PRA Group Earnings 2020-03-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

Document

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2020

☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to ________

Commission File Number: 000-50058

PRA Group, Inc.

(Exact name of registrant as specified in its charter)



Delaware				75-3078675
(State or other jurisdiction of incorporation or organization)				(I.R.S. Employer Identification No.)

120 Corporate Boulevard

Norfolk, Virginia 23502

(Address of principal executive offices)

(888) 772-7326

(Registrant's Telephone No., including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	PRAA	NASDAQ Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨

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

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

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

Table of Contents



Part I. Financial Information

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Income Statements	4
	Consolidated Statements of Comprehensive Income/(Loss)	5
	Consolidated Statement of Changes in Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
	1. Organization and Business	8
	2. Change in Accounting Principle	10
	3. Finance Receivables, net	11
	4. Investments	14
	5. Goodwill and Intangible Assets, net	15
	6. Leases	15
	7. Borrowings	16
	8. Derivatives	19
	9. Fair Value	20
	10. Accumulated Other Comprehensive Loss	23
	11. Earnings per Share	23
	12. Income Taxes	24
	13. Commitments and Contingencies	24
	14. Recently Issued Accounting Standards	25
	15. Subsequent Events	26
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	45

Part II. Other Information

Item 1.	Legal Proceedings	46
Item 1A.	Risk Factors	46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	47
Item 6.	Exhibits	47

Signatures		48

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

PRA Group, Inc.

Consolidated Balance Sheets

March 31, 2020 and December 31, 2019

(Amounts in thousands)



	(unaudited)
	March 31, 2020			December 31, 2019
Assets
Cash and cash equivalents	$	179,995		$	119,774
Investments	52,711			56,176
Finance receivables, net	3,408,074			3,514,165
Other receivables, net	11,383			10,606
Income taxes receivable	29,372			17,918
Deferred tax asset, net	63,911			63,225
Property and equipment, net	59,882			56,501
Right-of-use assets	66,655			68,972
Goodwill	418,565			480,794
Intangible assets, net	4,003			4,497
Other assets	55,548			31,263
Total assets	$	4,350,099		$	4,423,891
Liabilities and Equity
Liabilities:
Accounts payable	$	4,328		$	4,258
Accrued expenses	76,583			88,925
Income taxes payable	18,596			4,046
Deferred tax liability, net	69,845			85,390
Lease liabilities	71,102			73,377
Interest-bearing deposits	97,465			106,246
Borrowings	2,828,002			2,808,425
Other liabilities	63,502			26,211
Total liabilities	3,229,423			3,196,878
Equity:
Preferred stock, $0.01 par value, 2,000 shares authorized, no shares issued and outstanding	—			—
Common stock, $0.01 par value, 100,000 shares authorized, 45,540 shares issued and outstanding at March 31, 2020; 100,000 shares authorized, 45,416 shares issued and outstanding at December 31, 2019	455			454
Additional paid-in capital	67,021			67,321
Retained earnings	1,381,766			1,362,631
Accumulated other comprehensive loss	(375,617		)	(261,018		)
Total stockholders' equity - PRA Group, Inc.	1,073,625			1,169,388
Noncontrolling interest	47,051			57,625
Total equity	1,120,676			1,227,013
Total liabilities and equity	$	4,350,099		$	4,423,891

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

PRA Group, Inc.

Consolidated Income Statements

For the three months ended March 31, 2020 and 2019

(unaudited)

(Amounts in thousands, except per share amounts)



	Three Months Ended March 31,
	2020			2019
Revenues:
Portfolio income	$	262,022		$	—
Changes in expected recoveries	(12,816		)	—
Income recognized on finance receivables	—			238,836
Fee income	2,209			6,374
Other revenue	369			667
Total revenues	251,784			245,877

Net allowance charges	—			(6,095		)

