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, 20192020
¨ ☐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.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 | | |
|
120 Corporate Boulevard
Norfolk, Virginia23502
(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 Yes þ NO 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 Yes þ NO 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 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, 20195, 2020 was 45,383,831.45,541,199.
Table of Contents
|
| | |
| |
| | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
| |
| | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
| | |
Signatures | | |
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
PRA Group, Inc.
Consolidated Balance Sheets
March 31, 20192020 and December 31, 20182019
(Amounts in thousands)
| | | (unaudited) | | | (unaudited) | | |
| March 31, 2019 | | December 31, 2018 | March 31, 2020 | | December 31, 2019 |
Assets | | | | | | |
Cash and cash equivalents | $ | 102,102 |
| | $ | 98,695 |
| $ | 179,995 |
| | $ | 119,774 |
|
Investments | 85,082 |
| | 45,173 |
| 52,711 |
| | 56,176 |
|
Finance receivables, net | 3,177,229 |
| | 3,084,777 |
| 3,408,074 |
| | 3,514,165 |
|
Other receivables, net | 18,082 |
| | 46,157 |
| 11,383 |
| | 10,606 |
|
Income taxes receivable | 15,472 |
| | 16,809 |
| 29,372 |
| | 17,918 |
|
Net deferred tax asset | 61,619 |
| | 61,453 |
| |
Deferred tax asset, net | | 63,911 |
| | 63,225 |
|
Property and equipment, net | 54,463 |
| | 54,136 |
| 59,882 |
| | 56,501 |
|
Right-of-use assets | 70,550 |
| | — |
| 66,655 |
| | 68,972 |
|
Goodwill | 480,518 |
| | 464,116 |
| 418,565 |
| | 480,794 |
|
Intangible assets, net | 5,247 |
| | 5,522 |
| 4,003 |
| | 4,497 |
|
Other assets | 35,970 |
| | 32,721 |
| 55,548 |
| | 31,263 |
|
Total assets | $ | 4,106,334 |
| | $ | 3,909,559 |
| $ | 4,350,099 |
| | $ | 4,423,891 |
|
Liabilities and Equity | | | | | | |
Liabilities: | | | | | | |
Accounts payable | $ | 5,682 |
| | $ | 6,110 |
| $ | 4,328 |
| | $ | 4,258 |
|
Accrued expenses | 77,838 |
| | 79,396 |
| 76,583 |
| | 88,925 |
|
Income taxes payable | 389 |
| | 15,080 |
| 18,596 |
| | 4,046 |
|
Net deferred tax liability | 108,367 |
| | 114,979 |
| |
Deferred tax liability, net | | 69,845 |
| | 85,390 |
|
Lease liabilities | | 71,102 |
| | 73,377 |
|
Interest-bearing deposits | 95,314 |
| | 82,666 |
| 97,465 |
| | 106,246 |
|
Borrowings | 2,586,409 |
| | 2,473,656 |
| 2,828,002 |
| | 2,808,425 |
|
Lease liabilities | 74,308 |
| | — |
| |
Other liabilities | 25,789 |
| | 7,370 |
| 63,502 |
| | 26,211 |
|
Total liabilities | 2,974,096 |
| | 2,779,257 |
| 3,229,423 |
| | 3,196,878 |
|
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 |
| |
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 | 59,091 |
| | 60,303 |
| 67,021 |
| | 67,321 |
|
Retained earnings | 1,291,700 |
| | 1,276,473 |
| 1,381,766 |
| | 1,362,631 |
|
Accumulated other comprehensive loss | (248,521 | ) | | (242,109 | ) | (375,617 | ) | | (261,018 | ) |
Total stockholders' equity - PRA Group, Inc. | 1,102,724 |
| | 1,095,120 |
| 1,073,625 |
| | 1,169,388 |
|
Noncontrolling interest | 23,315 |
| | 28,849 |
| 47,051 |
| | 57,625 |
|
Total equity | 1,126,039 |
| | 1,123,969 |
| 1,120,676 |
| | 1,227,013 |
|
Total liabilities and equity | $ | 4,106,334 |
| | $ | 3,909,559 |
| $ | 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, 20192020 and 20182019
(unaudited)
(Amounts in thousands, except per share amounts)
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Revenues: | | | | | | |
Portfolio income | | $ | 262,022 |
| | $ | — |
|
Changes in expected recoveries | | (12,816 | ) | | — |
|
Income recognized on finance receivables | $ | 238,836 |
| | $ | 218,624 |
| — |
| | 238,836 |
|
Fee income | 6,374 |
| | 5,327 |
| 2,209 |
| | 6,374 |
|
Other revenue | 667 |
| | 157 |
| 369 |
| | 667 |
|
Total revenues | 245,877 |
| | 224,108 |
| 251,784 |
| | 245,877 |
|
| | | | | | |
Net allowance charges | (6,095 | ) | | (925 | ) | — |
| | (6,095 | ) |
| | | | | | |
Operating expenses: | | | | | | |
Compensation and employee services | 79,645 |
| | 81,237 |
| 75,171 |
| | 79,645 |
|
Legal collection fees | 13,059 |
| | 10,669 |
| 14,572 |
| | 13,059 |
|
Legal collection costs | 35,229 |
| | 22,243 |
| 34,447 |
| | 35,229 |
|
Agency fees | 14,032 |
| | 8,278 |
| 13,376 |
| | 14,032 |
|
Outside fees and services | 15,248 |
| | 14,158 |
| 19,394 |
| | 15,248 |
|
Communication | 13,201 |
| | 11,557 |
| 13,511 |
| | 13,201 |
|
Rent and occupancy | 4,363 |
| | 4,314 |
| 4,484 |
| | 4,363 |
|
Depreciation and amortization | 4,572 |
| | 4,929 |
| 4,084 |
| | 4,572 |
|
Other operating expenses | 11,585 |
| | 12,184 |
| 12,205 |
| | 11,585 |
|
Total operating expenses | 190,934 |
| | 169,569 |
| 191,244 |
| | 190,934 |
|
Income from operations | 48,848 |
| | 53,614 |
| 60,540 |
| | 48,848 |
|
Other income and (expense): | | | | | | |
Interest expense, net | (33,981 | ) | | (25,781 | ) | (37,211 | ) | | (33,981 | ) |
Foreign exchange gain | 6,264 |
| | 1,293 |
| 2,283 |
| | 6,264 |
|
Other | (352 | ) | | 243 |
| (76 | ) | | (352 | ) |
Income before income taxes | 20,779 |
| | 29,369 |
| 25,536 |
| | 20,779 |
|
Income tax expense | 3,867 |
| | 6,137 |
| 3,100 |
| | 3,867 |
|
Net income | 16,912 |
| | 23,232 |
| 22,436 |
| | 16,912 |
|
Adjustment for net income attributable to noncontrolling interests | 1,685 |
| | 2,126 |
| 3,301 |
| | 1,685 |
|
Net income attributable to PRA Group, Inc. | $ | 15,227 |
| | $ | 21,106 |
| $ | 19,135 |
| | $ | 15,227 |
|
Net income per common share attributable to PRA Group, Inc.: | | | | | | |
Basic | $ | 0.34 |
| | $ | 0.47 |
| $ | 0.42 |
| | $ | 0.34 |
|
Diluted | $ | 0.34 |
| | $ | 0.47 |
| $ | 0.42 |
| | $ | 0.34 |
|
Weighted average number of shares outstanding: | | | | | | |
Basic | 45,338 |
| | 45,231 |
| 45,452 |
| | 45,338 |
|
Diluted | 45,419 |
| | 45,370 |
| 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, 20192020 and 20182019
(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 |
|
|
| | | | | | | |
| 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 StatementStatements of Changes in Equity
For the three months ended March 31, 20192020 and 2018March 31, 2019
(unaudited)
(Amounts in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Noncontrolling Interest | | Total Equity |
| Shares | | Amount | | | | | |
Balance at December 31, 2019 | 45,416 |
| | $ | 454 |
| | $ | 67,321 |
| | $ | 1,362,631 |
| | $ | (261,018 | ) | | $ | 57,625 |
| | $ | 1,227,013 |
|
Components of comprehensive income, net of tax: |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Net income | — |
| | — |
| | — |
| | 19,135 |
| | — |
| | 3,301 |
| | 22,436 |
|
Currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (94,201 | ) | | (13,875 | ) | | (108,076 | ) |
Cash flow hedges | — |
| | — |
| | — |
| | — |
| | (20,568 | ) | | — |
| | (20,568 | ) |
Debt securities available-for-sale | — |
| | — |
| | — |
| | — |
| | 170 |
| | — |
| | 170 |
|
Vesting of restricted stock | 124 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
Share-based compensation expense | — |
| | — |
| | 2,857 |
| | — |
| | — |
| | — |
| | 2,857 |
|
Employee stock relinquished for payment of taxes | — |
| | — |
| | (3,157 | ) | | — |
| | — |
| | — |
| | (3,157 | ) |
Balance at March 31, 2020 | 45,540 |
| | $ | 455 |
| | $ | 67,021 |
| | $ | 1,381,766 |
| | $ | (375,617 | ) | | $ | 47,051 |
| | $ | 1,120,676 |
|
| | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Noncontrolling Interest | | Total Equity | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Noncontrolling Interest | | Total Equity |
| Shares | | Amount | | Shares | | Amount | |
Balance at December 31, 2018 | 45,304 |
| | $ | 453 |
| | $ | 60,303 |
| | $ | 1,276,473 |
| | $ | (242,109 | ) | | $ | 28,849 |
| | $ | 1,123,969 |
| 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 |
| — |
| | — |
| | — |
| | 15,227 |
| | — |
| | 1,685 |
| | 16,912 |
|
Currency translation adjustments | — |
| | — |
| | — |
| | — |
| | (742 | ) | | (431 | ) | | (1,173 | ) | — |
| | — |
| | — |
| | — |
| | (742 | ) | | (431 | ) | | (1,173 | ) |
Cash flow hedges | — |
| | — |
| | — |
| | — |
| | (5,715 | ) | | — |
| | (5,715 | ) | — |
| | — |
| | — |
| | — |
| | (5,715 | ) | | — |
| | (5,715 | ) |
Debt securities available-for-sale | — |
| | — |
| | — |
| | — |
| | 45 |
| | — |
| | 45 |
| — |
| | — |
| | — |
| | — |
| | 45 |
| | — |
| | 45 |
|
Distributions to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | (6,877 | ) | | (6,877 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | (6,877 | ) | | (6,877 | ) |
Contributions from noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | 89 |
| | 89 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 89 |
| | 89 |
|
Vesting of restricted stock | 80 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| 80 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
|
Share-based compensation expense | — |
| | — |
| | 2,314 |
| | — |
| | — |
| | — |
| | 2,314 |
| — |
| | — |
| | 2,314 |
| | — |
| | — |
| | — |
| | 2,314 |
|
Employee stock relinquished for payment of taxes | — |
| | — |
| | (1,437 | ) | | — |
| | — |
| | — |
| | (1,437 | ) | — |
| | — |
| | (1,437 | ) | | — |
| | — |
| | — |
| | (1,437 | ) |
Other | — |
| | — |
| | (2,088 | ) | | — |
| | — |
| | — |
| | (2,088 | ) | — |
| | — |
| | (2,088 | ) | | — |
| | — |
| | — |
| | (2,088 | ) |
Balance at March 31, 2019 | 45,384 |
| | $ | 454 |
| | $ | 59,091 |
| | $ | 1,291,700 |
| | $ | (248,521 | ) | | $ | 23,315 |
| | $ | 1,126,039 |
| 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.
PRA Group, Inc.
