PRA GROUP INC - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2020

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

For the transition period from ________ to ________

Commission File Number: 000-50058

PRA Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware

75-3078675

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

120 Corporate Boulevard

Norfolk, Virginia 23502

(Address of principal executive offices)

(888) 772-7326

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

Not Applicable

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

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


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

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

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

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

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

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

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

The number of shares of the registrant's common stock outstanding as of November 3, 2020 was 45,579,983.

Table of Contents


Part I. Financial Information

Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets	3
	Consolidated Income Statements	4
	Consolidated Statements of Comprehensive Income/(Loss)	5
	Consolidated Statement of Changes in Equity	6
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9
	1. Organization and Business	9
	2. Change in Accounting Principle	11
	3. Finance Receivables, net	12
	4. Investments	17
	5. Goodwill and Intangible Assets, net	18
	6. Leases	19
	7. Borrowings	20
	8. Derivatives	23
	9. Fair Value	25
	10. Accumulated Other Comprehensive Loss	28
	11. Earnings per Share	29
	12. Income Taxes	30
	13. Commitments and Contingencies	30
	14. Recently Issued Accounting Standards	31

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	55
Item 4.	Controls and Procedures	56

Part II. Other Information

Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	57

Signatures		59

Part I. Financial Information

Item 1. Financial Statements (Unaudited)

PRA Group, Inc.

Consolidated Balance Sheets

September 30, 2020 and December 31, 2019

(Amounts in thousands)


	(unaudited)
	September 30, 2020		December 31, 2019
Assets
Cash and cash equivalents	$	92,779	$	119,774
Investments	37,821		56,176
Finance receivables, net	3,332,748		3,514,165
Other receivables, net	12,575		10,606
Income taxes receivable	27,554		17,918
Deferred tax assets, net	79,121		63,225
Property and equipment, net	57,826		56,501
Right-of-use assets	51,606		68,972
Goodwill	456,308		480,794
Intangible assets, net	3,392		4,497
Other assets	45,519		31,263

Total assets	$	4,197,249	$	4,423,891
Liabilities and Equity
Liabilities:
Accounts payable	$	4,285	$	4,258
Accrued expenses	81,913		88,925
Income taxes payable	18,885		4,046
Deferred tax liabilities, net	48,144		85,390
Lease liabilities	55,987		73,377
Interest-bearing deposits	119,834		106,246
Borrowings	2,524,429		2,808,425
Other liabilities	71,600		26,211

Total liabilities	2,925,077		3,196,878

Equity:
Preferred stock, $0.01 par value, 2,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $0.01 par value, 100,000 shares authorized, 45,579 shares issued and outstanding at September 30, 2020; 100,000 shares authorized, 45,416 shares issued and outstanding at December 31, 2019	456		454
Additional paid-in capital	70,036		67,321
Retained earnings	1,482,172		1,362,631
Accumulated other comprehensive loss	(313,560)		(261,018)
Total stockholders' equity - PRA Group, Inc.	1,239,104		1,169,388
Noncontrolling interest	33,068		57,625
Total equity	1,272,172		1,227,013
Total liabilities and equity	$	4,197,249	$	4,423,891

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

PRA Group, Inc.

Consolidated Income Statements

For the three and nine months ended September 30, 2020 and 2019

(unaudited)

(Amounts in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues:
Portfolio income	$	240,250	$	—	$	750,556	$	—
Changes in expected recoveries	25,403		—		32,388		—
Income recognized on finance receivables	—		247,471		—		735,526
Fee income	1,978		2,391		6,826		11,472
Other revenue	233		152		1,788		950
Total revenues	267,864		250,014		791,558		747,948

Net allowance charges	—		(4,136)		—		(11,427)

Operating expenses:
Compensation and employee services	71,974		75,317		217,617		234,770
Legal collection fees	13,661		14,083		41,975		41,439
Legal collection costs	26,043		31,395		79,997		99,745
Agency fees	14,900		12,788		38,619		39,833
Outside fees and services	22,719		16,733		60,796		48,274
Communication	9,379		10,310		31,702		34,335
Rent and occupancy	4,460		4,414		13,415		13,268
Depreciation and amortization	4,301		4,046		12,494		13,341
Other operating expenses	11,761		12,102		34,457		34,613

Total operating expenses	179,198		181,188		531,072		559,618

Income from operations	88,666		64,690		260,486		176,903
Other income and (expense):

Interest expense, net	(33,692)		(35,864)		(106,319)		(105,872)
Foreign exchange gains	61		5,406		3,027		11,359
Other	291		(19)		(1,367)		(123)
Income before income taxes	55,326		34,213		155,827		82,267
Income tax expense	7,497		6,665		24,734		15,607
Net income	47,829		27,548		131,093		66,660
Adjustment for net income attributable to noncontrolling interests	5,337		2,577		11,552		7,843
Net income attributable to PRA Group, Inc.	$	42,492	$	24,971	$	119,541	$	58,817
Net income per common share attributable to PRA Group, Inc.:
Basic	$	0.93	$	0.55	$	2.63	$	1.30
Diluted	$	0.92	$	0.55	$	2.60	$	1.29
Weighted average number of shares outstanding:
Basic	45,579		45,410		45,526		45,378
Diluted	46,140		45,645		45,971		45,520

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

PRA Group, Inc.

Consolidated Statements of Comprehensive Income/(Loss)

For the three and nine months ended September 30, 2020 and 2019

(unaudited)

(Amounts in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	47,829	$	27,548	$	131,093	$	66,660
Other comprehensive income/(loss), net of tax:
Currency translation adjustments	30,705		(50,542)		(48,448)		(46,975)
Cash flow hedges	1,394		(5,832)		(22,927)		(19,549)
Debt securities available-for-sale	(30)		(1)		191		81
Other comprehensive income/(loss)	32,069		(56,375)		(71,184)		(66,443)
Total comprehensive income/(loss)	79,898		(28,827)		59,909		217
Less comprehensive income/(loss) attributable to noncontrolling interests	3,753		34		(7,091)		5,247
Comprehensive income/(loss) attributable to PRA Group, Inc.	$	76,145	$	(28,861)	$	67,000	$	(5,030)

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

PRA Group, Inc.

Consolidated Statements of Changes in Equity

For the nine months ended September 30, 2020

(unaudited)

(Amounts in thousands)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)		Noncontrolling Interest		Total Equity
	Shares	Amount
Balance at December 31, 2019	45,416	$	454	$	67,321	$	1,362,631	$	(261,018)	$	57,625	$	1,227,013


Components of comprehensive income, net of tax:
Net income	—	—		—		19,135		—		3,301		22,436
Currency translation adjustments	—	—		—		—		(94,201)		(13,875)		(108,076)
Cash flow hedges	—	—		—		—		(20,568)		—		(20,568)

Debt securities available-for-sale	—	—		—		—		170		—		170






Vesting of restricted stock	124	1		—		—		—		—		1

Share-based compensation expense	—	—		2,857		—		—		—		2,857

Employee stock relinquished for payment of taxes	—	—		(3,157)		—		—		—		(3,157)

Balance at March 31, 2020	45,540	$	455	$	67,021	$	1,381,766	$	(375,617)	$	47,051	$	1,120,676
Components of comprehensive income, net of tax:
Net income	—	—		—		57,914		—		2,914		60,828
Currency translation adjustments	—	—		—		—		32,107		(3,184)		28,923
Cash flow hedges	—	—		—		—		(3,753)		—		(3,753)
Debt securities available-for-sale	—	—		—		—		51		—		51
Distributions to noncontrolling interest	—	—		—		—		—		(14,908)		(14,908)

Vesting of restricted stock	39	1		(1)		—		—		—		—
Share-based compensation expense	—	—		3,063		—		—		—		3,063
Employee stock relinquished for payment of taxes	—	—		(18)		—		—		—		(18)

Balance at June 30, 2020	45,579	$	456	$	70,065	$	1,439,680	$	(347,212)	$	31,873	$	1,194,862
Components of comprehensive income, net of tax:
Net income	—	—		—		42,492		—		5,337		47,829
Currency translation adjustments	—	—		—		—		32,288		(1,583)		30,705
Cash flow hedges	—	—		—		—		1,394		—		1,394
Debt securities available-for-sale	—	—		—		—		(30)		—		(30)
Distributions to noncontrolling interest	—	—		—		—		—		(3,677)		(3,677)
Contributions from noncontrolling interest	—	—		—		—		—		1,118		1,118

Share-based compensation expense	—	—		3,097		—		—		—		3,097

Other	—	—		(3,126)		—		—		—		(3,126)
Balance at September 30, 2020	45,579	$	456	$	70,036	$	1,482,172	$	(313,560)	$	33,068	$	1,272,172

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

PRA Group, Inc.

Consolidated Statements of Changes in Equity

For the nine months ended September 30, 2019

(unaudited)

(Amounts in thousands)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive (Loss)		Noncontrolling Interest		Total Equity
	Shares	Amount
Balance at December 31, 2018	45,304	$	453	$	60,303	$	1,276,473	$	(242,109)	$	28,849	$	1,123,969


Components of comprehensive income, net of tax:
Net income	—	—		—		15,227		—		1,685		16,912
Currency translation adjustments	—	—		—		—		(742)		(431)		(1,173)
Cash flow hedges	—	—		—		—		(5,715)		—		(5,715)
Debt securities available-for-sale	—	—		—		—		45		—		45


Distributions to noncontrolling interest	—	—		—		—		—		(6,877)		(6,877)
Contributions from noncontrolling interest	—	—		—		—		—		89		89



Vesting of restricted stock	80	1		(1)		—		—		—		—

Share-based compensation expense	—	—		2,314		—		—		—		2,314

Employee stock relinquished for payment of taxes	—	—		(1,437)		—		—		—		(1,437)
Other	—	—		(2,088)		—		—		—		(2,088)
Balance at March 31, 2019	45,384	$	454	$	59,091	$	1,291,700	$	(248,521)	$	23,315	$	1,126,039
Components of comprehensive income, net of tax:
Net income	—	—		—		18,619		—		3,581		22,200
Currency translation adjustments	—	—		—		—		4,362		378		4,740
Cash flow hedges	—	—		—		—		(8,002)		—		(8,002)
Debt securities available-for-sale	—	—		—		—		37		—		37

Contributions from noncontrolling interest	—	—		—		—		—		3,229		3,229
Vesting of restricted stock	25	—		—		—		—		—		—
Share-based compensation expense	—	—		2,620		—		—		—		2,620
Employee stock relinquished for payment of taxes	—	—		(6)		—		—		—		(6)

Balance at June 30, 2019	45,409	$	454	$	61,705	$	1,310,319	$	(252,124)	$	30,503	$	1,150,857
Components of comprehensive income, net of tax:
Net income	—	—		—		24,971		—		2,577		27,548
Currency translation adjustments	—	—		—		—		(47,999)		(2,543)		(50,542)
Cash flow hedges	—	—		—		—		(5,832)		—		(5,832)
Debt securities available-for-sale	—	—		—		—		(1)		—		(1)
Distributions to noncontrolling interest	—	—		—		—		—		—		—
Contributions from noncontrolling interest	—	—		—		—		—		21,357		21,357
Vesting of restricted stock	2	—		—		—		—		—		—
Share-based compensation expense	—	—		2,974		—		—		—		2,974
Employee stock relinquished for payment of taxes	—	—		(48)		—		—		—		(48)

Balance at September 30, 2019	45,411	$	454	$	64,631	$	1,335,290	$	(305,956)	$	51,894	$	1,146,313

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

PRA Group, Inc.

Consolidated Statements of Cash Flows

For the nine months ended September 30, 2020 and 2019

(unaudited)

(Amounts in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities:
Net income	$	131,093	$	66,660
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation expense	9,017		7,908
Depreciation and amortization	12,494		13,341


Amortization of debt discount and issuance costs	16,711		17,180
Changes in expected recoveries	(32,388)		—

Deferred income taxes	(44,905)		(24,900)
Net unrealized foreign currency transactions	34,060		(3,622)
Fair value in earnings for equity securities	1,159		(6,921)
Net allowance charges	—		11,427
Other	(449)		—

Changes in operating assets and liabilities:
Other assets	1,466		2,651
Other receivables, net	(1,686)		1,019
Accounts payable	45		(2,888)
Income taxes payable, net	5,664		(21,823)
Accrued expenses	(5,315)		13,888
Other liabilities	4,408		(3,484)
Right of use asset/lease liability	(15)		—
Other, net	—		257
Net cash provided by operating activities	131,359		70,693
Cash flows from investing activities:
Net, purchases of property and equipment	(12,906)		(14,890)

Purchases of finance receivables	(613,050)		(832,995)
Recoveries applied to negative allowance	784,056		—
Collections applied to principal on finance receivables	—		649,136
Purchase of investments	(27,565)		(82,670)
Proceeds from sales and maturities of investments	41,932		74,771
Business acquisition, net of cash acquired	—		(57,610)

Proceeds from sale of subsidiaries, net	—		31,177
Net cash provided by/(used in) investing activities	172,467		(233,081)
Cash flows from financing activities:
Proceeds from lines of credit	998,088		885,318
Principal payments on lines of credit	(1,331,303)		(458,566)
Payments on convertible senior notes	(287,442)		—
Proceeds from senior notes	300,000		—
Proceeds from long-term debt	55,000		—
Principal payments on long-term debt	(7,500)		(310,665)

Payments of origination cost and fees	(16,998)		—
Tax withholdings related to share-based payments	(3,176)		(1,492)
Distributions paid to noncontrolling interest	(18,585)		(6,877)
Contributions from noncontrolling interest	1,118		24,675
Purchase of noncontrolling interest	—		(1,255)


Net increase in interest-bearing deposits	8,115		38,581
Other financing activities	(3,183)		(2,088)

Net cash (used in)/provided by financing activities	(305,866)		167,631
Effect of exchange rate on cash	(16,610)		(7,043)
Net decrease in cash and cash equivalents	(18,650)		(1,800)
Cash and cash equivalents, beginning of period	123,807		98,695
Cash and cash equivalents, end of period	$	105,157	$	96,895
Supplemental disclosure of cash flow information:
Cash paid for interest	$	88,003	$	89,100
Cash paid for income taxes	64,719		61,942
Cash, cash equivalents and restricted cash reconciliation:
Cash and cash equivalents per Consolidated Balance Sheets	$	92,779	$	90,000
Restricted cash included in Other assets per Consolidated Balance Sheets	12,378		6,895
Total cash, cash equivalents and restricted cash	$	105,157	$	96,895

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

1. Organization and Business:

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

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

On March 11, 2020, due to the global outbreak of the novel coronavirus ("COVID-19"), the World Health Organization declared a global pandemic. Since the initial outbreak was reported, COVID-19 has continued to adversely impact all countries in which the Company operates. As a result, the Company continues to operate in business continuity mode globally. The Company's business continuity plans have allowed the Company to operate its business while minimizing disruption and complying with country-specific, federal, state and local laws, regulations and governmental actions related to the pandemic.

Basis of presentation: The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). The accompanying interim financial statements have been prepared in accordance with the instructions for Quarterly Reports on Form 10-Q and, therefore, do not include all information and Notes to the Consolidated Financial Statements necessary for a complete presentation of financial position, results of operations, comprehensive income/(loss) and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the Company's Consolidated Balance Sheets as of September 30, 2020, its Consolidated Income Statements, and its Consolidated Statements of Comprehensive Income/(Loss) for the three and nine months ended September 30, 2020 and 2019, and its Consolidated Statements of Changes in Equity and Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019, have been included. The Consolidated Income Statements of the Company for the three and nine months ended September 30, 2020 may not be indicative of future results.

