Company Quick10K Filing
PRA Group
Price35.23 EPS1
Shares46 P/E24
MCap1,608 P/FCF23
Net Debt-97 EBIT184
TEV1,511 TEV/EBIT8
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-08
10-K 2019-12-31 Filed 2020-03-02
10-Q 2019-09-30 Filed 2019-11-08
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-10
10-K 2018-12-31 Filed 2019-03-12
10-Q 2018-09-30 Filed 2018-11-09
10-Q 2018-06-30 Filed 2018-08-08
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-02-28
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-09
10-Q 2017-03-31 Filed 2017-05-10
10-K 2016-12-31 Filed 2017-03-01
10-Q 2016-09-30 Filed 2016-11-08
10-Q 2016-06-30 Filed 2016-08-09
10-Q 2016-03-31 Filed 2016-05-10
10-K 2015-12-31 Filed 2016-02-26
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-08-10
10-Q 2015-03-31 Filed 2015-05-08
10-K 2014-12-31 Filed 2015-03-02
10-Q 2014-09-30 Filed 2014-11-10
10-Q 2014-06-30 Filed 2014-08-06
10-Q 2014-03-31 Filed 2014-05-08
10-K 2013-12-31 Filed 2014-02-28
10-Q 2013-09-30 Filed 2013-11-08
10-Q 2013-06-30 Filed 2013-08-02
10-Q 2013-03-31 Filed 2013-05-08
10-K 2012-12-31 Filed 2013-02-28
10-Q 2012-09-30 Filed 2012-11-07
10-Q 2012-06-30 Filed 2012-08-09
10-Q 2012-03-31 Filed 2012-05-10
10-K 2011-12-31 Filed 2012-02-28
10-Q 2011-09-30 Filed 2011-11-04
10-Q 2011-06-30 Filed 2011-08-05
10-Q 2011-03-31 Filed 2011-05-05
10-K 2010-12-31 Filed 2011-02-25
10-Q 2010-09-30 Filed 2010-11-09
10-Q 2010-06-30 Filed 2010-08-09
10-Q 2010-03-31 Filed 2010-05-10
10-K 2009-12-31 Filed 2010-02-16
8-K 2020-06-11
8-K 2020-06-09
8-K 2020-05-07
8-K 2020-03-27
8-K 2020-02-27
8-K 2019-11-07
8-K 2019-08-08
8-K 2019-06-13
8-K 2019-05-09
8-K 2019-03-25
8-K 2019-02-28
8-K 2019-01-03
8-K 2018-11-08
8-K 2018-10-04
8-K 2018-10-02
8-K 2018-08-07
8-K 2018-06-20
8-K 2018-06-04
8-K 2018-05-09
8-K 2018-02-27
8-K 2018-01-23
8-K 2017-12-26

PRAA 10Q Quarterly Report

Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 exhibit10120200331.htm
EX-31.1 exhibit311-20200331.htm
EX-31.2 exhibit312-20200331.htm
EX-32.1 exhibit321-20200331.htm

PRA Group Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
4.23.42.51.70.80.02012201420172020
Assets, Equity
0.30.20.10.1-0.0-0.12012201420172020
Rev, G Profit, Net Income
0.70.40.1-0.3-0.6-0.92012201420172020
Ops, Inv, Fin

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

FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2020
Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 000-50058

PRA Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
 
 
75-3078675
(State or other jurisdiction of incorporation or organization)
 
 
 
(I.R.S. Employer Identification No.)

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

(888) 772-7326
(Registrant's Telephone No., including area code)

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
PRAA
NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ   No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes  þ   No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company   Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No  þ

The number of shares of the registrant's common stock outstanding as of May 5, 2020 was 45,541,199.



Table of Contents

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

2



Part I. Financial Information
Item 1. Financial Statements (Unaudited)

PRA Group, Inc.
Consolidated Balance Sheets
March 31, 2020 and December 31, 2019
(Amounts in thousands)
 
(unaudited)
 
 
 
March 31,
2020
 
December 31,
2019
Assets
 
 
 
Cash and cash equivalents
$
179,995

 
$
119,774

Investments
52,711

 
56,176

Finance receivables, net
3,408,074

 
3,514,165

Other receivables, net
11,383

 
10,606

Income taxes receivable
29,372

 
17,918

Deferred tax asset, net
63,911

 
63,225

Property and equipment, net
59,882

 
56,501

Right-of-use assets
66,655

 
68,972

Goodwill
418,565

 
480,794

Intangible assets, net
4,003

 
4,497

Other assets
55,548

 
31,263

Total assets
$
4,350,099

 
$
4,423,891

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
4,328

 
$
4,258

Accrued expenses
76,583

 
88,925

Income taxes payable
18,596

 
4,046

Deferred tax liability, net
69,845

 
85,390

Lease liabilities
71,102

 
73,377

Interest-bearing deposits
97,465

 
106,246

Borrowings
2,828,002

 
2,808,425

Other liabilities
63,502

 
26,211

Total liabilities
3,229,423

 
3,196,878

Equity:
 
