Company Quick10K Filing
Quick10K
PRA Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$28.38 45 $1,290
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-13 Shareholder Vote
8-K 2019-05-09 Earnings, Regulation FD, Exhibits
8-K 2019-01-03 Officers, Exhibits
8-K 2018-11-08 Earnings, Regulation FD, Exhibits
8-K 2018-10-04 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-10-02 Other Events, Exhibits
8-K 2018-08-07 Earnings, Regulation FD, Exhibits
8-K 2018-06-20 Shareholder Vote
8-K 2018-06-04 Officers
8-K 2018-05-09 Earnings, Regulation FD, Exhibits
8-K 2018-02-27 Earnings, Regulation FD, Exhibits
8-K 2018-01-23 Enter Agreement
8-K 2017-12-26 Officers, Exhibits
MMM 3M 101,040
HFC HollyFrontier 7,440
SOI Solaris Oilfield Infrastructure 847
SRTS Sensus Healthcare 105
CMCL Caledonia Mining 62
FFHL Fuwei Films 8
ATEA Astea 0
SINC Sincerity Applied Materials Holdings 0
GRVE Groove Botanicals 0
GNTW Globe Net Wireless 0
PRAA 2019-03-31
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 exhibit101-20190331.htm
EX-31.1 exhibit311-20190331.htm
EX-31.2 exhibit312-20190331.htm
EX-32.1 exhibit321-20190331.htm

PRA Group Earnings 2019-03-31

PRAA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 praa-20190331x10q.htm 10-Q Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019
¨ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 000-50058

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  þ   NO  ¨
Indicate by check mark whether the registrant has submitted electronically 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. (Check one):
Large accelerated filer  þ   Accelerated filer  ¨   Non-accelerated filer  ¨   Smaller reporting company  ¨ Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to 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

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
The number of shares of the registrant's common stock outstanding as of May 6, 2019 was 45,383,831.



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, 2019 and December 31, 2018
(Amounts in thousands)
 
(unaudited)
 
 
 
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Cash and cash equivalents
$
102,102

 
$
98,695

Investments
85,082

 
45,173

Finance receivables, net
3,177,229

 
3,084,777

Other receivables, net
18,082

 
46,157

Income taxes receivable
15,472

 
16,809

Net deferred tax asset
61,619

 
61,453

Property and equipment, net
54,463

 
54,136

Right-of-use assets
70,550

 

Goodwill
480,518

 
464,116

Intangible assets, net
5,247

 
5,522

Other assets
35,970

 
32,721

Total assets
$
4,106,334

 
$
3,909,559

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Accounts payable
$
5,682

 
$
6,110

Accrued expenses
77,838

 
79,396

Income taxes payable
389

 
15,080

Net deferred tax liability
108,367

 
114,979

Interest-bearing deposits
95,314

 
82,666

Borrowings
2,586,409

 
2,473,656

Lease liabilities
74,308

 

Other liabilities
25,789

 
7,370

Total liabilities
2,974,096

 
2,779,257

Redeemable noncontrolling interest
6,199

 
6,333

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, 45,384 shares issued and outstanding at March 31, 2019; 100,000 shares authorized, 45,304 shares issued and outstanding at December 31, 2018
454

 
453

Additional paid-in capital
59,091

 
60,303

Retained earnings
1,291,700

 
1,276,473

Accumulated other comprehensive loss
(248,521
)
 
(242,109
)
Total stockholders' equity - PRA Group, Inc.
1,102,724

 
1,095,120

Noncontrolling interest
23,315

 
28,849

Total equity
1,126,039

 
1,123,969

Total liabilities and equity
$
4,106,334

 
$
3,909,559

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, 2019 and 2018
(unaudited)
(Amounts in thousands, except per share amounts)
 
Three Months Ended March 31,
 
2019
 
2018
Revenues:
 
 
 
Income recognized on finance receivables
$
238,836

 
$
218,624

Fee income
6,374

 
5,327

Other revenue
667

 
157

Total revenues
245,877

 
224,108

 
 
 
 
Net allowance charges
(6,095
)
 
(925
)
 
 
 
 
Operating expenses:
 
 
 
Compensation and employee services
79,645

 
81,237

Legal collection fees
13,059

 
10,669

Legal collection costs
35,229

 
22,243

Agency fees
14,032

 
8,278

Outside fees and services
15,248

 
14,158

Communication
13,201

 
11,557

Rent and occupancy
4,363

 
4,314

Depreciation and amortization
4,572

 
4,929

Other operating expenses
11,585

 
12,184

Total operating expenses
190,934

 
169,569

Income from operations
48,848

 
53,614

Other income and (expense):
 
 
 
Interest expense, net
(33,981
)
 
(25,781
)
Foreign exchange gain
6,264

 
1,293

Other
(352
)
 
243

Income before income taxes
20,779

 
29,369

Income tax expense
3,867

 
6,137

Net income
16,912

 
23,232

Adjustment for net income attributable to noncontrolling interests
1,685

 
2,126

Net income attributable to PRA Group, Inc.
$
15,227

 
$
21,106

Net income per common share attributable to PRA Group, Inc.:
 
 
 
Basic
$
0.34

 
$
0.47

Diluted
$
0.34

 
$
0.47

Weighted average number of shares outstanding:
 
 
 
Basic
45,338

 
45,231

Diluted
45,419

 
45,370

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, 2019 and 2018
(unaudited)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
16,912

 
$
23,232

Less net income attributable to noncontrolling interests
1,685

 
2,126

Net income attributable to PRA Group, Inc.
15,227

 
21,106

Other comprehensive (loss)/income, net of tax:
 
 
 
Currency translation adjustments
(1,173
)
 
29,941

Cash flow hedges
(5,715
)
 

Debt securities available-for-sale
45

 

Other comprehensive (loss)/income
(6,843
)
 
29,941

Less other comprehensive (loss)/income attributable to noncontrolling interests
(431
)
 
7,021

Other comprehensive (loss)/income attributable to PRA Group, Inc.
(6,412
)
 
22,920

Comprehensive income attributable to PRA Group, Inc.
$
8,815

 
$
44,026

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

5



PRA Group, Inc.
Consolidated Statement of Changes in Equity
For the three months ended March 31, 2019 and 2018
(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, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
45,189

 
$
452

 
$
53,870

 
$
1,214,840

 
$
(178,607
)
 
$
50,162

 
$
1,140,717

Cumulative effect of change in accounting principle - equity securities (1)

 

 

 
(3,930
)
 

 

 
(3,930
)
Balance at January 1, 2018
45,189

 
452

 
53,870

 
1,210,910

 
(178,607
)
 
50,162

 
1,136,787

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 
21,106

 

 
2,126

 
23,232

Currency translation adjustments

 

 

 

 
22,920

 
7,021

 
29,941

Distributions to noncontrolling interest

 

 

 

 

 
(11,807
)
 
(11,807
)
Vesting of restricted stock
86

 
1

 
(1
)
 

 

 

 

Share-based compensation expense

 

 
2,415

 

 

 

 
2,415

Employee stock relinquished for payment of taxes

 

 
(2,013
)
 

 

 

 
(2,013
)
Balance at March 31, 2018
45,275

 
$
453

 
$
54,271

 
$
1,232,016

 
$
(155,687
)
 
$
47,502

 
$
1,178,555

(1) Relates to the adoption of FASB ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"). Refer to Note 3 for further detail.
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, 2019 and 2018
(unaudited)
(Amounts in thousands)
 
Three Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
16,912

 
$
23,232

Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
 
 
 
Share-based compensation expense
2,314

 
2,415

Depreciation and amortization
4,572

 
4,929

Amortization of debt discount and issuance costs
5,678

 
5,430

Deferred tax benefit
(9,994
)
 
(10,138
)
Net unrealized foreign currency transaction (gain)
(6,632
)
 
(467
)
Fair value in earnings for equity securities
(2,139
)
 
(409
)
Net allowance charges
6,095

 
925

Changes in operating assets and liabilities:
 
 
 
Other assets
550

 
(5,787
)
Other receivables, net
(1,289
)
 
1,536

Accounts payable
(548
)
 
(2,749
)
Income taxes payable, net
(13,040
)
 
9,984

Accrued expenses
1,553

 
(1,058
)
Other liabilities
10,888

 
6,799

Other, net
37

 

Net cash provided by operating activities
14,957

 
34,642

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(4,493
)
 
(7,917
)
Acquisition of finance receivables
(264,632
)
 