Operating expenses:
Compensation and employee services	75,171			79,645
Legal collection fees	14,572			13,059
Legal collection costs	34,447			35,229
Agency fees	13,376			14,032
Outside fees and services	19,394			15,248
Communication	13,511			13,201
Rent and occupancy	4,484			4,363
Depreciation and amortization	4,084			4,572
Other operating expenses	12,205			11,585
Total operating expenses	191,244			190,934
Income from operations	60,540			48,848
Other income and (expense):
Interest expense, net	(37,211		)	(33,981		)
Foreign exchange gain	2,283			6,264
Other	(76		)	(352		)
Income before income taxes	25,536			20,779
Income tax expense	3,100			3,867
Net income	22,436			16,912
Adjustment for net income attributable to noncontrolling interests	3,301			1,685
Net income attributable to PRA Group, Inc.	$	19,135		$	15,227
Net income per common share attributable to PRA Group, Inc.:
Basic	$	0.42		$	0.34
Diluted	$	0.42		$	0.34
Weighted average number of shares outstanding:
Basic	45,452			45,338
Diluted	45,784			45,419

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

PRA Group, Inc.

Consolidated Statements of Comprehensive Income/(Loss)

For the three months ended March 31, 2020 and 2019

(unaudited)

(Amounts in thousands)



	Three Months Ended March 31,
	2020			2019
Net income	$	22,436		$	16,912
Other comprehensive (loss)/income, net of tax:
Currency translation adjustments	(108,076		)	(1,173		)
Cash flow hedges	(20,568		)	(5,715		)
Debt securities available-for-sale	170			45
Other comprehensive loss	(128,474		)	(6,843		)
Total comprehensive (loss)/income	(106,038		)	10,069
Less comprehensive (loss)/ income attributable to noncontrolling interests	(10,574		)	1,254
Comprehensive (loss)/income attributable to PRA Group, Inc.	$	(95,464	)	$	8,815

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

PRA Group, Inc.

Consolidated Statements of Changes in Equity

For the three months ended March 31, 2020 and March 31, 2019

(unaudited)

(Amounts in thousands)



	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive (Loss)			Noncontrolling Interest			Total Equity
	Shares	Amount		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive (Loss)			Noncontrolling Interest			Total Equity
Balance at December 31, 2019	45,416	$	454	$	67,321		$	1,362,631	$	(261,018	)	$	57,625		$	1,227,013
Components of comprehensive income, net of tax:
Net income	—	—		—			19,135		—			3,301			22,436
Currency translation adjustments	—	—		—			—		(94,201		)	(13,875		)	(108,076		)
Cash flow hedges	—	—		—			—		(20,568		)	—			(20,568		)
Debt securities available-for-sale	—	—		—			—		170			—			170
Vesting of restricted stock	124	1		—			—		—			—			1
Share-based compensation expense	—	—		2,857			—		—			—			2,857
Employee stock relinquished for payment of taxes	—	—		(3,157		)	—		—			—			(3,157		)
Balance at March 31, 2020	45,540	$	455	$	67,021		$	1,381,766	$	(375,617	)	$	47,051		$	1,120,676



	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive (Loss)			Noncontrolling Interest			Total Equity
	Shares	Amount		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive (Loss)			Noncontrolling Interest			Total Equity
Balance at December 31, 2018	45,304	$	453	$	60,303		$	1,276,473	$	(242,109	)	$	28,849		$	1,123,969
Components of comprehensive income, net of tax:
Net income	—	—		—			15,227		—			1,685			16,912
Currency translation adjustments	—	—		—			—		(742		)	(431		)	(1,173		)
Cash flow hedges	—	—		—			—		(5,715		)	—			(5,715		)
Debt securities available-for-sale	—	—		—			—		45			—			45
Distributions to noncontrolling interest	—	—		—			—		—			(6,877		)	(6,877		)
Contributions from noncontrolling interest	—	—		—			—		—			89			89
Vesting of restricted stock	80	1		(1		)	—		—			—			—
Share-based compensation expense	—	—		2,314			—		—			—			2,314
Employee stock relinquished for payment of taxes	—	—		(1,437		)	—		—			—			(1,437		)
Other	—	—		(2,088		)	—		—			—			(2,088		)
Balance at March 31, 2019	45,384	$	454	$	59,091		$	1,291,700	$	(248,521	)	$	23,315		$	1,126,039

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

PRA Group, Inc.