Consolidated Statements of Cash Flows
For the three months ended March 31, 20192020 and 20182019
(unaudited)
(Amounts in thousands)
| | | Three Months Ended March 31, | Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Cash flows from operating activities: | | | | | | |
Net income | $ | 16,912 |
| | $ | 23,232 |
| $ | 22,436 |
| | $ | 16,912 |
|
Adjustments to reconcile net income to net cash provided by/(used in) operating activities: | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Share-based compensation expense | 2,314 |
| | 2,415 |
| 2,857 |
| | 2,314 |
|
Depreciation and amortization | 4,572 |
| | 4,929 |
| 4,084 |
| | 4,572 |
|
Amortization of debt discount and issuance costs | 5,678 |
| | 5,430 |
| 5,857 |
| | 5,678 |
|
Deferred tax benefit | (9,994 | ) | | (10,138 | ) | |
Net unrealized foreign currency transaction (gain) | (6,632 | ) | | (467 | ) | |
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 | (2,139 | ) | | (409 | ) | (7,566 | ) | | (2,139 | ) |
Net allowance charges | 6,095 |
| | 925 |
| — |
| | 6,095 |
|
Other | | (135 | ) | | — |
|
Changes in operating assets and liabilities: | | | | | | |
Other assets | 550 |
| | (5,787 | ) | (1,242 | ) | | 550 |
|
Other receivables, net | (1,289 | ) | | 1,536 |
| (545 | ) | | (1,289 | ) |
Accounts payable | (548 | ) | | (2,749 | ) | 221 |
| | (548 | ) |
Income taxes payable, net | (13,040 | ) | | 9,984 |
| 3,835 |
| | (13,040 | ) |
Accrued expenses | 1,553 |
| | (1,058 | ) | (8,990 | ) | | 1,553 |
|
Other liabilities | 10,888 |
| | 6,799 |
| 994 |
| | 10,888 |
|
Right of use asset/lease liability | | 66 |
| | — |
|
Other, net | 37 |
| | — |
| — |
| | 37 |
|
Net cash provided by operating activities | 14,957 |
| | 34,642 |
| 46,806 |
| | 14,957 |
|
Cash flows from investing activities: | | | | | | |
Purchases of property and equipment | (4,493 | ) | | (7,917 | ) | (7,639 | ) | | (4,493 | ) |
Acquisition of finance receivables | (264,632 | ) | | (165,913 | ) | (271,845 | ) | | (264,632 | ) |
Recoveries applied to negative allowance | | 236,656 |
| | — |
|
Collections applied to principal on finance receivables | 222,335 |
| | 207,956 |
| — |
| | 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 | ) | | — |
| — |
| | (57,610 | ) |
Proceeds from sale of subsidiaries, net | 31,177 |
| | — |
| — |
| | 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 |
| |
Net cash used in investing activities | | (42,180 | ) | | (112,899 | ) |
Cash flows from financing activities: | | | | | | |
Proceeds from lines of credit | 537,891 |
| | 101,015 |
| 315,118 |
| | 537,891 |
|
Principal payments on lines of credit | (132,486 | ) | | (147,980 | ) | (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 | (1,437 | ) | | (2,013 | ) | (3,156 | ) | | (1,437 | ) |
Distributions paid to noncontrolling interest | (6,877 | ) | | (12,464 | ) | — |
| | (6,877 | ) |
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 | ) | |
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 | (4,115 | ) | | (3,400 | ) | (16,575 | ) | | (4,115 | ) |
Net increase/(decrease) in cash and cash equivalents | 3,407 |
| | (19,098 | ) | |
Net increase in cash and cash equivalents | | 60,193 |
| | 3,407 |
|
Cash and cash equivalents, beginning of period | 98,695 |
| | 120,516 |
| 123,807 |
| | 98,695 |
|
Cash and cash equivalents, end of period | $ | 102,102 |
| | $ | 101,418 |
| $ | 184,000 |
| | $ | 102,102 |
|
Supplemental disclosure of cash flow information: | | | | | | |
Cash paid for interest | $ | 25,479 |
| | $ | 22,833 |
| $ | 30,502 |
| | $ | 25,479 |
|
Cash paid for income taxes | 27,293 |
| | 12,175 |
| 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,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 Europe.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 one1 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, 20192020 and 2018, respectively,2019, and long-lived assets held at March 31, 20192020 and 2018, respectively,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 | As of and for the | | As of and for the |
| Three Months Ended March 31, 2019 | | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2020 | | Three Months Ended March 31, 2019 |
| Revenues | | Long-Lived Assets | | Revenues | | Long-Lived Assets | Revenues | | Long-Lived Assets | | Revenues | | Long-Lived Assets |
United States | $ | 167,576 |
| | $ | 110,643 |
| | $ | 153,402 |
| | $ | 46,439 |
| $ | 153,335 |
| | $ | 115,053 |
| | $ | 167,576 |
| | $ | 110,643 |
|
United Kingdom | 29,756 |
| | 3,993 |
| | 24,726 |
| | 2,225 |
| 36,340 |
| | 3,076 |
| | 29,756 |
| | 3,993 |
|
Other (1) | 48,545 |
| | 10,377 |
| | 45,980 |
| | 5,124 |
| 62,109 |
| | 8,408 |
| | 48,545 |
| | 10,377 |
|
Total | $ | 245,877 |
| | $ | 125,013 |
| | $ | 224,108 |
| | $ | 53,788 |
| $ | 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 purchasingacquisitions and collection activities, fee-based services and its 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 notesNotes to the consolidated financial statementsConsolidated 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 sheetConsolidated Balance Sheets as of March 31, 2019,2020, its consolidated income statementsConsolidated Income Statements, and statementsStatements of comprehensive income/(loss)Comprehensive Income/(Loss) for the three months ended March 31, 2020 and 2019, and 2018, its consolidated statementStatements of changesChanges in equityEquity and Consolidated Statements of Cash Flows for the three months ended March 31, 20192020 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 statementsConsolidated Income Statements of the Company for the three months ended March 31, 20192020 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, 20182019 (the "2018"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
2.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 and 2018 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 |
|
|
| | | | | | | |
| 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 areIncludes portfolio purchases that are net ofadjusted for buybacks and include certain capitalized acquisition related costs. They also include the finance receivablecosts, and portfolios that are acquired in connection with certain business acquisitions. The buybacks and capitalized acquisition costs are netted againstfrom the acquisition of finance receivables when paid and may relate to portfolios purchaseda business in prior periods.Canada made during the first quarter of 2019.
|
During the three months ended March 31, 2019, the Company acquired finance receivablesreceivable 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")ERC on the receivables acquired during the three months ended March 31, 2019 and 2018 were $541.1 million and $232.9 million, respectively.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 |
|
|
| | | |
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 representsrepresented the amount of income on finance receivables the Company can expectexpected to recognize over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions representrepresented the original expected accretable yield on portfolios purchasedacquired during the period to be earned by the Company based on its proprietary analytical models.period. Net reclassifications from nonaccretable difference to accretable yield primarily resultresulted from the increase in the Company's estimate of future cash flows. When applicable, net reclassifications to nonaccretable difference from accretable yield resultresulted from the decrease in the Company's estimates of future cash flows and allowance charges that together exceedexceeded the increase in the Company's estimate of future cash flows.
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 |
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
|
| | | | | | | |
| 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,finance receivables, for the three months ended March 31, 2019 and 2018 (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 |
|
|
| | | | | | | |
| 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 |
|
3.4. Investments:
Investments consisted of the following at March 31, 20192020 and December 31, 20182019 (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 |
|
|
| | | | | | | |
| 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: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.
PRA Group, Inc.
Notes to Consolidated Financial Statements
The amortized cost and estimated fair value of investments in debt securities at March 31, 20192020 and December 31, 20182019 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 |
|
|
| | | | | | | | | | | | | | | |
| 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%1% 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 USU.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 $2.1$7.6 million and $0.4$2.1 million for the three months ended March 31, 2020 and 2019, and 2018, respectively, on its equity securities.respectively.
PRA Group, Inc.
Notes to Consolidated Financial Statements
Equity Method Investments
Effective December 20, 2018, theThe Company has aan 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.
4.5. 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 aan annual review of goodwill as of October 1 of each year or more frequently if indicators of impairment exist.
PRA Group, Inc.
Notes 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 Consolidated Financial Statements
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, 20192020 and 20182019 (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 |
|
|
| | | | | | | |
| 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 ofrelated to the acquisition of a business in Canada.
5.6. 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 exerciseExercises of lease renewal options isare typically at the Company's sole discretion and are included in its ROUright-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 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, 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, 2019 |
Operating lease cost | $ | 2,863 |
|
Short-term lease cost | 842 |
|
Total lease cost | $ | 3,705 |
|
|
| | | | | | | |
| 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 |
|
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 operating leases were as follows as of the dates indicated (amounts in thousands):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 | % |
|
| | |
| March 31, 2019 |
Weighted-average remaining lease term (years) | |
Operating leases | 11 |
|
Weighted-average discount rate | |
Operating leases | 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 |
|
For the year ending December 31, 2022 | 9,281 |
|
For the year ending December 31, 2023 | 7,148 |
|
For the year ending December 31, 2024 | 6,387 |
|
Thereafter | 49,434 |
|
Total lease payments | $ | 92,247 |
|
Less imputed interest | 21,145 |
|
Total | $ | 71,102 |
|
|
| | | |
| 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 |
|
PRA Group, Inc.
Notes to Consolidated Financial Statements
6.7. Borrowings:
The Company's borrowings consisted of the following as of the dates indicated (amounts in thousands):
|
| | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Americas revolving credit | $ | 749,211 |
| | $ | 772,037 |
|
Europe revolving credit | 1,058,348 |
| | 1,017,465 |
|
Term loans | 422,500 |
| | 425,000 |
|
Convertible senior notes | 632,500 |
| | 632,500 |
|
| 2,862,559 |
| | 2,847,002 |
|
Less: Debt discount and issuance costs | (34,557 | ) | | (38,577 | ) |
Total | $ | 2,828,002 |
| | $ | 2,808,425 |
|
|
| | | | | | | |
| 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, 20192020 for the 12-month periods ending March 31, (amounts in thousands):
|
| | | |
2021 | $ | 298,395 |
|
2022 | 10,895 |
|
2023 | 2,208,269 |
|
2024 | 345,000 |
|
Total | $ | 2,862,559 |
|
|
| | | |
2020 | $ | 10,000 |
|
2021 | 1,203,005 |
|
2022 | 10,000 |
|
2023 | 1,068,744 |
|
2024 | 345,000 |
|
Thereafter | — |
|
Total | $ | 2,636,749 |
|
The Company believesdetermined that it was in compliance with the covenants of its financing arrangements as of March 31, 2019.2020.
PRA Group, Inc.
Notes to Consolidated Financial Statements
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$1,540.5 million (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a fully-funded $432.5$422.5 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, 2019,2020, the unused portion of the North American Credit Agreement was $451.8$371.2 million. Considering borrowing base restrictions, as of March 31, 2019,2020, the amount available to be drawn was $263.8$175.7 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;
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 consolidated 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))Notes);
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 2019,2020, the Company entered into the FifthSixth Amendment and Restatement Agreement to its European Credit Agreement which, among other things, mergedincreased the term loan facility withtotal commitments by $200 million, extended the revolving credit facility and increased all applicable margins formajority of the interest payable under the multicurrency revolving credit facility by 5 basis points.2 years and includes an accordion feature of no less than $50.0 million not to exceed $500.0 million, to allow for future increases.
Under the terms of the European Credit Agreement, the credit facility includes an aggregate amount of approximately $1.1 billion$1,300.0 million (subject to the borrowing base), accrues interest at the Interbank Offered Rate ("IBOR") plus 2.70% - 3.80% (as determined by the loan-to-valueestimated remaining collections ratio ("LTVERC Ratio") as defined in the European Credit Agreement), bears an unused line fee, currently 1.21%1.23% per annum, of 35% of the margin, is payable monthly in arrears, and matures February 19, 2021.2023. 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, 2021.2023. As of March 31, 2019,2020, the outstanding balance under the European Credit Agreement was $1,058.3 million and the unused portion of the European Credit Agreement (including the overdraft facility) was $234.5$281.7 million. Considering borrowing base restrictions and other covenants, as of March 31, 2019,2020, the amount available to be drawn under the European Credit Agreement (including the overdraft facility) was $125.0$56.4 million.
PRA Group, Inc.
Notes to Consolidated Financial Statements
The European Credit Agreement is secured by the shares of most of the Company's European subsidiaries and all intercompany loan receivablesloans receivable in Europe. The European Credit Agreement also contains restrictive covenants and events of default including the following:
the LTVERC Ratio cannot exceed 75%45%;
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.