 
 
Preferred stock, $0.01 par value, 2,000 shares authorized, no shares issued and outstanding

 

Common stock, $0.01 par value, 100,000 shares authorized, 45,540 shares issued and outstanding at March 31, 2020; 100,000 shares authorized, 45,416 shares issued and outstanding at December 31, 2019
455

 
454

Additional paid-in capital
67,021

 
67,321

Retained earnings
1,381,766

 
1,362,631

Accumulated other comprehensive loss
(375,617
)
 
(261,018
)
Total stockholders' equity - PRA Group, Inc.
1,073,625

 
1,169,388

Noncontrolling interest
47,051

 
57,625

Total equity
1,120,676

 
1,227,013

Total liabilities and equity
$
4,350,099

 
$
4,423,891

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

3



PRA Group, Inc.
Consolidated Income Statements
For the three months ended March 31, 2020 and 2019
(unaudited)
(Amounts in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2020
 
2019
Revenues:
 
 
 
Portfolio income
$
262,022

 
$

Changes in expected recoveries
(12,816
)
 

Income recognized on finance receivables

 
238,836

Fee income
2,209

 
6,374

Other revenue
369

 
667

Total revenues
251,784

 
245,877

 
 
 
 
Net allowance charges

 
(6,095
)
 
 
 
 
Operating expenses:
 
 
 
Compensation and employee services
75,171

 
79,645

Legal collection fees
14,572

 
13,059

Legal collection costs
34,447

 
35,229

Agency fees
13,376

 
14,032

Outside fees and services
19,394

 
15,248

Communication
13,511

 
13,201

Rent and occupancy
4,484

 
4,363

Depreciation and amortization
4,084

 
4,572

Other operating expenses
12,205

 
11,585

Total operating expenses
191,244

 
190,934

  Income from operations
60,540

 
48,848

Other income and (expense):
 
 
 
Interest expense, net
(37,211
)
 
(33,981
)
Foreign exchange gain
2,283

 
6,264

Other
(76
)
 
(352
)
Income before income taxes
25,536

 
20,779

Income tax expense
3,100

 
3,867

Net income
22,436

 
16,912

Adjustment for net income attributable to noncontrolling interests
3,301

 
1,685

Net income attributable to PRA Group, Inc.
$
19,135

 
$
15,227

Net income per common share attributable to PRA Group, Inc.:
 
 
 
Basic
$
0.42

 
$
0.34

Diluted
$
0.42

 
$
0.34

Weighted average number of shares outstanding:
 
 
 
Basic
45,452

 
45,338

Diluted
45,784

 
45,419

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

4



PRA Group, Inc.
Consolidated Statements of Comprehensive Income/(Loss)
For the three months ended March 31, 2020 and 2019
(unaudited)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Net income
$
22,436

 
$
16,912

Other comprehensive (loss)/income, net of tax:
 
 
 
Currency translation adjustments
(108,076
)
 
(1,173
)
Cash flow hedges
(20,568
)
 
(5,715
)
Debt securities available-for-sale
170

 
45

Other comprehensive loss
(128,474
)
 
(6,843
)
Total comprehensive (loss)/income
(106,038
)
 
10,069

Less comprehensive (loss)/ income attributable to noncontrolling interests
(10,574
)
 
1,254

Comprehensive (loss)/income attributable to PRA Group, Inc.
$
(95,464
)
 
$
8,815

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

5



PRA Group, Inc.
Consolidated Statements of Changes in Equity
For the three months ended March 31, 2020 and March 31, 2019
(unaudited)
(Amounts in thousands)

 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2019
45,416

 
$
454

 
$
67,321

 
$
1,362,631

 
$
(261,018
)
 
$
57,625

 
$
1,227,013

Components of comprehensive income, net of tax:


 


 


 


 


 


 


Net income

 

 

 
19,135

 

 
3,301

 
22,436

Currency translation adjustments

 

 

 

 
(94,201
)
 
(13,875
)
 
(108,076
)
Cash flow hedges

 

 

 

 
(20,568
)
 

 
(20,568
)
Debt securities available-for-sale

 

 

 

 
170

 

 
170

Vesting of restricted stock
124

 
1

 

 

 

 

 
1

Share-based compensation expense

 

 
2,857

 

 

 

 
2,857

Employee stock relinquished for payment of taxes

 

