PRA GROUP INC - Quarter Report: 2020 March (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 March 31, 2020
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from ________ to ________
Commission File Number: 000-50058
PRA Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 75-3078675 | |||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
120 Corporate Boulevard
Norfolk, Virginia 23502
(Address of principal executive offices)
(888) 772-7326
(Registrant's Telephone No., including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | PRAA | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
The number of shares of the registrant's common stock outstanding as of May 5, 2020 was 45,541,199.
Table of Contents
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Signatures |
2
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
PRA Group, Inc.
Consolidated Balance Sheets
March 31, 2020 and December 31, 2019
(Amounts in thousands)
(unaudited) | |||||||
March 31, 2020 | December 31, 2019 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 179,995 | $ | 119,774 | |||
Investments | 52,711 | 56,176 | |||||
Finance receivables, net | 3,408,074 | 3,514,165 | |||||
Other receivables, net | 11,383 | 10,606 | |||||
Income taxes receivable | 29,372 | 17,918 | |||||
Deferred tax asset, net | 63,911 | 63,225 | |||||
Property and equipment, net | 59,882 | 56,501 | |||||
Right-of-use assets | 66,655 | 68,972 | |||||
Goodwill | 418,565 | 480,794 | |||||
Intangible assets, net | 4,003 | 4,497 | |||||
Other assets | 55,548 | 31,263 | |||||
Total assets | $ | 4,350,099 | $ | 4,423,891 | |||
Liabilities and Equity | |||||||
Liabilities: | |||||||
Accounts payable | $ | 4,328 | $ | 4,258 | |||
Accrued expenses | 76,583 | 88,925 | |||||
Income taxes payable | 18,596 | 4,046 | |||||
Deferred tax liability, net | 69,845 | 85,390 | |||||
Lease liabilities | 71,102 | 73,377 | |||||
Interest-bearing deposits | 97,465 | 106,246 | |||||
Borrowings | 2,828,002 | 2,808,425 | |||||
Other liabilities | 63,502 | 26,211 | |||||
Total liabilities | 3,229,423 | 3,196,878 | |||||
Equity: | |||||||
Preferred stock, $0.01 par value, 2,000 shares authorized, no shares issued and outstanding | — | — | |||||
Common stock, $0.01 par value, 100,000 shares authorized, 45,540 shares issued and outstanding at March 31, 2020; 100,000 shares authorized, 45,416 shares issued and outstanding at December 31, 2019 | 455 | 454 | |||||
Additional paid-in capital | 67,021 | 67,321 | |||||
Retained earnings | 1,381,766 | 1,362,631 | |||||
Accumulated other comprehensive loss | (375,617 | ) | (261,018 | ) | |||
Total stockholders' equity - PRA Group, Inc. | 1,073,625 | 1,169,388 | |||||
Noncontrolling interest | 47,051 | 57,625 | |||||
Total equity | 1,120,676 | 1,227,013 | |||||
Total liabilities and equity | $ | 4,350,099 | $ | 4,423,891 |
The accompanying notes are an integral part of these consolidated financial statements.
3
PRA Group, Inc.
Consolidated Income Statements
For the three months ended March 31, 2020 and 2019
(unaudited)
(Amounts in thousands, except per share amounts)
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Revenues: | |||||||
Portfolio income | $ | 262,022 | $ | — | |||
Changes in expected recoveries | (12,816 | ) | — | ||||
Income recognized on finance receivables | — | 238,836 | |||||
Fee income | 2,209 | 6,374 | |||||
Other revenue | 369 | 667 | |||||
Total revenues | 251,784 | 245,877 | |||||
Net allowance charges | — | (6,095 | ) | ||||
Operating expenses: | |||||||
Compensation and employee services | 75,171 | 79,645 | |||||
Legal collection fees | 14,572 | 13,059 | |||||
Legal collection costs | 34,447 | 35,229 | |||||
Agency fees | 13,376 | 14,032 | |||||
Outside fees and services | 19,394 | 15,248 | |||||
Communication | 13,511 | 13,201 | |||||
Rent and occupancy | 4,484 | 4,363 | |||||
Depreciation and amortization | 4,084 | 4,572 | |||||
Other operating expenses | 12,205 | 11,585 | |||||
Total operating expenses | 191,244 | 190,934 | |||||
Income from operations | 60,540 | 48,848 | |||||
Other income and (expense): | |||||||
Interest expense, net | (37,211 | ) | (33,981 | ) | |||
Foreign exchange gain | 2,283 | 6,264 | |||||
Other | (76 | ) | (352 | ) | |||
Income before income taxes | 25,536 | 20,779 | |||||
Income tax expense | 3,100 | 3,867 | |||||
Net income | 22,436 | 16,912 | |||||
Adjustment for net income attributable to noncontrolling interests | 3,301 | 1,685 | |||||
Net income attributable to PRA Group, Inc. | $ | 19,135 | $ | 15,227 | |||
Net income per common share attributable to PRA Group, Inc.: | |||||||
Basic | $ | 0.42 | $ | 0.34 | |||
Diluted | $ | 0.42 | $ | 0.34 | |||
Weighted average number of shares outstanding: | |||||||
Basic | 45,452 | 45,338 | |||||
Diluted | 45,784 | 45,419 |
The accompanying notes are an integral part of these consolidated financial statements.
4
PRA Group, Inc.
Consolidated Statements of Comprehensive Income/(Loss)
For the three months ended March 31, 2020 and 2019
(unaudited)
(Amounts in thousands)
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Net income | $ | 22,436 | $ | 16,912 | |||
Other comprehensive (loss)/income, net of tax: | |||||||
Currency translation adjustments | (108,076 | ) | (1,173 | ) | |||
Cash flow hedges | (20,568 | ) | (5,715 | ) | |||
Debt securities available-for-sale | 170 | 45 | |||||
Other comprehensive loss | (128,474 | ) | (6,843 | ) | |||
Total comprehensive (loss)/income | (106,038 | ) | 10,069 | ||||
Less comprehensive (loss)/ income attributable to noncontrolling interests | (10,574 | ) | 1,254 | ||||
Comprehensive (loss)/income attributable to PRA Group, Inc. | $ | (95,464 | ) | $ | 8,815 |
The accompanying notes are an integral part of these consolidated financial statements.
5
PRA Group, Inc.
Consolidated Statements of Changes in Equity
For the three months ended March 31, 2020 and March 31, 2019
(unaudited)
(Amounts in thousands)
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Noncontrolling Interest | Total Equity | |||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||
Balance at December 31, 2019 | 45,416 | $ | 454 | $ | 67,321 | $ | 1,362,631 | $ | (261,018 | ) | $ | 57,625 | $ | 1,227,013 | ||||||||||||
Components of comprehensive income, net of tax: | ||||||||||||||||||||||||||
Net income | — | — | — | 19,135 | — | 3,301 | 22,436 | |||||||||||||||||||
Currency translation adjustments | — | — | — | — | (94,201 | ) | (13,875 | ) | (108,076 | ) | ||||||||||||||||
Cash flow hedges | — | — | — | — | (20,568 | ) | — | (20,568 | ) | |||||||||||||||||
Debt securities available-for-sale | — | — | — | — | 170 | — | 170 | |||||||||||||||||||
Vesting of restricted stock | 124 | 1 | — | — | — | — | 1 | |||||||||||||||||||
Share-based compensation expense | — | — | 2,857 | — | — | — | 2,857 | |||||||||||||||||||
Employee stock relinquished for payment of taxes | — | — | (3,157 | ) | — | — | — | (3,157 | ) | |||||||||||||||||
Balance at March 31, 2020 | 45,540 | $ | 455 | $ | 67,021 | $ | 1,381,766 | $ | (375,617 | ) | $ | 47,051 | $ | 1,120,676 |
Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) | Noncontrolling Interest | Total Equity | |||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||||
Balance at December 31, 2018 | 45,304 | $ | 453 | $ | 60,303 | $ | 1,276,473 | $ | (242,109 | ) | $ | 28,849 | $ | 1,123,969 | ||||||||||||
Components of comprehensive income, net of tax: | ||||||||||||||||||||||||||
Net income | — | — | — | 15,227 | — | 1,685 | 16,912 | |||||||||||||||||||
Currency translation adjustments | — | — | — | — | (742 | ) | (431 | ) | (1,173 | ) | ||||||||||||||||
Cash flow hedges | — | — | — | — | (5,715 | ) | — | (5,715 | ) | |||||||||||||||||
Debt securities available-for-sale | — | — | — | — | 45 | — | 45 | |||||||||||||||||||
Distributions to noncontrolling interest | — | — | — | — | — | (6,877 | ) | (6,877 | ) | |||||||||||||||||
Contributions from noncontrolling interest | — | — | — | — | — | 89 | 89 | |||||||||||||||||||
Vesting of restricted stock | 80 | 1 | (1 | ) | — | — | — | — | ||||||||||||||||||
Share-based compensation expense | — | — | 2,314 | — | — | — | 2,314 | |||||||||||||||||||
Employee stock relinquished for payment of taxes | — | — | (1,437 | ) | — | — | — | (1,437 | ) | |||||||||||||||||
Other | — | — | (2,088 | ) | — | — | — | (2,088 | ) | |||||||||||||||||
Balance at March 31, 2019 | 45,384 | $ | 454 | $ | 59,091 | $ | 1,291,700 | $ | (248,521 | ) | $ | 23,315 | $ | 1,126,039 |
The accompanying notes are an integral part of these consolidated financial statements.
6
PRA Group, Inc.
Consolidated Statements of Cash Flows
For the three months ended March 31, 2020 and 2019
(unaudited)
(Amounts in thousands)
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 22,436 | $ | 16,912 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Share-based compensation expense | 2,857 | 2,314 | |||||
Depreciation and amortization | 4,084 | 4,572 | |||||
Amortization of debt discount and issuance costs | 5,857 | 5,678 | |||||
Changes in expected recoveries | 12,816 | — | |||||
Deferred income taxes | (12,755 | ) | (9,994 | ) | |||
Net unrealized foreign currency transactions | 24,873 | (6,632 | ) | ||||
Fair value in earnings for equity securities | (7,566 | ) | (2,139 | ) | |||
Net allowance charges | — | 6,095 | |||||
Other | (135 | ) | — | ||||
Changes in operating assets and liabilities: | |||||||
Other assets | (1,242 | ) | 550 | ||||
Other receivables, net | (545 | ) | (1,289 | ) | |||
Accounts payable | 221 | (548 | ) | ||||
Income taxes payable, net | 3,835 | (13,040 | ) | ||||
Accrued expenses | (8,990 | ) | 1,553 | ||||
Other liabilities | 994 | 10,888 | |||||
Right of use asset/lease liability | 66 | — | |||||
Other, net | — | 37 | |||||
Net cash provided by operating activities | 46,806 | 14,957 | |||||
Cash flows from investing activities: | |||||||
Purchases of property and equipment | (7,639 | ) | (4,493 | ) | |||
Acquisition of finance receivables | (271,845 | ) | (264,632 | ) | |||
Recoveries applied to negative allowance | 236,656 | — | |||||
Collections applied to principal on finance receivables | — | 222,335 | |||||
Proceeds from/(purchase of) investments | 36 | (82,616 | ) | ||||
Proceeds from sales and maturities of investments | 612 | 42,940 | |||||
Business acquisition, net of cash acquired | — | (57,610 | ) | ||||
Proceeds from sale of subsidiaries, net | — | 31,177 | |||||
Net cash used in investing activities | (42,180 | ) | (112,899 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from lines of credit | 315,118 | 537,891 | |||||
Principal payments on lines of credit | (227,459 | ) | (132,486 | ) | |||
Principal payments on notes payable and long-term debt | (2,500 | ) | (305,665 | ) | |||
Payments of origination cost and fees | (8,203 | ) | — | ||||
Tax withholdings related to share-based payments | (3,156 | ) | (1,437 | ) | |||
Distributions paid to noncontrolling interest | — | (6,877 | ) | ||||
Net (decrease)/increase in interest-bearing deposits | (1,658 | ) | 16,126 | ||||
Other financing activities | — | (2,088 | ) | ||||
Net cash provided by financing activities | 72,142 | 105,464 | |||||
Effect of exchange rate on cash | (16,575 | ) | (4,115 | ) | |||
Net increase in cash and cash equivalents | 60,193 | 3,407 | |||||
Cash and cash equivalents, beginning of period | 123,807 | 98,695 | |||||
Cash and cash equivalents, end of period | $ | 184,000 | $ | 102,102 | |||
Supplemental disclosure of cash flow information: | |||||||
Cash paid for interest | $ | 30,502 | $ | 25,479 | |||
Cash paid for income taxes | 12,100 | 27,293 | |||||
Cash, cash equivalents and restricted cash reconciliation: | |||||||
Cash and cash equivalents per Consolidated Balance Sheets | $ | 179,995 | $ | 102,102 | |||
Restricted cash included in Other assets per Consolidated Balance Sheets | 4,005 | — | |||||
Total cash, cash equivalents and restricted cash | $ | 184,000 | $ | 102,102 |
The accompanying notes are an integral part of these consolidated financial statements.
7
PRA Group, Inc.
Notes to Consolidated Financial Statements
1. Organization and Business:
As used herein, the terms "PRA Group," the "Company," or similar terms refer to PRA Group, Inc. and its subsidiaries.
PRA Group, Inc., a Delaware corporation, is a global financial and business services company with operations in the Americas, Europe, and Australia. The Company's primary business is the purchase, collection, and management of portfolios of nonperforming loans. The Company also provides fee-based services on class action claims recoveries and by servicing consumer bankruptcy accounts in the United States ("U.S.").