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

Consolidation: The consolidated financial statements include the accounts of PRA Group and other entities in which the Company has a controlling interest. All significant intercompany accounts and transactions have been eliminated.

Entities in which the Company has a controlling financial interest, through ownership of the majority of the entities’ voting equity interests, or through other contractual rights that give the Company control, consist of entities which purchase and collect on portfolios of nonperforming loans.

Investments in companies in which the Company has significant influence over operating and financing decisions, but does not own a majority of the voting equity interests, are accounted for in accordance with the equity method of accounting, which requires the Company to recognize its proportionate share of the entity’s net earnings. These investments are included in other assets, with income or loss included in other revenue.

The Company performs on-going reassessments whether changes in the facts and circumstances regarding the Company’s involvement with an entity cause the Company’s consolidation conclusion to change.

Restricted cash: Cash that is subject to legal restrictions or is unavailable for general operating purposes is classified as restricted cash and is included within other assets on the Company's Consolidated Balance Sheets.

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

The following table shows the amount of revenue generated for the three and nine months ended September 30, 2020 and 2019, and long-lived assets held at September 30, 2020 and 2019, both for the U.S., the Company's country of domicile, and outside of the U.S. (amounts in thousands):


	As of and for the				As of and for the
	Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
	Revenues (2)		Long-Lived Assets		Revenues (2)		Long-Lived Assets
United States	$	172,286	$	98,049	$	166,284	$	114,595
United Kingdom	34,387		2,578		28,446		3,586
Other (1)	61,191		8,805		55,284		9,389
Total	$	267,864	$	109,432	$	250,014	$	127,570

	As of and for the				As of and for the
	Nine Months Ended September 30, 2020				Nine Months Ended September 30, 2019
	Revenues (2)		Long-Lived Assets		Revenues (2)		Long-Lived Assets
United States	$	517,914	$	98,049	$	501,783	$	114,595
United Kingdom	98,768		2,578		86,494		3,586
Other (1)	174,876		8,805		159,671		9,389
Total	$	791,558	$	109,432	$	747,948	$	127,570

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

(2) Based on the Company’s financial statement information used to produce the Company's general-purpose financial statements, it is impracticable to report further breakdowns of revenues from external customers by product or service.

Revenues are attributed to countries based on the location of the related operations. Long-lived assets consist of net property and equipment and right-of-use assets. The Company reports revenues earned from collection activities on nonperforming loans, fee-based services and investments. For additional information on the Company's investments, see Note 4.

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

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

Credit quality information: The Company acquires portfolios of accounts that have experienced deterioration of credit quality between origination and the Company's acquisition of the accounts. The amount paid for a portfolio reflects the Company's determination that it is probable the Company will be unable to collect all amounts due according to an account's contractual terms. The Company accounts for the portfolios in accordance with the guidance for purchased credit deteriorated ("PCD") assets. The initial allowance for credit losses is added to the purchase price rather than recorded as a credit loss expense. The Company has established a policy to write off the amortized cost of individual assets when it deems probable that it will not collect on an individual asset. Due to the deteriorated credit quality of the individual accounts, the Company may write off the unpaid principal balance of all accounts in a portfolio at the time of acquisition. However, when the Company has an expectation of collecting cash flows at the portfolio level, a negative allowance is established for expected recoveries at an amount not to exceed the amount paid for the financial portfolios.

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

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

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

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

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

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

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

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

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

2. Change in Accounting Principle:

Financial Instruments - Credit Losses

In June 2016, FASB issued ASU 2016-13, which introduced a new methodology requiring the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity debt securities and other receivables measured at amortized cost. The

PRA Group, Inc.

Notes to Consolidated Financial Statements

new methodology requires an entity to present on the balance sheet the net amount expected to be collected. This methodology replaces the multiple impairment methods under prior GAAP, including for purchased credit impaired ("PCI") assets, and introduces the concept of PCD assets. The Company's PCI assets previously accounted for under ASC 310-30 are now accounted for as PCD assets upon adoption. ASU 2016-13 requires PCD assets to be recognized at their purchase price plus the allowance for credit losses expected at the time of acquisition. ASU 2016-13 also requires that financial assets should be written off when they are deemed uncollectible.

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

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

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


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

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

3. Finance Receivables, net:

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

Finance receivables, net consisted of the following at September 30, 2020 (amounts in thousands):


Amortized cost	$	—
Negative allowance for expected recoveries (1)	3,332,748
Balance at end of period	$	3,332,748

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

Three Months Ended September 30, 2020

Changes in the negative allowance for expected recoveries by portfolio segment for the three months ended September 30, 2020 were as follows (amounts in thousands):


	For the Three Months Ended September 30, 2020
	Core		Insolvency		Total
Balance at beginning of period	$	2,908,136	$	443,396	$	3,351,532
Initial negative allowance for expected recoveries - portfolio acquisitions (1)	159,069		18,531		177,600
Foreign currency translation adjustment	53,934		6,752		60,686
Recoveries applied to negative allowance (2)	(246,738)		(35,735)		(282,473)
Changes in expected recoveries (3)	23,744		1,659		25,403
Balance at end of period	$	2,898,145	$	434,603	$	3,332,748

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

Portfolio acquisitions for the three months ended September 30, 2020 were as follows (amounts in thousands):


	For the Three Months Ended September 30, 2020
	Core		Insolvency		Total
Face value	$	1,106,910	$	91,793	$	1,198,703
Noncredit discount	(159,766)		(8,522)		(168,288)
Allowance for credit losses at acquisition	(788,075)		(64,740)		(852,815)
Purchase price	$	159,069	$	18,531	$	177,600

The initial negative allowance recorded on portfolio acquisitions for the three months ended September 30, 2020 was as follows (amounts in thousands):


	For the Three Months Ended September 30, 2020
	Core		Insolvency		Total
Allowance for credit losses at acquisition	$	(788,075)	$	(64,740)	$	(852,815)
Writeoffs, net	788,075		64,740		852,815
Expected recoveries	159,069		18,531		177,600
Initial negative allowance for expected recoveries	$	159,069	$	18,531	$	177,600

(2) Recoveries applied to negative allowance

Recoveries applied to the negative allowance for the three months ended September 30, 2020 were as follows (amounts in thousands):


	For the Three Months Ended September 30, 2020
	Core		Insolvency		Total
Recoveries (a)	$	470,056	$	52,667	$	522,723
Less - amounts reclassified to portfolio income (b)	223,318		16,932		240,250
Recoveries applied to negative allowance	$	246,738	$	35,735	$	282,473

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

(b) For more information, refer to the Company's discussion of portfolio income within finance receivables and income recognition in Note 1.

PRA Group, Inc.

Notes to Consolidated Financial Statements

(3) Changes in expected recoveries

Changes in expected recoveries for the three months ended September 30, 2020 were as follows (amounts in thousands):


	For the Three Months Ended September 30, 2020
	Core		Insolvency		Total
Changes in expected future recoveries	$	(62,999)	$	(588)	$	(63,587)
Recoveries received in excess of forecast	86,743		2,247		88,990
Changes in expected recoveries	$	23,744	$	1,659	$	25,403

Nine Months Ended September 30, 2020

Changes in the negative allowance for expected recoveries by portfolio segment for the nine months ended September 30, 2020 were as follows (amounts in thousands):


	For the Nine Months Ended September 30, 2020
	Core		Insolvency		Total
Balance at beginning of period	$	3,051,426	$	462,739	$	3,514,165
Initial negative allowance for expected recoveries - portfolio acquisitions (1)	537,477		77,859		615,336
Foreign currency translation adjustment	(42,065)		(3,020)		(45,085)
Recoveries applied to negative allowance (2)	(677,211)		(106,845)		(784,056)
Changes in expected recoveries (3)	28,518		3,870		32,388
Balance at end of period	$	2,898,145	$	434,603	$	3,332,748

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

Portfolio acquisitions for the nine months ended September 30, 2020 were as follows (amounts in thousands):


	For the Nine Months Ended September 30, 2020
	Core		Insolvency		Total
Face value	$	4,286,296	$	366,211	$	4,652,507
Noncredit discount	(533,465)		(29,533)		(562,998)
Allowance for credit losses at acquisition	(3,215,354)		(258,819)		(3,474,173)
Purchase price	$	537,477	$	77,859	$	615,336

The initial negative allowance recorded on portfolio acquisitions for the nine months ended September 30, 2020 was as follows (amounts in thousands):


	For the Nine Months Ended September 30, 2020
	Core		Insolvency		Total
Allowance for credit losses at acquisition	$	(3,215,354)	$	(258,819)	$	(3,474,173)
Writeoffs, net	3,215,354		258,819		3,474,173
Expected recoveries	537,477		77,859		615,336
Initial negative allowance for expected recoveries	$	537,477	$	77,859	$	615,336

PRA Group, Inc.

Notes to Consolidated Financial Statements

(2) Recoveries applied to negative allowance

Recoveries applied to the negative allowance for the nine months ended September 30, 2020 were as follows (amounts in thousands):


	For the Nine Months Ended September 30, 2020
	Core		Insolvency		Total
Recoveries (a)	$	1,371,988	$	162,624	$	1,534,612
Less - amounts reclassified to portfolio income (b)	694,777		55,779		750,556
Recoveries applied to negative allowance	$	677,211	$	106,845	$	784,056

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

(b) For more information, refer to the Company's discussion of portfolio income within finance receivables and income recognition in Note 1.

(3) Changes in expected recoveries

Changes in expected recoveries for the nine months ended September 30, 2020 were as follows (amounts in thousands):


	For the Nine Months Ended September 30, 2020
	Core		Insolvency		Total
Changes in expected future recoveries	$	(181,433)	$	(2,478)	$	(183,911)
Recoveries received in excess of forecast	209,951		6,348		216,299
Changes in expected recoveries	$	28,518	$	3,870	$	32,388

In order to evaluate the impact of the COVID-19 pandemic on expectations of future cash collections, the Company considered historical performance, current economic forecasts regarding the duration of the impact to short-term and long-term growth in the various geographies in which the Company operates, and evolving information regarding its effect on economic activity and consumer habits as conditions related to the pandemic continue to evolve. The Company also considered current collection activity in its determination to adjust the estimated timing of near term ERC for certain pools. Based on these considerations, the Company’s estimates incorporate changes in both amounts and in the timing of expected cash collections over the forecast period.

For the three months ended September 30, 2020, changes in expected recoveries were $25.4 million. This reflects $89.0 million in recoveries received during the quarter in excess of forecast, partially offset by a $63.6 million decrease to the present value of expected future recoveries. The majority of the decrease reflects the Company's assumption that the overperformance was acceleration in cash collections rather than an increase to total expected collections. Additionally, the Company made forecast adjustments deemed appropriate given the current environment in which the Company operates.

For the nine months ended September 30, 2020, changes in expected recoveries were $32.4 million. This reflects $216.3 million in recoveries in excess of forecast, which was largely due to significant cash collections overperformance during the second and third quarters. This was mostly offset by a $183.9 million decrease in the present value of expected future recoveries. The decrease reflects the Company's assumption that the majority of the current year overperformance was primarily due to acceleration in the timing of cash collections rather than an increase to total expected collections. Additionally, the Company made forecast adjustments in all quarters deemed appropriate given the current environment in which the Company operates.

Changes in the Company’s assumptions regarding the duration and impact of COVID-19 to cash collections could change significantly as conditions evolve.

Finance Receivables, net prior to adoption of ASC 326

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

Changes in finance receivables, net for the three and nine months ended September 30, 2019 were as follows (amounts in thousands):


	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019

Balance at beginning of period	$	3,230,949	$	3,084,777
Acquisitions of finance receivables (1)	276,918		874,812

Foreign currency translation adjustment	(59,172)		(60,213)
Cash collections	(453,217)		(1,384,662)
Income recognized on finance receivables	247,471		735,526
Net allowance charges	(4,136)		(11,427)

Balance at end of period	$	3,238,813	$	3,238,813

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

During the three months ended September 30, 2019, the Company acquired finance receivable portfolios with a face value of $2.4 billion for $279.0 million. During the nine months ended September 30, 2019, the Company acquired finance receivables portfolios with a face value of $8.9 billion for $887.0 million. At September 30, 2019, the ERC on the receivables acquired during the three and nine months ended September 30, 2019 were $494.8 million and $1.4 billion, respectively.

At the time of acquisition and each quarter thereafter, the life of each quarterly accounting pool was estimated based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon projections, cash collections expected to be applied to principal were estimated to be as follows for the twelve-month periods ending September 30, (amounts in thousands):


2020	$	864,692
2021	692,946
2023	507,491
2024	378,679
2025	259,808
2026	171,873
2027	110,078
2028	84,212
2029	61,656
2030	47,347
Thereafter	60,031
Total ERC expected to be applied to principal	$	3,238,813

At September 30, 2019, the Company had aggregate net finance receivables balances in pools accounted for under the cost recovery method of $36.2 million.

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

Changes in accretable yield for the three and nine months ended September 30, 2019 were as follows (amounts in thousands):


	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Balance at beginning of period	$	3,173,013	$	3,058,445
Income recognized on finance receivables	(247,471)		(735,526)
Net allowance charges	4,136		11,427
Additions from portfolio acquisitions	228,443		693,053
Reclassifications from nonaccretable difference	59,694		191,756
Foreign currency translation adjustment	(60,944)		(62,284)
Balance at end of period	$	3,156,871	$	3,156,871

The following is a summary of activity within the Company's valuation allowance account, all of which relates to acquired finance receivables, for the three and nine months ended September 30, 2019 (amounts in thousands):


	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Beginning balance	$	264,591	$	257,148
Allowance charges	8,087		21,596
Reversal of previously recorded allowance charges	(3,951)		(10,169)
Net allowance charges	4,136		11,427
Foreign currency translation adjustment	(1,192)		(1,040)
Ending balance	$	267,535	$	267,535

4. Investments:

Investments consisted of the following at September 30, 2020 and December 31, 2019 (amounts in thousands):


	September 30, 2020		December 31, 2019


Debt securities



Available-for-sale	$	4,890	$	5,052


Equity securities
Exchange traded funds	19,132		—
Private equity funds	5,818		7,218
Mutual funds	639		33,677
Equity method investments	7,342		10,229

Total investments	$	37,821	$	56,176

Debt Securities

Available-for-sale

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

The amortized cost and estimated fair value of investments in debt securities at September 30, 2020 and December 31, 2019 were as follows (amounts in thousands):


	September 30, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Aggregate Fair Value
Available-for-sale


Government bonds	$	4,742	$	148	$	—	$	4,890






	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Aggregate Fair Value
Available-for-sale

Government bonds	$	5,095	$	—	$	43	$	5,052

Equity Securities

Exchange traded funds: The Company invests in certain exchange traded funds, which are carried at fair value. Gains and losses from these investments are included within other income and (expense) in the Company's Consolidated Income Statements.

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

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

Equity Method Investments

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

5. Goodwill and Intangible Assets, net:

In connection with the Company's business acquisitions, the Company acquired certain tangible and intangible assets. Intangible assets resulting from these acquisitions include client and customer relationships, non-compete agreements, trademarks and technology. The Company performs an annual review of goodwill as of October 1 of each year or more frequently if indicators of impairment exist. The Company performed its most recent annual review as of October 1, 2019 and concluded that no goodwill impairment was necessary. The Company performed its quarterly assessment by evaluating whether any triggering events had occurred as of September 30, 2020, which included considering current market conditions resulting from the global COVID-19 pandemic. The Company concluded that no triggering event had occurred as of September 30, 2020 and will continue to monitor the market for any adverse conditions.

