PRA GROUP INC - Quarter Report: 2017 March (Form 10-Q)

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, 2017

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

For the transition period from ________ to ________

Commission File Number: 000-50058

PRA Group, Inc.

(Exact name of registrant as specified in its charter)



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

120 Corporate Boulevard, Norfolk, Virginia	23502	(888) 772-7326
(Address of principal executive offices)	(Zip Code)	(Registrant's Telephone No., including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨

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

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

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

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

The number of shares of the registrant's common stock outstanding as of May 4, 2017 was 46,438,952.

Table of Contents



Part I. Financial Information

Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Income Statements	4
	Consolidated Statements of Comprehensive Income/(Loss)	5
	Consolidated Statement of Changes in Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
	1. Organization and Business	8
	2. Finance Receivables, net	9
	3. Investments	10
	4. Borrowings	11
	5. Goodwill and Intangible Assets, net	14
	6. Income Taxes	15
	7. Earnings per Share	15
	8. Commitments and Contingencies	16
	9. Fair Value	17
	10. Recent Accounting Pronouncements	20
	11. Sale of Subsidiaries	21
	12. Subsequent Event	22
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42

Part II. Other Information

Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43

Signatures		44

Part I. Financial Information

Item 1. Financial Statements

PRA Group, Inc.

Consolidated Balance Sheets

March 31, 2017 and December 31, 2016

(Amounts in thousands)



	(unaudited)
	March 31, 2017			December 31, 2016
Assets
Cash and cash equivalents	$	82,110		$	94,287
Investments	74,055			68,543
Finance receivables, net	2,366,880			2,307,969
Other receivables, net	17,684			11,650
Income taxes receivable	—			9,427
Net deferred tax asset	29,090			28,482
Property and equipment, net	38,024			38,744
Goodwill	506,240			499,911
Intangible assets, net	27,393			27,935
Other assets	32,373			33,808
Assets held for sale	—			43,243
Total assets	$	3,173,849		$	3,163,999
Liabilities and Equity
Liabilities:
Accounts payable	$	3,924		$	2,459
Accrued expenses	82,594			82,699
Income taxes payable	37,960			19,631
Net deferred tax liability	259,330			258,344
Interest-bearing deposits	78,792			76,113
Borrowings	1,708,687			1,784,101
Other liabilities	13,344			10,821
Liabilities held for sale	—			4,220
Total liabilities	2,184,631			2,238,388
Redeemable noncontrolling interest	8,515			8,448
Equity:
Preferred stock, par value $0.01, authorized shares, 2,000, issued and outstanding shares, 0	—			—
Common stock, par value $0.01, authorized shares, 100,000, issued and outstanding shares, 46,439 at March 31, 2017; 100,000 authorized shares, 46,356 issued and outstanding shares at December 31, 2016	464			464
Additional paid-in capital	66,293			66,414
Retained earnings	1,097,534			1,049,367
Accumulated other comprehensive loss	(233,476		)	(251,944		)
Total stockholders' equity - PRA Group, Inc.	930,815			864,301
Noncontrolling interest	49,888			52,862
Total equity	980,703			917,163
Total liabilities and equity	$	3,173,849		$	3,163,999

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, 2017 and 2016

(unaudited)

(Amounts in thousands, except per share amounts)



	Three Months Ended March 31,
	2017			2016
Revenues:
Income recognized on finance receivables, net	$	194,535		$	206,507
Fee income	9,858			16,266
Other revenue	2,165			2,109
Total revenues	206,558			224,882
Operating expenses:
Compensation and employee services	68,468			66,765
Legal collection expenses	31,728			30,132
Agency fees	10,800			10,884
Outside fees and services	13,285			15,808
Communication	9,137			9,882
Rent and occupancy	3,783			3,796
Depreciation and amortization	5,215			6,070
Other operating expenses	10,885			10,651
Total operating expenses	153,301			153,988
Income from operations	53,257			70,894
Other income and (expense):
Gain on sale of subsidiaries	46,845			—
Interest expense	(21,257		)	(19,959		)
Foreign exchange gain/(loss)	2,179			(1,850		)
Income before income taxes	81,024			49,085
Provision for income taxes	31,409			16,232
Net income	49,615			32,853
Adjustment for net income attributable to noncontrolling interest	1,448			870
Net income attributable to PRA Group, Inc.	$	48,167		$	31,983
Net income per common share attributable to PRA Group, Inc.:
Basic	$	1.04		$	0.69
Diluted	$	1.03		$	0.69
Weighted average number of shares outstanding:
Basic	46,406			46,243
Diluted	46,627			46,372

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, 2017 and 2016

(unaudited)

(Amounts in thousands)



	Three Months Ended March 31,
	2017			2016
Net income	$	49,615		$	32,853
Other comprehensive income:
Change in foreign currency translation	14,823			36,694
Total comprehensive income	64,438			69,547
Comprehensive income attributable to noncontrolling interest:
Net income attributable to noncontrolling interest	1,448			870
Change in foreign currency translation	(3,645		)	3,968
Comprehensive (loss)/income attributable to noncontrolling interest	(2,197		)	4,838
Comprehensive income attributable to PRA Group, Inc.	$	66,635		$	64,709

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

PRA Group, Inc.

Consolidated Statement of Changes in Equity

For the three months ended March 31, 2017

(unaudited)

(Amounts in thousands)



	Common Stock			Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Noncontrolling Interest			Total Equity
	Shares	Amount		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Noncontrolling Interest			Total Equity
Balance at December 31, 2016	46,356	$	464	$	66,414		$	1,049,367	$	(251,944	)	$	52,862		$	917,163
Components of comprehensive income:
Net income	—	—		—			48,167		—			1,888			50,055
Foreign currency translation adjustment	—	—		—			—		18,468			(4,152		)	14,316
Distributions paid to noncontrolling interest	—	—		—			—		—			(710		)	(710		)
Vesting of nonvested shares	83	—		—			—		—			—			—
Amortization of share-based compensation	—	—		2,199			—		—			—			2,199
Employee stock relinquished for payment of taxes	—	—		(2,320		)	—		—			—			(2,320		)
Balance at March 31, 2017	46,439	$	464	$	66,293		$	1,097,534	$	(233,476	)	$	49,888		$	980,703

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, 2017 and 2016

(unaudited)

(Amounts in thousands)



	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net income	$	49,615		$	32,853
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of share-based compensation	2,199			3,437
Depreciation and amortization	5,215			6,070
Gain on sale of subsidiaries	(46,845		)	—
Amortization of debt discount and issuance costs	3,083			2,746
Deferred tax expense	25			4,815
Net foreign currency transaction (gain)/loss	(1,723		)	305
Other	(1,359		)	—
Changes in operating assets and liabilities:
Other assets	1,837			(42,818		)
Other receivables, net	(4,744		)	(2,304		)
Accounts payable	648			(1,773		)
Income taxes payable, net	27,708			5,073
Accrued expenses	(5,526		)	(4,374		)
Other liabilities	2,518			9,161
Net cash provided by operating activities	32,651			13,191
Cash flows from investing activities:
Purchases of property and equipment	(2,938		)	(6,383		)
Acquisition of finance receivables, net of buybacks	(226,092		)	(321,594		)
Collections applied to principal on finance receivables	185,295			177,826
Business acquisitions, net of cash acquired	—			(25,018		)
Proceeds from sale of subsidiaries, net	89,077			—
Purchase of investments	(3,569		)	—
Proceeds from sales and maturities of investments	2,907			5,568
Net cash provided by/(used in) investing activities	44,680			(169,601		)
Cash flows from financing activities:
Proceeds from lines of credit	153,353			378,706
Principal payments on lines of credit	(232,108		)	(223,117		)
Tax withholdings related to share-based payments	(2,320		)	(2,432		)
Distributions paid to noncontrolling interest	(710		)	(218		)
Principal payments on long-term debt	(10,012		)	(5,000		)
Payments of debt issuance costs	—			(8,477		)
Net increase in interest-bearing deposits	1,473			6,238
Net cash (used in)/provided by financing activities	(90,324		)	145,700
Effect of exchange rate on cash	816			18,780
Net (decrease)/increase in cash and cash equivalents	(12,177		)	8,070
Cash and cash equivalents, beginning of period	94,287			71,372
Cash and cash equivalents, end of period	$	82,110		$	79,442
Supplemental disclosure of cash flow information:
Cash paid for interest	$	20,257		$	16,873
Cash paid for income taxes	4,858			6,196

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

1. Organization and Business:

Throughout this report, the terms "PRA Group," "the Company," or similar terms refer to PRA Group, Inc. and its subsidiaries.

PRA Group, Inc., a Delaware corporation, and its subsidiaries, is a global financial and business services company with operations in the Americas and Europe. The Company's primary business is the purchase, collection and management of portfolios of nonperforming loans. The Company provides the following fee-based services: vehicle location, skip tracing and collateral recovery for auto lenders, government entities and law enforcement; class action claims recovery services and purchases; servicing of consumer bankruptcy accounts in the U.S.; and, to a lesser extent, contingent collections of nonperforming loans in Europe and South America. As discussed in Note 11, the Company sold its revenue administration, audit and revenue discovery/recovery business in January 2017.

The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and include the accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Under the guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 280 "Segment Reporting" ("ASC 280"), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and, therefore, it has one reportable segment, accounts receivable management, 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, 2017 and 2016, respectively, and long-lived assets held at March 31, 2017 and 2016, respectively, both for the United States, the Company's country of domicile, and outside of the United States (amounts in thousands):



	As Of And For The				As Of And For The
	Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
	Revenues		Long-Lived Assets		Revenues		Long-Lived Assets
United States	$	143,928	$	29,166	$	170,507	$	37,316
Outside the United States	62,630		8,858		54,375		10,469
Total	$	206,558	$	38,024	$	224,882	$	47,785

Revenues are attributed to countries based on the location of the related operations. Long-lived assets consist of net property and equipment. The Company reports revenues earned from its debt purchasing and collection activities and its fee-based services. It is impracticable for the Company to report further breakdowns of revenues from external customers by product or service.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the "SEC") and, therefore, do not include all information and disclosures required by GAAP for complete financial statements. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's consolidated balance sheet as of March 31, 2017, its consolidated income statements and statements of comprehensive income/(loss) for the three months ended March 31, 2017 and 2016, its consolidated statement of changes in equity for the three months ended March 31, 2017, and its consolidated statements of cash flows for the three months ended March 31, 2017 and 2016. The consolidated income statements of the Company for the three months ended March 31, 2017 may not be indicative of future results. Certain prior period amounts have been reclassified for consistency with the current period presentation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's 2016 Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 28, 2017 (the "2016 Form 10-K").

PRA Group, Inc.

Notes to Consolidated Financial Statements

2. Finance Receivables, net:

Changes in finance receivables, net for the three months ended March 31, 2017 and 2016 were as follows (amounts in thousands):



	Three Months Ended March 31,
	2017			2016
Balance at beginning of period	$	2,307,969		$	2,202,113
Acquisitions of finance receivables ⁽¹⁾	226,397			336,379
Foreign currency translation adjustment	17,809			16,411
Cash collections applied to principal and net allowance charges	(185,295		)	(177,826		)
Balance at end of period	$	2,366,880		$	2,377,077


(1)	Acquisitions of finance receivables are net of buybacks and include certain capitalized acquisition related costs. They also include the acquisition date finance receivables portfolios that are acquired in connection with certain business acquisitions.

During the three months ended March 31, 2017, the Company purchased finance receivables portfolios with a face value of $1.7 billion for $227.8 million. During the three months ended March 31, 2016, the Company purchased finance receivables portfolios with a face value of $3.6 billion for $336.8 million. At March 31, 2017, the estimated remaining collections ("ERC") on the receivables purchased during the three months ended March 31, 2017 and 2016 were $383.7 million and $484.3 million, respectively. At March 31, 2017 and 2016, total ERC was $5.1 billion and $5.3 billion, respectively.

At the time of acquisition, the life of each pool is estimated based on projected amounts and timing of future cash collections. Based upon current projections, cash collections expected to be applied to principal on finance receivables as of March 31, 2017 are estimated to be as follows for the twelve months in the periods ending March 31, (amounts in thousands):



2018	$	657,272
2019	548,346
2020	424,891
2021	333,705
2022	215,134
2023	103,021
2024	38,099
2025	17,412
2026	15,290
2027	13,034
Thereafter	676
Total ERC expected to be applied to principal	$	2,366,880

At March 31, 2017, the Company had aggregate net finance receivables balances in pools accounted for under the cost recovery method of $110.7 million; at December 31, 2016, the amount was $105.5 million.