Consolidated Statements of Cash Flows

For the three months ended March 31, 2020 and 2019

(unaudited)

(Amounts in thousands)



	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities:
Net income	$	22,436		$	16,912
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation expense	2,857			2,314
Depreciation and amortization	4,084			4,572
Amortization of debt discount and issuance costs	5,857			5,678
Changes in expected recoveries	12,816			—
Deferred income taxes	(12,755		)	(9,994		)
Net unrealized foreign currency transactions	24,873			(6,632		)
Fair value in earnings for equity securities	(7,566		)	(2,139		)
Net allowance charges	—			6,095
Other	(135		)	—
Changes in operating assets and liabilities:
Other assets	(1,242		)	550
Other receivables, net	(545		)	(1,289		)
Accounts payable	221			(548		)
Income taxes payable, net	3,835			(13,040		)
Accrued expenses	(8,990		)	1,553
Other liabilities	994			10,888
Right of use asset/lease liability	66			—
Other, net	—			37
Net cash provided by operating activities	46,806			14,957
Cash flows from investing activities:
Purchases of property and equipment	(7,639		)	(4,493		)
Acquisition of finance receivables	(271,845		)	(264,632		)
Recoveries applied to negative allowance	236,656			—
Collections applied to principal on finance receivables	—			222,335
Proceeds from/(purchase of) investments	36			(82,616		)
Proceeds from sales and maturities of investments	612			42,940
Business acquisition, net of cash acquired	—			(57,610		)
Proceeds from sale of subsidiaries, net	—			31,177
Net cash used in investing activities	(42,180		)	(112,899		)
Cash flows from financing activities:
Proceeds from lines of credit	315,118			537,891
Principal payments on lines of credit	(227,459		)	(132,486		)
Principal payments on notes payable and long-term debt	(2,500		)	(305,665		)
Payments of origination cost and fees	(8,203		)	—
Tax withholdings related to share-based payments	(3,156		)	(1,437		)
Distributions paid to noncontrolling interest	—			(6,877		)
Net (decrease)/increase in interest-bearing deposits	(1,658		)	16,126
Other financing activities	—			(2,088		)
Net cash provided by financing activities	72,142			105,464
Effect of exchange rate on cash	(16,575		)	(4,115		)
Net increase in cash and cash equivalents	60,193			3,407
Cash and cash equivalents, beginning of period	123,807			98,695
Cash and cash equivalents, end of period	$	184,000		$	102,102
Supplemental disclosure of cash flow information:
Cash paid for interest	$	30,502		$	25,479
Cash paid for income taxes	12,100			27,293
Cash, cash equivalents and restricted cash reconciliation:
Cash and cash equivalents per Consolidated Balance Sheets	$	179,995		$	102,102
Restricted cash included in Other assets per Consolidated Balance Sheets	4,005			—
Total cash, cash equivalents and restricted cash	$	184,000		$	102,102

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

1. Organization and Business:

As used herein, the terms "PRA Group," the "Company," or similar terms refer to PRA Group, Inc. and its subsidiaries.

PRA Group, Inc., a Delaware corporation, is a global financial and business services company with operations in the Americas, Europe, and Australia. The Company's primary business is the purchase, collection, and management of portfolios of nonperforming loans. The Company also provides fee-based services on class action claims recoveries and by servicing consumer bankruptcy accounts in the United States ("U.S.").

On March 11, 2020, due to the global outbreak of the novel coronavirus ("COVID-19"), the World Health Organization declared a global pandemic. Since the initial outbreak was reported, all U.S. states have declared states of emergency and COVID-19 has spread to all countries in which the Company operates. As a result, the Company implemented business continuity plans including remote work practices where possible and have leveraged existing space to follow social distancing recommendations. To date, the pandemic has not prevented the Company's ability to operate the business and the Company has continued to take steps necessary to minimize impact or disruption to the Company's global operations.

The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and include the accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Under the guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") ASC Topic 280 "Segment Reporting" ("ASC 280"), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and, therefore, it has one reportable segment, accounts receivable management. This conclusion is based on similarities among the operating units, including economic characteristics, the nature of the products and services, the nature of the production processes, the types or class of customer for their products and services, the methods used to distribute their products and services and the nature of the regulatory environment.