 
(3,157
)
 

 

 

 
(3,157
)
Balance at March 31, 2020
45,540

 
$
455

 
$
67,021

 
$
1,381,766

 
$
(375,617
)
 
$
47,051

 
$
1,120,676



 
Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive (Loss)
 
Noncontrolling Interest
 
Total Equity
 
Shares
 
Amount
 
 
 
 
 
Balance at December 31, 2018
45,304

 
$
453

 
$
60,303

 
$
1,276,473

 
$
(242,109
)
 
$
28,849

 
$
1,123,969

Components of comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
15,227

 

 
1,685

 
16,912

Currency translation adjustments

 

 

 

 
(742
)
 
(431
)
 
(1,173
)
Cash flow hedges

 

 

 

 
(5,715
)
 

 
(5,715
)
Debt securities available-for-sale

 

 

 

 
45

 

 
45

Distributions to noncontrolling interest

 

 

 

 

 
(6,877
)
 
(6,877
)
Contributions from noncontrolling interest

 

 

 

 

 
89

 
89

Vesting of restricted stock
80

 
1

 
(1
)
 

 

 

 

Share-based compensation expense

 

 
2,314

 

 

 

 
2,314

Employee stock relinquished for payment of taxes

 

 
(1,437
)
 

 

 

 
(1,437
)
Other

 

 
(2,088
)
 

 

 

 
(2,088
)
Balance at March 31, 2019
45,384

 
$
454

 
$
59,091

 
$
1,291,700

 
$
(248,521
)
 
$
23,315

 
$
1,126,039


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


6



PRA Group, Inc.
Consolidated Statements of Cash Flows
For the three months ended March 31, 2020 and 2019
(unaudited)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2020
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
22,436

 
$
16,912

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Share-based compensation expense
2,857

 
2,314

Depreciation and amortization
4,084

 
4,572

Amortization of debt discount and issuance costs
5,857

 
5,678

Changes in expected recoveries
12,816

 

Deferred income taxes
(12,755
)
 
(9,994
)
Net unrealized foreign currency transactions
24,873

 
(6,632
)
Fair value in earnings for equity securities
(7,566
)
 
(2,139
)
Net allowance charges

 
6,095

Other
(135
)
 

Changes in operating assets and liabilities:
 
 
 
Other assets
(1,242
)
 
550

Other receivables, net
(545
)
 
(1,289
)
Accounts payable
221

 
(548
)
Income taxes payable, net
3,835

 
(13,040
)
Accrued expenses
(8,990
)
 
1,553

Other liabilities
994

 
10,888

Right of use asset/lease liability
66

 

Other, net

 
37

Net cash provided by operating activities
46,806

 
14,957

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(7,639
)
 
(4,493
)
Acquisition of finance receivables
(271,845
)
 
(264,632
)
Recoveries applied to negative allowance
236,656

 

Collections applied to principal on finance receivables

 
222,335

Proceeds from/(purchase of) investments
36

 
(82,616
)
Proceeds from sales and maturities of investments
612

 
42,940

Business acquisition, net of cash acquired

 
(57,610
)
Proceeds from sale of subsidiaries, net

 
31,177

Net cash used in investing activities
(42,180
)
 
(112,899
)
Cash flows from financing activities:
 
 
 
Proceeds from lines of credit
315,118

 
537,891

Principal payments on lines of credit
(227,459
)
 
(132,486
)
Principal payments on notes payable and long-term debt
(2,500
)
 
(305,665
)
Payments of origination cost and fees
(8,203
)
 

Tax withholdings related to share-based payments
(3,156
)
 
(1,437
)
Distributions paid to noncontrolling interest

 
(6,877
)
Net (decrease)/increase in interest-bearing deposits
(1,658
)
 
16,126

Other financing activities

 
(2,088
)
Net cash provided by financing activities
72,142

 
105,464

Effect of exchange rate on cash
(16,575
)
 
(4,115
)
Net increase in cash and cash equivalents
60,193

 
3,407

Cash and cash equivalents, beginning of period
123,807

 
98,695

Cash and cash equivalents, end of period
$
184,000

 
$
102,102

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
30,502

 
$
25,479

Cash paid for income taxes
12,100

 
27,293

Cash, cash equivalents and restricted cash reconciliation:
 
 
 
Cash and cash equivalents per Consolidated Balance Sheets
$
179,995

 
$
102,102

Restricted cash included in Other assets per Consolidated Balance Sheets
4,005

 