Colombian Revolving Credit Facility
PRA Group Colombia Holding SAS, a subsidiary of the Company in Colombia, has a credit agreement that provides for borrowings in an aggregate amount of approximately $4.9 million. As of March 31, 2020, the outstanding balance under the credit agreement was $2.4 million, with a weighted average interest rate of 7.13%. The outstanding balance accrues interest at the Indicador Bancario de Referencia rate ("IBR") plus a weighted average spread of 2.74%, is payable quarterly in arrears, amortizes quarterly, and matures on October 17, 2022 (per the credit agreement, maturity represents three years from the last draw). This credit facility is fully collateralized using time deposits with the lender that are subject to certain limitations regarding withdrawal and usage and are included within other assets on the Company's Consolidated Balance Sheets. As of March 31, 2020, the unused portion of the Colombia Credit Agreement was $2.5 million.
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 August 1, 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.year. Prior to February 1, 2020, the 2020 Notes will bewere convertible only upon the occurrence of specified events. On or after February 1,As of March 31, 2020 the 2020 Notes will beare 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 convertedinto 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.
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 June 1, 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.year. 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, 2019,2020, the Company does not believe that any of the conditions allowing holders of the 2023 Notes to convert their notes have occurred.
PRA Group, Inc.
Notes to Consolidated Financial Statements
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 convertedinto 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, 2020 | | December 31, 2019 |
Liability component - principal amount | $ | 632,500 |
| | $ | 632,500 |
|
Unamortized debt discount | (28,197 | ) | | (31,414 | ) |
Liability component - net carrying amount | $ | 604,303 |
| | $ | 601,086 |
|
Equity component | $ | 76,216 |
| | $ | 76,216 |
|
|
| | | | | | | |
| 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, |
| 2020 | | 2019 |
Interest expense - stated coupon rate | $ | 5,175 |
| | $ | 5,175 |
|
Interest expense - amortization of debt discount | 3,217 |
| | 3,042 |
|
Total interest expense - convertible senior notes | $ | 8,392 |
|
| $ | 8,217 |
|
|
| | | | | | | |
| 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 |
|
PRA Group, Inc.
Notes to Consolidated Financial Statements
7.8. 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,Consolidated Balance Sheets, in accordance with the guidance of ASC Topic 815 “Derivatives and Hedging” (“ASC 815”).
PRA Group, Inc.
Notes to Consolidated Financial Statements
The following table summarizes the fair value of derivative instruments in the consolidated balance sheetsCompany's Consolidated Balance Sheets (amounts in thousands):
|
| | | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivatives designated as hedging instruments: | | | | | | | | |
Interest rate contracts | | Other assets | | $ | — |
| | Other assets | | $ | 323 |
|
Interest rate contracts | | Other liabilities | | 43,674 |
| | Other liabilities | | 17,807 |
|
Derivatives not designated as hedging instruments: | | | | | | | |
|
Foreign currency contracts | | Other assets | | 18,126 |
| | Other assets | | 552 |
|
Foreign currency contracts | | Other liabilities | | 15,614 |
| | Other liabilities | | 5,856 |
|
|
| | | | | | | | | | | | |
| | 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 designatedDesignated as hedging instruments: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, 20192020 and December 31, 2018,2019, the notional amount of interest rate contracts designated as cash flow hedging instruments was $661.9$922.2 million and $260.8$959.0 million, respectively. Derivatives designated as cash flow hedging instruments were evaluated and remain highly effective at March 31, 2019.2020 and have initial terms of two to seven years. The Company estimates that approximately $1.2$8.4 million of net derivative gain (loss)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, 20192020 and 20182019 (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 | | 2020 | | 2019 | | Location of gain or (loss) reclassified from OCI into income | | 2020 | | 2019 |
Interest rate contracts | | $ | (21,350 | ) | | $ | (5,795 | ) | | Interest expense, net | | $ | (1,012 | ) | | $ | (80 | ) |
|
| | | | | | | | | | | | | | | | | | |
| | 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 designatedNot Designated as hedging instruments: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, 20192020 and December 31, 2018,2019, the notional amount of foreign currency contracts that are not designated as hedging instruments was $359.0$747.8 million and $144.7$469.9 million, respectively.
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 statementsConsolidated Income Statements for the three months ended March 31, 20192020 and 20182019 (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 | | 2020 | | 2019 |
Foreign currency contracts | | Foreign exchange gain | | $ | 26,786 |
| | $ | (5,256 | ) |
Foreign currency contracts | | Interest expense, net | | (1,001 | ) | | — |
|
Interest rate contracts | | Interest expense, net | | 1,038 |
| | (349 | ) |
|
| | | | | | | | | | |
| | | | 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 |
|
8.9. 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.
PRA Group, Inc.
Notes to Consolidated Financial Statements
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 beTo 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 sheetsConsolidated Balance Sheets at March 31, 20192020 and December 31, 20182019 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| March 31, 2020 |
| December 31, 2019 |
| Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value |
Financial assets: | | | | | | | |
Cash and cash equivalents | $ | 179,995 |
| | $ | 179,995 |
| | $ | 119,774 |
| | $ | 119,774 |
|
Finance receivables, net | 3,408,074 |
| | 3,503,737 |
| | 3,514,165 |
| | 3,645,610 |
|
Financial liabilities: | | | | | | | |
Interest-bearing deposits | 97,465 |
| | 97,465 |
| | 106,246 |
| | 106,246 |
|
Revolving lines of credit | 1,807,559 |
| | 1,807,559 |
| | 1,789,502 |
| | 1,789,502 |
|
Term loans | 422,500 |
| | 422,500 |
| | 425,000 |
| | 425,000 |
|
Convertible senior notes | 604,303 |
| | 589,742 |
| | 601,086 |
| | 648,968 |
|
|
| | | | | | | | | | | | | | | |
| 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:
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 computedestimates the estimated fair value of these receivables using proprietary pricing models that the Company utilizes to make portfolio purchaseacquisition decisions. Accordingly, the Company's fair value estimates use Level 3 inputs as there is limitedlittle 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.
PRA Group, Inc.
Notes to Consolidated Financial Statements
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 andwhich 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 beTo Be Carried atAt Fair Value
The carrying amounts in the following table are measured at fair value on a recurring basis in the accompanying consolidated balance sheetsConsolidated Balance Sheets at March 31, 20192020 and December 31, 20182019 (amounts in thousands):
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements as of March 31, 2020 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Available-for-sale investments | | | | | | | |
Government bonds | $ | 4,347 |
| | $ | — |
| | $ | — |
| | $ | 4,347 |
|
Fair value through net income | | | | | | | |
Mutual funds | 33,353 |
| | — |
| | — |
| | 33,353 |
|
Derivative contracts (recorded in other assets) | — |
| | 18,126 |
| | — |
| | 18,126 |
|
Liabilities: | | | | | | | |
Derivative contracts (recorded in other liabilities) | — |
| | 59,288 |
| | — |
| | 59,288 |
|
| Fair Value Measurements as of December 31, 2019 |
| Level 1 | | Level 2 | | Level 3 | | Total |
Assets: | | | | | | | |
Available-for-sale investments | | | | | | | |
Government bonds | $ | 5,052 |
| | $ | — |
| | $ | — |
| | $ | 5,052 |
|
Fair value through net income | | | | | | | |
Mutual funds | 33,677 |
| | — |
| | — |
| | 33,677 |
|
Derivative contracts (recorded in other assets) | — |
| | 875 |
| | — |
| | 875 |
|
Liabilities: | | | | | | | |
Derivative contracts (recorded in other liabilities) | — |
| | 23,663 |
| | — |
| | 23,663 |
|
|
| | | | | | | | | | | | | | | |
| 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 investments
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.
PRA Group, Inc.
Notes to Consolidated Financial Statements
Fair value through net income investments
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
PRA Group, Inc.
Notes to Consolidated Financial Statements
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 1one to 6five years. The fair value of these private equity funds following the application of the Net Asset Value ("NAV") practical expedient was $7.5$7.1 million and $8.0$7.2 million as of March 31, 20192020 and December 31, 2018,2019, respectively.
9.10. Accumulated Other Comprehensive Loss:
The following table provides details about the reclassifications out of accumulated other comprehensive loss for the three months ended March 31, 2020 and 2019 (amounts in thousands):
|
| | | | | | | | | | |
| | Three Months Ended March 31, | | |
Gains and losses on cash flow hedges | | 2020 | | 2019 | | Affected line in the consolidated income statement |
Interest rate swaps | | $ | (1,012 | ) | | $ | (80 | ) | | Interest expense, net |
Income tax effect of item above | | 230 |
| | — |
| | Income tax expense |
Total losses on cash flow hedges | | $ | (782 | ) | | $ | (80 | ) | | Net of tax |
The following table represents the changes in accumulated other comprehensive loss by component, net ofafter tax, for the three months ended March 31, 2020 and 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 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2020 |
| | Debt Securities | | Cash Flow | | Currency Translation | | Accumulated Other |
| | Available-for-sale | | Hedges | | Adjustments | | Comprehensive Loss (1) |
Ending balance at December 31, 2019 | | $ | (44 | ) | | $ | (13,088 | ) | | (247,886 | ) | | $ | (261,018 | ) |
Other comprehensive loss before reclassifications | | 170 |
| | (21,350 | ) | | (94,201 | ) | | (115,381 | ) |
Reclassifications, net | | — |
| | 782 |
| | — |
| | 782 |
|
Net current period other comprehensive loss | | 170 |
| | (20,568 | ) | | (94,201 | ) | | (114,599 | ) |
Ending balance at March 31, 2020 | | $ | 126 |
| | (33,656 | ) | | $ | (342,087 | ) | | $ | (375,617 | ) |
| | | | | | | | |
| | Three Months Ended March 31, 2019 |
| | Debt Securities | | Cash Flow | | Currency Translation | | Accumulated Other |
| | Available-for-sale | | Hedges | | Adjustments | | Comprehensive Loss (1) |
Ending balance December 31, 2018 | | $ | (83 | ) | | $ | 44 |
| | $ | (242,070 | ) | | $ | (242,109 | ) |
Other comprehensive loss before reclassifications | | 45 |
| | (5,795 | ) | | (742 | ) | | (6,492 | ) |
Reclassifications, net | | — |
| | 80 |
| | — |
| | 80 |
|
Net current period other comprehensive loss | | 45 |
| | (5,715 | ) | | (742 | ) | | (6,412 | ) |
Ending balance March 31, 2019 | | $ | (38 | ) | | $ | (5,671 | ) | | $ | (242,812 | ) | | $ | (248,521 | ) |
(1) Net of deferred taxes for unrealized losses from cash flow hedges of $10.0 million and $1.7 million atfor the three months ended March 31, 2019.2020 and 2019, respectively.
10.11. 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 settlementThere has been no dilutive effect 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 issuedconvertible senior notes since issuance through March 31, 2019.2020. 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.
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, 20192020 and 20182019 (amounts in thousands, except per share amounts):
| | | For the Three Months Ended March 31, | For the Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
| Net income attributable to PRA Group, Inc. | | Weighted Average Common Shares | | EPS | | Net income attributable to PRA Group, Inc. | | Weighted Average Common Shares | | EPS | 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 |
| $ | 19,135 |
| | 45,452 |
| | $ | 0.42 |
| | $ | 15,227 |
| | 45,338 |
| | $ | 0.34 |
|
Dilutive effect of nonvested share awards | | | 81 |
| | — |
| | | | 139 |
| | — |
| — |
| | 332 |
| | — |
| | — |
| | 81 |
| | — |
|
Diluted EPS | $ | 15,227 |
| | 45,419 |
| | $ | 0.34 |
| | $ | 21,106 |
| | 45,370 |
| | $ | 0.47 |
| $ | 19,135 |
| | 45,784 |
| | $ | 0.42 |
| | $ | 15,227 |
| | 45,419 |
| | $ | 0.34 |
|
There were no0 antidilutive options outstanding for the three months ended March 31, 20192020 and 2018.2019.
