,261       3 %
Illinois
    849       4 %     1,576,133       3 %     49,328       4 %
Ohio
    729       3 %     1,547,891       3 %     53,193       4 %
Georgia
    659       3 %     1,452,481       3 %     50,211       4 %
New Jersey
    496       2 %     1,347,855       3 %     37,602       3 %
Michigan
    566       3 %     1,204,217       3 %     39,954       3 %
Virginia
    546       3 %     957,993       2 %     30,131       2 %
Tennessee
    448       2 %     946,093       2 %     32,720       3 %
Massachusetts
    386       2 %     912,634       2 %     24,912       2 %
Arizona
    346       2 %     894,153       2 %     22,564       2 %
South Carolina
    384       2 %     861,865       2 %     22,864       2 %
Other (3)
    5,886       27 %     12,167,959       27 %     364,572       28 %
     
 
                                               
Total:
    21,468       100 %   $ 46,016,051       100 %   $ 1,285,743       100 %
     
 
(1)   The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks.
 
(2)   The “Original Purchase Price of Defaulted Consumer Receivables” 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.

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Liquidity and Capital Resources
     Historically, our primary sources of cash have been cash flows from operations, bank borrowings and equity offerings. Cash has been used for acquisitions of finance receivables, corporate acquisitions, repurchase of our common stock, payment of cash dividends, repayments of bank borrowings, purchases of property and equipment and working capital to support our growth.
     As of September 30, 2009, total debt outstanding on our $365 million line of credit stood at $306.3 million which represents gross availability of $58.7 million. We believe that funds generated from operations, together with existing cash and available borrowings under our credit agreement will be sufficient to finance our current operations, planned capital expenditure requirements and internal growth at least through the next twelve months. However, we could require additional debt or equity financing if we were to make any other unplanned significant acquisitions requiring cash during that period. Accordingly, in order to be better prepared to take advantage of potential favorable selling opportunities, we filed with the SEC a shelf registration statement during the third quarter of 2009 registering $150 million of securities. There can be no assurance that we will ultimately issue and sell any of the securities registered on the shelf registration statement. In addition, we file taxes using the cost recovery method for tax revenue recognition. We were notified on June 21, 2007 that we were being examined by the Internal Revenue Service for the 2005 calendar year. The IRS has concluded its audit and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes for tax years ending December 31, 2007, 2006 and 2005. The IRS has proposed that cost recovery for tax revenue recognition does not clearly reflect income and that unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current deduction. On April 22, 2009, we filed a formal protest of the findings contained in the examination report prepared by the IRS. We 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. If we are unsuccessful in our appeal, we may be required to pay the related deferred taxes and any potential interest in the near-term, possibly requiring additional financing from other sources.
     Cash generated from operations is dependent upon our ability to collect on our defaulted consumer receivables. Many factors, including the economy and our ability to hire and retain qualified collectors and managers, are essential to our ability to generate cash flows. Fluctuations in these factors that cause a negative impact on our business could have a material impact on our expected future cash flows.
     Our operating activities provided cash of $64.2 million and $66.1 million for the nine months ended September 30, 2009 and 2008, respectively. In these periods, cash from operations was generated primarily from net income earned through cash collections and commissions received for the period. The decrease was due mostly to changes in deferred taxes and a decrease in net income from $34.8 million for the nine months ended September 30, 2008 to $31.9 million for the nine months ended September 30, 2009 offset by an increase in the amortization of share-based compensation. The remaining changes were due to net changes in other accounts related to our operating activities.
     Our investing activities used cash of $100.2 million and $155.0 million during the nine months ended September 30, 2009 and 2008, respectively. Cash provided by investing activities is primarily driven by cash collections applied to principal on finance receivables. Cash used in investing activities is primarily driven by acquisitions of defaulted consumer receivables, purchases of property and equipment and company acquisitions. The majority of the decrease was due to cash payments for corporate acquisitions totaling $25.8 million in 2008 as compared to $100,000 in 2009 as well as a decrease in acquisitions of finance receivables which decreased from $214.2 million for the nine months ended September 30, 2008, to $210.1 million for the nine months ended September 30, 2009 offset by an increase in collections applied to principal on finance receivables from $89.0 million for the nine months ended September 30, 2008 to $113.1 million for the nine months ended September 30, 2009.
     Our financing activities provided cash of $42.0 million and $100.2 million during the nine months ended September 30, 2009 and 2008, respectively. Cash used in financing activities is primarily driven by payments on our line of credit and principal payments on long-term debt and capital lease obligations. Cash is provided by draws on our line of credit, proceeds from debt financing and stock option exercises. The majority of the change was due to a decrease in the net borrowings on our line of credit.