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

Changes in accretable yield for the three months ended March 31, 2017 and 2016 were as follows (amounts in thousands):



	Three Months Ended March 31,
	2017			2016
Balance at beginning of period	$	2,740,006		$	2,727,204
Income recognized on finance receivables, net	(194,535		)	(206,507		)
Additions	163,395			260,249
Reclassifications from/(to) nonaccretable difference	47,078			(1,035		)
Foreign currency translation adjustment	20,502			99,839
Balance at end of period	$	2,776,446		$	2,879,750

The following is a summary of activity within the Company's valuation allowance account, all of which relates to loans acquired with deteriorated credit quality, for the three months ended March 31, 2017 and 2016 (amounts in thousands):



	Three Months Ended March 31,
	2017			2016
Beginning balance	$	211,465		$	114,861
Allowance charges	2,708			10,018
Reversal of previously recorded allowance charges	(29		)	(120		)
Net allowance charges	2,679			9,898
Foreign currency translation adjustment	269			(171		)
Ending balance	$	214,413		$	124,588

3. Investments:

Investments consist of the following at March 31, 2017 and December 31, 2016 (amounts in thousands):



	March 31, 2017		December 31, 2016
Available-for-sale
Government bonds and mutual funds	$	3,613	$	2,138
Held-to-maturity
Securitized assets	55,978		51,407
Other investments
Private equity funds	14,464		14,998
Total investments	$	74,055	$	68,543

Available-for-Sale

Government bonds and mutual funds: The Company's investments in government bonds and mutual funds 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.

Held-to-Maturity

Investments in securitized assets: The Company holds a majority interest in a closed-end Polish investment fund. The certificates, which provide a preferred return based on the expected net income of the portfolios, are accounted for as a beneficial interest in securitized financial assets and stated at amortized cost. The Company has determined it has the ability and intent to hold these certificates until maturity, which occurs when the fund terminates or liquidates its assets. The preferred return is not a guaranteed return. Income is recognized under FASB ASC Topic 325-40, "Beneficial Interest in Securitized Financial Assets" ("ASC 325-40"). Income is recognized using the effective yield method. The Company adjusts the yield for changes in estimated cash flows prospectively through earnings.

The underlying securities have both known principal repayment terms as well as unknown principal repayments due to potential borrower pre-payments. Accordingly, it is difficult to accurately predict the final maturity date of these investments.

PRA Group, Inc.

Notes to Consolidated Financial Statements

Revenues recognized on these investments are recorded in the Other Revenue line item in the income statement. During the three months ended March 31, 2017 and 2016, revenues recognized on these investments were $1.4 million and $1.6 million, respectively.

Other Investments

Investments in private equity funds: Investments in private equity funds represent limited partnerships in which the Company has less than a 3% interest and are carried at cost. Distributions received from the partnerships are included in other revenue. Distributions received in excess of the Company's proportionate share of accumulated earnings are applied as a reduction of the cost of the investment. Distributions received from investments carried at cost were $2.9 million and $0.2 million during the three months ended March 31, 2017 and 2016, respectively.

The amortized cost and estimated fair value of available-for sale and held-to-maturity investments at March 31, 2017 and December 31, 2016 were as follows (amounts in thousands):



	March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Aggregate Fair Value
Available-for-sale
Government bonds and mutual funds	$	3,610	$	5	$	2	$	3,613
Held-to-maturity
Securitized assets	55,978		4,187		—		60,165

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Aggregate Fair Value
Available-for-sale
Government bonds and mutual funds	$	2,161	$	—	$	23	$	2,138
Held-to-maturity
Securitized assets	51,407		4,147		—		55,554

4. Borrowings:

The Company's borrowings consisted of the following as of the dates indicated (amounts in thousands):



	March 31, 2017			December 31, 2016
North American revolving credit	$	643,004		$	695,088
Term loans	425,199			430,764
European revolving credit	382,359			401,780
Convertible senior notes	287,500			287,500
Less: Debt discount and issuance costs	(29,375		)	(31,031		)
Total	$	1,708,687		$	1,784,101

The following principal payments are due on the Company's borrowings as of March 31, 2017 for the twelve month periods ending March 31, (amounts in thousands):



2018	$	198,605
2019	10,000
2020	10,000
2021	1,519,457
2022	—
Total	$	1,738,062

The Company believes it was in compliance with the covenants of its material financing arrangements as of March 31, 2017 and December 31, 2016.

PRA Group, Inc.

Notes to Consolidated Financial Statements

North American Revolving Credit and Term Loan

On December 19, 2012, the Company entered into a credit facility with Bank of America, N.A., as administrative agent, and a syndicate of lenders named therein (such agreement as later amended or modified, the "North American Credit Agreement"). The total credit facility under the North American Credit Agreement includes an aggregate principal amount of $938.0 million (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a fully-funded $140.0 million term loan, (ii) a $748 million domestic revolving credit facility, and (iii) a $50 million Canadian revolving credit facility. The facility includes an optional increase in commitments for a $125.0 million accordion feature (at the option of the lenders) and also provides for up to $20 million of letters of credit 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 Credit Agreement) plus 0.50%, (b) Bank of America's prime rate, or (c) the Eurodollar rate plus 1.00%. Of the $938.0 million total principal amount of the credit facility, $207.5 million matures on December 19, 2017, and the remainder matures on the earlier of December 21, 2020 or 91 days prior to the maturity of the Company's Convertible Senior Notes due 2020 (the "Notes"). As of March 31, 2017, the unused portion of the North American Credit Agreement was $155.0 million. Considering borrowing base restrictions, as of March 31, 2017, the amount available to be drawn was $127.8 million.

The North American Credit Agreement is secured by a first priority lien on substantially all of the Company's assets. The North American Credit Agreement contains restrictive covenants and events of default, including the following as of March 31, 2017:


•	borrowings may not exceed 35% of the ERC of all eligible asset pools plus 75% of eligible accounts receivable;


•	the consolidated leverage ratio (as defined in the North American Credit Agreement) cannot exceed 2.25 to 1.0 as of the end of any fiscal quarter;


•	cash dividends and distributions during any fiscal year cannot exceed $20 million;


•	stock repurchases during any fiscal year cannot exceed $100 million plus 50% of the prior year's net income;


•	permitted acquisitions (as defined in the North American Credit Agreement) during any fiscal year cannot exceed $250 million;


•	indebtedness in the form of senior, unsecured convertible notes or other unsecured financings cannot exceed $500 million in the aggregate (without respect to the Notes);


•	the Company must maintain positive consolidated income from operations (as defined in the North American Credit Agreement) during any fiscal quarter; and


•	restrictions on changes in control.

The revolving credit facility also bears an unused line fee of 0.375% per annum, payable quarterly in arrears.

Information on the outstanding balances and weighted average interest rates by type of borrowing under the North American Credit Agreement as of the dates indicated (dollar amounts in thousands):



	March 31, 2017				December 31, 2016
	Amount Outstanding		Weighted Average Interest Rate		Amount Outstanding		Weighted Average Interest Rate
Term loan	$	140,000	3.48	%	$	150,000	3.27	%
Revolving facility	$	643,004	3.50	%	$	695,088	3.28	%

European Revolving Credit Facility and Term Loan

On October 23, 2014, the Company 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"). Under the terms of the European Credit Agreement, the credit facility includes an aggregate amount of approximately $1.2 billion (subject to the borrowing base), of which approximately $300 million is a term loan, accrues interest at the Interbank Offered Rate ("IBOR") plus 2.80%-3.90% under the revolving facility and 4.25%-4.50% under the term loan facility (as determined by the loan-to-value ratio ("LTV Ratio") as defined in the European Credit Agreement), bears an unused line fee, currently 1.26% per annum, of 35% of the margin, payable monthly in arrears, and matures on February 19, 2021. The European Credit Agreement also includes an Overdraft Facility in the aggregate amount of $40 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 annum, payable quarterly in arrears, and also matures February 19, 2021. As of March 31, 2017, the unused portion of the European Credit Agreement (including the Overdraft Facility) was $557.6

PRA Group, Inc.

Notes to Consolidated Financial Statements

million. Considering borrowing base restrictions and other covenants, as of March 31, 2017, the amount available to be drawn under the European Credit Agreement (including the Overdraft Facility) was $157.9 million.

The European Credit Agreement is secured by the shares of most of the Company's European subsidiaries and all intercompany loan receivables in Europe. The European Credit Agreement also contains restrictive covenants and events of default including the following:


•	the LTV Ratio (as defined in the European Credit Agreement) cannot exceed 75%;


•	the GIBD Ratio (as defined in the European Credit Agreement) in Europe cannot exceed 3.5 to 1.0 as of the end of any fiscal quarter until March 31, 2017 and 3.25:1.0 thereafter;


•	interest bearing deposits in AK Nordic AB cannot exceed SEK 1,500,000,000;


•	PRA Europe's cash collections must exceed 95% of Europe's ERC for the same set of portfolios, measured on a quarterly basis.

Information on the outstanding balances and weighted average interest rates by type of borrowing under the European Credit Agreement as the dates indicated (dollar amounts in thousands):



	March 31, 2017				December 31, 2016
	Amount Outstanding		Weighted Average Interest Rate		Amount Outstanding		Weighted Average Interest Rate
Term loan	$	285,199	4.25	%	$	280,764	4.25	%
Revolving facility	$	382,359	3.99	%	$	401,780	4.06	%

Convertible Senior Notes due 2020

On August 13, 2013, the Company completed the private offering of $287.5 million in aggregate principal amount of the Company's 3.00% Notes. The Notes were issued pursuant to an Indenture, dated August 13, 2013 (the "Indenture") between the Company and Wells Fargo Bank, National Association, as trustee. The Indenture contains customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately. The Notes are senior unsecured obligations of the Company. Interest on the Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year, beginning on February 1, 2014. Prior to February 1, 2020, the Notes will be convertible only upon the occurrence of specified events. On or after February 1, 2020, the Notes will be convertible at any time. The Company does not have the right to redeem the Notes prior to maturity. As of March 31, 2017 and December 31, 2016, none of the conditions allowing holders of the Notes to convert their Notes had occurred.

The conversion rate for the Notes is initially 15.2172 shares per $1,000 principal amount of 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 Indenture. Upon conversion, holders of the 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 current intent is to settle conversions through combination settlement (i.e., the Notes would be converted into cash up to the aggregate principal amount, and shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election, for the remainder). As a result and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds $65.72.

The Company determined that the fair value of the 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 original Notes issuance cost as debt issuance cost and the remaining $0.9 million as equity issuance cost.

PRA Group, Inc.

Notes to Consolidated Financial Statements

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, 2017			December 31, 2016
Liability component - principal amount	$	287,500		$	287,500
Unamortized debt discount	(16,775		)	(17,930		)
Liability component - net carrying amount	$	270,725		$	269,570
Equity component	$	31,306		$	31,306

The debt discount is being amortized into interest expense over the remaining life of the Notes using the effective interest rate, which is 4.92%.

Interest expense related to the Notes was as follows for the periods indicated (amounts in thousands):



	Three Months Ended March 31,
	2017		2016
Interest expense - stated coupon rate	$	2,156	$	2,156
Interest expense - amortization of debt discount	1,155		1,100
Total interest expense - convertible senior notes	$	3,311	$	3,256

5. Goodwill and Intangible Assets, net:

In connection with the Company's business acquisitions, the Company acquired certain tangible and intangible assets. Intangible assets resulting from these acquisitions include client and customer relationships, non-compete agreements, trademarks and technology. The Company performs an annual review of goodwill on October 1 of each year or more frequently if indicators of impairment exist.

The following table represents the changes in goodwill for the three months ended March 31, 2017 and 2016 (amounts in thousands):



	Three Months Ended March 31,
	2017			2016
Balance at beginning of period:
Goodwill	$	506,308		$	501,553
Accumulated impairment loss	(6,397		)	(6,397		)
	499,911			495,156
Changes:
Acquisitions	—			4,742
Foreign currency translation adjustment	6,329			24,972
Net change in goodwill	6,329			29,714

Goodwill	512,637			531,267
Accumulated impairment loss	(6,397		)	(6,397		)
Balance at end of period:	$	506,240		$	524,870

The $4.7 million addition to goodwill during the three months ended March 31, 2016, was mainly attributable to the acquisition of Recovery Management Systems Corporation ("RMSC") in addition to a purchase price adjustment from a previous acquisition. The goodwill recognized from the RMSC acquisition is expected to be deductible for U.S. income tax purposes.

PRA Group, Inc.

Notes to Consolidated Financial Statements

6. 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.

For tax purposes, the Company utilizes the cost recovery method of accounting. Under the cost recovery method, collections on finance receivables are applied first to principal to reduce the finance receivables to zero before taxable income is recognized. The Internal Revenue Service ("IRS") examined the Company's 2005 through 2012 tax returns and has asserted that tax revenue recognition using the cost recovery method does not clearly reflect taxable income. The Company believes it has sufficient support for the technical merits of its position, and believes cost recovery to be an acceptable tax revenue recognition method for the Company's industry. The Company has received Notices of Deficiency for tax years ended December 31, 2005 through 2012. The proposed deficiencies relate to the cost recovery method of tax accounting. In response to the notices, the Company filed petitions in the U.S. Tax Court (the "Tax Court") challenging the deficiencies. On July 10, 2015 and July 21, 2015, the IRS filed Motions for Summary Judgment for tax years 2008 through 2012 and 2005 through 2007, respectively. On November 12, 2015 the Tax Court denied the IRS's Motions for Summary Judgment and set this matter for trial to begin on September 19, 2016. On July 5, 2016, the Tax Court granted the IRS’s Motion for Continuance filed on June 28, 2016. On July 14, 2016, the Tax Court set the trial to begin on May 15, 2017.