11.12. 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("IRS") regarding the IRS 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 used 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 behas been 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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted into U.S. law in response to COVID-19 with varying legislation enacted in many of the countries in which the Company operates. While the Company is continuing to evaluate impact, it intends to implement the tax payment and filing deferral provisions as applicable and does not believe that any of the other provisions will have a material impact to its financial reporting. As international tax legislative updates continue to be released, they will be monitored by the Company.
At March 31, 2019,2020, 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 foreigninternational earnings to be indefinitely reinvested in its foreign operations.international operations and, therefore, the recording of deferred tax liabilities for such unremitted earnings is not required. If foreigninternational 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 foreigninternational operations with indefinitely reinvested earnings was $83.8$115.4 million and $78.6$109.7 million as of March 31, 20192020 and December 31, 2018,2019, respectively.
12.13. Commitments and Contingencies:
Employment agreements: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-short and long-term financial and strategic objectives. At March 31, 2019,2020, estimated future compensation under these agreements was approximately $14.3$6.2 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$6.2 million total above.
PRA Group, Inc.
Notes to Consolidated Financial Statements
Forward flow agreements: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, 20192020, was approximately $351.5$629.2 million.
Finance receivables: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.
PRA Group, Inc.
Notes to Consolidated Financial Statements
Litigation and regulatory matters:Regulatory Matters:
The Company isand its subsidiaries are from time to time subject to a variety of routine legal and regulatory claims, inquiries and 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, 2019,2020, 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 During 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. Onyear ended 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 11,31, 2019, the Company filed a motion to compel arbitration with the North Carolina state court. The North Carolina state court deniedrecorded $1.0 million in recoveries receivable under the Company's motion to compel arbitration andinsurance policies or third-party indemnities which is included in other receivables, net at December 31, 2019.
Matters that are not considered routine legal proceedings were disclosed previously in 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.2019 Form 10-K.
13.14. 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
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
Effective January 1, 2020, the measurement of expected credit losses for financial instruments held at the reporting date basedCompany adopted ASC 326 on historical experience, current conditions and reasonable and supportable forecasts. The main objective of ASU 2016-13 isa prospective basis. Prior 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 ofJanuary 1, 2020, substantially 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 changesCompany's investment 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 assetsreceivables were accounted for under ASC 310-30 should use a prospective transition approach where upon adoption, the amortized cost basis should be adjusted310-30. Refer to reflect the addition of the allowanceNote 2 for credit losses. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal yearscomprehensive details.
Intangibles - Goodwill 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.Other
In January 2017, FASB issued ASU 2017-04 "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04which eliminates Step 2 of the goodwill impairment test. Instead, an entity should performperforms its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognizerecognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair
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
PRA Group, Inc.
Notes to Consolidated Financial Statements
option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted 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 afteron January 1, 2017. The Company is in the process of evaluating the2020 which had no impact of adoption of ASU 2017-04 on its consolidated financial statements.
Fair Value Measurement
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 Company adopted ASU 2018-13 on January 1, 2020 which had no impact to the Company's Notes to Consolidated Financial Statements.
Recently issued accounting standards not yet adopted:
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes. This standard is effective for allannual and interim periods beginning after December 15, 2020 on a prospective basis, and early adoption is permitted. The Company is currently evaluating the impact of ASU 2019-12 on its consolidated financial statements and expects that the adoption of the standard will result in additional and modified disclosures.
Investments-Equity Securities
In January 2020, the FASB issued ASU 2020-01 “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (“ASU 2020-01”). ASU 2020-01 clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. Additionally, it clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. This standard is effective for public entities for financial statements issued for fiscal years and interim periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted.2020. The Company is currently in the process of evaluating the impact of ASU 2020-01 but does not expect adoption of ASU 2018-13to have a material effect on its consolidated financial statements.
Reference Rate Reform
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Inter-bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. ASU 2020-04 is effective immediately for a limited time through December 31, 2022. The Company is currently evaluating the impact of ASU 2020-04.
The Company does not expect that any other recently issued accounting pronouncements will have a material effect on its consolidated financial statements.
15. Subsequent Events:
On May 6, 2020 , the Company entered into the Second Amendment to the North American Credit Facility, which, among other things, includes:
the consolidated total leverage ratio limit will increase to 3.25 from 2.75 effective after June 30, 2020 through December 31, 2020. After December 31, 2020, the consolidated total leverage ratio limit will decrease to 3.0 until maturity;
the LIBOR floor increases from zero to 100% on the revolving loans;
| |
• | the consolidated senior secured leverage ratio limit will increase from 2.25 to 2.75 until March 31, 2021. On March 31, 2021, the senior secured leverage ratio will decrease to 2.25 until maturity; |
the ERC borrowing base on all domestic Core eligible pools will increase from 35% to 40% effective July 31, 2020 until January 31, 2021. If the ERC advance rate drops to 35% or below during this period, the ERC borrowing base will return to 35%;
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 or volatility in the credit or capital markets, which affect our ability to borrow money or raise capital;capital, including as a result of the impact of the novel coronavirus ("COVID-19") pandemic;
our ability to replace our portfolios of nonperforming loans with additional portfolios;portfolios sufficient to operate efficiently and profitably;
our ability to continue to purchase nonperforming loans at appropriate prices;
our ability to collect sufficient amounts on our nonperforming loans to fund our operations;
the possibility that we could recognize significant decreases in our estimate of future recoveries on nonperforming loans;
changes in, or interpretations of, federal, state, local, or foreigninternational laws, including bankruptcy and collection laws, or changes in the administrative practices of various bankruptcy courts, which may impactcould negatively affect our business or our ability to collect on our nonperforming loans;
our ability to collect sufficient amounts on our nonperforming loans;successfully manage the challenges associated with a disease outbreak, including epidemics, pandemics or similar widespread public health concerns, including the COVID-19 pandemic;
the possibility thatimpact of the COVID-19 pandemic on the markets in which we could incur significant allowance charges on our finance receivables;operate, including business disruptions, unemployment, economic disruption, overall market volatility, and the inability or unwillingness of consumers to pay the amounts owed to us;
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;accounting standards and their interpretations;
our ability to manage risks associated with our international operations;
changes in tax laws and interpretations regarding earnings of our domestic and foreigninternational 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 byexit of the United Kingdom ("UK") to leavefrom the European Union;
adverse outcomes in pending litigation or administrative proceedings;Union ("EU");
our loss contingency accruals may not be adequate to cover actual losses;
adverse outcomes in pending litigation or administrative proceedings;
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;
disruptions of business operations caused by the underperformance or failure of information technology infrastructure, networks or telephone systems;
our ability to collect and enforce our nonperforming loans may be limited under federal, state, local and foreign laws;international laws, regulations and policies;
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, reviews, 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 purchasingacquisitions 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 foreigncomplex and evolving international 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 raisecomply with data privacy regulations such as the funds necessary to repurchase the convertible senior notes or to settle conversions in cash;General Data Protection Regulation ("GDPR");
our ability to retain, expand, renegotiate or replace our credit facilities and our ability to comply with the covenants under our financing arrangements;
our ability to raise the funds necessary to repurchase our convertible senior notes or to settle conversions in cash;
our ability to refinance our indebtedness, including our outstanding convertible senior notes;
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,future accounting standards could negatively impact our resultsbusiness;
default by or failure of operations andone or more of our counterparty financial condition;institutions could cause us to incur significant losses
uncertainty about the future of the London Inter-Bank Offer Rate ("LIBOR") may adversely affect our business; and
the risk factors discussed herein and in our other 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, 20182019 ("20182019 Form 10-K").
and the "Risk Factors" section of this Quarterly Report.
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 may use the following terminology throughout this Quarterly Report:document:
"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 cash collections on our owned finance receivables portfolios plus fee income.
"Change in expected recoveries" refers to the differences of actual recoveries received when compared to expected recoveries and the net present value of changes in ERC.
"Core" accounts or portfolios refer to accounts or portfolios that are nonperforming loans and are not in an insolvent status upon purchase.acquisition. 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 accounts 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.
"Negative Allowance" refers to the present value of cash flows expected to be collected on our finance receivables, carried as an asset on the balance sheet.
"Portfolio acquisitions" refers to all portfolios added as a result of a purchase, but also includes portfolios added as a result of a business acquisition.
"Portfolio purchases" refers to all portfolios purchased in the normal course of business and excludes those purchased via business acquisitions.
"Portfolio income" reflects revenue recorded due to the passage of time using the effective interest rate calculated based on the purchase price of portfolios and estimated remaining collections.
"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, plusloans. Prior to the adoption of ASC Topic 326 purchase price also included certain capitalized costs lessand adjustments for buybacks.
"Purchase price multiple" refers to the total estimated collections (as defined below) on owned finance receivables portfolios divided by purchase price.
"Recoveries" refers to cash collections plus buybacks and other adjustments.
"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.
Overview
We are a global financial and business services company with operations in the Americas, Europe and Europe.Australia. 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, 20192020, employed 5,2364,014 full time equivalents. Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol "PRAA.""PRAA".
COVID-19 Update
The recent outbreak of COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on the U.S. and global economies and created uncertainty. Since the initial outbreak was reported, all states in the U.S. have declared states of emergency and COVID-19 has spread to all countries in which we operate. As a result, we have implemented our business continuity plans including remote work practices where possible and have leveraged existing space to follow social distancing guidelines. To date, the pandemic has not prevented our ability to operate the business and we have continued to take steps necessary to minimize impact or disruption to our global operations. We believe we have sufficient liquidity on hand, or access to the capital markets to provide liquidity, to continue normal business operations. Refer to the Liquidity and Capital Resources section below for further discussion. Furthermore, the pandemic presents potential new risks which are difficult to reasonably estimate. As a result, the impact COVID-19 may have on our business, results of operations or financial condition is also difficult to predict. See discussion in Part II, Item 1A - “Risk Factors”.