On March 11, 2020, due to the global outbreak of the novel coronavirus ("COVID-19"), the World Health Organization declared a global pandemic. Since the initial outbreak was reported, all U.S. states have declared states of emergency and COVID-19 has spread to all countries in which the Company operates. As a result, the Company implemented business continuity plans including remote work practices where possible and have leveraged existing space to follow social distancing recommendations. To date, the pandemic has not prevented the Company's ability to operate the business and the Company has continued to take steps necessary to minimize impact or disruption to the Company's global operations.
The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and include the accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Under the guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") ASC Topic 280 "Segment Reporting" ("ASC 280"), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and, therefore, it has one reportable segment, accounts receivable management. This conclusion is based on similarities among the operating units, including economic characteristics, the nature of the products and services, the nature of the production processes, the types or class of customer for their products and services, the methods used to distribute their products and services and the nature of the regulatory environment.
The following table shows the amount of revenue generated for the three months ended March 31, 2020 and 2019, and long-lived assets held at March 31, 2020 and 2019, both for the U.S., the Company's country of domicile, and outside of the U.S. (amounts in thousands):
As of and for the | As of and for the | ||||||||||||||
Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | ||||||||||||||
Revenues | Long-Lived Assets | Revenues | Long-Lived Assets | ||||||||||||
United States | $ | 153,335 | $ | 115,053 | $ | 167,576 | $ | 110,643 | |||||||
United Kingdom | 36,340 | 3,076 | 29,756 | 3,993 | |||||||||||
Other (1) | 62,109 | 8,408 | 48,545 | 10,377 | |||||||||||
Total | $ | 251,784 | $ | 126,537 | $ | 245,877 | $ | 125,013 |
Revenues are attributed to countries based on the location of the related operations. Long-lived assets consist of net property and equipment and right-of-use assets. The Company reports revenues earned from nonperforming loan acquisitions and collection activities, fee-based services and investments. For additional information on the Company's investments, see Note 4. It is impracticable for the Company to report further breakdowns of revenues from external customers by product or service.
Beginning January 1, 2020, the Company implemented Accounting Standards Update ("ASU") ASU 2016-13, "Financial Instruments - Credit Losses" ("Topic 326") ("ASU 2016-13") and ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (“ASU 2019-11”), collectively referred to as "ASC Topic 326", on a prospective basis. Prior to January 1, 2020, the vast majority of the Company's investment in finance receivables were accounted for under ASC 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). Refer to Note 2.
Finance receivables and income recognition: The Company accounts for its investment in finance receivables at amortized cost under the guidance of ASC Topic 310 “Receivables” (“ASC Topic 310”) and ASC Topic 326-20 “Financial Instruments - Credit Losses - Measured at Amortized Cost” (“ASC Topic 326-20”). ASC Topic 326-20 requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.
Credit quality information: The Company acquires portfolios of accounts that have experienced deterioration of credit quality between origination and the Company's acquisition of the accounts. The amount paid for a portfolio reflects the Company's determination that it is probable the Company will be unable to collect all amounts due according to an account's contractual terms.
8
PRA Group, Inc.
Notes to Consolidated Financial Statements
The Company accounts for the portfolios in accordance with the guidance for purchased credit deteriorated ("PCD") assets. The initial allowance for credit losses is added to the purchase price rather than recorded as a credit loss expense. The Company has established a policy to writeoff the amortized cost of individual assets when it deems probable that it will not collect on an individual asset. Due to the deteriorated credit quality of the individual accounts, the Company may writeoff the unpaid principal balance of all accounts in a portfolio at the time of acquisition. However, when the Company has an expectation of collecting cash flows at the portfolio level, a negative allowance is established for expected recoveries at an amount not to exceed the amount paid for the financial portfolios.
Portfolio segments: The Company develops systematic methodologies to determine its allowance for credit losses at the portfolio segment level. The Company’s nonperforming loan portfolio segments consist of two broad categories: Core and Insolvency. The Company’s Core portfolios contain loan accounts that are in default, which were purchased at a substantial discount to face value because either the credit grantor and/or other third-party collection agencies have been unsuccessful in collecting the full balance owed. The Company’s Insolvency portfolios contain loan accounts that are in default where the customer is involved in a bankruptcy or insolvency proceeding and were purchased at a substantial discount to face value. Each of the two broad portfolio segments of purchased nonperforming loan portfolios consist of large numbers of homogeneous receivables with similar risk characteristics.
Effective Interest Rate and Accounting Pools: Within each portfolio segment, the Company pools accounts with similar risk characteristics that are acquired in the same year. Similar risk characteristics generally include portfolio segment and geographic region. The initial effective interest rate of the pool is established based on the purchase price and expected recoveries of each individual purchase at the purchase date. During the year of acquisition, the annual pool is aggregated, and the blended effective interest rate will change to reflect new acquisitions and new cash flow estimates until the end of the year. The effective interest rate for a pool is fixed for the remaining life of the pool once the year has ended.
Methodology: The Company develops its estimates of expected recoveries in the Consolidated Balance Sheets by applying discounted cash flow methodologies to its estimated remaining collections (“ERC”) and recognizes income over the estimated life of the pool at the constant effective interest rate of the pool. Subsequent changes (favorable and unfavorable) in expected cash flows are recognized within changes in expected recoveries in the Consolidated Income Statements by adjusting the present value of increases or decreases in ERC at a constant effective interest rate. Amounts included in the estimate of recoveries do not exceed the aggregate amount of the amortized cost basis previously written off or expected to be written off.
The measurement of expected recoveries is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. Factors that may contribute to the changes in estimated cash flows include both external and internal factors. External factors that may have an impact on the collectability, and subsequently on the overall profitability of acquired pools of nonperforming loans, would include new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors that may have an impact on the collectability, and subsequently the overall profitability of acquired pools of nonperforming loans, would include necessary revisions to initial and post-acquisition scoring and modeling estimates, operational activities, and changes in productivity related to turnover and tenure of the Company's collection staff.
Portfolio income: The recognition of income on expected recoveries is based on the constant effective interest rate established for a pool.
Changes in expected recoveries: The activity consists of differences between actual recoveries compared to expected recoveries for the reporting period, as well as the net present value of increases or decreases in ERC at the constant effective interest rate.
Agreements to acquire the aforementioned receivables include general representations and warranties from the sellers covering matters such as account holder death or insolvency and accounts settled or disputed prior to sale. The representation and warranty period permitting the return of these accounts from the Company to the seller is typically 90 to 180 days, with certain international agreements extending as long as 24 months. Any funds received from the seller as a return of purchase price are referred to as buybacks. Buyback funds are included in changes in expected recoveries when received. In some cases, the seller will replace the returned accounts with new accounts in lieu of returning the purchase price. In that case, the old account is removed from the pool and the new account is added.
Fees paid to third parties other than the seller related to the direct acquisition of a portfolio of accounts are expensed when incurred.
9
PRA Group, Inc.
Notes to Consolidated Financial Statements
Goodwill and intangible assets: Goodwill, in accordance with ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), is not amortized but rather is reviewed for impairment annually or more frequently if indicators of potential impairment exist. On January 1, 2020, the Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). The Company performs its annual assessment of goodwill as of October 1. The Company may first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an impairment loss is recognized. The loss will be recorded at the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the respective reporting unit.
Basis of presentation: The accompanying interim financial statements have been prepared in accordance with the instructions for Quarterly Reports on Form 10-Q and, therefore, do not include all information and Notes to the Consolidated Financial Statements necessary for a complete presentation of financial position, results of operations, comprehensive income/(loss) and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the Company's Consolidated Balance Sheets as of March 31, 2020, its Consolidated Income Statements, and Statements of Comprehensive Income/(Loss) for the three months ended March 31, 2020 and 2019, and its Statements of Changes in Equity and Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019, have been included. The Consolidated Income Statements of the Company for the three months ended March 31, 2020 may not be indicative of future results.
These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 (the "2019 Form 10-K").
2. Change in Accounting Principle:
Financial Instruments - Credit Losses
In June 2016, FASB issued ASU 2016-13, which introduced a new methodology requiring the measurement of expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. ASU 2016-13 utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity debt securities and other receivables measured at amortized cost. The new methodology requires an entity to present on the balance sheet the net amount expected to be collected. This methodology replaces the multiple impairment methods under prior GAAP, including for purchased credit impaired ("PCI") assets, and introduces the concept of PCD assets. The Company's PCI assets previously accounted for under ASC 310-30 are now accounted for as PCD assets upon adoption of ASU 2016-13. ASU 2016-13 requires PCD assets to be recognized at their purchase price plus the allowance for credit losses expected at the time of acquisition. ASU 2016-13 also requires that financial assets should be written off when they are deemed uncollectible.
In November 2019, FASB issued ASU 2019-11, which amended the PCD asset guidance in ASU 2016-13 to clarify that expected recoveries of amounts previously written off and expected to be written off should be included in the valuation account. Additionally, they should not exceed the aggregate of amounts previously written off and expected to be written off by an entity. Further, ASU 2019-11 clarifies that a negative allowance is recognized when an entity determines, after a full or partial writeoff of the amortized cost basis, that it will recover all or a portion of the basis.
The Company adopted ASC Topic 326 on January 1, 2020 on a prospective basis. In accordance with the guidance, substantially all the Company’s PCI assets were transitioned using the PCD guidance, with immediate writeoff of the amortized cost basis of individual accounts and establishment of a negative allowance for expected recoveries equal to the amortized cost basis written off. Accounts previously accounted for under ASC Topic 310-30, were aggregated into annual pools based on similar risk characteristics and an effective interest rate was established based on the estimated remaining cash flows of the annual pool. The immediate writeoff and subsequent recognition of expected recoveries had no impact on the Company’s Consolidated Income Statements or the Consolidated Balance Sheets at the date of adoption. The Company develops its estimate of expected recoveries by applying discounted cash flow methodologies to its ERC and recognizes income over the estimated life of the pool at the constant effective interest rate of the pool. Changes (favorable and unfavorable) in expected cash flows are recognized in current period earnings by adjusting the present value of the expected recoveries.
10
PRA Group, Inc.
Notes to Consolidated Financial Statements
Following the transition guidance for PCD assets, the Company grossed up the amortized cost of its net finance receivables at January 1, 2020 as shown below (amounts in thousands):
Amortized cost | $ | 3,514,165 | |
Allowance for credit losses | 125,757,689 | ||
Noncredit discount | 3,240,131 | ||
Face value | $ | 132,511,985 | |
Allowance for credit losses | $ | 125,757,689 | |
Writeoffs, net | (125,757,689 | ) | |
Expected recoveries | 3,514,165 | ||
Initial negative allowance for expected recoveries | $ | 3,514,165 |
3. Finance Receivables, net:
Finance Receivables, net after the adoption of ASC Topic 326 (refer to Note 2)
Finance receivables, net consists of the following at March 31, 2020 (amounts in thousands):
Amortized cost | $ | — | |
Negative allowance for expected recoveries (1) | 3,408,074 | ||
Balance at end of period | $ | 3,408,074 |
(1) The negative allowance balance includes certain portfolios of nonperforming loans for which the Company holds a beneficial interest representing approximately 1% of the balance.
Changes in the negative allowance for expected recoveries by portfolio segment for the three months ended March 31, 2020 were as follows (amounts in thousands):
Core | Insolvency | Total | |||||||||
Balance at beginning of period | $ | 3,051,426 | $ | 462,739 | $ | 3,514,165 | |||||
Initial negative allowance for expected recoveries - portfolio acquisitions (1) | 233,687 | 39,550 | 273,237 | ||||||||
Foreign currency translation adjustment | (120,214 | ) | (9,642 | ) | (129,856 | ) | |||||
Recoveries applied to negative allowance (2) | (199,038 | ) | (37,618 | ) | (236,656 | ) | |||||
Changes in expected recoveries (3) | (16,477 | ) | 3,661 | (12,816 | ) | ||||||
Balance at end of period | $ | 2,949,384 | $ | 458,690 | $ | 3,408,074 |
(1) Initial negative allowance for expected recoveries - portfolio acquisitions
Portfolio acquisitions for the three months ended March 31, 2020 were as follows (amounts in thousands):
Core | Insolvency | Total | |||||||||
Face value | $ | 1,891,142 | $ | 177,454 | $ | 2,068,596 | |||||
Noncredit discount | (213,289 | ) | (13,032 | ) | (226,321 | ) | |||||
Allowance for credit losses at acquisition | (1,444,166 | ) | (124,872 | ) | (1,569,038 | ) | |||||
Purchase price | $ | 233,687 | $ | 39,550 | $ | 273,237 |
11
PRA Group, Inc.
Notes to Consolidated Financial Statements
The initial negative allowance recorded on portfolio acquisitions for the three months ended March 31, 2020 was as follows (amounts in thousands):
Core | Insolvency | Total | |||||||||
Allowance for credit losses at acquisition | $ | (1,444,166 | ) | $ | (124,872 | ) | $ | (1,569,038 | ) | ||
Writeoffs, net | 1,444,166 | 124,872 | 1,569,038 | ||||||||
Expected recoveries | 233,687 | 39,550 | 273,237 | ||||||||
Initial negative allowance for expected recoveries | $ | 233,687 | $ | 39,550 | $ | 273,237 |
(2) Recoveries applied to negative allowance
Recoveries applied to the negative allowance were computed as follows for the three months ended March 31, 2020 (amounts in thousands):
Core | Insolvency | Total | |||||||||
Recoveries (a) | $ | 440,694 | $ | 57,984 | $ | 498,678 | |||||
Less - amounts reclassified to portfolio income (b) | 241,656 | 20,366 | 262,022 | ||||||||
Recoveries applied to negative allowance | $ | 199,038 | $ | 37,618 | $ | 236,656 |
(a) Recoveries includes cash collections, buybacks and other adjustments.