The following table shows the amount of revenue generated for the three months ended March 31, 2020 and 2019, and long-lived assets held at March 31, 2020 and 2019, both for the U.S., the Company's country of domicile, and outside of the U.S. (amounts in thousands):



	As of and for the				As of and for the
	Three Months Ended March 31, 2020				Three Months Ended March 31, 2019
	Revenues		Long-Lived Assets		Revenues		Long-Lived Assets
United States	$	153,335	$	115,053	$	167,576	$	110,643
United Kingdom	36,340		3,076		29,756		3,993
Other ⁽¹⁾	62,109		8,408		48,545		10,377
Total	$	251,784	$	126,537	$	245,877	$	125,013

(1) None of the countries included in "Other" comprise greater than 10% of the Company's consolidated revenues or long-lived assets.

Revenues are attributed to countries based on the location of the related operations. Long-lived assets consist of net property and equipment and right-of-use assets. The Company reports revenues earned from nonperforming loan acquisitions and collection activities, fee-based services and investments. For additional information on the Company's investments, see Note 4. It is impracticable for the Company to report further breakdowns of revenues from external customers by product or service.

Beginning January 1, 2020, the Company implemented Accounting Standards Update ("ASU") ASU 2016-13, "Financial Instruments - Credit Losses" ("Topic 326") ("ASU 2016-13") and ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (“ASU 2019-11”), collectively referred to as "ASC Topic 326", on a prospective basis. Prior to January 1, 2020, the vast majority of the Company's investment in finance receivables were accounted for under ASC 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). Refer to Note 2.

Finance receivables and income recognition: The Company accounts for its investment in finance receivables at amortized cost under the guidance of ASC Topic 310 “Receivables” (“ASC Topic 310”) and ASC Topic 326-20 “Financial Instruments - Credit Losses - Measured at Amortized Cost” (“ASC Topic 326-20”). ASC Topic 326-20 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.

Credit quality information: The Company acquires portfolios of accounts that have experienced deterioration of credit quality between origination and the Company's acquisition of the accounts. The amount paid for a portfolio reflects the Company's determination that it is probable the Company will be unable to collect all amounts due according to an account's contractual terms.

PRA Group, Inc.

Notes to Consolidated Financial Statements

The Company accounts for the portfolios in accordance with the guidance for purchased credit deteriorated ("PCD") assets. The initial allowance for credit losses is added to the purchase price rather than recorded as a credit loss expense. The Company has established a policy to writeoff the amortized cost of individual assets when it deems probable that it will not collect on an individual asset. Due to the deteriorated credit quality of the individual accounts, the Company may writeoff the unpaid principal balance of all accounts in a portfolio at the time of acquisition. However, when the Company has an expectation of collecting cash flows at the portfolio level, a negative allowance is established for expected recoveries at an amount not to exceed the amount paid for the financial portfolios.

Portfolio segments: The Company develops systematic methodologies to determine its allowance for credit losses at the portfolio segment level. The Company’s nonperforming loan portfolio segments consist of two broad categories: Core and Insolvency. The Company’s Core portfolios contain loan accounts that are in default, which were purchased at a substantial discount to face value because either the credit grantor and/or other third-party collection agencies have been unsuccessful in collecting the full balance owed. The Company’s Insolvency portfolios contain loan accounts that are in default where the customer is involved in a bankruptcy or insolvency proceeding and were purchased at a substantial discount to face value. Each of the two broad portfolio segments of purchased nonperforming loan portfolios consist of large numbers of homogeneous receivables with similar risk characteristics.

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

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

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

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

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

Agreements to acquire the aforementioned receivables include general representations and warranties from the sellers covering matters such as account holder death or insolvency and accounts settled or disputed prior to sale. The representation and warranty period permitting the return of these accounts from the Company to the seller is typically 90 to 180 days, with certain international agreements extending as long as 24 months. Any funds received from the seller as a return of purchase price are referred to as buybacks. Buyback funds are included in changes in expected recoveries when received. In some cases, the seller will replace the returned accounts with new accounts in lieu of returning the purchase price. In that case, the old account is removed from the pool and the new account is added.

Fees paid to third parties other than the seller related to the direct acquisition of a portfolio of accounts are expensed when incurred.

PRA Group, Inc.

Notes to Consolidated Financial Statements

Goodwill and intangible assets: Goodwill, in accordance with ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), is not amortized but rather is reviewed for impairment annually or more frequently if indicators of potential impairment exist. On January 1, 2020, the Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). The Company performs its annual assessment of goodwill as of October 1. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an impairment loss is recognized. The loss will be recorded at the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the respective reporting unit.