PRA Group, Inc.

Notes to Consolidated Financial Statements

The following table represents the changes in goodwill for the three and nine months ended September 30, 2020 and 2019 (amounts in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019

Balance at beginning of period	$	444,507	$	489,293	$	480,794	$	464,116


Changes:
Acquisition (1)	—		467		—		18,831


Foreign currency translation adjustment	11,801		(24,188)		(24,486)		(17,375)
Net change in goodwill	11,801		(23,721)		(24,486)		1,456



Balance at end of period	$	456,308	$	465,572	$	456,308	$	465,572

(1) The $0.5 million and $18.8 million additions to goodwill during the three and nine months ended September 30, 2019 respectively, were related to the acquisition of a business in Canada.

6. Leases:

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

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

The components of lease expense for the three and nine months ended September 30, 2020 and 2019, were as follows (amounts in thousands):


	Three Months Ended September 30				Nine Months Ended September 30
	2020		2019		2020		2019
Operating lease expense	$	3,035	$	3,018	$	9,072	$	8,948
Short-term lease expense	661		657		2,030		2,219







Total lease expense	$	3,696	$	3,675	$	11,102	$	11,167

Supplemental cash flow information and non-cash activity related to leases for the nine months ended September 30, 2020 and 2019 were as follows (amounts in thousands):


	Nine Months Ended September 30
	2020		2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	9,179	$	8,597

ROU assets obtained in exchange for operating lease obligations	(10,465)		80,581

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


	September 30,
	2020		2019
Weighted-average remaining lease term (years)	9.5		11.0


Weighted-average discount rate	4.82	%	4.97	%

PRA Group, Inc.

Notes to Consolidated Financial Statements

Maturities of lease liabilities at September 30, 2020 are as follows for the following periods (amounts in thousands):


	Operating Leases
For the three months ending December 31, 2020	$	3,005
For the year ending December 31, 2021	11,011
For the year ending December 31, 2022	8,750
For the year ending December 31, 2023	6,520
For the year ending December 31, 2024	5,683
Thereafter	35,154
Total lease payments	$	70,123
Less imputed interest	14,136
Total	$	55,987

7. Borrowings:

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


	September 30, 2020		December 31, 2019
Americas revolving credit	$	414,803	$	772,037
Europe revolving credit	1,025,948		1,017,465

Term loan	472,500		425,000


Senior notes	300,000		—
Convertible senior notes	345,000		632,500
	2,558,251		2,847,002
Less: Debt discount and issuance costs	(33,822)		(38,577)
Total	$	2,524,429	$	2,808,425

The following principal payments are due on the Company's borrowings as of September 30, 2020 for the 12-month periods ending September 30, (amounts in thousands):


2021	$	10,937
2022	10,937
2023	1,381,120
2024	855,257
Thereafter	300,000

Total	$	2,558,251

The Company determined that it was in compliance with the covenants of its financing arrangements as of September 30, 2020.

North American Revolving Credit and Term Loan

On May 5, 2017, the Company amended and restated its existing credit agreement (as amended, and modified from time to time, the “North American Credit Agreement”) with Bank of America, N.A., as administrative agent, Bank of America, National Association, acting through its Canada branch, as the Canadian administrative agent, and a syndicate of lenders named therein. On August 26, 2020, the Company entered into the Third Amendment to the North American Credit Agreement which, among other things, increased the term loan by $55.0 million, reduced the aggregate commitments under the domestic revolving credit facility by $68.0 million, increased the Canadian revolving credit facility by $25.0 million, and extended the maturity date by two years.

The total credit facility under the North American Credit Agreement includes an aggregate principal amount of $1,547.5 million (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a fully-funded $472.5 million term loan, (ii) a $1,000.0 million domestic revolving credit facility, and (iii) a $75.0 million Canadian revolving credit facility. The facility includes an accordion feature for up to $500.0 million in additional commitments (at the option of

PRA Group, Inc.

Notes to Consolidated Financial Statements

the lender) and also provides for up to $25.0 million of letters of credit and a $25.0 million swingline loan sub-limit 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 (unless the ERC Advance Rate Increase Period event, as defined in the North American Credit Agreement, triggers an additional 55 basis points that would be added to the margin). The base rate is the highest of (a) the Federal Funds Rate (as defined in the North American Credit Agreement) plus 0.50%, (b) Bank of America's prime rate, or (c) the one-month Eurodollar rate plus 1.00%. Canadian Prime Rate Loans bear interest at a rate per annum equal to the Canadian Prime Rate plus 1.50% (unless the ERC Advance Rate Increase Period event, as defined in the North American Credit Agreement, triggers an additional 55 basis points that would be added to the margin). The revolving loans within the credit facility are subject to a 0.75% floor. The revolving credit facilities also bear an unused line fee of 0.375% per annum, payable quarterly in arrears. The loans under the North American Credit Agreement mature May 5, 2024. As of September 30, 2020, the unused portion of the North American Credit Agreement was $662.2 million. Considering borrowing base restrictions, as of September 30, 2020, the amount available to be drawn was $353.7 million.

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

•borrowings under each of the domestic revolving loan facility and the Canadian revolving loan facility are subject to borrowing base calculations and may not exceed 35% of the ERC on all eligible Core asset pools. After July 31, 2020, the ERC borrowing base limit on the domestic revolving loan facility can be increased to 40% until January 31, 2021. If the ERC advance rate is increased to 40% and then subsequently decreases back to 35% or below during this period, the ERC borrowing base will return to 35%;

•borrowings under each of the domestic revolving loan facility and the Canadian revolving loan facility are subject to separate borrowing base calculations and may not exceed 55% of the ERC of all domestic or Canadian, as applicable, insolvency eligible asset pools, plus 75% of domestic or Canadian, as applicable, eligible accounts receivable;

•the consolidated total leverage ratio cannot exceed 3.50 to 1.0;

•investments by any loan party in any entity are permitted in an amount not to exceed 75% of the aggregate principal amount of any indebtedness in the form of additional convertible notes and/or certain unsecured financings incurred after August 1, 2020;

•Subsidiary indebtedness, excluding PRA Europe (as defined below), are permitted in an amount not to exceed the greater of $200.0 million or 5% of consolidated total assets;

•the consolidated senior secured leverage ratio cannot exceed 2.75 to 1.0 as of the end of any fiscal quarter until March 31, 2021. On March 31, 2021, the senior secured leverage ratio will decrease to 2.25 to 1.0 until maturity;

•subject to no default or event of default, cash dividends and distributions during any fiscal year cannot exceed $20.0 million;

•subject to no default or event of default, equity interests and permitted convertible note repurchases during any fiscal year cannot exceed $100.0 million plus 50% of the prior year's consolidated net income;

•permitted acquisitions during any fiscal year cannot exceed $250.0 million (with a $50.0 million per year sublimit for permitted acquisitions by non-loan parties);

•the Company must maintain positive income from operations during any fiscal quarter; and

•restrictions on changes in control.

European Revolving Credit Facility

On October 23, 2014, European subsidiaries of the Company ("PRA Europe") entered into a credit agreement with DNB Bank ASA for a Multicurrency Revolving Credit Facility (such agreement as later amended or modified, the "European Credit Agreement"). On March 27, 2020, the Company entered into the Sixth Amendment and Restatement Agreement to its European Credit Agreement which, among other things, increased the total commitments by $200.0 million, extended the majority of the facility by two years and includes an accordion feature of no less than $50.0 million not to exceed $500.0 million, to allow for future increases. Any new lender must participate with a commitment of at least $100.0 million.

Under the terms of the European Credit Agreement, the credit facility includes an aggregate amount of $1,300.0 million (subject to the borrowing base), accrues interest at the Interbank Offered Rate ("IBOR") plus 2.70% - 3.80% (as determined by the estimated remaining collections ratio ("ERC Ratio") as defined in the European Credit Agreement), bears an unused line fee, currently 1.23% per annum, or 35% of the margin, is payable monthly in arrears, and matures February 19, 2023. The European Credit Agreement also includes an overdraft facility in the aggregate amount of $40.0 million (subject to the borrowing base), which accrues interest (per currency) at the daily rates as published by the facility agent, bears a facility line

PRA Group, Inc.

Notes to Consolidated Financial Statements

fee of 0.125% per quarter, payable quarterly in arrears, and matures February 19, 2023. As of September 30, 2020, the unused portion of the European Credit Agreement (including the overdraft facility) was $314.1 million. Considering borrowing base restrictions and other covenants, as of September 30, 2020, the amount available to be drawn under the European Credit Agreement (including the overdraft facility) was $118.1 million.

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

•the ERC Ratio cannot exceed 45%;

•the gross interest-bearing debt ratio in Europe cannot exceed 3.25 to 1.0 as of the end of any fiscal quarter;

•interest bearing deposits in AK Nordic AB cannot exceed SEK 1.2 billion; and

•PRA Europe's cash collections must meet certain thresholds, measured on a quarterly basis.

Colombian Revolving Credit Facility

PRA Group Colombia Holding SAS, a subsidiary of the Company in Colombia, has a credit agreement that provides for borrowings in an aggregate amount of approximately $5.1 million. As of September 30, 2020, the outstanding balance under the credit agreement was $2.0 million, with a weighted average interest rate of 7.13%. The outstanding balance accrues interest at the Indicador Bancario de Referencia rate ("IBR") plus a weighted average spread of 2.74%, is payable quarterly in arrears, amortizes quarterly, and matures on October 17, 2022 (per the credit agreement, maturity represents three years from the last draw). This credit facility is fully collateralized using time deposits with the lender. As of September 30, 2020, the unused portion of the Colombia Credit Agreement was approximately $3.1 million.

Senior Notes due 2025

On August 27, 2020, the Company completed the private offering of $300.0 million in aggregate principal amount of its 7.375% Senior Notes due September 1, 2025 (the "2025 Notes" or "senior notes"). The 2025 Notes were issued pursuant to an Indenture dated August 27, 2020 (the "2020 Indenture"), between the Company and Regions Bank, as a trustee. The 2020 Indenture contains customary terms and covenants, including certain events of default after which the 2025 Notes may be due and payable immediately. The 2025 Notes are senior unsecured obligations of the Company. Interest on the 2025 Notes is payable semi-annually, in arrears, on September 1 and March 1 of each year, beginning March 1, 2021. On or after September 1, 2022, the 2025 Notes may be redeemed, in whole or in part, at a price equal to 103.688% of the aggregate principal amount of the 2025 Notes being redeemed. The applicable redemption price changes if redeemed during the 12-months beginning September 1 of each year to, 101.844% for 2023 and then 100% for 2024 and thereafter.

In addition, on or before September 1, 2022, the Company may redeem up to 40% of the aggregate principal amount of the 2025 Notes at a redemption price of 107.375% plus accrued and unpaid interest subject to the rights of holders of the 2025 Notes with the net cash proceeds of a public offering of common stock of the Company provided, that at least 60% in aggregate principal amount of the 2025 Notes remains outstanding immediately after the occurrence of such redemption and that such redemption will occur within 90 days of the date of the closing of such public offering.

In the event of a Change of Control (as defined in the 2020 Indenture), the Company must offer to repurchase all of the 2025 Notes (unless otherwise redeemed) at a price equal to 101% of their aggregate principal amount, plus accrued and unpaid interest. If the Company sells assets under certain circumstances and does not use the proceeds for specified purposes, the Company will be required to make an offer to repurchase the 2025 Notes at 100% of their principal amount, plus accrued and unpaid interest.

Convertible Senior Notes due 2020

On August 13, 2013, the Company completed the private offering of $287.5 million in aggregate principal amount of its 3.00% Convertible Senior Notes due August 1, 2020 (the "2020 Notes"). In the third quarter of 2020, the Company repaid the 2020 Notes in full using borrowings under the domestic revolving loan facility in the North American Credit Agreement and available cash.

Convertible Senior Notes due 2023

On May 26, 2017, the Company completed the private offering of $345.0 million in aggregate principal amount of its 3.50% Convertible Senior Notes due June 1, 2023 (the "2023 Notes" and, together with the 2020 Notes, the "Convertible Notes"). The 2023 Notes were issued pursuant to an Indenture, dated May 26, 2017 (the "2017 Indenture"), between the

PRA Group, Inc.

Notes to Consolidated Financial Statements

Company and Regions Bank, as trustee. The 2017 Indenture contains customary terms and covenants, including certain events of default after which the 2023 Notes may be due and payable immediately. The 2023 Notes are senior unsecured obligations of the Company. Interest on the 2023 Notes is payable semi-annually, in arrears, on June 1 and December 1 of each year. Prior to March 1, 2023, the 2023 Notes will be convertible only upon the occurrence of specified events. On or after March 1, 2023, the 2023 Notes will be convertible at any time. The Company has the right, at its election, to redeem all or any part of the outstanding 2023 Notes at any time on or after June 1, 2021 for cash, but only if the last reported sale price (as defined in the 2017 Indenture) exceeds 130% of the conversion price on each of at least 20 trading days during the 30 consecutive trading days ending on and including the trading day immediately before the date the Company sends the related redemption notice. As of September 30, 2020, the Company does not believe that any of the conditions allowing holders of the 2023 Notes to convert their notes have occurred.

The conversion rate for the 2023 Notes is initially 21.6275 shares per $1,000 principal amount of 2023 Notes, which is equivalent to an initial conversion price of approximately $46.24 per share of the Company's common stock, and is subject to adjustment in certain circumstances pursuant to the 2017 Indenture. Upon conversion, holders of the 2023 Notes will receive cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election. The Company's intent is to settle conversions through combination settlement (i.e., the 2023 Notes would be converted into cash up to the aggregate principal amount, and shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election, for the remainder). As a result and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds $46.24.

The Company determined that the fair value of the 2023 Notes at the date of issuance was approximately $298.8 million, and designated the residual value of approximately $46.2 million as the equity component. Additionally, the Company allocated approximately $8.3 million of the $9.6 million 2023 Notes issuance cost as debt issuance cost and the remaining $1.3 million as equity issuance cost.

The balances of the liability and equity components of the Convertible Notes outstanding were as follows as of the dates indicated (amounts in thousands):


	September 30, 2020		December 31, 2019
Liability component - principal amount	$	345,000	$	632,500
Unamortized debt discount	(22,562)		(31,414)
Liability component - net carrying amount	$	322,438	$	601,086
Equity component	$	44,910	$	76,216

The debt discount is amortized into interest expense over the remaining life of the Convertible Notes. The 2020 Notes were using the effective interest rate of 4.92% through August 1, 2020. The 2023 Notes are using an effective interest rate of 6.20%.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Interest expense - stated coupon rate	$	3,695	$	5,175	$	14,045	$	15,525
Interest expense - amortization of debt discount	2,388		3,128		8,852		9,241
Total interest expense - Convertible Notes	$	6,083	$	8,303	$	22,897	$	24,766

8. Derivatives:

The Company periodically enters into derivative financial instruments, typically interest rate swap agreements, interest rate caps, and foreign currency contracts to reduce its exposure to fluctuations in interest rates on variable-rate debt and foreign currency exchange rates. The Company does not utilize derivative financial instruments with a level of complexity or with a risk greater than the exposure to be managed nor does it enter into or hold derivatives for trading or speculative purposes. The Company periodically reviews the creditworthiness of the counterparty to assess the counterparty’s ability to honor its obligation. Counterparty default would expose the Company to fluctuations in interest and currency rates. Derivative financial instruments are recognized at fair value in the Consolidated Balance Sheets, in accordance with the guidance of ASC Topic 815 “Derivatives and Hedging” (“ASC 815”).

PRA Group, Inc.