Total cash, cash equivalents and restricted cash
$
184,000

 
$
102,102

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

7

PRA Group, Inc.
Notes to Consolidated Financial Statements



1. Organization and Business:
As used herein, the terms "PRA Group," the "Company," or similar terms refer to PRA Group, Inc. and its subsidiaries.
PRA Group, Inc., a Delaware corporation, is a global financial and business services company with operations in the Americas, Europe, and Australia. The Company's primary business is the purchase, collection, and management of portfolios of nonperforming loans. The Company also provides fee-based services on class action claims recoveries and by servicing consumer bankruptcy accounts in the United States ("U.S.").
On March 11, 2020, due to the global outbreak of the novel coronavirus ("COVID-19"), the World Health Organization declared a global pandemic.  Since the initial outbreak was reported, all U.S. states have declared states of emergency and COVID-19 has spread to all countries in which the Company operates.  As a result, the Company implemented business continuity plans including remote work practices where possible and have leveraged existing space to follow social distancing recommendations.  To date, the pandemic has not prevented the Company's ability to operate the business and the Company has continued to take steps necessary to minimize impact or disruption to the Company's global operations. 
The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and include the accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Under the guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 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. This conclusion is based on similarities among the operating units, including economic characteristics, the nature of the products and services, the nature of the production processes, the types or class of customer for their products and services, the methods used to distribute their products and services and the nature of the regulatory environment.
The following table shows the amount of revenue generated for the three months ended March 31, 2020 and 2019, and long-lived assets held at March 31, 2020 and 2019, both for the U.S., the Company's country of domicile, and outside of the U.S. (amounts in thousands):
 
As of and for the
 
As of and for the
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
Revenues
 
Long-Lived Assets
 
Revenues
 
Long-Lived Assets
United States
$
153,335

 
$
115,053

 
$
167,576

 
$
110,643

United Kingdom
36,340

 
3,076

 
29,756

 
3,993

Other (1)
62,109

 
8,408

 
48,545

 
10,377

Total
$
251,784

 
$
126,537

 
$
245,877

 
$
125,013

(1) None of the countries included in "Other" comprise greater than 10% of the Company's consolidated revenues or long-lived assets.
Revenues are attributed to countries based on the location of the related operations. Long-lived assets consist of net property and equipment and right-of-use assets. The Company reports revenues earned from nonperforming loan acquisitions and collection activities, fee-based services and investments. For additional information on the Company's investments, see Note 4. It is impracticable for the Company to report further breakdowns of revenues from external customers by product or service.
Beginning January 1, 2020, the Company implemented Accounting Standards Update ("ASU") ASU 2016-13, "Financial Instruments - Credit Losses" ("Topic 326") ("ASU 2016-13") and ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (“ASU 2019-11”), collectively referred to as "ASC Topic 326", on a prospective basis. Prior to January 1, 2020, the vast majority of the Company's investment in finance receivables were accounted for under ASC 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). Refer to Note 2.
Finance receivables and income recognition: The Company accounts for its investment in finance receivables at amortized cost under the guidance of ASC Topic 310 “Receivables” (“ASC Topic 310”) and ASC Topic 326-20 “Financial Instruments - Credit Losses - Measured at Amortized Cost” (“ASC Topic 326-20”). ASC Topic 326-20 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.
Credit quality information: The Company acquires portfolios of accounts that have experienced deterioration of credit quality between origination and the Company's acquisition of the accounts. The amount paid for a portfolio 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.

8

PRA Group, Inc.
Notes to Consolidated Financial Statements


The Company accounts for the portfolios in accordance with the guidance for purchased credit deteriorated ("PCD") assets. The initial allowance for credit losses is added to the purchase price rather than recorded as a credit loss expense. The Company has established a policy to writeoff the amortized cost of individual assets when it deems probable that it will not collect on an individual asset. Due to the deteriorated credit quality of the individual accounts, the Company may writeoff the unpaid principal balance of all accounts in a portfolio at the time of acquisition. However, when the Company has an expectation of collecting cash flows at the portfolio level, a negative allowance is established for expected recoveries at an amount not to exceed the amount paid for the financial portfolios.
Portfolio segments:     The Company develops systematic methodologies to determine its allowance for credit losses at the portfolio segment level. The Company’s nonperforming loan portfolio segments consist of two broad categories: Core and Insolvency. The Company’s Core portfolios contain loan accounts that are in default, which were purchased at a substantial discount to face value because either the credit grantor and/or other third-party collection agencies have been unsuccessful in collecting the full balance owed. The Company’s Insolvency portfolios contain loan accounts that are in default where the customer is involved in a bankruptcy or insolvency proceeding and were purchased at a substantial discount to face value. Each of the two broad portfolio segments of purchased nonperforming loan portfolios consist of large numbers of homogeneous receivables with similar risk characteristics.