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     Cash paid for interest was $6.0 million and $8.3 million for the nine months ended September 30, 2009 and 2008, respectively. Interest was paid on our line of credit, long-term debt and capital lease obligations. The decrease was mainly due to a decrease in our weighted average interest rate which decreased to 2.67% for the nine months ended September 30, 2009 as compared to 4.77% for the nine months ended September 30, 2008 offset by an increase in our average borrowings for the nine months ended September 30, 2009 compared to the same period in 2008.
     On November 29, 2005, we entered into a Loan and Security Agreement for a revolving line of credit. The agreement has been amended six times to add additional lenders and ultimately increase the total availability of credit under the line to $365 million. The agreement is a line of credit in an amount equal to the lesser of $365 million or 30% of our ERC of all our eligible asset pools. Borrowings under the revolving credit facility bear interest at a floating rate equal to the one month LIBOR Market Index Rate plus 1.40%, which was 1.65% at September 30, 2009, and the facility expires on May 2, 2011. We also pay an unused line fee equal to three-tenths of one percent, or 30 basis points, on any unused portion of the line of credit. The loan is collateralized by substantially all our tangible and intangible assets. The agreement provides as follows:
    monthly borrowings may not exceed 30% of ERC;
 
    funded debt to EBITDA (defined as net income, less income or plus loss from discontinued operations and extraordinary items, plus income taxes, plus interest expense, plus depreciation, depletion, amortization (including finance receivable amortization) and other non-cash charges) ratio must be less than 2.0 to 1.0 calculated on a rolling twelve-month average;
 
    tangible net worth must be at least 100% of tangible net worth reported at September 30, 2005, plus 25% of cumulative positive net income since the end of such fiscal quarter, plus 100% of the net proceeds from any equity offering without giving effect to reductions in tangible net worth due to repurchases of up to $100,000,000 of our common stock; and
 
    restrictions on change of control.
     As of September 30, 2009 and 2008, outstanding borrowings under the facility totaled $306,300,000 and $267,300,000, respectively, of which $50,000,000 was part of the non-revolving fixed rate sub-limit which bears interest at 6.80% and expires on May 4, 2012. As of September 30, 2009, we were in compliance with all of the covenants of the agreement.
Contractual Obligations
     Our contractual obligations at September 30, 2009 are as follows (amounts in thousands):
                                         
            Payments due by period    
            Less                   More
            than 1   1 - 3   4 - 5   than 5
Contractual Obligations   Total   year   years   years   years
 
Operating Leases
  $ 19,519     $ 3,738     $ 6,503     $ 5,231     $ 4,047  
 
Line of Credit  (1)
    329,224       10,813       318,411              
Long-term Debt
    1,764       730       1,034              
Purchase Commitments (2)
    77,610       77,122       488              
Employment Agreements
    8,452       4,407       4,045              
     
Total
  $ 436,569     $ 96,810     $ 330,481     $ 5,231     $ 4,047  
     
 
(1)   To the extent that a balance is outstanding on our lines of credit, the revolving portion would be due in May, 2011 and the non-revolving fixed rate sub-limit portion would be due in May 2012. This amount also includes estimated interest and unused line fees due on the line of credit for both the fixed rate and variable rate components as well as interest due on our interest rate swap. This estimate also assumes that the balance on the line of credit remains constant from the September 30, 2009 balance of $306.3 million and the balance is paid in full at its respective maturity.
 
(2)   This amount includes the maximum remaining amount to be purchased under forward flow contracts for the purchase of charged-off consumer debt in the amount of approximately $73.9 million.