Notes to Consolidated Financial Statements

The following table summarizes the fair value of derivative instruments in the Company's Consolidated Balance Sheets as of the dates indicated (amounts in thousands):

September 30, 2020

December 31, 2019

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments:

Interest rate contracts

Other assets

—

Other assets

323

Interest rate contracts

Other liabilities

46,570

Other liabilities

17,807

Derivatives not designated as hedging instruments:

Foreign currency contracts

Other assets

2,877

Other assets

552

Foreign currency contracts

Other liabilities

17,690

Other liabilities

5,856

Derivatives Designated as Hedging Instruments:

Changes in fair value of derivative contracts designated as cash flow hedging instruments are recognized in other comprehensive income ("OCI"). As of September 30, 2020 and December 31, 2019, the notional amount of interest rate contracts designated as cash flow hedging instruments was $932.3 million and $959.0 million, respectively. Derivatives designated as cash flow hedging instruments were evaluated and remain highly effective at September 30, 2020 and have initial terms of one to six years. The Company estimates that approximately $10.1 million of net derivative loss included in OCI will be reclassified into earnings within the next 12 months.

The following table summarizes the effects of derivatives designated as cash flow hedging instruments on the consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 (amounts in thousands):


	Loss recognized in OCI, net of tax
	Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives designated as cash flow hedging instruments	2020		2019			2020		2019
Interest rate contracts	$	(1,089)	$	(6,245)		$	(27,953)	$	(20,160)

	Loss reclassified from OCI into income
	Three Months Ended September 30,				Nine Months Ended September 30,
Location of loss reclassified from OCI into income	2020		2019			2020		2019
Interest expense, net	$	(3,175)	$	(413)		$	(6,488)	$	(611)

Derivatives Not Designated as Hedging Instruments:

Changes in fair value of derivative contracts not designated as hedging instruments are recognized in earnings. The Company also enters into foreign currency contracts to economically hedge the foreign currency re-measurement exposure related to certain balances that are denominated in currencies other than the functional currency of the entity. As of September 30, 2020 and December 31, 2019, the notional amount of foreign currency contracts that are not designated as hedging instruments was $466.2 million and $469.9 million, respectively.

PRA Group, Inc.

Notes to Consolidated Financial Statements

The following table summarizes the effects of derivatives not designated as hedging instruments on the Company’s Consolidated Income Statements for the three and nine months ended September 30, 2020 and 2019 (amounts in thousands):


		Amount of gain or (loss) recognized in income
		Three Months Ended September 30,
Derivatives not designated as hedging instruments	Location of gain or (loss) recognized in income	2020		2019
Foreign currency contracts	Foreign exchange gains	$	2,280	$	4,270
Foreign currency contracts	Interest expense, net	(322)		(1,141)
Interest rate contracts	Interest expense, net	—		15

		Amount of gain or (loss) recognized in income
		Nine Months Ended September 30,
Derivatives not designated as hedging instruments	Location of gain or (loss) recognized in income	2020		2019
Foreign currency contracts	Foreign exchange gains	$	27,437	$	(3,401)
Foreign currency contracts	Interest expense, net	(2,135)		(2,628)
Interest rate contracts	Interest expense, net	—		(492)

9. Fair Value:

As defined by ASC Topic 820, "Fair Value Measurements and Disclosures" ("ASC 820"), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 requires the consideration of differing levels of inputs in the determination of fair values.

Those levels of input are summarized as follows:

•Level 1: Quoted prices in active markets for identical assets and liabilities.

•Level 2: Observable inputs other than Level 1 quoted prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

•Level 3: Unobservable inputs that are supported by little or no market activity. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

Financial Instruments Not Required To Be Carried at Fair Value

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

PRA Group, Inc.

Notes to Consolidated Financial Statements

The carrying amounts in the table are recorded in the Consolidated Balance Sheets at September 30, 2020 and December 31, 2019 (amounts in thousands):


	September 30, 2020				December 31, 2019
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	92,779	$	92,779	$	119,774	$	119,774


Finance receivables, net	3,332,748		3,408,353		3,514,165		3,645,610
Financial liabilities:
Interest-bearing deposits	119,834		119,834		106,246		106,246
Revolving lines of credit	1,440,751		1,440,751		1,789,502		1,789,502
Term loan	472,500		472,500		425,000		425,000
Senior Notes	300,000		313,104		—		—
Convertible Notes	322,438		378,720		601,086		648,968

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

Cash and cash equivalents: The carrying amount approximates fair value and quoted prices for identical assets that can be found in active markets. Accordingly, the Company estimates the fair value of cash and cash equivalents using Level 1 inputs.

Finance receivables, net: The Company estimates the fair value of these receivables using proprietary pricing models that the Company utilizes to make portfolio acquisition 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 loan: 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 estimate.

Senior and Convertible Notes: The fair value estimates for the Senior Notes and the Convertible Notes incorporate 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. Furthermore, in the table above, carrying amount represents the portion classified as debt, while estimated fair value pertains to their face amount.

PRA Group, Inc.

Notes to Consolidated Financial Statements

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 September 30, 2020 and December 31, 2019 (amounts in thousands):


	Fair Value Measurements as of September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:

Available-for-sale investments
Government bonds	$	4,890	$	—	$	—	$	4,890
Fair value through net income
Exchange traded funds	19,132		—		—		19,132
Mutual funds	639		—		—		639
Derivative contracts (recorded in other assets)	—		2,877		—		2,877
Liabilities:
Derivative contracts (recorded in other liabilities)	—		64,260		—		64,260

	Fair Value Measurements as of December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:

Available-for-sale investments
Government bonds	$	5,052	$	—	$	—	$	5,052
Fair value through net income
Mutual funds	33,677		—		—		33,677
Derivative contracts (recorded in other assets)	—		875		—		875
Liabilities:
Derivative contracts (recorded in other liabilities)	—		23,663		—		23,663

Available-for-sale investments

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

Fair value through net income investments

Exchange traded funds: Fair value of the Company's investment in exchange traded funds is estimated using quoted market prices. Accordingly, the Company uses Level 1 inputs.

Mutual funds: Fair value of the Company's investment in mutual funds is estimated using quoted market prices. Accordingly, the Company uses Level 1 inputs.

Derivative contracts: The estimated fair value of the derivative contracts is determined using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves and other factors. Accordingly, the Company uses Level 2 inputs for its fair value estimates.

Investments measured using net asset value

Private equity funds: This class of investments consists of private equity funds that invest primarily in loans and securities including single-family residential debt; corporate debt products; and financially-oriented, real-estate-rich and other operating companies in the Americas, Western Europe, and Japan. These investments are subject to certain restrictions regarding transfers and withdrawals. The investments cannot be redeemed with the funds. Instead, the nature of the investments in this class is that distributions are received through the liquidation of the underlying assets of the fund. The investments are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over one to five years.

PRA Group, Inc.

Notes to Consolidated Financial Statements

The fair value of these private equity funds following the application of the Net Asset Value ("NAV") practical expedient was $5.8 million and $7.2 million as of September 30, 2020 and December 31, 2019, respectively.

10. Accumulated Other Comprehensive Loss:

The following table provides details about the reclassifications from accumulated other comprehensive loss for the three and nine months ended September 30, 2020 and 2019 (amounts in thousands):


	Three Months Ended September 30,
Gains and losses on cash flow hedges	2020		2019		Affected line in the consolidated income statement
Interest rate swaps	$	(3,175)	$	(413)	Interest expense, net
Income tax effect of item above	692		—		Income tax expense
Total losses on cash flow hedges	$	(2,483)	$	(413)	Net of tax

	Nine Months Ended September 30,
Gains and losses on cash flow hedges	2020		2019		Affected line in the consolidated income statement
Interest rate swaps	$	(6,488)	$	(611)	Interest expense, net
Income tax effect of item above	1,461		—		Income tax expense
Total losses on cash flow hedges	$	(5,027)	$	(611)	Net of tax

The following table represents the changes in accumulated other comprehensive loss by component, after tax, for the three and nine months ended September 30, 2020 and 2019 (amounts in thousands):


	Three Months Ended September 30, 2020
	Debt Securities		Cash Flow		Currency Translation		Accumulated Other
	Available-for-sale		Hedges		Adjustments		Comprehensive Loss (1)
Balance at beginning of period	$	177	$	(37,409)	$	(309,980)	$	(347,212)
Other comprehensive (loss)/income before reclassifications	(30)		(1,089)		32,288		31,169
Reclassifications, net	—		2,483		—		2,483
Net current period other comprehensive (loss)/income	(30)		1,394		32,288		33,652
Balance at end of period	$	147	$	(36,015)	$	(277,692)	$	(313,560)

	Three Months Ended September 30, 2019
	Debt Securities		Cash Flow		Currency Translation		Accumulated Other
	Available-for-sale		Hedges		Adjustments		Comprehensive Loss (1)
Balance at beginning of period	$	(1)	$	(13,673)	$	(238,450)	$	(252,124)
Other comprehensive income/(loss) before reclassifications	(1)		(6,245)		(47,999)		(54,245)
Reclassifications, net	—		413		—		413
Net current period other comprehensive loss	(1)		(5,832)		(47,999)		(53,832)
Balance at end of period	$	(2)	$	(19,505)	$	(286,449)	$	(305,956)

(1) For the three months ended September 30, 2020 and 2019, net deferred taxes for unrealized gains/(losses) from cash flow hedges were $0.5 million and $(2.0) million, respectively.

PRA Group, Inc.

Notes to Consolidated Financial Statements


	Nine Months Ended September 30, 2020
	Debt Securities		Cash Flow		Currency Translation		Accumulated Other
	Available-for-sale		Hedges		Adjustments		Comprehensive Loss (2)
Balance at beginning of period	$	(44)	$	(13,088)	$	(247,886)	$	(261,018)
Other comprehensive income/(loss) before reclassifications	191		(27,954)		(29,806)		(57,569)
Reclassifications, net	—		5,027		—		5,027
Net current period other comprehensive income/(loss)	191		(22,927)		(29,806)		(52,542)
Balance at end of period	$	147	$	(36,015)	$	(277,692)	$	(313,560)

	Nine Months Ended September 30, 2019
	Debt Securities		Cash Flow		Currency Translation		Accumulated Other
	Available-for-sale		Hedges		Adjustments		Comprehensive Loss (2)
Balance at beginning of period	$	(83)	$	44	$	(242,070)	$	(242,109)
Other comprehensive income/(loss) before reclassifications	81		(20,160)		(44,379)		(64,458)
Reclassifications, net	—		611		—		611
Net current period other comprehensive income/(loss)	81		(19,549)		(44,379)		(63,847)
Balance at end of period	$	(2)	$	(19,505)	$	(286,449)	$	(305,956)
(2) For the nine months ended September 30, 2020 and 2019, net deferred taxes for unrealized losses from cash flow hedges were $10.2 million and $6.4 million, respectively.

11. Earnings per Share:

Basic earnings per share ("EPS") are computed by dividing net income available to common stockholders of PRA Group, Inc. by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of the Convertible Notes and nonvested share awards, if dilutive. There has been no dilutive effect of the Convertible Notes since issuance through September 30, 2020. Share-based awards that are contingent upon the attainment of performance goals are included in the computation of diluted EPS if the effect is dilutive. The dilutive effect of nonvested shares is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the vesting of nonvested shares would be used to purchase common shares at the average market price for the period.

The following table provides a reconciliation between the computation of basic EPS and diluted EPS for the three and nine months ended September 30, 2020 and 2019 (amounts in thousands, except per share amounts):


	For the Three Months Ended September 30,
	2020					2019
	Net Income Attributable to PRA Group, Inc.		Weighted Average Common Shares	EPS		Net Income Attributable to PRA Group, Inc.		Weighted Average Common Shares	EPS
Basic EPS	$	42,492	45,579	$	0.93	$	24,971	45,410	$	0.55
Dilutive effect of nonvested share awards			561	(0.01)				235	—
Diluted EPS	$	42,492	46,140	$	0.92	$	24,971	45,645	$	0.55

	For the Nine Months Ended September 30,
	2020					2019
	Net income attributable to PRA Group, Inc.		Weighted Average Common Shares	EPS		Net income attributable to PRA Group, Inc.		Weighted Average Common Shares	EPS
Basic EPS	$	119,541	45,526	$	2.63	$	58,817	45,378	$	1.30
Dilutive effect of nonvested share awards			445	(0.03)				142	(0.01)
Diluted EPS	$	119,541	45,971	$	2.60	$	58,817	45,520	$	1.29

PRA Group, Inc.

Notes to Consolidated Financial Statements

There were no antidilutive options outstanding for the three and nine months ended September 30, 2020 and 2019.

12. Income Taxes:

The Company accounts for income taxes in accordance with FASB ASC Topic 740 "Income Taxes" ("ASC 740") as it relates to the provision for income taxes and uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

On May 10, 2017, the Company reached a settlement with the Internal Revenue Service ("IRS") regarding the IRS assertion that tax revenue recognition using the cost recovery method did not clearly reflect taxable income. In accordance with the settlement, the Company changed its tax accounting method used to recognize finance receivables revenue effective with tax year 2017. Under the new method, a portion of the annual collections amortizes principal and the remaining portion is taxable income. The deferred tax liability related to the difference in timing between the new method and the cost recovery method has been incorporated evenly into the Company’s tax filings over four years effective with tax year 2017 and ending with tax year 2020. The Company was not required to pay any interest or penalties in connection with the settlement.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was enacted into U.S. law in response to COVID-19, with varying legislation enacted in many of the other countries in which the Company operates. While the Company is continuing to evaluate impact, the Company has implemented the tax payment and filing deferral provisions as applicable on a global basis and does not believe that any of the other provisions will have a material impact to its financial reporting. As tax legislative updates continue to be released, they will be monitored by the Company.

At September 30, 2020, the tax years subject to examination by the major federal, state and international taxing jurisdictions are 2013 and subsequent years.

The Company intends for predominantly all international earnings to be indefinitely reinvested in its international operations; therefore, the recording of deferred tax liabilities for such unremitted earnings is not required. If international earnings were repatriated, the Company may need to accrue and pay taxes, although foreign tax credits may be available to partially reduce U.S. income taxes. The amount of cash on hand related to international operations with indefinitely reinvested earnings was $81.6 million and $109.7 million as of September 30, 2020 and December 31, 2019, respectively.

13. Commitments and Contingencies:

Employment Agreements:

The Company has entered into employment agreements, most of which expire on December 31, 2020, with all of its U.S. executive officers and with several members of its U.S. senior management group. Such agreements provide for base salary payments as well as potential discretionary bonuses that take into consideration the Company’s overall performance against its short and long-term financial and strategic objectives. At September 30, 2020, estimated future compensation under these agreements was approximately $2.0 million. The agreements also contain confidentiality and non-compete provisions. Outside the U.S., employment agreements are in place with employees pursuant to local country regulations. Generally, these agreements do not have expiration dates and therefore it is impractical to estimate the amount of future compensation under these agreements. Accordingly, the future compensation under these agreements is not included in the $2.0 million total above.

Forward Flow Agreements:

The Company is party to several forward flow agreements that allow for the purchase of nonperforming loans at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at September 30, 2020, was approximately $395.6 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.

PRA Group, Inc.

Notes to Consolidated Financial Statements

Litigation and Regulatory Matters:

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

The Company accrues for potential liability arising from legal proceedings and regulatory matters when it is probable that such liability has been incurred and the amount of the loss can be reasonably estimated. This determination is based upon currently available information for those proceedings in which the Company is involved, taking into account the Company's best estimate of such losses for those cases for which such estimates can be made. The Company's estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the number of unresolved issues in many of the proceedings (including issues regarding class certification and the scope of many of the claims), and the related uncertainty of the potential outcomes of these proceedings. In making determinations of the likely outcome of pending litigation, the Company considers many factors, including, but not limited to, the nature of the claims, the Company's experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative mechanisms, the matter's current status and the damages sought or demands made. Accordingly, the Company's estimate will change from time to time, and actual losses could be more than the current estimate.