(b) The Company reported income on expected recoveries based on the constant effective interest rate in portfolio income on the Company's Consolidated Income Statements.
(3) Changes in expected recoveries
Changes in expected recoveries consists of the following for the three months ended March 31, 2020 (amounts in thousands):
Core | Insolvency | Total | |||||||||
Changes in expected future recoveries | $ | (20,524 | ) | $ | (102 | ) | $ | (20,626 | ) | ||
Recoveries received in excess/(shortfall) of forecast | 4,047 | 3,763 | 7,810 | ||||||||
Changes in expected recoveries | $ | (16,477 | ) | $ | 3,661 | $ | (12,816 | ) |
In order to evaluate the impact of the COVID-19 pandemic on expectations of future cash collections, the Company considered historical performance, current economic forecasts regarding the duration of the impact to short-term and long-term growth in the various geographies in which the Company operates, and evolving information regarding government stimulus packages and the reduced economic activity required by stay at home orders. The Company also considered current collection activity in its determination to adjust the timing of near term ERC for certain pools. Based on these considerations, the Company’s estimates incorporate changes in the timing of expected cash collections over the next 6 to 12 months. Changes in expected recoveries were a net write down of $12.8 million. This reflects a $20.6 million net, negative adjustment to the expected future recoveries primarily related to an expected delay in cash collections from the impact of COVID-19, partially offset by $7.8 million in recoveries in excess of expectations in the current quarter. Changes in the Company’s assumptions regarding the duration and impact of COVID-19 to cash collections could change significantly as conditions evolve.
Finance Receivables, net prior to adoption of ASC Topic 326
The following information reflect finance receivables, net as previously disclosed in the Company's Quarterly Report on Form 10-Q for the three months ended March 31, 2019 which was under previous revenue recognition accounting standard ASC Topic 310-30.
12
PRA Group, Inc.
Notes to Consolidated Financial Statements
Changes in finance receivables, net for the three months ended March 31, 2019 were as follows (amounts in thousands):
Three Months Ended March 31, 2019 | ||||
Balance at beginning of period | $ | 3,084,777 | ||
Acquisitions of finance receivables (1) | 313,446 | |||
Foreign currency translation adjustment | 7,436 | |||
Cash collections | (461,171 | ) | ||
Income recognized on finance receivables | 238,836 | |||
Net allowance charges | (6,095 | ) | ||
Balance at end of period | $ | 3,177,229 |
(1) | Includes portfolio purchases adjusted for buybacks and acquisition related costs, and portfolios from the acquisition of a business in Canada made during the first quarter of 2019. |
During the three months ended March 31, 2019, the Company acquired finance receivable portfolios with a face value of $4.7 billion for $318.8 million. At March 31, 2019, the ERC on the receivables acquired during the three months ended March 31, 2019 were $541.1 million.
At the time of acquisition and each quarter thereafter, the life of each quarterly accounting pool is estimated based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon current projections, cash collections expected to be applied to principal are estimated to be as follows for the twelve-month periods ending March 31, (amounts in thousands):
2020 | $ | 850,955 | |
2021 | 718,010 | ||
2023 | 562,256 | ||
2024 | 426,004 | ||
2025 | 258,793 | ||
2026 | 137,843 | ||
2027 | 77,642 | ||
2028 | 47,138 | ||
2029 | 38,084 | ||
2030 | 28,474 | ||
Thereafter | 32,030 | ||
Total ERC expected to be applied to principal | $ | 3,177,229 |
At March 31, 2019, the Company had aggregate net finance receivables balances in pools accounted for under the cost recovery method of $43.5 million.
Accretable yield represented the amount of income on finance receivables the Company expected to recognize over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represented the original expected accretable yield on portfolios acquired during the period. Net reclassifications from nonaccretable difference to accretable yield primarily resulted from the increase in the Company's estimate of future cash flows. When applicable, net reclassifications to nonaccretable difference from accretable yield resulted from the decrease in the Company's estimates of future cash flows and allowance charges that together exceeded the increase in the Company's estimate of future cash flows.
Changes in accretable yield for the three months ended March 31, 2019 were as follows (amounts in thousands):
Three Months Ended March 31, 2019 | |||
Balance at beginning of period | $ | 3,058,445 | |
Income recognized on finance receivables | (238,836 | ) | |
Net allowance charges | 6,095 | ||
Additions from portfolio acquisitions | 235,814 | ||
Reclassifications from nonaccretable difference | 19,161 | ||
Foreign currency translation adjustment | (511 | ) | |
Balance at end of period | $ | 3,080,168 |
13
PRA Group, Inc.
Notes to Consolidated Financial Statements
The following is a summary of activity within the Company's valuation allowance account, all of which relates to acquired finance receivables, for the three months ended March 31, 2019 (amounts in thousands):
Three Months Ended March 31, 2019 | |||
Beginning balance | $ | 257,148 | |
Allowance charges | 7,977 | ||
Reversal of previously recorded allowance charges | (1,882 | ) | |
Net allowance charges | 6,095 | ||
Foreign currency translation adjustment | 81 | ||
Ending balance | $ | 263,324 |
4. Investments:
Investments consisted of the following at March 31, 2020 and December 31, 2019 (amounts in thousands):
March 31, 2020 | December 31, 2019 | ||||||
Debt securities | |||||||
Available-for-sale | $ | 4,347 | $ | 5,052 | |||
Equity securities | |||||||
Private equity funds | 7,141 | 7,218 | |||||
Mutual funds | 33,353 | 33,677 | |||||
Equity method investments | 7,870 | 10,229 | |||||
Total investments | $ | 52,711 | $ | 56,176 |
Debt Securities
Available-for-sale
Government bonds: The Company's investments in government bonds are classified as available-for-sale and are stated at fair value.
The amortized cost and estimated fair value of investments in debt securities at March 31, 2020 and December 31, 2019 were as follows (amounts in thousands):
March 31, 2020 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Aggregate Fair Value | ||||||||||||
Available-for-sale | |||||||||||||||
Government bonds | $ | 4,219 | $ | 128 | $ | — | $ | 4,347 | |||||||
December 31, 2019 | |||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Aggregate Fair Value | ||||||||||||
Available-for-sale | |||||||||||||||
Government bonds | $ | 5,095 | $ | — | $ | 43 | $ | 5,052 |
Equity Securities
Investments in private equity funds: Investments in private equity funds represent limited partnerships in which the Company has less than a 1% interest.
Mutual funds: The Company invests certain excess funds held in Brazil in a Brazilian real denominated mutual fund benchmarked to the U.S. dollar that invests principally in Brazilian fixed income securities. The investments are carried at fair value based on quoted market prices. Gains and losses from this investment are included as a foreign exchange component of other income and (expense) in the Company's Consolidated Income Statements.
Unrealized gains and losses: Net unrealized gains on the Company's equity securities were $7.6 million and $2.1 million for the three months ended March 31, 2020 and 2019, respectively.
14
PRA Group, Inc.
Notes to Consolidated Financial Statements
Equity Method Investments
The Company has an 11.7% interest in RCB Investimentos S.A. ("RCB"), a servicing platform for nonperforming loans in Brazil. This investment is accounted for on the equity method because the Company exercises significant influence over RCB’s operating and financial activities. Accordingly, the Company’s investment in RCB is adjusted for the Company’s proportionate share of RCB’s earnings or losses.
5. Goodwill and Intangible Assets, net:
In connection with the Company's business acquisitions, the Company acquired certain tangible and intangible assets. Intangible assets resulting from these acquisitions include client and customer relationships, non-compete agreements, trademarks and technology. The Company performs an annual review of goodwill as of October 1 of each year or more frequently if indicators of impairment exist. The Company performed its most recent annual review as of October 1, 2019 and concluded that no goodwill impairment was necessary. The Company performed its quarterly assessment by evaluating whether a triggering event had occurred as of March 31, 2020 considering current market conditions resulting from the global COVID-19 pandemic. The Company concluded that no triggering event had occurred at March 31, 2020 and will continue to monitor the market for any adverse conditions resulting from the COVID-19 pandemic.
The following table represents the changes in goodwill for the three months ended March 31, 2020 and 2019 (amounts in thousands):
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Goodwill: | |||||||
Balance at beginning of period | $ | 480,794 | $ | 464,116 | |||
Changes: | |||||||
Acquisition (1) | — | 13,653 | |||||
Foreign currency translation adjustment | (62,229 | ) | 2,749 | ||||
Net change in goodwill | (62,229 | ) | 16,402 | ||||
Balance at end of period | $ | 418,565 | $ | 480,518 |
(1) The $13.7 million addition to goodwill during the three months ended March 31, 2019, is related to the acquisition of a business in Canada.
6. Leases:
The Company's operating lease portfolio primarily includes corporate offices and call centers. The majority of its leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for 5 years, and others include options to terminate the leases within 1 year. Exercises of lease renewal options are typically at the Company's sole discretion and are included in its right-of-use ("ROU") assets and lease liabilities based upon whether the Company is reasonably certain of exercising the renewal options. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.
The components of lease expense for the three months ended March 31, 2020 and 2019, were as follows (amounts in thousands):
Three months ended March 31, | |||||||
2020 | 2019 | ||||||
Operating lease expense | $ | 3,063 | $ | 2,863 | |||
Short-term lease expense | 693 | 842 | |||||
Total lease expense | $ | 3,756 | $ | 3,705 |
15
PRA Group, Inc.
Notes to Consolidated Financial Statements
Supplemental cash flow information and non-cash activity related to leases for the three months ended March 31, 2020 and 2019 were as follows (amounts in thousands):
Three months ended March 31, | |||||||
2020 | 2019 | ||||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 2,991 | $ | 2,780 | |||
ROU assets obtained in exchange for operating lease obligations | 531 | 76,175 |
Lease term and discount rate information related to operating leases were as follows as of the dates indicated:
Three months ended March 31, | |||||
2020 | 2019 | ||||
Weighted-average remaining lease term (years) | 10.6 | 11.0 | |||
Weighted-average discount rate | 4.89 | % | 4.95 | % |
Maturities of lease liabilities at March 31, 2020 are as follows for the following periods (amounts in thousands):
Operating Leases | |||
For the nine months ending December 31, 2020 | $ | 8,747 | |
For the year ending December 31, 2021 | 11,250 | ||
For the year ending December 31, 2022 | 9,281 | ||
For the year ending December 31, 2023 | 7,148 | ||
For the year ending December 31, 2024 | 6,387 | ||
Thereafter | 49,434 | ||
Total lease payments | $ | 92,247 | |
Less imputed interest | 21,145 | ||
Total | $ | 71,102 |
7. Borrowings:
The Company's borrowings consisted of the following as of the dates indicated (amounts in thousands):
March 31, 2020 | December 31, 2019 | ||||||
Americas revolving credit | $ | 749,211 | $ | 772,037 | |||
Europe revolving credit | 1,058,348 | 1,017,465 | |||||
Term loans | 422,500 | 425,000 | |||||
Convertible senior notes | 632,500 | 632,500 | |||||
2,862,559 | 2,847,002 | ||||||
Less: Debt discount and issuance costs | (34,557 | ) | (38,577 | ) | |||
Total | $ | 2,828,002 | $ | 2,808,425 |
The following principal payments are due on the Company's borrowings as of March 31, 2020 for the 12-month periods ending March 31, (amounts in thousands):
2021 | $ | 298,395 | |
2022 | 10,895 | ||
2023 | 2,208,269 | ||
2024 | 345,000 | ||
Total | $ | 2,862,559 |
The Company determined that it was in compliance with the covenants of its financing arrangements as of March 31, 2020.
16
PRA Group, Inc.
Notes to Consolidated Financial Statements
North American Revolving Credit and Term Loan
On May 5, 2017, the Company amended and restated its existing credit agreement (as amended, and modified from time to time, the “North American Credit Agreement”) with Bank of America, N.A., as administrative agent, Bank of America, National Association, acting through its Canada branch, as the Canadian administrative agent, and a syndicate of lenders named therein. The total credit facility under the North American Credit Agreement includes an aggregate principal amount of $1,540.5 million (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a fully-funded $422.5 million term loan, (ii) a $1,068.0 million domestic revolving credit facility, and (iii) a $50.0 million Canadian revolving credit facility. The facility includes an accordion feature for up to $500.0 million in additional commitments (at the option of the lender) and also provides for up to $25.0 million of letters of credit and a $25.0 million swingline loan sublimit that would reduce amounts available for borrowing. The term and revolving loans accrue interest, at the option of the Company, at either the base rate or the Eurodollar rate (as defined in the North American Credit Agreement) for the applicable term plus 2.50% per annum in the case of the Eurodollar rate loans and 1.50% in the case of the base rate loans. The base rate is the highest of (a) the Federal Funds Rate (as defined in the North American Credit Agreement) plus 0.50%, (b) Bank of America's prime rate, or (c) the one-month Eurodollar rate plus 1.00%. Canadian Prime Rate Loans bear interest at a rate per annum equal to the Canadian Prime Rate plus 1.50%. The revolving credit facilities also bear an unused line fee of 0.375% per annum, payable quarterly in arrears. The loans under the North American Credit Agreement mature May 5, 2022. As of March 31, 2020, the unused portion of the North American Credit Agreement was $371.2 million. Considering borrowing base restrictions, as of March 31, 2020, the amount available to be drawn was $175.7 million.