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Off Balance Sheet Arrangements
     We do not have any off balance sheet arrangements as defined by Regulation S-K 303(a)(4) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”).
Recent Accounting Pronouncements
     In December 2007, the FASB issued guidance which clarifies the accounting for business combinations in accordance with FASB ASC Topic 805 “Business Combinations” (“ASC 805”). The guidance establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. It also provides guidance for recognizing and measuring the goodwill acquired in the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. The guidance is effective for acquisitions consummated in fiscal years beginning after December 15, 2008. We adopted the guidance on January 1, 2009, which had no material impact on our consolidated financial statements.
     In December 2007, the FASB issued guidance on noncontrolling interests in consolidated financial statements. This guidance requires that the noncontrolling interest in the equity of a subsidiary be accounted for and reported as equity, provides revised guidance on the treatment of net income and losses attributable to the noncontrolling interest and changes in ownership interests in a subsidiary and requires additional disclosures that identify and distinguish between the interests of the controlling and noncontrolling owners. The guidance is effective for fiscal years beginning after December 15, 2008 with early application prohibited. We adopted the guidance on January 1, 2009, which had no material impact on our consolidated financial statements.
     In March 2008, the FASB issued disclosure requirements regarding derivative instruments and hedging activities. Entities must now provide enhanced disclosures on an interim and annual basis regarding how and why the entity uses derivatives; how derivatives and related hedged items are accounted for, and how derivatives and related hedged items affect the entity’s financial position, financial results and cash flow. The guidance is effective for periods beginning on or after November 15, 2008. We adopted the guidance effective January 1, 2009 and have added the required narrative and tabular disclosure in Note 5 of our consolidated financial statements.
     In April 2008, the FASB issued guidance regarding the determination of the useful life of intangible assets. In developing assumptions about renewal or extension options used to determine the useful life of an intangible asset, an entity needs to consider its own historical experience adjusted for entity-specific factors. In the absence of that experience, an entity shall consider the assumptions that market participants would use about renewal or extension options. The guidance is effective for fiscal years beginning after December 15, 2008. We adopted the guidance on January 1, 2009, which had no material impact on our consolidated financial statements.
     In April 2009, the FASB issued guidance on determining fair value when the volume and level of activity for an asset or liability has significantly decreased, and in identifying transactions that are not orderly. Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value. The guidance was effective on a prospective basis for interim and annual periods ending after June 15, 2009. We adopted the guidance during the second quarter of 2009, which had no material impact on our consolidated financial statements.
     In April 2009, the FASB issued additional requirements regarding interim disclosures about the fair value of financial instruments which were previously only disclosed on an annual basis. Entities are now required to disclose the fair value of financial instruments which are not recorded at fair value in the financial statements in both their interim and annual financial statements. The standard is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted these requirements during the second quarter of 2009, and have added the required disclosure in Note 13 of our consolidated financial statements.

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     In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments on investments in debt securities. If an entity’s management asserts that it does not have the intent to sell a debt security and it is more likely than not that it will not have to sell the security before recovery of its cost basis, then an entity may separate other-than-temporary impairments into two components: 1) the amount related to credit losses (recorded in earnings), and 2) all other amounts (recorded in other comprehensive income). The guidance is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, and will be applied to all existing and new investments in debt securities. We adopted the guidance during the second quarter of 2009, which had no material impact on our consolidated financial statements.
     In May 2009, the FASB issued guidance on subsequent events which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. This guidance, which falls under ASC Topic 855 “Subsequent Events”, provides guidance on the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. We adopted the guidance during the second quarter of 2009, and its application had no impact on our consolidated financial statements. We evaluated subsequent events through the date the accompanying financial statements were issued, which was November 6, 2009.
     In June 2009, the FASB issued guidance on accounting for transfers of financial assets to improve the reporting for the transfer of financial assets. The guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. We believe the guidance will have no material impact on our consolidated financial statements.
     In June 2009, the FASB issued guidance on consolidation of variable interest entities to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. We believe the guidance will have no material impact on our consolidated financial statements.
     In June 2009, the FASB issued The FASB Accounting Standards Codification (“Codification”). The Codification became the single source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification is non-authoritative. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted the Codification for the quarter ending September 30, 2009. There was no impact to our consolidated financial statements as this change is disclosure-only in nature.
Critical Accounting Policies
     The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles and our discussion and analysis of our financial condition and results of operations require our management to make judgments, assumptions, and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates and such differences may be material.
     Management believes our critical accounting policies and estimates are those related to revenue recognition, valuation of acquired intangibles and goodwill and income taxes. Management believes these policies to be critical because they are both important to the portrayal of our financial condition and results, and they require management

