PRA Group
Annual Report 2019

Plain-text annual report

fp0052934_PRA_10k_2020_combined4.indd 14/20/2020 12:52:26 PMfp0052934_PRA_10k_2020_combined4.indd 24/20/2020 12:52:27 PMfp0052934_PRA_10k_2020_combined4.indd 34/20/2020 12:52:27 PMfp0052934_PRA_10k_2020_combined4.indd 44/20/2020 12:52:27 PMfp0052934_PRA_10k_2020_combined4.indd 54/20/2020 12:52:28 PMfp0052934_PRA_10k_2020_combined4.indd 64/20/2020 12:52:28 PMfp0052934_PRA_10k_2020_combined4.indd 74/20/2020 12:52:29 PMfp0052934_PRA_10k_2020_combined4.indd 84/20/2020 12:52:29 PMfp0052934_PRA_10k_2020_combined4.indd 94/20/2020 12:52:30 PMfp0052934_PRA_10k_2020_combined4.indd 104/20/2020 12:52:30 PMfp0052934_PRA_10k_2020_combined4.indd 114/20/2020 12:52:31 PMfp0052934_PRA_10k_2020_combined4.indd 124/20/2020 12:52:31 PMfp0052934_PRA_10k_2020_combined4.indd 134/20/2020 12:52:32 PM2018Form10-Kfp0052934_PRA_10k_2020_combined4.indd 144/20/2020 12:52:32 PM2018Form10-Kfp0052934_PRA_10k_2020_combined4.indd 14/20/2020 12:52:33 PMU(cid:49)ITED STATES SECURITIES A(cid:49)D EXCHA(cid:49)GE COMMISSIO(cid:49) Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2019 Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Delaware (State or other jurisdiction of incorporation or organization) 75-3078675 (I.R.S. Employer Identification (cid:49)o.) For the transition period from ________ to ________ Commission File (cid:49)umber: 000-50058 PRA Group, Inc. (Exact name of registrant as specified in its charter) 120 Corporate Boulevard, (cid:49)orfolk, Virginia 23502 (888) 772-7326 (Address of principal executive offices, zip code, telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) (cid:49)ame of each exchange on which registered Common Stock, $0.01 par value per share PRAA (cid:49)ASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: (cid:49)one Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:49)o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes (cid:49)o 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 (cid:49)o 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 (cid:49)o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer filer Smaller reporting company Emerging growth company Accelerated filer (cid:49)on-accelerated 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 (cid:49)o The aggregate market value of the common stock held by non-affiliates of the registrant as of June 28, 2019 was $1,255,667,779 based on the $28.14 closing price as reported on the (cid:49)ASDAQ Global Select Market. The number of shares of the registrant's Common Stock outstanding as of February 25, 2020 was 45,416,258. Documents incorporated by reference: Portions of the Registrant's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. fp0052934_PRA_10k_2020_combined4.indd 2 4/20/2020 12:52:33 PM U(cid:49)ITED STATES SECURITIES A(cid:49)D EXCHA(cid:49)GE COMMISSIO(cid:49) Washington, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2019 Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to ________ Commission File (cid:49)umber: 000-50058 PRA Group, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 75-3078675 (I.R.S. Employer Identification (cid:49)o.) 120 Corporate Boulevard, (cid:49)orfolk, Virginia 23502 (888) 772-7326 (Address of principal executive offices, zip code, telephone number) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $0.01 par value per share Trading Symbol(s) PRAA (cid:49)ame of each exchange on which registered (cid:49)ASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: (cid:49)one Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes (cid:49)o Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes (cid:49)o 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 (cid:49)o 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 (cid:49)o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging (cid:49)on-accelerated growth company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer filer Smaller reporting company Emerging growth company Accelerated filer 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 (cid:49)o The aggregate market value of the common stock held by non-affiliates of the registrant as of June 28, 2019 was $1,255,667,779 based on the $28.14 closing price as reported on the (cid:49)ASDAQ Global Select Market. The number of shares of the registrant's Common Stock outstanding as of February 25, 2020 was 45,416,258. Documents incorporated by reference: Portions of the Registrant's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. fp0052934_PRA_10k_2020_combined4.indd 3 4/20/2020 12:52:33 PM Table of Contents continued Directors, Executive Officers and Corporate Governance Executive Compensation Stockholder Matters Security Ownership of Certain Beneficial Owners and Management and Related Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules Form 10-K Summary Part III Item 10. Item 11. Item 12. Item 13. Item 14. Part IV Item 15. Item 16. Signatures 80 80 80 80 80 80 82 83 Part I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Part II Item 5. Item 6. Item 7. Item 7A. Item 8. Table of Contents Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosure Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Income Statements Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows (cid:49)otes to Consolidated Financial Statements 1 – General and Summary of Significant Accounting Policies 2 – Finance Receivables, net 3 – Investments 4 – Leases 5 – Goodwill and Intangible Assets, net 6 – Borrowings 7 – Property and Equipment, net 8 – Fair Value 9 – Derivatives 10 – Accumulated Other Comprehensive Income 11 – Share-Based Compensation 12 – Earnings Per Share 13 – Income Taxes 14 – Commitments and Contingencies 15 – Retirement Plans 16 – Redeemable (cid:49)oncontrolling interest 17 – Sales of Subsidiaries Item 9. Item 9A. Item 9B. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information 5 9 17 17 17 18 19 21 24 40 42 43 45 46 47 48 49 50 50 57 59 60 61 62 66 66 69 70 70 72 73 75 76 76 77 78 78 80 2 3 fp0052934_PRA_10k_2020_combined4.indd 4 4/20/2020 12:52:33 PM Table of Contents Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosure of Equity Securities Selected Financial Data Part I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Part II Item 5. Item 6. Item 7. Item 7A. Item 8. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases Management’s Discussion and Analysis of Financial Condition and Results of Operations Table of Contents continued Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits and Financial Statement Schedules Form 10-K Summary Part III Item 10. Item 11. Item 12. Item 13. Item 14. Part IV Item 15. Item 16. Signatures 80 80 80 80 80 80 82 83 5 9 17 17 17 18 19 21 24 40 42 43 45 46 47 48 49 50 50 57 59 60 61 62 66 66 69 70 70 72 73 75 76 76 77 78 78 80 Quantitative and Qualitative Disclosures about Market Risk Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Income Statements Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows (cid:49)otes to Consolidated Financial Statements 1 – General and Summary of Significant Accounting Policies 2 – Finance Receivables, net 10 – Accumulated Other Comprehensive Income 5 – Goodwill and Intangible Assets, net 7 – Property and Equipment, net 3 – Investments 4 – Leases 6 – Borrowings 8 – Fair Value 9 – Derivatives 11 – Share-Based Compensation 12 – Earnings Per Share 13 – Income Taxes 14 – Commitments and Contingencies 15 – Retirement Plans 16 – Redeemable (cid:49)oncontrolling interest 17 – Sales of Subsidiaries Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9. Item 9A. Item 9B. Controls and Procedures Other Information 2 3 fp0052934_PRA_10k_2020_combined4.indd 5 4/20/2020 12:52:33 PM Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995: This 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 in the credit or capital markets, which affect our ability to borrow money or raise capital; our ability to replace our portfolios of nonperforming loans with additional portfolios sufficient to operate efficiently and profitably; our ability 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; 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 under performance or failure of information technology infastructure, 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; 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 carefully consider the factors listed above and review the "Risk Factors" section beginning on page 9, as well as the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section beginning on page 24 and the "Business" section beginning on page 5. 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 Form 10-K 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 Form 10-K 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. Item 1. Business. General PART I Headquartered in (cid:49)orfolk, Virginia and incorporated in Delaware, 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. The accounts we purchase are primarily the unpaid obligations of individuals owed to credit grantors, which include banks and other types of consumer, retail, and auto finance companies. We purchase portfolios of nonperforming loans at a discount in two broad categories: Core and Insolvency. Our Core operation specializes in purchasing and collecting nonperforming loans, which we purchased since either the credit grantor and/or other third-party collection agencies have been unsuccessful in collecting the full balance owed. Our Insolvency operation consists primarily of purchasing and collecting on nonperforming loan accounts where the customer is involved in a bankruptcy proceeding or the equivalent in some European countries. We also provide fee-based services on class action claims recoveries and by servicing consumer bankruptcy accounts in the U.S. We have one reportable segment based on similarities among the operating units, including the nature of the products and services, the nature of the production processes, the types or classes of customers for our products and services, the methods used to distribute our products and services, and the nature of the regulatory environment. We were initially formed as Portfolio Recovery Associates, L.L.C., a Delaware limited liability company, on March 20, 1996. We formed Portfolio Recovery Associates, Inc. in August 2002 in order to become a publicly traded company and our common stock began trading on the (cid:49)asdaq Global Select Market ("(cid:49)asdaq") on (cid:49)ovember 8, 2002. We changed our legal name to PRA Group, Inc. on October 23, 2014. We acquired Aktiv Kapital AS ("Aktiv"), a (cid:49)orway-based company specializing in the purchase, collection, and management of portfolios of nonperforming loans throughout Europe and Canada, on July 16, 2014. On April 26, 2016, we acquired DTP S.A. ("DTP"), a Polish-based debt collection company, further building our in-house collection efforts in Poland. We expanded into South America on August 3, 2015 by acquiring 55% of the equity interest in RCB Investimentos S.A. ("RCB"), a servicing platform for nonperforming loans in Brazil. On December 20, 2018, we entered into a strategic partnership with Banco Bradesco S.A. (“Bradesco”), under which Bradesco purchased 79% of our interest in RCB's servicing platform with PRA Group retaining an 11.7% equity interest. The sale did not impact the nonperforming loan purchasing business that we have established in Brazil in partnership with the previous owners of RCB, as it was not part of the sale to Bradesco. On March 1, 2019, we entered into a share purchase agreement to acquire the majority of the assets of a business in Canada, which was consolidated through our current Canadian business. Additionally, we are planning to begin operations in Australia in the future, leveraging an entity we set up in 2011. You should assume that the information appearing in this Annual Report on Form 10-K ("Form 10-K") 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. Inc. and its subsidiaries. All references in this Form 10-K to the "PRA Group," "our," "we," "us," the "Company" or similar terms are to PRA Group, 4 5 fp0052934_PRA_10k_2020_combined4.indd 6 4/20/2020 12:52:33 PM Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995: This 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; profitably; changes in the credit or capital markets, which affect our ability to borrow money or raise capital; our ability to replace our portfolios of nonperforming loans with additional portfolios sufficient to operate efficiently and our ability 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; 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 under performance or failure of information technology infastructure, our ability to collect and enforce our nonperforming loans may be limited under federal, state, and international laws, our ability to comply with existing and new regulations of the collection industry, the failure of which could result in penalties, fines, litigation, damage to our reputation, or the suspension or termination of or required modification to our networks or telephone systems; regulations, and policies; 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 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 our financing arrangements; may not be successful; the possibility that the adoption of future accounting standards could negatively impact our business; default by or failure of one or more of our counterparty financial institutions could cause us to incur significant losses; uncertainty about the future of the London Inter-Bank Offer Rate ("LIBOR") may adversely affect our business; and the risk factors discussed herein and in our other filings with the Securities and Exchange Commission ("SEC"). • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • You should carefully consider the factors listed above and review the "Risk Factors" section beginning on page 9, as well as the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section beginning on page 24 and the "Business" section beginning on page 5. 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 Form 10-K 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 Form 10-K 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. Item 1. Business. General PART I Headquartered in (cid:49)orfolk, Virginia and incorporated in Delaware, 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. The accounts we purchase are primarily the unpaid obligations of individuals owed to credit grantors, which include banks and other types of consumer, retail, and auto finance companies. We purchase portfolios of nonperforming loans at a discount in two broad categories: Core and Insolvency. Our Core operation specializes in purchasing and collecting nonperforming loans, which we purchased since either the credit grantor and/or other third-party collection agencies have been unsuccessful in collecting the full balance owed. Our Insolvency operation consists primarily of purchasing and collecting on nonperforming loan accounts where the customer is involved in a bankruptcy proceeding or the equivalent in some European countries. We also provide fee-based services on class action claims recoveries and by servicing consumer bankruptcy accounts in the U.S. We have one reportable segment based on similarities among the operating units, including the nature of the products and services, the nature of the production processes, the types or classes of customers for our products and services, the methods used to distribute our products and services, and the nature of the regulatory environment. We were initially formed as Portfolio Recovery Associates, L.L.C., a Delaware limited liability company, on March 20, 1996. We formed Portfolio Recovery Associates, Inc. in August 2002 in order to become a publicly traded company and our common stock began trading on the (cid:49)asdaq Global Select Market ("(cid:49)asdaq") on (cid:49)ovember 8, 2002. We changed our legal name to PRA Group, Inc. on October 23, 2014. We acquired Aktiv Kapital AS ("Aktiv"), a (cid:49)orway-based company specializing in the purchase, collection, and management of portfolios of nonperforming loans throughout Europe and Canada, on July 16, 2014. On April 26, 2016, we acquired DTP S.A. ("DTP"), a Polish-based debt collection company, further building our in-house collection efforts in Poland. We expanded into South America on August 3, 2015 by acquiring 55% of the equity interest in RCB Investimentos S.A. ("RCB"), a servicing platform for nonperforming loans in Brazil. On December 20, 2018, we entered into a strategic partnership with Banco Bradesco S.A. (“Bradesco”), under which Bradesco purchased 79% of our interest in RCB's servicing platform with PRA Group retaining an 11.7% equity interest. The sale did not impact the nonperforming loan purchasing business that we have established in Brazil in partnership with the previous owners of RCB, as it was not part of the sale to Bradesco. On March 1, 2019, we entered into a share purchase agreement to acquire the majority of the assets of a business in Canada, which was consolidated through our current Canadian business. Additionally, we are planning to begin operations in Australia in the future, leveraging an entity we set up in 2011. You should assume that the information appearing in this Annual Report on Form 10-K ("Form 10-K") is accurate only as All references in this Form 10-K to the "PRA Group," "our," "we," "us," the "Company" or similar terms are to PRA Group, of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date. Inc. and its subsidiaries. 