The North American Credit Agreement is secured by a first priority lien on substantially all of the Company's North American assets. The North American Credit Agreement contains restrictive covenants and events of default including the following:
• | borrowings under each of the domestic revolving loan facility and the Canadian revolving loan facility are subject to separate borrowing base calculations and may not exceed 35% of the ERC of all domestic or Canadian, as applicable, core eligible asset pools, plus 55% of ERC of domestic or Canadian, as applicable, insolvency eligible asset pools, plus 75% of domestic or Canadian, as applicable, eligible accounts receivable; |
• | the consolidated total leverage ratio cannot exceed 2.75 to 1.0 as of the end of any fiscal quarter; |
• | the consolidated senior secured leverage ratio cannot exceed 2.25 to 1.0 as of the end of any fiscal quarter; |
• | subject to no default or event of default, cash dividends and distributions during any fiscal year cannot exceed $20.0 million; |
• | subject to no default or event of default, stock repurchases during any fiscal year cannot exceed $100.0 million plus 50% of the prior year's consolidated net income; |
• | permitted acquisitions during any fiscal year cannot exceed $250.0 million (with a $50.0 million per year sublimit for permitted acquisitions by non-loan parties); |
• | indebtedness in the form of senior, unsecured convertible notes or other unsecured financings cannot exceed $750.0 million in the aggregate (without respect to the 2020 Notes); |
• | the Company must maintain positive consolidated income from operations during any fiscal quarter; and |
• | restrictions on changes in control. |
European Revolving Credit Facility and Term Loan
On October 23, 2014, European subsidiaries of the Company ("PRA Europe") entered into a credit agreement with DNB Bank ASA for a Multicurrency Revolving Credit Facility (such agreement as later amended or modified, the "European Credit Agreement"). In the first quarter of 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 million, extended the majority of the facility by 2 years and includes an accordion feature of no less than $50.0 million not to exceed $500.0 million, to allow for future increases.
Under the terms of the European Credit Agreement, the credit facility includes an aggregate amount of $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, of 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 fee of 0.125% per quarter, payable quarterly in arrears, and matures February 19, 2023. As of March 31, 2020, the outstanding balance under the European Credit Agreement was $1,058.3 million and the unused portion of the European Credit Agreement (including the overdraft facility) was $281.7 million. Considering borrowing base restrictions and other covenants, as of March 31, 2020, the amount available to be drawn under the European Credit Agreement (including the overdraft facility) was $56.4 million.
17
PRA Group, Inc.
Notes to Consolidated Financial Statements
The European Credit Agreement is secured by the shares of most of the Company's European subsidiaries and all intercompany 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 $4.9 million. As of March 31, 2020, the outstanding balance under the credit agreement was $2.4 million, with a weighted average interest rate of 7.13%. The outstanding balance accrues interest at the Indicador Bancario de Referencia rate ("IBR") plus a weighted average spread of 2.74%, is payable quarterly in arrears, amortizes quarterly, and matures on October 17, 2022 (per the credit agreement, maturity represents three years from the last draw). This credit facility is fully collateralized using time deposits with the lender that are subject to certain limitations regarding withdrawal and usage and are included within other assets on the Company's Consolidated Balance Sheets. As of March 31, 2020, the unused portion of the Colombia Credit Agreement was $2.5 million.
Convertible Senior Notes due 2020
On August 13, 2013, the Company completed the private offering of $287.5 million in aggregate principal amount of its 3.00% Convertible Senior Notes due August 1, 2020 (the "2020 Notes"). The 2020 Notes were issued pursuant to an Indenture, dated August 13, 2013 (the "2013 Indenture"), between the Company and Regions Bank, as successor trustee. The 2013 Indenture contains customary terms and covenants, including certain events of default after which the 2020 Notes may be due and payable immediately. The 2020 Notes are senior unsecured obligations of the Company. Interest on the 2020 Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year. Prior to February 1, 2020, the 2020 Notes were convertible only upon the occurrence of specified events. As of March 31, 2020 the 2020 Notes are convertible at any time.
The conversion rate for the 2020 Notes is initially 15.2172 shares per $1,000 principal amount of 2020 Notes, which is equivalent to an initial conversion price of approximately $65.72 per share of the Company's common stock, and is subject to adjustment in certain circumstances pursuant to the 2013 Indenture. Upon conversion, holders of the 2020 Notes will receive cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election. The Company's intent is to settle conversions through combination settlement (i.e., the 2020 Notes would be converted into cash up to the aggregate principal amount, and shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election, for the remainder). As a result and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds $65.72.
The Company determined that the fair value of the 2020 Notes at the date of issuance was approximately $255.3 million, and designated the residual value of approximately $32.2 million as the equity component. Additionally, the Company allocated approximately $7.3 million of the $8.2 million 2020 Notes issuance cost as debt issuance cost and the remaining $0.9 million as equity issuance cost.
Convertible Senior Notes due 2023
On May 26, 2017, the Company completed the private offering of $345.0 million in aggregate principal amount of its 3.50% Convertible Senior Notes due June 1, 2023 (the "2023 Notes" and, together with the 2020 Notes, the "Notes"). The 2023 Notes were issued pursuant to an Indenture, dated May 26, 2017 (the "2017 Indenture"), between the Company and Regions Bank, as trustee. The 2017 Indenture contains customary terms and covenants, including certain events of default after which the 2023 Notes may be due and payable immediately. The 2023 Notes are senior unsecured obligations of the Company. Interest on the 2023 Notes is payable semi-annually, in arrears, on June 1 and December 1 of each year. Prior to March 1, 2023, the 2023 Notes will be convertible only upon the occurrence of specified events. On or after March 1, 2023, the 2023 Notes will be convertible at any time. The Company has the right, at its election, to redeem all or any part of the outstanding 2023 Notes at any time on or after June 1, 2021 for cash, but only if the last reported sale price (as defined in the 2017 Indenture) exceeds 130% of the conversion price on each of at least 20 trading days during the 30 consecutive trading days ending on and including the trading day immediately before the date the Company sends the related redemption notice. As of March 31, 2020, the Company does not believe that any of the conditions allowing holders of the 2023 Notes to convert their notes have occurred.
18
PRA Group, Inc.
Notes to Consolidated Financial Statements
The conversion rate for the 2023 Notes is initially 21.6275 shares per $1,000 principal amount of 2023 Notes, which is equivalent to an initial conversion price of approximately $46.24 per share of the Company's common stock, and is subject to adjustment in certain circumstances pursuant to the 2017 Indenture. Upon conversion, holders of the 2023 Notes will receive cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election. The Company's intent is to settle conversions through combination settlement (i.e., the 2023 Notes would be converted into cash up to the aggregate principal amount, and shares of the Company's common stock or a combination of cash and shares of the Company's common stock, at the Company's election, for the remainder). As a result and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company's common stock during any quarter exceeds $46.24.
The Company determined that the fair value of the 2023 Notes at the date of issuance was approximately $298.8 million, and designated the residual value of approximately $46.2 million as the equity component. Additionally, the Company allocated approximately $8.3 million of the $9.6 million 2023 Notes issuance cost as debt issuance cost and the remaining $1.3 million as equity issuance cost.
The balances of the liability and equity components of the Notes outstanding were as follows as of the dates indicated (amounts in thousands):
March 31, 2020 | December 31, 2019 | ||||||
Liability component - principal amount | $ | 632,500 | $ | 632,500 | |||
Unamortized debt discount | (28,197 | ) | (31,414 | ) | |||
Liability component - net carrying amount | $ | 604,303 | $ | 601,086 | |||
Equity component | $ | 76,216 | $ | 76,216 |
The debt discount is being amortized into interest expense over the remaining life of the 2020 Notes and the 2023 Notes using the effective interest rate, which is 4.92% and 6.20%, respectively.
Interest expense related to the Notes was as follows for the periods indicated (amounts in thousands):
Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Interest expense - stated coupon rate | $ | 5,175 | $ | 5,175 | |||
Interest expense - amortization of debt discount | 3,217 | 3,042 | |||||
Total interest expense - convertible senior notes | $ | 8,392 | $ | 8,217 |
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”).
19
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 (amounts in thousands):
March 31, 2020 | December 31, 2019 | |||||||||||
Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||
Derivatives designated as hedging instruments: | ||||||||||||
Interest rate contracts | Other assets | $ | — | Other assets | $ | 323 | ||||||
Interest rate contracts | Other liabilities | 43,674 | Other liabilities | 17,807 | ||||||||
Derivatives not designated as hedging instruments: | ||||||||||||
Foreign currency contracts | Other assets | 18,126 | Other assets | 552 | ||||||||
Foreign currency contracts | Other liabilities | 15,614 | Other liabilities | 5,856 |
Derivatives Designated as Hedging Instruments:
Changes in fair value of derivative contracts designated as cash flow hedging instruments are recognized in other comprehensive income ("OCI"). As of March 31, 2020 and December 31, 2019, the notional amount of interest rate contracts designated as cash flow hedging instruments was $922.2 million and $959.0 million, respectively. Derivatives designated as cash flow hedging instruments were evaluated and remain highly effective at March 31, 2020 and have initial terms of two to seven years. The Company estimates that approximately $8.4 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 months ended March 31, 2020 and 2019 (amounts in thousands):
Gain or (loss) recognized in OCI, net of tax | Gain or (loss) reclassified from OCI into income | |||||||||||||||||
Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||||
Derivatives designated as cash flow hedging instruments | 2020 | 2019 | Location of gain or (loss) reclassified from OCI into income | 2020 | 2019 | |||||||||||||
Interest rate contracts | $ | (21,350 | ) | $ | (5,795 | ) | Interest expense, net | $ | (1,012 | ) | $ | (80 | ) |
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 March 31, 2020 and December 31, 2019, the notional amount of foreign currency contracts that are not designated as hedging instruments was $747.8 million and $469.9 million, respectively.
The following table summarizes the effects of derivatives not designated as hedging instruments on the Company’s Consolidated Income Statements for the three months ended March 31, 2020 and 2019 (amounts in thousands):
Amount of gain or (loss) recognized in income | ||||||||||
Three Months Ended March 31, | ||||||||||
Derivatives not designated as hedging instruments | Location of gain or (loss) recognized in income | 2020 | 2019 | |||||||
Foreign currency contracts | Foreign exchange gain | $ | 26,786 | $ | (5,256 | ) | ||||
Foreign currency contracts | Interest expense, net | (1,001 | ) | — | ||||||
Interest rate contracts | Interest expense, net | 1,038 | (349 | ) |
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.
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PRA Group, Inc.
Notes to Consolidated Financial Statements
Those levels of input are summarized as follows:
• | Level 1: Quoted prices in active markets for identical assets and liabilities. |
• | Level 2: Observable inputs other than Level 1 quoted prices, such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. |
• | Level 3: Unobservable inputs that are supported by little or no market activity. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.
Financial Instruments Not Required To Be Carried at Fair Value
In accordance with the disclosure requirements of ASC Topic 825, "Financial Instruments" ("ASC 825"), the table below summarizes fair value estimates for the Company's financial instruments that are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.
The carrying amounts in the table are recorded in the Consolidated Balance Sheets at March 31, 2020 and December 31, 2019 (amounts in thousands):
March 31, 2020 | December 31, 2019 | ||||||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||
Financial assets: | |||||||||||||||
Cash and cash equivalents | $ | 179,995 | $ | 179,995 | $ | 119,774 | $ | 119,774 | |||||||
Finance receivables, net | 3,408,074 | 3,503,737 | 3,514,165 | 3,645,610 | |||||||||||
Financial liabilities: | |||||||||||||||
Interest-bearing deposits | 97,465 | 97,465 | 106,246 | 106,246 | |||||||||||
Revolving lines of credit | 1,807,559 | 1,807,559 | 1,789,502 | 1,789,502 | |||||||||||
Term loans | 422,500 | 422,500 | 425,000 | 425,000 | |||||||||||
Convertible senior notes | 604,303 | 589,742 | 601,086 | 648,968 |
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 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.
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PRA Group, Inc.
Notes to Consolidated Financial Statements
Term loans: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates.
Convertible senior notes: The fair value estimates for the Notes incorporate quoted market prices which were obtained from secondary market broker quotes 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 of the Notes classified as debt, while estimated fair value pertains to the face amount of the Notes.
Financial Instruments Required To Be Carried At Fair Value
The carrying amounts in the following table are measured at fair value on a recurring basis in the accompanying Consolidated Balance Sheets at March 31, 2020 and December 31, 2019 (amounts in thousands):
Fair Value Measurements as of March 31, 2020 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | |||||||||||||||
Available-for-sale investments | |||||||||||||||
Government bonds | $ | 4,347 | $ | — | $ | — | $ | 4,347 | |||||||
Fair value through net income | |||||||||||||||
Mutual funds | 33,353 | — | — | 33,353 | |||||||||||
Derivative contracts (recorded in other assets) | — | 18,126 | — | 18,126 | |||||||||||
Liabilities: | |||||||||||||||
Derivative contracts (recorded in other liabilities) | — | 59,288 | — | 59,288 | |||||||||||
Fair Value Measurements as of December 31, 2019 | |||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Assets: | |||||||||||||||
Available-for-sale investments | |||||||||||||||
Government bonds | $ | 5,052 | $ | — | $ | — | $ | 5,052 | |||||||
Fair value through net income | |||||||||||||||
Mutual funds | 33,677 | — | — | 33,677 | |||||||||||
Derivative contracts (recorded in other assets) | — | 875 | — | 875 | |||||||||||
Liabilities: | |||||||||||||||
Derivative contracts (recorded in other liabilities) | — | 23,663 | — | 23,663 |
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
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
22
PRA Group, Inc.