The Company believes that the estimate of the aggregate range of reasonably possible losses in excess of the amount accrued for its legal proceedings outstanding at September 30, 2020, where the range of loss can be estimated, was not material.

In certain legal proceedings, the Company may have recourse to insurance or third-party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. Loss estimates and accruals for potential liability related to legal proceedings are typically exclusive of potential recoveries, if any, under the Company's insurance policies or third-party indemnities. At September 30, 2020 and December 31, 2019, the Company recorded $1.8 million and $1.0 million in recoveries receivable under the Company's insurance policies or third-party indemnities, respectively. These amounts are included in other receivables, net in the Consolidated Balance Sheets.

Matters that are not considered routine legal proceedings were disclosed previously in the 2019 Form 10-K and in Note 13 to the Company's Consolidated Financial Statements included in Part 1. Item 1 to its Quarterly Report on Form 10-Q for the period ended June 30, 2020.

14. Recently Issued Accounting Standards:

Recently issued accounting standards adopted:

Financial Instruments - Credit Losses

Effective January 1, 2020, the Company adopted ASC 326 on a prospective basis. Prior to January 1, 2020, substantially all of the Company's investment in finance receivables were accounted for under ASC 310-30. Refer to Note 2 for comprehensive details.

Intangibles - Goodwill and Other

In January 2017, FASB issued ASU 2017-04 which eliminates Step 2 of the goodwill impairment test. Instead, an entity performs its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity recognizes 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. The Company adopted ASU 2017-04 on January 1, 2020 which had no impact on its consolidated financial statements.

PRA Group, Inc.

Notes to Consolidated Financial Statements

Fair Value Measurement

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” ("ASU 2018-13"). ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The Company adopted ASU 2018-13 on January 1, 2020 which had no impact to the Company's Notes to Consolidated Financial Statements.

Recently issued accounting standards not yet adopted:

Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 removes certain exceptions for recognizing deferred taxes for investments and calculating income taxes in interim periods. Additionally, it adds guidance to reduce complexity in certain areas, including recognizing taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2020 on a prospective basis, and early adoption is permitted. The Company is currently evaluating the impact of ASU 2019-12 on its consolidated financial statements and expects to adopt on January 1, 2021. The Company does not expect adoption to have a material impact on its consolidated financial statements.

Investments-Equity Securities

In January 2020, the FASB issued ASU 2020-01 “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (“ASU 2020-01”). ASU 2020-01 clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. Additionally, it clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. This standard is effective for public entities for financial statements issued for fiscal years and interim periods beginning after December 15, 2020. The Company is evaluating the impact of ASU 2020-01 but does not expect adoption to have a material effect on its consolidated financial statements.

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference London Inter-bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued. ASU 2020-04 is effective immediately for a limited time through December 31, 2022. The Company is evaluating the impact of ASU 2020-04 but does not expect it to have a material impact on its financial statements.

Accounting for Convertible Instruments

In August 2020, the FASB issued ASU 2020-06, "Debt —Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging —Contracts in Entity 's Own Equity (Subtopic 815-40) —Accounting for Convertible Instruments and Contracts in an Entity 's Own Equity" ("ASU 2020-06"). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock. Additionally, ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for public entities for financial statements issued for fiscal years and interim periods beginning after December 15, 2021 with early adoption permitted at the beginning of a fiscal year. The Company is currently evaluating the impact of ASU 2020-06 including the likelihood of early adoption.

The Company does not expect that any other recently issued accounting pronouncements will have a material effect on its consolidated financial statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements:

This Quarterly Report on Form 10-Q (this "Quarterly Report") contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall cash collection trends, 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 deterioration in the economic or inflationary environment in the Americas or Europe, including the interest rate environment;

•changes or volatility in the credit or capital markets, which affect our ability to borrow money or raise capital, including as a result of the impact of the novel coronavirus ("COVID-19") pandemic;

•our ability to replace our portfolios of nonperforming loans with additional portfolios sufficient to operate efficiently and profitably;

•our ability to continue to purchase nonperforming loans at appropriate prices;

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

•the possibility that we could recognize significant decreases in our estimate of future recoveries on nonperforming loans;

•changes in, or interpretations of, federal, state, local, or international laws, including bankruptcy and collection laws, or changes in the administrative practices of various bankruptcy courts, which could negatively affect our business or our ability to collect on nonperforming loans;

•our ability to successfully manage the challenges associated with a disease outbreak, including epidemics, pandemics or similar widespread public health concerns, including the COVID-19 pandemic;

•the impact of the COVID-19 pandemic on the markets in which we operate, including business disruptions, unemployment, economic disruption, overall market volatility, and the inability or unwillingness of consumers to pay the amounts owed to us;

•changes in accounting standards and their interpretations;

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

•changes in tax laws and interpretations regarding earnings of our domestic and international operations;

•the impact of the Tax Cuts and Jobs Act ("Tax Act") and/or the Coronavirus Aid, Relief and Economic Security Act including interpretations and determinations by tax authorities;

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

•adverse effects from the exit of the United Kingdom ("UK") from the European Union ("EU");

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

•adverse outcomes in pending litigation or administrative proceedings;

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

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

•disruptions of business operations caused by the underperformance or failure of information technology infrastructure, networks or telephone systems;

•our ability to collect and enforce our nonperforming loans may be limited under federal, state, and international laws, regulations and policies;

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

•investigations, reviews, or enforcement actions by governmental authorities, including the Consumer Financial Protection Bureau ("CFPB"), which could result in changes to our business practices, negatively impact our portfolio acquisitions 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 complex and evolving international and United States ("U.S.") laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions;

•our ability to comply with data privacy regulations such as the General Data Protection Regulation ("GDPR");

•our ability to retain, expand, renegotiate or replace our credit facilities and our ability to comply with the covenants under our financing arrangements;

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

•our ability to refinance our indebtedness, including our outstanding convertible senior notes and senior notes;

•changes in interest or exchange rates, which could reduce our net income, and the possibility that future hedging strategies may not be successful;

•the possibility that the adoption of future accounting standards could negatively impact our business;

•default by or failure of one or more of our counterparty financial institutions could cause us to incur significant losses;

•uncertainty about the future of the London Inter-Bank Offer Rate ("LIBOR") may adversely affect our business; and

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

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

You should carefully consider the factors listed above and review the following "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as the "Risk Factors" section and "Business" section of our Annual Report on Form 10-K for the year ended December 31, 2019 ("2019 Form 10-K") and the "Risk Factors" section in Part II, Item 1A of our Quarterly Report on Form 10-Q for the period ended March 31, 2020 ("2020 First Quarter Form 10-Q").

Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in, or implied by, this Quarterly Report could turn out to be materially different. Except as required by law, we assume no obligation to publicly update or revise our forward-looking statements after the date of this Quarterly Report and you should not expect us to do so.

Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do not, by policy, selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.

Frequently Used Terms

We may use the following terminology throughout this document:

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

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

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

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

•"Change in expected recoveries" refers to the differences of actual recoveries received when compared to expected recoveries and the net present value of changes in ERC.

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

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

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

•"Negative Allowance" refers to the present value of cash flows expected to be collected on our finance receivables, carried as an asset on the balance sheet.

•"Portfolio acquisitions" refers to all portfolios added as a result of a purchase, but also includes portfolios added as a result of a business acquisition.

•"Portfolio purchases" refers to all portfolios purchased in the normal course of business and excludes those purchased via business acquisitions.

•"Portfolio income" reflects revenue recorded due to the passage of time using the effective interest rate calculated based on the purchase price of portfolios and estimated remaining collections.

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

•"Purchase price" refers to the cash paid to a seller to acquire nonperforming loans. Prior to the adoption of ASC 326 purchase price also included certain capitalized costs and adjustments for buybacks.

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

•"Recoveries" refers to cash collections plus buybacks and other adjustments.

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

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

Overview

We are a global financial and business services company with operations in the Americas, Europe and Australia. Our primary business is the purchase, collection and management of portfolios of nonperforming loans.

We are headquartered in Norfolk, Virginia, and as of September 30, 2020, employed 3,811 full time equivalents. Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol "PRAA".

COVID-19 Update

The COVID-19 pandemic has continued to adversely impact all countries in which we operate. As a result, we continue to operate in business continuity mode globally. Our business continuity plans seek to minimize disruptions to our global operations while complying with country-specific, federal, state and local laws, regulations and governmental actions related to the pandemic. Impacts on our business, results of operations and financial condition have included:

•a reduction in U.S. staffing in mid-March 2020, which returned to almost normal levels by the end of April and remains at these levels;

•an increase in U.S. Core cash collections, which we believe is due to our increased ability to contact customers and customers choosing to use additional discretionary funds to voluntarily resolve their debts;

•a decrease in legal collection costs primarily during the second quarter of 2020 as a result of the following, both of which restarted to varying degrees during the second and third quarters of 2020;

–a decrease in the volume of U.S. accounts sent through the legal channel, due to our decision to temporarily pause placing accounts into a legal eligible status;

–a decrease in the volume of European accounts sent through the legal channel due to the closure of courts in many of our European countries;

•decreases in certain expenses such as communications expenses during the second quarter of 2020 due to mailing decisions made during the COVID-19 pandemic and interruptions in postal mailings and deliveries; and

•decreased portfolio purchases due to deferrals by sellers and lower levels of bankruptcy filings and charge-offs.

Funds generated from operations, cash collections on finance receivables, existing cash, available borrowings under our revolving credit facilities (including recent modifications to the terms of those facilities) and the addition of our senior notes, have been sufficient to finance our operations, planned capital expenditures, forward flow purchase commitments, debt maturities and portfolio purchases during the pandemic.

Our analysis of the current and future impact of COVID-19 on our operations is based on management’s constant monitoring of key data and information, including (1) changes in laws, regulations and governmental actions, (2) trends in the macroeconomic environment, consumer behavior and key operational metrics such as cash collections and (3) conditions in the nonperforming loan market. However, we cannot predict the full extent to which COVID-19 will impact our business, results of operations and financial condition due to the numerous evolving factors associated with the pandemic. See the "Risk Factors" in section in Part II, Item 1A of our 2020 First Quarter Form 10-Q.

Results of Operations

The results of operations include the financial results of the Company and all of our subsidiaries. As of January 1, 2020 we adopted ASU 2016-13, "Financial Instruments - Credit Losses" ("Topic 326") ("ASU 2016-13") and ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (“ASU 2019-11”), collectively referred to as "ASC 326", on a prospective basis. Prior period amounts were accounted for under ASC Topic 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). For further information refer to Note 2 to our Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report. The following table sets forth Consolidated Income Statement amounts as a percentage of total revenues for the periods indicated (dollars in thousands):


	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2020				2019				2020				2019
Revenues:
Portfolio income	$	240,250	89.7	%	$	—	—	%	$	750,556	94.8	%	$	—	—	%
Changes in expected recoveries	25,403		9.5		—		—		32,388		4.1		—		—
Income recognized on finance receivables	—		—		247,471		99.0		—		—		735,526		98.4
Fee income	1,978		0.7		2,391		1.0		6,826		0.9		11,472		1.5
Other revenue	233		0.1		152		—		1,788		0.2		950		0.1
Total revenues	267,864		100.0		250,014		100.0		791,558		100.0		747,948		100.0

Net allowance charges	—		—		(4,136)		(1.7)		—		—		(11,427)		(1.5)

Operating expenses:
Compensation and employee services	71,974		26.9		75,317		30.1		217,617		27.5		234,770		31.4
Legal collection fees	13,661		5.1		14,083		5.6		41,975		5.3		41,439		5.5
Legal collection costs	26,043		9.7		31,395		12.6		79,997		10.1		99,745		13.3
Agency fees	14,900		5.6		12,788		5.1		38,619		4.9		39,833		5.3
Outside fees and services	22,719		8.4		16,733		6.7		60,796		7.7		48,274		6.5
Communication	9,379		3.5		10,310		4.1		31,702		4.0		34,335		4.6
Rent and occupancy	4,460		1.7		4,414		1.8		13,415		1.7		13,268		1.8
Depreciation and amortization	4,301		1.6		4,046		1.6		12,494		1.6		13,341		1.8
Other operating expenses	11,761		4.4		12,102		4.8		34,457		4.3		34,613		4.6

Total operating expenses	179,198		66.9		181,188		72.4		531,072		67.1		559,618		74.8

Income from operations	88,666		33.1		64,690		25.9		260,486		32.9		176,903		23.7
Other income and (expense):

Interest expense, net	(33,692)		(12.5)		(35,864)		(14.4)		(106,319)		(13.4)		(105,872)		(14.2)
Foreign exchange gains	61		—		5,406		2.2		3,027		0.4		11,359		1.5
Other	291		0.1		(19)		—		(1,367)		(0.2)		(123)		—
Income before income taxes	55,326		20.7		34,213		13.7		155,827		19.7		82,267		11.0
Income tax expense	7,497		2.8		6,665		2.7		24,734		3.1		15,607		2.1
Net income	47,829		17.9		27,548		11.0		131,093		16.6		66,660		8.9
Adjustment for net income attributable to noncontrolling interests	5,337		2.0		2,577		1.0		11,552		1.5		7,843		1.0
Net income attributable to PRA Group, Inc.	$	42,492	15.9	%	$	24,971	10.0	%	$	119,541	15.1	%	$	58,817	7.9	%

Three Months Ended September 30, 2020 Compared To Three Months Ended September 30, 2019

Cash Collections

Cash collections for the periods indicated were as follows (amounts in thousands):


	For the Three Months Ended September 30,				Changes
	2020		2019		2020 vs. 2019
Americas Core	$	336,322	$	279,902	$	56,420
Americas Insolvency	37,344		45,759		(8,415)
Europe Core	131,702		118,917		12,785
Europe Insolvency	13,971		8,639		5,332
Total cash collections	$	519,339	$	453,217	$	66,122

Cash collections adjusted (1)	$	519,339	$	453,594	$	65,745

(1) Cash collections adjusted refers to 2019 cash collections remeasured using 2020 exchange rates.

Cash collections were $519.3 million for the three months ended September 30, 2020, an increase of $66.1 million, or 14.6%, compared to $453.2 million for the three months ended September 30, 2019. The increase was largely due to our U.S. call center and other collections, including higher level of collections through our digital channel, increasing $55.5 million, or 37.0%, primarily due to what we believe to be various circumstances that have provided U.S. consumers with additional discretionary funds and a willingness to voluntarily resolve their debts. Additionally, Europe cash collections increased $18.1 million, or 14.2%, reflecting the impact of record 2019 purchases. These increases were partially offset by an $8.4 million, or 18.4%, decrease in cash collections for Americas Insolvency, mainly as a result of investment levels not offsetting the runoff of older portfolios.