(165,913
)
Collections applied to principal on finance receivables
222,335

 
207,956

Business acquisition, net of cash acquired
(57,610
)
 

Proceeds from sale of subsidiaries, net
31,177

 

Purchase of investments
(82,616
)
 
(13,924
)
Proceeds from sales and maturities of investments
42,940

 
96

Net cash (used in)/provided by investing activities
(112,899
)
 
20,298

Cash flows from financing activities:
 
 
 
Proceeds from lines of credit
537,891

 
101,015

Principal payments on lines of credit
(132,486
)
 
(147,980
)
Tax withholdings related to share-based payments
(1,437
)
 
(2,013
)
Distributions paid to noncontrolling interest
(6,877
)
 
(12,464
)
Principal payments on notes payable and long-term debt
(305,665
)
 
(2,502
)
Payments of origination costs and fees

 
(380
)
Net increase/(decrease) in interest-bearing deposits
16,126

 
(6,314
)
Other
(2,088
)
 

Net cash provided by/(used in) financing activities
105,464

 
(70,638
)
Effect of exchange rate on cash
(4,115
)
 
(3,400
)
Net increase/(decrease) in cash and cash equivalents
3,407

 
(19,098
)
Cash and cash equivalents, beginning of period
98,695

 
120,516

Cash and cash equivalents, end of period
$
102,102

 
$
101,418

Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest
$
25,479

 
$
22,833

Cash paid for income taxes
27,293

 
12,175

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 and Europe. 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.").
The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and include the accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Under the guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 280 "Segment Reporting" ("ASC 280"), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and, therefore, it has one reportable segment, accounts receivable management. 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, 2019 and 2018, respectively, and long-lived assets held at March 31, 2019 and 2018, respectively, 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, 2019
 
Three Months Ended March 31, 2018
 
Revenues
 
Long-Lived Assets
 
Revenues
 
Long-Lived Assets
United States
$
167,576

 
$
110,643

 
$
153,402

 
$
46,439

United Kingdom
29,756

 
3,993

 
24,726

 
2,225

Other (1)
48,545

 
10,377

 
45,980

 
5,124

Total
$
245,877

 
$
125,013

 
$
224,108

 
$
53,788

(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 purchasing and collection activities, fee-based services and its investments. It is impracticable for the Company to report further breakdowns of revenues from external customers by product or service.
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 sheet as of March 31, 2019, its consolidated income statements and statements of comprehensive income/(loss) for the three months ended March 31, 2019 and 2018, its consolidated statement of changes in equity for the three months ended March 31, 2019 and 2018, and its consolidated statements of cash flows for the three months ended March 31, 2019 and 2018, have been included. The consolidated income statements of the Company for the three months ended March 31, 2019 may not be indicative of future results.
Certain prior year period amounts have been reclassified for consistency with the current period presentation. The Company revised the presentation of its consolidated income statements for the prior year period by reclassifying allowance adjustments to the valuation of its finance receivables as a line item separate from revenues. The Company also revised the presentation in its consolidated statement of cash flows for the prior year period by reclassifying allowance charges on its finance receivables from investing activities to operating activities.These presentation changes had no other impacts on the Company's consolidated financial statements.
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, 2018 (the "2018 Form 10-K").

8


PRA Group, Inc.
Notes to Consolidated Financial Statements


2. Finance Receivables, net:
Changes in finance receivables, net for the three months ended March 31, 2019 and 2018 were as follows (amounts in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Balance at beginning of period
$
3,084,777

 
$
2,776,199

Acquisitions of finance receivables (1)
313,446

 
165,020

Foreign currency translation adjustment
7,436

 
39,070

Cash collections
(461,171
)
 
(426,580
)
Income recognized on finance receivables
238,836

 
218,624

Net allowance charges
(6,095
)
 
(925
)
Balance at end of period
$
3,177,229

 
$
2,771,408

(1)
Acquisitions of finance receivables are portfolio purchases that are net of buybacks and include certain capitalized acquisition related costs. They also include the finance receivable portfolios that are acquired in connection with certain business acquisitions. The buybacks and capitalized acquisition costs are netted against the acquisition of finance receivables when paid and may relate to portfolios purchased in prior periods.
During the three months ended March 31, 2019, the Company acquired finance receivables portfolios with a face value of $4.7 billion for $318.8 million. During the three months ended March 31, 2018, the Company acquired finance receivables portfolios with a face value of $1.5 billion for $168.3 million. At March 31, 2019, the estimated remaining collections ("ERC") on the receivables acquired during the three months ended March 31, 2019 and 2018 were $541.1 million and $232.9 million, respectively.
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

2022
562,256

2023
426,004

2024
258,793

2025
137,843

2026
77,642

2027
47,138

2028
38,084

2029
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; at December 31, 2018, the amount was $48.0 million.
Accretable yield represents the amount of income on finance receivables the Company can expect to recognize over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield on portfolios purchased during the period to be earned by the Company based on its proprietary analytical models. Net reclassifications from nonaccretable difference to accretable yield primarily result from the increase in the Company's estimate of future cash flows. When applicable, net reclassifications to nonaccretable difference from accretable yield result from the decrease in the Company's estimates of future cash flows and allowance charges that together exceed the increase in the Company's estimate of future cash flows.

9


PRA Group, Inc.
Notes to Consolidated Financial Statements


Changes in accretable yield for the three months ended March 31, 2019 and 2018 were as follows (amounts in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Balance at beginning of period
$
3,058,445

 
$
2,927,866

Income recognized on finance receivables
(238,836
)
 
(218,624
)
Net allowance charges
6,095

 
925

Additions from portfolio purchases (1)
235,814

 
146,832

Reclassifications from nonaccretable difference
19,161

 
112,028

Foreign currency translation adjustment
(511
)
 
37,241

Balance at end of period
$
3,080,168

 
$
3,006,268

(1) Also includes accretable yield additions resulting from certain business acquisitions.
The following is a summary of activity within the Company's valuation allowance account, all of which relates to acquired nonperforming loans, for the three months ended March 31, 2019 and 2018 (amounts in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Beginning balance
$
257,148

 
$
225,555

Allowance charges
7,977

 
6,833

Reversal of previously recorded allowance charges
(1,882
)
 
(5,908
)
Net allowance charges
6,095

 
925

Foreign currency translation adjustment
81

 
495

Ending balance
$
263,324

 
$
226,975

3. Investments:
Investments consisted of the following at March 31, 2019 and December 31, 2018 (amounts in thousands):
 
March 31, 2019
 
December 31, 2018
Debt securities
 
 
 
Available-for-sale
$
5,088

 
$
5,077

Equity securities
 
 
 
Private equity funds
7,498

 
7,973

Mutual funds
62,192

 
21,753

Equity method investments
10,304

 
10,370

Total investments
$
85,082

 
$
45,173

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. Fair value is determined using quoted market prices. Unrealized gains and losses are included in comprehensive income and reported in equity.

10


PRA Group, Inc.
Notes to Consolidated Financial Statements


The amortized cost and estimated fair value of investments in debt securities at March 31, 2019 and December 31, 2018 were as follows (amounts in thousands):
 
March 31, 2019
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Aggregate Fair Value
Available-for-sale
 
 
 
 
 
 
 
Government bonds
$
5,126

 
$

 
$
38

 
$
5,088

 
 
 
 
 
 
 
 
 
December 31, 2018
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Aggregate Fair Value
Available-for-sale
 
 
 
 
 
 
 
Government bonds
$
5,160

 
$

 
$
83

 
$
5,077

Equity Securities
Investments in private equity funds: Investments in private equity funds represent limited partnerships in which the Company has less than a 3% interest. In the first quarter of 2018, the Company adopted ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), which requires that investments in equity securities be measured at fair value with changes in unrealized gains and losses reported in earnings. Upon adoption of ASU 2016-01, the investments are carried at the fair value reported by the Fund manager. The Company recorded a cumulative effect adjustment of $3.9 million, net of tax, to beginning retained earnings for the unrealized loss on the investments. Prior to 2018, the investments were carried at cost with income recognized in Other Revenue in the consolidated income statements when distributions, up to reported income, were received from the partnerships.
Mutual funds: The Company invests certain excess funds held in Brazil in a Brazilian real denominated mutual fund benchmarked to the US dollar that invests principally in Brazilian fixed income securities. The investments are carried at fair value based on quoted market prices.
Unrealized gains and losses: Net unrealized gains were $2.1 million and $0.4 million for the three months ended March 31, 2019 and 2018, respectively, on its equity securities.
Equity Method Investments
Effective December 20, 2018, the Company has a 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.
4. 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 a review of goodwill as of October 1 of each year or more frequently if indicators of impairment exist.