4 5 fp0052934_PRA_10k_2020_combined4.indd 7 4/20/2020 12:52:33 PM (cid:49)onperforming Loan Portfolio Acquisitions Fee-Based Services To identify buying opportunities, we maintain an extensive marketing effort with our senior officers contacting known and prospective sellers of nonperforming loans. From these sellers, we have aquired a variety of nonperforming loans including Visa® and MasterCard® credit cards, private label and other credit cards, installment loans, lines of credit, deficiency balances of various types, legal judgments, and trade payables. Sellers of nonperforming loans include major banks, credit unions, consumer finance companies, retailers, utilities, automobile finance companies, and other debt owners. The price at which we purchase portfolios depends on the age of the portfolio, whether it is a Core or Insolvency portfolio, geographic distribution, the seller's selection criteria, our historical experience with a certain asset type or credit grantor, and other similar factors. We purchase portfolios of nonperforming loans from credit grantors through auctions and negotiated sales. In an auction process, the seller will assemble a portfolio of nonperforming loans and will seek purchase prices from specifically invited potential purchasers. In a privately negotiated sale process, the credit grantor will contact one or more purchasers directly, receive a bid, and negotiate the terms of sale. In either case, typically, invited purchasers will have already successfully completed a qualification process that can include the seller's review of any or all of the following: the purchaser's experience, reputation, financial standing, operating procedures, business practices, and compliance oversight. We purchase portfolios of nonperforming loans through either single portfolio transactions, referred to as spot sales, or through the pre-arranged purchase of multiple portfolios over time, referred to as forward flow sales. Under a forward flow contract, we agree to purchase statistically similar nonperforming loan portfolios from credit grantors on a periodic basis, at a negotiated price over a specified time period, generally from three to twelve months. (cid:49)onperforming Loan Portfolio Collection Operations Call Center Operations In higher volume markets, our collection efforts leverage internally staffed call centers. In some newer markets or in markets that have less consistent debt purchasing patterns, most notably outside the U.S., we may utilize external vendors to do some of this work. Whether the accounts are being worked internally or externally, we utilize our proprietary analysis to proportionally direct work efforts to those customers most likely to pay. The analysis driving those decisions relies on models and variables that have the highest correlation to profitable collections from call activity. Compliance Legal Recovery - Core Portfolios An important component of our collections effort involves our legal recovery operations and the judicial collection of balances from customers who, in general, we believe have the ability, but not the willingness, to resolve their obligations. There are some markets in which the collection process follows a prescribed, time-sensitive and sequential set of legal actions, but in the majority of instances, we use models and analysis to select those accounts reflecting a high propensity to pay in a legal environment. Depending on the characteristics of the receivable and the applicable local collection laws, we determine whether to commence legal action to judicially collect on the receivable. The legal process can take an extended period of time and can be costly, but when accounts are selected properly, it also usually generates net cash collections that likely would not have been realized otherwise. We use a combination of internal staff (attorney and support) and external staff to pursue legal collections under certain circumstances, as we deem appropriate. Insolvency Operations Insolvency Operations in the U.S. manages customer filings under the U.S. Bankruptcy Code on debtor accounts derived from two sources: (1) our purchased pools of bankrupt nonperforming loans and (2) our Core purchased pools of nonperforming loans that have filed for bankruptcy protection after being purchased by us. We file proofs of claim ("POCs") or claim transfers and actively manage these accounts through the entire life cycle of the bankruptcy proceeding to substantiate our claims and ensure that we participate in any distributions to creditors. Outside of the U.S., similar insolvency work is primarily outsourced to third parties. Insolvency accounts in the U.S. are typically those filed under Chapter 13 of the U.S. Bankruptcy Code, have an associated payment plan that generally ranges from three to five years in duration, and can be purchased at any stage in the bankruptcy plan life cycle. Portfolios sold close to the filing of the bankruptcy plan will generally take months to generate cash flow; however, aged portfolios sold years after the filing of the bankruptcy plan will typically generate cash flows immediately. (cid:49)on-U.S. insolvency accounts may have some slight differences, but generally operate in a similar manner. In Canada, we purchase consumer proposal, consumer credit counseling and bankrupt accounts. In the UK, we purchase individual voluntary arrangements, company voluntary arrangements, trust deeds, and bankrupt accounts. In Germany, we purchase consumer bankruptcies, which may also consist of small business loans with a personal guarantee. In addition to the purchase, collection, and management of portfolios of nonperforming loans, we provide fee-based services including class action claims recovery purchasing and servicing through Claims Compensation Bureau, LLC ("CCB") and third- party servicing of bankruptcy accounts in the U.S. 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. Seasonality Competition Purchased portfolio competition is derived from both third-party contingent fee collection agencies and other purchasers of debt that manage their own nonperforming loans or outsource such servicing. Our primary competitors in our fee-based business are providers of outsourced receivables management services. Regulatory complexity and burdens, combined with seller preference for experienced portfolio purchasers, create significant barriers to successful entry for new competitors particularly in the U.S. While both markets remain competitive, the contingent fee industry is more fragmented than the purchased portfolio industry. We face bidding competition in our purchase of nonperforming loans and in obtaining placements for our fee-based businesses. We also compete on the basis of reputation, industry experience, and performance. We believe that our competitive strengths include our disciplined and proprietary underwriting process, the extensive data set we have developed since our founding in 1996, our ability to bid on portfolios at appropriate prices, our capital position, our reputation from previous portfolio purchase transactions, our ability to close transactions in a timely fashion, our strong relationships with credit grantors, our team of well- trained collectors who provide quality customer service while complying with applicable collection laws, and our ability to efficiently and effectively collect on various asset types. Our approach to compliance is multifaceted and comprehensive and is overseen by both the Board of Directors and management. Our compliance management system includes policies and procedures, training, monitoring, and consumer complaint response. In addition, our compliance expectations extend to our service providers. Our compliance management system is predicated on the following: • our Code of Conduct, which applies to all directors, officers, and employees, is available at the Investor Relations page of our website at www.pragroup.com; compliance and ethics training for our directors, officers, and employees; • • a confidential telephone and email hotline and web-based portals to report suspected compliance violations, fraud, financial reporting, accounting, and auditing matters, and other acts that may be illegal and/or unethical; • regular testing by our compliance and internal audit departments of controls embedded in business processes designed to foster compliance with laws, regulations, and internal policy; and • regular evaluation of the legislative and regulatory environment and monitoring of statutory and regulatory changes and relevant case law, so that operations personnel are aware of and in compliance with the laws and judicial decisions that may impact their job duties. Regulation We are subject to a variety of federal, state, local, and international laws that establish specific guidelines and procedures that debt collectors must follow when collecting customer accounts, including laws relating to the collection, use, retention, security, and transfer of personal information. It is our policy to comply with applicable federal, state, local, and international laws in all our activities even though there are inconsistencies between jurisdictions and frequent changes in these laws and regulations, including their interpretation and application. Our failure to comply with these laws could result in enforcement action against us, the payment of significant fines and penalties, restrictions upon our operations, or our inability to recover amounts owed to us. Significant laws and regulations applicable to our business include the following: • Fair Debt Collection Practices Act ("FDCPA"), which imposes certain obligations and restrictions on the practices of debt collectors, including specific restrictions regarding the time, place and manner of the communications. 6 7 fp0052934_PRA_10k_2020_combined4.indd 8 4/20/2020 12:52:33 PM To identify buying opportunities, we maintain an extensive marketing effort with our senior officers contacting known and prospective sellers of nonperforming loans. From these sellers, we have aquired a variety of nonperforming loans including Visa® and MasterCard® credit cards, private label and other credit cards, installment loans, lines of credit, deficiency balances of various types, legal judgments, and trade payables. Sellers of nonperforming loans include major banks, credit unions, consumer finance companies, retailers, utilities, automobile finance companies, and other debt owners. The price at which we purchase portfolios depends on the age of the portfolio, whether it is a Core or Insolvency portfolio, geographic distribution, the seller's selection criteria, our historical experience with a certain asset type or credit grantor, and other similar factors. We purchase portfolios of nonperforming loans from credit grantors through auctions and negotiated sales. In an auction process, the seller will assemble a portfolio of nonperforming loans and will seek purchase prices from specifically invited potential purchasers. In a privately negotiated sale process, the credit grantor will contact one or more purchasers directly, receive a bid, and negotiate the terms of sale. In either case, typically, invited purchasers will have already successfully completed a qualification process that can include the seller's review of any or all of the following: the purchaser's experience, reputation, financial standing, operating procedures, business practices, and compliance oversight. We purchase portfolios of nonperforming loans through either single portfolio transactions, referred to as spot sales, or through the pre-arranged purchase of multiple portfolios over time, referred to as forward flow sales. Under a forward flow contract, we agree to purchase statistically similar nonperforming loan portfolios from credit grantors on a periodic basis, at a negotiated price over a specified time period, generally from three to twelve months. (cid:49)onperforming Loan Portfolio Collection Operations Call Center Operations In higher volume markets, our collection efforts leverage internally staffed call centers. In some newer markets or in markets that have less consistent debt purchasing patterns, most notably outside the U.S., we may utilize external vendors to do some of this work. Whether the accounts are being worked internally or externally, we utilize our proprietary analysis to proportionally direct work efforts to those customers most likely to pay. The analysis driving those decisions relies on models and variables that have the highest correlation to profitable collections from call activity. Legal Recovery - Core Portfolios An important component of our collections effort involves our legal recovery operations and the judicial collection of balances from customers who, in general, we believe have the ability, but not the willingness, to resolve their obligations. There are some markets in which the collection process follows a prescribed, time-sensitive and sequential set of legal actions, but in the majority of instances, we use models and analysis to select those accounts reflecting a high propensity to pay in a legal environment. Depending on the characteristics of the receivable and the applicable local collection laws, we determine whether to commence legal action to judicially collect on the receivable. The legal process can take an extended period of time and can be costly, but when accounts are selected properly, it also usually generates net cash collections that likely would not have been realized otherwise. We use a combination of internal staff (attorney and support) and external staff to pursue legal collections under certain circumstances, as we deem appropriate. Insolvency Operations Insolvency Operations in the U.S. manages customer filings under the U.S. Bankruptcy Code on debtor accounts derived from two sources: (1) our purchased pools of bankrupt nonperforming loans and (2) our Core purchased pools of nonperforming loans that have filed for bankruptcy protection after being purchased by us. We file proofs of claim ("POCs") or claim transfers that we participate in any distributions to creditors. Outside of the U.S., similar insolvency work is primarily outsourced to third parties. Insolvency accounts in the U.S. are typically those filed under Chapter 13 of the U.S. Bankruptcy Code, have an associated payment plan that generally ranges from three to five years in duration, and can be purchased at any stage in the bankruptcy plan life cycle. Portfolios sold close to the filing of the bankruptcy plan will generally take months to generate cash flow; however, aged portfolios sold years after the filing of the bankruptcy plan will typically generate cash flows immediately. (cid:49)on-U.S. insolvency accounts may have some slight differences, but generally operate in a similar manner. In Canada, we purchase consumer proposal, consumer credit counseling and bankrupt accounts. In the UK, we purchase individual voluntary arrangements, company voluntary arrangements, trust deeds, and bankrupt accounts. In Germany, we purchase consumer bankruptcies, which may also consist of small business loans with a personal guarantee. (cid:49)onperforming Loan Portfolio Acquisitions Fee-Based Services In addition to the purchase, collection, and management of portfolios of nonperforming loans, we provide fee-based services including class action claims recovery purchasing and servicing through Claims Compensation Bureau, LLC ("CCB") and third- party servicing of bankruptcy accounts in the U.S. 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. Competition Purchased portfolio competition is derived from both third-party contingent fee collection agencies and other purchasers of debt that manage their own nonperforming loans or outsource such servicing. Our primary competitors in our fee-based business are providers of outsourced receivables management services. Regulatory complexity and burdens, combined with seller preference for experienced portfolio purchasers, create significant barriers to successful entry for new competitors particularly in the U.S. While both markets remain competitive, the contingent fee industry is more fragmented than the purchased portfolio industry. We face bidding competition in our purchase of nonperforming loans and in obtaining placements for our fee-based businesses. We also compete on the basis of reputation, industry experience, and performance. We believe that our competitive strengths include our disciplined and proprietary underwriting process, the extensive data set we have developed since our founding in 1996, our ability to bid on portfolios at appropriate prices, our capital position, our reputation from previous portfolio purchase transactions, our ability to close transactions in a timely fashion, our strong relationships with credit grantors, our team of well- trained collectors who provide quality customer service while complying with applicable collection laws, and our ability to efficiently and effectively collect on various asset types. Compliance Our approach to compliance is multifaceted and comprehensive and is overseen by both the Board of Directors and management. Our compliance management system includes policies and procedures, training, monitoring, and consumer complaint response. In addition, our compliance expectations extend to our service providers. Our compliance management system is predicated on the following: • • • • • our Code of Conduct, which applies to all directors, officers, and employees, is available at the Investor Relations page of our website at www.pragroup.com; compliance and ethics training for our directors, officers, and employees; a confidential telephone and email hotline and web-based portals to report suspected compliance violations, fraud, financial reporting, accounting, and auditing matters, and other acts that may be illegal and/or unethical; regular testing by our compliance and internal audit departments of controls embedded in business processes designed to foster compliance with laws, regulations, and internal policy; and regular evaluation of the legislative and regulatory environment and monitoring of statutory and regulatory changes and relevant case law, so that operations personnel are aware of and in compliance with the laws and judicial decisions that may impact their job duties. and actively manage these accounts through the entire life cycle of the bankruptcy proceeding to substantiate our claims and ensure Regulation We are subject to a variety of federal, state, local, and international laws that establish specific guidelines and procedures that debt collectors must follow when collecting customer accounts, including laws relating to the collection, use, retention, security, and transfer of personal information. It is our policy to comply with applicable federal, state, local, and international laws in all our activities even though there are inconsistencies between jurisdictions and frequent changes in these laws and regulations, including their interpretation and application. Our failure to comply with these laws could result in enforcement action against us, the payment of significant fines and penalties, restrictions upon our operations, or our inability to recover amounts owed to us. Significant laws and regulations applicable to our business include the following: • Fair Debt Collection Practices Act ("FDCPA"), which imposes certain obligations and restrictions on the practices of debt collectors, including specific restrictions regarding the time, place and manner of the communications. 