Notes to Consolidated Financial Statements
distributions are received through the liquidation of the underlying assets of the fund. The investments are expected to be returned through distributions as a result of liquidations of the funds' underlying assets over one to five years. The fair value of these private equity funds following the application of the Net Asset Value ("NAV") practical expedient was $7.1 million and $7.2 million as of March 31, 2020 and December 31, 2019, respectively.
10. Accumulated Other Comprehensive Loss:
The following table provides details about the reclassifications out of accumulated other comprehensive loss for the three months ended March 31, 2020 and 2019 (amounts in thousands):
Three Months Ended March 31, | ||||||||||
Gains and losses on cash flow hedges | 2020 | 2019 | Affected line in the consolidated income statement | |||||||
Interest rate swaps | $ | (1,012 | ) | $ | (80 | ) | Interest expense, net | |||
Income tax effect of item above | 230 | — | Income tax expense | |||||||
Total losses on cash flow hedges | $ | (782 | ) | $ | (80 | ) | Net of tax |
The following table represents the changes in accumulated other comprehensive loss by component, after tax, for the three months ended March 31, 2020 and 2019 (amounts in thousands):
Three Months Ended March 31, 2020 | ||||||||||||||||
Debt Securities | Cash Flow | Currency Translation | Accumulated Other | |||||||||||||
Available-for-sale | Hedges | Adjustments | Comprehensive Loss (1) | |||||||||||||
Ending balance at December 31, 2019 | $ | (44 | ) | $ | (13,088 | ) | (247,886 | ) | $ | (261,018 | ) | |||||
Other comprehensive loss before reclassifications | 170 | (21,350 | ) | (94,201 | ) | (115,381 | ) | |||||||||
Reclassifications, net | — | 782 | — | 782 | ||||||||||||
Net current period other comprehensive loss | 170 | (20,568 | ) | (94,201 | ) | (114,599 | ) | |||||||||
Ending balance at March 31, 2020 | $ | 126 | (33,656 | ) | $ | (342,087 | ) | $ | (375,617 | ) | ||||||
Three Months Ended March 31, 2019 | ||||||||||||||||
Debt Securities | Cash Flow | Currency Translation | Accumulated Other | |||||||||||||
Available-for-sale | Hedges | Adjustments | Comprehensive Loss (1) | |||||||||||||
Ending balance December 31, 2018 | $ | (83 | ) | $ | 44 | $ | (242,070 | ) | $ | (242,109 | ) | |||||
Other comprehensive loss before reclassifications | 45 | (5,795 | ) | (742 | ) | (6,492 | ) | |||||||||
Reclassifications, net | — | 80 | — | 80 | ||||||||||||
Net current period other comprehensive loss | 45 | (5,715 | ) | (742 | ) | (6,412 | ) | |||||||||
Ending balance March 31, 2019 | $ | (38 | ) | $ | (5,671 | ) | $ | (242,812 | ) | $ | (248,521 | ) |
(1) Net of deferred taxes for unrealized losses from cash flow hedges of $10.0 million and $1.7 million for the three months ended March 31, 2020 and 2019, 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 Notes and nonvested share awards, if dilutive. There has been no dilutive effect of the convertible senior notes since issuance through March 31, 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.
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PRA Group, Inc.
Notes to Consolidated Financial Statements
The following table provides a reconciliation between the computation of basic EPS and diluted EPS for the three months ended March 31, 2020 and 2019 (amounts in thousands, except per share amounts):
For the Three Months Ended March 31, | |||||||||||||||||||||
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 | $ | 19,135 | 45,452 | $ | 0.42 | $ | 15,227 | 45,338 | $ | 0.34 | |||||||||||
Dilutive effect of nonvested share awards | — | 332 | — | — | 81 | — | |||||||||||||||
Diluted EPS | $ | 19,135 | 45,784 | $ | 0.42 | $ | 15,227 | 45,419 | $ | 0.34 |
There were no antidilutive options outstanding for the three months ended March 31, 2020 and 2019.
12. Income Taxes:
The Company follows the guidance of FASB ASC Topic 740 "Income Taxes" ("ASC 740") as it relates to the provision for income taxes and uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
On May 10, 2017, the Company reached a settlement with the Internal Revenue Service ("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. The Company was not required to pay any interest or penalties in connection with the settlement.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted into U.S. law in response to COVID-19 with varying legislation enacted in many of the countries in which the Company operates. While the Company is continuing to evaluate impact, it intends to implement the tax payment and filing deferral provisions as applicable and does not believe that any of the other provisions will have a material impact to its financial reporting. As international tax legislative updates continue to be released, they will be monitored by the Company.
At March 31, 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 and, 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 $115.4 million and $109.7 million as of March 31, 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 March 31, 2020, estimated future compensation under these agreements was approximately $6.2 million. The agreements also contain confidentiality and non-compete provisions. Outside the U.S., employment agreements are in place with employees pursuant to local country regulations. Generally, these agreements do not have expiration dates and therefore it is impractical to estimate the amount of future compensation under these agreements. Accordingly, the future compensation under these agreements is not included in the $6.2 million total above.
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PRA Group, Inc.
Notes to Consolidated Financial Statements
Forward Flow Agreements:
The Company is party to several forward flow agreements that allow for the purchase of nonperforming loans at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at March 31, 2020, was approximately $629.2 million.
Finance Receivables:
Certain agreements for the purchase of finance receivables portfolios contain provisions that may, in limited circumstances, require the Company to refund a portion or all of the collections subsequently received by the Company on particular accounts. The potential refunds as of the balance sheet date are not considered to be significant.
Litigation and Regulatory Matters:
The Company 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 March 31, 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. During the year ended December 31, 2019, the Company recorded $1.0 million in recoveries receivable under the Company's insurance policies or third-party indemnities which is included in other receivables, net at December 31, 2019.
Matters that are not considered routine legal proceedings were disclosed previously in the 2019 Form 10-K.
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
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PRA Group, Inc.
Notes to Consolidated Financial Statements
option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted ASU 2017-04 on January 1, 2020 which had no impact on its consolidated financial statements.
Fair Value Measurement
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” ("ASU 2018-13"). ASU 2018-13 eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. The Company adopted ASU 2018-13 on January 1, 2020 which had no impact to the Company's Notes to Consolidated Financial Statements.
Recently issued accounting standards not yet adopted:
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes. This standard is effective for 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 that the adoption of the standard will result in additional and modified disclosures.
Investments-Equity Securities
In January 2020, the FASB issued ASU 2020-01 “Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815” (“ASU 2020-01”). ASU 2020-01 clarifies that a company should consider observable transactions that require a company to either apply or discontinue the equity method of accounting under Topic 323, Investments-Equity Method and Joint Ventures, for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. Additionally, it clarifies that, when determining the accounting for certain forward contracts and purchased options a company should not consider, whether upon settlement or exercise, if the underlying securities would be accounted for under the equity method or fair value option. This standard is effective for public entities for financial statements issued for fiscal years and interim periods beginning after December 15, 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 currently evaluating the impact of ASU 2020-04.
The Company does not expect that any other recently issued accounting pronouncements will have a material effect on its consolidated financial statements.
15. Subsequent Events:
On May 6, 2020 , the Company entered into the Second Amendment to the North American Credit Facility, which, among other things, includes:
• | the consolidated total leverage ratio limit will increase to 3.25 from 2.75 effective after June 30, 2020 through December 31, 2020. After December 31, 2020, the consolidated total leverage ratio limit will decrease to 3.0 until maturity; |
• | the LIBOR floor increases from zero to 100% on the revolving loans; |
• | the consolidated senior secured leverage ratio limit will increase from 2.25 to 2.75 until March 31, 2021. On March 31, 2021, the senior secured leverage ratio will decrease to 2.25 until maturity; |
• | the ERC borrowing base on all domestic Core eligible pools will increase from 35% to 40% effective July 31, 2020 until January 31, 2021. If the ERC advance rate drops to 35% or below during this period, the ERC borrowing base will return to 35%; |
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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") 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; |
• | changes in interest or exchange rates, which could reduce our net income, and the possibility that future hedging strategies may not be successful, |
27
• | 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 of this Quarterly Report.
Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in, or implied by, this Quarterly Report could turn out to be materially different. Except as required by law, we assume no obligation to publicly update or revise our forward-looking statements after the date of this Quarterly Report and you should not expect us to do so.
Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do not, by policy, selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility.
Frequently Used Terms
We may use the following terminology throughout this 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 Topic 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.
28
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 March 31, 2020, employed 4,014 full time equivalents. Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol "PRAA".
COVID-19 Update
The recent outbreak of COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on the U.S. and global economies and created uncertainty. Since the initial outbreak was reported, all states in the U.S. have declared states of emergency and COVID-19 has spread to all countries in which we operate. As a result, we have implemented our business continuity plans including remote work practices where possible and have leveraged existing space to follow social distancing guidelines. To date, the pandemic has not prevented our ability to operate the business and we have continued to take steps necessary to minimize impact or disruption to our global operations. We believe we have sufficient liquidity on hand, or access to the capital markets to provide liquidity, to continue normal business operations. Refer to the Liquidity and Capital Resources section below for further discussion. Furthermore, the pandemic presents potential new risks which are difficult to reasonably estimate. As a result, the impact COVID-19 may have on our business, results of operations or financial condition is also difficult to predict. See discussion in Part II, Item 1A - “Risk Factors”.
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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 Topic 326", on a prospective basis. Prior period amounts were accounted for under ASC Topic 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). For further information refer to Note 2 to our Consolidated Financial Statements included in Part 1, Item 1 of this Quarterly Report. The following table sets forth Consolidated Income Statement amounts as a percentage of total revenues for the periods indicated (dollars in thousands):
For the Three Months Ended March 31, | |||||||||||||
2020 | 2019 | ||||||||||||
Revenues: | |||||||||||||
Portfolio income | $ | 262,022 | 104.1 | % | $ | — | — | % | |||||
Changes in expected recoveries | (12,816 | ) | (5.1 | ) | — | — | |||||||
Income recognized on finance receivables | — | — | 238,836 | 97.1 | |||||||||
Fee income | 2,209 | 0.9 | 6,374 | 2.6 | |||||||||
Other revenue | 369 | 0.1 | 667 | 0.3 | |||||||||
Total revenues | 251,784 | 100.0 | 245,877 | 100.0 | |||||||||
Net allowance charges | — | — | (6,095 | ) | (2.5 | ) | |||||||
Operating expenses: | |||||||||||||
Compensation and employee services | 75,171 | 29.9 | 79,645 | 32.4 | |||||||||
Legal collection fees | 14,572 | 5.8 | 13,059 | 5.3 | |||||||||
Legal collection costs | 34,447 | 13.7 | 35,229 | 14.3 | |||||||||
Agency fees | 13,376 | 5.3 | 14,032 | 5.7 | |||||||||
Outside fees and services | 19,394 | 7.7 | 15,248 | 6.2 | |||||||||
Communication | 13,511 | 5.4 | 13,201 | 5.4 | |||||||||
Rent and occupancy | 4,484 | 1.8 | 4,363 | 1.8 | |||||||||
Depreciation and amortization | 4,084 | 1.6 | 4,572 | 1.9 | |||||||||
Other operating expenses | 12,205 | 4.8 | 11,585 | 4.7 | |||||||||
Total operating expenses | 191,244 | 76.0 | 190,934 | 77.7 | |||||||||
Income from operations | 60,540 | 24.0 | 48,848 | 19.9 | |||||||||
Other income and (expense): | |||||||||||||
Interest expense, net | (37,211 | ) | (14.8 | ) | (33,981 | ) | (13.8 | ) | |||||
Foreign exchange gain | 2,283 | 0.9 | 6,264 | 2.5 | |||||||||
Other | (76 | ) | — | (352 | ) | (0.1 | ) | ||||||
Income before income taxes | 25,536 | 10.1 | 20,779 | 8.5 | |||||||||
Income tax expense | 3,100 | 1.2 | 3,867 | 1.6 | |||||||||
Net income | 22,436 | 8.9 | 16,912 | 6.9 | |||||||||
Adjustment for net income attributable to noncontrolling interests | 3,301 | 1.3 | 1,685 | 0.7 | |||||||||
Net income attributable to PRA Group, Inc. | $ | 19,135 | 7.6 | % | $ | 15,227 | 6.2 | % |
30
Three Months Ended March 31, 2020 Compared To Three Months Ended March 31, 2019
Cash Collections
Cash collections were as follows for the periods indicated:
For the Three Months Ended March 31, | Variances | ||||||||||
(Amounts in thousands) | 2020 | 2019 | 2020 vs. 2019 | ||||||||
Americas Core | $ | 305,780 | $ | 290,723 | $ | 15,057 | |||||
Americas Insolvency | 43,210 | 44,613 | (1,403 | ) | |||||||
Europe Core | 131,340 | 116,858 | 14,482 | ||||||||
Europe Insolvency | 14,243 | 8,977 | 5,266 | ||||||||
Total cash collections | $ | 494,573 | $ | 461,171 | $ | 33,402 | |||||
Cash collections adjusted (1) | $ | 494,573 | $ | 454,654 | $ | 39,919 |
(1) Cash collections adjusted refers to 2019 cash collections remeasured using 2020 exchange rates.
Cash collections were $494.6 million for the three months ended March 31, 2020, an increase of $33.4 million, or 7.2%, compared to $461.2 million for the three months ended March 31, 2019. The increase was largely due to increases in Americas Core and Europe Core cash collections, partially offset by the overall economic disruption in the last two weeks of the quarter. Americas Core cash collections increased $15.1 million, or 5.2%, mainly driven by higher U.S. legal collections and an increase in Other Americas, slightly offset by lower U.S. call center and other collections. The U.S. legal collections increase of $9.9 million, or 10.4% was due primarily to a higher number of accounts placed in the legal channel. Other Americas increased $6.8 million, or 25.6%, primarily as a result of increased portfolio purchasing in South America. Furthermore, the increase of $14.5 million, or 12.4% in Europe Core cash collections reflects higher 2019 purchases.