11


PRA Group, Inc.
Notes to Consolidated Financial Statements


The following table represents the changes in goodwill for the three months ended March 31, 2019 and 2018 (amounts in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Balance at beginning of period:
 
 
 
Goodwill
$
464,116

 
$
526,513

Accumulated impairment loss

 

 
464,116

 
526,513

Changes:
 
 
 
Acquisition (1)
13,653

 

Foreign currency translation adjustment
2,749

 
17,780

Net change in goodwill
16,402

 
17,780

 
 
 
 
Goodwill
480,518

 
544,293

Accumulated impairment loss

 

Balance at end of period
$
480,518

 
$
544,293

(1) The $13.7 million addition to goodwill during the three months ended March 31, 2019 is the result of the acquisition of a business in Canada.
5. Leases:
In February 2016, FASB issued ASU 2016-02, "Leases (Topic 842) Section A - Leases: Amendments to the FASB Account Standards Codification" ("ASU 2016-02"). ASU 2016-02 requires that a lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted ASU 2016-02 on January 1, 2019 using the alternative method which resulted in the recording of operating lease right-of-use ("ROU") assets and lease liabilities of $72.1 million and $75.8 million, respectively. The Company's balance sheets for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance.
The Company elected to apply the transition package of practical expedients permitted within the new standard, which among other things, allows it to carryforward the historical lease classification. In addition, the Company elected the practical expedient to exclude short-term leases (lease terms of less than one year) from its ROU assets and lease liabilities.
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. The exercise of lease renewal options is typically at the Company's sole discretion and are included in its 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 Company used its incremental borrowing rate as of January 1, 2019 to calculate the present value of the lease payments of its existing leases at adoption.
The components of lease expense for the three months ended March 31, 2019 were as follows (amounts in thousands):
 
Three Months Ended March 31, 2019
Operating lease cost
$
2,863

Short-term lease cost
842

Total lease cost
$
3,705


12


PRA Group, Inc.
Notes to Consolidated Financial Statements


Supplemental cash flow information related to leases for the three months ended March 31, 2019 were as follows (amounts in thousands):
 
Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
2,780

 
 
Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
76,175

Lease term and discount rate information related to leases were as follows as of the dates indicated (amounts in thousands):
 
March 31, 2019
Weighted-average remaining lease term (years)
 
Operating leases
11

Weighted-average discount rate
 
Operating leases
4.95
%
Maturities of lease liabilities are as follows for the following periods (amounts in thousands):
 
Operating Leases
For the Nine Months Ended December 31, 2019
$
8,415

For the Year Ended December 31, 2020
11,183

For the Year Ended December 31, 2021
10,660

For the Year Ended December 31, 2022
8,797

For the Year Ended December 31, 2023
6,667

Thereafter
52,275

Total lease payments
97,997

Less imputed interest
(23,689
)
Total
$
74,308


As previously disclosed in the 2018 Form 10-K and under the previous lease accounting standard (which excludes the impact of the Company's intent to exercise renewal options as required by ASU 2016-02), future minimum lease payments for operating leases at December 31, 2018, are as follows for the years ending December 31, (amounts in thousands):
2019
$
11,470

2020
11,451

2021
10,809

2022
7,287

2023
6,189

Thereafter
7,866

Total future minimum lease payments
$
55,072


13


PRA Group, Inc.
Notes to Consolidated Financial Statements


6. Borrowings:
The Company's borrowings consisted of the following as of the dates indicated (amounts in thousands):
 
March 31, 2019
 
December 31, 2018
Revolving credit
$
1,571,749

 
$
1,160,161

Term loans
432,500

 
740,551

Convertible senior notes
632,500

 
632,500

 
2,636,749

 
2,533,212

Less: Debt discount and issuance costs
(50,340
)
 
(59,556
)
Total
$
2,586,409

 
$
2,473,656

The following principal payments are due on the Company's borrowings as of March 31, 2019 for the 12-month periods ending March 31, (amounts in thousands):
2020
$
10,000

2021
1,203,005

2022
10,000

2023
1,068,744

2024
345,000

Thereafter

Total
$
2,636,749

The Company believes it was in compliance with the covenants of its financing arrangements as of March 31, 2019.
North American Revolving Credit and Term Loan
On May 5, 2017, the Company amended and restated its existing credit agreement (as amended, and modified from time to time, the “North American Credit Agreement”) with Bank of America, N.A., as administrative agent, Bank of America, National Association, acting through its Canada branch, as the Canadian administrative agent, and a syndicate of lenders named therein. The total credit facility under the North American Credit Agreement includes an aggregate principal amount of $1.6 billion (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a fully-funded $432.5 million term loan, (ii) a $1,068.0 million domestic revolving credit facility, and (iii) a $50.0 million Canadian revolving credit facility. The facility includes an accordion feature for up to $500.0 million in additional commitments (at the option of the lender) and also provides for up to $25.0 million of letters of credit and a $25.0 million swingline loan sublimit that would reduce amounts available for borrowing. The term and revolving loans accrue interest, at the option of the Company, at either the base rate or the Eurodollar rate (as defined in the North American Credit Agreement) for the applicable term plus 2.50% per annum in the case of the Eurodollar rate loans and 1.50% in the case of the base rate loans. The base rate is the highest of (a) the Federal Funds Rate (as defined in the North American Credit Agreement) plus 0.50%, (b) Bank of America's prime rate, or (c) the one-month Eurodollar rate plus 1.00%. Canadian Prime Rate Loans will bear interest at a rate per annum equal to the Canadian Prime Rate plus 1.50%. The revolving credit facilities also bear an unused line fee of 0.375% per annum, payable quarterly in arrears. The loans under the North American Credit Agreement mature May 5, 2022. As of March 31, 2019, the unused portion of the North American Credit Agreement was $451.8 million. Considering borrowing base restrictions, as of March 31, 2019, the amount available to be drawn was $263.8 million.
The North American Credit Agreement is secured by a first priority lien on substantially all of the Company's North American assets. The North American Credit Agreement contains restrictive covenants and events of default including the following:
borrowings under each of the domestic revolving loan facility and the Canadian revolving loan facility are subject to separate borrowing base calculations and may not exceed 35% of the ERC of all domestic or Canadian, as applicable, core eligible asset pools, plus 55% of ERC of domestic or Canadian, as applicable, insolvency eligible asset pools, plus 75% of domestic or Canadian, as applicable, eligible accounts receivable;
the consolidated total leverage ratio cannot exceed 2.75 to 1.0 as of the end of any fiscal quarter;
the consolidated senior secured leverage ratio cannot exceed 2.25 to 1.0 as of the end of any fiscal quarter;
subject to no default or event of default, cash dividends and distributions during any fiscal year cannot exceed $20.0 million;