6 7 fp0052934_PRA_10k_2020_combined4.indd 9 4/20/2020 12:52:33 PM • Fair Credit Reporting Act ("FCRA"), which obligates credit information providers to verify the accuracy of information Available Information provided to credit reporting agencies and investigate consumer disputes concerning the accuracy of such information. • Gramm-Leach-Bliley Act, which requires that certain financial institutions, including collection agencies, develop policies to protect the privacy of consumers' private financial information and provide notices to consumers advising them of their privacy policies. • Electronic Funds Transfer Act, which regulates electronic fund transfer transactions, including a consumer’s right to stop payments on a pre-approved fund transfer and right to receive certain documentation of the transaction. We make available on or through our website, www.pragroup.com, certain reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC Filings"). We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with or furnish it to the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at: www.sec.gov. • • Telephone Consumer Protection Act ("TCPA"), which, along with similar state laws, places certain restrictions on users of certain automated dialing equipment and pre-recorded messages that place telephone calls to consumers. The information contained on, or that can be accessed through our website, is not, and shall not be deemed to be, a part of this Form 10-K or incorporated into any of our other SEC Filings. Servicemembers Civil Relief Act ("SCRA"), which gives U.S. military service personnel relief from credit obligations they may have incurred prior to entering military service and may also apply in certain circumstances to obligations and liabilities incurred by a servicemember while serving on active duty. at: Reports filed with, or furnished to, the SEC are also available free of charge upon request by contacting our corporate office • Health Insurance Portability and Accountability Act, which provides standards to protect the confidentiality of patients' personal healthcare and financial information in the U.S. • U.S. Bankruptcy Code, which prohibits certain contacts with consumers after the filing of bankruptcy petitions and dictates what types of claims will or will not be allowed in a bankruptcy proceeding including how such claims may be discharged. • Americans with Disabilities Act, which requires that telecommunications companies operating in the U.S. take steps to ensure functionally equivalent services are available for their consumers with disabilities, and requires accommodation of consumers with disabilities, such as the implementation of telecommunications relay services. • U.S. Foreign Corrupt Practices Act ("FCPA"), United Kingdom Bribery Act ("UK Bribery Act") and Similar Laws. Our operations outside the U.S. are subject to various U.S. and international laws and regulations, such as the FCPA and the UK Bribery Act, which prohibit corrupt payments to governmental officials and certain other individuals. The FCPA prohibits U.S. companies and their agents and employees from providing anything of value to a foreign official for the purposes of influencing any act or decision of these individuals in order to obtain an unfair advantage or help obtain or retain business. Although similar to the FCPA, the UK Bribery Act is broader in scope and covers bribes given to or received by any person with improper intent. • Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which restructured the regulation and supervision of the financial services industry in the U.S. and created the CFPB. The CFPB has rulemaking, supervisory, and enforcement authority over larger consumer debt collectors. The Dodd-Frank Act, along with the Unfair, Deceptive, or Abusive Acts or Practices ("UDAAP") provisions included therein, and the Federal Trade Commission Act, prohibit unfair, deceptive, and/or abusive acts and practices. • International data protection and privacy laws, which include relevant country specific legislation in the United Kingdom and other European countries where we operate that regulate the processing of information relating to individuals, including the obtaining, holding, use or disclosure of such information; the Personal Information Protection and Electronic Documents Act, which aims to protect personal information that is collected, used or disclosed in certain circumstances for purposes of electronic commerce in Canada; and the EU GDPR, which regulates the processing and free movement of personal data within the EU and transfer of such data outside the EU. • Consumer Credit Act 1974 (and its related regulations), Unfair Terms in Consumer Contracts Regulations of 1999 and the Financial Conduct Authority's consumer credit conduct of business rules, which apply to our international operations and govern consumer credit agreements. In addition, certain of our EU subsidiaries are subject to capital adequacy and liquidity requirements. Employees As of December 31, 2019, we employed 4,412 full-time equivalents globally. Management considers our employee relations to be good. While none of our (cid:49)orth American employees are represented by a union or covered by a collective bargaining agreement, in Europe we work closely with a number of works councils, and in countries where it is the customary local practice, such as Finland and Spain, we have collective bargaining agreements. PRA Group, Inc. Attn: Investor Relations 120 Corporate Boulevard, Suite 100 (cid:49)orfolk, Virginia 23502 Item 1A. Risk Factors. An investment in our Company involves risk, including the possibility that the value of the investment could fall substantially. The following are risks that could materially affect our business, results of operations, financial condition, liquidity, cash flows, and the value of, and return on, an investment in our Company. Risks related to our operations and industry A deterioration in the economic or inflationary environment in the Americas or Europe could have an adverse effect on our business and results of operations. Our performance may be adversely affected by economic, political or inflationary conditions in any market in which we operate. These conditions could include regulatory developments, changes in global or domestic economic policy, legislative changes, the sovereign debt crises experienced in several European countries and the uncertainty regarding the EU’s future as a result of the UK's departure from the EU. Deterioration in economic conditions, or a significant rise in inflation could cause personal bankruptcy and insolvency filings to increase, and the ability of consumers to pay their debts could be adversely affected. This may in turn adversely impact our business and financial results. Deteriorating economic conditions could also adversely impact the businesses to which we provide fee-based services, which could reduce our fee income and cash flow. If global credit market conditions and the stability of global banks deteriorate, it could negatively impact the generation of comprehensive receivable buying opportunities which could adversely affect our business, financial results, and ability to succeed in international markets. If conditions in major credit markets deteriorate, the amount of consumer or commercial lending and financing could be reduced, thus decreasing the volume of nonperforming loans available for our purchase. Other factors associated with the economy that could influence our performance include the financial stability of the lenders on our bank loans and credit facilities and our access to capital and credit. The financial turmoil that adversely affected the banking system and financial markets during the last domestic recession resulted in the tightening of credit markets. Although there has since been improvement, a worsening of current conditions could have a negative impact on our business, including a decrease in the value of our financial investments and the insolvency of lending institutions, including the lenders providing our bank loans and credit facilities, resulting in our difficulty in or inability to obtain credit. These and other economic factors could have an adverse effect on our financial condition and results of operations. We may not be able to continually replace our nonperforming loans with additional portfolios sufficient to operate efficiently and profitably, and/or we may not be able to purchase nonperforming loans at appropriate prices. To operate profitably, we must purchase and service a sufficient amount of nonperforming loans to generate revenue that exceeds our expenses. Fixed costs such as salaries and other compensation expense constitute a significant portion of our overhead and, if we do not replace the nonperforming loan portfolios we service with additional portfolios, we may have to reduce the number of our collection personnel. We would then have to rehire collection staff if we subsequently obtain additional portfolios. These practices could lead to negative consequences such as: 8 9 fp0052934_PRA_10k_2020_combined4.indd 10 4/20/2020 12:52:34 PM • Fair Credit Reporting Act ("FCRA"), which obligates credit information providers to verify the accuracy of information Available Information provided to credit reporting agencies and investigate consumer disputes concerning the accuracy of such information. • Gramm-Leach-Bliley Act, which requires that certain financial institutions, including collection agencies, develop policies to protect the privacy of consumers' private financial information and provide notices to consumers advising them of their privacy policies. • Electronic Funds Transfer Act, which regulates electronic fund transfer transactions, including a consumer’s right to stop payments on a pre-approved fund transfer and right to receive certain documentation of the transaction. We make available on or through our website, www.pragroup.com, certain reports that we file with or furnish to the SEC in accordance with the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC Filings"). We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with or furnish it to the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at: www.sec.gov. • Telephone Consumer Protection Act ("TCPA"), which, along with similar state laws, places certain restrictions on users of certain automated dialing equipment and pre-recorded messages that place telephone calls to consumers. The information contained on, or that can be accessed through our website, is not, and shall not be deemed to be, a part of this Form 10-K or incorporated into any of our other SEC Filings. • Servicemembers Civil Relief Act ("SCRA"), which gives U.S. military service personnel relief from credit obligations they may have incurred prior to entering military service and may also apply in certain circumstances to obligations and liabilities incurred by a servicemember while serving on active duty. at: Reports filed with, or furnished to, the SEC are also available free of charge upon request by contacting our corporate office • Health Insurance Portability and Accountability Act, which provides standards to protect the confidentiality of patients' personal healthcare and financial information in the U.S. • U.S. Bankruptcy Code, which prohibits certain contacts with consumers after the filing of bankruptcy petitions and dictates what types of claims will or will not be allowed in a bankruptcy proceeding including how such claims may be discharged. • Americans with Disabilities Act, which requires that telecommunications companies operating in the U.S. take steps to ensure functionally equivalent services are available for their consumers with disabilities, and requires accommodation of consumers with disabilities, such as the implementation of telecommunications relay services. • U.S. Foreign Corrupt Practices Act ("FCPA"), United Kingdom Bribery Act ("UK Bribery Act") and Similar Laws. Our operations outside the U.S. are subject to various U.S. and international laws and regulations, such as the FCPA and the UK Bribery Act, which prohibit corrupt payments to governmental officials and certain other individuals. The FCPA prohibits U.S. companies and their agents and employees from providing anything of value to a foreign official for the purposes of influencing any act or decision of these individuals in order to obtain an unfair advantage or help obtain or retain business. Although similar to the FCPA, the UK Bribery Act is broader in scope and covers bribes given to or received by any person with improper intent. • Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), which restructured the regulation and supervision of the financial services industry in the U.S. and created the CFPB. The CFPB has rulemaking, supervisory, and enforcement authority over larger consumer debt collectors. The Dodd-Frank Act, along with the Unfair, Deceptive, or Abusive Acts or Practices ("UDAAP") provisions included therein, and the Federal Trade Commission Act, prohibit unfair, deceptive, and/or abusive acts and practices. • International data protection and privacy laws, which include relevant country specific legislation in the United Kingdom and other European countries where we operate that regulate the processing of information relating to individuals, including the obtaining, holding, use or disclosure of such information; the Personal Information Protection and Electronic Documents Act, which aims to protect personal information that is collected, used or disclosed in certain circumstances for purposes of electronic commerce in Canada; and the EU GDPR, which regulates the processing and free movement of personal data within the EU and transfer of such data outside the EU. • Consumer Credit Act 1974 (and its related regulations), Unfair Terms in Consumer Contracts Regulations of 1999 and the Financial Conduct Authority's consumer credit conduct of business rules, which apply to our international operations and govern consumer credit agreements. In addition, certain of our EU subsidiaries are subject to capital adequacy and liquidity requirements. Employees As of December 31, 2019, we employed 4,412 full-time equivalents globally. Management considers our employee relations to be good. While none of our (cid:49)orth American employees are represented by a union or covered by a collective bargaining agreement, in Europe we work closely with a number of works councils, and in countries where it is the customary local practice, such as Finland and Spain, we have collective bargaining agreements. PRA Group, Inc. Attn: Investor Relations 120 Corporate Boulevard, Suite 100 (cid:49)orfolk, Virginia 23502 Item 1A. Risk Factors. An investment in our Company involves risk, including the possibility that the value of the investment could fall substantially. The following are risks that could materially affect our business, results of operations, financial condition, liquidity, cash flows, and the value of, and return on, an investment in our Company. Risks related to our operations and industry A deterioration in the economic or inflationary environment in the Americas or Europe could have an adverse effect on our business and results of operations. Our performance may be adversely affected by economic, political or inflationary conditions in any market in which we operate. These conditions could include regulatory developments, changes in global or domestic economic policy, legislative changes, the sovereign debt crises experienced in several European countries and the uncertainty regarding the EU’s future as a result of the UK's departure from the EU. Deterioration in economic conditions, or a significant rise in inflation could cause personal bankruptcy and insolvency filings to increase, and the ability of consumers to pay their debts could be adversely affected. This may in turn adversely impact our business and financial results. Deteriorating economic conditions could also adversely impact the businesses to which we provide fee-based services, which could reduce our fee income and cash flow. If global credit market conditions and the stability of global banks deteriorate, it could negatively impact the generation of comprehensive receivable buying opportunities which could adversely affect our business, financial results, and ability to succeed in international markets. If conditions in major credit markets deteriorate, the amount of consumer or commercial lending and financing could be reduced, thus decreasing the volume of nonperforming loans available for our purchase. Other factors associated with the economy that could influence our performance include the financial stability of the lenders on our bank loans and credit facilities and our access to capital and credit. The financial turmoil that adversely affected the banking system and financial markets during the last domestic recession resulted in the tightening of credit markets. Although there has since been improvement, a worsening of current conditions could have a negative impact on our business, including a decrease in the value of our financial investments and the insolvency of lending institutions, including the lenders providing our bank loans and credit facilities, resulting in our difficulty in or inability to obtain credit. These and other economic factors could have an adverse effect on our financial condition and results of operations. We may not be able to continually replace our nonperforming loans with additional portfolios sufficient to operate efficiently and profitably, and/or we may not be able to purchase nonperforming loans at appropriate prices. To operate profitably, we must purchase and service a sufficient amount of nonperforming loans to generate revenue that exceeds our expenses. Fixed costs such as salaries and other compensation expense constitute a significant portion of our overhead and, if we do not replace the nonperforming loan portfolios we service with additional portfolios, we may have to reduce the number of our collection personnel. We would then have to rehire collection staff if we subsequently obtain additional portfolios. These practices could lead to negative consequences such as: 8 9 fp0052934_PRA_10k_2020_combined4.indd 11 4/20/2020 12:52:34 PM • • • • • • low employee morale; fewer experienced employees; higher training costs; disruptions in our operations; loss of efficiency; and excess costs associated with unused space in our facilities. The availability of nonperforming loan portfolios at prices that generate an appropriate return on our investment depends on a number of factors both within and outside of our control, including the following: • • • the continuation of high levels of consumer debt obligations; sales of nonperforming loan portfolios by debt owners; and competitive factors affecting potential purchasers and credit grantors of receivables. Furthermore, heightened regulation of the credit card and consumer lending industry or changing credit origination strategies may result in decreased availability of credit to consumers, potentially leading to a future reduction in nonperforming loans available for purchase from debt owners. Conversely, lower regulatory barriers with respect to debt buyers could lead to increased participants in the debt collection industry, which could, in turn, impact the supply of nonperforming loans available for purchase. We cannot predict how our ability to identify and purchase nonperforming loans and the quality of those nonperforming loans would be affected if there were a shift in lending practices, whether caused by changes in the regulations or accounting practices applicable to debt owners or debt buyers, a sustained economic downturn or otherwise. Moreover, there can be no assurance that debt owners will continue to sell their nonperforming loans consistent with recent levels or at all, or that we will be able to bid competitively for those portfolios. Because of the length of time involved in collecting on acquired portfolios and the variability in the timing of our collections, we may not be able to identify trends