Effective Interest Rate and Accounting Pools: Within each portfolio segment, the Company pools accounts with similar risk characteristics that are acquired in the same year. Similar risk characteristics generally include portfolio segment and geographic region. The initial effective interest rate of the pool is established based on the purchase price and expected recoveries of each individual purchase at the purchase date. During the year of acquisition, the annual pool is aggregated, and the blended effective interest rate will change to reflect new acquisitions and new cash flow estimates until the end of the year. The effective interest rate for a pool is fixed for the remaining life of the pool once the year has ended.

Methodology: The Company develops its estimates of expected recoveries in the Consolidated Balance Sheets by applying discounted cash flow methodologies to its estimated remaining collections (“ERC”) and recognizes income over the estimated life of the pool at the constant effective interest rate of the pool. Subsequent changes (favorable and unfavorable) in expected cash flows are recognized within changes in expected recoveries in the Consolidated Income Statements by adjusting the present value of increases or decreases in ERC at a constant effective interest rate. Amounts included in the estimate of recoveries do not exceed the aggregate amount of the amortized cost basis previously written off or expected to be written off.

The measurement of expected recoveries is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Factors that may contribute to the changes in estimated cash flows include both external and internal factors. External factors that may have an impact on the collectability, and subsequently on the overall profitability of acquired pools of nonperforming loans, would include new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors that may have an impact on the collectability, and subsequently the overall profitability of acquired pools of nonperforming loans, would include necessary revisions to initial and post-acquisition scoring and modeling estimates, operational activities, and changes in productivity related to turnover and tenure of the Company's collection staff.

Portfolio income: The recognition of income on expected recoveries is based on the constant effective interest rate established for a pool.

Changes in expected recoveries: The activity consists of differences between actual recoveries compared to expected recoveries for the reporting period, as well as the net present value of increases or decreases in ERC at the constant effective interest rate.

Agreements to acquire the aforementioned receivables include general representations and warranties from the sellers covering matters such as account holder death or insolvency 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, with certain international agreements extending as long as 24 months.  Any funds received from the seller as a return of purchase price are referred to as buybacks. Buyback funds are included in changes in expected recoveries when received. 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.
Fees paid to third parties other than the seller related to the direct acquisition of a portfolio of accounts are expensed when incurred.

9

PRA Group, Inc.
Notes to Consolidated Financial Statements


Goodwill and intangible assets: Goodwill, in accordance with ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), is not amortized but rather is reviewed for impairment annually or more frequently if indicators of potential impairment exist. On January 1, 2020, the Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). The Company performs its annual assessment of goodwill as of October 1. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an impairment loss is recognized. The loss will be recorded at the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the respective reporting unit.
Basis of presentation: The accompanying interim financial statements have been prepared in accordance with the instructions for Quarterly Reports on Form 10-Q and, therefore, do not include all information and Notes to the Consolidated Financial Statements necessary for a complete presentation of financial position, results of operations, comprehensive income/(loss) and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the Company's Consolidated Balance Sheets as of March 31, 2020, its Consolidated Income Statements, and Statements of Comprehensive Income/(Loss) for the three months ended March 31, 2020 and 2019, and its Statements of Changes in Equity and Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019, have been included. The Consolidated Income Statements of the Company for the three months ended March 31, 2020 may not be indicative of future results.
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 for the year ended December 31, 2019 (the "2019 Form 10-K").

2. Change in Accounting Principle:

Financial Instruments - Credit Losses
In June 2016, FASB issued ASU 2016-13, which introduced a new methodology requiring the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity debt securities and other receivables measured at amortized cost. The new methodology requires an entity to present on the balance sheet the net amount expected to be collected. This methodology replaces the multiple impairment methods under prior GAAP, including for purchased credit impaired ("PCI") assets, and introduces the concept of PCD assets. The Company's PCI assets previously accounted for under ASC 310-30 are now accounted for as PCD assets upon adoption of ASU 2016-13. ASU 2016-13 requires PCD assets to be recognized at their purchase price plus the allowance for credit losses expected at the time of acquisition. ASU 2016-13 also requires that financial assets should be written off when they are deemed uncollectible.
In November 2019, FASB issued ASU 2019-11, which amended the PCD asset guidance in ASU 2016-13 to clarify that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account. Additionally, they should not exceed the aggregate of amounts previously written off and expected to be written off by an entity. Further, ASU 2019-11 clarifies that a negative allowance is recognized when an entity determines, after a full or partial writeoff of the amortized cost basis, that it will recover all or a portion of the basis.
The Company adopted ASC Topic 326 on January 1, 2020 on a prospective basis. In accordance with the guidance, substantially all the Company’s PCI assets were transitioned using the PCD guidance, with immediate writeoff of the amortized cost basis of individual accounts and establishment of a negative allowance for expected recoveries equal to the amortized cost basis written off. Accounts previously accounted for under ASC Topic 310-30, were aggregated into annual pools based on similar risk characteristics and an effective interest rate was established based on the estimated remaining cash flows of the annual pool. The immediate writeoff and subsequent recognition of expected recoveries had no impact on the Company’s Consolidated Income Statements or the Consolidated Balance Sheets at the date of adoption. The Company develops its estimate of expected recoveries by applying discounted cash flow methodologies to its ERC and recognizes income over the estimated life of the pool at the constant effective interest rate of the pool. Changes (favorable and unfavorable) in expected cash flows are recognized in current period earnings by adjusting the present value of the expected recoveries.