14


PRA Group, Inc.
Notes to Consolidated Financial Statements


subject to no default or event of default, stock repurchases during any fiscal year cannot exceed $100.0 million plus 50% of the prior year's net income;
permitted acquisitions during any fiscal year cannot exceed $250.0 million (with a $50.0 million per year sublimit for permitted acquisitions by non-loan parties);
indebtedness in the form of senior, unsecured convertible notes or other unsecured financings cannot exceed $750.0 million in the aggregate (without respect to the 2020 Notes (as defined below));
the Company must maintain positive consolidated income from operations during any fiscal quarter; and
restrictions on changes in control.
European Revolving Credit Facility and Term Loan
On October 23, 2014, European subsidiaries of the Company ("PRA Europe") entered into a credit agreement with DNB Bank ASA for a Multicurrency Revolving Credit Facility (such agreement as later amended or modified, the "European Credit Agreement"). In the first quarter of 2019, the Company entered into the Fifth Amendment and Restatement Agreement to its European Credit Agreement which, among other things, merged the term loan facility with the revolving credit facility and increased all applicable margins for the interest payable under the multicurrency revolving credit facility by 5 basis points.
Under the terms of the European Credit Agreement, the credit facility includes an aggregate amount of approximately $1.1 billion (subject to the borrowing base), accrues interest at the Interbank Offered Rate ("IBOR") plus 2.70% - 3.80% (as determined by the loan-to-value ratio ("LTV Ratio") as defined in the European Credit Agreement), bears an unused line fee, currently 1.21% per annum, of 35% of the margin, is payable monthly in arrears, and matures February 19, 2021. The European Credit Agreement also includes an overdraft facility in the aggregate amount of $40.0 million (subject to the borrowing base), which accrues interest (per currency) at the daily rates as published by the facility agent, bears a facility line fee of 0.125% per quarter, payable quarterly in arrears, and matures February 19, 2021. As of March 31, 2019, the unused portion of the European Credit Agreement (including the overdraft facility) was $234.5 million. Considering borrowing base restrictions and other covenants, as of March 31, 2019, the amount available to be drawn under the European Credit Agreement (including the overdraft facility) was $125.0 million.
The European Credit Agreement is secured by the shares of most of the Company's European subsidiaries and all intercompany loan receivables in Europe. The European Credit Agreement also contains restrictive covenants and events of default including the following:
the LTV Ratio cannot exceed 75%;
the gross interest-bearing debt ratio in Europe cannot exceed 3.25 to 1.0 as of the end of any fiscal quarter;
interest bearing deposits in AK Nordic AB cannot exceed SEK 1.2 billion; and
PRA Europe's cash collections must meet certain thresholds, measured on a quarterly basis.
Convertible Senior Notes due 2020
On August 13, 2013, the Company completed the private offering of $287.5 million in aggregate principal amount of its 3.00% Convertible Senior Notes due 2020 (the "2020 Notes"). The 2020 Notes were issued pursuant to an Indenture, dated August 13, 2013 (the "2013 Indenture"), between the Company and Regions Bank, as successor trustee. The 2013 Indenture contains customary terms and covenants, including certain events of default after which the 2020 Notes may be due and payable immediately. The 2020 Notes are senior unsecured obligations of the Company. Interest on the 2020 Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year, beginning on February 1, 2014. Prior to February 1, 2020, the 2020 Notes will be convertible only upon the occurrence of specified events. On or after February 1, 2020, the 2020 Notes will be convertible at any time. The Company does not have the right to redeem the 2020 Notes prior to maturity. As of March 31, 2019, the Company does not believe that any of the conditions allowing holders of the 2020 Notes to convert their notes have occurred.
The conversion rate for the 2020 Notes is initially 15.2172 shares per $1,000 principal amount of 2020 Notes, which is equivalent to an initial conversion price of approximately $65.72 per share of the Company's common stock, and is subject to adjustment in certain circumstances pursuant to the 2013 Indenture. Upon conversion, holders of the 2020 Notes will receive cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election. The Company's intent is to settle conversions through combination settlement (i.e., the 2020 Notes would be converted into cash up to the aggregate principal amount, and shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election, for the remainder). As a result and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds $65.72.

15


PRA Group, Inc.
Notes to Consolidated Financial Statements


The Company determined that the fair value of the 2020 Notes at the date of issuance was approximately $255.3 million, and designated the residual value of approximately $32.2 million as the equity component. Additionally, the Company allocated approximately $7.3 million of the $8.2 million 2020 Notes issuance cost as debt issuance cost and the remaining $0.9 million as equity issuance cost.
Convertible Senior Notes due 2023
On May 26, 2017, the Company completed the private offering of $345.0 million in aggregate principal amount of its 3.50% Convertible Senior Notes due 2023 (the "2023 Notes" and, together with the 2020 Notes, the "Notes"). The 2023 Notes were issued pursuant to an Indenture, dated May 26, 2017 (the "2017 Indenture"), between the Company and Regions Bank, as trustee. The 2017 Indenture contains customary terms and covenants, including certain events of default after which the 2023 Notes may be due and payable immediately. The 2023 Notes are senior unsecured obligations of the Company. Interest on the 2023 Notes is payable semi-annually, in arrears, on June 1 and December 1 of each year, beginning on December 1, 2017. Prior to March 1, 2023, the 2023 Notes will be convertible only upon the occurrence of specified events. On or after March 1, 2023, the 2023 Notes will be convertible at any time. The Company has the right, at its election, to redeem all or any part of the outstanding 2023 Notes at any time on or after June 1, 2021 for cash, but only if the last reported sale price (as defined in the 2017 Indenture) exceeds 130% of the conversion price on each of at least 20 trading days during the 30 consecutive trading days ending on and including the trading day immediately before the date the Company sends the related redemption notice. As of March 31, 2019, the Company does not believe that any of the conditions allowing holders of the 2023 Notes to convert their notes have occurred.
The conversion rate for the 2023 Notes is initially 21.6275 shares per $1,000 principal amount of 2023 Notes, which is equivalent to an initial conversion price of approximately $46.24 per share of the Company's common stock, and is subject to adjustment in certain circumstances pursuant to the 2017 Indenture. Upon conversion, holders of the 2023 Notes will receive cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election. The Company's intent is to settle conversions through combination settlement (i.e., the 2023 Notes would be converted into cash up to the aggregate principal amount, and shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election, for the remainder). As a result and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds $46.24.
The Company determined that the fair value of the 2023 Notes at the date of issuance was approximately $298.8 million, and designated the residual value of approximately $46.2 million as the equity component. Additionally, the Company allocated approximately $8.3 million of the $9.6 million 2023 Notes issuance cost as debt issuance cost and the remaining $1.3 million as equity issuance cost.
The balances of the liability and equity components of the Notes outstanding were as follows as of the dates indicated (amounts in thousands):
 
March 31, 2019
 
December 31, 2018
Liability component - principal amount
$
632,500

 
$
632,500

Unamortized debt discount
(40,769
)
 
(43,812
)
Liability component - net carrying amount
$
591,731

 
$
588,688

Equity component
$
76,216

 
$
76,216

The debt discount is being amortized into interest expense over the remaining life of the 2020 Notes and the 2023 Notes using the effective interest rate, which is 4.92% and 6.20%, respectively.
Interest expense related to the Notes was as follows for the periods indicated (amounts in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Interest expense - stated coupon rate
$
5,175

 
$
5,175

Interest expense - amortization of debt discount
3,042

 
2,877

Total interest expense - convertible senior notes
$
8,217


$
8,052


16


PRA Group, Inc.
Notes to Consolidated Financial Statements


7. Derivatives:
The Company periodically enters into derivative financial instruments, typically interest rate swap agreements, interest rate caps, and foreign currency contracts to reduce its exposure to fluctuations in interest rates on variable-rate debt and foreign currency exchange rates. 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 interest and currency rates. Derivative financial instruments are recognized at fair value in the consolidated balance sheets, in accordance with the guidance of ASC Topic 815 “Derivatives and Hedging” (“ASC 815”).
The following table summarizes the fair value of derivative instruments in the consolidated balance sheets (amounts in thousands):
 
 
March 31, 2019
 
December 31, 2018
 
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest rate contracts
 
Other liabilities
 
$
7,390

 
Other assets
 
$
44

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Other assets
 
950

 
Other assets
 
2,555

Foreign currency contracts
 
Other liabilities
 
748

 
Other liabilities
 

Interest rate contracts
 
Other assets
 
791

 
Other assets
 
735

Interest rate contracts
 
Other liabilities
 
415

 
Other liabilities
 

Derivatives designated as hedging instruments:
Changes in fair value of derivative contracts designated as cash flow hedging instruments are recognized in other comprehensive income ("OCI"). As of March 31, 2019 and December 31, 2018, the notional amount of interest rate contracts designated as cash flow hedging instruments was $661.9 million and $260.8 million, respectively. Derivatives designated as cash flow hedging instruments were evaluated and remain highly effective at March 31, 2019. The Company estimates that approximately $1.2 million of net derivative gain (loss) included in OCI will be reclassified into earnings within the next 12 months.
The following table summarizes the effects of derivatives designated as cash flow hedging instruments on the consolidated financial statements for the three months ended March 31, 2019 and 2018 (amounts in thousands):
 
 
Gain or (loss) recognized in OCI, net of tax
 
 
 
Gain or (loss) reclassified from OCI into income
 
 
Three Months Ended March 31,
 
 
 
Three Months Ended March 31,
Derivatives designated as cash flow hedging instruments
 
2019
 
2018
 
Location of gain or (loss) reclassified from OCI into income
 
2019
 
2018
Interest rate contracts
 
$
(5,795
)
 
$

 
Interest expense, net
 
$
(80
)
 
$

Derivatives not designated as hedging instruments:
Changes in fair value of derivative contracts not designated as hedging instruments are recognized in earnings. As of March 31, 2019 and December 31, 2018, the notional amount of interest rate contracts not designated as hedging instruments was $172.3 million and $169.7 million, respectively. The Company also enters into foreign currency contracts to economically hedge the foreign currency re-measurement exposure related to certain balances that are denominated in currencies other than the functional currency of the entity. As of March 31, 2019 and December 31, 2018, the notional amount of foreign currency contracts that are not designated as hedging instruments was $359.0 million and $144.7 million, respectively.