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to make judgments and estimates about matters that are inherently uncertain. Our senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of our Board of Directors.
Revenue Recognition
     We acquire accounts that have experienced deterioration of credit quality between origination and our acquisition of the accounts. The amount paid for an account reflects our determination that it is probable we will be unable to collect all amounts due according to the account’s contractual terms. At acquisition, we review each account to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that we will be unable to collect all amounts due according to the account’s contractual terms. If both conditions exist, we determine whether each such account is to be accounted for individually or whether such accounts will be assembled into pools based on common risk characteristics. We consider expected prepayments and estimate the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio and subsequently aggregated pools of accounts. We determine the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference) based on our proprietary acquisition models. The remaining amount, representing the excess of the account’s cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining life of the account or pool (accretable yield).
     We account for our investment in finance receivables under the guidance of ASC Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (ASC 310-30). Under ASC 310-30 static pools of accounts may be established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). ASC 310-30 requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. ASC 310-30 initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased as the basis for subsequent impairment testing. Significant increases in expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Effective for fiscal years beginning after December 15, 2004 under ASC 310-30, rather than lowering the estimated IRR if the collection estimates are not received or projected to be received (as was permitted under the prior accounting guidance), the carrying value of a pool would be written down to maintain the then current IRR and is shown as a reduction in revenue in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables, net, on the consolidated balance sheet. Income on finance receivables is accrued quarterly based on each static pool’s effective IRR. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. This reduction in carrying value is defined as payments applied to principal (also referred to as finance receivable amortization). Likewise, cash flows that are less than the interest accrual will accrete the carrying balance. Generally, we do not allow accretion in the first six to twelve months; accordingly, we utilize either the cost recovery method or cash method when necessary to prevent accretion as permitted by ASC 310-30. The IRR is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using our proprietary collection models. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Under the cash method, revenue is recognized as it would be under the interest method up to the amount of cash collections. Additionally, we use the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. These pools are not aggregated with other portfolios. Under the cost recovery method, no revenue is recognized until we have fully collected the cost of the portfolio, or until such time that we consider the collections to be probable and estimable and begin to recognize income based on the interest method as described above.
     We establish valuation allowances for all acquired accounts subject to ASC 310-30 to reflect only those losses incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the accounts. At September 30, 2009, we had a $41,770,000 valuation allowance on our finance receivables. Prior to January 1, 2005, in the event that a reduction of the yield to as low as zero in conjunction with estimated future cash collections

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that were inadequate to amortize the carrying balance, an allowance charge would be taken with a corresponding write-off of the receivable balance.
     We implement the accounting for income recognized on finance receivables under ASC 310-30 as follows. We create each accounting pool using our projections of estimated cash flows and expected economic life. We then compute the effective yield that fully amortizes the pool to the end of its expected economic life based on the current projections of estimated cash flows. As actual cash flow results are recorded, we balance those results to the data contained in our proprietary models to ensure accuracy, then review each accounting pool watching for trends, actual performance versus projections and curve shape, sometimes re-forecasting future cash flows utilizing our statistical models. The review process is primarily performed by our finance staff; however, our operational and statistical staffs may also be involved depending upon actual cash flow results achieved. To the extent there is overperformance, we will either increase the yield, if persuasive evidence indicates that the overperformance is considered to be a significant betterment, or, if the overperformance is considered more of an acceleration of cash flows (a timing difference), adjust future cash flows downward which effectively extends the amortization period, or take no action at all if the amortization period is reasonable and falls within the pools’ expected economic life. To the extent there is underperformance, we will book an allowance if the underperformance is significant and will also consider revising future cash flows based on current period information, or take no action if the pool’s amortization period is reasonable and falls within the currently projected economic life.
     We utilize the provisions ASC Topic 605-45 “Principal Agent Considerations” (“ASC 605-45”) to account for commission revenue from our contingent fee, skip-tracing and government processing and collection subsidiaries. ASC 605-45 requires an analysis to be completed to determine if certain revenues should be reported gross or reported net of their related operating expense. This analysis includes an assessment of who retains inventory/credit risk, which controls vendor selection, who establishes pricing and who remains the primary obligor on the transaction. Each of these factors was considered to determine the correct method of recognizing revenue from our subsidiaries.
     For our contingent fee subsidiary, the portfolios which are placed for servicing are owned by our clients and are placed under a contingent fee commission arrangement. Our subsidiary is paid to collect funds from the client’s debtors and earns a commission generally expressed as a percentage of the gross collection amount. The “Commissions” line of our income statement reflects the contingent fee amount earned, and not the gross collection amount. We discontinued our ARM contingent fee operation during the second quarter of 2008.
     Our skip tracing subsidiary utilizes gross reporting under ASC 605-45. We generate revenue by working an account and successfully locating a customer for our client. An “investigative fee” is received for these services. In addition, we incur “agent expenses” where we hire a third-party collector to effectuate repossession. In many cases we have an arrangement with our client which allows us to bill the client for these fees. We have determined these fees to be gross revenue based on the criteria in ASC 605-45 and they are recorded as such in the line item “Commissions,” primarily because we are primarily liable to the third party collector. There is a corresponding expense in “Legal and agency fees and costs” for these pass-through items.
     Our government processing and collection business’s primary source of income is derived from servicing taxing authorities in several different ways: processing all of 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 we conduct an audit, there are two components. The first is a charge for the hours incurred on conducting the audit. This charge is for hours worked. This charge is up-charged from the actual costs incurred. The gross billing is a component of the line item “Commissions” and the 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 “Commissions” and the expense component is included in its appropriate expense category, generally, “Other operating expenses.”
     We account for gains on cash sales of finance receivables under ASC Topic 860 “Transfers and Servicing” (“ASC 860”). Gains on sale of finance receivables, representing the difference between the sales price and the unamortized value of the finance receivables sold, are recognized when finance receivables are sold.