Results of Operations
The results of operations include the financial results of the Company and all of itsour subsidiaries. As of January 1, 2020 we adopted 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 period amounts were accounted for under ASC Topic 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). For further information refer to Note 2 to our Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report. The following table sets forth consolidated income statementConsolidated Income Statement amounts as a percentage of total revenues for the periods indicated (dollars in thousands):
| | | For the Three Months Ended March 31, | For the Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Revenues: | | | | | | | | | | | | | | |
Portfolio income | | $ | 262,022 |
| | 104.1 | % | | $ | — |
| | — | % |
Changes in expected recoveries | | (12,816 | ) | | (5.1 | ) | | — |
| | — |
|
Income recognized on finance receivables | $ | 238,836 |
| | 97.1 | % | | $ | 218,624 |
| | 97.6 | % | — |
| | — |
| | 238,836 |
| | 97.1 |
|
Fee income | 6,374 |
| | 2.6 |
| | 5,327 |
| | 2.4 |
| 2,209 |
| | 0.9 |
| | 6,374 |
| | 2.6 |
|
Other revenue | 667 |
| | 0.3 |
| | 157 |
| | 0.1 |
| 369 |
| | 0.1 |
| | 667 |
| | 0.3 |
|
Total revenues | 245,877 |
| | 100.0 |
| | 224,108 |
| | 100.0 |
| 251,784 |
| | 100.0 |
| | 245,877 |
| | 100.0 |
|
| | | | | | | | | | | | | | |
Net allowance charges | (6,095 | ) | | (2.5 | ) | | (925 | ) | | (0.4 | ) | — |
| | — |
| | (6,095 | ) | | (2.5 | ) |
| | | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | | |
Compensation and employee services | 79,645 |
| | 32.4 |
| | 81,237 |
| | 36.2 |
| 75,171 |
| | 29.9 |
| | 79,645 |
| | 32.4 |
|
Legal collection fees | 13,059 |
| | 5.3 |
| | 10,669 |
| | 4.8 |
| 14,572 |
| | 5.8 |
| | 13,059 |
| | 5.3 |
|
Legal collection costs | 35,229 |
| | 14.3 |
| | 22,243 |
| | 9.9 |
| 34,447 |
| | 13.7 |
| | 35,229 |
| | 14.3 |
|
Agency fees | 14,032 |
| | 5.7 |
| | 8,278 |
| | 3.7 |
| 13,376 |
| | 5.3 |
| | 14,032 |
| | 5.7 |
|
Outside fees and services | 15,248 |
| | 6.2 |
| | 14,158 |
| | 6.3 |
| 19,394 |
| | 7.7 |
| | 15,248 |
| | 6.2 |
|
Communication | 13,201 |
| | 5.4 |
| | 11,557 |
| | 5.2 |
| 13,511 |
| | 5.4 |
| | 13,201 |
| | 5.4 |
|
Rent and occupancy | 4,363 |
| | 1.8 |
| | 4,314 |
| | 1.9 |
| 4,484 |
| | 1.8 |
| | 4,363 |
| | 1.8 |
|
Depreciation and amortization | 4,572 |
| | 1.9 |
| | 4,929 |
| | 2.2 |
| 4,084 |
| | 1.6 |
| | 4,572 |
| | 1.9 |
|
Other operating expenses | 11,585 |
| | 4.7 |
| | 12,184 |
| | 5.4 |
| 12,205 |
| | 4.8 |
| | 11,585 |
| | 4.7 |
|
Total operating expenses | 190,934 |
| | 77.7 |
| | 169,569 |
| | 75.7 |
| 191,244 |
| | 76.0 |
| | 190,934 |
| | 77.7 |
|
Income from operations | 48,848 |
| | 19.9 |
| | 53,614 |
| | 23.9 |
| 60,540 |
| | 24.0 |
| | 48,848 |
| | 19.9 |
|
Other income and (expense): | | | | | | | | | | | | | | |
Interest expense, net | (33,981 | ) | | (13.8 | ) | | (25,781 | ) | | (11.5 | ) | (37,211 | ) | | (14.8 | ) | | (33,981 | ) | | (13.8 | ) |
Foreign exchange gain | 6,264 |
| | 2.5 |
| | 1,293 |
| | 0.6 |
| 2,283 |
| | 0.9 |
| | 6,264 |
| | 2.5 |
|
Other | (352 | ) | | (0.1 | ) | | 243 |
| | 0.1 |
| (76 | ) | | — |
| | (352 | ) | | (0.1 | ) |
Income before income taxes | 20,779 |
| | 8.5 |
| | 29,369 |
| | 13.1 |
| 25,536 |
| | 10.1 |
| | 20,779 |
| | 8.5 |
|
Income tax expense | 3,867 |
| | 1.6 |
| | 6,137 |
| | 2.7 |
| 3,100 |
| | 1.2 |
| | 3,867 |
| | 1.6 |
|
Net income | 16,912 |
| | 6.9 |
| | 23,232 |
| | 10.4 |
| 22,436 |
| | 8.9 |
| | 16,912 |
| | 6.9 |
|
Adjustment for net income attributable to noncontrolling interests | 1,685 |
| | 0.7 |
| | 2,126 |
| | 0.9 |
| 3,301 |
| | 1.3 |
| | 1,685 |
| | 0.7 |
|
Net income attributable to PRA Group, Inc. | $ | 15,227 |
| | 6.2 | % | | $ | 21,106 |
| | 9.4 | % | $ | 19,135 |
| | 7.6 | % | | $ | 15,227 |
| | 6.2 | % |
Three Months Ended March 31, 2020 Compared To Three Months Ended March 31, 2019
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 | ) |
|
| | | | | | | | | | | |
| For the Three Months Ended March 31, | | Variances |
(Amounts in thousands) | 2020 | | 2019 | | 2020 vs. 2019 |
Americas Core | $ | 305,780 |
| | $ | 290,723 |
| | $ | 15,057 |
|
Americas Insolvency | 43,210 |
| | 44,613 |
| | (1,403 | ) |
Europe Core | 131,340 |
| | 116,858 |
| | 14,482 |
|
Europe Insolvency | 14,243 |
| | 8,977 |
| | 5,266 |
|
Total cash collections | $ | 494,573 |
| | $ | 461,171 |
| | $ | 33,402 |
|
| | | | | |
Cash collections adjusted (1) | $ | 494,573 |
| | $ | 454,654 |
| | $ | 39,919 |
|
(1) Cash collections adjusted refers to 20182019 cash collections remeasured using 20192020 exchange rates.
Cash collections were $494.6 million for the three months ended March 31, 2020, an increase of $33.4 million, or 7.2%, compared to $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, 2018.2019. The increase was largely due to ourincreases in Americas Core and Europe Core cash collections, partially offset by the overall economic disruption in the last two weeks of the quarter. Americas Core cash collections increased $15.1 million, or 5.2%, mainly driven by higher U.S. legal collections increasing $22.1and an increase in Other Americas, slightly offset by lower U.S. call center and other collections. The U.S. legal collections increase of $9.9 million, or 30.6%,10.4% was due primarily to the increase in thea higher number of accounts qualifying forplaced in the legal channel, and our U.S. call center collections increasing $14.3channel. Other Americas increased $6.8 million, or 9.2%25.6%, due primarily to record U.S. Coreas a result of increased portfolio purchasing in 2018. These increases were partially offset by a declineSouth America. Furthermore, the increase of $10.7$14.5 million, or 19.3%,12.4% in Americas InsolvencyEurope Core cash collections caused mainly by a decline in Americas Insolvency portfolio purchasing in 2018 not offsetting the continued runoff of the older portfolios.reflects higher 2019 purchases.
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, 20192020 and 20182019 is as follows (amounts in thousands):
| | | For the Three Months Ended March 31, | For the Three Months Ended March 31, |
| 2019 | | 2018 | 2020 | | 2019 |
Cash collections | $ | 461,171 |
| | $ | 426,580 |
| |
Principal amortization | (222,335 | ) | | (207,956 | ) | |
Portfolio income | | $ | 262,022 |
| | — |
|
Changes in expected recoveries | | (12,816 | ) | | — |
|
Income recognized on finance receivables | 238,836 |
| | 218,624 |
| — |
| | 238,836 |
|
Fee income | 6,374 |
| | 5,327 |
| 2,209 |
| | 6,374 |
|
Other revenue | 667 |
| | 157 |
| 369 |
| | 667 |
|
Total revenues | $ | 245,877 |
| | $ | 224,108 |
| $ | 251,784 |
| | $ | 245,877 |
|
Income recognized on finance receivables
Income recognized on finance receivables was $238.8Total revenues were $251.8 million for the three months ended March 31, 2019,2020, an increase of $20.2$5.9 million, or 9.2%2.4%, compared to income recognized on finance receivables of $218.6$245.9 million for the three months ended March 31, 2018. The2019. This increase was primarily the result ofdriven by higher cash collections, somewhat offset by adjustments to our estimated remaining collections mainly to reflect the impact of record Americas Core purchasing in 2018COVID-19 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 consolidatedlower fee 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.
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 toreflecting 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
NetIn 2019, under ASC Topic 310-30, net allowance charges arewere 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, weEffective January 1, 2020, under ASC Topic 326 changes to expected cash flows are 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.in changes in expected recoveries within revenues.
Operating Expenses
Total operating expenses were $191.2 million for the three months ended March 31, 2020, an increase of $0.3 million, or 0.2%, compared to $190.9 million for the three months ended March 31, 2019, an increase of $21.3 million or 12.6%, compared to operating2019.
Compensation and Employee Services
Compensation and employee services expenses of $169.6were $75.2 million for the three months ended March 31, 2018.
Compensation and employee services
Compensation and employee services expenses were2020, a decrease of $4.4 million, or 5.5%, compared to $79.6 million for the three months ended March 31, 2019,2019. The decrease in compensation expense was primarily attributable to a decrease of $1.6 million, or 2.0%, compared to $81.2 million forreduction in 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 tocenter workforce as we balance the first quarter of 2018 asvolume between the total number of collectors decreased, but this was offset by higher medical costs.legal collection channel and call centers. Total full-time equivalents decreased to 4,014 as of March 31, 2020, from 5,236 as of March 31, 2019, compared to 5,639 as of March 31, 2018.2019.
Legal collection feesCollection Fees
Legal collection fees represent contingent fees incurred for the cash collections generated by our independent third-party attorney network. Legal collection fees were $14.6 million for the three months ended March 31, 2020, an increase of $1.5 million, or 11.5%, compared to $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 costsCollection Costs
Legal collection costs primarily consist of costs paid to courts where a lawsuit is filed.filed for the purpose of attempting to collect on an account. Legal collection costs were $34.4 million for the three months ended March 31, 2020, a decrease of $0.8 million, or 2.3% compared to $35.2 million for the three months ended March 31, 2019, an increase2019. The decrease primarily reflects slightly lower court costs in the U.S. due to the disruption in the last two weeks of $13.0 million or 58.6%, compared to legal collectionthe quarter resulting from the COVID-19 pandemic, mostly offset by higher costs of $22.2in Europe.
Outside Fees and Services
Outside fees and services expenses were $19.4 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, 2019,2020, an increase of $5.7$4.2 million, or 68.7%27.6%, 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, 2019,2019. The increase was primarily due to a number of items that were not material individually and higher consulting fees in 2020.
Interest Expense, Net
Interest expense, net was $37.2 million during the three months ended March 31, 2020, an increase of $1.0$3.2 million, or 7.0%9.4%, compared to outside fees and services expenses of $14.2$34.0 million for the three months ended March 31, 2018.
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, 2018.2019. The increase was primarily due to higher average interest rates paired with higher levels of average borrowings outstanding on our debt obligations in additionprimarily to fund increased portfolio investments and the impact of the changes in the fair value of interest rate swap agreements not designated as hedging instruments.our derivatives.
Interest expense, net consisted of the following for the three months ended March 31, 20192020 and 20182019 (amounts in thousands):
| | | Three Months Ended March 31, | For the Three Months Ended March 31, |
| 2019 | | 2018 | | Change | 2020 | | 2019 | | Change |
Stated interest on debt obligations and unused line fees | $ | 23,397 |
| | $ | 20,043 |
| | $ | 3,354 |
| $ | 24,459 |
| | $ | 23,397 |
| | $ | 1,062 |
|
Coupon interest on convertible debt | 5,175 |
| | 5,175 |
| | — |
| 5,175 |
| | 5,175 |
| | — |
|
Amortization of convertible debt discount | 3,042 |
| | 2,877 |
| | 165 |
| 3,217 |
| | 3,042 |
| | 175 |
|
Amortization of loan fees and other loan costs | 2,636 |
| | 2,553 |
| | 83 |
| 2,640 |
| | 2,636 |
| | 4 |
|
Change in fair value on derivatives | 349 |
| | (3,673 | ) | | 4,022 |
| |
Change in fair value of derivatives | | 2,039 |
| | 349 |
| | 1,690 |
|
Interest income | (618 | ) | | (1,194 | ) | | 576 |
| (319 | ) | | (618 | ) | | 299 |
|
Interest expense, net | $ | 33,981 |
| | $ | 25,781 |
| | $ | 8,200 |
| $ | 37,211 |
| | $ | 33,981 |
| | $ | 3,230 |
|
Net Foreign Currency Transaction Gains/(Losses)Gains
Net foreignForeign currency transaction gains were $2.3 million for the three months ended March 31, 2020, compared to $6.3 million for the three months ended March 31, 2019, compared to $1.3 million for the three months ended March 31, 2018.2019. In any given period, we may incur foreign currency transactions gains ortransaction losses from transactions in currencies other than the functional currency.
Other Expense
Other expense The decrease was $0.4 millionprimarily related to lower foreign currency gains in Europe and $0.2 million during the three months ended March 31, 2019 and March 31, 2018, respectively.slightly lower gains on U.S. dollar linked investments held in Brazil.