and make changes in our purchasing strategies in a timely manner. If we are unable to maintain our business or adapt to changing market needs as well as our current or future competitors, we may experience reduced access to nonperforming loan portfolios at appropriate prices and, therefore, reduced profitability. Currently, a number of large banks that historically sold nonperforming loans in the U.S., including sellers of bankrupt accounts, are not selling such debt. Should these conditions worsen, it could negatively impact our ability to replace our nonperforming loans with additional portfolios sufficient to operate profitably. We may not be able to collect sufficient amounts on our nonperforming loans to fund our operations. tribunals and works councils; Our principal business consists of purchasing and liquidating nonperforming loans that consumers or others have failed to pay. The debt owners have typically made numerous attempts to recover on their receivables, often using a combination of in- house recovery efforts and third-party collection agencies. These nonperforming loans are difficult to collect, and we may not collect a sufficient amount to cover our investment and the costs of running our business. Our collections may decrease if certain types of insolvency proceedings and bankruptcy filings involving liquidations increase. Various economic trends and potential changes to existing legislation may contribute to an increase in the amount of personal bankruptcy and insolvency filings. Under certain of these filings, a debtor's assets may be sold to repay creditors, but because most of the receivables we collect through our collections operations are unsecured, we typically would not be able to collect on those receivables. Although our insolvency collections business could benefit from an increase in personal bankruptcies and insolvencies, we cannot ensure that our collections operations business would not decline with an increase in personal insolvencies or bankruptcy filings or changes in related regulations or practices. If our actual collection experience with respect to a nonperforming or insolvent bankrupt receivables portfolio is significantly lower than the total amount we projected when we acquired the portfolio, our financial condition and results of operations could be adversely impacted. Changes in accounting standards and their interpretations could adversely affect our operating results. U.S. Generally Accepted Accounting Principles ("GAAP"), as issued and amended by the Financial Accounting Standards Board ("FASB"), is subject to interpretation by the SEC, and various other bodies that promulgate and interpret appropriate 10 11 fp0052934_PRA_10k_2020_combined4.indd 12 4/20/2020 12:52:34 PM accounting principles. These principles and related implementation guidelines and interpretations can be highly complex and involve subjective estimates. A change in these principles or interpretations could have a significant effect on our reported financial results. For example, in June 2016 the FASB issued Accounting Standards Codification ("ASC") (cid:49)o. 2016-13, Financial Instruments - Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires 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. Furthermore, in (cid:49)ovember 2019, FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (“ASU 2019-11”), which amends the Purchase Credit Deteriorated ("PCD") financial 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 and should not exceed the aggregate of amounts previously written off and expected to be written off by an entity. 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. ASU 2016-13 and ASU 2019-11 supersede ASC 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"), which we currently follow to account for income recognized on our finance receivables, and are effective for the fiscal year beginning January 1, 2020. ASU 2016-13 and ASU 2019-11 represent a significant significant change from existing U.S. GAAP and are expected to result in material changes to the Company’s accounting for its finance receivables. Implementation efforts are nearly complete, including finalizing the accounting processes, fulfillment of additional data needs for new disclosures and reporting requirements, and drafting accounting and internal control policies and procedures. ASU 2016-13 and ASU 2019-11, amendments thereof, and amendments to new and existing accounting standards could have an adverse effect on our financial condition and results of operations. Our international operations expose us to risks which could harm our business, results of operations and financial condition. A significant portion of our operations is conducted outside the U.S. This could expose us to adverse economic, industry and political conditions that may have a negative impact on our ability to manage our existing operations or pursue alternative strategic transactions, which could have a negative effect on our business, results of operations and financial condition. The global nature of our operations expands the risks and uncertainties described elsewhere in this section, including the following: changes in local political, economic, social and labor conditions in the markets in which we operate; foreign exchange controls on currency conversion and the transfer of funds that might prevent us from repatriating cash earned in countries outside the U.S. in a tax-efficient manner; • currency exchange rate fluctuations, currency restructurings, inflation or deflation, and our ability to manage these fluctuations through a foreign exchange risk management program; • different employee/employer relationships, laws and regulations, union recognition and the existence of employment laws and regulations imposed by international governments, including those governing data security, sharing and transfer; potentially adverse tax consequences resulting from changes in tax laws in the jurisdictions in which we operate or challenges to our interpretations and application of complex international tax laws; • logistical, communications and other challenges caused by distance and cultural and language differences, each making it harder to do business in certain jurisdictions; risks related to crimes, strikes, riots, civil disturbances, terrorist attacks, wars and natural disasters; volatility of global credit markets and the availability of consumer credit and financing in our international markets; uncertainty as to the enforceability of contract and intellectual property rights under local laws; the potential of forced nationalization of certain industries, or the impact on creditors' rights, consumer disposable income levels, flexibility and availability of consumer credit, and the ability to enforce and collect aged or charged-off debts stemming from international governmental actions, whether through austerity or stimulus measures or initiatives, intended to control or influence macroeconomic factors such as wages, unemployment, national output or consumption, inflation, investment, credit, finance, taxation or other economic drivers; • • • • • • • • low employee morale; fewer experienced employees; higher training costs; disruptions in our operations; loss of efficiency; and • • • • • • • • • excess costs associated with unused space in our facilities. The availability of nonperforming loan portfolios at prices that generate an appropriate return on our investment depends on a number of factors both within and outside of our control, including the following: the continuation of high levels of consumer debt obligations; sales of nonperforming loan portfolios by debt owners; and competitive factors affecting potential purchasers and credit grantors of receivables. Furthermore, heightened regulation of the credit card and consumer lending industry or changing credit origination strategies may result in decreased availability of credit to consumers, potentially leading to a future reduction in nonperforming loans available for purchase from debt owners. Conversely, lower regulatory barriers with respect to debt buyers could lead to increased participants in the debt collection industry, which could, in turn, impact the supply of nonperforming loans available for purchase. We cannot predict how our ability to identify and purchase nonperforming loans and the quality of those nonperforming loans would be affected if there were a shift in lending practices, whether caused by changes in the regulations or accounting practices applicable to debt owners or debt buyers, a sustained economic downturn or otherwise. Moreover, there can be no assurance that debt owners will continue to sell their nonperforming loans consistent with recent levels or at all, or that we will be able to bid competitively for those portfolios. Because of the length of time involved in collecting on acquired portfolios and the variability in the timing of our collections, we may not be able to identify trends and make changes in our purchasing strategies in a timely manner. If we are unable to maintain our business or adapt to changing market needs as well as our current or future competitors, we may experience reduced access to nonperforming loan portfolios at appropriate prices and, therefore, reduced profitability. Currently, a number of large banks that historically sold nonperforming loans in the U.S., including sellers of bankrupt accounts, are not selling such debt. Should these conditions worsen, it could negatively impact our ability to replace our nonperforming loans with additional portfolios sufficient to operate profitably. We may not be able to collect sufficient amounts on our nonperforming loans to fund our operations. Our principal business consists of purchasing and liquidating nonperforming loans that consumers or others have failed to pay. The debt owners have typically made numerous attempts to recover on their receivables, often using a combination of in- house recovery efforts and third-party collection agencies. These nonperforming loans are difficult to collect, and we may not collect a sufficient amount to cover our investment and the costs of running our business. Our collections may decrease if certain types of insolvency proceedings and bankruptcy filings involving liquidations increase. Various economic trends and potential changes to existing legislation may contribute to an increase in the amount of personal bankruptcy and insolvency filings. Under certain of these filings, a debtor's assets may be sold to repay creditors, but because most of the receivables we collect through our collections operations are unsecured, we typically would not be able to collect on those receivables. Although our insolvency collections business could benefit from an increase in personal bankruptcies and insolvencies, we cannot ensure that our collections operations business would not decline with an increase in personal insolvencies or bankruptcy filings or changes in related regulations or practices. If our actual collection experience with respect to a nonperforming or insolvent bankrupt receivables portfolio is significantly lower than the total amount we projected when we acquired the portfolio, our financial condition and results of operations could be adversely impacted. Changes in accounting standards and their interpretations could adversely affect our operating results. U.S. Generally Accepted Accounting Principles ("GAAP"), as issued and amended by the Financial Accounting Standards Board ("FASB"), is subject to interpretation by the SEC, and various other bodies that promulgate and interpret appropriate accounting principles. These principles and related implementation guidelines and interpretations can be highly complex and involve subjective estimates. A change in these principles or interpretations could have a significant effect on our reported financial results. For example, in June 2016 the FASB issued Accounting Standards Codification ("ASC") (cid:49)o. 2016-13, Financial Instruments - Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which requires 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. Furthermore, in (cid:49)ovember 2019, FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (“ASU 2019-11”), which amends the Purchase Credit Deteriorated ("PCD") financial 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 and should not exceed the aggregate of amounts previously written off and expected to be written off by an entity. 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. ASU 2016-13 and ASU 2019-11 supersede ASC 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"), which we currently follow to account for income recognized on our finance receivables, and are effective for the fiscal year beginning January 1, 2020. ASU 2016-13 and ASU 2019-11 represent a significant significant change from existing U.S. GAAP and are expected to result in material changes to the Company’s accounting for its finance receivables. Implementation efforts are nearly complete, including finalizing the accounting processes, fulfillment of additional data needs for new disclosures and reporting requirements, and drafting accounting and internal control policies and procedures. ASU 2016-13 and ASU 2019-11, amendments thereof, and amendments to new and existing accounting standards could have an adverse effect on our financial condition and results of operations. Our international operations expose us to risks which could harm our business, results of operations and financial condition. A significant portion of our operations is conducted outside the U.S. This could expose us to adverse economic, industry and political conditions that may have a negative impact on our ability to manage our existing operations or pursue alternative strategic transactions, which could have a negative effect on our business, results of operations and financial condition. The global nature of our operations expands the risks and uncertainties described elsewhere in this section, including the following: • • • • • • • • • • • changes in local political, economic, social and labor conditions in the markets in which we operate; foreign exchange controls on currency conversion and the transfer of funds that might prevent us from repatriating cash earned in countries outside the U.S. in a tax-efficient manner; currency exchange rate fluctuations, currency restructurings, inflation or deflation, and our ability to manage these fluctuations through a foreign exchange risk management program; different employee/employer relationships, laws and regulations, union recognition and the existence of employment tribunals and works councils; laws and regulations imposed by international governments, including those governing data security, sharing and transfer; potentially adverse tax consequences resulting from changes in tax laws in the jurisdictions in which we operate or challenges to our interpretations and application of complex international tax laws; logistical, communications and other challenges caused by distance and cultural and language differences, each making it harder to do business in certain jurisdictions; risks related to crimes, strikes, riots, civil disturbances, terrorist attacks, wars and natural disasters; volatility of global credit markets and the availability of consumer credit and financing in our international markets; uncertainty as to the enforceability of contract and intellectual property rights under local laws; the potential of forced nationalization of certain industries, or the impact on creditors' rights, consumer disposable income levels, flexibility and availability of consumer credit, and the ability to enforce and collect aged or charged-off debts stemming from international governmental actions, whether through austerity or stimulus measures or initiatives, intended to control or influence macroeconomic factors such as wages, unemployment, national output or consumption, inflation, investment, credit, finance, taxation or other economic drivers; 10 11 fp0052934_PRA_10k_2020_combined4.indd 13 4/20/2020 12:52:34 PM • • • • the presence of varying levels of business corruption in international markets and the effect of various anti-corruption and other laws on our international operations; the impact on our day-to-day operations and our ability to staff our international operations given our changing labor conditions and long-term trends towards higher wages in developed and emerging international markets as well as the potential impact of union organizing efforts; potential damage to our reputation due to non-compliance with international and local laws; and the complexity and necessity of using non-U.S. representatives, consultants and other third-party vendors. Any one of these factors could adversely affect our business, results of operations and financial condition. The impact of worldwide tax audits, changes to international or domestic tax laws, the issuance of new tax guidance, and the results of operations could have an adverse tax effect on our financial condition. Our tax filings are subject to audit by domestic and international tax authorities. These audits may result in assessments of additional taxes, adjustments to the timing of taxable income or deductions, or re-allocations of income among tax jurisdictions. Any one of these factors could adversely affect our business, results of operations and financial condition. In addition, many countries in the EU and around the world have adopted and/or proposed changes to current tax laws. Further, organizations such as the Organization for Economic Cooperation and Development have published actions that, if adopted by countries where we do business, could increase our tax obligations in those countries. Due to the scale of our U.S. and international business activities, many of these enacted and proposed changes to the taxation of our activities could increase our worldwide effective tax rate potentially harming our financial position and results of operations. While the Tax Act was enacted during December 2017, we still expect to see future regulatory, administrative or legislative guidance. To the extent any future guidance differs from our current interpretation of the law, it could have a material effect on our financial position and results of operations. The Tax Act included a broad range of tax reform provisions affecting businesses, including the elimination of U.S. federal income taxes on dividends from international subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled international corporations referred to as Global Intangible Low- Taxed Income (“GILTI”); creating the base erosion anti-abuse tax, a new minimum tax; creating a new limitation on deductible interest expense; and increased limitations on the deductibility of executive compensation. Our future tax expense could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. The determination of the provision for income taxes and other tax liabilities regarding our global operations requires significant judgment. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may adversely affect our financial results in the period(s) for which such determination is made. Goodwill or other intangible asset impairment charges could negatively impact our net income and stockholders' equity. We have recorded a significant amount of goodwill as a result of our acquisitions. Goodwill is not amortized, but is tested for impairment at the reporting unit level. Goodwill is required to be tested for impairment annually and between annual tests if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. There are numerous risks that may cause the fair value of a reporting unit to fall below its carrying amount, which could lead to the recognition of goodwill impairment. These risks include, but are not limited to, adverse changes in macroeconomic conditions, the business climate, or the market for the entity's products or services; significant variances between actual and expected financial results; negative or declining cash flows; lowered expectations of future results; failure to realize anticipated synergies from acquisitions; significant expense increases; a more likely-than-not expectation of selling or disposing all or a portion of a reporting unit; the loss of key personnel; an adverse action or assessment by a regulator; or a sustained decrease in the Company's share price. Our goodwill impairment testing involves the use of estimates and the exercise of judgment, including judgments regarding expected future business performance and market conditions. Significant changes in our assessment of such factors, including the deterioration of market conditions, could affect our assessment of the fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. Other intangible assets, such as client and customer relationships, non-compete agreements and trademarks, are amortized. Risks such as those that could lead to the recognition of goodwill impairment, could also lead to the recognition of other intangible asset impairment. The UK's exit from the EU could adversely impact our business, results of operations and financial condition. On June 23, 2016, the UK voted to leave the EU (commonly referred to as "Brexit"). Although Brexit occurred on January 31, 2020, there remains significant uncertainty about the future relationship between the UK and the EU and the impact of the UK's withdrawal from the EU including its affect on business activity, impact on foreign currency, political stability and economic, regulatory, and financial market conditions in the UK, the EU and globally. As of December 31, 2019, the total estimated remaining collections ("ERC") of our UK portfolios constituted approximately 23% of our consolidated ERC. Our British pound assets are predominantly funded by British pound liabilities. However, British pound net income and retained earnings could be affected when translated back to the U.S. dollar, positively or negatively, by foreign exchange volatility in the short term resulting from the uncertainty of Brexit. In the longer term, any impact from Brexit on our business, results of operations and financial condition will depend on the final terms negotiated by the UK and the EU, including arrangements concerning taxes and financial services regulation. Our loss contingency accruals may not be adequate to cover actual losses. We are involved in judicial, regulatory, and arbitration proceedings or investigations concerning matters arising from our business activities. We believe that we have adopted reasonable compliance policies and procedures and believe we have meritorious defenses in all material litigation pending against us. However, there can be no assurance as to the ultimate outcome. We establish accruals for potential liability arising from legal proceedings when it is probable that such liability has been incurred and the amount of the loss can be reasonably estimated. We may still incur legal costs for a matter even if we have not accrued a liability. In addition, actual losses may be higher than the amount accrued for a certain matter, or in the aggregate. An unfavorable resolution of a legal proceeding or claim could adversely impact our business, financial condition, results of operations, or liquidity. For more information, refer to the "Litigation and Regulatory Matters" section of (cid:49)ote 14 to our Consolidated Financial Statements included in Item 8 of this Form 10-K ("(cid:49)ote 14"). Class action suits and other litigation could divert our management's attention from operating our business and increase our expenses. Credit grantors, nonperforming loan purchasers and third-party collection agencies and attorneys in the consumer credit industry are frequently subject to putative class action lawsuits and other litigation. Claims include failure to comply with applicable laws and regulations and improper or deceptive origination and servicing practices. An unfavorable outcome in a class action suit or other litigation could adversely affect our results of operations, financial condition, cash flows and liquidity. Even when we prevail or the basis for the litigation is groundless, considerable time, energy and resources may be needed to respond, and such class action lawsuits or other litigation could adversely affect our results of operations, financial condition, cash flows and liquidity. A cyber incident could disrupt our operations, compromise or corrupt our confidential information or damage our reputation, all of which could negatively impact our business and financial results. Our business is highly dependent on our ability to process and monitor a large number of transactions across markets and in multiple currencies. As we expand geographically, maintaining the security of our information technology systems and infrastructure becomes more significant and difficult. As our reliance on technology has increased, so have the risks posed to our systems, some of which are internal and others we have outsourced. The three primary risks we face from a cyber incident are operational disruption, reputational damage and the exposure of private data such as customer information, our employees' personally identifiable information, or proprietary business information such as underwriting and collections methodologies. Although we take protective steps, including upgrading our systems and networks with intrusion and detection prevention systems, monitoring firewalls to safeguard critical business applications and supervising third party providers that have access to our systems, our computer systems, software and networks may still be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. We have implemented solutions, processes, and procedures to help mitigate these risks, but these measures, as well as our organization's increased awareness of our risk of a cyber incident do not guarantee that our business, reputation or financial results will not be impacted negatively by such an incident. Should such a cyber incident occur, we may be required to expend significant additional resources to notify affected consumers, modify our protective measures or to investigate and remediate vulnerabilities or other exposures. Additionally, we may be subject to fines, penalties, litigation costs and settlements and financial losses that may not be fully covered by our cyber insurance. 12 13 fp0052934_PRA_10k_2020_combined4.indd 14 4/20/2020 12:52:34 PM • the presence of varying levels of business corruption in international markets and the effect of various anti-corruption The UK's exit from the EU could adversely impact our business, results of operations and financial condition. and other laws on our international operations; • the impact on our day-to-day operations and our ability to staff our international operations given our changing labor conditions and long-term trends towards higher wages in developed and emerging international markets as well as the potential impact of union organizing efforts; • • potential damage to our reputation due to non-compliance with international and local laws; and the complexity and necessity of using non-U.S. representatives, consultants and other third-party vendors. Any one of these factors could adversely affect our business, results of operations and financial condition. The impact of worldwide tax audits, changes to international or domestic tax laws, the issuance of new tax guidance, and the results of operations could have an adverse tax effect on our financial condition. Our tax filings are subject to audit by domestic and international tax authorities. These audits may result in assessments of additional taxes, adjustments to the timing of taxable income or deductions, or re-allocations of income among tax jurisdictions. Any one of these factors could adversely affect our business, results of operations and financial condition. In addition, many countries in the EU and around the world have adopted and/or proposed changes to current tax laws. Further, organizations such as the Organization for Economic Cooperation and Development have published actions that, if adopted by countries where we do business, could increase our tax obligations in those countries. Due to the scale of our U.S. and international business activities, many of these enacted and proposed changes to the taxation of our activities could increase our worldwide effective tax rate potentially harming our financial position and results of operations. While the Tax Act was enacted during December 2017, we still expect to see future regulatory, administrative or legislative guidance. To the extent any future guidance differs from our current interpretation of the law, it could have a material effect on our financial position and results of operations. The Tax Act included a broad range of tax reform provisions affecting businesses, including the elimination of U.S. federal income taxes on dividends from international subsidiaries; requiring a current inclusion in U.S. federal taxable income of certain earnings of controlled international corporations referred to as Global Intangible Low- Taxed Income (“GILTI”); creating the base erosion anti-abuse tax, a new minimum tax; creating a new limitation on deductible interest expense; and increased limitations on the deductibility of executive compensation. Our future tax expense could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. The determination of the provision for income taxes and other tax liabilities regarding our global operations requires significant judgment. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may adversely affect our financial results in the period(s) for which such determination is made. Goodwill or other intangible asset impairment charges could negatively impact our net income and stockholders' equity. We have recorded a significant amount of goodwill as a result of our acquisitions. Goodwill is not amortized, but is tested for impairment at the reporting unit level. Goodwill is required to be tested for impairment annually and between annual tests if events or circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. There are numerous risks that may cause the fair value of a reporting unit to fall below its carrying amount, which could lead to the recognition of goodwill impairment. These risks include, but are not limited to, adverse changes in macroeconomic conditions, the business climate, or the market for the entity's products or services; significant variances between actual and expected financial results; negative or declining cash flows; lowered expectations of future results; failure to realize anticipated synergies from acquisitions; significant expense increases; a more likely-than-not expectation of selling or disposing all or a portion of a reporting unit; the loss of key personnel; an adverse action or assessment by a regulator; or a sustained decrease in the Company's share price. Our goodwill impairment testing involves the use of estimates and the exercise of judgment, including judgments regarding expected future business performance and market conditions. Significant changes in our assessment of such factors, including the deterioration of market conditions, could affect our assessment of the fair value of one or more of our reporting units and could result in a goodwill impairment charge in a future period. Other intangible assets, such as client and customer relationships, non-compete agreements and trademarks, are amortized. Risks such as those that could lead to the recognition of goodwill impairment, could also lead to the recognition of other intangible asset impairment. 12 On June 23, 2016, the UK voted to leave the EU (commonly referred to as "Brexit"). Although Brexit occurred on January 31, 2020, there remains significant uncertainty about the future relationship between the UK and the EU and the impact of the UK's withdrawal from the EU including its affect on business activity, impact on foreign currency, political stability and economic, regulatory, and financial market conditions in the UK, the EU and globally. As of December 31, 2019, the total estimated remaining collections ("ERC") of our UK portfolios constituted approximately 23% of our consolidated ERC. Our British pound assets are predominantly funded by British pound liabilities. However, British pound net income and retained earnings could be affected when translated back to the U.S. dollar, positively or negatively, by foreign exchange volatility in the short term resulting from the uncertainty of Brexit. In the longer term, any impact from Brexit on our business, results of operations and financial condition will depend on the final terms negotiated by the UK and the EU, including arrangements concerning taxes and financial services regulation. Our loss contingency accruals may not be adequate to cover actual losses. We are involved in judicial, regulatory, and arbitration proceedings or investigations concerning matters arising from our business activities. We believe that we have adopted reasonable compliance policies and procedures and believe we have meritorious defenses in all material litigation pending against us. However, there can be no assurance as to the ultimate outcome. We establish accruals for potential liability arising from legal proceedings when it is probable that such liability has been incurred and the amount of the loss can be reasonably estimated. We may still incur legal costs for a matter even if we have not accrued a liability. In addition, actual losses may be higher than the amount accrued for a certain matter, or in the aggregate. An unfavorable resolution of a legal proceeding or claim could adversely impact our business, financial condition, results of operations, or liquidity. For more information, refer to the "Litigation and Regulatory Matters" section of (cid:49)ote 14 to our Consolidated Financial Statements included in Item 8 of this Form 10-K ("(cid:49)ote 14"). Class action suits and other litigation could divert our management's attention from operating our business and increase our expenses. Credit grantors, nonperforming loan purchasers and third-party collection agencies and attorneys in the consumer credit industry are frequently subject to putative class action lawsuits and other litigation. Claims include failure to comply with applicable laws and regulations and improper or deceptive origination and servicing practices. An unfavorable outcome in a class action suit or other litigation could adversely affect our results of operations, financial condition, cash flows and liquidity. Even when we prevail or the basis for the litigation is groundless, considerable time, energy and resources may be needed to respond, and such class action lawsuits or other litigation could adversely affect our results of operations, financial condition, cash flows and liquidity. A cyber incident could disrupt our operations, compromise or corrupt our confidential information or damage our reputation, all of which could negatively impact our business and financial results. Our business is highly dependent on our ability to process and monitor a large number of transactions across markets and in multiple currencies. As we expand geographically, maintaining the security of our information technology systems and infrastructure becomes more significant and difficult. As our reliance on technology has increased, so have the risks posed to our systems, some of which are internal and others we have outsourced. The three primary risks we face from a cyber incident are operational disruption, reputational damage and the exposure of private data such as customer information, our employees' personally identifiable information, or proprietary business information such as underwriting and collections methodologies. Although we take protective steps, including upgrading our systems and networks with intrusion and detection prevention systems, monitoring firewalls to safeguard critical business applications and supervising third party providers that have access to our systems, our computer systems, software and networks may still be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have a security impact. We have implemented solutions, processes, and procedures to help mitigate these risks, but these measures, as well as our organization's increased awareness of our risk of a cyber incident do not guarantee that our business, reputation or financial results will not be impacted negatively by such an incident. Should such a cyber incident occur, we may be required to expend significant additional resources to notify affected consumers, modify our protective measures or to investigate and remediate vulnerabilities or other exposures. Additionally, we may be subject to fines, penalties, litigation costs and settlements and financial losses that may not be fully covered by our cyber insurance. 