Revenues

A summary of our revenue generation during the three months ended September 30, 2020 and 2019 is as follows (amounts in thousands):


	For the Three Months Ended September 30,
	2020		2019
Portfolio income	$	240,250	$	—
Changes in expected recoveries	25,403		—


Income recognized on finance receivables	—		247,471
Fee income	1,978		2,391
Other revenue	233		152
Total revenues	$	267,864	$	250,014

Total revenues were $267.9 million for the three months ended September 30, 2020, an increase of $17.9 million, or 7.2%, compared to $250.0 million for the three months ended September 30, 2019. The increase is largely due to significant cash collections overperformance in the quarter, partially offset by adjustments to our estimated remaining collections to reflect our assumption that the majority of the current quarter overperformance was primarily due to acceleration in the timing of cash collections rather than an increase to total expected collections. We believe this to be an appropriate assumption as we have continued to generate unprecedented cash collections, primarily in the Americas call center and digital channels, with two consecutive record cash collections quarters following the record first quarter of 2020, deviating from typical seasonal patterns. We have assumed that these collections are accelerated due to current circumstances providing consumers with additional discretionary funds and a willingness to voluntarily repay their debts. If we observe sustained performance over time supporting an increase in our total expected collections, there may be additional revenue in the future. Additionally, we made forecast adjustments deemed appropriate given the current environment in which we are operating.

Net Allowance Charges

In 2019, under ASC 310-30, net allowance charges were 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. Effective January 1, 2020, under ASC 326, changes to expected cash flows are recorded in changes in expected recoveries within revenues.

Operating Expenses

Total operating expenses were $179.2 million for the three months ended September 30, 2020, a decrease of $2.0 million, or 1.1%, compared to $181.2 million for the three months ended September 30, 2019.

Compensation and Employee Services

Compensation and employee services expenses were $72.0 million for the three months ended September 30, 2020, a decrease of $3.3 million, or 4.4%, compared to $75.3 million for the three months ended September 30, 2019. The decrease in compensation expense was primarily attributable to a reduction in the U.S. call center workforce due to efficiencies realized through technology and data and analytics. Total full-time equivalents decreased to 3,811 as of September 30, 2020, from 4,525 as of September 30, 2019.

Legal Collection Fees

Legal collection fees represent contingent fees incurred for the cash collections generated by our independent third-party attorney network. Legal collection fees were $13.7 million for the three months ended September 30, 2020, which compared to $14.1 million for the three months ended September 30, 2019.

Legal Collection Costs

Legal collection costs primarily consist of costs paid to courts where a lawsuit is filed for the purpose of attempting to collect on an account. Legal collection costs were $26.0 million for the three months ended September 30, 2020, a decrease of $5.4 million, or 17.2%, compared to $31.4 million for the three months ended September 30, 2019. The decrease is primarily due to a reduced number of accounts placed into the U.S. legal channel. This was the result of our voluntary decision to pause moving accounts into a legal eligible status for a period of time earlier in the year and a shift in collections from the legal channel to the call center and digital channels.

Agency Fees

Agency fees primarily represent third-party collection fees. Agency fees were $14.9 million for the three months ended September 30, 2020, an increase of $2.1 million, or 16.4%, compared to $12.8 million for the three months ended September 30, 2019. The increase was due to higher cash collections in locations outside the U.S. where we utilize third-party collection agencies.

Outside Fees and Services

Outside fees and services expenses were $22.7 million for the three months ended September 30, 2020, an increase of $6.0 million, or 35.9%, compared to $16.7 million for the three months ended September 30, 2019. The increase was primarily due to higher corporate legal expenses, consulting fees and higher fees associated with processing an increased number of debit card transactions due to the increase in cash collections.

Interest Expense, Net

Interest expense, net was $33.7 million during the three months ended September 30, 2020, a decrease of $2.2 million, or 6.1%, compared to $35.9 million for the three months ended September 30, 2019. The decrease was primarily related to lower average interest rates.

Interest expense, net consisted of the following for the three months ended September 30, 2020 and 2019 (amounts in thousands):


	For the Three Months Ended September 30,
	2020		2019		Change
Interest on debt obligations and unused line fees	$	25,282	$	25,447	$	(165)
Coupon interest on convertible debt	3,695		5,175		(1,480)
Amortization of convertible debt discount	2,388		3,128		(740)
Amortization of loan fees and other loan costs	2,476		2,649		(173)

Interest income	(149)		(536)		387
Interest expense, net	$	33,692	$	35,864	$	(2,172)

Net Foreign Currency Transaction Gains

Foreign currency transaction gains were $0.1 million for the three months ended September 30, 2020, compared to $5.4 million for the three months ended September 30, 2019. In any given period, we may incur foreign currency transaction gains or losses from transactions in currencies other than the functional currency. The decrease was primarily related to lower gains on U.S. dollar linked investments held in Brazil.

Income Tax Expense

Income tax expense was $7.5 million for the three months ended September 30, 2020, an increase of $0.8 million, or 11.9%, compared to $6.7 million for the three months ended September 30, 2019. The increase was primarily due to higher income before taxes which increased $21.1 million, or 61.7%, partially offset by the impact of foreign tax rates, return to provision adjustments and the mix of earnings between jurisdictions. During the three months ended September 30, 2020, our effective tax rate was 13.6%, compared to 19.5% for the three months ended September 30, 2019.

Nine Months Ended September 30, 2020 Compared To Nine Months Ended September 30, 2019

Cash Collections

Cash collections for the periods indicated were as follows (amounts in thousands):


	For the Nine Months Ended September 30,				Change
	2020		2019		2020 vs. 2019
Americas Core	$	985,371	$	864,868	$	120,503
Americas Insolvency	119,239		140,142		(20,903)
Europe Core	378,187		353,410		24,777
Europe Insolvency	41,055		26,242		14,813
Total cash collections	$	1,523,852	$	1,384,662	$	139,190

Cash collections adjusted (1)	$	1,523,852	$	1,367,796	$	156,056

(1) Cash collections adjusted refers to 2019 cash collections remeasured using 2020 exchange rates.

Cash collections were $1,523.9 million for the nine months ended September 30, 2020, an increase of $139.2 million, or 10.1%, compared to $1,384.7 million for the nine months ended September 30, 2019. The increase was largely due to our U.S. call center and other collections, including higher level of collections through our digital channel, increasing $113.3 million, or 23.6%, primarily due to what we believe to be various circumstances that have provided U.S. consumers with additional discretionary funds and a willingness to voluntarily resolve their debts. Other Americas Core also increased $7.4 million, or 8.4%. These increases were partially offset by a decline of $20.9 million, or 14.9%, in Americas Insolvency cash collections mainly reflecting investment levels not offsetting the runoff of older portfolios. Additionally, Europe cash collections increased $39.6 million, or 10.4%, reflecting the impact of record 2019 purchases.

Revenues

A summary of our revenue generation during the nine months ended September 30, 2020 and 2019 is as follows (amounts in thousands):


	For the Nine Months Ended September 30,
	2020		2019
Portfolio income	$	750,556	$	—
Changes in expected recoveries	32,388		—


Income recognized on finance receivables	—		735,526
Fee income	6,826		11,472
Other revenue	1,788		950
Total revenues	$	791,558	$	747,948

Total revenues were $791.6 million for the nine months ended September 30, 2020, an increase of $43.7 million, or 5.8%, compared to $747.9 million for the nine months ended September 30, 2019. The increase is largely due to record level of portfolio purchases in 2019 and significant cash collections overperformance in the last two quarters, partially offset by adjustments to our estimated remaining collections to reflect our assumption that the majority of the second and third quarter overperformance was primarily due to acceleration in the timing of cash collections rather than an increase to total expected collections. We believe this to be an appropriate assumption as we have continued to generate unprecedented cash collections, primarily in the Americas call center and digital channels, with two consecutive record cash collections quarters following the record first quarter of 2020, deviating from typical seasonal patterns. We have assumed that these collections are accelerated due to current circumstances providing consumers with additional discretionary funds and a willingness to voluntarily repay their debts. If we observe sustained performance over time supporting an increase in our total expected collections, there may be additional revenue in the future. Additionally, we made forecast adjustments deemed appropriate given the current environment in which we are operating.

Net Allowance Charges

January 1, 2020, under ASC 326, changes to expected cash flows are recorded in changes in expected recoveries within revenues.

Operating Expenses

Operating expenses were $531.1 million for the nine months ended September 30, 2020, a decrease of $28.5 million, or 5.1%, compared to $559.6 million for the nine months ended September 30, 2019.

Compensation and Employee Services

Compensation and employee services expenses were $217.6 million for the nine months ended September 30, 2020, a decrease of $17.2 million, or 7.3%, compared to $234.8 million for the nine months ended September 30, 2019. The decrease in compensation expense was primarily attributable to a reduction in U.S. call center workforce due to efficiencies realized through technology and data and analytics. Total full-time equivalents decreased to 3,811 as of September 30, 2020, compared to 4,525 as of September 30, 2019.

Legal Collection Fees

Legal collection fees were $42.0 million for the nine months ended September 30, 2020, which compared to $41.4 million for the nine months ended September 30, 2019.

Legal Collection Costs

Legal collection costs were $80.0 million for the nine months ended September 30, 2020, a decrease of $19.7 million, or 19.8%, compared to $99.7 million for the nine months ended September 30, 2019. The decrease is primarily due to a reduced number of accounts placed into the U.S. legal channel. This was the result of our voluntary decision to pause moving accounts into a legal eligible status for a period of time earlier in the year and a shift in collections from the legal channel to the call center and digital channels.

Agency Fees

Agency fees were $38.6 million for the nine months ended September 30, 2020, compared to $39.8 million for the nine months ended September 30, 2019.

Outside Fees and Services

Outside fees and services expenses were $60.8 million for the nine months ended September 30, 2020, an increase of $12.5 million, or 25.9%, compared to $48.3 million for the nine months ended September 30, 2019. The increase was primarily the result of higher corporate legal expenses, consulting fees and higher fees associated with processing an increased number of debit card transactions due to the increase in cash collections.

Communication

Communication expense primarily represents postage and telephone related expenses incurred as a result of our collection efforts. Communication expenses were $31.7 million for the nine months ended September 30, 2020, a decrease of $2.6 million, or 7.6%, compared to $34.3 million for the nine months ended September 30, 2019. The decrease mainly reflects lower postage costs due to mailing decisions made during the COVID-19 pandemic and, to a lesser extent, telephone expenses as a result of improvements in data and analytics that drove efficiencies.

Interest Expense, Net

Interest expense, net was $106.3 million for the nine months ended September 30, 2020, which compared to $105.9 million for the nine months ended September 30, 2019 as higher levels of outstanding borrowings were offset by lower average interest rates.

Interest expense, net consisted of the following for the nine months ended September 30, 2020 and 2019 (amounts in thousands):


	For the Nine Months Ended September 30,
	2020		2019		Change
Interest on debt obligations and unused line fees	$	76,345	$	74,839	$	1,506
Coupon interest on convertible debt	14,045		15,525		(1,480)
Amortization of convertible debt discount	8,852		9,241		(389)
Amortization of loan fees and other loan costs	7,859		7,940		(81)

Interest income	(782)		(1,673)		891
Interest expense, net	$	106,319	$	105,872	$	447

Net Foreign Currency Transaction Gains

Foreign currency transaction gains were $3.0 million for the nine months ended September 30, 2020, compared to $11.4 million for the nine months ended September 30, 2019. The decrease was primarily related to lower foreign currency gains in Europe and slightly lower gains on U.S. dollar linked investments held in Brazil during the first quarter. In any given period, we may incur foreign currency transaction gains or losses from transactions in currencies other than the functional currency.

Income Tax Expense

Income tax expense was $24.7 million for the nine months ended September 30, 2020, an increase of $9.1 million, or 58.3%, compared to $15.6 million for the nine months ended September 30, 2019. The increase was primarily due to higher income before income taxes which increased $73.5 million, or 89.3%. The increase was partially offset by changes in foreign tax rates, return to provision adjustments and the mix of earnings between jurisdictions. During the nine months ended September 30, 2020, our effective tax rate was 15.9%, compared to 19.0% for the nine months ended September 30, 2019.

Supplemental Performance Data

Finance Receivables Portfolio Performance

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

The accounts represented in the Insolvency tables are those portfolios of accounts that were in an insolvency status at the time of purchase. This contrasts with accounts in our Core portfolios that file for bankruptcy/insolvency protection after we purchase them, which continue to be tracked in their corresponding Core portfolio. Core customers sometimes file for bankruptcy/insolvency protection subsequent to our purchase of the related Core portfolio. When this occurs, we adjust our collection practices to comply with bankruptcy/insolvency rules and procedures; however, for accounting purposes, these accounts remain in the original Core portfolio. Insolvency accounts may be dismissed voluntarily or involuntarily subsequent to our purchase of the Insolvency portfolio. Dismissal occurs when the terms of the bankruptcy are not met by the petitioner. When this occurs, we are typically free to pursue collection outside of bankruptcy procedures; however, for accounting purposes, these accounts remain in the original Insolvency pool.

Purchase price multiples can vary over time due to a variety of factors, including pricing competition, supply levels, age of the receivables acquired, and changes in our operational efficiency. For example, increased pricing competition during the 2005 to 2008 period negatively impacted purchase price multiples of our Core portfolio compared to prior years. Conversely, during the 2009 to 2011 period, additional supply occurred as a result of the economic downturn. This created unique and advantageous purchasing opportunities, particularly within the Insolvency market, relative to the prior four years. Purchase price multiples can also vary among types of finance receivables. For example, we generally incur lower collection costs on our Insolvency portfolio compared with our Core portfolio. This allows us, in general, to pay more for an Insolvency portfolio and experience lower purchase price multiples, while generating similar net income margins when compared with a Core portfolio.

When competition increases and/or supply decreases, pricing often becomes negatively impacted relative to expected collections, and yields tend to trend lower. The opposite tends to occur when competition decreases and/or supply increases.

Within a given portfolio type, to the extent that lower purchase price multiples are the result of more competitive pricing and lower net yields, this will generally lead to 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 paper.

Revenue recognition under ASC 310-10 and ASC 326 is driven by estimates of the amount and timing of collections. We record new portfolio acquisitions at the purchase price which reflects the amount we expect to collect discounted at an effective interest rate. During the year of acquisition, the annual pool is aggregated and the blended effective interest rate will change to reflect new buying and new cash flow estimates until the end of the year. At that time, the effective interest rate is fixed at the amount we expect to collect discounted at the rate to equate purchase price to the recovery estimate. During the first year of purchase, we typically do not allow purchase price multiples to expand. Subsequent to the initial year, as we gain collection experience and confidence with a pool of accounts, we regularly update ERC. As a result, our estimate of total collections has often increased as pools have aged. These processes have tended to cause the ratio of ERC to purchase price for any given year of buying to gradually increase over time. Thus, all factors being equal in terms of pricing, one would typically tend to see a higher collection to purchase price ratio from a pool of accounts that was six years from acquisition than a pool that was just two years from acquisition.

The numbers presented in the following tables represent gross cash collections and do not reflect any costs to collect; therefore, they may not represent relative profitability. Due to all the factors described above, readers should be cautious when making comparisons of purchase price multiples among periods and between types of receivables.