Income Tax Expense
Income tax expense was $3.1 million for the three months ended March 31, 2020, a decrease of $0.8 million, or 20.5%, compared to $3.9 million for the three months ended March 31, 2019, a2019. The decrease was primarily due to estimated return to provision adjustments partially offset by changes in the mix of $2.2 million, or 36.1%income between countries of operation. During the three months ended March 31, 2020, our effective tax rate was 12.1%, compared to provision for income taxes of $6.1 million18.6% for the three months ended March 31, 2018. The decrease was primarily due to decreases in income before income taxes and our effective tax rate. During the three months ended March 31, 2019, our income before income taxes was $20.8 million, compared to $29.4 million for the three months ended March 31, 2018. During the three months ended March 31, 2019, our effective tax rate was 18.6%, compared to 20.9% for the three months ended March 31, 2018. The decrease was due to changes in the mix of projected taxable income between tax jurisdictions including a decrease in the estimated blended rate for U.S. state taxes due to state apportionment.2019.
Supplemental Performance Data
Finance receivables portfolio performanceReceivables Portfolio Performance
The following tables show certain data related to our finance receivables portfolios. Certain adjustments, as noted in the footnotes to these tables, have been made to reduce the impact of foreign currency fluctuations on ERC and purchase price multiples.
The accounts represented in the insolvency tables are those portfolios of accounts that were in an insolvency status at the time of purchase. This contrasts with accounts in our Core portfolios that file for bankruptcy/insolvency protection after we purchase them, which continue to be tracked in their corresponding Core portfolio. Core customers sometimes file for bankruptcy/insolvency protection subsequent to our purchase of the related Core portfolio. When this occurs, we adjust our collection practices to comply with bankruptcy/insolvency rules and procedures; however, for accounting purposes, these accounts remain in the original Core pool.portfolio. Insolvency accounts may be dismissed voluntarily or involuntarily subsequent to our purchase of the Insolvency portfolio. Dismissal occurs when the terms of the bankruptcy are not met by the petitioner. When this occurs, we are typically free to pursue collection outside of bankruptcy procedures; however, for accounting purposes, these accounts remain in the original Insolvency pool.
Purchase price multiples can vary over time due to a variety of factors, including pricing competition, supply levels, age of the receivables purchased,acquired, and changes in our operational efficiency. For example, increased pricing competition during the 2005 to 2008 period negatively impacted purchase price multiples of our Core portfolio compared to prior years. Conversely, during the 2009 to 2011 period, additional supply occurred as a result of the economic downturn. This created unique and advantageous purchasing opportunities, particularly within the Insolvency market, relative to the prior four years. Purchase price multiples can also vary among types of finance receivables. For example, we generally incur lower collection costs on our Insolvency portfolio compared with our Core portfolio. This allows us, in general, to pay more for an Insolvency portfolio and experience lower purchase price multiples, while generating similar net income margins when compared with a Core portfolio.
When competition increases and/or supply decreases, pricing often becomes negatively impacted relative to expected collections, and yields tend to trend lower. The opposite tends to occur when competition decreases and/or supply increases.
Within a given portfolio type, to the extent that lower purchase price multiples are the result of more competitive pricing and lower net yields, this will generally lead to higher amortization rates and lower profitability. As portfolio pricing becomes more favorable on a relative basis, our profitability will tend to increase. Profitability within given Core portfolio types may also be impacted by the age and quality of the receivables, which impact the cost to collect those accounts. Fresher accounts, for example, typically carry lower associated collection expenses, while older accounts and lower balance accounts typically carry higher costs and, as a result, require higher purchase price multiples to achieve the same net profitability as fresher accounts.paper.
Revenue recognition under ASC 310-10 and ASC Topic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30")326 is driven by estimates of the amount and timing of collections as well as the timing of those collections. We record new portfolio purchases based on our best estimate ofacquisitions at the cash flows expected at acquisition,purchase price which reflects the uncertainties inherent inamount we expect to collect discounted at an effective interest rate. During the purchaseyear of nonperforming loansacquisition, the annual pool is aggregated and the resultsblended effective interest rate will change to reflect new buying and new cash flow estimates until the end of our underwriting process.the year. At that time, the effective interest rate is fixed at the amount we expect to collect discounted at the rate to equate purchase price to the recovery estimate. During the first year of purchase, we typically do not allow purchase price multiples to expand. Subsequent to the initial booking,year, as we gain collection experience and confidence with a pool of accounts, we regularly update ERC. As a result, our estimate of total collections has often increased as pools have aged. These processes have tended to cause the ratio of ERC to purchase price for any given year of buying to gradually increase over time. Thus, all factors being equal in terms of pricing, one would typically tend to see a higher collection to purchase price ratio from a pool of accounts that was six years from purchaseacquisition than a pool that was just two years from purchase.
We hold a beneficial interest in certain pools of finance receivables in Europe. Revenue is recognized under ASC Topic 310-20, "Receivables - Nonrefundable Fees and Other Costs" where we compute a life-to-date yield on a retrospective basis and apply it to the ERC of the portfolio. Revenue on these pools is included in income recognized on finance receivables. In addition, these pools are included in the following tables as they perform economically similar to finance receivables accounted for under ASC 310-30.acquisition.
The numbers presented in the following tables represent gross cash collections and do not reflect any costs to collect; therefore, they may not represent relative profitability. Due to all the factors described above, readers should be cautious when making comparisons of purchase price multiples among periods and between types of receivables.
We hold a majority interest in a Polish investment fund that was previously classified in our Consolidated Balance Sheets as "Investments" and previously excluded from the following tables. Effective July 1, 2018, we assumed servicing responsibilities for approximately 50% of the portfolios held by the Polish investment fund which led to an accounting reconsideration event and the consolidation of this investment. The finance receivables recorded at the consolidation date and the related portfolio performance information are included in the Supplemental Performance Data section in the Europe-Core 2018 line unless otherwise indicated. On March 29, 2019, we signed an agreement making PRA Group the servicer of effectively 100% of the portfolios held by the Polish investment fund effective April 1, 2019.
Purchase Price Multiples as of March 31, 2019 Amounts in thousands | |
Purchase Price Multiples as of March 31, 2020 Amounts in thousands | | Purchase Price Multiples as of March 31, 2020 Amounts in thousands |
| Purchase Period | Purchase Price (1)(2) | Net Finance Receivables (3) | ERC-Historical Period Exchange Rates (4) | Total Estimated Collections (5) | ERC-Current Period Exchange Rates (6) | Current Estimated Purchase Price Multiple | Original Estimated Purchase Price Multiple (7) | Purchase Price (1)(2) | ERC-Historical Period Exchange Rates (3) | Total Estimated Collections (4) | ERC-Current Period Exchange Rates (5) | Current Estimated Purchase Price Multiple | Original Estimated Purchase Price Multiple(6) |
Americas-Core | | | |
1996-2008 | $ | 804,882 |
| $ | 8,460 |
| $ | 32,757 |
| $ | 2,424,133 |
| $ | 32,757 |
| 301 | % | 236 | % | |
2009 | 125,153 |
| 642 |
| 20,893 |
| 459,594 |
| 20,893 |
| 367 | % | 252 | % | |
Americas Core | | | |
1996-2009 | | $ | 930,026 |
| $ | 38,390 |
| $ | 2,886,117 |
| $ | 38,390 |
| 310 | % | 238 | % |
2010 | 148,199 |
| 4,239 |
| 34,123 |
| 534,384 |
| 34,123 |
| 361 | % | 247 | % | 148,193 |
| 26,621 |
| 535,652 |
| 26,621 |
| 361 | % | 247 | % |
2011 | 209,606 |
| 9,231 |
| 57,522 |
| 736,144 |
| 57,522 |
| 351 | % | 245 | % | 209,602 |
| 44,992 |
| 738,981 |
| 44,992 |
| 353 | % | 245 | % |
2012 | 254,118 |
| 18,385 |
| 74,305 |
| 681,435 |
| 74,305 |
| 268 | % | 226 | % | 254,076 |
| 56,991 |
| 680,187 |
| 56,991 |
| 268 | % | 226 | % |
2013 | 390,979 |
| 44,602 |
| 129,076 |
| 939,654 |
| 129,076 |
| 240 | % | 211 | % | 390,826 |
| 85,283 |
| 928,709 |
| 85,283 |
| 238 | % | 211 | % |
2014 | 405,398 |
| 73,574 |
| 193,729 |
| 931,183 |
| 190,424 |
| 230 | % | 204 | % | 404,117 |
| 138,067 |
| 921,659 |
| 135,051 |
| 228 | % | 204 | % |
2015 | 443,992 |
| 122,428 |
| 288,967 |
| 970,072 |
| 288,804 |
| 218 | % | 205 | % | 443,114 |
| 206,581 |
| 960,145 |
| 205,976 |
| 217 | % | 205 | % |
2016 | 453,575 |
| 176,337 |
| 428,963 |
| 1,054,922 |
| 423,406 |
| 233 | % | 201 | % | 455,767 |
| 327,345 |
| 1,093,346 |
| 314,819 |
| 240 | % | 201 | % |
2017 | 534,185 |
| 330,760 |
| 657,395 |
| 1,119,849 |
| 653,959 |
| 210 | % | 193 | % | 532,851 |
| 468,942 |
| 1,167,610 |
| 464,659 |
| 219 | % | 193 | % |
2018 | 656,699 |
| 588,009 |
| 1,108,027 |
| 1,323,983 |
| 1,105,245 |
| 202 | % | 202 | % | 653,975 |
| 762,474 |
| 1,337,704 |
| 749,410 |
| 205 | % | 202 | % |
2019 | 169,526 |
| 166,465 |
| 335,384 |
| 345,455 |
| 335,384 |
| 204 | % | 204 | % | 581,476 |
| 969,495 |
| 1,198,926 |
| 933,976 |
| 206 | % | 206 | % |
2020 | | 172,697 |
| 329,648 |
| 336,822 |
| 329,648 |
| 195 | % | 195 | % |
Subtotal | 4,596,312 |
| 1,543,132 |
| 3,361,141 |