Revenues
A summary of our revenue generation during the three months ended March 31, 2020 and 2019 is as follows (amounts in thousands):
For the Three Months Ended March 31, | |||||||
2020 | 2019 | ||||||
Portfolio income | $ | 262,022 | — | ||||
Changes in expected recoveries | (12,816 | ) | — | ||||
Income recognized on finance receivables | — | 238,836 | |||||
Fee income | 2,209 | 6,374 | |||||
Other revenue | 369 | 667 | |||||
Total revenues | $ | 251,784 | $ | 245,877 |
Total revenues were $251.8 million for the three months ended March 31, 2020, an increase of $5.9 million, or 2.4%, compared to $245.9 million for the three months ended March 31, 2019. This increase was driven by higher cash collections, somewhat offset by adjustments to our estimated remaining collections mainly to reflect the impact of COVID-19 and lower fee income reflecting settlement timing in our claims processing company, Claims Compensation Bureau.
Net Allowance Charges
In 2019, under ASC Topic 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 Topic 326 changes to expected cash flows are recorded in changes in expected recoveries within revenues.
Operating Expenses
Total operating expenses were $191.2 million for the three months ended March 31, 2020, an increase of $0.3 million, or 0.2%, compared to $190.9 million for the three months ended March 31, 2019.
31
Compensation and Employee Services
Compensation and employee services expenses were $75.2 million for the three months ended March 31, 2020, a decrease of $4.4 million, or 5.5%, compared to $79.6 million for the three months ended March 31, 2019. The decrease in compensation expense was primarily attributable to a reduction in the U.S. call center workforce as we balance the volume between the legal collection channel and call centers. Total full-time equivalents decreased to 4,014 as of March 31, 2020, from 5,236 as of March 31, 2019.
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 $14.6 million for the three months ended March 31, 2020, an increase of $1.5 million, or 11.5%, compared to $13.1 million for the three months ended March 31, 2019 primarily due to an increase in external legal cash collections in the U.S.
Legal Collection Costs
Legal collection costs primarily consist of costs paid to courts where a lawsuit is filed for the purpose of attempting to collect on an account. Legal collection costs were $34.4 million for the three months ended March 31, 2020, a decrease of $0.8 million, or 2.3% compared to $35.2 million for the three months ended March 31, 2019. The decrease primarily reflects slightly lower court costs in the U.S. due to the disruption in the last two weeks of the quarter resulting from the COVID-19 pandemic, mostly offset by higher costs in Europe.
Outside Fees and Services
Outside fees and services expenses were $19.4 million for the three months ended March 31, 2020, an increase of $4.2 million, or 27.6%, compared to $15.2 million for the three months ended March 31, 2019. The increase was primarily due to a number of items that were not material individually and higher consulting fees in 2020.
Interest Expense, Net
Interest expense, net was $37.2 million during the three months ended March 31, 2020, an increase of $3.2 million, or 9.4%, compared to $34.0 million for the three months ended March 31, 2019. The increase was primarily due to higher levels of average borrowings primarily to fund increased portfolio investments and the impact of changes in the fair value of our derivatives.
Interest expense, net consisted of the following for the three months ended March 31, 2020 and 2019 (amounts in thousands):
For the Three Months Ended March 31, | |||||||||||
2020 | 2019 | Change | |||||||||
Stated interest on debt obligations and unused line fees | $ | 24,459 | $ | 23,397 | $ | 1,062 | |||||
Coupon interest on convertible debt | 5,175 | 5,175 | — | ||||||||
Amortization of convertible debt discount | 3,217 | 3,042 | 175 | ||||||||
Amortization of loan fees and other loan costs | 2,640 | 2,636 | 4 | ||||||||
Change in fair value of derivatives | 2,039 | 349 | 1,690 | ||||||||
Interest income | (319 | ) | (618 | ) | 299 | ||||||
Interest expense, net | $ | 37,211 | $ | 33,981 | $ | 3,230 |
Net Foreign Currency Transaction Gains
Foreign currency transaction gains were $2.3 million for the three months ended March 31, 2020, compared to $6.3 million for the three months ended March 31, 2019. In any given period, we may incur foreign currency transaction losses from transactions in currencies other than the functional currency. 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.
Income Tax Expense
Income tax expense was $3.1 million for the three months ended March 31, 2020, a decrease of $0.8 million, or 20.5%, compared to $3.9 million for the three months ended March 31, 2019. The decrease was primarily due to estimated return to provision adjustments partially offset by changes in the mix of income between countries of operation. During the three months ended March 31, 2020, our effective tax rate was 12.1%, compared to 18.6% for the three months ended March 31, 2019.
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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 Topic 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.
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Purchase Price Multiples as of March 31, 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 | $ | 38,390 | $ | 2,886,117 | $ | 38,390 | 310 | % | 238 | % | ||||
2010 | 148,193 | 26,621 | 535,652 | 26,621 | 361 | % | 247 | % | ||||||||
2011 | 209,602 | 44,992 | 738,981 | 44,992 | 353 | % | 245 | % | ||||||||
2012 | 254,076 | 56,991 | 680,187 | 56,991 | 268 | % | 226 | % | ||||||||
2013 | 390,826 | 85,283 | 928,709 | 85,283 | 238 | % | 211 | % | ||||||||
2014 | 404,117 | 138,067 | 921,659 | 135,051 | 228 | % | 204 | % | ||||||||
2015 | 443,114 | 206,581 | 960,145 | 205,976 | 217 | % | 205 | % | ||||||||
2016 | 455,767 | 327,345 | 1,093,346 | 314,819 | 240 | % | 201 | % | ||||||||
2017 | 532,851 | 468,942 | 1,167,610 | 464,659 | 219 | % | 193 | % | ||||||||
2018 | 653,975 | 762,474 | 1,337,704 | 749,410 | 205 | % | 202 | % | ||||||||
2019 | 581,476 | 969,495 | 1,198,926 | 933,976 | 206 | % | 206 | % | ||||||||
2020 | 172,697 | 329,648 | 336,822 | 329,648 | 195 | % | 195 | % | ||||||||
Subtotal | 5,176,720 | 3,454,829 | 12,785,858 | 3,385,816 | ||||||||||||
Americas Insolvency | ||||||||||||||||
1996-2009 | 397,453 | 794 | 835,929 | 794 | 210 | % | 178 | % | ||||||||
2010 | 208,942 | 1,016 | 546,844 | 1,016 | 262 | % | 184 | % | ||||||||
2011 | 180,432 | 848 | 370,113 | 848 | 205 | % | 155 | % | ||||||||
2012 | 251,395 | 688 | 392,419 | 688 | 156 | % | 136 | % | ||||||||
2013 | 227,834 | 1,728 | 354,918 | 1,728 | 156 | % | 133 | % | ||||||||
2014 | 148,420 | 2,252 | 217,283 | 2,232 | 146 | % | 124 | % | ||||||||
2015 | 63,170 | 6,655 | 87,791 | 6,655 | 139 | % | 125 | % | ||||||||
2016 | 91,442 | 18,596 | 116,061 | 18,536 | 127 | % | 123 | % | ||||||||
2017 | 275,257 | 104,624 | 349,186 | 104,624 | 127 | % | 125 | % | ||||||||
2018 | 97,879 | 85,846 | 127,700 | 85,846 | 130 | % | 127 | % | ||||||||
2019 | 123,077 | 137,797 | 158,639 | 137,556 | 129 | % | 128 | % | ||||||||
2020 | 20,772 | 25,768 | 27,344 | 25,768 | 132 | % | 132 | % | ||||||||
Subtotal | 2,086,073 | 386,612 | 3,584,227 | 386,291 | ||||||||||||
Total Americas | 7,262,793 | 3,841,441 | 16,370,085 | 3,772,107 | ||||||||||||
Europe Core | ||||||||||||||||
2012 | 20,409 | 533 | 40,607 | 406 | 199 | % | 187 | % | ||||||||
2013 | 20,334 | 262 | 25,056 | 196 | 123 | % | 119 | % | ||||||||
2014 | 773,811 | 759,304 | 2,202,629 | 640,238 | 285 | % | 208 | % | ||||||||
2015 | 411,340 | 323,139 | 734,838 | 285,151 | 179 | % | 160 | % | ||||||||
2016 | 333,090 | 310,630 | 557,579 | 291,054 | 167 | % | 167 | % | ||||||||
2017 | 252,174 | 229,143 | 361,268 | 204,423 | 143 | % | 144 | % | ||||||||
2018 | 341,775 | 385,373 | 518,022 | 369,842 | 152 | % | 148 | % | ||||||||
2019 | 518,610 | 706,719 | 790,270 | 665,335 | 152 | % | 152 | % | ||||||||
2020 | 60,990 | 105,783 | 108,540 | 105,783 | 178 | % | 178 | % | ||||||||
Subtotal | 2,732,533 | 2,820,886 | 5,338,809 | 2,562,428 | ||||||||||||
Europe Insolvency | ||||||||||||||||
2014 | 10,876 | 798 | 18,164 | 678 | 167 | % | 129 | % | ||||||||
2015 | 18,973 | 4,969 | 29,054 | 4,162 | 153 | % | 139 | % | ||||||||
2016 | 39,338 | 14,946 | 56,971 | 15,133 | 145 | % | 130 | % | ||||||||
2017 | 39,235 | 27,096 | 48,706 | 24,854 | 124 | % | 128 | % | ||||||||
2018 | 44,908 | 43,766 | 55,331 | 42,403 | 123 | % | 123 | % | ||||||||
2019 | 77,218 | 91,096 | 102,236 | 85,535 | 132 | % | 130 | % | ||||||||
2020 | 18,778 | 23,947 | 24,090 | 23,947 | 128 | % | 128 | % | ||||||||
Subtotal | 249,326 | 206,618 | 334,552 | 196,712 | ||||||||||||
Total Europe | 2,981,859 | 3,027,504 | 5,673,361 | 2,759,140 | ||||||||||||
Total PRA Group | $ | 10,244,652 | $ | 6,868,945 | $ | 22,043,446 | $ | 6,531,247 |
(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 March 31, 2020 exchange rate. |
(6) | The Original Estimated Purchase Price Multiple represents the purchase price multiple at the end of the year of acquisition. |
34
Portfolio Financial Information Year-to-date as of March 31, 2020 Amounts in thousands | |||||||||||||||
Purchase Period | Cash Collections (1) | Portfolio Income (1) | Changes in Expected Recoveries | Total Portfolio Revenue (1)(2) | Net Finance Receivables as of March 31, 2020 (3) | ||||||||||
Americas Core | |||||||||||||||
1996-2009 | $ | 3,940 | $ | 2,922 | $ | 228 | $ | 3,150 | $ | 8,489 | |||||
2010 | 2,016 | 1,826 | (31 | ) | 1,795 | 3,263 | |||||||||
2011 | 3,383 | 3,081 | (176 | ) | 2,905 | 7,229 | |||||||||
2012 | 3,556 | 3,115 | (160 | ) | 2,955 | 15,406 | |||||||||
2013 | 6,966 | 5,299 | (2,285 | ) | 3,014 | 29,641 | |||||||||
2014 | 9,452 | 7,547 | (4,072 | ) | 3,475 | 48,628 | |||||||||
2015 | 16,050 | 10,589 | (4,661 | ) | 5,928 | 83,039 | |||||||||
2016 | 27,017 | 17,389 | (2,817 | ) | 14,572 | 126,158 | |||||||||