Purchase Price Multiples as of September 30, 2020 Amounts in thousands
Purchase Period	Purchase Price (1)(2)		ERC-Historical Period Exchange Rates (3)		Total Estimated Collections (4)		ERC-Current Period Exchange Rates (5)		Current Estimated Purchase Price Multiple	Original Estimated Purchase Price Multiple(6)
Americas Core
1996-2009	$	930,026	$	23,046	$	2,877,116	$	23,046	309%	238%
2010	148,193		14,122		526,052		14,122		355%	247%
2011	209,602		26,186		725,498		26,186		346%	245%
2012	254,076		31,217		660,403		31,217		260%	226%
2013	390,826		57,085		912,068		57,085		233%	211%
2014	404,117		91,301		891,499		89,353		221%	204%
2015	443,114		149,049		933,513		148,585		211%	205%
2016	455,767		273,495		1,101,186		260,392		242%	201%
2017	532,851		406,451		1,209,406		402,103		227%	193%
2018	653,975		587,961		1,348,402		576,414		206%	202%
2019	581,476		812,641		1,234,909		784,614		212%	206%
2020	367,050		688,459		770,975		688,459		210%	210%
Subtotal	5,371,073		3,161,013		13,191,027		3,101,576
Americas Insolvency
1996-2009	397,453		578		835,901		578		210%	178%
2010	208,942		737		546,812		737		262%	184%
2011	180,432		649		370,158		649		205%	155%
2012	251,395		356		392,527		356		156%	136%
2013	227,834		1,093		354,914		1,093		156%	133%
2014	148,420		1,660		217,699		1,649		147%	124%
2015	63,170		2,633		87,590		2,633		139%	125%
2016	91,442		11,549		116,138		11,554		127%	123%
2017	275,257		73,636		347,183		73,636		126%	125%
2018	97,879		73,500		130,542		73,500		133%	127%
2019	123,077		124,052		160,344		123,982		130%	128%
2020	49,626		63,719		68,018		63,719		137%	137%
Subtotal	2,114,927		354,162		3,627,826		354,086
Total Americas	7,486,000		3,515,175		16,818,853		3,455,662
Europe Core
2012	20,409		121		40,963		96		201%	187%
2013	20,334		65		25,294		51		124%	119%
2014	773,811		698,195		2,223,673		628,800		287%	208%
2015	411,340		293,515		733,024		272,301		178%	160%
2016	333,090		288,132		558,471		290,464		168%	167%
2017	252,174		207,615		358,335		195,887		142%	144%
2018	341,775		360,283		527,239		362,163		154%	148%
2019	518,610		632,065		777,563		627,204		150%	152%
2020	172,494		289,657		306,357		289,657		178%	178%
Subtotal	2,844,037		2,769,648		5,550,919		2,666,623
Europe Insolvency
2014	10,876		377		18,190		333		167%	129%
2015	18,973		3,432		29,036		2,996		153%	139%
2016	39,338		11,064		56,719		11,709		144%	130%
2017	39,235		22,247		48,969		21,292		125%	128%
2018	44,908		38,230		54,791		38,778		122%	123%
2019	77,218		80,148		101,336		78,302		131%	130%
2020	28,221		36,180		38,249		36,180		136%	136%
Subtotal	258,769		191,678		347,290		189,590
Total Europe	3,102,806		2,961,326		5,898,209		2,856,213
Total PRA Group	$	10,588,806	$	6,476,501	$	22,717,062	$	6,311,875

(1)Includes the acquisition date finance receivables portfolios that were acquired through our business acquisitions.

(2)For our non-US amounts, purchase price is presented at the exchange rate at the end of the year in which the pool was purchased. In addition, any purchase price adjustments that occur throughout the life of the pool are presented at the year-end exchange rate for the respective year of purchase.

(3)For our non-US amounts, ERC-Historical Period Exchange Rates is presented at the year-end exchange rate for the respective year of purchase.

(4)For our non-US amounts, TEC is presented at the year-end exchange rate for the respective year of purchase.

(5)For our non-U.S. amounts, ERC-Current Period Exchange Rates is presented at the September 30, 2020 exchange rate.

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


Portfolio Financial Information Year-to-date as of September 30, 2020 Amounts in thousands
Purchase Period	Cash Collections (1)		Portfolio Income (1)		Changes in Expected Recoveries (1)		Total Portfolio Revenue (1)(2)		Net Finance Receivables as of September 30, 2020 (3)
Americas Core
1996-2009	$	10,283	$	7,623	$	(942)	$	6,681	$	5,632
2010	4,915		4,815		(1,249)		3,566		2,135
2011	8,705		8,080		(2,493)		5,587		4,587
2012	9,544		8,200		(4,924)		3,276		9,732
2013	18,522		13,507		(8,147)		5,360		20,420
2014	25,834		19,101		(15,624)		3,477		32,450
2015	46,778		27,520		(13,397)		14,123		60,495
2016	84,173		46,641		2,896		49,537		104,052
2017	156,140		72,319		17,633		89,952		174,974
2018	269,287		108,426		14,505		122,931		308,890
2019	268,687		137,243		24,458		161,701		406,209
2020	82,503		46,636		13,745		60,381		344,306
Subtotal	985,371		500,111		26,461		526,572		1,473,882
Americas Insolvency
1996-2009	282		339		(42)		297		—
2010	383		444		(59)		385		—
2011	379		324		57		381		—
2012	746		597		429		1,026		—
2013	1,041		1,050		(7)		1,043		—
2014	1,841		2,193		(850)		1,343		190
2015	7,101		3,572		(538)		3,034		1,708
2016	11,196		2,793		280		3,073		9,292
2017	46,234		12,563		(1,726)		10,837		60,022
2018	22,905		6,801		2,804		9,605		61,150
2019	22,832		8,657		3,103		11,760		102,671
2020	4,299		2,366		(737)		1,629		46,617
Subtotal	119,239		41,699		2,714		44,413		281,650
Total Americas	1,104,610		541,810		29,175		570,985		1,755,532
Europe Core
2012	920		589		331		920		—
2013	510		281		230		511		—
2014	109,979		80,855		5,230		86,085		165,812
2015	40,402		23,441		(1,084)		22,357		142,366
2016	35,954		20,203		(1,431)		18,772		167,280
2017	26,862		10,270		(2,975)		7,295		135,303
2018	53,388		19,851		4,565		24,416		234,456
2019	93,784		32,805		(5,338)		27,467		414,706
2020	16,388		6,371		2,529		8,900		164,342
Subtotal	378,187		194,666		2,057		196,723		1,424,265
Europe Insolvency
2014	640		434		41		475		141
2015	2,241		1,099		44		1,143		1,887
2016	5,970		2,418		(324)		2,094		8,382
2017	7,207		1,527		357		1,884		18,575
2018	7,436		2,244		(517)		1,727		33,282
2019	15,521		5,059		1,215		6,274		62,948
2020	2,040		1,299		340		1,639		27,736
Subtotal	41,055		14,080		1,156		15,236		152,951
Total Europe	419,242		208,746		3,213		211,959		1,577,216
Total PRA Group	$	1,523,852	$	750,556	$	32,388	$	782,944	$	3,332,748

(1)For our non-U.S. amounts, amounts are presented using the average exchange rates during the current reporting period.

(2)Total Portfolio Revenue refers to portfolio income and changes in expected recoveries combined.

(3)For our non-U.S. amounts, net finance receivables are presented at the September 30, 2020 exchange rate.

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


Cash Collections by Year, By Year of Purchase (1) as of September 30, 2020 Amounts in millions
			Cash Collections
Purchase Period	Purchase Price (2)(3)		1996- 2009		2010		2011		2012		2013		2014		2015		2016		2017		2018		2019		2020		Total
Americas Core
1996-2009	$	930.0	$	1,647.7	$	295.7	$	253.5	$	201.6	$	146.4	$	101.8	$	71.2	$	45.7	$	30.5	$	23.3	$	19.2	$	10.3	$	2,846.9
2010	148.2		—		47.1		113.6		109.9		82.0		55.9		38.1		24.5		15.6		11.1		9.2		4.9		511.9
2011	209.6		—		—		62.0		174.5		152.9		108.5		73.8		48.7		32.0		21.6		16.6		8.7		699.3
2012	254.1		—		—		—		56.9		173.6		146.2		97.3		60.0		40.0		27.8		17.9		9.5		629.2
2013	390.8		—		—		—		—		101.6		247.8		194.0		120.8		78.9		56.4		36.9		18.6		855.0
2014	404.1		—		—		—		—		—		92.7		253.4		170.3		114.2		82.2		55.3		25.8		793.9
2015	443.1		—		—		—		—		—		—		117.0		228.4		185.9		126.6		83.6		46.8		788.3
2016	455.8		—		—		—		—		—		—		—		138.7		256.5		194.6		140.6		84.2		814.6
2017	532.9		—		—		—		—		—		—		—		—		107.3		278.7		256.5		156.1		798.6
2018	654.0		—		—		—		—		—		—		—		—		—		122.7		361.9		269.3		753.9
2019	581.5		—		—		—		—		—		—		—		—		—		—		143.8		268.7		412.5
2020	367.0		—		—		—		—		—		—		—		—		—		—		—		82.5		82.5
Subtotal	5,371.1		1,647.7		342.8		429.1		542.9		656.5		752.9		844.8		837.1		860.9		945.0		1,141.5		985.4		9,986.6
Americas Insolvency
1996-2009	397.5		204.3		147.1		156.7		145.4		109.3		57.0		7.6		3.6		2.2		1.1		0.7		0.2		835.2
2010	208.9		—		39.5		104.5		125.0		121.7		101.9		43.6		5.0		2.4		1.4		0.7		0.4		546.1
2011	180.4		—		—		15.2		66.4		82.8		85.8		76.9		36.0		3.7		1.6		0.7		0.4		369.5
2012	251.4		—		—		—		17.4		103.6		94.1		80.1		60.7		29.3		4.3		1.9		0.8		392.2
2013	227.8		—		—		—		—		52.5		82.6		81.7		63.4		47.8		21.9		2.9		1.0		353.8
2014	148.4		—		—		—		—		—		37.0		50.9		44.3		37.4		28.8		15.8		1.8		216.0
2015	63.2		—		—		—		—		—		—		3.4		17.9		20.1		19.8		16.7		7.1		85.0
2016	91.4		—		—		—		—		—		—		—		18.9		30.4		25.0		19.9		11.2		105.4
2017	275.3		—		—		—		—		—		—		—		—		49.1		97.3		80.9		46.2		273.5
2018	97.9		—		—		—		—		—		—		—		—		—		6.7		27.4		22.9		57.0
2019	123.1		—		—		—		—		—		—		—		—		—		—		13.4		22.9		36.3
2020	49.6		—		—		—		—		—		—		—		—		—		—		—		4.3		4.3
Subtotal	2,114.9		204.3		186.6		276.4		354.2		469.9		458.4		344.2		249.8		222.4		207.9		181.0		119.2		3,274.3
Total Americas	7,486.0		1,852.0		529.4		705.5		897.1		1,126.4		1,211.3		1,189.0		1,086.9		1,083.3		1,152.9		1,322.5		1,104.6		13,260.9
Europe Core
2012	20.4		—		—		—		11.6		9.0		5.6		3.2		2.2		2.0		2.0		1.5		0.9		38.0
2013	20.3		—		—		—		—		7.1		8.5		2.3		1.3		1.2		1.3		0.9		0.5		23.1
2014	773.8		—		—		—		—		—		153.2		292.0		246.4		220.8		206.3		172.9		109.9		1,401.5
2015	411.3		—		—		—		—		—		—		45.8		100.3		86.2		80.9		66.1		40.3		419.6
2016	333.1		—		—		—		—		—		—		—		40.4		78.9		72.6		58.0		35.9		285.8
2017	252.2		—		—		—		—		—		—		—		—		17.9		56.0		44.1		27.0		145.0
2018	341.8		—		—		—		—		—		—		—		—		—		24.3		88.7		53.4		166.4
2019	518.6		—		—		—		—		—		—		—		—		—		—		48.0		93.8		141.8
2020	172.5		—		—		—		—		—		—		—		—		—		—		—		16.4		16.4
Subtotal	2,844.0		—		—		—		11.6		16.1		167.3		343.3		390.6		407.0		443.4		480.2		378.1		2,637.6
Europe Insolvency
2014	10.9		—		—		—		—		—		—		4.3		3.9		3.2		2.6		1.5		0.6		16.1
2015	19.0		—		—		—		—		—		—		3.0		4.4		5.0		4.8		3.9		2.2		23.3
2016	39.3		—		—		—		—		—		—		—		6.2		12.7		12.9		10.7		6.0		48.5
2017	39.2		—		—		—		—		—		—		—		—		1.2		7.9		9.2		7.2		25.5
2018	44.9		—		—		—		—		—		—		—		—		—		0.6		8.4		7.5		16.5
2019	77.2		—		—		—		—		—		—		—		—		—		—		5.0		15.5		20.5
2020	28.3		—		—		—		—		—		—		—		—		—		—		—		2.1		2.1
Subtotal	258.8		—		—		—		—		—		—		7.3		14.5		22.1		28.8		38.7		41.1		152.5
Total Europe	3,102.8		—		—		—		11.6		16.1		167.3		350.6		405.1		429.1		472.2		518.9		419.2		2,790.1
Total PRA Group	$	10,588.8	$	1,852.0	$	529.4	$	705.5	$	908.7	$	1,142.5	$	1,378.6	$	1,539.6	$	1,492.0	$	1,512.4	$	1,625.1	$	1,841.4	$	1,523.8	$	16,051.0

(1)For our non-U.S. amounts, cash collections are presented using the average exchange rates during the cash collection period.

(2)Includes the acquisition date finance receivables portfolios that were acquired through our business acquisitions.

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

Estimated remaining collections

The following chart shows our ERC of $6,311.9 million at September 30, 2020 by geographical region (amounts in millions).

Seasonality

Cash collections in the Americas tend to be higher in the first half of the year due to the high volume of income tax refunds received by individuals in the U.S., and trend lower as the year progresses. Customer payment patterns in all of the countries in which we operate can be affected by seasonal employment trends, income tax refunds, and holiday spending habits.

Cash Collections

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
	2020						2019								2018
	Q3		Q2		Q1		Q4		Q3		Q2		Q1		Q4
Americas Core	$	336,322	$	343,269	$	305,780	$	276,639	$	279,902	$	294,243	$	290,723	$	233,937
Americas Insolvency	37,344		38,685		43,210		40,801		45,759		49,770		44,613		48,000
Europe Core	131,702		115,145		131,340		126,649		118,917		117,635		116,858		113,154
Europe Insolvency	13,971		12,841		14,243		12,520		8,639		8,626		8,977		7,618
Total Cash Collections	$	519,339	$	509,940	$	494,573	$	456,609	$	453,217	$	470,274	$	461,171	$	402,709

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


U.S. Core Portfolio Cash Collections by Source Amounts in thousands
	2020						2019								2018
	Q3		Q2		Q1		Q4		Q3		Q2		Q1		Q4
Call Center and Other Collections	$	205,257	$	219,856	$	168,166	$	139,399	$	149,782	$	160,479	$	169,753	$	134,543
External Legal Collections	60,569		62,792		66,190		58,831		64,301		63,490		57,419		47,410
Internal Legal Collections	33,653		34,467		38,111		33,944		35,679		38,065		37,018		30,724
Total U.S. Core Cash Collections	$	299,479	$	317,115	$	272,467	$	232,174	$	249,762	$	262,034	$	264,190	$	212,677

Collections Productivity (U.S. Portfolio)

The following tables display certain collections productivity measures:





























Cash Collections per Collector Hour Paid U.S. Portfolio
	Call center and other cash collections (1)
	2020		2019		2018		2017		2016
First Quarter	$	172	$	139	$	121	$	161	$	168
Second Quarter	263		139		101		129		167
Third Quarter	246		124		107		125		177
Fourth Quarter	—		128		104		112		153

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

Portfolio Acquisitions

The following graph shows the purchase price of our portfolios by year since 2010. It includes the acquisition date finance receivable portfolios that were acquired through our business acquisitions. The 2020 totals represent portfolio acquisitions through the nine months ended September 30, 2020 while the prior year totals are for the full year.