Basis of presentation: The accompanying interim financial statements have been prepared in accordance with the instructions for Quarterly Reports on Form 10-Q and, therefore, do not include all information and Notes to the Consolidated Financial Statements necessary for a complete presentation of financial position, results of operations, comprehensive income/(loss) and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the Company's Consolidated Balance Sheets as of March 31, 2020, its Consolidated Income Statements, and Statements of Comprehensive Income/(Loss) for the three months ended March 31, 2020 and 2019, and its Statements of Changes in Equity and Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019, have been included. The Consolidated Income Statements of the Company for the three months ended March 31, 2020 may not be indicative of future results.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K").

2. Change in Accounting Principle:

Financial Instruments - Credit Losses

In June 2016, FASB issued ASU 2016-13, which introduced a new methodology requiring the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity debt securities and other receivables measured at amortized cost. The new methodology requires an entity to present on the balance sheet the net amount expected to be collected. This methodology replaces the multiple impairment methods under prior GAAP, including for purchased credit impaired ("PCI") assets, and introduces the concept of PCD assets. The Company's PCI assets previously accounted for under ASC 310-30 are now accounted for as PCD assets upon adoption of ASU 2016-13. ASU 2016-13 requires PCD assets to be recognized at their purchase price plus the allowance for credit losses expected at the time of acquisition. ASU 2016-13 also requires that financial assets should be written off when they are deemed uncollectible.

In November 2019, FASB issued ASU 2019-11, which amended the PCD asset guidance in ASU 2016-13 to clarify that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account. Additionally, they should not exceed the aggregate of amounts previously written off and expected to be written off by an entity. Further, ASU 2019-11 clarifies that a negative allowance is recognized when an entity determines, after a full or partial writeoff of the amortized cost basis, that it will recover all or a portion of the basis.

The Company adopted ASC Topic 326 on January 1, 2020 on a prospective basis. In accordance with the guidance, substantially all the Company’s PCI assets were transitioned using the PCD guidance, with immediate writeoff of the amortized cost basis of individual accounts and establishment of a negative allowance for expected recoveries equal to the amortized cost basis written off. Accounts previously accounted for under ASC Topic 310-30, were aggregated into annual pools based on similar risk characteristics and an effective interest rate was established based on the estimated remaining cash flows of the annual pool. The immediate writeoff and subsequent recognition of expected recoveries had no impact on the Company’s Consolidated Income Statements or the Consolidated Balance Sheets at the date of adoption. The Company develops its estimate of expected recoveries by applying discounted cash flow methodologies to its ERC and recognizes income over the estimated life of the pool at the constant effective interest rate of the pool. Changes (favorable and unfavorable) in expected cash flows are recognized in current period earnings by adjusting the present value of the expected recoveries.

PRA Group, Inc.

Notes to Consolidated Financial Statements

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



Amortized cost	$	3,514,165
Allowance for credit losses	125,757,689
Noncredit discount	3,240,131
Face value	$	132,511,985

Allowance for credit losses	$	125,757,689
Writeoffs, net	(125,757,689		)
Expected recoveries	3,514,165
Initial negative allowance for expected recoveries	$	3,514,165

3. Finance Receivables, net:

Finance Receivables, net after the adoption of ASC Topic 326 (refer to Note 2)

Finance receivables, net consists of the following at March 31, 2020 (amounts in thousands):



Amortized cost	$	—
Negative allowance for expected recoveries⁽¹⁾	3,408,074
Balance at end of period	$	3,408,074

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

Changes in the negative allowance for expected recoveries by portfolio segment for the three months ended March 31, 2020 were as follows (amounts in thousands):



	Core			Insolvency			Total
Balance at beginning of period	$	3,051,426		$	462,739		$	3,514,165
Initial negative allowance for expected recoveries - portfolio acquisitions ⁽¹⁾	233,687			39,550			273,237
Foreign currency translation adjustment	(120,214		)	(9,642		)	(129,856		)
Recoveries applied to negative allowance ⁽²⁾	(199,038		)	(37,618		)	(236,656		)
Changes in expected recoveries ⁽³⁾	(16,477		)	3,661			(12,816		)
Balance at end of period	$	2,949,384		$	458,690		$	3,408,074

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

Portfolio acquisitions for the three months ended March 31, 2020 were as follows (amounts in thousands):



	Core			Insolvency			Total
Face value	$	1,891,142		$	177,454		$	2,068,596
Noncredit discount	(213,289		)	(13,032		)	(226,321		)
Allowance for credit losses at acquisition	(1,444,166		)	(124,872		)	(1,569,038		)
Purchase price	$	233,687		$	39,550		$	273,237

PRA Group, Inc.