2017 | 53,489 | 26,613 | (1,857 | ) | 24,756 | 212,544 | |||||||||
2018 | 89,601 | 40,978 | (2,418 | ) | 38,560 | 404,887 | |||||||||
2019 | 83,127 | 49,886 | (3,509 | ) | 46,377 | 477,513 | |||||||||
2020 | 7,183 | 5,611 | 365 | 5,976 | 170,995 | ||||||||||
Subtotal | 305,780 | 174,856 | (21,393 | ) | 153,463 | 1,587,792 | |||||||||
Americas Insolvecy | |||||||||||||||
1996-2009 | 95 | 123 | (28 | ) | 95 | — | |||||||||
2010 | 137 | 165 | (28 | ) | 137 | — | |||||||||
2011 | 135 | 125 | 11 | 136 | — | ||||||||||
2012 | 307 | 265 | 42 | 307 | — | ||||||||||
2013 | 410 | 415 | (4 | ) | 411 | — | |||||||||
2014 | 837 | 1,085 | (500 | ) | 585 | 503 | |||||||||
2015 | 3,280 | 1,661 | 21 | 1,682 | 4,182 | ||||||||||
2016 | 4,076 | 1,130 | 220 | 1,350 | 14,704 | ||||||||||
2017 | 17,250 | 4,813 | 377 | 5,190 | 83,360 | ||||||||||
2018 | 7,717 | 2,409 | 450 | 2,859 | 69,595 | ||||||||||
2019 | 7,390 | 2,992 | 1,240 | 4,232 | 111,219 | ||||||||||
2020 | 1,576 | 300 | (1 | ) | 299 | 19,433 | |||||||||
Subtotal | 43,210 | 15,483 | 1,800 | 17,283 | 302,996 | ||||||||||
Total Americas | 348,990 | 190,339 | (19,593 | ) | 170,746 | 1,890,788 | |||||||||
Europe Core | |||||||||||||||
2012 | 321 | 270 | 51 | 321 | — | ||||||||||
2013 | 178 | 131 | 47 | 178 | — | ||||||||||
2014 | 38,124 | 28,465 | (92 | ) | 28,373 | 168,327 | |||||||||
2015 | 14,761 | 8,134 | (58 | ) | 8,076 | 146,671 | |||||||||
2016 | 12,548 | 7,010 | 44 | 7,054 | 165,489 | ||||||||||
2017 | 9,631 | 3,587 | (186 | ) | 3,401 | 141,100 | |||||||||
2018 | 19,535 | 6,900 | 454 | 7,354 | 240,588 | ||||||||||
2019 | 33,449 | 11,457 | 2,958 | 14,415 | 440,409 | ||||||||||
2020 | 2,793 | 846 | 1,698 | 2,544 | 59,008 | ||||||||||
Subtotal | 131,340 | 66,800 | 4,916 | 71,716 | 1,361,592 | ||||||||||
Europe Insolvency | |||||||||||||||
2014 | 240 | 177 | 10 | 187 | 243 | ||||||||||
2015 | 928 | 422 | 110 | 532 | 2,506 | ||||||||||
2016 | 2,200 | 911 | (74 | ) | 837 | 10,497 | |||||||||
2017 | 2,401 | 556 | 69 | 625 | 21,319 | ||||||||||
2018 | 2,472 | 788 | (16 | ) | 772 | 35,749 | |||||||||
2019 | 5,854 | 1,773 | 1,589 | 3,362 | 67,269 | ||||||||||
2020 | 148 | 256 | 173 | 429 | 18,111 | ||||||||||
Subtotal | 14,243 | 4,883 | 1,861 | 6,744 | 155,694 | ||||||||||
Total Europe | 145,583 | 71,683 | 6,777 | 78,460 | 1,517,286 | ||||||||||
Total PRA Group | $ | 494,573 | $ | 262,022 | $ | (12,816 | ) | $ | 249,206 | $ | 3,408,074 |
(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 March 31, 2020 exchange rate. |
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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 March 31, 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 | $ | 3.9 | $ | 2,840.5 | ||||||||||||||
2010 | 148.2 | — | 47.1 | 113.6 | 109.9 | 82.0 | 55.9 | 38.1 | 24.5 | 15.6 | 11.1 | 9.2 | 2.0 | 509.0 | ||||||||||||||||||||||||||||
2011 | 209.6 | — | — | 62.0 | 174.5 | 152.9 | 108.5 | 73.8 | 48.7 | 32.0 | 21.6 | 16.6 | 3.4 | 694.0 | ||||||||||||||||||||||||||||
2012 | 254.1 | — | — | — | 56.9 | 173.6 | 146.2 | 97.3 | 60.0 | 40.0 | 27.8 | 17.9 | 3.6 | 623.3 | ||||||||||||||||||||||||||||
2013 | 390.8 | — | — | — | — | 101.6 | 247.8 | 194.0 | 120.8 | 78.9 | 56.4 | 36.9 | 7.0 | 843.4 | ||||||||||||||||||||||||||||
2014 | 404.1 | — | — | — | — | — | 92.7 | 253.4 | 170.3 | 114.2 | 82.2 | 55.3 | 9.5 | 777.6 | ||||||||||||||||||||||||||||
2015 | 443.1 | — | — | — | — | — | — | 117.0 | 228.4 | 185.9 | 126.6 | 83.6 | 16.1 | 757.6 | ||||||||||||||||||||||||||||
2016 | 455.8 | — | — | — | — | — | — | — | 138.7 | 256.5 | 194.6 | 140.6 | 27.0 | 757.4 | ||||||||||||||||||||||||||||
2017 | 532.9 | — | — | — | — | — | — | — | — | 107.3 | 278.7 | 256.5 | 53.5 | 696.0 | ||||||||||||||||||||||||||||
2018 | 654.0 | — | — | — | — | — | — | — | — | — | 122.7 | 361.9 | 89.6 | 574.2 | ||||||||||||||||||||||||||||
2019 | 581.5 | — | — | — | — | — | — | — | — | — | — | 143.8 | 83.1 | 226.9 | ||||||||||||||||||||||||||||
2020 | 172.7 | — | — | — | — | — | — | — | — | — | — | — | 7.1 | 7.1 | ||||||||||||||||||||||||||||
Subtotal | 5,176.8 | 1,647.7 | 342.8 | 429.1 | 542.9 | 656.5 | 752.9 | 844.8 | 837.1 | 860.9 | 945.0 | 1,141.5 | 305.8 | 9,307.0 | ||||||||||||||||||||||||||||
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 | 0.1 | 835.1 | ||||||||||||||||||||||||||||
2010 | 208.9 | — | 39.5 | 104.5 | 125.0 | 121.7 | 101.9 | 43.6 | 5.0 | 2.4 | 1.4 | 0.7 | 0.1 | 545.8 | ||||||||||||||||||||||||||||
2011 | 180.4 | — | — | 15.2 | 66.4 | 82.8 | 85.8 | 76.9 | 36.0 | 3.7 | 1.6 | 0.7 | 0.1 | 369.2 | ||||||||||||||||||||||||||||
2012 | 251.4 | — | — | — | 17.4 | 103.6 | 94.1 | 80.1 | 60.7 | 29.3 | 4.3 | 1.9 | 0.3 | 391.7 | ||||||||||||||||||||||||||||
2013 | 227.8 | — | — | — | — | 52.5 | 82.6 | 81.7 | 63.4 | 47.8 | 21.9 | 2.9 | 0.4 | 353.2 | ||||||||||||||||||||||||||||
2014 | 148.4 | — | — | — | — | — | 37.0 | 50.9 | 44.3 | 37.4 | 28.8 | 15.8 | 0.8 | 215.0 | ||||||||||||||||||||||||||||
2015 | 63.2 | — | — | — | — | — | — | 3.4 | 17.9 | 20.1 | 19.8 | 16.7 | 3.3 | 81.2 | ||||||||||||||||||||||||||||
2016 | 91.4 | — | — | — | — | — | — | — | 18.9 | 30.4 | 25.0 | 19.9 | 4.1 | 98.3 | ||||||||||||||||||||||||||||
2017 | 275.3 | — | — | — | — | — | — | — | — | 49.1 | 97.3 | 80.9 | 17.3 | 244.6 | ||||||||||||||||||||||||||||
2018 | 97.9 | — | — | — | — | — | — | — | — | — | 6.7 | 27.4 | 7.7 | 41.8 | ||||||||||||||||||||||||||||
2019 | 123.1 | — | — | — | — | — | — | — | — | — | — | 13.4 | 7.4 | 20.8 | ||||||||||||||||||||||||||||
2020 | 20.8 | — | — | — | — | — | — | — | — | — | — | — | 1.6 | 1.6 | ||||||||||||||||||||||||||||
Subtotal | 2,086.1 | 204.3 | 186.6 | 276.4 | 354.2 | 469.9 | 458.4 | 344.2 | 249.8 | 222.4 | 207.9 | 181.0 | 43.2 | 3,198.3 | ||||||||||||||||||||||||||||
Total Americas | 7,262.9 | 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 | 349.0 | 12,505.3 | ||||||||||||||||||||||||||||
Europe Core | ||||||||||||||||||||||||||||||||||||||||||
2012 | 20.4 | — | — | — | 11.6 | 9.0 | 5.6 | 3.2 | 2.2 | 2.0 | 2.0 | 1.5 | 0.3 | 37.4 | ||||||||||||||||||||||||||||
2013 | 20.3 | — | — | — | — | 7.1 | 8.5 | 2.3 | 1.3 | 1.2 | 1.3 | 0.9 | 0.2 | 22.8 | ||||||||||||||||||||||||||||
2014 | 773.8 | — | — | — | — | — | 153.2 | 292.0 | 246.4 | 220.8 | 206.3 | 172.9 | 38.1 | 1,329.7 | ||||||||||||||||||||||||||||
2015 | 411.3 | — | — | — | — | — | — | 45.8 | 100.3 | 86.2 | 80.9 | 66.1 | 14.8 | 394.1 | ||||||||||||||||||||||||||||
2016 | 333.1 | — | — | — | — | — | — | — | 40.4 | 78.9 | 72.6 | 58.0 | 12.5 | 262.4 | ||||||||||||||||||||||||||||
2017 | 252.2 | — | — | — | — | — | — | — | — | 17.9 | 56.0 | 44.1 | 9.6 | 127.6 | ||||||||||||||||||||||||||||
2018 | 341.8 | — | — | — | — | — | — | — | — | — | 24.3 | 88.7 | 19.5 | 132.5 | ||||||||||||||||||||||||||||
2019 | 518.6 | — | — | — | — | — | — | — | — | — | — | 48.0 | 33.4 | 81.4 | ||||||||||||||||||||||||||||
2020 | 61.0 | — | — | — | — | — | — | — | — | — | — | — | 2.9 | 2.9 | ||||||||||||||||||||||||||||
Subtotal | 2,732.5 | — | — | — | 11.6 | 16.1 | 167.3 | 343.3 | 390.6 | 407.0 | 443.4 | 480.2 | 131.3 | 2,390.8 | ||||||||||||||||||||||||||||
Europe Insolvency | ||||||||||||||||||||||||||||||||||||||||||
2014 | 10.9 | — | — | — | — | — | — | 4.3 | 3.9 | 3.2 | 2.6 | 1.5 | 0.2 | 15.7 | ||||||||||||||||||||||||||||
2015 | 19.0 | — | — | — | — | — | — | 3.0 | 4.4 | 5.0 | 4.8 | 3.9 | 0.9 | 22.0 | ||||||||||||||||||||||||||||
2016 | 39.3 | — | — | — | — | — | — | — | 6.2 | 12.7 | 12.9 | 10.7 | 2.2 | 44.7 | ||||||||||||||||||||||||||||
2017 | 39.2 | — | — | — | — | — | — | — | — | 1.2 | 7.9 | 9.2 | 2.4 | 20.7 | ||||||||||||||||||||||||||||
2018 | 44.9 | — | — | — | — | — | — | — | — | — | 0.6 | 8.4 | 2.5 | 11.5 | ||||||||||||||||||||||||||||
2019 | 77.2 | — | — | — | — | — | — | — | — | — | — | 5.0 | 5.9 | 10.9 | ||||||||||||||||||||||||||||
2020 | 18.8 | — | — | — | — | — | — | — | — | — | — | — | 0.1 | 0.1 | ||||||||||||||||||||||||||||
Subtotal | 249.3 | — | — | — | — | — | — | 7.3 | 14.5 | 22.1 | 28.8 | 38.7 | 14.2 | 125.6 | ||||||||||||||||||||||||||||
Total Europe | 2,981.8 | — | — | — | 11.6 | 16.1 | 167.3 | 350.6 | 405.1 | 429.1 | 472.2 | 518.9 | 145.5 | 2,516.4 | ||||||||||||||||||||||||||||
Total PRA Group | $ | 10,244.7 | $ | 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 | $ | 494.5 | $ | 15,021.7 |
(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. |
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Estimated remaining collections
The following chart shows our ERC of $6,531.2 million at March 31, 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 | |||||||||||||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | ||||||||||||||||||||||||
Americas Core | $ | 305,780 | $ | 276,639 | $ | 279,902 | $ | 294,243 | $ | 290,723 | $ | 233,937 | $ | 231,253 | $ | 233,752 | |||||||||||||||
Americas Insolvency | 43,210 | 40,801 | 45,759 | 49,770 | 44,613 | 48,000 | 48,518 | 56,063 | |||||||||||||||||||||||
Europe Core | 131,340 | 126,649 | 118,917 | 117,635 | 116,858 | 113,154 | 102,780 | 109,359 | |||||||||||||||||||||||
Europe Insolvency | 14,243 | 12,520 | 8,639 | 8,626 | 8,977 | 7,618 | 6,731 | 7,460 | |||||||||||||||||||||||
Total Cash Collections | $ | 494,573 | $ | 456,609 | $ | 453,217 | $ | 470,274 | $ | 461,171 | $ | 402,709 | $ | 389,282 | $ | 406,634 |
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 | |||||||||||||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | ||||||||||||||||||||||||
Call Center and Other Collections | $ | 168,166 | $ | 139,399 | $ | 149,782 | $ | 160,479 | $ | 169,753 | $ | 134,543 | $ | 137,325 | $ | 143,527 | |||||||||||||||
External Legal Collections | 66,190 | 58,831 | 64,301 | 63,490 | 57,419 | 47,410 | 41,935 | 40,631 | |||||||||||||||||||||||
Internal Legal Collections | 38,111 | 33,944 | 35,679 | 38,065 | 37,018 | 30,724 | 32,064 | 32,532 | |||||||||||||||||||||||
Total US Core Cash Collections | $ | 272,467 | $ | 232,174 | $ | 249,762 | $ | 262,034 | $ | 264,190 | $ | 212,677 | $ | 211,324 | $ | 216,690 |
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Collections Productivity (U.S. Portfolio)
The following tables display certain collections productivity measures.