13 fp0052934_PRA_10k_2020_combined4.indd 15 4/20/2020 12:52:34 PM The underperformance or failure of our information technology infrastructure, networks or telephone systems could result in loss in productivity, loss of competitive advantage and business disruption. Investigations, reviews, or enforcement actions by governmental authorities may result in changes to our business practices; negatively impact our receivables portfolio acquisition volume; make collection of receivables more difficult; or expose us to the We depend on effective information and telephone systems to operate our business. We have also acquired and expect to acquire additional systems as a result of business acquisitions. Significant resources are required to maintain or enhance our existing information and telephone systems and to replace obsolete systems. Although we are continually upgrading, streamlining, and integrating our systems and have invested in strategies to prevent a failure, our systems are susceptible to outages due to natural disasters, power loss, computer viruses, security breaches, hardware or software vulnerabilities, disruptions, and similar events. Failure to adequately implement or maintain effective and efficient information systems with sufficiently advanced technological capabilities, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could cause us to lose our competitive advantage, divert management’s time, result in a loss of productivity or disrupt business operations, which could have a material adverse effect on our business, financial condition and results of operations. Risks associated with governmental regulation and laws Our ability to collect and enforce our nonperforming loans may be limited under federal, state and international laws, regulations and policies. The businesses conducted by our operating subsidiaries are subject to licensing and regulation by governmental and regulatory bodies in the many jurisdictions in which we operate. Federal and state laws and the laws and regulations of the international countries in which we operate may limit our ability to collect on and enforce our rights with respect to our nonperforming loans regardless of any act or omission on our part. Some laws and regulations applicable to credit issuers may preclude us from collecting on nonperforming loans we acquire if the credit issuer previously failed to comply with applicable laws in generating or servicing those receivables. Collection laws and regulations also directly apply to our business. Such laws and regulations are extensive and subject to change. A variety of state, federal and international laws and regulations govern the collection, use, retention, transmission, sharing and security of consumer data. Consumer protection and privacy protection laws, changes in the ways that existing rules or laws are interpreted or enforced and any procedures that may be implemented as a result of regulatory consent orders may adversely affect our ability to collect on our nonperforming loans and may harm our business. Our failure to comply with laws or regulations applicable to us could limit our ability to collect on our receivables, which could reduce our profitability and harm our business. Failure to comply with government regulation of the collections industry could result in penalties, fines, litigation, damage to our reputation or the suspension or termination of our ability to conduct our business. The collections industry throughout the markets in which we operate is governed by various laws and regulations, many of which require us to be a licensed debt collector. Our industry is also at times investigated by regulators and offices of state attorneys general, and subpoenas and other requests or demands for information may be issued by governmental authorities who are investigating debt collection activities. These investigations may result in enforcement actions, fines and penalties, or the assertion of private claims and lawsuits. If any such investigations result in findings that we or our vendors have failed to comply with applicable laws and regulations, we could be subject to penalties, litigation losses and expenses, damage to our reputation, or the suspension or termination of, or required modification to, our ability to conduct collections, which would adversely affect our business, results of operations and financial condition. In a number of jurisdictions, we must maintain licenses to purchase or own debt, and/or to perform debt recovery services and must satisfy related bonding requirements. Our failure to comply with existing licensing requirements, changing interpretations of existing requirements, or adoption of new licensing requirements, could restrict our ability to collect in certain jurisdictions, subject us to increased regulation, increase our costs, or adversely affect our ability to purchase, own and/or collect our receivables. Some laws, among other things, also may limit the interest rate and the fees that a credit grantor may impose on our consumers, limit the time in which we may file legal actions to enforce consumer accounts, and require specific account information for certain collection activities. In addition, local requirements and court rulings in various jurisdictions also may affect our ability to collect. Regulations and statutes applicable to our industry further provide that, in some cases, consumers cannot be held liable for, or their liability may be limited with respect to, charges to their debt or credit card accounts that resulted from unauthorized use of their credit. These laws, among others, may limit our ability to recover amounts owing with respect to the receivables, whether or not we committed any wrongful act or omission in connection with the account. If we fail to comply with any applicable laws and regulations discussed above, such failure could result in penalties, litigation losses and expenses, damage to our reputation, or otherwise impact our ability to conduct collections efforts, which could adversely affect our business, results of operations and financial condition. risk of fines, penalties, restitution payments and litigation. Our debt collection activities and business practices are subject to review from time to time by various governmental authorities and regulators, including the CFPB, which may commence investigations, reviews, or enforcement actions, or reviews targeted at businesses in the financial services industry. These investigations or reviews may involve governmental authority consideration of individual consumer complaints, or could involve a broader review of our debt collection policies and practices. Such investigations or reviews could lead to assertions by governmental authorities that we are not complying with applicable laws or regulations. In such circumstances, authorities may request or seek to impose a range of remedies that could involve potential compensatory or punitive damage claims, fines, restitution payments, sanctions or injunctive relief, that if agreed to or granted, could require us to make payments or incur other expenditures that could have an adverse effect on our financial position. The CFPB has the authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief), recover costs, and impose monetary penalties (ranging from $5,000 per day to over $1 million per day, depending on the nature and gravity of the violation). In addition, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented thereunder, the Dodd-Frank Act empowers state attorneys general and other state regulators to bring civil actions to remedy violations under state law. Government authorities could also request or seek to require us to cease certain of our practices or institute new practices. (cid:49)egative publicity relating to investigations or proceedings brought by governmental authorities could have an adverse impact on our reputation, harm our ability to conduct business with industry participants, and result in financial institutions reducing or eliminating sales of receivables portfolios to us which would harm our business and negatively impact our results of operations. Moreover, changing or modifying our internal policies or procedures, responding to governmental inquiries and investigations and defending lawsuits or other proceedings could require significant efforts on the part of management and result in increased costs to our business. In addition, such efforts could divert management's full attention from our business operations. All of these factors could have an adverse effect on our business, results of operations, and financial condition. The CFPB has issued civil investigative demands to many companies that it regulates and periodically examines practices regarding the collection of consumer debt. On September 9, 2015, Portfolio Associates, LLC ("PRA"), our wholly owned subsidiary, entered into a consent order with the CFPB settling a previously disclosed investigation of certain debt collection practices of PRA (the "Consent Order"). Among other things, the Consent Order required PRA to: (i) vacate 837 judgments obtained after the applicable statute of limitations, refund $860,607 in payments received on account of such judgments and waive the remaining $3.4 million in judgment balances; (ii) refund $18.2 million in Litigation Department Calls Restitution, as defined in the Consent Order; and (iii) pay an $8.0 million civil money penalty to the CFPB. Although we have implemented the requirements of the Consent Order, there can be no assurance that additional litigation or new industry regulations currently under consideration by the CFPB would not have an adverse effect on our business, results of operations, and financial condition. In addition, the CFPB monitors our compliance with the Consent Order and could make a determination that we have failed to adhere to our obligations. Such a determination could result in additional inquiries, penalties or liabilities, which could have an adverse effect on our business, results of operations, and financial condition. Compliance with complex and evolving international and U.S. laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions. We operate on a global basis with offices and activities in a number of jurisdictions throughout the Americas and Europe. We face increased exposure to risks inherent in conducting business internationally, including compliance with complex international and U.S. laws and regulations that apply to our international operations, which could increase our cost of doing business in international jurisdictions. These laws and regulations include those related to taxation and anti-corruption laws such as the FCPA, the UK Bribery Act and other local laws prohibiting corrupt payments to governmental officials. Given the complexity of these laws, there is a risk that we may inadvertently breach certain provisions of these laws, such as through the negligent behavior of an employee or our failure to comply with certain formal documentation requirements. Violations of these laws and regulations by us, any of our employees or our third-party vendors, either inadvertently or intentionally, could result in fines and penalties, criminal sanctions, restrictions on our operations and limits on our ability to offer our products and services in one or more countries. Violations of these laws could also adversely affect our business, brand, international expansion efforts, ability to attract and retain employees and results of operations. The regulation of data privacy in the U.S and globally could have an adverse effect on our business, results of operations, and financial condition by increasing our compliance costs. The regulation of data privacy, including interpretations and determinations by regulatory authorities in the U.S. and in the countries in which we operate, continues to evolve. It is not possible to predict the effect of such rigorous data protection regulations over time. For example, the EU and UK adopted the GDPR, which impacts our European operations. On May 25, 2018 the GDPR 14 15 fp0052934_PRA_10k_2020_combined4.indd 16 4/20/2020 12:52:34 PM The underperformance or failure of our information technology infrastructure, networks or telephone systems could result in loss in productivity, loss of competitive advantage and business disruption. We depend on effective information and telephone systems to operate our business. We have also acquired and expect to acquire additional systems as a result of business acquisitions. Significant resources are required to maintain or enhance our existing information and telephone systems and to replace obsolete systems. Although we are continually upgrading, streamlining, and integrating our systems and have invested in strategies to prevent a failure, our systems are susceptible to outages due to natural disasters, power loss, computer viruses, security breaches, hardware or software vulnerabilities, disruptions, and similar events. Failure to adequately implement or maintain effective and efficient information systems with sufficiently advanced technological capabilities, or our failure to efficiently and effectively consolidate our information systems to eliminate redundant or obsolete applications, could cause us to lose our competitive advantage, divert management’s time, result in a loss of productivity or disrupt business operations, which could have a material adverse effect on our business, financial condition and results of operations. Risks associated with governmental regulation and laws Our ability to collect and enforce our nonperforming loans may be limited under federal, state and international laws, regulations and policies. The businesses conducted by our operating subsidiaries are subject to licensing and regulation by governmental and regulatory bodies in the many jurisdictions in which we operate. Federal and state laws and the laws and regulations of the international countries in which we operate may limit our ability to collect on and enforce our rights with respect to our nonperforming loans regardless of any act or omission on our part. Some laws and regulations applicable to credit issuers may preclude us from collecting on nonperforming loans we acquire if the credit issuer previously failed to comply with applicable laws in generating or servicing those receivables. Collection laws and regulations also directly apply to our business. Such laws and regulations are extensive and subject to change. A variety of state, federal and international laws and regulations govern the collection, use, retention, transmission, sharing and security of consumer data. Consumer protection and privacy protection laws, changes in the ways that existing rules or laws are interpreted or enforced and any procedures that may be implemented as a result of regulatory consent orders may adversely affect our ability to collect on our nonperforming loans and may harm our business. Our failure to comply with laws or regulations applicable to us could limit our ability to collect on our receivables, which could reduce our profitability and harm our business. Failure to comply with government regulation of the collections industry could result in penalties, fines, litigation, damage to our reputation or the suspension or termination of our ability to conduct our business. The collections industry throughout the markets in which we operate is governed by various laws and regulations, many of which require us to be a licensed debt collector. Our industry is also at times investigated by regulators and offices of state attorneys general, and subpoenas and other requests or demands for information may be issued by governmental authorities who are investigating debt collection activities. These investigations may result in enforcement actions, fines and penalties, or the assertion of private claims and lawsuits. If any such investigations result in findings that we or our vendors have failed to comply with applicable laws and regulations, we could be subject to penalties, litigation losses and expenses, damage to our reputation, or the suspension or termination of, or required modification to, our ability to conduct collections, which would adversely affect our business, results of operations and financial condition. In a number of jurisdictions, we must maintain licenses to purchase or own debt, and/or to perform debt recovery services and must satisfy related bonding requirements. Our failure to comply with existing licensing requirements, changing interpretations of existing requirements, or adoption of new licensing requirements, could restrict our ability to collect in certain jurisdictions, subject us to increased regulation, increase our costs, or adversely affect our ability to purchase, own and/or collect our receivables. Some laws, among other things, also may limit the interest rate and the fees that a credit grantor may impose on our consumers, limit the time in which we may file legal actions to enforce consumer accounts, and require specific account information for certain collection activities. In addition, local requirements and court rulings in various jurisdictions also may affect our ability to collect. Regulations and statutes applicable to our industry further provide that, in some cases, consumers cannot be held liable for, or their liability may be limited with respect to, charges to their debt or credit card accounts that resulted from unauthorized use of their credit. These laws, among others, may limit our ability to recover amounts owing with respect to the receivables, whether or not we committed any wrongful act or omission in connection with the account. If we fail to comply with any applicable laws and regulations discussed above, such failure could result in penalties, litigation losses and expenses, damage to our reputation, or otherwise impact our ability to conduct collections efforts, which could adversely affect our business, results of operations and financial condition. Investigations, reviews, or enforcement actions by governmental authorities may result in changes to our business practices; negatively impact our receivables portfolio acquisition volume; make collection of receivables more difficult; or expose us to the risk of fines, penalties, restitution payments and litigation. Our debt collection activities and business practices are subject to review from time to time by various governmental authorities and regulators, including the CFPB, which may commence investigations, reviews, or enforcement actions, or reviews targeted at businesses in the financial services industry. These investigations or reviews may involve governmental authority consideration of individual consumer complaints, or could involve a broader review of our debt collection policies and practices. Such investigations or reviews could lead to assertions by governmental authorities that we are not complying with applicable laws or regulations. In such circumstances, authorities may request or seek to impose a range of remedies that could involve potential compensatory or punitive damage claims, fines, restitution payments, sanctions or injunctive relief, that if agreed to or granted, could require us to make payments or incur other expenditures that could have an adverse effect on our financial position. The CFPB has the authority to obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief), recover costs, and impose monetary penalties (ranging from $5,000 per day to over $1 million per day, depending on the nature and gravity of the violation). In addition, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented thereunder, the Dodd-Frank Act empowers state attorneys general and other state regulators to bring civil actions to remedy violations under state law. Government authorities could also request or seek to require us to cease certain of our practices or institute new practices. (cid:49)egative publicity relating to investigations or proceedings brought by governmental authorities could have an adverse impact on our reputation, harm our ability to conduct business with industry participants, and result in financial institutions reducing or eliminating sales of receivables portfolios to us which would harm our business and negatively impact