If the Company is unsuccessful in the Tax Court and any potential appeals, it may be required to pay the related deferred taxes, and possibly interest and penalties. At March 31, 2017 and December 31, 2016, deferred tax liabilities related to this matter were $241.9 million and $239.3 million, respectively. Any adverse determination on this matter could result in the Company amending state tax returns for prior years, increasing its taxable income in those states. The Company files tax returns in multiple state jurisdictions; therefore, any underpayment of state tax will accrue interest in accordance with the respective state statute. At March 31, 2017 and December 31, 2016, the Company's estimate of the potential federal and state interest was $117.6 million and $112.0 million, respectively.

ASC 740 requires the recognition of interest if the tax law would require interest to be paid on the underpayment of taxes, and recognition of penalties if a tax position does not meet the minimum statutory threshold to avoid payment of penalties. The Company believes it has sufficient support for the technical merits of its position and that it is more likely than not this position will be sustained. Accordingly, the Company has not accrued for interest or penalties on any of its tax positions, including the cost recovery matter.

At March 31, 2017, the tax years subject to examination by the major federal, state and international taxing jurisdictions are 2003, 2005 and subsequent years. The 2003 tax year remains open to examination because of a net operating loss that originated in that year but was not fully utilized until the 2005 tax year. The examination periods for the 2005 through 2012 tax years are suspended until a decision of the Tax Court becomes final.

The Company intends to permanently reinvest predominantly all foreign earnings in its foreign operations. If foreign earnings were repatriated, the Company would need to accrue and pay taxes, although foreign tax credits may be available to partially reduce U.S. income taxes. The amount of cash on hand related to foreign operations with permanently reinvested earnings was $69.6 million and $73.6 million as of March 31, 2017 and December 31, 2016, respectively.

7. 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 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, which did not occur during the period from which the Notes were issued on August 13, 2013 through March 31, 2017. 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. The assumed proceeds include the tax benefit that would be realized upon assumed exercise.

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, 2017 and 2016 (amounts in thousands, except per share amounts):



	For the Three Months Ended March 31,
	2017						2016
	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	$	48,167	46,406	$	1.04		$	31,983	46,243	$	0.69
Dilutive effect of nonvested share awards			221	(0.01		)			129	—
Diluted EPS	$	48,167	46,627	$	1.03		$	31,983	46,372	$	0.69

There were no antidilutive options outstanding for the three months ended March 31, 2017 and 2016.

8. Commitments and Contingencies:

Employment Agreements:

The Company has entered into employment agreements, most of which expire on December 31, 2017, 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 bonuses that are based on the attainment of specific management goals. At March 31, 2017, estimated future compensation under these agreements is approximately $8.0 million. The agreements also contain confidentiality and non-compete provisions. Outside the United States, 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 $8.0 million total above.

Leases:

The Company is party to various operating leases with respect to its facilities and equipment. The future minimum lease payments at March 31, 2017 total approximately $44.3 million.

Forward Flow Agreements:

The Company is party to several forward flow agreements that allow for the purchase of nonperforming loans at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at March 31, 2017 is approximately $437.7 million.

Finance Receivables:

Certain agreements for the purchase of finance receivables portfolios contain provisions that may, in limited circumstances, require the Company to refund a portion or all of the collections subsequently received by the Company on particular accounts. The potential refunds as of the balance sheet date are not considered to be significant.

Litigation and Regulatory Matters:

The Company is from time to time subject to routine legal claims, proceedings and regulatory matters, most of which are incidental to the ordinary course of its business. The Company initiates lawsuits against customers and is occasionally countersued by them in such actions. Also, customers, either individually, as members of a class action, or through a governmental entity on behalf of customers, may initiate litigation against the Company in which they allege that the Company has violated a state or federal law in the process of collecting on an account. From time to time, other types of lawsuits are brought against the Company. Additionally, the Company receives subpoenas and other requests or demands for information from regulators or governmental authorities who are investigating the Company's debt collection activities.

The Company accrues for potential liability arising from legal proceedings and regulatory matters when it is probable that such liability has been incurred and the amount of the loss can be reasonably estimated. This determination is based upon currently available information for those proceedings in which the Company is involved, taking into account the Company's best estimate of such losses for those cases for which such estimates can be made. The Company's estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the number of unresolved issues in many of the proceedings (including issues regarding class certification and the scope of many of the claims),

PRA Group, Inc.

Notes to Consolidated Financial Statements

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, 2017, excluding the potential interest associated with the IRS matter described below, is 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 Company has not recorded any potential recoveries under the Company's insurance policies or third-party indemnities as of March 31, 2017.

The matters described below fall outside of the normal parameters of the Company's routine legal proceedings.

Telephone Consumer Protection Act Litigation

As previously reported in the 2016 Form 10-K, the Company was named as defendant in a number of putative class action cases, each alleging that the Company violated the Telephone Consumer Protection Act ("TCPA") by calling consumers' cellular telephones without their prior express consent. In January 2016, the parties reached a settlement agreement in principle ("the Settlement Agreement") under which the parties agreed to seek court approval of class certification and the proposed settlement. As required by the Settlement Agreement, which received final court approval in December 2016, the Company paid $18 million in the second quarter of 2016 to resolve the matter.

Internal Revenue Service Audit

The IRS examined the Company's 2005 through 2012 tax returns and has asserted that tax revenue recognition using the cost recovery method does not clearly reflect taxable income. The Company believes it has sufficient support for the technical merits of its position, and believes cost recovery to be an acceptable tax revenue recognition method for the Company's industry. The Company has received Notices of Deficiency for tax years ended December 31, 2005 through 2012. The proposed deficiencies relate to the cost recovery method of tax accounting for finance receivables. In response to the notices, the Company filed petitions in the Tax Court challenging the deficiencies. On July 10, 2015 and July 21, 2015, the IRS filed Motions for Summary Judgment for tax years 2008 through 2012 and 2005 through 2007, respectively. On November 12, 2015, the Tax Court denied the IRS's Motions for Summary Judgment and set this matter for trial to begin on September 19, 2016. On July 5, 2016, the Tax Court granted the IRS’s Motion for Continuance filed on June 28, 2016. On July 14, 2016, the Tax Court set the trial to begin on May 15, 2017. If the Company is unsuccessful in the Tax Court and any potential appeals, it may ultimately be required to pay the related deferred taxes, and possibly interest and penalties. Deferred tax liabilities related to this matter were $241.9 million at March 31, 2017. Any adverse determination on this matter could result in the Company amending state tax returns for prior years, increasing its taxable income in those states. The Company files tax returns in multiple state jurisdictions; therefore, any underpayment of state tax will accrue interest in accordance with the respective state statute. The Company's estimate of the potential federal and state interest is $117.6 million as of March 31, 2017, which has not been accrued.

Portfolio Recovery Associates, LLC v. Guadalupe Mejia

As previously reported in the Company’s 2016 Form 10-K, the Company reached a settlement in principle in February 2017 to resolve this matter. As of December 31, 2016, the Company had fully accrued for the settlement amount, which it paid in April 2017.

9. Fair Value:

As defined by FASB 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 also 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 Be Carried at Fair Value

In accordance with the disclosure requirements of FASB ASC Topic 825, "Financial Instruments" ("ASC 825"), the table below summarizes fair value estimates for the Company's financial instruments not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.

The carrying amounts of the financial instruments in the following table are recorded in the consolidated balance sheets at March 31, 2017 and December 31, 2016 (amounts in thousands):



	March 31, 2017				December 31, 2016
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	82,110	$	82,110	$	94,287	$	94,287
Held-to-maturity investments	55,978		60,165		51,407		55,554
Other investments	14,464		11,557		14,998		12,573
Finance receivables, net	2,366,880		2,764,081		2,307,969		2,708,582
Financial liabilities:
Interest-bearing deposits	78,792		78,792		76,113		76,113
Revolving lines of credit	1,025,363		1,025,363		1,096,868		1,096,868
Term loans	425,199		425,199		430,764		430,764
Convertible senior notes	270,725		261,421		269,570		270,825

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 the financial instruments in the above table:

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.

Held-to-maturity investments: Fair value of the Company's investment in Series B certificates of a closed-end Polish investment fund is estimated using proprietary pricing models that the Company utilizes to make portfolio purchase decisions. Accordingly, the Company estimates the fair value of its held-to-maturity investments using Level 3 inputs as there is little observable market data available and management is required to use significant judgment in its estimates.

Other investments: 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 can never be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through the liquidation of the underlying assets of the fund. The fair value of the Company's interest is valued by the fund managers; accordingly, the Company estimates the fair value of these investments using Level 3 inputs. The

PRA Group, Inc.

Notes to Consolidated Financial Statements

investments are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over 1 to 4 years.

Finance receivables, net: The Company records purchased receivables at cost, which represents a significant discount from the contractual receivable balances due. The Company computed the estimated fair value of these receivables using proprietary pricing models that the Company utilizes to make portfolio purchase decisions. Accordingly, the Company's fair value estimates use Level 3 inputs as there is little observable market data available and management is required to use significant judgment in its estimates.

Interest-bearing deposits: The carrying amount approximates fair value due to the short-term nature of the deposits and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.

Revolving lines of credit: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.

Term loans: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.

Convertible notes: The Notes are carried at historical cost, adjusted for the debt discount. The fair value estimates for these Notes incorporates quoted market prices which were obtained from secondary market broker quotes which 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.

Financial Instruments Required To Be Carried At Fair Value

The carrying amounts in the following table are measured at fair value on a recurring basis in the accompanying consolidated balance sheets at March 31, 2017 and December 31, 2016 (amounts in thousands):



	Fair Value Measurements as of March 31, 2017
	Level 1		Level 2		Level 3		Total
Assets:
Available-for-sale investments	$	3,613	$	—	$	—	$	3,613
Liabilities:
Interest rate swap contracts (recorded in accrued expenses)	—		3,021		—		3,021

	Fair Value Measurements as of December 31, 2016
	Level 1		Level 2		Level 3		Total
Assets:
Available-for-sale investments	$	2,138	$	—			$	2,138
Liabilities:
Interest rate swap contracts (recorded in accrued expenses)	—		2,825		—		2,825

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

Interest rate swap contracts: The interest rate swap contracts are carried at fair value which is determined by 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.

PRA Group, Inc.

Notes to Consolidated Financial Statements

10. Recent Accounting Pronouncements:

In May 2014, FASB issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers" ("ASU 2014-09") that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also amends the required disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, with early application not permitted. The Company believes that the revenue it classifies as Fee Income is within the scope of this standard. The Company's fee income consists of revenue generated by its Claims Compensation Bureau, LLC ("CCB"), PRA Location Services, LLC ("PLS"), and PRA Government Services, LLC ("PGS") subsidiaries. Based on the Company's evaluation, the Company does not believe the new standard will impact the accounting for its CCB and PLS revenue. The Company sold its PGS business in January 2017.

In January 2016, FASB issued ASU 2016-01, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), which provides new guidance on the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted only for certain provisions. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements.

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. It is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, using a modified retrospective approach and early adoption is permitted. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements. The Company currently discloses approximately $44.3 million in operating lease obligations in its contractual obligations table in Part I, Item 2 of this Quarterly Report and will evaluate those contracts as well as other existing arrangements to determine if they qualify for lease accounting under the new standard. The Company does not plan to adopt the standard early.

In March 2016, FASB issued ASU 2016-06, "Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments" ("ASU 2016-06"). Topic 815 requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met, including the "clearly and closely related" criterion. ASU 2016-06 clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The amendments in ASU 2016-06 apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. For public entities, this update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted ASU 2016-06 in the first quarter of 2017 which had no material impact on its Consolidated Financial Statements.

In March 2016, FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). The guidance eliminates additional paid in capital ("APIC") pools and requires companies to recognize all excess tax benefits and tax deficiencies in the income statement when the awards vest or are settled. It also addresses the presentation of excess tax benefits and employee taxes paid on the statement of cash flows. Further, the new guidance eliminates the requirement to estimate forfeitures during the vesting period. Instead, companies can elect to account for actual forfeitures as they occur and record any previously unrecognized compensation expense for estimated forfeitures up to the period of adoption as a retrospective adjustment to beginning retained earnings. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years and early adoption is permitted. The Company prospectively adopted ASU 2016-09 in the first quarter of 2017, which increased its provision for income taxes by $1.0 million as a result of the recognition of all excess tax benefits and tax deficiencies in its income statement. The ASU requires that excess tax benefits be presented as an operating activity in the statement of cash flows, so with its prospective adoption, prior periods have not been restated. The Company also elected to use an estimated forfeiture rate, based on historical data, to record its share-based compensation expense, which is consistent with its previous accounting treatment with respect to forfeitures. None of the other provisions of the ASU had a material impact on its Consolidated Financial Statements.