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     We apply a financial components approach that focuses on control when accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, eliminates financial assets when control has been surrendered, and eliminates liabilities when extinguished. This approach provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.
Valuation of Acquired Intangibles and Goodwill
     In accordance with ASC Topic 350 “Intangibles—Goodwill and Other” (“ASC 350”) we are required to perform a review of goodwill for impairment annually or earlier if indicators of potential impairment exist. The review of goodwill for potential impairment is highly subjective and requires that: (1) goodwill is allocated to various reporting units of our business to which it relates; and (2) we estimate the fair value of those reporting units to which the goodwill relates and then determine the book value of those reporting units. If the estimated fair value of reporting units with allocated goodwill is determined to be less than their book value, we are required to estimate the fair value of all identifiable assets and liabilities of those reporting units in a manner similar to a purchase price allocation for an acquired business. This requires independent valuation of certain unrecognized assets. Once this process is complete, the amount of goodwill impairment, if any, can be determined.
     We believe that, at September 30, 2009, there was no impairment of goodwill or other intangible assets. However, changes in various circumstances including changes in our market capitalization, changes in our forecasts and changes in our internal business structure could cause one of our reporting units to be valued differently thereby causing an impairment of goodwill. Additionally, in response to changes in our industry and changes in global or regional economic conditions, we may strategically realign our resources and consider restructuring, disposing or otherwise exiting businesses, which could result in an impairment of some or all of our identifiable intangibles or goodwill.
Income Taxes
     We record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with ASC Topic 740 “Income Taxes” (“ASC 740”) the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. On July 13, 2006, the FASB issued accounting guidance on accounting for uncertainty in income taxes. This guidance clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB ASC Topic 740 “Income Taxes” (“ASC 740”). The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with the guidance is a two-step process. The first step is recognition: the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
     Effective with our 2002 tax filings, we adopted the cost recovery method of income recognition for tax purposes. We believe cost recovery to be an acceptable method for companies in the bad debt purchasing industry

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and results in the reduction of current taxable income as, for tax purposes, collections on finance receivables are applied first to principal to reduce the finance receivables to zero before any income is recognized.
     We believe it is more likely than not that forecasted income, including income that may be generated as a result of certain tax planning strategies, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax assets. In the event that all or part of the deferred tax assets are determined not to be realizable in the future, a valuation allowance would be established and charged to earnings in the period such determination is made. Similarly, if we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings or a decrease in goodwill in the period such determination is made. In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position.
Item 3.   Quantitative and Qualitative Disclosure About Market Risk
     Our exposure to market risk relates to interest rate risk with our variable rate credit line. The average borrowings on our variable rate credit line were $238.8 million for the three months ended September 30, 2009. Assuming a 200 basis point increase in interest rates, interest expense would have increased by $1.2 million and $1.0 million for the three months ended September 30, 2009 and 2008, respectively. At September 30, 2009 and 2008, we had $256.3 million and $217.3 million, respectively, of variable rate debt outstanding on our credit line. We do not have any other variable rate debt outstanding at September 30, 2009. Significant increases in future interest rates on the variable rate credit line could lead to a material decrease in future earnings assuming all other factors remained constant.
Item 4.   Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial and Administrative Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, controls may become inadequate because of changes in conditions and the degree of compliance with the policies or procedures may deteriorate. We conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer have concluded that, as of September 30, 2009, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.   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 consumers and are occasionally countersued by them in such actions. Also, consumers, either individually, as a member of a class action, or through a governmental entity on behalf of consumers, 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