our results of operations. Moreover, changing or modifying our internal policies or procedures, responding to governmental inquiries and investigations and defending lawsuits or other proceedings could require significant efforts on the part of management and result in increased costs to our business. In addition, such efforts could divert management's full attention from our business operations. All of these factors could have an adverse effect on our business, results of operations, and financial condition. The CFPB has issued civil investigative demands to many companies that it regulates and periodically examines practices regarding the collection of consumer debt. On September 9, 2015, Portfolio Associates, LLC ("PRA"), our wholly owned subsidiary, entered into a consent order with the CFPB settling a previously disclosed investigation of certain debt collection practices of PRA (the "Consent Order"). Among other things, the Consent Order required PRA to: (i) vacate 837 judgments obtained after the applicable statute of limitations, refund $860,607 in payments received on account of such judgments and waive the remaining $3.4 million in judgment balances; (ii) refund $18.2 million in Litigation Department Calls Restitution, as defined in the Consent Order; and (iii) pay an $8.0 million civil money penalty to the CFPB. Although we have implemented the requirements of the Consent Order, there can be no assurance that additional litigation or new industry regulations currently under consideration by the CFPB would not have an adverse effect on our business, results of operations, and financial condition. In addition, the CFPB monitors our compliance with the Consent Order and could make a determination that we have failed to adhere to our obligations. Such a determination could result in additional inquiries, penalties or liabilities, which could have an adverse effect on our business, results of operations, and financial condition. Compliance with complex and evolving international and U.S. laws and regulations that apply to our international operations could increase our cost of doing business in international jurisdictions. We operate on a global basis with offices and activities in a number of jurisdictions throughout the Americas and Europe. We face increased exposure to risks inherent in conducting business internationally, including compliance with complex international and U.S. laws and regulations that apply to our international operations, which could increase our cost of doing business in international jurisdictions. These laws and regulations include those related to taxation and anti-corruption laws such as the FCPA, the UK Bribery Act and other local laws prohibiting corrupt payments to governmental officials. Given the complexity of these laws, there is a risk that we may inadvertently breach certain provisions of these laws, such as through the negligent behavior of an employee or our failure to comply with certain formal documentation requirements. Violations of these laws and regulations by us, any of our employees or our third-party vendors, either inadvertently or intentionally, could result in fines and penalties, criminal sanctions, restrictions on our operations and limits on our ability to offer our products and services in one or more countries. Violations of these laws could also adversely affect our business, brand, international expansion efforts, ability to attract and retain employees and results of operations. The regulation of data privacy in the U.S and globally could have an adverse effect on our business, results of operations, and financial condition by increasing our compliance costs. The regulation of data privacy, including interpretations and determinations by regulatory authorities in the U.S. and in the countries in which we operate, continues to evolve. It is not possible to predict the effect of such rigorous data protection regulations over time. For example, the EU and UK adopted the GDPR, which impacts our European operations. On May 25, 2018 the GDPR 14 15 fp0052934_PRA_10k_2020_combined4.indd 17 4/20/2020 12:52:34 PM updated data privacy compliance obligations, which required us to adapt our business practices accordingly. Financial penalties for noncompliance with the GDPR can be significant. It is also the case that the U.S. federal government and states within the U.S. have enacted or are considering legislation to enact data privacy protections. Data privacy regulations could result in increased costs of conducting business to maintain compliance with such regulations. Although we take significant steps to protect the security of our data and the personal data of our customers, we may be required to expend significant resources to comply with regulations if third parties improperly obtain and use such data. Risks associated with indebtedness We utilize bank loans, credit facilities and convertible notes to finance our business activities, which could negatively impact our liquidity and business operations if we are unable to retain, renegotiate, expand or replace our bank loans and credit facilities or raise the necessary funds to repurchase our convertible notes. As described in (cid:49)ote 6 to our Consolidated Financial Statements included in Item 8 of this Form 10-K, our sources of liquidity include a (cid:49)orth American credit facility, a European multicurrency revolving credit facility and convertible senior notes. The credit facilities contain financial and other restrictive covenants, including restrictions on how we operate our business and our ability to pay dividends to our stockholders. Failure to satisfy any one of these covenants could result in negative consequences including the following: • • • • acceleration of outstanding indebtedness; exercise by our lenders of rights with respect to the collateral pledged under certain of our outstanding indebtedness; our inability to continue to purchase nonperforming loans needed to operate our business; or our inability to secure alternative financing on favorable terms, if at all. If we are unable to retain, renegotiate, expand or replace our credit facilities, including as a result of failure to satisfy the restrictive covenants contained in them, our liquidity and business operations could be impacted negatively. As referenced above, we have indebtedness in the form of Convertible Senior (cid:49)otes due 2020 and 2023 (collectively the "(cid:49)otes") and may not have the ability to raise the funds necessary to repurchase the (cid:49)otes upon a fundamental change or to settle conversions in cash. Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including the (cid:49)otes, or to make cash payments in connection with any conversion of the (cid:49)otes depends on our future performance, which could be negatively impacted by economic, financial, competitive and other factors beyond our control. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at that time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, in the event the conditional conversion features of the (cid:49)otes are triggered, holders of the (cid:49)otes are entitled to convert the (cid:49)otes into shares of our common stock at any time during specified periods at their option, subject to the terms of the indenture governing the (cid:49)otes. Upon conversion, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional shares of our common stock), we will be required to make cash payments in respect of the (cid:49)otes. However, we may not have enough available cash or be able to obtain financing at the time we are required to repurchase (cid:49)otes surrendered to settle conversions in cash, and our ability to repurchase the (cid:49)otes or pay cash upon conversion may be limited by law. Any issuance of shares of our common stock upon conversion of the (cid:49)otes would dilute the ownership interest of our stockholders. We may be restricted from paying cash upon conversion of the (cid:49)otes, repurchasing the (cid:49)otes for cash when required and repaying the (cid:49)otes at maturity or upon acceleration following an event of default under the (cid:49)otes unless we repay all amounts outstanding under, and terminate, our (cid:49)orth American Credit Agreement. Additionally, our future indebtedness may contain limitations on our ability to pay cash upon conversion of the (cid:49)otes and on our ability to repurchase the (cid:49)otes. The terms of our (cid:49)orth American Credit Agreement prohibit us from paying cash upon conversion of the (cid:49)otes, repurchasing the (cid:49)otes for cash when required upon the occurrence of a fundamental change and repaying the (cid:49)otes at maturity or upon acceleration following an event of default under the indenture governing the (cid:49)otes if a default or an event of default exists on the date of such required payment, repurchase or repayment, as applicable, or certain other conditions are not met, including pro forma compliance with the financial covenants and having “Sufficient Liquidity” (described below). As a result, we will be restricted from making such payments unless the default or event of default under our (cid:49)orth American Credit Agreement is cured or waived, such conditions are met and/or we repay all amounts then outstanding under, and terminate, our (cid:49)orth American Credit Agreement. 16 In addition, under our (cid:49)orth American Credit Agreement our ability to settle conversions of the (cid:49)otes in cash requires that immediately prior to any such conversion, our cash and cash equivalents (including our availability under our domestic and multi- currency revolving facilities under our (cid:49)orth American Credit Agreement) be at least 115% of the sum of the principal amount of the (cid:49)otes to be paid in cash (“Sufficient Liquidity”). The terms of any additional indebtedness incurred as permitted by our (cid:49)orth American Credit Agreement may contain similar or more onerous restrictions than the foregoing. Our failure to repurchase (cid:49)otes, to pay, when due, cash upon conversion of the (cid:49)otes or repay the (cid:49)otes at maturity or upon acceleration following an event of default under the indenture governing the (cid:49)otes would constitute a default under the indenture governing the (cid:49)otes. A default under the indenture may constitute a default under our (cid:49)orth American Credit Agreement. Changes in interest rates could increase our interest expense and reduce our net income. Our revolving credit facilities bear interest at variable rates. Increases in interest rates could increase our interest expense which would, in turn, lower our earnings. From time to time, we may enter into hedging transactions to mitigate our interest rate risk on all or a portion of our debt. Hedging strategies rely on assumptions and projections. If these assumptions and projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates, we may experience volatility in our earnings that could adversely affect our results of operations and financial condition. Default by or failure of one or more of our counterparty financial institutions could cause us to incur significant losses. As part of our risk management activities, we enter into transactions involving derivative financial instruments, including, among others, forward contracts and interest rate swap contracts, with various financial institutions. In addition, we have significant amounts of cash and cash equivalents on deposit or in accounts with banks or other financial institutions in the U.S. and abroad. As a result, we are exposed to the risk of default by, or failure of, counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or to retrieve our assets that are deposited or held in accounts with such counterparty may be limited by the counterparty's liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. Uncertainty about the future of the LIBOR may adversely affect our business. LIBOR is a reference rate used for over $110 trillion of financial contracts on a global basis. We incorporate LIBOR in both our bank loan and derivative hedging agreements. Due to reforms coming out of the 2008 financial crisis, LIBOR is scheduled to sunset at the end of 2021 and be replaced by an Alternative Reference Rate ("ARR"). A number of regulatory institutions are involved in coordinating this transition including the Financial Conduct Authority in the UK, the U.S. Federal Reserve, the SEC, and the FASB. Key industry-wide issues regarding the transition are still unresolved; these include the fact that a term structure (1 month, 3 month, 6 month, etc.) for the ARR has not yet been developed and a way to ensure neither borrowers nor lenders gain an unfair advantage has yet to be finalized. It is unknown whether proposed alternative reference rates will attain market acceptance as replacements for LIBOR or whether the outstanding issues related to them will be satisfactorily resolved. As a result, while we do not expect the impact to have a significant effect on our cost of capital, financial results, and cash flows, the final impact cannot Item 1B. Unresolved Staff Comments. yet be determined. (cid:49)one. Item 2. Properties. leased). Item 3. Legal Proceedings. Our corporate headquarters and primary domestic operations facilities are located in (cid:49)orfolk, Virginia. In addition, at December 31, 2019, we had operational centers in the Americas (13 leased and 3 owned), Europe (12 leased) and Australia (1 We and our subsidiaries are from time to time subject to a variety of routine legal and regulatory claims, inquiries and proceedings, most of which are incidental to the ordinary course of our business. We initiate lawsuits against customers and are 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 us in which they allege that we have 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 us. Refer to (cid:49)ote 14 to our Consolidated Financial Statements included in Item 8 of this Form 10-K for information regarding legal proceedings in which we are involved. 17 fp0052934_PRA_10k_2020_combined4.indd 18 4/20/2020 12:52:34 PM updated data privacy compliance obligations, which required us to adapt our business practices accordingly. Financial penalties for noncompliance with the GDPR can be significant. It is also the case that the U.S. federal government and states within the U.S. have enacted or are considering legislation to enact data privacy protections. Data privacy regulations could result in increased costs of conducting business to maintain compliance with such regulations. Although we take significant steps to protect the security of our data and the personal data of our customers, we may be required to expend significant resources to comply with regulations if third parties improperly obtain and use such data. Risks associated with indebtedness We utilize bank loans, credit facilities and convertible notes to finance our business activities, which could negatively impact our raise the necessary funds to repurchase our convertible notes. As described in (cid:49)ote 6 to our Consolidated Financial Statements included in Item 8 of this Form 10-K, our sources of liquidity include a (cid:49)orth American credit facility, a European multicurrency revolving credit facility and convertible senior notes. The credit facilities contain financial and other restrictive covenants, including restrictions on how we operate our business and our ability to pay dividends to our stockholders. Failure to satisfy any one of these covenants could result in negative consequences including the following: acceleration of outstanding indebtedness; • • • • exercise by our lenders of rights with respect to the collateral pledged under certain of our outstanding indebtedness; our inability to continue to purchase nonperforming loans needed to operate our business; or our inability to secure alternative financing on favorable terms, if at all. If we are unable to retain, renegotiate, expand or replace our credit facilities, including as a result of failure to satisfy the restrictive covenants contained in them, our liquidity and business operations could be impacted negatively. As referenced above, we have indebtedness in the form of Convertible Senior (cid:49)otes due 2020 and 2023 (collectively the "(cid:49)otes") and may not have the ability to raise the funds necessary to repurchase the (cid:49)otes upon a fundamental change or to settle conversions in cash. Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness, including the (cid:49)otes, or to make cash payments in connection with any conversion of the (cid:49)otes depends on our future performance, which could be negatively impacted by economic, financial, competitive and other factors beyond our control. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at that time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations. In addition, in the event the conditional conversion features of the (cid:49)otes are triggered, holders of the (cid:49)otes are entitled to convert the (cid:49)otes into shares of our common stock at any time during specified periods at their option, subject to the terms of the indenture governing the (cid:49)otes. Upon conversion, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional shares of our common stock), we will be required to make cash payments in respect of the (cid:49)otes. However, we may not have enough available cash or be able to obtain financing at the time we are required to repurchase (cid:49)otes surrendered to settle conversions in cash, and our ability to repurchase the (cid:49)otes or pay cash upon conversion may be limited by law. Any issuance of shares of our common stock upon conversion of the (cid:49)otes would dilute the ownership interest of our stockholders. We may be restricted from paying cash upon conversion of the (cid:49)otes, repurchasing the (cid:49)otes for cash when required and repaying the (cid:49)otes at maturity or upon acceleration following an event of default under the (cid:49)otes unless we repay all amounts outstanding under, and terminate, our (cid:49)orth American Credit Agreement. Additionally, our future indebtedness may contain limitations on our ability to pay cash upon conversion of the (cid:49)otes and on our ability to repurchase the (cid:49)otes. The terms of our (cid:49)orth American Credit Agreement prohibit us from paying cash upon conversion of the (cid:49)otes, repurchasing acceleration following an event of default under the indenture governing the (cid:49)otes if a default or an event of default exists on the date of such required payment, repurchase or repayment, as applicable, or certain other conditions are not met, including pro forma compliance with the financial covenants and having “Sufficient Liquidity” (described below). As a result, we will be restricted from making such payments unless the default or event of default under our (cid:49)orth American Credit Agreement is cured or waived, such conditions are met and/or we repay all amounts then outstanding under, and terminate, our (cid:49)orth American Credit Agreement. 