10

PRA Group, Inc.
Notes to Consolidated Financial Statements


Following the transition guidance for PCD assets, the Company grossed up the amortized cost of its net finance receivables at January 1, 2020 as shown below (amounts in thousands):
Amortized cost
$
3,514,165

Allowance for credit losses
125,757,689

Noncredit discount
3,240,131

Face value
$
132,511,985

 
 
Allowance for credit losses
$
125,757,689

Writeoffs, net
(125,757,689
)
Expected recoveries
3,514,165

Initial negative allowance for expected recoveries
$
3,514,165


3. Finance Receivables, net:
Finance Receivables, net after the adoption of ASC Topic 326 (refer to Note 2)
Finance receivables, net consists of the following at March 31, 2020 (amounts in thousands):
Amortized cost
$

Negative allowance for expected recoveries (1)
3,408,074

Balance at end of period
$
3,408,074


(1) The negative allowance balance includes certain portfolios of nonperforming loans for which the Company holds a beneficial interest representing approximately 1% of the balance.

Changes in the negative allowance for expected recoveries by portfolio segment for the three months ended March 31, 2020 were as follows (amounts in thousands):
 
Core
 
Insolvency
 
Total
Balance at beginning of period
$
3,051,426

 
$
462,739

 
$
3,514,165

Initial negative allowance for expected recoveries - portfolio acquisitions (1)
233,687

 
39,550

 
273,237

Foreign currency translation adjustment
(120,214
)
 
(9,642
)
 
(129,856
)
Recoveries applied to negative allowance (2)
(199,038
)
 
(37,618
)
 
(236,656
)
Changes in expected recoveries (3)
(16,477
)
 
3,661

 
(12,816
)
Balance at end of period
$
2,949,384

 
$
458,690

 
$
3,408,074

(1) Initial negative allowance for expected recoveries - portfolio acquisitions
Portfolio acquisitions for the three months ended March 31, 2020 were as follows (amounts in thousands):
 
Core
 
Insolvency
 
Total
Face value
$
1,891,142

 
$
177,454

 
$
2,068,596

Noncredit discount
(213,289
)
 
(13,032
)
 
(226,321
)
Allowance for credit losses at acquisition
(1,444,166
)
 
(124,872
)
 
(1,569,038
)
Purchase price
$
233,687

 
$
39,550

 
$
273,237





11

PRA Group, Inc.
Notes to Consolidated Financial Statements


The initial negative allowance recorded on portfolio acquisitions for the three months ended March 31, 2020 was as follows (amounts in thousands):
 
Core
 
Insolvency
 
Total
Allowance for credit losses at acquisition
$
(1,444,166
)
 
$
(124,872
)
 
$
(1,569,038
)
Writeoffs, net
1,444,166

 
124,872

 
1,569,038

Expected recoveries
233,687

 
39,550

 
273,237

Initial negative allowance for expected recoveries
$
233,687

 
$
39,550

 
$
273,237

(2) Recoveries applied to negative allowance
Recoveries applied to the negative allowance were computed as follows for the three months ended March 31, 2020 (amounts in thousands):
 
Core
 
Insolvency
 
Total
Recoveries (a)
$
440,694

 
$
57,984

 
$
498,678

Less - amounts reclassified to portfolio income (b)
241,656

 
20,366

 
262,022

Recoveries applied to negative allowance
$
199,038

 
$
37,618

 
$
236,656

(a) Recoveries includes cash collections, buybacks and other adjustments.
(b) The Company reported income on expected recoveries based on the constant effective interest rate in portfolio income on the Company's Consolidated Income Statements.
(3) Changes in expected recoveries
Changes in expected recoveries consists of the following for the three months ended March 31, 2020 (amounts in thousands):
 
Core
 
Insolvency
 
Total
Changes in expected future recoveries
$
(20,524
)
 
$
(102
)
 