In June 2016, FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13"). ASU 2016-13 requires the measurement of expected credit losses for financial instruments held at the reporting date based on historical

PRA Group, Inc.

Notes to Consolidated Financial Statements

experience, current conditions and reasonable forecasts. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years and allows for early adoption as of the beginning of an interim or annual reporting period beginning after December 15, 2018. This ASU supersedes ASC Topic 310-30, which the Company currently follows to account for revenue on its finance receivables. This ASU could have a significant impact on how the Company measures and records revenue on its finance receivables. The Company is currently in the process of evaluating the impact of adoption of the ASU on its 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. Early adoption is permitted, including adoption in an interim period, but requires all elements of the amendments to be adopted at once rather than individually. The new standard must be adopted using a retrospective transition method. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements.

In October 2016, the FASB issued ASU 2016-16, "Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory" ("ASU 2016-16"), which requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted as of the beginning of a fiscal year. The new standard must be adopted using a modified retrospective transition method which is a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements.

In January 2017, FASB issued ASU-2017-01, "Business Combinations - Clarifying the Definition of a Business (Topic 805)" ("ASU 2017-01"). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist companies with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance is expected to reduce the number of transactions that need to be further evaluated as businesses. The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for certain types of transactions.

In January 2017, FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 eliminates Step 2 of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for annual and interim periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is currently in the process of evaluating the impact of adoption of the ASU on its Consolidated Financial Statements.

The Company does not expect that any other recently issued accounting pronouncements will have a material effect on its Consolidated Financial Statements.

11. Sale of Subsidiaries:

As part of the Company’s strategy to focus on businesses with greater global growth potential, the Company decided in the fourth quarter of 2016 to sell its government services businesses: PRA Government Services, LLC; MuniServices, LLC; and PRA Professional Services, LLC. On January 24, 2017, the Company completed the sale of its government services businesses for $91.5 million in cash plus additional consideration for certain balance sheet items. The impact of the transaction was reported in the first quarter of 2017. The gain on sale before income taxes was $46.8 million.

PRA Group, Inc.

Notes to Consolidated Financial Statements

The assets and liabilities of the businesses that were sold consisted of the following at January 24, 2017 (amounts in thousands):



	January 24, 2017
Other receivables, net	$	7,399
Property and equipment, net	3,168
Goodwill	29,683
Intangible assets, net	1,711
Other assets	525
Total assets	$	42,486

Accrued expenses	$	2,927
Total liabilities	$	2,927

12. Subsequent Event:

On May 5, 2017, the Company amended and restated the North American Credit Agreement (the “Amended and Restated North American Credit Facility”). The Amended and Restated North American Credit Facility increased the total facility size to $1.2 billion, consisting of a $450 million term loan and a $755 million revolving credit facility, and matures on May 5, 2022. The $207.5 million that was to mature on December 19, 2017 was repaid at closing and the non-extended lenders were removed from the new facility. The interest rates and unused line fee under the new facility remained unchanged.

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, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall cash collection trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following:


•	a prolonged economic recovery or a deterioration in the economic or inflationary environment in the Americas or Europe, including the interest rate environment;


•	changes in the credit or capital markets, which affect our ability to borrow money or raise capital;


•	our ability to replace our nonperforming loans with additional portfolios;


•	our ability to purchase nonperforming loans at appropriate prices;


•	changes in, or interpretations of, federal, state, local, or foreign laws or the administrative practices of various bankruptcy courts, which may impact our ability to collect on our nonperforming loans;


•	our ability to collect sufficient amounts on our nonperforming loans;


•	the possibility that we could incur significant allowance charges on our finance receivables;


•	changes in, or interpretations of, bankruptcy or collection laws that could negatively affect our business, including by causing an increase in certain types of bankruptcy filings involving liquidations, which may cause our collections to decrease;


•	our ability to manage risks associated with our international operations;


•	changes in tax laws regarding earnings of our subsidiaries located outside of the United States ("U.S.");


•	the imposition of additional taxes on us;


•	the possibility that we could incur goodwill or other intangible asset impairment charges;


•	adverse effects from the vote by the United Kingdom ("UK") to leave the European Union ("EU");


•	adverse outcomes in pending litigations or administrative proceedings;


•	our loss contingency accruals may not be adequate to cover actual losses;


•	the possibility that class action suits and other litigation could divert our management's attention and increase our expenses;


•	the possibility that we could incur business or technology disruptions or cyber incidents;


•	our ability to collect and enforce our finance receivables may be limited under federal, state, local and foreign laws;


•	our ability to comply with existing and new regulations of the collection industry, the failure of which could result in penalties, fines, litigation, damage to our reputation, or the suspension or termination of or required modification to our ability to conduct our business;


•	investigations or enforcement actions by governmental authorities, including the Consumer Financial Protection Bureau ("CFPB"), which could result in changes to our business practices; negatively impact our portfolio purchasing volume; make collection of account balances more difficult or expose us to the risk of fines, penalties, restitution payments, and litigation;


•	the possibility that compliance with foreign and U.S. laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions;


•	our ability to raise the funds necessary to repurchase the convertible senior notes or to settle conversions in cash;


•	our ability to maintain, renegotiate or replace our credit facilities;


•	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, as could our failure to comply with hedge accounting principles and interpretations; and


•	the risk factors discussed in our filings with the Securities and Exchange Commission (the "SEC").

You should assume that the information appearing in this Quarterly Report is accurate only as of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date.

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, 2016, filed with the SEC on February 28, 2017 ("2016 Form 10-K").

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, stockholders should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

Frequently Used Terms

We use the following terminology throughout this document:


•	"Allowance charges" refers to a reduction in income recognized on finance receivables on pools of finance receivables due to a decrease in cash collection estimates or a delay in the expected timing of the cash collections.


•	"Amortization rate" refers to cash collections applied to principal on finance receivables as a percentage of total cash collections.


•	"Buybacks" refers to purchase price refunded by the seller due to the return of ineligible accounts.


•	"Cash collections" refers to collections on our owned finance receivables portfolios.


•	"Cash receipts" refers to collections on our owned finance receivables portfolios plus fee income.


•	"Core" accounts or portfolios refer to accounts or portfolios that are nonperforming loans and are not in an insolvent status upon purchase. These accounts are aggregated separately from insolvency accounts.


•	"Estimated remaining collections" or "ERC" refers to the sum of all future projected cash collections on our owned finance receivables portfolios.


•	"Fee income" refers to revenues generated from our fee-for-service businesses.


•	"Income recognized on finance receivables" refers to income derived from our owned finance receivables portfolios.


•	"Income recognized on finance receivables, net" refers to income derived from our owned finance receivables portfolios and is shown net of allowance charges/reversals.


•	"Insolvency" accounts or portfolios refer to accounts or portfolios of receivables that are in an insolvent status when we purchase them and as such are purchased as a pool of insolvent accounts. These include Individual Voluntary Arrangements ("IVAs"), Trust Deeds in the UK, Consumer Proposals in Canada and bankruptcy accounts in the U.S., Canada, Germany and the UK.


•	"Net finance receivable balance" is recorded on our balance sheet and refers to the purchase price less principal amortization and net allowance charges/reversals.


•	"Nonperforming loans" refers to the loans that we purchase, which consist generally of defaulted, unpaid obligations of individuals that have been charged-off by the credit grantor.


•	"Principal amortization" refers to cash collections applied to principal on finance receivables.


•	"Purchase price" refers to the cash paid to a seller to acquire nonperforming loans, plus certain capitalized costs, less buybacks.


•	"Purchase price multiple" refers to the total estimated collections (as defined below) on owned finance receivables portfolios divided by purchase price.


•	"Total estimated collections" or "TEC" refers to actual cash collections, including cash sales, plus estimated remaining collections on our finance receivables portfolios.

All references in this Quarterly Report to "PRA Group," "our," "we," "us," the "Company" or similar terms are to PRA Group, Inc. and its subsidiaries.

Overview

We are a global financial and business services company with operations in the Americas and Europe. Our primary business is the purchase, collection and management of portfolios of nonperforming loans. We also provide the following fee-based services: vehicle location, skip tracing and collateral recovery for auto lenders, government entities and law enforcement; class action claims recovery services and purchases; servicing of consumer bankruptcy accounts in the U.S.; and, to a lesser extent, contingent collections of nonperforming loans in Europe and South America. As discussed in Note 11, we sold our revenue administration, audit and revenue discovery/recovery business in January 2017.

We are headquartered in Norfolk, Virginia, and as of March 31, 2017 employ 4,205 full time equivalents. Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol "PRAA."

Earnings Summary

During the three months ended March 31, 2017, net income attributable to PRA Group, Inc. was $48.2 million, or $1.03 per diluted share, compared with $32.0 million, or $0.69 per diluted share, in the three months ended March 31, 2016. Total revenues decreased 8.1% to $206.6 million in the three months ended March 31, 2017, compared to the three months ended March 31, 2016. Revenues in the three months ended March 31, 2017 consisted of $194.5 million in income recognized on finance receivables, net; $9.9 million in fee income; and $2.2 million in other revenue. Income recognized on finance receivables, net, in the three months ended March 31, 2017 decreased $12.0 million, or 5.8%, over the three months ended March 31, 2016, primarily as a result of a $4.5 million decrease in cash collections and a $14.7 million increase in principal amortization. This was partially offset by a $7.2 million decrease in net allowance charges. During the three months ended March 31, 2017, we incurred $2.7 million in net allowance charges, compared with $9.9 million in the three months ended March 31, 2016. Our finance receivables amortization rate, including net allowance charges/reversals, was 48.8% for the three months ended March 31, 2017 compared to 46.3% for the three months ended March 31, 2016. Our finance receivables amortization rate, excluding net allowance charges/reversals, was 48.1% for the three months ended March 31, 2017 compared to 43.7% for the three months ended March 31, 2016. Cash collections, which drive our finance receivables income, were $379.8 million in the three months ended March 31, 2017, down 1.2%, or $4.5 million, as compared to the three months ended March 31, 2016.

A summary of the sources of our revenue during the three months ended March 31, 2017 and 2016 is presented below (amounts in thousands):



	For the Three Months Ended March 31,
	2017			2016
Cash collections	$	379,830		$	384,333
Principal amortization	(182,616		)	(167,928		)
Net allowance charges	(2,679		)	(9,898		)
Income recognized on finance receivables, net	194,535			206,507
Fee income	9,858			16,266
Other revenue	2,165			2,109
Total revenues	$	206,558		$	224,882

Operating expenses were $153.3 million for the three months ended March 31, 2017, a decrease of $0.7 million or 0.5%, as compared to the three months ended March 31, 2016.

During the three months ended March 31, 2017 and 2016, we acquired finance receivables portfolios at a cost of $227.8 million and $336.8 million, respectively. In any period, we acquire nonperforming loans that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase prices relative to face value for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can increase or decrease pricing, irrespective of other quality fluctuations. As a result, the average purchase price paid relative to face value for any given period can fluctuate dramatically. However, regardless of the average purchase price, we intend to target a similar internal rate of return, after direct expenses, in pricing our portfolio acquisitions during any given period. Therefore, the price paid relative to face value is not necessarily indicative of profitability.

Results of Operations

The results of operations include the financial results of the Company and all of its subsidiaries. The following table sets forth certain operating data as a percentage of total revenues for the periods indicated:



	For the Three Months Ended March 31,
	2017		2016
Revenues:
Income recognized on finance receivables, net	94.2	%	91.8	%
Fee income	4.8	%	7.2	%
Other revenue	1.0	%	1.0	%
Total revenues	100.0	%	100.0	%
Operating expenses:
Compensation and employee services	33.1	%	29.7	%
Legal collection expenses	15.4	%	13.4	%
Agency fees	5.2	%	4.8	%
Outside fees and services	6.5	%	7.0	%
Communication	4.4	%	4.4	%
Rent and occupancy	1.8	%	1.7	%
Depreciation and amortization	2.5	%	2.7	%
Other operating expenses	5.3	%	4.7	%
Total operating expenses	74.2	%	68.4	%
Income from operations	25.8	%	31.6	%
Other income and (expense):
Gain on sale of subsidiaries	22.7	%	—	%
Interest expense	(10.3	)%	(8.9	)%
Foreign exchange gain/(loss)	1.1	%	(0.8	)%
Income before income taxes	39.3	%	21.9	%
Provision for income taxes	15.2	%	7.2	%
Net income	24.1	%	14.7	%
Adjustment for net income attributable to noncontrolling interest	0.7	%	0.4	%
Net income attributable to PRA Group, Inc.	23.4	%	14.3	%

Three Months Ended March 31, 2017 Compared To Three Months Ended March 31, 2016

Revenues

Total revenues were $206.6 million for the three months ended March 31, 2017, a decrease of $18.3 million, or 8.1%, compared to total revenues of $224.9 million for the three months ended March 31, 2016.