17


PRA Group, Inc.
Notes to Consolidated Financial Statements


The following table summarizes the effects of derivatives not designated as hedging instruments on the Company’s consolidated income statements for the three months ended March 31, 2019 and 2018 (amounts in thousands):
 
 
 
 
Amount of gain or (loss) recognized in income
 
 
 
 
Three Months Ended March 31,
Derivatives not designated as hedging instruments
 
Location of gain or (loss) recognized in income
 
2019
 
2018
Foreign currency contracts
 
Foreign exchange gain/(loss)
 
$
(5,256
)
 
$

Interest rate contracts
 
Interest expense, net
 
(349
)
 
$
3,673

8. Fair Value:
As defined by ASC Topic 820, "Fair Value Measurements and Disclosures" ("ASC 820"), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires the consideration of differing levels of inputs in the determination of fair values.
Those levels of input are summarized as follows:
Level 1: Quoted prices in active markets for identical assets and liabilities.
Level 2: Observable inputs other than Level 1 quoted prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3: Unobservable inputs that are supported by little or no market activity. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Financial Instruments Not Required to be Carried at Fair Value
In accordance with the disclosure requirements of ASC Topic 825, "Financial Instruments" ("ASC 825"), the table below summarizes fair value estimates for the Company's financial instruments that are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.
The carrying amounts of the financial instruments in the following table are recorded in the consolidated balance sheets at March 31, 2019 and December 31, 2018 (amounts in thousands):
 
March 31, 2019

December 31, 2018
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Financial assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
102,102

 
$
102,102

 
$
98,695

 
$
98,695

Finance receivables, net
3,177,229

 
3,464,135

 
3,084,777

 
3,410,475

Financial liabilities:
 
 
 
 
 
 
 
Interest-bearing deposits
95,314

 
95,314

 
82,666

 
82,666

Revolving lines of credit
1,571,749

 
1,571,749

 
1,160,161

 
1,160,161

Term loans
432,500

 
432,500

 
740,551

 
740,551

Convertible senior notes
591,731

 
588,503

 
588,688

 
557,122

Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The carrying amount and estimates of the fair value of the Company's debt obligations outlined above do not include any related debt issuance costs associated with the debt obligations. The Company uses the following methods and assumptions to estimate the fair value of financial instruments:

18


PRA Group, Inc.
Notes to Consolidated Financial Statements


Cash and cash equivalents: The carrying amount approximates fair value and quoted prices for identical assets can be found in active markets. Accordingly, the Company estimates the fair value of cash and cash equivalents using Level 1 inputs.
Finance receivables, net: The Company computed the estimated fair value of these receivables using proprietary pricing models that the Company utilizes to make portfolio purchase decisions. Accordingly, the Company's fair value estimates use Level 3 inputs as there is limited observable market data available and management is required to use significant judgment in its estimates.
Interest-bearing deposits: The carrying amount approximates fair value due to the short-term nature of the deposits and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
Revolving lines of credit: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
Term loans: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
Convertible senior notes: The fair value estimates for the Notes incorporate quoted market prices which were obtained from secondary market broker quotes and were derived from a variety of inputs including client orders, information from their pricing vendors, modeling software, and actual trading prices when they occur. Accordingly, the Company uses Level 2 inputs for its fair value estimates. Furthermore, in the table above, carrying amount represents the portion of the Notes classified as debt, while estimated fair value pertains to the face amount of the Notes.
Financial Instruments Required to be Carried at Fair Value
The carrying amounts in the following table are measured at fair value on a recurring basis in the accompanying consolidated balance sheets at March 31, 2019 and December 31, 2018 (amounts in thousands):
 
Fair Value Measurements as of March 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Available-for-sale investments
 
 
 
 
 
 
 
Government bonds
$
5,088

 
$

 
$

 
$
5,088

Fair value through net income
 
 
 
 
 
 
 
Mutual funds
62,192

 

 

 
62,192

Derivative contracts (recorded in other assets)

 
1,741

 

 
1,741

Liabilities:
 
 
 
 
 
 
 
Derivative contracts (recorded in other liabilities)

 
8,553

 

 
8,553

 
Fair Value Measurements as of December 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Available-for-sale investments
 
 
 
 
 
 
 
Government bonds
$
5,077

 
$

 
$

 
$
5,077

Fair value through net income
 
 
 
 
 
 
 
Mutual funds
21,753

 

 

 
21,753

Derivative contracts (recorded in other assets)

 
3,334

 

 
3,334

Available-for-sale
Government bonds: Fair value of the Company's investment in government bonds is estimated using quoted market prices. Accordingly, the Company uses Level 1 inputs.

19


PRA Group, Inc.
Notes to Consolidated Financial Statements


Fair value through net income
Mutual funds: Fair value of the Company's investment in mutual funds is estimated using quoted market prices. Accordingly, the Company uses Level 1 inputs.
Derivative contracts: The estimated fair value of the derivative contracts is determined using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves and other factors. Accordingly, the Company uses Level 2 inputs for its fair value estimates. Effective in the second quarter of 2018, the Company began to apply hedge accounting to certain of its derivative contracts. By applying hedge accounting, changes in market value are reflected as adjustments in Other Comprehensive Income. The hedges were evaluated and remain highly effective at March 31, 2019 and have initial terms of 2 to 7 years.
Investments measured using net asset value
Private equity funds: This class of investments consists of private equity funds that invest primarily in loans and securities including single-family residential debt; corporate debt products; and financially-oriented, real-estate-rich and other operating companies in the Americas, Western Europe, and Japan. These investments are subject to certain restrictions regarding transfers and withdrawals. The investments cannot be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through the liquidation of the underlying assets of the fund. The investments are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over 1 to 6 years. The fair value of these private equity funds following the Net Asset Value ("NAV") practical expedient was $7.5 million and $8.0 million as of March 31, 2019 and December 31, 2018, respectively.
9. Accumulated Other Comprehensive Loss:
The following table represents the changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2019 (amounts in thousands):
 
 
Debt Securities
 
 
 
Currency Translation
 
Accumulated Other
 
 
Available-for-sale
 
Cash Flow Hedges
 
Adjustments
 
Comprehensive Loss (1)
Balance at January 1, 2019
 
$
(83
)
 
$
44

 
$
(242,070
)
 
$
(242,109
)
Other comprehensive (loss)/income before reclassifications, net (1)
 
45

 
(5,795
)
 
(742
)
 
(6,492
)
Amounts reclassified from other comprehensive loss:
 
 
 

 
 
 

Reclassifications
 

 
80

 

 
80

Tax effect
 

 

 

 

Amounts reclassified from other comprehensive loss, net
 

 
80

 

 
80

Net current period other comprehensive (loss)/income
 
45

 
(5,715
)
 
(742
)
 
(6,412
)
Balance at March 31, 2019
 
$
(38
)
 
$
(5,671
)
 
$
(242,812
)
 
$
(248,521
)
(1) Net of deferred taxes for unrealized losses from cash flow hedges of $1.7 million at March 31, 2019.
10. Earnings per Share:
Basic earnings per share ("EPS") are computed by dividing net income available to common stockholders of PRA Group, Inc. by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of the Notes and nonvested share awards, if dilutive. For the Notes, only the conversion spread is included in the diluted EPS calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds $65.72 for the 2020 Notes or $46.24 for the 2023 Notes, neither of which occurred during the respective periods from which the Notes were issued through March 31, 2019. Share-based awards that are contingent upon the attainment of performance goals are included in the computation of diluted EPS if the effect is dilutive. The dilutive effect of nonvested shares is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the vesting of nonvested shares would be used to purchase common shares at the average market price for the period.

20


PRA Group, Inc.
Notes to Consolidated Financial Statements


The following table provides a reconciliation between the computation of basic EPS and diluted EPS for the three months ended March 31, 2019 and 2018 (amounts in thousands, except per share amounts):
 
For the Three Months Ended March 31,
 
2019
 
2018
 
Net income attributable to PRA Group, Inc.
 
Weighted
Average
Common Shares
 
EPS
 
Net income attributable to PRA Group, Inc.
 