Notes to Consolidated Financial Statements

The initial negative allowance recorded on portfolio acquisitions for the three months ended March 31, 2020 was as follows (amounts in thousands):



	Core			Insolvency			Total
Allowance for credit losses at acquisition	$	(1,444,166	)	$	(124,872	)	$	(1,569,038	)
Writeoffs, net	1,444,166			124,872			1,569,038
Expected recoveries	233,687			39,550			273,237
Initial negative allowance for expected recoveries	$	233,687		$	39,550		$	273,237

(2) Recoveries applied to negative allowance

Recoveries applied to the negative allowance were computed as follows for the three months ended March 31, 2020 (amounts in thousands):



	Core		Insolvency		Total
Recoveries^(a)	$	440,694	$	57,984	$	498,678
Less - amounts reclassified to portfolio income ^(b)	241,656		20,366		262,022
Recoveries applied to negative allowance	$	199,038	$	37,618	$	236,656

(a) Recoveries includes cash collections, buybacks and other adjustments.

(b) The Company reported income on expected recoveries based on the constant effective interest rate in portfolio income on the Company's Consolidated Income Statements.

(3) Changes in expected recoveries

Changes in expected recoveries consists of the following for the three months ended March 31, 2020 (amounts in thousands):



	Core			Insolvency			Total
Changes in expected future recoveries	$	(20,524	)	$	(102	)	$	(20,626	)
Recoveries received in excess/(shortfall) of forecast	4,047			3,763			7,810
Changes in expected recoveries	$	(16,477	)	$	3,661		$	(12,816	)

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

Finance Receivables, net prior to adoption of ASC Topic 326

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

Changes in finance receivables, net for the three months ended March 31, 2019 were as follows (amounts in thousands):



	Three Months Ended March 31, 2019
Balance at beginning of period	$	3,084,777
Acquisitions of finance receivables ⁽¹⁾	313,446
Foreign currency translation adjustment	7,436
Cash collections	(461,171		)
Income recognized on finance receivables	238,836
Net allowance charges	(6,095		)
Balance at end of period	$	3,177,229


(1)	Includes portfolio purchases adjusted for buybacks and acquisition related costs, and portfolios from the acquisition of a business in Canada made during the first quarter of 2019.

During the three months ended March 31, 2019, the Company acquired finance receivable portfolios with a face value of $4.7 billion for $318.8 million. At March 31, 2019, the ERC on the receivables acquired during the three months ended March 31, 2019 were $541.1 million.

At the time of acquisition and each quarter thereafter, the life of each quarterly accounting pool is estimated based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon current projections, cash collections expected to be applied to principal are estimated to be as follows for the twelve-month periods ending March 31, (amounts in thousands):



2020	$	850,955
2021	718,010
2023	562,256
2024	426,004
2025	258,793
2026	137,843
2027	77,642
2028	47,138
2029	38,084
2030	28,474
Thereafter	32,030
Total ERC expected to be applied to principal	$	3,177,229

At March 31, 2019, the Company had aggregate net finance receivables balances in pools accounted for under the cost recovery method of $43.5 million.

Accretable yield represented the amount of income on finance receivables the Company expected to recognize over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represented the original expected accretable yield on portfolios acquired during the period. Net reclassifications from nonaccretable difference to accretable yield primarily resulted from the increase in the Company's estimate of future cash flows. When applicable, net reclassifications to nonaccretable difference from accretable yield resulted from the decrease in the Company's estimates of future cash flows and allowance charges that together exceeded the increase in the Company's estimate of future cash flows.