$
(20,626
)
Recoveries received in excess/(shortfall) of forecast
4,047

 
3,763

 
7,810

Changes in expected recoveries
$
(16,477
)
 
$
3,661

 
$
(12,816
)


In order to evaluate the impact of the COVID-19 pandemic on expectations of future cash collections, the Company considered historical performance, current economic forecasts regarding the duration of the impact to short-term and long-term growth in the various geographies in which the Company operates, and evolving information regarding government stimulus packages and the reduced economic activity required by stay at home orders. The Company also considered current collection activity in its determination to adjust the timing of near term ERC for certain pools. Based on these considerations, the Company’s estimates incorporate changes in the timing of expected cash collections over the next 6 to 12 months.  Changes in expected recoveries were a net write down of $12.8 million. This reflects a $20.6 million net, negative adjustment to the expected future recoveries primarily related to an expected delay in cash collections from the impact of COVID-19, partially offset by $7.8 million in recoveries in excess of expectations in the current quarter.  Changes in the Company’s assumptions regarding the duration and impact of COVID-19 to cash collections could change significantly as conditions evolve.

Finance Receivables, net prior to adoption of ASC Topic 326

The following information reflect finance receivables, net as previously disclosed in the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2019 which was under previous revenue recognition accounting standard ASC Topic 310-30.

12

PRA Group, Inc.
Notes to Consolidated Financial Statements


Changes in finance receivables, net for the three months ended March 31, 2019 were as follows (amounts in thousands):
 
 
Three Months Ended March 31, 2019
Balance at beginning of period
 
$
3,084,777

Acquisitions of finance receivables (1)
 
313,446

Foreign currency translation adjustment
 
7,436

Cash collections
 
(461,171
)
Income recognized on finance receivables
 
238,836

Net allowance charges
 
(6,095
)
Balance at end of period
 
$
3,177,229


(1)
Includes portfolio purchases adjusted for buybacks and acquisition related costs, and portfolios from the acquisition of a business in Canada made during the first quarter of 2019.
During the three months ended March 31, 2019, the Company acquired finance receivable portfolios with a face value of $4.7 billion for $318.8 million. At March 31, 2019, the ERC on the receivables acquired during the three months ended March 31, 2019 were $541.1 million.
At the time of acquisition and each quarter thereafter, the life of each quarterly accounting pool is estimated based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon current projections, cash collections expected to be applied to principal are estimated to be as follows for the twelve-month periods ending March 31, (amounts in thousands):
2020
$
850,955

2021
718,010

2023
562,256

2024
426,004

2025
258,793

2026
137,843

2027
77,642

2028
47,138

2029
38,084

2030
28,474

Thereafter
32,030

Total ERC expected to be applied to principal
$
3,177,229


At March 31, 2019, the Company had aggregate net finance receivables balances in pools accounted for under the cost recovery method of $43.5 million.
Accretable yield represented the amount of income on finance receivables the Company expected to recognize over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represented the original expected accretable yield on portfolios acquired during the period. Net reclassifications from nonaccretable difference to accretable yield primarily resulted from the increase in the Company's estimate of future cash flows. When applicable, net reclassifications to nonaccretable difference from accretable yield resulted from the decrease in the Company's estimates of future cash flows and allowance charges that together exceeded the increase in the Company's estimate of future cash flows.
Changes in accretable yield for the three months ended March 31, 2019 were as follows (amounts in thousands):
 
Three Months Ended March 31, 2019
Balance at beginning of period
$
3,058,445

Income recognized on finance receivables
(238,836
)
Net allowance charges
6,095

Additions from portfolio acquisitions
235,814

Reclassifications from nonaccretable difference
19,161

Foreign currency translation adjustment
(511
)
Balance at end of period
$
3,080,168



13

PRA Group, Inc.
Notes to Consolidated Financial Statements


The following is a summary of activity within the Company's valuation allowance account, all of which relates to acquired finance receivables, for the three months ended March 31, 2019 (amounts in thousands):
 
Three Months Ended March 31, 2019
Beginning balance
$
257,148

Allowance charges
7,977

Reversal of previously recorded allowance charges
(1,882
)
Net allowance charges
6,095

Foreign currency translation adjustment
81

Ending balance
$
263,324


4. Investments:
Investments consisted of the following at March 31, 2020 and December 31, 2019 (amounts in thousands):
 
March 31, 2020
 
December 31, 2019
Debt securities
 
 
 
Available-for-sale
$
4,347

 
$
5,052

Equity securities
 
 
 