Income Recognized on Finance Receivables, net

Income recognized on finance receivables, net was $194.5 million for the three months ended March 31, 2017, a decrease of $12.0 million, or 5.8%, compared to income recognized on finance receivables, net, of $206.5 million for the three months ended March 31, 2016. The decrease was primarily a result of a $4.5 million decrease in cash collections and a $14.7 million increase in principal amortization. This was partially offset by a $7.2 million decrease in net allowance charges. Cash collections, which drive our finance receivable income, were $379.8 million in the three months ended March 31, 2017, down $4.5 million, or 1.2%, as compared to the three months ended March 31, 2016. During the three months ended March 31, 2017, we incurred $2.7 million in net allowance charges, compared with $9.9 million in the three months ended March 31, 2016. Our finance receivables amortization rate, including net allowance charges, was 48.8% for the three months ended March 31, 2017 compared to 46.3% for the three months ended March 31, 2016. Our finance receivables amortization rate, excluding net allowance charges, was 48.1% for the three months ended March 31, 2017 compared to 43.7% for the three months ended March 31, 2016.

Accretable yield represents the amount of income recognized on finance receivables we can expect to generate over the remaining life of our existing portfolios based on estimated future cash flows as of the balance sheet date. Additions from portfolio purchases represent the original expected accretable yield, on portfolios purchased during the period, to be earned by us. Net reclassifications from nonaccretable difference to accretable yield primarily result from an increase in our estimate of future cash flows. Increases in future cash flows may occur as portfolios age and actual cash collections exceed those originally expected. If those cash flows are determined to be incremental to the portfolio's original forecast, future projections of cash flows are generally increased resulting in higher expected revenue and hence increases in accretable yield. When applicable, net reclassifications to nonaccretable difference from accretable yield result from a decrease in our estimates of future cash flows and allowance charges that together exceed the increase in our estimate of future cash flows. During the three months ended March 31, 2017, we reclassified $47.1 million from nonaccretable difference to accretable yield primarily due to increased cash collection forecasts relating to pools acquired from 2013-2016. During the three months ended March 31, 2016, we reclassified $1.0 million to nonaccretable difference from accretable yield primarily due to a decrease in cash collection forecasts. When applicable, net reclassifications to nonaccretable difference from accretable yield result from the decrease in our estimates of future cash flows and allowance charges that together exceed the increase in our estimate of future cash flows.

Income recognized on finance receivables, net, is shown net of changes in valuation allowances which are recorded for significant decreases in expected cash flows or a change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the three months ended March 31, 2017, we recorded net allowance charges of $2.7 million. On our domestic Core and Insolvency portfolios, we recorded net allowance charges of $0.5 million. and $0.1 million, respectively. We also recorded allowance charges of $1.5 million on our European portfolios, $0.3 million on our Canadian portfolios and $0.2 million on our Brazilian portfolios.

For the three months ended March 31, 2016, we recorded net allowance charges of $9.9 million. On our domestic Core portfolios, we recorded net allowance charges of $7.1 million on portfolios purchased mainly in 2012 and 2013. On our Insolvency portfolios, we recorded allowance charges of $0.3 million on our domestic portfolios. We also recorded allowance charges of $2.2 million on our European portfolios, and $0.3 million on our Canadian portfolios.

Fee Income

Fee income was $9.9 million in the three months ended March 31, 2017, a decrease of $6.4 million or 39.3%, compared to $16.3 million in the three months ended March 31, 2016. This was primarily due to a decrease in fee income generated by our government services business, which we sold in January 2017.

Other Revenue

Other revenue increased to $2.2 million in the three months ended March 31, 2017 from $2.1 million in the three months ended March 31, 2016.

Operating Expenses

Total operating expenses were $153.3 million for the three months ended March 31, 2017, a decrease of $0.7 million or 0.5%, compared to operating expenses of $154.0 million for the three months ended March 31, 2016. Operating expenses were 39.3% of cash receipts for the three months ended March 31, 2017 compared to 38.4% for the three months ended March 31, 2016.

Compensation and Employee Services

Compensation and employee services expenses were $68.5 million for the three months ended March 31, 2017, an increase of $1.7 million, or 2.5%, compared to compensation and employee services expenses of $66.8 million for the three months ended March 31, 2016. Compensation expense increased primarily as a result of larger average staff sizes and increased bonus expense, partially offset by decreases in normal incentive compensation and share-based compensation. Additionally, compensation and employee services expense was impacted by the sale of the government services business, which occurred in January 2017. Regular compensation and employee services expense declined by $3.0 million due to the sale of the business; this was partially offset by $2.1 million in one-time compensation expense incurred during the three months ended March 31, 2017 directly related to the sale. Total full-time equivalents increased to 4,205 as of March 31, 2017, compared to 3,748 as of March 31, 2016.

Legal Collection Expenses

Legal collection expenses represent costs paid to courts where a lawsuit is filed, contingent fees incurred for the cash collections generated by our independent third-party attorney network, and the cost of documents paid to sellers of nonperforming loans. Legal collection expenses were $31.7 million for the three months ended March 31, 2017, compared to legal collection expenses of $30.1 million for the three months ended March 31, 2016. The increase was primarily due to additional court costs

related to the expansion of the number of accounts brought into the legal channel in Europe during the three months ended March 31, 2017. Our costs paid to courts were $20.0 million for the three months ended March 31, 2017, an increase of $4.5 million or 29.0% compared to $15.5 million for the three months ended March 31, 2016. This was partially offset by a decrease in legal collection expenses paid to third-party attorneys, primarily as a result of a decrease in domestic external legal collections. Our costs paid to third-party attorneys were $11.3 million for the three months ended March 31, 2017, a decrease of $1.7 million or 13.1% compared to $13.0 million for the three months ended March 31, 2016. Our costs paid to sellers of nonperforming loans for documents were $0.4 million for the three months ended March 31, 2017, a decrease of $1.3 million or 76.5% compared to $1.7 million for the three months ended March 31, 2016.

Agency Fees

Agency fees primarily represent third-party collection fees and costs paid to repossession agents to repossess vehicles. Agency fees were $10.8 million for the three months ended March 31, 2017, compared to $10.9 million for the three months ended March 31, 2016.

Outside Fees and Services

Outside fees and services expenses were $13.3 million for the three months ended March 31, 2017, a decrease of $2.5 million, or 15.8%, compared to outside fees and services expenses of $15.8 million for the three months ended March 31, 2016. This decrease was primarily due to a $1.8 million decrease in corporate legal expenses and a $0.7 million decrease in professional fees.

Communication

Communication expenses were $9.1 million for the three months ended March 31, 2017, a decrease of $0.8 million or 8.1%, compared to communication expenses of $9.9 million for the three months ended March 31, 2016. This decrease was primarily due to a $0.7 million decrease in bulk postage expenses.

Rent and Occupancy

Rent and occupancy expenses were $3.8 million for the both the three months ended March 31, 2017 and 2016.

Depreciation and Amortization

Depreciation and amortization expenses were $5.2 million for the three months ended March 31, 2017, a decrease of $0.9 million, or 14.8%, compared to depreciation and amortization expenses of $6.1 million for the three months ended March 31, 2016. The decrease was primarily due to the impact of the sale of our government services business in January 2017.

Other Operating Expenses

Other operating expenses were $10.9 million for the three months ended March 31, 2017, a decrease of $0.2 million, or 1.9%, compared to other operating expenses of $10.7 million for the three months ended March 31, 2016.

Gain on Sale of Subsidiaries

Gain on sale of subsidiaries was $46.8 million for the three months ended March 31, 2017 compared to $0 for the three months ended March 31, 2016. As part of our strategy to focus on businesses with greater global growth potential, we decided in the fourth quarter of 2016 to sell our government services businesses. On January 24, 2017, we completed the sale which resulted in a gain of $46.8 million. We also incurred approximately $2.1 million of additional compensation expense related to the sale that is not reflected in this gain.

Interest Expense

Interest expense was $21.3 million during the three months ended March 31, 2017, an increase of $1.3 million or 6.5%, compared to $20.0 million for the three months ended March 31, 2016. The increase was primarily due to increases in interest rates and unused line fees during the three months ended March 31, 2017 compared to the three months ended March 31, 2016. This was partially offset by a decrease in interest expenses incurred on our interest rate swaps and a decrease in the average borrowings outstanding during the three months ended March 31, 2017 compared to the three months ended March 31, 2016.

Net Foreign Currency Transaction Gains/(Losses)

Net foreign currency transaction gains were $2.2 million for the three months ended March 31, 2017 compared to net foreign currency transaction losses of $1.9 million for the three months ended March 31, 2016. In any given period, our foreign entities

conduct operations in currencies different from their functional currency which generate foreign currency transaction gains and losses.

Provision for Income Taxes

Provision for income taxes was $31.4 million for the three months ended March 31, 2017, an increase of $15.2 million, or 93.8%, compared to provision for income taxes of $16.2 million for the three months ended March 31, 2016. The increase was primarily due to a $31.9 million increase in income before taxes for the three months ended March 31, 2017 being predominantly taxed in higher tax jurisdictions, compared to the three months ended March 31, 2016. During the three months ended March 31, 2017, our effective tax rate was 38.8%, compared to 33.1% for the three months ended March 31, 2016. The increase was due primarily to changes in the mix of earnings, which was impacted by the sale of our government services businesses, and the adoption of ASU 2016-09 in the first quarter of 2017 which increased our provision for income taxes by $1.0 million.

Supplemental Performance Data

Finance Receivables Portfolio Performance

The following tables show certain data related to our finance receivables portfolio. Certain adjustments, as noted in the footnotes to these tables, have been made to reduce the impact of foreign currency fluctuations on purchase price multiples.

Further, these tables disclose our Americas and European Core and Insolvency portfolios. 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 accordingly to comply with bankruptcy/insolvency rules and procedures; however, for accounting purposes, these accounts remain in the related Core portfolio. Conversely, Insolvency accounts may be dismissed voluntarily or involuntarily subsequent to our purchase of the related 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 related 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, 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, pricing disruptions 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 internal rates of return, net of expenses, 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 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.

Revenue recognition under Financial Accounting Standards Board ("FASB") Accounting Standards Codification 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30") is driven by estimates of total collections as well as the timing of those collections. We record new portfolio purchases based on our best estimate of the cash flows expected at acquisition, which reflects the uncertainties inherent in the purchase of nonperforming loans and the results of our underwriting process. Subsequent to the initial booking, as we gain collection experience and confidence with a pool of accounts, we regularly update ERC. These processes have tended to cause the ratio of ERC to purchase price for any given year of buying to gradually increase over time. As a result, our estimate of total collections has often increased as pools have aged. 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 purchase than a pool that was just two years from purchase.

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 closed-end Polish investment fund that purchases and services finance receivables. Our investment in this fund is classified in our Consolidated Balance Sheets as "Investments" and as such is not included in the following tables. The equivalent of the estimated remaining collections of the portfolios, expected to be received by us, is $62.7 million at March 31, 2017.

Purchase Price Multiples as of March 31, 2017 Amounts in thousands

Purchase Period	Purchase Price ⁽³⁾		Net Finance Receivables ⁽⁴⁾		ERC-Historical Period Exchange Rates ⁽⁵⁾		Total Estimated Collections ⁽⁶⁾		ERC-Current Period Exchange Rates ⁽⁷⁾		Current Estimated Purchase Price Multiple		Original Estimated Purchase Price Multiple ⁽²⁾
Americas-Core
1996-2006	$	458,636	$	3,927	$	21,008	$	1,605,823	$	21,008	350	%	246	%
2007	179,832		6,124		26,386		445,595		26,386		248	%	227	%
2008	166,479		6,519		20,112		375,162		20,112		225	%	220	%
2009	125,169		2,040		41,330		462,071		41,330		369	%	252	%
2010	148,217		7,158		63,049		538,967		63,049		364	%	247	%
2011	209,725		17,719		92,826		723,228		92,826		345	%	245	%
2012	254,591		35,799		131,761		677,723		131,761		266	%	226	%
2013	391,520		95,067		282,842		970,750		282,842		248	%	211	%
2014 ⁽¹⁾	406,181		151,074		416,988		973,591		411,629		240	%	204	%
2015	446,754		256,606		543,201		943,421		546,368		211	%	205	%
2016	458,288		369,988		730,522		937,082		737,666		204	%	201	%
2017 YTD	116,389		115,773		229,062		233,726		229,062		201	%	201	%
Subtotal	3,361,781		1,067,794		2,599,087		8,887,139		2,604,039
Americas-Insolvency
1996-2006	54,396		—		504		91,172		504		168	%	145	%
2007	78,524		125		385		106,044		385		135	%	150	%
2008	108,578		567		1,211		169,039		1,211		156	%	163	%
2009	155,998		—		4,756		472,272		4,756		303	%	214	%
2010	208,971		—		6,760		548,761		6,760		263	%	184	%
2011	180,586		—		1,479		366,064		1,479		203	%	155	%
2012	251,733		5,198		15,306		382,250		15,306		152	%	136	%
2013	228,036		31,420		49,512		343,008		49,512		150	%	133	%
2014 ⁽¹⁾	148,934		47,808		66,907		209,143		66,815		140	%	124	%
2015	64,000		45,465		55,398		81,372		55,398		127	%	125	%
2016	94,121		72,644		88,054		115,025		87,671		122	%	123	%
2017 YTD	66,451		66,450		83,932		84,143		83,932		127	%	127	%
Subtotal	1,640,328		269,677		374,204		2,968,293		373,729
Total Americas	5,002,109		1,337,471		2,973,291		11,855,432		2,977,768
Europe-Core
2012	20,457		—		67		33,548		52		164	%	187	%
2013	20,370		809		1,561		22,123		1,176		109	%	119	%
2014 ⁽¹⁾	797,876		368,473		1,244,100		2,077,970		1,030,923		260	%	208	%
2015	423,670		261,171		550,910		727,222		481,992		172	%	160	%
2016	351,499		306,747		524,318		584,620		512,551		166	%	167	%
2017 YTD	39,537		38,942		62,965		64,050		62,965		162	%	162	%
Subtotal	1,653,409		976,142		2,383,921		3,509,533		2,089,659
Europe-Insolvency
2014	10,876		3,185		8,582		18,501		7,366		170	%	129	%
2015	19,420		10,279		19,658		28,913		16,464		149	%	139	%
2016	43,093		33,749		46,663		56,099		44,375		130	%	130	%
2017 YTD	6,069		6,054		7,737		7,763		7,737		128	%	128	%
Subtotal	79,458		53,267		82,640		111,276		75,942
Total Europe	1,732,867		1,029,409		2,466,561		3,620,809		2,165,601
Total PRA Group	$	6,734,976	$	2,366,880	$	5,439,852	$	15,476,241	$	5,143,369


(1)	The amount reflected in the Purchase Price also includes the acquisition date finance receivables portfolios that were acquired through our various business acquisitions.