Weighted
Average
Common Shares
 
EPS
Basic EPS
$
15,227

 
45,338

 
$
0.34

 
$
21,106

 
45,231

 
$
0.47

Dilutive effect of nonvested share awards
 
 
81

 

 
 
 
139

 

Diluted EPS
$
15,227

 
45,419

 
$
0.34

 
$
21,106

 
45,370

 
$
0.47

There were no antidilutive options outstanding for the three months ended March 31, 2019 and 2018.
11. Income Taxes:
The Company follows the guidance of FASB ASC Topic 740 "Income Taxes" ("ASC 740") as it relates to the provision for income taxes and uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
On May 10, 2017, the Company reached a settlement with the Internal Revenue Service in regards to its assertion that tax revenue recognition using the cost recovery method did not clearly reflect taxable income. In accordance with the settlement, the Company changed its tax accounting method to recognize finance receivables revenue effective with tax year 2017. Under the new method, a portion of the annual collections amortizes principal and the remaining portion is taxable income. The deferred tax liability related to the difference in timing between the new method and the cost recovery method will be incorporated evenly into the Company’s tax filings over four years effective with tax year 2017. The Company was not required to pay any interest or penalties in connection with the settlement.
At March 31, 2019, the tax years subject to examination by the major federal, state and international taxing jurisdictions are 2013 and subsequent years.
The Company intends for predominantly all foreign earnings to be indefinitely reinvested in its foreign operations. If foreign earnings were repatriated, the Company may need to accrue and pay taxes, although foreign tax credits may be available to partially reduce U.S. income taxes. The amount of cash on hand related to foreign operations with indefinitely reinvested earnings was $83.8 million and $78.6 million as of March 31, 2019 and December 31, 2018, respectively.
12. Commitments and Contingencies:
Employment agreements:
The Company has entered into employment agreements, most of which expire on December 31, 2020, with all of its U.S. executive officers and with several members of its U.S. senior management group. Such agreements provide for base salary payments as well as potential discretionary bonuses that take into consideration the Company’s overall performance against its short- and long-term financial and strategic objectives. At March 31, 2019, estimated future compensation under these agreements was approximately $14.3 million. The agreements also contain confidentiality and non-compete provisions. Outside the U.S., employment agreements are in place with employees pursuant to local country regulations. Generally, these agreements do not have expiration dates and therefore it is impractical to estimate the amount of future compensation under these agreements. Accordingly, the future compensation under these agreements is not included in the $14.3 million total above.
Forward flow agreements:
The Company is party to several forward flow agreements that allow for the purchase of nonperforming loans at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at March 31, 2019 was approximately $351.5 million.
Finance receivables:
Certain agreements for the purchase of finance receivables portfolios contain provisions that may, in limited circumstances, require the Company to refund a portion or all of the collections subsequently received by the Company on particular accounts. The potential refunds as of the balance sheet date are not considered to be significant.

21


PRA Group, Inc.
Notes to Consolidated Financial Statements


Litigation and regulatory matters:
The Company is from time to time subject to routine legal claims, proceedings and regulatory matters, most of which are incidental to the ordinary course of its business. The Company initiates lawsuits against customers and is occasionally countersued by them in such actions. Also, customers, either individually, as members of a class action, or through a governmental entity on behalf of customers, may initiate litigation against the Company in which they allege that the Company has violated a state or federal law in the process of collecting on an account. From time to time, other types of lawsuits are brought against the Company. Additionally, the Company receives subpoenas and other requests or demands for information from regulators or governmental authorities who are investigating the Company's debt collection activities.
The Company accrues for potential liability arising from legal proceedings and regulatory matters when it is probable that such liability has been incurred and the amount of the loss can be reasonably estimated. This determination is based upon currently available information for those proceedings in which the Company is involved, taking into account the Company's best estimate of such losses for those cases for which such estimates can be made. The Company's estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the number of unresolved issues in many of the proceedings (including issues regarding class certification and the scope of many of the claims), and the related uncertainty of the potential outcomes of these proceedings. In making determinations of the likely outcome of pending litigation, the Company considers many factors, including, but not limited to, the nature of the claims, the Company's experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative mechanisms, the matter's current status and the damages sought or demands made. Accordingly, the Company's estimate will change from time to time, and actual losses could be more than the current estimate.
The Company believes that the estimate of the aggregate range of reasonably possible losses in excess of the amount accrued for its legal proceedings outstanding at March 31, 2019, where the range of loss can be estimated, was not material.
In certain legal proceedings, the Company may have recourse to insurance or third-party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. Loss estimates and accruals for potential liability related to legal proceedings are typically exclusive of potential recoveries, if any, under the Company's insurance policies or third-party indemnities.
The matters described below fall outside of the normal parameters of the Company's routine legal proceedings.
Multi-State Investigation
On November 17, 2015, the Company received civil investigative demands from multiple state Attorney General offices ("AGOs") broadly relating to its debt collection practices in the U.S. The Company believes that it has fully cooperated with the investigations and discussed potential resolution of the investigations with the AGOs. In these discussions, the AGOs have taken positions with which the Company disagrees, including positions related to penalties, restitution and/or the adoption of new practices and controls in the conduct of the Company's business. If the Company is unable to resolve its differences with the AGOs, it is possible that one or more individual state AGOs may file claims against the Company. The range of loss, if any, cannot be estimated at this time.
Iris Pounds v. Portfolio Recovery Associates, LLC
On November 21, 2016, Iris Pounds filed suit against the Company in Durham County, North Carolina alleging violations of the North Carolina Prohibited Practices by Collection Agencies Act. The purported class consists of all individuals against whom the Company had obtained a judgment by default in North Carolina on or after October 1, 2009. On December 9, 2016, the Company removed the matter to the United States District Court for the Middle District of North Carolina (the "District Court"). On March 28, 2018, the District Court entered an order remanding the matter to the North Carolina state court which the Fourth Circuit Court of Appeals affirmed on May 17, 2018. On January 11, 2019, the Company filed a motion to compel arbitration with the North Carolina state court. The North Carolina state court denied the Company's motion to compel arbitration and the Company is seeking review of that decision. The range of loss, if any, cannot be estimated at this time due to the uncertainty surrounding liability, class certification and the interpretation of statutory damages.
13. Recently Issued Accounting Standards:
Recently issued accounting standards adopted:
In February 2016, FASB issued ASU 2016-02, "Leases (Topic 842) Section A - Leases: Amendments to the FASB Account Standards Codification" ("ASU 2016-02"). ASU 2016-02 requires that a lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. In July 2018, FASB

22


PRA Group, Inc.
Notes to Consolidated Financial Statements


issued ASU 2018-10, "Codification Improvements to Topic 842, Leases" and ASU 2018-11, "Leases (Topic 842) Targeted Improvements" which among other things, allowed for an alternative transition method which eliminated the requirement to restate the earliest prior period presented in an entity's financial statements. Entities that elected this transition option still adopted the new lease standard using the modified retrospective transition method required by the standard, but they recognized a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The Company adopted the new leasing standard on January 1, 2019 and as a result recorded operating lease ROU assets and lease liabilities of $72.1 million and $75.8 million, respectively. The adoption of the standard did not have any other material affect on the Company's consolidated financial statements.
In August 2016, FASB issued ASU 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)" ("ASU 2016-15"). ASU 2016-15 reduces diversity in practice of how certain transactions are classified in the statement of cash flows. The new guidance clarifies the classification of cash activity related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions received from equity-method investments, and beneficial interests in securitization transactions. The guidance also describes a predominance principle in which cash flows with aspects of more than one class that cannot be separated should be classified based on the activity that is likely to be the predominant source or use of cash flow. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2018. The new standard must be adopted using a retrospective transition method. The Company adopted ASU 2016-15 in the first quarter of 2019 which had no material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded income tax effects resulting from the 2017 Tax Cuts and Jobs Act. The amendments in this ASU also require certain disclosures about stranded income tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company’s provisional adjustments recorded during the year ended December 31, 2017 to account for the impact of the Tax Act did not result in stranded tax effects. The Company adopted ASU 2018-02 in the first quarter of 2019 which had no material impact on its consolidated financial statements.
Recently issued accounting standards not yet adopted:
In June 2016, FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) ("ASU 2016-13"), which requires 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. The main objective of ASU 2016-13 is to provide financial statement users with more decision-useful information about expected credit losses and recoveries on financial instruments measured at amortized cost held by a reporting entity at each reporting date. Under this model, an entity would recognize an allowance equal to its current estimate of all contractual cash flows that the entity does not expect to collect. The expected credit losses, and subsequent adjustments to such losses, will be recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, with the net carrying value of the financial asset presented on the consolidated balance sheet at the net amount expected to be collected. Revenue is recognized over the life of the portfolio at the initial effective interest rate. Subsequent changes in cash flow forecasts, on a present value basis, are adjusted through revenue. ASU 2016-13 supersedes ASC Topic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"), which the Company currently follows to account for income recognized on its finance receivables. Financial assets accounted for under ASC 310-30 should use a prospective transition approach where upon adoption, the amortized cost basis should be adjusted to reflect the addition of the allowance for credit losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and allows for early adoption as of the beginning of an interim or annual reporting period beginning after December 15, 2018.  The Company expects ASU 2016-13, including the effect of ongoing developments and amendments to the guidance, will have a significant impact on how it measures and records income recognized on its finance receivables and its balance sheet presentation. The Company is in the process of evaluating the impact of adoption on its consolidated financial statements including accounting policy and operational implementation issues.
In January 2017, FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 eliminates Step 2 of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair

23


PRA Group, Inc.
Notes to Consolidated Financial Statements


value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is in the process of evaluating the impact of adoption of ASU 2017-04 on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” ("ASU 2018-13"). ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of ASU 2018-13 on its consolidated financial statements.
The Company does not expect that any other recently issued accounting pronouncements will have a material effect on its consolidated financial statements.