Private equity funds
7,141

 
7,218

Mutual funds
33,353

 
33,677

Equity method investments
7,870

 
10,229

Total investments
$
52,711

 
$
56,176


Debt Securities
Available-for-sale
Government bonds: The Company's investments in government bonds are classified as available-for-sale and are stated at fair value.
The amortized cost and estimated fair value of investments in debt securities at March 31, 2020 and December 31, 2019 were as follows (amounts in thousands):
 
March 31, 2020
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Aggregate Fair Value
Available-for-sale
 
 
 
 
 
 
 
Government bonds
$
4,219

 
$
128

 
$

 
$
4,347

 
 
 
 
 
 
 
 
 
December 31, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Aggregate Fair Value
Available-for-sale
 
 
 
 
 
 
 
Government bonds
$
5,095

 
$

 
$
43

 
$
5,052


Equity Securities
Investments in private equity funds: Investments in private equity funds represent limited partnerships in which the Company has less than a 1% interest.
Mutual funds: The Company invests certain excess funds held in Brazil in a Brazilian real denominated mutual fund benchmarked to the U.S. dollar that invests principally in Brazilian fixed income securities. The investments are carried at fair value based on quoted market prices. Gains and losses from this investment are included as a foreign exchange component of other income and (expense) in the Company's Consolidated Income Statements.
Unrealized gains and losses: Net unrealized gains on the Company's equity securities were $7.6 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively.

14

PRA Group, Inc.
Notes to Consolidated Financial Statements


Equity Method Investments
The Company has an 11.7% interest in RCB Investimentos S.A. ("RCB"), a servicing platform for nonperforming loans in Brazil. This investment is accounted for on the equity method because the Company exercises significant influence over RCB’s operating and financial activities. Accordingly, the Company’s investment in RCB is adjusted for the Company’s proportionate share of RCB’s earnings or losses.
5. Goodwill and Intangible Assets, net:
In connection with the Company's business acquisitions, the Company acquired certain tangible and intangible assets. Intangible assets resulting from these acquisitions include client and customer relationships, non-compete agreements, trademarks and technology. The Company performs an annual review of goodwill as of October 1 of each year or more frequently if indicators of impairment exist. The Company performed its most recent annual review as of October 1, 2019 and concluded that no goodwill impairment was necessary. The Company performed its quarterly assessment by evaluating whether a triggering event had occurred as of March 31, 2020 considering current market conditions resulting from the global COVID-19 pandemic. The Company concluded that no triggering event had occurred at March 31, 2020 and will continue to monitor the market for any adverse conditions resulting from the COVID-19 pandemic.
The following table represents the changes in goodwill for the three months ended March 31, 2020 and 2019 (amounts in thousands):
 
Three Months Ended March 31,
 
2020
 
2019
Goodwill:
 
 
 
Balance at beginning of period
$
480,794

 
$
464,116

Changes:
 
 
 
Acquisition (1)

 
13,653

Foreign currency translation adjustment
(62,229
)
 
2,749

Net change in goodwill
(62,229
)
 
16,402

 
 
 
 
Balance at end of period
$
418,565

 
$
480,518


(1) The $13.7 million addition to goodwill during the three months ended March 31, 2019, is related to the acquisition of a business in Canada.
6. Leases:
 The Company's operating lease portfolio primarily includes corporate offices and call centers. The majority of its leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for 5 years, and others include options to terminate the leases within 1 year. Exercises of lease renewal options are typically at the Company's sole discretion and are included in its right-of-use ("ROU") assets and lease liabilities based upon whether the Company is reasonably certain of exercising the renewal options. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.

As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.
The components of lease expense for the three months ended March 31, 2020 and 2019, were as follows (amounts in thousands):
 
Three months ended March 31,
 
2020

2019
Operating lease expense
$
3,063

 
$
2,863

Short-term lease expense
693

 
842

Total lease expense
$
3,756

 
$
3,705




15

PRA Group, Inc.
Notes to Consolidated Financial Statements


Supplemental cash flow information and non-cash activity related to leases for the three months ended March 31, 2020 and 2019 were as follows (amounts in thousands):
 
Three months ended March 31,
 
2020
 
2019
Cash paid for amounts included in the measurement of operating lease liabilities
$
2,991

 
$
2,780

 
 
 
 
ROU assets obtained in exchange for operating lease obligations
531

 
76,175

Lease term and discount rate information related to operating leases were as follows as of the dates indicated:
 
Three months ended March 31,
 
2020
 
2019
Weighted-average remaining lease term (years)
10.6

 
11.0

 
 
 
 
Weighted-average discount rate
4.89
%
 
4.95
%

Maturities of lease liabilities at March 31, 2020 are as follows for the following periods (amounts in thousands):
 
Operating Leases
For the nine months ending December 31, 2020
$
8,747

For the year ending December 31, 2021
11,250