| 11,520,808 |
| 3,345,898 |
| | 5,176,720 |
| 3,454,829 |
| 12,785,858 |
| 3,385,816 |
| |
Americas-Insolvency | | | |
2004-2008 | 241,465 |
| — |
| 582 |
| 365,645 |
| 582 |
| 151 | % | 155 | % | |
2009 | 155,988 |
| — |
| 1,084 |
| 470,628 |
| 1,084 |
| 302 | % | 214 | % | |
Americas Insolvency | | Americas Insolvency | | |
1996-2009 | | 397,453 |
| 794 |
| 835,929 |
| 794 |
| 210 | % | 178 | % |
2010 | 208,942 |
| — |
| 1,915 |
| 547,132 |
| 1,915 |
| 262 | % | 184 | % | 208,942 |
| 1,016 |
| 546,844 |
| 1,016 |
| 262 | % | 184 | % |
2011 | 180,433 |
| — |
| 262 |
| 368,873 |
| 262 |
| 204 | % | 155 | % | 180,432 |
| 848 |
| 370,113 |
| 848 |
| 205 | % | 155 | % |
2012 | 251,418 |
| — |
| 163 |
| 390,297 |
| 163 |
| 155 | % | 136 | % | 251,395 |
| 688 |
| 392,419 |
| 688 |
| 156 | % | 136 | % |
2013 | 227,903 |
| — |
| 4,024 |
| 355,004 |
| 4,024 |
| 156 | % | 133 | % | 227,834 |
| 1,728 |
| 354,918 |
| 1,728 |
| 156 | % | 133 | % |
2014 | 148,710 |
| 5,226 |
| 12,734 |
| 216,687 |
| 12,701 |
| 146 | % | 124 | % | 148,420 |
| 2,252 |
| 217,283 |
| 2,232 |
| 146 | % | 124 | % |
2015 | 63,181 |
| 12,929 |
| 18,623 |
| 84,083 |
| 18,623 |
| 133 | % | 125 | % | 63,170 |
| 6,655 |
| 87,791 |
| 6,655 |
| 139 | % | 125 | % |
2016 | 92,280 |
| 26,671 |
| 34,798 |
| 114,224 |
| 34,741 |
| 124 | % | 123 | % | 91,442 |
| 18,596 |
| 116,061 |
| 18,536 |
| 127 | % | 123 | % |
2017 | 275,287 |
| 139,471 |
| 178,661 |
| 346,306 |
| 178,661 |
| 126 | % | 125 | % | 275,257 |
| 104,624 |
| 349,186 |
| 104,624 |
| 127 | % | 125 | % |
2018 | 98,102 |
| 90,015 |
| 112,373 |
| 124,694 |
| 112,373 |
| 127 | % | 127 | % | 97,879 |
| 85,846 |
| 127,700 |
| 85,846 |
| 130 | % | 127 | % |
2019 | 48,230 |
| 47,935 |
| 59,136 |
| 60,056 |
| 59,136 |
| 125 | % | 125 | % | 123,077 |
| 137,797 |
| 158,639 |
| 137,556 |
| 129 | % | 128 | % |
2020 | | 20,772 |
| 25,768 |
| 27,344 |
| 25,768 |
| 132 | % | 132 | % |
Subtotal | 1,991,939 |
| 322,247 |
| 424,355 |
| 3,443,629 |
| 424,265 |
| | 2,086,073 |
| 386,612 |
| 3,584,227 |
| 386,291 |
| |
Total Americas | 6,588,251 |
| 1,865,379 |
| 3,785,496 |
| 14,964,437 |
| 3,770,163 |
| | 7,262,793 |
| 3,841,441 |
| 16,370,085 |
| 3,772,107 |
| |
Europe-Core | | | |
Europe Core | | | |
2012 | 20,423 |
| — |
| 1,028 |
| 39,353 |
| 824 |
| 193 | % | 187 | % | 20,409 |
| 533 |
| 40,607 |
| 406 |
| 199 | % | 187 | % |
2013 | 20,346 |
| 8 |
| 615 |
| 24,356 |
| 483 |
| 120 | % | 119 | % | 20,334 |
| 262 |
| 25,056 |
| 196 |
| 123 | % | 119 | % |
2014 | 796,860 |
| 225,367 |
| 873,647 |
| 2,177,579 |
| 744,656 |
| 273 | % | 208 | % | 773,811 |
| 759,304 |
| 2,202,629 |
| 640,238 |
| 285 | % | 208 | % |
2015 | 420,576 |
| 181,626 |
| 393,001 |
| 742,543 |
| 355,328 |
| 177 | % | 160 | % | 411,340 |
| 323,139 |
| 734,838 |
| 285,151 |
| 179 | % | 160 | % |
2016 | 348,370 |
| 215,547 |
| 380,638 |
| 582,463 |
| 379,792 |
| 167 | % | 167 | % | 333,090 |
| 310,630 |
| 557,579 |
| 291,054 |
| 167 | % | 167 | % |
2017 | 247,719 |
| 181,807 |
| 270,435 |
| 354,772 |
| 264,864 |
| 143 | % | 144 | % | 252,174 |
| 229,143 |
| 361,268 |
| 204,423 |
| 143 | % | 144 | % |
2018 (8) | 345,892 |
| 310,988 |
| 465,042 |
| 514,378 |
| 466,881 |
| 149 | % | 148 | % | |
2018 | | 341,775 |
| 385,373 |
| 518,022 |
| 369,842 |
| 152 | % | 148 | % |
2019 | 93,270 |
| 92,656 |
| 137,193 |
| 138,379 |
| 137,193 |
| 148 | % | 148 | % | 518,610 |
| 706,719 |
| 790,270 |
| 665,335 |
| 152 | % | 152 | % |
2020 | | 60,990 |
| 105,783 |
| 108,540 |
| 105,783 |
| 178 | % | 178 | % |
Subtotal | 2,293,456 |
| 1,207,999 |
| 2,521,599 |
| 4,573,823 |
| 2,350,021 |
| | 2,732,533 |
| 2,820,886 |
| 5,338,809 |
| 2,562,428 |
| |
Europe-Insolvency | | | |
Europe Insolvency | | Europe Insolvency | | |
2014 | 10,876 |
| 692 |
| 2,064 |
| 18,029 |
| 1,841 |
| 166 | % | 129 | % | 10,876 |
| 798 |
| 18,164 |
| 678 |
| 167 | % | 129 | % |
2015 | 19,393 |
| 4,621 |
| 9,165 |
| 29,219 |
| 8,027 |
| 151 | % | 139 | % | 18,973 |
| 4,969 |
| 29,054 |
| 4,162 |
| 153 | % | 139 | % |
2016 | 42,190 |
| 17,448 |
| 26,534 |
| 61,144 |
| 26,416 |
| 145 | % | 130 | % | 39,338 |
| 14,946 |
| 56,971 |
| 15,133 |
| 145 | % | 130 | % |
2017 | 38,787 |
| 30,359 |
| 39,064 |
| 50,550 |
| 38,307 |
| 130 | % | 128 | % | 39,235 |
| 27,096 |
| 48,706 |
| 24,854 |
| 124 | % | 128 | % |
2018 | 45,633 |
| 43,606 |
| 53,453 |
| 56,077 |
| 53,283 |
| 123 | % | 123 | % | 44,908 |
| 43,766 |
| 55,331 |
| 42,403 |
| 123 | % | 123 | % |
2019 | 7,125 |
| 7,125 |
| 9,360 |
| 9,393 |
| 9,360 |
| 132 | % | 132 | % | 77,218 |
| 91,096 |
| 102,236 |
| 85,535 |
| 132 | % | 130 | % |
2020 | | 18,778 |
| 23,947 |
| 24,090 |
| 23,947 |
| 128 | % | 128 | % |
Subtotal | 164,004 |
| 103,851 |
| 139,640 |
| 224,412 |
| 137,234 |
| | 249,326 |
| 206,618 |
| 334,552 |
| 196,712 |
| |
Total Europe | 2,457,460 |
| 1,311,850 |
| 2,661,239 |
| 4,798,235 |
| 2,487,255 |
| | 2,981,859 |
| 3,027,504 |
| 5,673,361 |
| 2,759,140 |
| |
Total PRA Group | $ | 9,045,711 |
| $ | 3,177,229 |
| $ | 6,446,735 |
| $ | 19,762,672 |
| $ | 6,257,418 |
| | $ | 10,244,652 |
| $ | 6,868,945 |
| $ | 22,043,446 |
| $ | 6,531,247 |
| |
| |
(1) | The amount reflected in Purchase Price also includesIncludes the acquisition date finance receivables portfolios that were acquired through our various business acquisitions. |
| |
(2) | For our internationalnon-US amounts, Purchase Pricepurchase price is presented at the exchange rate at the end of the quarteryear in which the pool was purchased. In addition, any purchase price adjustments that occur throughout the life of the pool are presented at the period-endyear-end exchange rate for the respective quarteryear of purchase. |
| |
(3) | For our internationalnon-US amounts, Net Finance Receivables areERC-Historical Period Exchange Rates is presented at the March 31, 2019year-end exchange rate.rate for the respective year of purchase. |
| |
(4) | For our internationalnon-US amounts, ERC-Historical Period Exchange RatesTEC is presented at the period-endyear-end exchange rate for the respective quarteryear of purchase. |
| |
(5) | For our international amounts, TEC is presented at the period-end exchange rate for the respective quarter of purchase. |
| |
(6) | For our internationalnon-U.S. amounts, ERC-Current Period Exchange Rates is presented at the March 31, 20192020 exchange rate. |
| |
(7)(6) | The Original Estimated Purchase Price Multiple represents the purchase price multiple at the end of the year of acquisition. |
| |
(8) | The Europe-Core purchases include a $34.9 million finance receivables portfolio addition in the third quarter of 2018 relating to the consolidation of a Polish investment fund. |
Portfolio Financial Information Year-to-date as of March 31, 2019 Amounts in thousands | |
Portfolio Financial Information Year-to-date as of March 31, 2020 Amounts in thousands | | Portfolio Financial Information Year-to-date as of March 31, 2020 Amounts in thousands |
| Purchase Period | Purchase Price (1)(2) | Cash Collections (3) | Gross Revenue (3) | Amortization (3) | Net Allowance Charges/(Reversals) (3) | Net Revenue (3)(4) | Net Finance Receivables as of March 31, 2019 (5) | Cash Collections (1) | Portfolio Income (1) | Changes in Expected Recoveries | Total Portfolio Revenue (1)(2) | Net Finance Receivables as of March 31, 2020 (3) |
Americas-Core | | |
1996-2008 | $ | 804,882 |
| $ | 3,551 |
| $ | 2,353 |
| $ | 1,198 |
| $ | (550 | ) | $ | 2,903 |
| $ | 8,460 |
| |
2009 | 125,153 |
| 1,900 |
| 1,789 |
| 111 |
| (100 | ) | 1,889 |
| 642 |
| |
Americas Core | | |
1996-2009 | | $ | 3,940 |
| $ | 2,922 |
| $ | 228 |
| $ | 3,150 |
| $ | 8,489 |
|
2010 | 148,199 |
| 2,448 |
| 2,204 |
| 244 |
| 160 |
| 2,044 |
| 4,239 |
| 2,016 |
| 1,826 |
| (31 | ) | 1,795 |
| 3,263 |
|
2011 | 209,606 |
| 4,653 |
| 4,025 |
| 628 |
| 575 |
| 3,450 |
| 9,231 |
| 3,383 |
| 3,081 |
| (176 | ) | 2,905 |
| 7,229 |
|
2012 | 254,118 |
| 5,355 |
| 3,821 |
| 1,534 |
| (300 | ) | 4,121 |
| 18,385 |
| 3,556 |
| 3,115 |
| (160 | ) | 2,955 |
| 15,406 |
|
2013 | 390,979 |
| 10,972 |
| 7,576 |
| 3,396 |
| 2,505 |
| 5,071 |
| 44,602 |
| 6,966 |
| 5,299 |
| (2,285 | ) | 3,014 |
| 29,641 |
|
2014 | 405,398 |
| 16,884 |
| 10,884 |
| 6,000 |
| 1,533 |
| 9,351 |
| 73,574 |
| 9,452 |
| 7,547 |
| (4,072 | ) | 3,475 |
| 48,628 |
|
2015 | 443,992 |
| 25,966 |
| 14,919 |
| 11,047 |
| 494 |
| 14,425 |
| 122,428 |
| 16,050 |
| 10,589 |
| (4,661 | ) | 5,928 |
| 83,039 |
|
2016 | 453,575 |
| 41,916 |
| 23,291 |
| 18,625 |
| 505 |
| 22,786 |
| 176,337 |
| 27,017 |
| 17,389 |
| (2,817 | ) | 14,572 |
| 126,158 |
|
2017 | 534,185 |
| 74,211 |
| 33,808 |
| 40,403 |
| — |
| 33,808 |
| 330,760 |
| 53,489 |
| 26,613 |
| (1,857 | ) | 24,756 |
| 212,544 |
|
2018 | 656,699 |
| 92,768 |
| 52,025 |
| 40,743 |
| — |
| 52,025 |
| 588,009 |
| 89,601 |
| 40,978 |
| (2,418 | ) | 38,560 |
| 404,887 |
|
2019 | 169,526 |
| 10,099 |
| 7,023 |
| 3,076 |
| — |
| 7,023 |
| 166,465 |
| 83,127 |
| 49,886 |
| (3,509 | ) | 46,377 |
| 477,513 |
|
2020 | | 7,183 |
| 5,611 |
| 365 |
| 5,976 |
| 170,995 |
|
Subtotal | 4,596,312 |
| 290,723 |
| 163,718 |
| 127,005 |
| 4,822 |
| 158,896 |
| 1,543,132 |
| 305,780 |
| 174,856 |
| (21,393 | ) | 153,463 |
| 1,587,792 |
|
Americas-Insolvency | | |
2004-2008 | 241,465 |
| 68 |
| 68 |
| — |
| — |
| 68 |
| — |
| |
2009 | 155,988 |
| 151 |
| 151 |
| — |
| — |
| 151 |
| — |
| |
Americas Insolvecy | | |
1996-2009 | | 95 |
| 123 |
| (28 | ) | 95 |
| — |
|
2010 | 208,942 |
| 189 |
| 189 |
| — |
| — |
| 189 |
| — |
| 137 |
| 165 |
| (28 | ) | 137 |
| — |
|
2011 | 180,433 |
| 224 |
| 224 |
| — |
| — |
| 224 |
| — |
| 135 |
| 125 |
| 11 |
| 136 |
| — |
|
2012 | 251,418 |
| 579 |
| 579 |
| — |
| — |
| 579 |
| — |
| 307 |
| 265 |
| 42 |
| 307 |
| — |
|
2013 | 227,903 |
| 1,061 |
| 1,061 |
| — |
| — |
| 1,061 |
| — |
| 410 |
| 415 |
| (4 | ) | 411 |
| — |
|
2014 | 148,710 |
| 5,313 |
| 3,051 |
| 2,262 |
| — |
| 3,051 |
| 5,226 |
| 837 |
| 1,085 |
| (500 | ) | 585 |
| 503 |
|
2015 | 63,181 |
| 4,261 |
| 959 |
| 3,302 |
| — |
| 959 |
| 12,929 |
| 3,280 |
| 1,661 |
| 21 |
| 1,682 |
| 4,182 |
|
2016 | 92,280 |
| 4,987 |
| 1,052 |
| 3,935 |
| — |
| 1,052 |
| 26,671 |
| 4,076 |
| 1,130 |
| 220 |
| 1,350 |
| 14,704 |
|
2017 | 275,287 |
| 21,239 |
| 5,108 |
| 16,131 |
| — |
| 5,108 |
| 139,471 |
| 17,250 |
| 4,813 |
| 377 |
| 5,190 |
| 83,360 |
|
2018 | 98,102 |
| 5,622 |
| 1,727 |
| 3,895 |
| — |
| 1,727 |
| 90,015 |
| 7,717 |
| 2,409 |
| 450 |
| 2,859 |
| 69,595 |
|
2019 | 48,230 |
| 919 |
| 625 |
| 294 |
| — |
| 625 |
| 47,935 |
| 7,390 |
| 2,992 |
| 1,240 |
| 4,232 |
| 111,219 |
|
2020 | | 1,576 |
| 300 |
| (1 | ) | 299 |
| 19,433 |