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us. While it is not expected that these or any other legal proceedings or claims in which we are involved will, either individually or in the aggregate, have a material adverse impact on our results of operations, liquidity or our financial condition, the matter described below falls outside of the normal parameters of our routine legal proceedings.
     PRA is currently a defendant in a purported class action counterclaim entitled PRA v. Barkwell, 4:09-cv-00113-CDL, which was originally filed in the Superior Court of Muscogee County, Georgia. The counterclaim, which was filed against PRA, the National Arbitration Forum (“NAF”) and MBNA American Bank, N.A., on July 29, 2009, has since been removed to the United States District Court for the Middle District of Georgia, where it is currently pending. The counterclaim alleges that in pursuing arbitration claims against Barkwell and other consumer debtors, pursuant to the terms and conditions of their respective cardholder agreements, PRA breached a duty of good faith and fair dealing and made negligent misrepresentations concerning its “arbitration practices.” The plaintiffs are seeking, among other things, to vacate the arbitration awards that PRA has obtained before NAF and have PRA disgorge the amounts collected with respect to such awards. It is not possible at this time to accurately estimate the possible loss, if any. PRA believes it has meritorious defenses to the allegations made in this counterclaim and intends to defend itself vigorously against them.
Item 1A.   Risk Factors
     An investment in our common stock involves a high degree of risk. You should carefully consider the specific risk factors listed under Part I, Item 1A of our Annual Report on Form 10-K filed on February 27, 2009, together with all other information included or incorporated in our reports filed with the SEC. Any such risks may materialize, and additional risks not known to us, or that we now deem immaterial, may arise. In such event, our business, financial condition, results of operations or prospects could be materially adversely affected. If that occurs, the market price of our common stock could fall, and you could lose all or part of your investment.
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.   Defaults Upon Senior Securities
None.
Item 4.   Submission of Matters to a Vote of the Security Holders
None.
Item 5.   Other Information
None.
Item 6.   Exhibits
  31.1   Section 302 Certifications of Chief Executive Officer.
 
  31.2   Section 302 Certifications of Chief Financial Officer.
 
  32.1   Section 906 Certifications of Chief Executive Officer and Chief Financial Officer.

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SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  PORTFOLIO RECOVERY ASSOCIATES, INC.
(Registrant)
 
 
Date: November 6, 2009  By:   /s/ Steven D. Fredrickson    
    Steven D. Fredrickson   
    Chief Executive Officer, President and
Chairman of the Board of Directors
(Principal Executive Officer) 
 
 
     
Date: November 6, 2009  By:   /s/ Kevin P. Stevenson    
    Kevin P. Stevenson   
    Chief Financial and Administrative Officer, Executive Vice President, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer)   

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Exhibit 31.1
I, Steven D. Fredrickson, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Portfolio Recovery Associates, Inc.;
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: November 6, 2009  By:   /s/ Steven D. Fredrickson    
    Steven D. Fredrickson   
    Chief Executive Officer, President and
Chairman of the Board of Directors
(Principal Executive Officer) 
 

 

Exhibit 31.2
I, Kevin P. Stevenson, certify that:
1.   I have reviewed this quarterly report on Form 10-Q of Portfolio Recovery Associates, Inc.;
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report;
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
         
     
Date: November 6, 2009  By:   /s/ Kevin P. Stevenson    
    Kevin P. Stevenson   
    Chief Financial and Administrative Officer,
Executive Vice President, Treasurer and
Assistant Secretary (Principal Financial and
Accounting Officer) 
 

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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Portfolio Recovery Associates, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven D. Fredrickson, Chief Executive Officer, President and Chairman of the Board of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
         
     
Date: November 6, 2009  By:   /s/ Steven D. Fredrickson    
    Steven D. Fredrickson   
    Chief Executive Officer, President and
Chairman of the Board of Directors
(Principal Executive Officer) 
 
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Portfolio Recovery Associates, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kevin P. Stevenson, Chief Financial and Administrative Officer, Executive Vice President, Treasurer and Assistant Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
         
     
Date: November 6, 2009  By:   /s/ Kevin P. Stevenson    
    Kevin P. Stevenson   
    Chief Financial and Administrative Officer,
Executive Vice President, Treasurer and
Assistant Secretary (Principal Financial and
Accounting Officer) 
 
 

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