24



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements:
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall cash collection trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:
a prolonged economic recovery or a deterioration in the economic or inflationary environment in the Americas or Europe, including the interest rate environment;
changes in the credit or capital markets, which affect our ability to borrow money or raise capital;
our ability to replace our portfolios of nonperforming loans with additional portfolios;
our ability to purchase nonperforming loans at appropriate prices;
changes in, or interpretations of, federal, state, local, or foreign laws or the administrative practices of various bankruptcy courts, which may impact our ability to collect on our nonperforming loans;
our ability to collect sufficient amounts on our nonperforming loans;
the possibility that we could incur significant allowance charges on our finance receivables;
changes in, or interpretations of, bankruptcy or collection laws that could negatively affect our business, including by causing an increase in certain types of bankruptcy filings involving liquidations, which may cause our collections to decrease;
our ability to manage risks associated with our international operations;
changes in tax laws and interpretations regarding earnings of our domestic and foreign operations;
the impact of the Tax Cuts and Jobs Act ("Tax Act"), including interpretations and determinations by tax authorities;
the possibility that we could incur goodwill or other intangible asset impairment charges;
adverse effects from the vote by the United Kingdom ("UK") to leave the European Union;
adverse outcomes in pending litigation or administrative proceedings;
our loss contingency accruals may not be adequate to cover actual losses;
the possibility that class action suits and other litigation could divert management's attention and increase our expenses;
the possibility that we could incur business or technology disruptions or cyber incidents;
our ability to collect and enforce our nonperforming loans may be limited under federal, state, local and foreign laws;
our ability to comply with existing and new regulations of the collection industry, the failure of which could result in penalties, fines, litigation, damage to our reputation, or the suspension or termination of or required modification to our ability to conduct our business;
investigations or enforcement actions by governmental authorities, including the Consumer Financial Protection Bureau ("CFPB"), which could result in changes to our business practices, negatively impact our portfolio purchasing volume, make collection of account balances more difficult or expose us to the risk of fines, penalties, restitution payments, and litigation;
the ability of our European operations to comply with the provisions of the General Data Protection Regulation;
the possibility that compliance with foreign and United States ("U.S.") laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions;
our ability to raise the funds necessary to repurchase the convertible senior notes or to settle conversions in cash;
our ability to expand, renegotiate or replace our credit facilities and our ability to comply with the covenants under our financing arrangements;
changes in interest or exchange rates, which could reduce our net income, and the possibility that future hedging strategies may not be successful, which could adversely affect our results of operations and financial condition;
the possibility that the adoption of, or delays in implementing, accounting standards could negatively impact our results of operations and financial condition; and
the risk factors discussed in our filings with the Securities and Exchange Commission ("SEC").
You should assume that the information appearing in this Quarterly Report is accurate only as of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date.
You should carefully consider the factors listed above and review the following "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as the "Risk Factors" section and "Business" section of our Annual Report on Form 10-K for the year ended December 31, 2018 ("2018 Form 10-K").

25



Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in, or implied by, this Quarterly Report could turn out to be materially different. Except as required by law, we assume no obligation to publicly update or revise our forward-looking statements after the date of this Quarterly Report and you should not expect us to do so.
Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do not, by policy, selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Frequently Used Terms
We use the following terminology throughout this Quarterly Report:
"Amortization rate" refers to cash collections applied to principal on finance receivables as a percentage of total cash collections.
"Buybacks" refers to purchase price refunded by the seller due to the return of ineligible accounts.
"Cash collections" refers to collections on our owned finance receivables portfolios.
"Cash receipts" refers to collections on our owned finance receivables portfolios plus fee income.
"Core" accounts or portfolios refer to accounts or portfolios that are nonperforming loans and are not in an insolvent status upon purchase. These accounts are aggregated separately from insolvency accounts.
"Estimated remaining collections" or "ERC" refers to the sum of all future projected cash collections on our owned finance receivables portfolios.
"Insolvency" accounts or portfolios refer to accounts or portfolios of receivables that are in an insolvent status when we purchase them and as such are purchased as a pool of insolvent accounts. These include Individual Voluntary Arrangements ("IVAs"), Trust Deeds in the UK, Consumer Proposals in Canada and bankruptcy accounts in the U.S., Canada, Germany and the UK.
"Principal amortization" refers to cash collections applied to principal on finance receivables.
"Purchase price" refers to the cash paid to a seller to acquire nonperforming loans, plus certain capitalized costs, less buybacks.
"Purchase price multiple" refers to the total estimated collections (as defined below) on owned finance receivables portfolios divided by purchase price.
"Total estimated collections" or "TEC" refers to actual cash collections, including cash sales, plus estimated remaining collections on our finance receivables portfolios.
All references in this Quarterly Report to "PRA Group," "our," "we," "us," "the Company" or similar terms are to PRA Group, Inc. and its subsidiaries.

26



Overview
We are a global financial and business services company with operations in the Americas and Europe. Our primary business is the purchase, collection and management of portfolios of nonperforming loans.
We are headquartered in Norfolk, Virginia, and as of March 31, 2019 employed 5,236 full time equivalents. Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol "PRAA."
Results of Operations
The results of operations include the financial results of the Company and all of its subsidiaries. The following table sets forth consolidated income statement amounts as a percentage of total revenues for the periods indicated (dollars in thousands):
 
For the Three Months Ended March 31,
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Income recognized on finance receivables
$
238,836

 
97.1
 %
 
$
218,624

 
97.6
 %
Fee income
6,374

 
2.6

 
5,327

 
2.4

Other revenue
667

 
0.3

 
157

 
0.1

Total revenues
245,877

 
100.0

 
224,108

 
100.0

 
 
 
 
 
 
 
 
Net allowance charges
(6,095
)
 
(2.5
)
 
(925
)
 
(0.4
)
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Compensation and employee services
79,645

 
32.4

 
81,237

 
36.2

Legal collection fees
13,059

 
5.3

 
10,669

 
4.8

Legal collection costs
35,229

 
14.3

 
22,243

 
9.9

Agency fees
14,032

 
5.7

 
8,278

 
3.7

Outside fees and services
15,248

 
6.2

 
14,158

 
6.3

Communication
13,201

 
5.4

 
11,557

 
5.2

Rent and occupancy
4,363

 
1.8

 
4,314

 
1.9

Depreciation and amortization
4,572

 
1.9

 
4,929

 
2.2

Other operating expenses
11,585

 
4.7

 
12,184

 
5.4

Total operating expenses
190,934

 
77.7

 
169,569

 
75.7

Income from operations
48,848

 
19.9

 
53,614

 
23.9

Other income and (expense):
 
 
 
 
 
 
 
Interest expense, net
(33,981
)
 
(13.8
)
 
(25,781
)
 
(11.5
)
Foreign exchange gain
6,264

 
2.5

 
1,293

 
0.6

Other
(352
)
 
(0.1
)
 
243

 
0.1

Income before income taxes
20,779

 
8.5

 
29,369

 
13.1

Income tax expense
3,867

 
1.6

 
6,137

 
2.7

Net income
16,912

 
6.9

 
23,232

 
10.4

Adjustment for net income attributable to noncontrolling interests
1,685

 
0.7

 
2,126

 
0.9

Net income attributable to PRA Group, Inc.
$
15,227

 
6.2
 %
 
$
21,106

 
9.4
 %

27



Cash Collections
Cash collections were as follows for the periods indicated:
 