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


Portfolio Acquisitions by Geography and Type Amounts in thousands
			2020				2019								2018
	Q3		Q2		Q1		Q4		Q3		Q2		Q1		Q4
Americas Core	$	84,139	$	110,474	$	172,697	$	118,153	$	168,185	$	121,996	$	169,189	$	172,511
Americas Insolvency	14,328		14,527		20,772		22,650		26,311		26,092		48,243		52,871
Europe Core	74,930		34,247		60,990		218,919		64,728		136,344		94,283		231,810
Europe Insolvency	4,203		5,251		18,778		42,613		19,772		4,715		7,134		33,661
Total Portfolio Acquisitions	$	177,600	$	164,499	$	273,237	$	402,335	$	278,996	$	289,147	$	318,849	$	490,853

Portfolio Acquisitions by Stratification (U.S. Only)

The following table categorizes our quarterly U.S. portfolio acquisitions for the periods indicated into major asset type and delinquency category. Since our inception in 1996, we have acquired more than 56 million customer accounts in the U.S.


U.S. Portfolio Acquisitions by Major Asset Type Amounts in thousands
	2020												2019
	Q3				Q2				Q1				Q4				Q3
Major Credit Cards	$	23,322	25.7	%	$	50,270	40.9	%	$	71,225	38.3	%	$	30,337	24.3	%	$	50,500	40.1	%
Private Label Credit Cards	60,331		66.5		69,651		56.7		104,300		56.0		85,351		68.4		72,714		57.7
Consumer Finance	6,333		7.0		2,430		2.0		2,109		1.1		2,046		1.7		2,090		1.7
Auto Related	680		0.8		460		0.4		8,510		4.6		6,991		5.6		638		0.5
Total	$	90,666	100.0	%	$	122,811	100.0	%	$	186,144	100.0	%	$	124,725	100.0	%	$	125,942	100.0	%


U.S. Portfolio Acquisitions by Delinquency Category Amounts in thousands
	2020												2019
	Q3				Q2				Q1				Q4				Q3
Fresh (1)	$	25,236	33.1	%	$	28,847	26.6	%	$	51,126	30.9	%	$	35,330	34.6	%	$	27,600	27.1	%
Primary (2)	5,187		6.8		9,887		9.1		18,152		11.0		5,796		5.7		17,658		17.3
Secondary (3)	44,534		58.3		67,609		62.5		92,855		56.1		52,899		51.8		50,082		49.2
Tertiary (3)	1,381		1.8		1,941		1.8		3,239		2.0		4,409		4.3		6,483		6.4
Other (4)	—		—		—		—		—		—		3,641		3.6		—		—
Total Core	76,338		100.0	%	108,284		100.0	%	165,372		100.0	%	102,075		100.0	%	101,823		100.0	%
Insolvency	14,328				14,527				20,772				22,650				24,119
Total	$	90,666			$	122,811			$	186,144			$	124,725			$	125,942

(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 actively manage our liquidity to help provide access to sufficient funding to meet our business needs and financial obligations. As of September 30, 2020, cash and cash equivalents totaled $92.8 million, of which, $81.6 million consisted of cash on hand related to international operations with indefinitely reinvested earnings. See the "Undistributed Earnings of International Subsidiaries" section below for more information.

At September 30, 2020, we had the following borrowings outstanding and availability under our credit facilities (amounts in thousands):


	Outstanding		Available without Restrictions		Available with Restrictions (1)
Americas revolving credit	$	414,803	$	665,355	$	356,791
European revolving credit	1,025,948		314,052		118,052
Term loan	472,500		—		—
Senior Notes	300,000		—		—
Convertible Notes	345,000		—		—
Less: Debt discounts and issuance costs	(33,822)		—		—
Total	$	2,524,429	$	979,407	$	474,843

(1) Available borrowings after calculation of current borrowing base and debt covenants.

For more information, see Note 7 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.

An additional funding source for our Europe operations is interest-bearing deposits. Per the terms of our European credit facility, we are permitted to obtain interest-bearing deposit funding of up to SEK 1.2 billion (approximately $133.6 million as of September 30, 2020). Interest-bearing deposits as of September 30, 2020 were $119.8 million.

We determined that we were in compliance with the covenants of our financing arrangements as of September 30, 2020.

We have the ability to slow the purchase of finance receivables if necessary, and use the net cash flow generated from our cash collections from our existing finance receivables to temporarily service our debt and fund existing operations.

Contractual obligations over the next year are primarily related to debt maturities and purchase commitments. Of our $472.5 million in long-term debt outstanding at September 30, 2020, $10.0 million in principal is due within one year. Our European credit facility expires in February of 2023. Our North American credit facility expires in May 2024.

In the third quarter of 2020, we retired $287.5 million aggregate principal amount of 3.00% Convertible Senior Notes due August 1, 2020 in full. Additionally, we completed the private offering of $300.0 million in aggregate principal amount of its 7.375% Senior Notes due September 1, 2025. For more information, see Note 7 to our Consolidated Financial Statements included in Part. 1 Item 1 of this Quarterly Report.

Additionally, we have in place forward flow commitments for the purchase of nonperforming loans primarily over the next 12 months with a maximum purchase price of $395.3 million as of September 30, 2020. The $395.3 million is comprised of $343.5 million for the Americas and $51.8 million for Europe. We may also enter into new or renewed forward flow commitments and close on spot transactions in addition to the aforementioned forward flow agreements.

In May 2017, we reached a settlement with the Internal Revenue Service ("IRS") in regard to the IRS assertion that tax revenue recognition using the cost recovery method did not clearly reflect our taxable income. In accordance with the settlement, our tax accounting method to recognize finance receivables revenue changed effective with tax year 2017. Under the new method, a portion of the annual collections amortizes principal and the remaining portion is taxable income. The revenue related to the difference in timing between the new method and the cost recovery method has been included evenly into our tax filings over four years effective with tax year 2017 and ending with tax year 2020. We estimate the related tax payments to be approximately $9.2 million per quarter through the year 2020. No interest or penalties were assessed as part of the settlement.

We continue to monitor the recent outbreak of COVID-19 on our operations and how that may impact our cash flows and our ability to settle debt. As a result of COVID-19, global financial markets have experienced overall volatility and

disruptions to capital and credit markets. We believe that funds generated from operations and from cash collections on finance receivables, together with existing cash, available borrowings under our revolving credit facilities, including recent modifications to the terms of those facilities, and access to the capital markets will be sufficient to finance our operations, planned capital expenditures, forward flow purchase commitments, debt maturities and additional portfolio purchases during the next 12 months. We may, however, seek to access the debt or equity capital markets as as we deem appropriate, market permitting. 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

The following table summarizes our cash flow activity for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 (amounts in thousands):


	Nine Months Ended September 30,
	2020		2019
Total cash provided by (used in):
Operating activities	$	131,359	$	70,693
Investing activities	172,467		(233,081)
Financing activities	(305,866)		167,631
Effect of exchange rate on cash	(16,610)		(7,043)
Net decrease in cash and cash equivalents	$	(18,650)	$	(1,800)

Operating Activities

Cash provided by operating activities mainly reflects cash collections recognized as revenue partially offset by cash paid for operating expenses, interest and income taxes. Key drivers of operating activities were adjusted for (i) non-cash items included in net income such as provisions for unrealized gains and losses, changes in expected recoveries, depreciation and amortization, deferred taxes, fair value changes in equity securities, and stock-based compensation as well as (ii) changes in the balances of operating assets and liabilities, which can vary significantly in the normal course of business due to the amount and timing of payments.

Net cash provided by operating activities increased $60.7 million during the nine months ended September 30, 2020, mainly driven by higher cash collections, lower operating expenses and the impact of unrealized foreign currency transactions.

Investing Activities

Cash provided by investing activities mainly reflects recoveries applied to our negative allowance. Cash used in investing activities mainly reflects acquisitions of nonperforming loans.

Net cash provided by investing activities increased $405.5 million during the nine months ended September 30, 2020, primarily from a $219.9 million decrease in purchases of nonperforming loans, a $134.9 million increase in recoveries applied to negative allowance in the current year versus collections applied to principal in the prior year, a $22.3 million decrease in net purchases of investments and $57.6 million of cash used related to a business acquisition during the first quarter of 2019. These changes were partially offset by $31.2 million of cash received during the first quarter of 2019 related to the sale of a subsidiary in the fourth quarter of 2018.

Financing Activities

Cash provided by financing activities is normally provided by draws on our lines of credit and proceeds from debt offerings. Cash used in financing activities is primarily driven by principal payments on our lines of credit and long-term debt.

Cash used in financing activities increased $473.5 million during the nine months ended September 30, 2020, primarily from an $872.7 million increase in payments on our lines of credit, a $287.4 million payment on convertible senior notes related to the settlement of our 2020 Notes and a $30.5 million decrease in cash provided by interest-bearing deposits. These changes were partially offset by a $303.2 million decrease in payments on notes payable and long term debt, $300.0 million of proceeds related to our senior notes, and a $112.8 million increase in proceeds from our lines of credit.

Undistributed Earnings of International Subsidiaries

We intend to use predominantly all of our accumulated and future undistributed earnings of international subsidiaries to expand operations outside the U.S.; therefore, such undistributed earnings of international subsidiaries are considered to be indefinitely reinvested outside the U.S. Accordingly, no provision for income tax and withholding tax has been provided thereon. If management's intentions change and eligible undistributed earnings of international subsidiaries are repatriated, we could be subject to additional income taxes and withholding taxes. This could result in a higher effective tax rate in the period in which such a decision is made to repatriate accumulated or future undistributed international earnings. The amount of cash on hand related to international operations with indefinitely reinvested earnings was $81.6 million and $109.7 million as of September 30, 2020 and December 31, 2019, respectively. Refer to Note 12 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report for further information related to our income taxes and undistributed international earnings.

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 14 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements have been prepared in accordance with GAAP. Our significant accounting policies are discussed in Note 1 to our Consolidated Financial Statements included in Item 8 of our 2019 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 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 the majority of our investment in finance receivables under the guidance of ASC Topic 310 “Receivables” (“ASC 310”) and ASC Topic 326-20 “Financial Instruments - Credit Losses - Measured at Amortized Cost” (“ASC 326-20”). Revenue recognition for finance receivables 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 or decreased revenue as we immediately recognize the discounted value of such changes using the constant effective interest rate of the pool.

We account for our finance receivables as follows:

We create each annual accounting pool using our projections of estimated cash flows and expected economic life. We then compute a constant effective interest rate based on the net carrying amount of the pool and reasonable projections of estimated cash flows and expectation of its economic life. As actual cash flow results are received we record the time value of the expected cash as portfolio income and over and under performance and changes in expected future cash flows from expected cash as changes in expected recoveries. We review each pool watching for trends, actual performance versus projections and curve shape (a graphical depiction of the timing of cash flows). We then re-forecast future cash flows by applying discounted cash flow methodologies to our ERC and recognize income over the estimated life of the pool at the constant effective interest rate of the pool.

Significant judgment is used in evaluating expected recoveries using the discounted cash flow approach and the estimated life of the pool.

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 under the qualitative assessment option. If we qualitatively determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, an impairment loss is recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value.

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 international income tax expense, we must make judgments about the application of these inherently complex laws.

We follow the guidance of FASB ASC Topic 740 "Income Taxes" ("ASC 740") as it relates to the provision for income taxes and uncertainty in income taxes. Accordingly, we record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with ASC 740, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. The evaluation of a tax position in accordance with the guidance is a two-step process. The first step is recognition: we determine 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, we 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 carryforwards 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our activities are subject to various financial risks including market risk, currency and interest rate risk, credit risk, liquidity risk and cash flow risk. Our financial risk management program focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on our financial performance. We may periodically enter into derivative financial instruments, typically interest rate and currency derivatives, to reduce our exposure to fluctuations in interest rates on variable-rate debt, fluctuations in currency rates and their impact on earnings and cash flows. We do not utilize derivative financial instruments with a level of complexity or with a risk greater than the exposure to be managed nor do we enter into or hold derivatives for trading or speculative purposes. Derivative instruments involve, to varying degrees, elements of non-performance, or credit risk. We do not believe that we currently face a significant risk of loss in the event of non-performance by the counterparties associated with these instruments, as these transactions were executed with a diversified group of major financial institutions with an investment-grade credit rating. Our intention is to spread our counterparty credit risk across a number of counterparties so that exposure to a single counterparty is minimized.

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 $1.9 billion as of September 30, 2020. Based on our debt structure at September 30, 2020, assuming a 50 basis point decrease in interest rates, for example, interest expense over the following 12 months would decrease by an estimated $2.3 million. Assuming a 50 basis point increase in interest rates, interest expense over the following 12 months would increase by an estimated $4.0 million.

To reduce the exposure to changes in the market rate of interest and to be in compliance with the terms of our European credit facility, we have entered into interest rate derivative contracts for a portion of our borrowings under our floating rate financing arrangements. We apply hedge accounting to certain of our interest rate derivative contracts. By applying hedge accounting, changes in market value are reflected as adjustments in Other Comprehensive Income. All derivatives to which we have applied hedge accounting were evaluated and remained highly effective at September 30, 2020. Terms of the interest rate derivative contracts require us to receive a variable interest rate and pay a fixed interest rate. The sensitivity calculations above consider the impact of our interest rate derivative contracts.

Currency Exchange Risk

We operate internationally and enter into transactions denominated in various foreign currencies. During the three months ended September 30, 2020, we generated $95.6 million of revenues from operations outside the U.S. and used eleven functional currencies, excluding the U.S. dollar. 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 gains and losses are primarily the result of the re-measurement of transactions in certain other 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. From time to time we may elect to enter into foreign exchange derivative contracts to reduce these variations 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 (loss)/income 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 organized 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 acquisitions by currency. We actively monitor the value of our finance receivables by currency. In the event adjustments are required to our liability composition by currency we may, from time to time, execute re-balancing foreign exchange contracts to more closely align funding and portfolio acquisitions by currency.

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 Quarterly Report. Based on this evaluation, the principal executive officer and principal financial officer have concluded that, as of September 30, 2020, 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 September 30, 2020 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 September 30, 2020, refer to Note 13 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of our 2019 Form 10-K and in Part II, Item 1A of our 2020 First Quarter Form 10-Q.

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			Fifth 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 June 17, 2020).
3.2			Amended and Restated By-Laws of PRA Group, Inc. (Incorporated by reference to Exhibit 3.2 of the Current Report on Form 8-K (File No. 000-50058) filed on June 17, 2020).
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 May 26, 2017 between PRA Group, Inc. and Regions Bank, as trustee (Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K (File No. 000-50058) filed on May 26, 2017).
4.4			Indenture dated as of August 27,2020 among PRA Group Inc., the domestic subsidiaries of PRA Group Inc., party thereto and Regions Bank, or Trustee (Incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K (F ile No. 000-50058) filed on September 1, 2020).
4.5			Description of the Registrant's Securities Registered pursuant to Section 12 of the Securities Exchange Act of 1934 (Incorporated by reference to Exhibit 4.5 of the Current Report on Form 10-K (File No. 000-50058) filed on March 2, 2020).



10.1			Third Amendment to the Credit Agreement dated August 26,2020, by and a mong PRA Group Inc. and PRA Group Canada Inc., the Guarantors, the Lenders party thereto, Bank of America, N.A., as Administrative Agent and Bank of America, N.A., acting through its Canada Branch, as Canadian Administrative Agent (filed herewith).
31.1			Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith).
31.2			Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith).
32.1			Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith).
101.INS			XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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


104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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)

November 5, 2020	By:	/s/ Kevin P. Stevenson
		Kevin P. Stevenson
		President and Chief Executive Officer
		(Principal Executive Officer)




November 5, 2020	By:	/s/ Peter M. Graham
		Peter M. Graham
		Executive Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)