(2)	The Original Purchase Price Multiple represents the purchase price multiple at the end of the year of acquisition.


(3)	For our international amounts, Purchase Price is presented at the exchange rate at the end of the quarter 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-end exchange rate for the respective quarter of purchase.


(4)	For our international amounts, Net Finance Receivables are presented at the March 31, 2017 exchange rate.


(5)	For our international amounts, ERC-Historical Period Exchange Rates is presented at the period-end exchange rate for the respective quarter of purchase.


(6)	For our international amounts, TEC is presented at the period-end exchange rate for the respective quarter of purchase.


(7)	For our international amounts, ERC-Current Period Exchange Rates is presented at the March 31, 2017 exchange rate.

Portfolio Financial Information Year-to-date as of March 31, 2017 Amounts in thousands

Purchase Period	Purchase Price ⁽³⁾		Cash Collections ⁽²⁾		Gross Revenue ⁽²⁾		Amortization ⁽²⁾		Allowance ⁽²⁾		Net Revenue ⁽²⁾			Net Finance Receivables as of March 31, 2017⁽⁴⁾
Americas-Core
1996-2006	$	458,636	$	2,370	$	1,840	$	530	$	—	$	1,840		$	3,927
2007	179,832		1,688		1,077		611		—		1,077			6,124
2008	166,479		1,741		992		749		75		917			6,519
2009	125,169		3,115		2,328		787		200		2,128			2,040
2010	148,217		4,831		3,505		1,326		—		3,505			7,158
2011	209,725		10,045		7,675		2,370		—		7,675			17,719
2012	254,591		12,025		7,626		4,399		—		7,626			35,799
2013	391,520		23,631		15,904		7,727		235		15,669			95,067
2014 ⁽¹⁾	406,181		34,542		22,262		12,280		217		22,045			151,074
2015	446,754		56,350		26,085		30,265		297		25,788			256,606
2016	458,288		71,889		37,859		34,030		—		37,859			369,988
2017 YTD	116,389		4,679		4,069		610		—		4,069			115,773
Subtotal	3,361,781		226,906		131,222		95,684		1,024		130,198			1,067,794
Americas-Insolvency
1996-2006	54,396		39		39		—		—		39			—
2007	78,524		45		21		24		—		21			125
2008	108,578		86		41		45		100		(59		)	567
2009	155,998		451		451		—		—		451			—
2010	208,971		750		689		61		20		669			—
2011	180,586		1,508		1,508		—		—		1,508			—
2012	251,733		11,012		6,609		4,403		—		6,609			5,198
2013	228,036		13,308		3,435		9,873		—		3,435			31,420
2014 ⁽¹⁾	148,934		9,799		2,990		6,809		—		2,990			47,808
2015	64,000		4,687		1,044		3,643		—		1,044			45,465
2016	94,121		7,918		1,743		6,175		—		1,743			72,644
2017 YTD	66,451		210		210		—		—		210			66,450
Subtotal	1,640,328		49,813		18,780		31,033		120		18,660			269,677
Total Americas	5,002,109		276,719		150,002		126,717		1,144		148,858			1,337,471
Europe-Core
2012	20,457		500		500		—		—		500			—
2013	20,370		305		206		99		62		144			809
2014 ⁽¹⁾	797,876		55,787		30,617		25,170		238		30,379			368,473
2015	423,670		21,424		7,673		13,751		681		6,992			261,171
2016	351,499		18,985		6,647		12,338		554		6,093			306,747
2017 YTD	39,537		1,080		486		594		—		486			38,942
Subtotal	1,653,409		98,081		46,129		51,952		1,535		44,594			976,142
Europe-Insolvency
2014	10,876		767		346		421		—		346			3,185
2015	19,420		1,290		261		1,029		—		261			10,279
2016	43,093		2,947		466		2,481		—		466			33,749
2017 YTD	6,069		26		10		16		—		10			6,054
Subtotal	79,458		5,030		1,083		3,947		—		1,083			53,267
Total Europe	1,732,867		103,111		47,212		55,899		1,535		45,677			1,029,409
Total PRA Group	$	6,734,976	$	379,830	$	197,214	$	182,616	$	2,679	$	194,535		$	2,366,880


(1)	The amount reflected in the Purchase Price also includes the acquisition date finance receivables portfolios that were acquired through our various business acquisitions.


(2)	For our international amounts, amounts are presented using the average exchange rates during the current reporting period.


(3)	For our international amounts, Purchase Price is presented at the exchange rate at the end of the quarter 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-end exchange rate for the respective quarter of purchase.


(4)	For our international amounts, net finance receivables are presented at the March 31, 2017 exchange rate.

The following table, which excludes any proceeds from cash sales of finance receivables, illustrate historical cash collections, by year, on our portfolios.

Cash Collections by Year, By Year of Purchase ⁽²⁾ as of March 31, 2017 Amounts in thousands

			Cash Collections
Purchase Period	Purchase Price ⁽³⁾		1996- 2006		2007		2008		2009		2010		2011		2012		2013		2014		2015		2016		2017 YTD		Total
Americas-Core
1996-2006	$	458,636	$	861,003	$	195,738	$	135,589	$	99,674	$	77,459	$	64,555	$	49,820	$	35,711	$	25,488	$	18,293	$	11,862	$	2,370	$	1,577,562
2007	179,832		—		39,412		87,039		69,175		60,230		50,996		39,585		28,244		19,759		14,198		8,883		1,688		419,209
2008	166,479		—		—		47,253		72,080		62,363		53,654		42,850		31,307		21,027		13,786		8,989		1,741		355,050
2009	125,169		—		—		—		40,703		95,627		84,339		69,385		51,121		35,555		24,896		16,000		3,115		420,741
2010	148,217		—		—		—		—		47,076		113,554		109,873		82,014		55,946		38,110		24,515		4,831		475,919
2011	209,725		—		—		—		—		—		61,971		174,461		152,908		108,513		73,793		48,711		10,045		630,402
2012	254,591		—		—		—		—		—		—		56,901		173,589		146,198		97,267		59,981		12,025		545,961
2013	391,520		—		—		—		—		—		—		—		101,614		247,849		194,026		120,789		23,631		687,909
2014 ⁽¹⁾	406,181		—		—		—		—		—		—		—		—		92,660		253,448		170,311		34,542		550,961
2015	446,754		—		—		—		—		—		—		—		—		—		116,951		228,432		56,350		401,733
2016	458,288		—		—		—		—		—		—		—		—		—		—		138,723		71,889		210,612
2017 YTD	116,389		—		—		—		—		—		—		—		—		—		—		—		4,679		4,679
Subtotal	3,361,781		861,003		235,150		269,881		281,632		342,755		429,069		542,875		656,508		752,995		844,768		837,196		226,906		6,280,738
Americas-Insolvency
1996-2006	54,396		34,138		24,166		14,822		8,212		4,518		2,141		1,023		678		437		302		193		39		90,669
2007	78,524		—		2,850		27,972		25,630		22,829		16,093		7,551		1,206		714		500		270		45		105,660
2008	108,578		—		—		14,024		35,894		37,974		35,690		28,956		11,650		1,884		1,034		635		86		167,827
2009	155,998		—		—		—		16,635		81,780		102,780		107,888		95,725		53,945		5,781		2,531		451		467,516
2010	208,971		—		—		—		—		39,486		104,499		125,020		121,717		101,873		43,649		5,008		750		542,002
2011	180,586		—		—		—		—		—		15,218		66,379		82,752		85,816		76,915		35,996		1,508		364,584
2012	251,733		—		—		—		—		—		—		17,388		103,610		94,141		80,079		60,715		11,012		366,945
2013	228,036		—		—		—		—		—		—		—		52,528		82,596		81,679		63,386		13,308		293,497
2014 ⁽¹⁾	148,934		—		—		—		—		—		—		—		—		37,045		50,880		44,313		9,799		142,037
2015	64,000		—		—		—		—		—		—		—		—		—		3,395		17,892		4,687		25,974
2016	94,121		—		—		—		—		—		—		—		—		—		—		18,869		7,918		26,787
2017 YTD	66,451		—		—		—		—		—		—		—		—		—		—		—		210		210
Subtotal	1,640,328		34,138		27,016		56,818		86,371		186,587		276,421		354,205		469,866		458,451		344,214		249,808		49,813		2,593,708
Total Americas	5,002,109		895,141		262,166		326,699		368,003		529,342		705,490		897,080		1,126,374		1,211,446		1,188,982		1,087,004		276,719		8,874,446
Europe-Core
2012	20,457		—		—		—		—		—		—		11,604		8,995		5,641		3,175		2,198		500		32,113
2013	20,370		—		—		—		—		—		—		—		7,068		8,540		2,347		1,326		305		19,586
2014 ⁽¹⁾	797,876		—		—		—		—		—		—		—		—		153,180		291,980		246,365		55,787		747,312
2015	423,670		—		—		—		—		—		—		—		—		—		45,760		100,263		21,424		167,447
2016	351,499		—		—		—		—		—		—		—		—		—		—		40,368		18,985		59,353
2017 YTD	39,537		—		—		—		—		—		—		—		—		—		—		—		1,080		1,080
Subtotal	1,653,409		—		—		—		—		—		—		11,604		16,063		167,361		343,262		390,520		98,081		1,026,891
Europe-Insolvency
2014	10,876		—		—		—		—		—		—		—		—		5		4,297		3,921		767		8,990
2015	19,420		—		—		—		—		—		—		—		—		—		2,954		4,366		1,290		8,610
2016	43,093		—		—		—		—		—		—		—		—		—		—		6,175		2,947		9,122
2017 YTD	6,069		—		—		—		—		—		—		—		—		—		—		—		26		26
Subtotal	79,458		—		—		—		—		—		—		—		—		5		7,251		14,462		5,030		26,748
Total Europe	1,732,867		—		—		—		—		—		—		11,604		16,063		167,366		350,513		404,982		103,111		1,053,639
Total PRA Group	$	6,734,976	$	895,141	$	262,166	$	326,699	$	368,003	$	529,342	$	705,490	$	908,684	$	1,142,437	$	1,378,812	$	1,539,495	$	1,491,986	$	379,830	$	9,928,085


(1)	The amount reflected in the Purchase Price also includes the acquisition date finance receivables portfolios that were acquired through our various business acquisitions.


(2)	For our international amounts, cash collections are presented using the average exchange rates during the cash collection period.


(3)	For our international amounts, purchase price is presented at the exchange rate at the end of the quarter in which the portfolio was purchased. In addition, any purchase price adjustments that occur throughout the life of the pool are presented at the period end exchange rate for the respective quarter of purchase.

Estimated Remaining Collections

The following chart shows our ERC by geographical region at March 31, 2017 (amounts in millions).

Seasonality

Cash collections in the Americas tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters of the year; cash collections in Europe tend to be higher in the third and fourth quarters of the year. Customer payment patterns are affected by seasonal employment trends, income tax refunds and holiday spending habits geographically.

The following table displays our quarterly cash collections by geography and portfolio type, for the periods indicated.