Cash Collections per Collector Hour Paid U.S. Portfolio Amounts in millions | |||||||||||||||||||
Call center and other cash collections (1) | |||||||||||||||||||
2020 | 2019 | 2018 | 2017 | 2016 | |||||||||||||||
First Quarter | $ | 172 | $ | 139 | $ | 121 | $ | 161 | $ | 168 | |||||||||
Second Quarter | — | 139 | 101 | 129 | 167 | ||||||||||||||
Third Quarter | — | 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 2009. It includes the acquisition date finance receivable portfolios that were acquired through our business acquisitions. The 2020 totals represent portfolio acquisitions through the three months ended March 31, 2020 while the prior years 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 | |||||||||||||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | Q4 | Q3 | Q2 | ||||||||||||||||||||||||
Americas Core | $ | 172,697 | $ | 118,153 | $ | 168,185 | $ | 121,996 | $ | 169,189 | $ | 172,511 | $ | 170,426 | $ | 182,768 | |||||||||||||||
Americas Insolvency | 20,772 | 22,650 | 26,311 | 26,092 | 48,243 | 52,871 | 17,151 | 16,651 | |||||||||||||||||||||||
Europe Core | 60,990 | 218,919 | 64,728 | 136,344 | 94,283 | 231,810 | 45,754 | 19,403 | |||||||||||||||||||||||
Europe Insolvency | 18,778 | 42,613 | 19,772 | 4,715 | 7,134 | 33,661 | 4,159 | 2,577 | |||||||||||||||||||||||
Total Portfolio Acquisitions | $ | 273,237 | $ | 402,335 | $ | 278,996 | $ | 289,147 | $ | 318,849 | $ | 490,853 | $ | 237,490 | $ | 221,399 |
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Portfolio Acquisitions by Stratifications (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 55 million customer accounts in the U.S.
U.S. Portfolio Acquisitions by Major Asset Type Amounts in thousands | |||||||||||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | |||||||||||||||||||||||||
Major Credit Cards | $ | 71,225 | 38.3 | % | $ | 30,337 | 24.3 | % | $ | 50,500 | 40.1 | % | $ | 39,468 | 28.2 | % | $ | 43,440 | 27.0 | % | |||||||||
Private Label Credit Cards | 104,300 | 56.0 | 85,351 | 68.4 | 72,714 | 57.7 | 70,536 | 50.4 | $ | 84,515 | 52.6 | ||||||||||||||||||
Consumer Finance | 2,109 | 1.1 | 2,046 | 1.7 | 2,090 | 1.7 | 28,649 | 20.4 | $ | 2,424 | 1.5 | ||||||||||||||||||
Auto Related | 8,510 | 4.6 | 6,991 | 5.6 | 638 | 0.5 | 1,407 | 1.0 | 30,358 | 18.9 | |||||||||||||||||||
Total | $ | 186,144 | 100.0 | % | $ | 124,725 | 100.0 | % | $ | 125,942 | 100.0 | % | $ | 140,060 | 100.0 | % | $ | 160,737 | 100.0 | % |
U.S. Portfolio Acquisitions by Delinquency Category Amounts in thousands | ||||||||||||||||||||||||||||||||||
2020 | 2019 | |||||||||||||||||||||||||||||||||
Q1 | Q4 | Q3 | Q2 | Q1 | ||||||||||||||||||||||||||||||
Fresh (1) | $ | 51,126 | 30.9 | % | $ | 35,330 | 34.6 | % | $ | 27,600 | 27.1 | % | $ | 33,288 | 29.3 | % | $ | 51,212 | 45.6 | % | ||||||||||||||
Primary (2) | 18,152 | 11.0 | 5,796 | 5.7 | 17,658 | 17.3 | 40,027 | 35.1 | 19,725 | 17.5 | ||||||||||||||||||||||||
Secondary (3) | 92,855 | 56.1 | 52,899 | 51.8 | 50,082 | 49.2 | 34,920 | 30.6 | 35,857 | 31.9 | ||||||||||||||||||||||||
Tertiary (3) | 3,239 | 2.0 | 4,409 | 4.3 | 6,483 | 6.4 | 5,733 | 5.0 | 4,435 | 3.9 | ||||||||||||||||||||||||
Other (4) | — | — | 3,641 | 3.6 | — | — | — | — | 1,265 | 1.1 | ||||||||||||||||||||||||
Total Core | 165,372 | 100.0 | % | 102,075 | 100.0 | % | 101,823 | 100.0 | % | 113,968 | 100.0 | % | 112,494 | 100.0 | % | |||||||||||||||||||
Insolvency | 20,772 | 22,650 | 24,119 | 26,092 | 48,243 | |||||||||||||||||||||||||||||
Total | $ | 186,144 | $ | 124,725 | $ | 125,942 | $ | 140,060 | $ | 160,737 |
(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 March 31, 2020, cash and cash equivalents totaled $180.0 million. Of the cash and cash equivalent balance as of March 31, 2020, $115.4 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 March 31, 2020, we had approximately $2.8 billion in borrowings outstanding with $655.4 million of availability under all of our credit facilities (subject to the borrowing base and applicable debt covenants). Considering borrowing base restrictions, as of March 31, 2020, the amount available to be drawn was $234.6 million. Of the $655.4 million of borrowing availability, $281.7 million was available under our European credit facility, $371.2 million was available under our North American credit facility and $2.5 million was available under our Colombian revolving credit facility. Of the $234.6 million available considering borrowing base restrictions, $56.4 million was available under our European credit facility, $175.7 million was available under our North American credit facility and $2.5 million was available under the Colombian revolving credit facility. 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 $119.7 million as of March 31, 2020). Interest-bearing deposits as of March 31, 2020 were $97.5 million.
We determined that we were in compliance with the covenants of our financing arrangements as of March 31, 2020.
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We have the ability to slow the purchase of finance receivables if necessary, with low impact to current year cash collections. For example, we invested $1,289.3 million in portfolio acquisitions in 2019. The portfolios acquired in 2019 generated $210.2 million of cash collections, representing only 11.4% of 2019 cash collections.
Contractual obligations over the next year are primarily related to debt maturities and purchase commitments. Our North American credit facility expires in May 2022. Our European credit facility expires in February 2023. Of our $422.5 million in term loans outstanding at March 31, 2020, $10.0 million in principal is due within one year.
Additionally, the $287.5 million principal amount of the 3.00% Convertible Senior Notes due 2020 is due on August 1, 2020. Based upon our current availability considering borrowing base restrictions in North America ($175.7 million), our cash on hand, the recent modifications to our credit facilities, our ability to secure additional financing in the open market, and our strong operating cash flows, we believe that we have the ability to settle this instrument in cash at maturity.
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 $626.5 million as of March 31, 2020. The $626.5 million is comprised of $443.0 million for the Americas and $183.5 million for Europe.We may also enter into new or renewed forward flow commitments and close on spot transactions in addition to the aforementioned forward flow agreements.
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 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. 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, and recent modifications to the terms of those facilities, 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. 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 three months ended March 31, 2020 compared to the three months ended March 31, 2019 (amounts in thousands):
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Total cash provided by (used in): | ||||||||
Operating activities | $ | 46,806 | $ | 14,957 | ||||
Investing activities | (42,180 | ) | (112,899 | ) | ||||
Financing activities | 72,142 | 105,464 | ||||||
Effect of exchange rate on cash | (16,575 | ) | (4,115 | ) | ||||
Net increase in cash and cash equivalents | $ | 60,193 | $ | 3,407 |
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 change of derivatives, 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 $31.8 million for the three months ended March 31, 2020, mainly driven by a $31.5 million impact of unrealized foreign currency transactions and changes in expected recoveries compared to the prior
40
year net allowance charges. These increases are partially offset by deferred taxes and changes in other operating assets and liabilities.
Investing Activities
Cash used in investing activities mainly reflects acquisitions of nonperforming loans. Cash provided by investing activities mainly reflects recoveries applied to negative allowances.
Net cash used in investing activities decreased $70.7 million or 62.6% during the three months ended March 31, 2020, primarily from a $82.7 million decrease in investment purchases and $57.6 million of cash used related to a business acquisition during the first quarter of 2019. These decreases were partially offset by a $42.3 million increase in proceeds from sales and maturities of investments and $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 for financing activities is normally provided by draws on our lines of credit and proceeds from debt offerings. Cash used in financing activities is primarily driven by principal payments on our lines of credit and long-term debt.
Cash provided by financing activities decreased $33.3 million or 31.6% during the three months ended March 31, 2020, primarily from a $222.8 million decrease in proceeds from our lines of credit and a $17.8 million decrease in interest-bearing deposits partially offset by a $208.2 million decrease in principal payments on our lines of credit, notes payables and long-term debt.
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 $115.4 million and $109.7 million as of March 31, 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.
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Revenue Recognition - Finance Receivables
We account for the majority of our investment in finance receivables under the guidance of ASC Topic 310 “Receivables” (“ASC Topic 310”) and ASC Topic 326-20 “Financial Instruments - Credit Losses - Measured at Amortized Cost” (“ASC Topic 326-20”). 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 change 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 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: the Company determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company
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should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense.
In the event that all or part of the deferred tax assets are determined not to be realizable in the future, a valuation allowance would be established and charged to earnings in the period such determination is made. If we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings in the period such determination is made. The establishment or release of a valuation allowance does not have an impact on cash, nor does such an allowance preclude the use of loss carry-forwards or other deferred tax assets in future periods. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position.
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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 $2.2 billion as of March 31, 2020. Based on our current debt structure at March 31, 2020, assuming a 50 basis point decrease in interest rates, for example, interest expense over the following 12 months would decrease by an estimated $7.5 million. Assuming a 50 basis point increase in interest rates, interest expense over the following 12 months would increase by an estimated $7.7 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 remain highly effective at March 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 March 31, 2020, we generated $98.4 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.
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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 March 31, 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 March 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings
For information regarding legal proceedings as of March 31, 2020, refer to Note 13 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.
Item 1A. Risk Factors
With the exception of the following, there have been no other material changes in our risk factors from those disclosed in Part I, Item 1A, of our fiscal 2019 Form 10-K.
The novel coronavirus ("COVID-19") pandemic could have an adverse effect on our business, results of operations, and financial results.
In December 2019, a COVID-19 outbreak was reported in China. By March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and to date, all countries in which we operate have acted to address the spread of COVID-19 including restricting travel, closing country borders, banning gatherings of unrelated individuals, quarantining and isolating infected individuals, closing schools and non-essential businesses and establishing criteria that must be met before businesses reopen. The global spread of COVID-19 has disrupted normal business operations and resulted in significant unemployment, recessionary economic trends and overall volatility, uncertainty, and economic disruption.
To date, we have continued to operate our business considering governmental, legal and regulatory actions in response to the COVID-19 pandemic. We are able to monitor on a daily basis the impacts of COVID-19 on our business, operations, and financial results and to take steps to mitigate adverse effects including communicating with regulators and government officials concerning legislation and regulations that impact our business, enabling employees to work remotely, implementing social distancing in workplaces that remain open, monitoring global operations on a daily basis to quickly identify COVID-19 impacts and expanding our credit capacity.
Although it is difficult to predict the extent to which COVID-19 will impact us due to numerous evolving factors that we are unable to predict, the COVID-19 pandemic could have an adverse effect on our business, results of operations and financial condition if:
• | the duration and scope of the pandemic result in deterioration in the economic or inflationary environment in the Americas or Europe; |
• | political, legal and regulatory actions and policies in response to the pandemic prevent us from performing our collection activities or result in material increases in our costs to comply with such laws and regulations; |
• | consumers respond to COVID-19 by failing to pay amounts owed to us as a result of their unemployment or other factors that impact their ability to make payments; |
• | we are unable to maintain staffing at the levels necessary to operate our business due to extended lockdowns, governmental actions that result in our business operations being deemed non-essential or continued spread of COVID-19 causing employees to be unable or unwilling to work; |
• | we are unable to collect on existing nonperforming loans or experience material decreases in our cash collections; |
• | we are unable to purchase nonperforming loans needed to operate our business because debt owners become unable or unwilling to sell their nonperforming loans consistent with recent levels; or |
• | we suffer a cyber incident as a result of increased vulnerability while a larger number of our employees work remotely. |
Any of these factors could cause or contribute to the risks and uncertainties identified in our fiscal 2019 Form 10-K and could materially adversely affect our business, operations, and financial results.
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.
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Item 5. Other Information
On May 6, 2020, we entered into the Second Amendment to the North American Credit Facility that includes:
• | The consolidated total leverage ratio limit will increase to 3.25 from 2.75 effective after June 30, 2020 and through December 31, 2020. After December 31, 2020, the consolidated total leverage ratio limit will decrease to 3.0 until maturity. |
• | The LIBOR floor increases from zero to 1.00% on the revolving loans. |
• | The consolidated senior secured leverage ratio limit will increase from 2.25 to 2.75 until March 31, 2021. On March 31, 2021, the senior secured leverage ratio will decrease to 2.25 until maturity. |
• | The ERC borrowing base on all domestic Core eligible pools will increase from 35% to 40% effective July 31, 2020 until January 31, 2021. If the ERC advance rate drops to 35% or below during this period, the ERC borrowing base will return to 35%. |
Bank of America, National Association, Capital One, N.A., Fifth Third Bank and SunTrust Bank, DNB Capital, ING Capital, MUFG Union Bank, N.A. and Regions Bank and their respective affiliates, who are lenders and serve in various capacities under the North American Credit Agreement, have engaged in, and may in the future engage in, banking and other commercial dealings in the ordinary course of business with the Company, the Borrowers or their affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.
The foregoing description of the Second Amendment does not purport to be complete and is qualified in its entirety by reference to the complete text of the Second Amendment, a copy of which will be filed with our Quarterly Report on Form 10-Q for the quarter ending June 30, 2020.
Item 6. Exhibits
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) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PRA Group, Inc. | |||
(Registrant) | |||
May 7, 2020 | By: | /s/ Kevin P. Stevenson | |
Kevin P. Stevenson | |||
President and Chief Executive Officer | |||
(Principal Executive Officer) |
May 7, 2020 | By: | /s/ Peter M. Graham | |
Peter M. Graham | |||
Executive Vice President and Chief Financial Officer | |||
(Principal Financial and Accounting Officer) |
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