For the Three Months Ended March 31,
 
Variance
(Amounts in thousands)
2019
 
2018
 
2019 vs. 2018
   Americas-Core
$
290,723

 
$
246,237

 
$
44,486

   Americas-Insolvency
44,613

 
55,280

 
(10,667
)
   Europe-Core
116,858

 
118,109

 
(1,251
)
   Europe-Insolvency
8,977

 
6,954

 
2,023

Total cash collections
$
461,171

 
$
426,580

 
$
34,591

 
 
 
 
 
 
Cash collections adjusted (1)
$
461,171

 
$
414,902

 
$
46,269

Cash collections on fully amortized pools
12,084

 
15,622

 
(3,538
)
Cash collections on cost recovery pools
3,653

 
17,524

 
(13,871
)
Net finance receivables on cost recovery at period-end
43,479

 
149,179

 
(105,700
)
(1) Cash collections adjusted refers to 2018 cash collections remeasured using 2019 exchange rates.
Cash collections were $461.2 million for the three months ended March 31, 2019, an increase of $34.6 million or 8.1%, compared to $426.6 million for the three months ended March 31, 2018. The increase was largely due to our U.S. legal collections increasing $22.1 million, or 30.6%, due primarily to the increase in the number of accounts qualifying for the legal channel, and our U.S. call center collections increasing $14.3 million, or 9.2%, due primarily to record U.S. Core portfolio purchasing in 2018. These increases were partially offset by a decline of $10.7 million, or 19.3%, in Americas Insolvency cash collections caused mainly by a decline in Americas Insolvency portfolio purchasing in 2018 not offsetting the continued runoff of the older portfolios.
Revenues
Total revenues were $245.9 million for the three months ended March 31, 2019, an increase of $21.8 million, or 9.7%, compared to total revenues of $224.1 million for the three months ended March 31, 2018.
A summary of our revenue generation during the three months ended March 31, 2019 and 2018 is as follows (amounts in thousands):
 
For the Three Months Ended March 31,
 
2019
 
2018
Cash collections
$
461,171

 
$
426,580

Principal amortization
(222,335
)
 
(207,956
)
Income recognized on finance receivables
238,836

 
218,624

Fee income
6,374

 
5,327

Other revenue
667

 
157

Total revenues
$
245,877

 
$
224,108

Income recognized on finance receivables
Income recognized on finance receivables was $238.8 million for the three months ended March 31, 2019, an increase of $20.2 million or 9.2% compared to income recognized on finance receivables of $218.6 million for the three months ended March 31, 2018. The increase was primarily the result of the impact of record Americas Core purchasing in 2018 and the impact of overperformance on select Americas Core and Europe Core portfolios which resulted in yield increases on certain pools. This was partially offset by a decline in our Americas Insolvency revenue caused mainly by reduced Americas Insolvency portfolio purchasing in 2018 not offsetting the continued runoff of our older portfolios.
We have revised the presentation of our consolidated income statements for the prior year reporting period by reclassifying net allowance charges on our finance receivables as a line item separate from revenues. As a result, we no longer include net allowance charges as part of "Income recognized on finance receivables, net" on the face of our consolidated income statements and report income recognized on finance receivables gross of valuation allowances.


28



Fee income
Fee income was $6.4 million in the three months ended March 31, 2019, an increase of $1.1 million or 20.8%, compared to $5.3 million in the three months ended March 31, 2018. The increase is primarily attributable to settlement timing in our claims processing company, Claims Compensation Bureau.
Other revenue
Other revenue was $0.7 million and $0.2 million in the three months ended March 31, 2019 and 2018, respectively.
Net Allowance Charges
Net allowance charges are recorded for significant decreases in expected cash flows or a change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the three months ended March 31, 2019, we recorded net allowance charges of $6.1 million consisting of $4.8 million on our Americas Core portfolios, primarily on vintages purchased between 2013-2015, and $1.3 million on our European portfolios. For the three months ended March 31, 2018, we recorded net allowance charges of $0.9 million, consisting of net allowance reversals of $0.7 million on our Americas Core portfolios and net allowance charges of $0.2 million and $1.4 million on our Americas Insolvency and our European Core portfolios, respectively.
Operating Expenses
Total operating expenses were $190.9 million for the three months ended March 31, 2019, an increase of $21.3 million or 12.6%, compared to operating expenses of $169.6 million for the three months ended March 31, 2018.
Compensation and employee services
Compensation and employee services expenses were $79.6 million for the three months ended March 31, 2019, a decrease of $1.6 million, or 2.0%, compared to $81.2 million for the three months ended March 31, 2018. Compensation expense decreased primarily as a result of the impact of the deconsolidation of RCB Investimentos S.A. ("RCB") in December 2018. Additionally, U.S. call centers compensation expenses declined compared to the first quarter of 2018 as the total number of collectors decreased, but this was offset by higher medical costs. Total full-time equivalents decreased to 5,236 as of March 31, 2019, compared to 5,639 as of March 31, 2018.
Legal collection fees
Legal collection fees represent contingent fees incurred for the cash collections generated by our independent third-party attorney network. Legal collection fees were $13.1 million for the three months ended March 31, 2019, an increase of $2.4 million or 22.4%, compared to legal collection fees of $10.7 million for the three months ended March 31, 2018. The increase was primarily due to an increase in external legal cash collections in the U.S.
Legal collection costs
Legal collection costs primarily consist of costs paid to courts where a lawsuit is filed. Legal collection costs were $35.2 million for the three months ended March 31, 2019, an increase of $13.0 million or 58.6%, compared to legal collection costs of $22.2 million for the three months ended March 31, 2018. The increase was primarily due to additional court costs related to the expansion of the number of accounts qualifying for the legal channel in the U.S. partially offset by a reduction in Europe.  This expansion is the result of a change in the nature of the accounts purchased, the regulatory environment and consumer behavior.
Agency fees
Agency fees primarily represent third-party collection fees incurred mainly outside the U.S. Agency fees were $14.0 million for the three months ended March 31, 2019, an increase of $5.7 million or 68.7%, compared to $8.3 million for the three months ended March 31, 2018. The increase was primarily the result of higher volumes of servicing activity in areas where we utilize third party agencies to collect. Additionally, with the sale of the RCB operating platform, certain expenses in other line items shifted from fixed to variable and are now recorded on the agency fees line.
Outside fees and services
Outside fees and services expenses were $15.2 million for the three months ended March 31, 2019, an increase of $1.0 million or 7.0%, compared to outside fees and services expenses of $14.2 million for the three months ended March 31, 2018.

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Communication
Communication expenses were $13.2 million for the three months ended March 31, 2019, an increase of $1.6 million or 13.8%, compared to communication expenses of $11.6 million for the three months ended March 31, 2018. These increases are primarily the result of increased letter and call volume associated with record portfolio purchases in Americas Core in 2018.
Rent and occupancy
Rent and occupancy expenses were $4.4 million for the three months ended March 31, 2019, an increase of $0.1 million or 2.3%, compared to rent and occupancy expense of $4.3 million for the three months ended March 31, 2018.
Depreciation and amortization
Depreciation and amortization expenses were $4.6 million for the three months ended March 31, 2019, a decrease of $0.3 million or 6.1% , compared to depreciation and amortization expenses of $4.9 million for the three months ended March 31, 2018.
Other operating expenses
Other operating expenses were $11.6 million for the three months ended March 31, 2019, a decrease of $0.6 million, or 4.9%, compared to other operating expenses of $12.2 million for the three months ended March 31, 2018.
Interest Expense, Net
Interest expense, net was $34.0 million during the three months ended March 31, 2019, an increase of $8.2 million or 31.8%, compared to $25.8 million for the three months ended March 31, 2018. The increase was primarily due to higher average interest rates paired with higher levels of average borrowings outstanding on our debt obligations in addition to the impact of the changes in the fair value of interest rate swap agreements not designated as hedging instruments.
Interest expense, net consisted of the following for the three months ended March 31, 2019 and 2018 (amounts in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
 
Change
Stated interest on debt obligations and unused line fees
$
23,397

 
$
20,043

 
$
3,354

Coupon interest on convertible debt
5,175

 
5,175

 

Amortization of convertible debt discount
3,042

 
2,877

 
165

Amortization of loan fees and other loan costs
2,636

 
2,553

 
83

Change in fair value on derivatives
349

 
(3,673
)