Cash Collections by Geography and Type Amounts in thousands

	2017		2016								2015
	Q1		Q4		Q3		Q2		Q1		Q4		Q3		Q2
Americas-Core	$	226,906	$	193,360	$	210,524	$	213,741	$	219,571	$	195,835	$	210,725	$	218,838
Americas-Insolvency	49,813		52,988		60,429		67,745		68,646		73,842		81,865		92,974
Europe-Core	98,081		97,429		96,028		102,972		94,091		97,149		85,635		76,602
Europe-Insolvency	5,030		4,974		4,719		2,744		2,025		2,545		2,528		1,210
Total Cash Collections	$	379,830	$	348,751	$	371,700	$	387,202	$	384,333	$	369,371	$	380,753	$	389,624

The following table provides additional details on the composition of our U.S. Core cash collections for the periods indicated.

Domestic Portfolio Core Cash Collections by Source Amounts in thousands

	2017		2016								2015
	Q1		Q4		Q3		Q2		Q1		Q4		Q3		Q2
Call Center and Other Collections	$	127,368	$	103,595	$	115,454	$	119,568	$	127,851	$	108,979	$	117,560	$	121,148
External Legal Collections	40,267		35,231		36,415		40,369		43,203		42,432		47,318		49,995
Internal Legal Collections	34,937		31,458		33,206		34,505		39,080		38,998		41,338		42,482
Total Domestic Core Cash Collections	$	202,572	$	170,284	$	185,075	$	194,442	$	210,134	$	190,409	$	206,216	$	213,625

Collections Productivity (Domestic Portfolio)

The following tables display collections productivity measures that we track.

Cash Collections per Collector Hour Paid Domestic Portfolio

	Total domestic core cash collections ⁽¹⁾
	2017		2016		2015		2014		2013
First Quarter	$	254	$	274	$	247	$	223	$	193
Second Quarter	—		269		245		220		190
Third Quarter	—		281		250		217		191
Fourth Quarter	—		248		239		203		190

	Call center and other cash collections ⁽²⁾
	2017		2016		2015		2014		2013
First Quarter	$	161	$	168	$	143	$	119	$	107
Second Quarter	—		167		141		107		104
Third Quarter	—		177		145		112		104
Fourth Quarter	—		153		139		110		100

(1)

Represents total cash collections less Insolvency cash collections from trustee-administered accounts. This metric includes cash collections from Insolvency accounts administered by the Core call centers as well as cash collections generated by our internal staff of legal collectors. This calculation does not include hours paid to our internal staff of legal collectors or to employees processing the required notifications to trustees on Insolvency accounts.


(2)	Represents total cash collections less internal legal cash collections, external legal cash collections, and Insolvency cash collections from trustee-administered accounts.

Portfolio Purchasing

The following graph shows the purchase price of our portfolios by year since 2007. It also includes the acquisition date finance receivable portfolios that were acquired through our various business acquisitions.

Our ability to profitably purchase and liquidate pools of Insolvency accounts provides diversity to our nonperforming loan purchasing business. Although we generally purchase Insolvency portfolios from many of the same consumer lenders from whom we acquire Core customer portfolios, the volumes and pricing characteristics as well as the competitors are different. Based upon market dynamics, the profitability of portfolios purchased in the Insolvency and Core markets may differ over time. We have found periods when Insolvency accounts were more profitable and other times when Core accounts were more profitable. When pricing becomes more competitive due to reduced portfolios available for purchase or increased demand from competitors entering or increasing their presence in the market, prices tend to go up, driving down the purchase price multiples and lowering the overall expected returns. When pricing relaxes due to market dynamics, purchase price multiples tend to increase, thereby increasing the expected returns.

In order to collect our Core portfolios, we generally need to employ relatively higher amounts of labor and incur additional collection costs to generate each dollar of cash collections as compared with Insolvency portfolios. In order to achieve acceptable levels of net return on investment (after direct expenses), we are generally targeting a higher Total Estimated Collections to purchase price multiple for Core portfolios. On the other hand, Insolvency accounts generate the majority of their cash collections through the efforts of insolvency courts and trustees. In this process, cash is remitted to our Company with no corresponding cost other than the cost of filing claims at the time of purchase, court fees associated with the filing of ownership claim transfers and general administrative costs for monitoring the progress of each account through the insolvency process. As a result, collection costs are much lower for us when liquidating a pool of Insolvency accounts as compared to a pool of Core accounts, but conversely the price we pay for Insolvency accounts is generally higher than Core accounts. We generally target similar net returns on investment (measured after direct expenses) for Insolvency and Core portfolios at any given point in the market cycles. However, because of the lower related collection costs, we can pay more for Insolvency portfolios, which causes the estimated total cash collections to purchase price multiples of Insolvency pools generally to be lower. In summary, compared to a similar investment in a pool of Core accounts, to the extent both pools had identical targeted net returns on investment (measured after direct expenses), the Insolvency pool would be expected to generate less revenue, less direct expenses, similar operating income, and a higher operating margin. From time to time, especially in Europe, we purchase Core portfolios which consist of a majority of previously charged-off accounts which are now paying based on established payment plans. These portfolios have some of the same financial dynamics as Insolvency accounts, with lower collection costs and lower purchase price multiples.

As a result of these purchase price and collection cost dynamics, the mix of our portfolios impacts the relative profitability we realize in a given year. We minimize the impact of higher pricing, to the degree possible, with increased analytics used to score Core accounts and determine on which of those accounts to focus our collection efforts.

We utilize a long-term approach to collecting our receivables. This approach has historically caused us to realize significant cash collections and revenues from purchased portfolios of finance receivables years after they are originally acquired. As a result, we have in the past been able to temporarily reduce our level of current period acquisitions without a material negative current period impact on cash collections and revenue.

The following table displays our quarterly portfolio purchases for the periods indicated.

Portfolio Purchases by Geography and Type Amounts in thousands

	2017		2016								2015
	Q1		Q4		Q3		Q2		Q1		Q4		Q3		Q2
Americas-Core	$	115,166	$	91,800	$	95,452	$	130,529	$	136,057	$	120,554	$	90,912	$	98,317
Americas-Insolvency	67,123		20,929		16,760		33,723		22,952		20,589		9,300		19,111
Europe-Core	39,505		80,129		34,240		68,835		171,038		79,735		240,385		88,499
Europe-Insolvency	6,020		6,943		14,803		16,410		6,731		4,976		3,959		2,450
Total Portfolio Purchases	$	227,814	$	199,801	$	161,255	$	249,497	$	336,778	$	225,854	$	344,556	$	208,377

Portfolio Purchases by Stratifications (Domestic Only)

The following table categorizes our quarterly domestic portfolio purchases for the periods indicated into major asset type and delinquency category. Over the past 20 years, we have acquired more than 44 million customer accounts in the U.S. alone.

Domestic Portfolio Purchases by Stratification (Major Asset Type) Amounts in thousand

	2017		2016								2015
	Q1		Q4		Q3		Q2		Q1		Q4		Q3		Q2
Major Credit Cards	$	57,615	$	35,306	$	38,858	$	48,471	$	68,072	$	32,734	$	25,104	$	23,978
Consumer Finance	7,987		5,678		1,309		1,616		2,533		2,616		2,513		2,947
Private Label Credit Cards	73,473		56,681		54,969		86,331		62,104		93,660		65,456		89,066
Auto Deficiency	30,191		6,104		—		831		411		7,032		557		—
Total	$	169,266	$	103,769	$	95,136	$	137,249	$	133,120	$	136,042	$	93,630	$	115,991

Domestic Portfolio Purchases by Stratification (Delinquency Category) Amounts in thousand

	2017		2016								2015
	Q1		Q4		Q3		Q2		Q1		Q4		Q3		Q2
Fresh ⁽¹⁾	$	43,786	$	30,919	$	30,114	$	42,048	$	37,036	$	37,450	$	27,899	$	39,555
Primary ⁽²⁾	726		2,672		1,568		29,990		26,240		37,994		25,517		12,462
Secondary ⁽³⁾	49,794		48,005		51,630		51,019		43,841		36,804		28,667		40,029
Tertiary ⁽³⁾	1,111		557		—		—		1,843		2,298		—		2,260
Insolvency	67,123		20,930		11,145		13,702		22,952		20,589		9,299		19,111
Other ⁽⁴⁾	6,726		686		679		490		1,208		907		2,248		2,574
Total	$	169,266	$	103,769	$	95,136	$	137,249	$	133,120	$	136,042	$	93,630	$	115,991


(1)	Fresh accounts are typically past due 120 to 270 days, charged-off by the credit originator and are either being sold prior to any post-charge-off collection activity or placement with a third-party for the first time.


(2)	Primary accounts are typically 360 to 450 days past due and charged-off and have been previously placed with one contingent fee servicer.


(3)	Secondary and tertiary accounts are typically more than 660 days past due and charged-off and have been placed with two or three contingent fee servicers.


(4)	Other accounts are typically two to three years or more past due and charged-off and have previously been worked by four or more contingent fee servicers.

Liquidity and Capital Resources

We manage our liquidity to help provide access to sufficient funding to meet our business needs and financial obligations. As of March 31, 2017, cash and cash equivalents totaled $82.1 million. Of the cash and cash equivalent balance as of March 31, 2017, $69.6 million consisted of cash on hand related to foreign operations with indefinitely reinvested earnings. See the "Undistributed Earnings of Foreign Subsidiaries" section below for more information.

At March 31, 2017, we had approximately $1.7 billion in borrowings outstanding with $712.6 million of availability under all of our credit facilities (subject to the borrowing base and applicable debt covenants). Considering borrowing base restrictions, as of March 31, 2017, the amount available to be drawn was $285.7 million. Of the $712.6 million of borrowing availability, $557.6 million was available under our European credit facility and $155.0 million was available under our North American credit facility. Of the $285.7 million available considering borrowing base restrictions, $157.9 million was available under our European credit facility and $127.8 million was available under our North American credit facility. The primary borrowing base under both credit facilities is ERC of the respective finance receivables portfolios. For more information, see Note 4.

An additional funding source is interest-bearing deposits generated in Europe. Per the terms of our European credit facility, we are permitted to obtain interest-bearing deposit funding of up to SEK 1.5 billion (approximately $167.8 million as of March 31, 2017). Interest-bearing deposits as of March 31, 2017 were $78.8 million.

We believe we were in compliance with the covenants of our financing arrangements as of March 31, 2017.

As discussed in Note 11, we sold our government services business in January 2017 for $91.5 million in cash plus additional consideration for certain balance sheet items.

We have the ability to slow the purchasing of finance receivables if necessary, with low impact to current year cash collections. For example, acquisitions of finance receivables, net of buybacks, totaled $890.8 million in 2016. The portfolios purchased in 2016 generated $204.1 million of cash collections, representing only 13.7% of 2016 cash collections.

Contractual obligations over the next year are primarily related to debt maturities and purchase commitments. A portion of our North American credit facility expires in December 2017, and the remaining portion expires in December 2020. Of the $643.0 million outstanding under our North American revolving credit facility at March 31, 2017, $141.1 million is due within one year. Our European credit facility expires in February 2021. Of our $712.7 million in long-term debt outstanding at March 31, 2017, $57.5 million is due within one year.

We have in place forward flow commitments for the purchase of nonperforming loans over the next twelve months with a maximum purchase price of $437.7 million as of March 31, 2017. We may also enter into new or renewed flow commitments and close on spot transactions in addition to the aforementioned flow agreements.

For domestic income tax purposes, we recognize revenue from the collections of finance receivables using the cost recovery method. The Internal Revenue Service has audited and issued Notices of Deficiency for the tax years ended December 31, 2005 through 2012. It has asserted that tax revenue recognition using the cost recovery method does not clearly reflect taxable income. We have filed petitions in the U.S. Tax Court (the "Tax Court") challenging the deficiencies and believe we have sufficient support for the technical merits of our positions. On July 14, 2016, the Tax Court set the trial to begin on May 15, 2017. If we are unsuccessful in the Tax Court and any potential appeals, we may ultimately be required to pay the related deferred taxes, and possibly interest and penalties, which may require additional financing from other sources. Deferred tax liabilities related to this item were $241.9 million at March 31, 2017. Any adverse determination on this matter could result in our amending state tax returns for prior years, increasing our taxable income in those states. Our estimate of the potential federal and state interest is $117.6 million as of March 31, 2017. Accordingly, an adverse determination on this matter could have a material adverse effect on our liquidity. While the trial is set to begin on May 15, 2017, due to the administrative process involved, the final outcome is anticipated to occur between late 2018 and early 2021, depending on any appeals. Accordingly, an adverse outcome, if it was to occur, is not expected to impact the Company in the short term.

On October 22, 2015, our board of directors authorized a share repurchase program to purchase up to $125.0 million of our outstanding shares of common stock. Repurchases depend on prevailing market conditions and other factors. The repurchase program may be suspended or discontinued at any time. We made no repurchases during 2016 or the first quarter of 2017. At March 31, 2017, the maximum remaining purchase price for share repurchases under the program was approximately $45.0 million.

We believe that funds generated from operations and from cash collections on finance receivables, together with existing cash and available borrowings under our revolving credit facilities will be sufficient to finance our operations, planned capital expenditures, forward flow purchase commitments, and additional portfolio purchasing during the next twelve months. Business acquisitions, adverse outcomes in pending litigation or higher than expected levels of portfolio purchasing could require additional financing from other sources.