|
Subtotal | 1,991,939 |
| 44,613 |
| 14,794 |
| 29,819 |
| — |
| 14,794 |
| 322,247 |
| 43,210 |
| 15,483 |
| 1,800 |
| 17,283 |
| 302,996 |
|
Total Americas | 6,588,251 |
| 335,336 |
| 178,512 |
| 156,824 |
| 4,822 |
| 173,690 |
| 1,865,379 |
| 348,990 |
| 190,339 |
| (19,593 | ) | 170,746 |
| 1,890,788 |
|
Europe-Core | | |
Europe Core | | |
2012 | 20,423 |
| 402 |
| 402 |
| — |
| — |
| 402 |
| — |
| 321 |
| 270 |
| 51 |
| 321 |
| — |
|
2013 | 20,346 |
| 271 |
| 178 |
| 93 |
| — |
| 178 |
| 8 |
| 178 |
| 131 |
| 47 |
| 178 |
| — |
|
2014 | 796,860 |
| 45,432 |
| 30,356 |
| 15,076 |
| (250 | ) | 30,606 |
| 225,367 |
| 38,124 |
| 28,465 |
| (92 | ) | 28,373 |
| 168,327 |
|
2015 | 420,576 |
| 17,889 |
| 7,932 |
| 9,957 |
| (333 | ) | 8,265 |
| 181,626 |
| 14,761 |
| 8,134 |
| (58 | ) | 8,076 |
| 146,671 |
|
2016 | 348,370 |
| 15,303 |
| 7,261 |
| 8,042 |
| 1,392 |
| 5,869 |
| 215,547 |
| 12,548 |
| 7,010 |
| 44 |
| 7,054 |
| 165,489 |
|
2017 | 247,719 |
| 11,524 |
| 4,058 |
| 7,466 |
| 576 |
| 3,482 |
| 181,807 |
| 9,631 |
| 3,587 |
| (186 | ) | 3,401 |
| 141,100 |
|
2018 (6) | 345,892 |
| 24,843 |
| 6,571 |
| 18,272 |
| — |
| 6,571 |
| 310,988 |
| |
2018 | | 19,535 |
| 6,900 |
| 454 |
| 7,354 |
| 240,588 |
|
2019 | 93,270 |
| 1,194 |
| 576 |
| 618 |
| — |
| 576 |
| 92,656 |
| 33,449 |
| 11,457 |
| 2,958 |
| 14,415 |
| 440,409 |
|
2020 | | 2,793 |
| 846 |
| 1,698 |
| 2,544 |
| 59,008 |
|
Subtotal | 2,293,456 |
| 116,858 |
| 57,334 |
| 59,524 |
| 1,385 |
| 55,949 |
| 1,207,999 |
| 131,340 |
| 66,800 |
| 4,916 |
| 71,716 |
| 1,361,592 |
|
Europe-Insolvency | | |
Europe Insolvency | | |
2014 | 10,876 |
| 555 |
| 268 |
| 287 |
| — |
| 268 |
| 692 |
| 240 |
| 177 |
| 10 |
| 187 |
| 243 |
|
2015 | 19,393 |
| 1,104 |
| 482 |
| 622 |
| (72 | ) | 554 |
| 4,621 |
| 928 |
| 422 |
| 110 |
| 532 |
| 2,506 |
|
2016 | 42,190 |
| 2,961 |
| 1,106 |
| 1,855 |
| (40 | ) | 1,146 |
| 17,448 |
| 2,200 |
| 911 |
| (74 | ) | 837 |
| 10,497 |
|
2017 | 38,787 |
| 2,359 |
| 605 |
| 1,754 |
| — |
| 605 |
| 30,359 |
| 2,401 |
| 556 |
| 69 |
| 625 |
| 21,319 |
|
2018 | 45,633 |
| 1,964 |
| 495 |
| 1,469 |
| — |
| 495 |
| 43,606 |
| 2,472 |
| 788 |
| (16 | ) | 772 |
| 35,749 |
|
2019 | 7,125 |
| 34 |
| 34 |
| — |
| — |
| 34 |
| 7,125 |
| 5,854 |
| 1,773 |
| 1,589 |
| 3,362 |
| 67,269 |
|
2020 | | 148 |
| 256 |
| 173 |
| 429 |
| 18,111 |
|
Subtotal | 164,004 |
| 8,977 |
| 2,990 |
| 5,987 |
| (112 | ) | 3,102 |
| 103,851 |
| 14,243 |
| 4,883 |
| 1,861 |
| 6,744 |
| 155,694 |
|
Total Europe | 2,457,460 |
| 125,835 |
| 60,324 |
| 65,511 |
| 1,273 |
| 59,051 |
| 1,311,850 |
| 145,583 |
| 71,683 |
| 6,777 |
| 78,460 |
| 1,517,286 |
|
Total PRA Group | $ | 9,045,711 |
| $ | 461,171 |
| $ | 238,836 |
| $ | 222,335 |
| $ | 6,095 |
| $ | 232,741 |
| $ | 3,177,229 |
| $ | 494,573 |
| $ | 262,022 |
| $ | (12,816 | ) | $ | 249,206 |
| $ | 3,408,074 |
|
The following table, which excludes any proceeds from cash sales of finance receivables, illustrates historical cash collections, by year, on our portfolios.
The following table displays our quarterly cash collections by geography and portfolio type, for the periods indicated.
The following table provides additional details on the composition of our U.S. Core cash collections for the periods indicated.
The following tables display certain collections productivity measures.
The following graph shows the purchase price of our portfolios by year since 2009. It also includes the acquisition date finance receivable portfolios that were acquired through our various business acquisitions. The 20192020 totals represent portfolio purchasesacquisitions through the first quarter of 2019three months ended March 31, 2020 while the prior years totals are for the full year.
The following table categorizes our quarterly U.S. portfolio purchasesacquisitions for the periods indicated into major asset type and delinquency category. Over the past 20 plus years,Since our inception in 1996, we have acquired more than 5155 million customer accounts in the U.S.
An additional funding source for our Europe operations is interest-bearing deposits. Per the terms of our European credit facility, we are permitted to obtain interest-bearing deposit funding of up to SEK 1.2 billion (approximately $129.0$119.7 million as of March 31, 2019)2020). Interest-bearing deposits as of March 31, 20192020 were $95.3$97.5 million.
Contractual obligations over the next year are primarily related to debt maturities and purchase commitments. Our North American credit facility expires in May 2022. Our European credit facility expires in February 2021.2023. Of our $432.5$422.5 million in term loans outstanding at March 31, 2019,2020, $10.0 million in principal is due within one year.
We have in place forward flow commitments for the purchase of nonperforming loans primarily over the next 12 months with a maximum purchase price of $351.5$626.5 million as of March 31, 2019. We2020. The $626.5 million is comprised of $443.0 million for the Americas and $183.5 million for Europe.We may also enter into new or renewed forward flow commitments and close on spot transactions in addition to the aforementioned forward flow agreements.
over four years effective with tax year 2017. We estimate the related tax payments for future years to be approximately $9.3$9.2 million per quarter.quarter through the year 2020. No interest or penalties were assessed as part of the settlement.
Cash for financing activities is normally provided by draws on our lines of credit and proceeds from debt offerings. Cash used in financing activities is primarily driven by principal payments on our lines of credit and long-term debt. The change in cash
We intend to use predominantly all of our accumulated and future undistributed earnings of foreigninternational subsidiaries to expand operations outside the U.S.; therefore, such undistributed earnings of foreigninternational subsidiaries are considered to be indefinitely reinvested outside the U.S. Accordingly, no provision for income tax and withholding tax has been provided thereon. If management's intentions change and eligible undistributed earnings of foreigninternational subsidiaries are repatriated, we could be subject to additional income taxes and withholding taxes. This could result in a higher effective tax rate in the period in which such a decision is made to repatriate accumulated or future undistributed foreigninternational earnings. The amount of cash on hand related to foreigninternational operations with indefinitely reinvested earnings was $83.8$115.4 million and $78.6$109.7 million as of March 31, 20192020 and December 31, 2018,2019, respectively. Refer to Note11Note 12 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report for further information related to our income taxes and undistributed foreigninternational earnings.
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
For a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statementsConsolidated Financial Statements see Note 1314 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.
Three of these policies are considered to be critical because they are important to the portrayal of our financial condition and results, and because they require management to make judgments and estimates that are difficult, subjective, and complex regarding matters that are inherently uncertain.
We base our estimates on historical experience, current trends and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ significantly from actual results, the impact on our consolidated financial statementsConsolidated Financial Statements may be material.
Management has reviewed these critical accounting policies with the Audit Committee of our boardBoard of directors.Directors.
In accordance with FASB ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), we amortize intangible assets over their estimated useful lives. Goodwill, pursuant to ASC 350, is not amortized but rather evaluated for impairment annually and more frequently if indicators of potential impairment exist. Goodwill is reviewed for potential impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment.
We determine the fair value of a reporting unit by applying the approaches prescribed under the fair value measurement accounting framework: the income approach and the market approach. Depending on the availability of public data and suitable comparables, we may or may not use the market approach or we may emphasize the results from the approach differently. Under the income approach, we estimate the fair value of a reporting unit based on the present value of estimated future cash flows and a residual terminal value. Cash flow projections are based on management's estimates of revenue growth rates, operating margins, necessary working capital, and capital expenditure requirements, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected cash flows. Under the market approach, we estimate fair value based on prices and other relevant market transactions involving comparable publicly-traded companies with operating and investment characteristics similar to the reporting unit.
We are subject to the income tax laws of the various jurisdictions in which we operate, including U.S. federal, state, local, and international jurisdictions. These tax laws are complex and are subject to different interpretations by the taxpayer and the relevant government taxing authorities. When determining our domestic and foreigninternational income tax expense, we must make judgments about the application of these inherently complex laws.
We follow 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. Accordingly, we record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with ASC 740, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The evaluation of a tax position in accordance with the guidance is a two-step process. The first step is recognition: the Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company
should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense.
In the event that all or part of the deferred tax assets are determined not to be realizable in the future, a valuation allowance would be established and charged to earnings in the period such determination is made. If we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period such determination is made. The establishment or release of a valuation allowance does not have an impact on cash, nor does such an allowance preclude the use of loss carry-forwards or other deferred tax assets in future periods. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position.