Changes in accretable yield for the three months ended March 31, 2019 were as follows (amounts in thousands):



	Three Months Ended March 31, 2019
Balance at beginning of period	$	3,058,445
Income recognized on finance receivables	(238,836		)
Net allowance charges	6,095
Additions from portfolio acquisitions	235,814
Reclassifications from nonaccretable difference	19,161
Foreign currency translation adjustment	(511		)
Balance at end of period	$	3,080,168

PRA Group, Inc.

Notes to Consolidated Financial Statements

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



	Three Months Ended March 31, 2019
Beginning balance	$	257,148
Allowance charges	7,977
Reversal of previously recorded allowance charges	(1,882		)
Net allowance charges	6,095
Foreign currency translation adjustment	81
Ending balance	$	263,324

4. Investments:

Investments consisted of the following at March 31, 2020 and December 31, 2019 (amounts in thousands):



	March 31, 2020		December 31, 2019
Debt securities
Available-for-sale	$	4,347	$	5,052
Equity securities
Private equity funds	7,141		7,218
Mutual funds	33,353		33,677
Equity method investments	7,870		10,229
Total investments	$	52,711	$	56,176

Debt Securities

Available-for-sale

Government bonds: The Company's investments in government bonds are classified as available-for-sale and are stated at fair value.

The amortized cost and estimated fair value of investments in debt securities at March 31, 2020 and December 31, 2019 were as follows (amounts in thousands):



	March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Aggregate Fair Value
Available-for-sale
Government bonds	$	4,219	$	128	$	—	$	4,347

	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Aggregate Fair Value
Available-for-sale
Government bonds	$	5,095	$	—	$	43	$	5,052

Equity Securities

Investments in private equity funds: Investments in private equity funds represent limited partnerships in which the Company has less than a 1% interest.

Mutual funds: The Company invests certain excess funds held in Brazil in a Brazilian real denominated mutual fund benchmarked to the U.S. dollar that invests principally in Brazilian fixed income securities. The investments are carried at fair value based on quoted market prices. Gains and losses from this investment are included as a foreign exchange component of other income and (expense) in the Company's Consolidated Income Statements.

Unrealized gains and losses: Net unrealized gains on the Company's equity securities were $7.6 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively.

PRA Group, Inc.

Notes to Consolidated Financial Statements

Equity Method Investments

The Company has an 11.7% interest in RCB Investimentos S.A. ("RCB"), a servicing platform for nonperforming loans in Brazil. This investment is accounted for on the equity method because the Company exercises significant influence over RCB’s operating and financial activities. Accordingly, the Company’s investment in RCB is adjusted for the Company’s proportionate share of RCB’s earnings or losses.

5. Goodwill and Intangible Assets, net:

In connection with the Company's business acquisitions, the Company acquired certain tangible and intangible assets. Intangible assets resulting from these acquisitions include client and customer relationships, non-compete agreements, trademarks and technology. The Company performs an annual review of goodwill as of October 1 of each year or more frequently if indicators of impairment exist. The Company performed its most recent annual review as of October 1, 2019 and concluded that no goodwill impairment was necessary. The Company performed its quarterly assessment by evaluating whether a triggering event had occurred as of March 31, 2020 considering current market conditions resulting from the global COVID-19 pandemic. The Company concluded that no triggering event had occurred at March 31, 2020 and will continue to monitor the market for any adverse conditions resulting from the COVID-19 pandemic.

The following table represents the changes in goodwill for the three months ended March 31, 2020 and 2019 (amounts in thousands):



	Three Months Ended March 31,
	2020			2019
Goodwill:
Balance at beginning of period	$	480,794		$	464,116
Changes:
Acquisition ⁽¹⁾	—			13,653
Foreign currency translation adjustment	(62,229		)	2,749
Net change in goodwill	(62,229		)	16,402

Balance at end of period	$	418,565		$	480,518

(1) The $13.7 million addition to goodwill during the three months ended March 31, 2019, is related to the acquisition of a business in Canada.

6. Leases:

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

As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

The components of lease expense for the three months ended March 31, 2020 and 2019, were as follows (amounts in thousands):



	Three months ended March 31,
	2020		2019
Operating lease expense	$	3,063	$	2,863
Short-term lease expense	693		842
Total lease expense	$	3,756	$	3,705

PRA Group, Inc.