Cash Flows Analysis

Our operating activities provided cash of $32.7 million and $13.2 million for the three months ended March 31, 2017 and 2016, respectively. In these periods, cash from operations was generated primarily from net income earned through cash collections recognized as revenue and fee income received. In addition, changes in other accounts related to our operating activities impacted our cash from operations. We also had a gain on the sale of subsidiaries of $46.8 million during the three months ended March 31, 2017 which impacted our operating cash flows.

Our investing activities provided cash of $44.7 million and used cash of $169.6 million for the three months ended March 31, 2017 and 2016, respectively. Cash provided by investing activities is primarily driven by cash collections applied to principal on finance receivables and proceeds from business divestitures. Cash used in investing activities is primarily driven by acquisitions of nonperforming loans and business acquisitions. The increase in cash provided by investing activities is primarily due to the sale of subsidiaries during the three months ended March 31, 2017, which provided us with net proceeds of approximately $89.1 million. The decrease in cash used in investing activities is primarily due to a decrease in the amounts of acquisitions of finance receivables, which totaled $226.1 million for the three months ended March 31, 2017, compared to $321.6 million three months ended March 31, 2016. We also used cash of $25.0 million for business acquisitions during the three months ended March 31, 2016, compared to $0 during the three months ended March 31, 2017.

Our financing activities used cash of $90.3 million and provided cash of $145.7 million for the three months ended March 31, 2017 and 2016, respectively. Cash used in financing activities is primarily driven by principal payments on our lines of credit and long-term debt. Cash for financing activities is normally provided by draws on our lines of credit and proceeds from long-term debt. The change in cash (used in)/provided by financing activities for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 was primarily due to a decrease in our net borrowings on our lines of credit. During the three months ended March 31, 2017, we had net repayments on our lines of credit of $78.8 million compared to net draws of $155.6 million during the three months ended March 31, 2016.

Cash paid for interest was $20.3 million and $16.9 million for the three months ended March 31, 2017 and 2016, respectively. Interest was paid on our revolving credit facilities, long-term debt, 3.00% Convertible Senior Notes ("the Notes"), interest-bearing deposits and interest rate swap agreements. The increase during the three months ended March 31, 2017 as compared to three months ended March 31, 2016, was mainly the result of increases in the interest rates charged on our variable rate borrowings. Cash paid for income taxes was $4.9 million and $6.2 million for the three months ended March 31, 2017 and 2016, respectively.

Undistributed Earnings of Foreign Subsidiaries

We intend to use predominantly all of our accumulated and future undistributed earnings of foreign subsidiaries to expand operations outside the U.S.; therefore, such undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested outside the U.S. Accordingly, no provision for federal and state income tax has been provided thereon. If management's intentions change and eligible undistributed earnings of foreign subsidiaries are repatriated, we would be subject to additional U.S. income taxes and withholding taxes payable to various foreign jurisdictions, where applicable. 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 foreign earnings. The amount of cash on hand related to foreign operations with indefinitely reinvested earnings was $69.6 million and $73.6 million as of March 31, 2017 and December 31, 2016, respectively. Refer to the Note 6 for further information related to our income taxes and undistributed foreign earnings.

Contractual Obligations

Our contractual obligations as of March 31, 2017 were as follows (amounts in thousands):



	Payments due by period
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Operating leases	$	44,339	$	10,379	$	14,412	$	9,233	$	10,315
Revolving credit ⁽¹⁾	1,182,394		187,785		84,597		908,398		1,614
Long-term debt ⁽²⁾	882,614		83,051		67,968		731,595		—
Purchase commitments ⁽³⁾	439,137		439,137		—		—		—
Employment agreements	8,021		8,021		—		—		—
Total	$	2,556,505	$	728,373	$	166,977	$	1,649,226	$	11,929


(1)	This amount includes estimated interest and unused line fees due on our revolving credit and assumes that the outstanding balances on the revolving credit remain constant from the March 31, 2017 balances to maturity.


(2)	This amount includes scheduled interest and principal payments on our term loans and the Notes.


(3)	This amount includes the maximum remaining amount to be purchased under forward flow and other contracts for the purchase of defaulted finance receivables in the amount of approximately $437.7 million.

Off-Balance Sheet Arrangements

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").

Recent Accounting Pronouncements

For a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statements see Note 10.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. Our significant accounting policies are discussed in Note 1 to our Consolidated Financial Statements included in Part II, Item 8 of our 2016 Form 10-K. Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates, assumptions and judgments that affect the reported amounts of revenues, expenses, assets, and liabilities.

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 on 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 statements may be material.

Management has reviewed these critical accounting policies with the Audit Committee of our board of directors.

Revenue Recognition - Finance Receivables

We account for our investment in finance receivables under the guidance of ASC 310-30. Revenue recognition for finance receivables accounted for under ASC 310-30 involves the use of estimates and the exercise of judgment on the part of management. These estimates include projections of the quantity and timing of future cash flows and economic lives of our pools of finance receivables. Significant changes in such estimates could result in increased revenue or decreased revenue through the incurrence of allowance charges.

We implement the accounting for income recognized on finance receivables under ASC 310-30 as follows:

We create each accounting pool using our projections of estimated cash flows and expected economic life. We then compute the effective yield that fully amortizes the pool over a reasonable expectation of its economic life based on the current projections of estimated cash flows. As actual cash flow results are recorded, we balance those results to the data contained in our proprietary models to ensure accuracy, then review each pool watching for trends, actual performance versus projections and curve shape (a graphical depiction of the timing of cash flows), regularly re-forecasting future cash flows utilizing our statistical models. The review process is primarily performed by our finance staff; however, our operational and statistical staff are also involved, providing updated statistical input and cash projections to the finance staff. Significant judgment is used in evaluating whether overperformance is due to an increase in projected cash flows or an acceleration of cash flows (a timing difference). If determined to be a significant increase in expected cash flows, we will recognize the effect of the increase prospectively first through an adjustment to any previously recognized valuation allowance for that pool and then through an increase in yield. If the overperformance is determined to be due to a timing difference, we will: a) adjust estimated future cash flows downward which effectively extends the amortization period to fall within a reasonable expectation of the pool's economic life; b) adjust future cash flow projections as noted previously coupled with an increase in yield in order for the amortization period to fall within a reasonable expectation of the pool's economic life; or c) take no action at all if the amortization period falls within a reasonable expectation of the pool's expected economic life. To the extent there is underperformance, we will record an allowance if the underperformance is significant and causes us to significantly decrease estimated future cash flows or delay the expected timing of the cash flows, or take no action if the pool's amortization period is reasonable and falls within the currently projected economic life.

Valuation of Acquired Intangibles and Goodwill

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.

Goodwill is evaluated for impairment either under the qualitative assessment option or the two-step test approach depending on facts and circumstances of a reporting unit, including the excess of fair value over carrying amount in the last valuation or changes in business environment. If we qualitatively determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. Otherwise, goodwill is evaluated for impairment using the two-step test, where the carrying amount of a reporting unit is compared to its fair value in Step 1; if the fair value exceeds the carrying amount, Step 2 is unnecessary. If the carrying amount exceeds the reporting unit’s fair value, this could indicate potential impairment and Step 2 of the goodwill evaluation process is required to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. When Step 2 is necessary, the fair value of individual assets and liabilities is determined using valuations (which in some cases may be based in part on third-party valuation reports), or other observable sources of fair value, as appropriate. If the carrying amount of goodwill exceeds its implied fair value, the excess is recognized as an impairment loss.

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.

Income Taxes

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 foreign 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 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 enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 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.

For domestic income tax purposes, we recognize revenue using the cost recovery method with respect to our nonperforming loan purchasing business. We believe cost recovery to be an acceptable method for companies in the nonperforming loan purchasing industry. Under the cost recovery method, collections on finance receivables are applied first to principal to reduce the finance receivables to zero before any income is recognized.

Our international operations requires the use of material estimates and interpretations of complex tax laws in multiple jurisdictions, and increases the complexity of our accounting for income taxes.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are subject to interest rate risk from outstanding borrowings on our variable rate credit facilities. As such, our consolidated financial results are subject to fluctuations due to changes in the market rate of interest. We assess this interest rate risk by estimating the increase or decrease in interest expense that would occur due to a change in short-term interest rates. The borrowings on our variable rate credit facilities were approximately $1.5 billion as of March 31, 2017. Assuming a 50 basis point decrease in interest rates, for example, interest expense over the following twelve months would decrease by an estimated $5.0 million. Assuming a 50 basis point increase in interest rates, interest expense over the following twelve months would increase by an estimated $5.3 million.

To reduce the exposure to changes in the market rate of interest, we have entered into interest rate swap agreements for a portion of our floating rate financing arrangements. The terms of the interest rate swap agreements require us to receive a variable interest rate and pay a fixed interest rate. For the majority of our floating rate financing arrangements, we have no interest rate swap agreements in place. The sensitivity calculations above consider the impact of our interest rate swap agreements.

The fair value of our interest rate swap agreements was a net liability of $3.0 million at March 31, 2017. A hypothetical 50 basis point decrease in interest rates would cause a decrease in the estimated fair value of our interest rate swap agreements and the resulting estimated fair value would be a liability of $9.8 million at March 31, 2017. Conversely, a hypothetical 50 basis point increase in interest rates would cause an increase in the estimated fair value of our interest rate swap agreements and the resulting estimated fair value would be an asset of $3.3 million at March 31, 2017.

Currency Exchange Risk

We operate internationally and enter into transactions denominated in foreign currencies, including the euro, the Great British pound, the Canadian dollar, Norwegian kroner, Swiss franc, Danish kroner, Swedish kroner, Polish zloty, and Brazilian real. In the three months ended March 31, 2017, we generated $62.6 million of revenues from operations outside the U.S. and used eight functional currencies. Weakness in one particular currency might be offset by strength in other currencies over time.

As a result of our international operations, fluctuations in foreign currencies could cause us to incur foreign currency exchange gains and losses, and could adversely affect our comprehensive income and stockholders' equity. Additionally, our reported financial results could change from period to period due solely to fluctuations between currencies.

Foreign currency exchange gains and losses are primarily the result of the re-measurement of account balances in certain currencies into an entity's functional currency. Foreign currency gains and losses are included as a component of other income and (expense) in our consolidated income statements.

When an entity's functional currency is different than the reporting currency of its parent, foreign currency translation adjustments may occur. Foreign currency translation adjustments are included as a component of other comprehensive income/(loss) in our consolidated statements of comprehensive income and as a component of equity in our consolidated balance sheets.

We have taken measures to mitigate the impact of foreign currency fluctuations. We have restructured our European operations so that portfolio ownership and collections generally occur within the same entity. Our European credit facility is a multi-currency facility, allowing us to better match funding and portfolio investments by currency. We strive to maintain the distribution of our European borrowings within defined thresholds based on the currency composition of our finance receivables portfolios. When those thresholds are exceeded, we engage in foreign exchange spot transactions to mitigate our risk.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. We conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer have concluded that, as of March 31, 2017, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

For information regarding legal proceedings as of March 31, 2017, refer to Note 8.

Item 1A. Risk Factors

There have been no material changes to the risk factors disclosed in our 2016 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



3.1	Fourth Amended and Restated Certificate of Incorporation of PRA Group, Inc. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K (File No. 000-50058) filed on October 29, 2014).
3.2	Amended and Restated By-Laws of PRA Group, Inc. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K (File No. 000-50058) filed on May 22, 2015).
4.1	Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of Amendment No. 1 to the Registration Statement on Form S-1 (Registration No. 333-99225) filed on October 15, 2002).
4.2	Form of Warrant (Incorporated by reference to Exhibit 4.2 of Amendment No. 2 to the Registration Statement on Form S-1 (Registration No. 333-99225) filed on October 30, 2002).
4.3	Indenture dated August 13, 2013 between Portfolio Recovery Associates, Inc. and Wells Fargo Bank, National Association, as trustee (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File No. 000-50058) filed on August 14, 2013).
10.1	Form of Performance Stock Unit Agreement *
10.2	Form of Restricted Stock Unit Agreement *
10.3	Employment Agreement, dated February 23, 2017, by and between Kevin P. Stevenson and PRA Group, Inc. *
10.4	Executive Chairman Agreement, dated February 23, 2017, by and between Steven D. Fredrickson and PRA Group, Inc. *
31.1	Section 302 Certifications of Chief Executive Officer.
31.2	Section 302 Certifications of Chief Financial Officer.
32.1	Section 906 Certifications of Chief Executive Officer and Chief Financial Officer.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkable Document
101.LAB	XBRL Taxonomy Extension Label Linkable Document
101.PRE	XBRL Taxonomy Extension Presentation Linkable Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

________________________________________

* Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.




	PRA Group, Inc.
	(Registrant)

May 9, 2017	By:	/s/ Steven D. Fredrickson
		Steven D. Fredrickson
		Chairman of the Board of Directors, and Chief Executive Officer
		(Principal Executive Officer)





May 9, 2017	By:	/s/ Peter M. Graham
		Peter M. Graham
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)