Notes to Consolidated Financial Statements

Supplemental cash flow information and non-cash activity related to leases for the three months ended March 31, 2020 and 2019 were as follows (amounts in thousands):



	Three months ended March 31,
	2020		2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	2,991	$	2,780

ROU assets obtained in exchange for operating lease obligations	531		76,175

Lease term and discount rate information related to operating leases were as follows as of the dates indicated:



	Three months ended March 31,
	2020		2019
Weighted-average remaining lease term (years)	10.6		11.0

Weighted-average discount rate	4.89	%	4.95	%

Maturities of lease liabilities at March 31, 2020 are as follows for the following periods (amounts in thousands):



	Operating Leases
For the nine months ending December 31, 2020	$	8,747
For the year ending December 31, 2021	11,250

Price	35.23	EPS	1
Shares	46	P/E	24
MCap	1,608	P/FCF	23
Net Debt	-97	EBIT	184
TEV	1,511	TEV/EBIT	8
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-03-31	Filed 2020-05-08
10-K	2019-12-31	Filed 2020-03-02
10-Q	2019-09-30	Filed 2019-11-08
10-Q	2019-06-30	Filed 2019-08-09
10-Q	2019-03-31	Filed 2019-05-10
10-K	2018-12-31	Filed 2019-03-12
10-Q	2018-09-30	Filed 2018-11-09
10-Q	2018-06-30	Filed 2018-08-08
10-Q	2018-03-31	Filed 2018-05-10
10-K	2017-12-31	Filed 2018-02-28
10-Q	2017-09-30	Filed 2017-11-09
10-Q	2017-06-30	Filed 2017-08-09
10-Q	2017-03-31	Filed 2017-05-10
10-K	2016-12-31	Filed 2017-03-01
10-Q	2016-09-30	Filed 2016-11-08
10-Q	2016-06-30	Filed 2016-08-09
10-Q	2016-03-31	Filed 2016-05-10
10-K	2015-12-31	Filed 2016-02-26
10-Q	2015-09-30	Filed 2015-11-06
10-Q	2015-06-30	Filed 2015-08-10
10-Q	2015-03-31	Filed 2015-05-08
10-K	2014-12-31	Filed 2015-03-02
10-Q	2014-09-30	Filed 2014-11-10
10-Q	2014-06-30	Filed 2014-08-06
10-Q	2014-03-31	Filed 2014-05-08
10-K	2013-12-31	Filed 2014-02-28
10-Q	2013-09-30	Filed 2013-11-08
10-Q	2013-06-30	Filed 2013-08-02
10-Q	2013-03-31	Filed 2013-05-08
10-K	2012-12-31	Filed 2013-02-28
10-Q	2012-09-30	Filed 2012-11-07
10-Q	2012-06-30	Filed 2012-08-09
10-Q	2012-03-31	Filed 2012-05-10
10-K	2011-12-31	Filed 2012-02-28
10-Q	2011-09-30	Filed 2011-11-04
10-Q	2011-06-30	Filed 2011-08-05
10-Q	2011-03-31	Filed 2011-05-05
10-K	2010-12-31	Filed 2011-02-25
10-Q	2010-09-30	Filed 2010-11-09
10-Q	2010-06-30	Filed 2010-08-09
10-Q	2010-03-31	Filed 2010-05-10
10-K	2009-12-31	Filed 2010-02-16

8-K	2020-06-11
8-K	2020-06-09
8-K	2020-05-07
8-K	2020-03-27
8-K	2020-02-27
8-K	2019-11-07
8-K	2019-08-08
8-K	2019-06-13
8-K	2019-05-09
8-K	2019-03-25
8-K	2019-02-28
8-K	2019-01-03
8-K	2018-11-08
8-K	2018-10-04
8-K	2018-10-02
8-K	2018-08-07
8-K	2018-06-20
8-K	2018-06-04
8-K	2018-05-09
8-K	2018-02-27
8-K	2018-01-23
8-K	2017-12-26

EX-10.1	exhibit10120200331.htm
EX-31.1	exhibit311-20200331.htm
EX-31.2	exhibit312-20200331.htm
EX-32.1	exhibit321-20200331.htm

PRAA 10Q Quarterly Report

PRA Group Earnings 2020-03-31