16 liquidity and business operations if we are unable to retain, renegotiate, expand or replace our bank loans and credit facilities or Changes in interest rates could increase our interest expense and reduce our net income. In addition, under our (cid:49)orth American Credit Agreement our ability to settle conversions of the (cid:49)otes in cash requires that immediately prior to any such conversion, our cash and cash equivalents (including our availability under our domestic and multi- currency revolving facilities under our (cid:49)orth American Credit Agreement) be at least 115% of the sum of the principal amount of the (cid:49)otes to be paid in cash (“Sufficient Liquidity”). The terms of any additional indebtedness incurred as permitted by our (cid:49)orth American Credit Agreement may contain similar or more onerous restrictions than the foregoing. Our failure to repurchase (cid:49)otes, to pay, when due, cash upon conversion of the (cid:49)otes or repay the (cid:49)otes at maturity or upon acceleration following an event of default under the indenture governing the (cid:49)otes would constitute a default under the indenture governing the (cid:49)otes. A default under the indenture may constitute a default under our (cid:49)orth American Credit Agreement. Our revolving credit facilities bear interest at variable rates. Increases in interest rates could increase our interest expense which would, in turn, lower our earnings. From time to time, we may enter into hedging transactions to mitigate our interest rate risk on all or a portion of our debt. Hedging strategies rely on assumptions and projections. If these assumptions and projections prove to be incorrect or our hedges do not adequately mitigate the impact of changes in interest rates, we may experience volatility in our earnings that could adversely affect our results of operations and financial condition. Default by or failure of one or more of our counterparty financial institutions could cause us to incur significant losses. As part of our risk management activities, we enter into transactions involving derivative financial instruments, including, among others, forward contracts and interest rate swap contracts, with various financial institutions. In addition, we have significant amounts of cash and cash equivalents on deposit or in accounts with banks or other financial institutions in the U.S. and abroad. As a result, we are exposed to the risk of default by, or failure of, counterparty financial institutions. The risk of counterparty default or failure may be heightened during economic downturns and periods of uncertainty in the financial markets. If one of our counterparties were to become insolvent or file for bankruptcy, our ability to recover losses incurred as a result of default or to retrieve our assets that are deposited or held in accounts with such counterparty may be limited by the counterparty's liquidity or the applicable laws governing the insolvency or bankruptcy proceedings. Uncertainty about the future of the LIBOR may adversely affect our business. LIBOR is a reference rate used for over $110 trillion of financial contracts on a global basis. We incorporate LIBOR in both our bank loan and derivative hedging agreements. Due to reforms coming out of the 2008 financial crisis, LIBOR is scheduled to sunset at the end of 2021 and be replaced by an Alternative Reference Rate ("ARR"). A number of regulatory institutions are involved in coordinating this transition including the Financial Conduct Authority in the UK, the U.S. Federal Reserve, the SEC, and the FASB. Key industry-wide issues regarding the transition are still unresolved; these include the fact that a term structure (1 month, 3 month, 6 month, etc.) for the ARR has not yet been developed and a way to ensure neither borrowers nor lenders gain an unfair advantage has yet to be finalized. It is unknown whether proposed alternative reference rates will attain market acceptance as replacements for LIBOR or whether the outstanding issues related to them will be satisfactorily resolved. As a result, while we do not expect the impact to have a significant effect on our cost of capital, financial results, and cash flows, the final impact cannot yet be determined. Item 1B. Unresolved Staff Comments. (cid:49)one. Item 2. Properties. Our corporate headquarters and primary domestic operations facilities are located in (cid:49)orfolk, Virginia. In addition, at December 31, 2019, we had operational centers in the Americas (13 leased and 3 owned), Europe (12 leased) and Australia (1 leased). the (cid:49)otes for cash when required upon the occurrence of a fundamental change and repaying the (cid:49)otes at maturity or upon Item 3. Legal Proceedings. We and our subsidiaries are from time to time subject to a variety of routine legal and regulatory claims, inquiries and proceedings, most of which are incidental to the ordinary course of our business. We initiate lawsuits against customers and are 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 us in which they allege that we have 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 us. Refer to (cid:49)ote 14 to our Consolidated Financial Statements included in Item 8 of this Form 10-K for information regarding legal proceedings in which we are involved. 17 fp0052934_PRA_10k_2020_combined4.indd 19 4/20/2020 12:52:34 PM Item 4. Mine Safety Disclosures. (cid:49)ot applicable. Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity PART II Securities. Common Stock Stock Performance Our common stock is traded on (cid:49)asdaq under the symbol "PRAA." Based on information provided by our transfer agent and registrar, as of February 14, 2020, there were 46 holders of record. The following graph and subsequent table compare from December 31, 2014 to December 31, 2019, the cumulative stockholder returns assuming an initial investment of $100 in our common stock (PRAA), the stocks comprising the (cid:49)asdaq Financial 100 (IXF) and the stocks comprising the (cid:49)asdaq Global Market Composite Index ((cid:49)QGM) at the beginning of the period. Any dividends paid during the five-year period are assumed to be reinvested. PRA Group, Inc. (cid:49)asdaq Financial 100 (cid:49)asdaq Global Market Composite Index Ticker 2014 2015 2016 2017 2018 2019 PRAA $ IXF $ (cid:49)QGM $ 100 100 100 $ $ $ 60 106 100 $ $ $ 68 135 96 $ $ $ 57 155 120 $ $ $ 42 142 112 $ $ $ 63 184 155 The comparisons of stock performance shown above are not intended to forecast or be indicative of possible future performance of our common stock. We do not make or endorse any predictions as to our future stock performance. Dividend Policy Our board of directors sets our dividend policy. We do not currently pay regular dividends on our common stock and did not pay dividends in the three years ended December 31, 2019; however, our board of directors may determine in the future to declare or pay dividends on our common stock. Under the terms of (cid:49)orthern American Credit Agreement, cash dividends may not exceed $20 million in any fiscal year without the consent of our lenders. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our results of operations, financial condition, contractual restrictions, capital requirements, business prospects, and other factors that our board of directors may consider relevant. 18 19 fp0052934_PRA_10k_2020_combined4.indd 20 4/20/2020 12:52:34 PM Item 4. Mine Safety Disclosures. (cid:49)ot applicable. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Common Stock Our common stock is traded on (cid:49)asdaq under the symbol "PRAA." Based on information provided by our transfer agent and registrar, as of February 14, 2020, there were 46 holders of record. Stock Performance The following graph and subsequent table compare from December 31, 2014 to December 31, 2019, the cumulative stockholder returns assuming an initial investment of $100 in our common stock (PRAA), the stocks comprising the (cid:49)asdaq Financial 100 (IXF) and the stocks comprising the (cid:49)asdaq Global Market Composite Index ((cid:49)QGM) at the beginning of the period. Any dividends paid during the five-year period are assumed to be reinvested. PRA Group, Inc. (cid:49)asdaq Financial 100 (cid:49)asdaq Global Market Composite Index Ticker 2014 2015 2016 2017 2018 2019 PRAA $ IXF $ (cid:49)QGM $ 100 100 100 $ $ $ 60 106 100 $ $ $ 68 135 96 $ $ $ 57 155 120 $ $ $ 42 142 112 $ $ $ 63 184 155 The comparisons of stock performance shown above are not intended to forecast or be indicative of possible future performance of our common stock. We do not make or endorse any predictions as to our future stock performance. Dividend Policy Our board of directors sets our dividend policy. We do not currently pay regular dividends on our common stock and did not pay dividends in the three years ended December 31, 2019; however, our board of directors may determine in the future to declare or pay dividends on our common stock. Under the terms of (cid:49)orthern American Credit Agreement, cash dividends may not exceed $20 million in any fiscal year without the consent of our lenders. Any future determination as to the declaration and payment of dividends will be at the discretion of our board of directors and will depend on then existing conditions, including our results of operations, financial condition, contractual restrictions, capital requirements, business prospects, and other factors that our board of directors may consider relevant. 18 19 fp0052934_PRA_10k_2020_combined4.indd 21 4/20/2020 12:52:34 PM Recent Sales of Unregistered Securities (cid:49)one. Securities Authorized for Issuance Under Equity Compensation Plans For information regarding securities authorized for issuance under equity compensation plans see (cid:49)ote 11 to our Consolidated Financial Statements included in Item 8 of this Form 10-K. Share Repurchase Programs (cid:49)one. Item 6. Selected Financial Data. The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this Form 10-K and our Consolidated Financial Statements and the related notes thereto included in Item 8 of this Form 10-K. Certain prior year amounts have been reclassified for consistency with the current period presentation. Consolidated Income Statements, Operating and Other Financial Data $ in thousands, except per share amounts 2019 2018 2017 2016 2015 Years Ended December 31, Income recognized on finance receivables $ 998,361 $ 891,899 $ 795,435 $ 845,142 $ 894,491 24,916 7,855 828,206 77,381 8,080 930,603 64,383 12,513 971,387 (24,025) (33,425) (11,898) (98,479) (29,369) Compensation and employee services 273,033 258,846 268,345 15,769 2,951 1,017,081 310,441 55,261 134,156 55,812 63,513 44,057 17,854 17,464 46,811 745,369 247,687 — (141,918) 11,954 (364) 117,359 19,680 97,679 11,521 $1.90 $1.89 45,387 45,577 14,916 1,441 908,256 319,400 42,941 104,988 33,854 61,492 43,224 16,906 19,322 47,444 689,571 185,260 26,575 (121,078) (944) (316) 89,497 13,763 75,734 10,171 $1.45 $1.44 45,280 45,413 43,351 76,047 35,530 62,792 33,132 14,823 19,763 44,103 602,574 213,734 48,474 (98,041) (1,104) (2,790) 160,273 (10,852) 171,125 6,810 $3.60 $3.59 45,671 45,823 47,717 84,485 44,922 63,098 33,771 15,710 24,359 39,466 612,374 219,750 — (80,864) 2,564 (5,823) 135,627 43,577 92,050 5,795 $1.86 $1.86 46,316 46,388 53,393 76,063 32,188 65,155 33,113 14,714 19,874 68,829 631,674 310,344 — (60,336) 7,514 — 257,522 89,391 168,131 205 $3.49 $3.47 48,128 48,405 $ 86,158 $ 65,563 $ 164,315 $ 86,255 $ 167,926 Income Statement Data: Revenues: Fee income Other revenue Total revenues (cid:49)et allowance charges Operating expenses: Legal collection fees Legal collection costs Agency fees Outside fees and services Communication Rent and occupancy Depreciation and amortization Other operating expenses Total operating expenses Income from operations Other income and (expense): Gain on sale of subsidiaries Interest expense, net Foreign exchange gain/(loss) Other Income before income taxes Income tax expense/(benefit) (cid:49)et income Adjustment for net income attributable to noncontrolling interests (cid:49)et income attributable to PRA Group, Inc. (cid:49)et income per share attributable to PRA Group, Inc.: Weighted average number of shares outstanding: Basic Diluted Basic Diluted Operating and Other Financial Data: Cash receipts Cash Efficiency Ratio (1) Acquisitions of finance receivables, at cost (2) Full-time equivalents at period end $ $ 1,857,040 1,640,121 1,537,521 1,569,367 1,603,878 59.9% 58.0% 60.8% 61.0% 60.6% 1,289,327 4,412 1,117,997 5,377 1,108,959 5,154 947,331 4,019 963,811 3,799 $ $ $ $ $ $ $ $ (1) Calculated by dividing cash receipts less operating expenses by cash receipts. (2) Represents cash paid for finance receivables through the ordinary course of business as well as the acquisition date finance receivable portfolios that were acquired through our business acquisitions. 20 21 fp0052934_PRA_10k_2020_combined4.indd 22 4/20/2020 12:52:34 PM Recent Sales of Unregistered Securities Item 6. Selected Financial Data. Securities Authorized for Issuance Under Equity Compensation Plans For information regarding securities authorized for issuance under equity compensation plans see (cid:49)ote 11 to our Consolidated Financial Statements included in Item 8 of this Form 10-K. Share Repurchase Programs (cid:49)one. (cid:49)one. The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this Form 10-K and our Consolidated Financial Statements and the related notes thereto included in Item 8 of this Form 10-K. Certain prior year amounts have been reclassified for consistency with the current period presentation. Consolidated Income Statements, Operating and Other Financial Data $ in thousands, except per share amounts Income Statement Data: Revenues: Income recognized on finance receivables Fee income Other revenue Total revenues $ 2019 998,361 15,769 2,951 1,017,081 Years Ended December 31, 2017 2018 2016 $ $ 891,899 14,916 1,441 908,256 $ 795,435 24,916 7,855 828,206 $ 845,142 77,381 8,080 930,603 2015 894,491 64,383 12,513 971,387 (cid:49)et allowance charges Operating expenses: Compensation and employee services Legal collection fees Legal collection costs Agency fees Outside fees and services Communication Rent and occupancy Depreciation and amortization Other operating expenses Total operating expenses Income from operations Other income and (expense): Gain on sale of subsidiaries Interest expense, net Foreign exchange gain/(loss) Other Income before income taxes Income tax expense/(benefit) (cid:49)et income Adjustment for net income attributable to noncontrolling interests (cid:49)et income attributable to PRA Group, Inc. (cid:49)et income per share attributable to PRA Group, Inc.: Basic Diluted Weighted average number of shares outstanding: Basic Diluted Operating and Other Financial Data: Cash receipts Cash Efficiency Ratio (1) Acquisitions of finance receivables, at cost (2) Full-time equivalents at period end (24,025) (33,425) (11,898) (98,479) (29,369) 310,441 55,261 134,156 55,812 63,513 44,057 17,854 17,464 46,811 745,369 247,687 — (141,918) 11,954 (364) 117,359 19,680 97,679 319,400 42,941 104,988 33,854 61,492 43,224 16,906 19,322 47,444 689,571 185,260 26,575 (121,078) (944) (316) 89,497 13,763 75,734 11,521 10,171 273,033 43,351 76,047 35,530 62,792 33,132 14,823 19,763 44,103 602,574 213,734 48,474 (98,041) (1,104) (2,790) 160,273 (10,852) 171,125 6,810 258,846 47,717 84,485 44,922 63,098 33,771 15,710 24,359 39,466 612,374 219,750 — (80,864) 2,564 (5,823) 135,627 43,577 92,050 5,795 268,345 53,393 76,063 32,188 65,155 33,113 14,714 19,874 68,829 631,674 310,344 — (60,336) 7,514 — 257,522 89,391 168,131 205 $ 86,158 $ 65,563 $ 164,315 $ 86,255 $ 167,926 $1.90 $1.89 45,387 45,577 $1.45 $1.44 45,280 45,413 $3.60 $3.59 45,671 45,823 $1.86 $1.86 46,316 46,388 $3.49 $3.47 48,128 48,405 $ $ 1,857,040 59.9% 1,289,327 4,412 $ $ 1,640,121 58.0% 1,117,997 5,377 $ $ 1,537,521 60.8% 1,108,959 5,154 $ $ 1,569,367 61.0% 947,331 4,019 $ $ 1,603,878 60.6% 963,811 3,799 (1) Calculated by dividing cash receipts less operating expenses by cash receipts. (2) Represents cash paid for finance receivables through the ordinary course of business as well as the acquisition date finance receivable portfolios that were acquired through our business acquisitions. 20 21 fp0052934_PRA_10k_2020_combined4.indd 23 4/20/2020 12:52:35 PM Cash and cash equivalents Finance receivables, net Total assets Borrowings Total equity Key Balance Sheet Data Amounts in thousands As of December 31, 2019 2018 2017 2016 2015 $ 119,774 $ 98,695 $ 120,516 $ 94,287 $ 71,372 3,514,165 4,423,891 2,808,425 1,227,013 3,084,777 3,909,559 2,473,656 1,123,969 2,776,199 3,700,972 2,170,182 1,140,717 2,309,513 3,165,157 1,784,101 918,321 2,202,113 2,990,567 1,717,129 839,747 Quarterly Income Statement Data Amounts in thousands, except per share amounts Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 Mar 31, 2019 Dec 31, 2018 Sep 30, 2018 Jun 30, 2018 Mar 31, 2018 Revenues: Income recognized on finance receivables Fee income Other revenue Total revenues $ 262,835 $ 247,471 $ 249,219 $ 238,836 $ 231,029 $ 223,228 $ 219,018 $ 218,624 4,297 2,001 269,133 2,391 152 250,014 2,707 131 252,057 6,374 667 245,877 4,686 1,027 236,742 2,561 99 225,888 2,342 158 221,518 5,327 157 224,108 (cid:49)et allowance charges (12,598) (4,136) (1,196) (6,095) (21,381) (8,285) (2,834) (925) Operating expenses: Compensation and employee services Legal collection fees Legal collection costs Agency fees Outside fees and services Communication Rent and occupancy Depreciation and amortization Other operating expenses Total operating expenses Income from operations Other income and (expense): Gain on sale of subsidiaries Interest expense, net Foreign exchange gain/(loss) Other Income before income taxes Income tax expense (cid:49)et income Adjustment for net income attributable to noncontrolling interests (cid:49)et income attributable to PRA Group, Inc. (cid:49)et income per share attributable to PRA Group, Inc.: Basic Diluted Weighted average number of shares outstanding: Basic Diluted $ $ $ 75,671 13,822 34,411 15,979 15,239 9,722 4,586 4,123 12,198 185,751 70,784 — (36,046) 595 (241) 35,092 4,073 31,019 75,317 14,083 31,395 12,788 16,733 10,310 4,414 4,046 12,102 181,188 64,690 — (35,864) 5,406 (19) 34,213 6,665 27,548 79,808 14,297 33,121 13,013 16,293 10,824 4,491 4,723 10,926 187,496 63,365 — (36,027) (311) 248 27,275 5,075 22,200 79,645 13,059 35,229 14,032 15,248 13,201 4,363 4,572 11,585 190,934 48,848 — (33,981) 6,264 (352) 20,779 3,867 16,912 79,123 11,501 33,281 9,088 17,068 10,645 4,319 5,092 13,030 183,147 32,214 26,575 (33,549) (4,553) (381) 20,306 1,980 18,326 78,350 10,428 30,769 8,350 15,701 10,240 4,270 4,776 10,602 173,486 44,117 — (30,624) 626 222 14,341 1,789 12,552 80,690 10,343 18,695 8,138 14,565 10,782 4,003 4,525 11,628 163,369 55,315 — (31,124) 1,690 (400) 25,481 3,857 21,624 81,237 10,669 22,243 8,278 14,158 11,557 4,314 4,929 12,184 169,569 53,614 — (25,781) 1,293 243 29,369 6,137 23,232 3,678 2,577 3,581 1,685 3,384 2,625 2,036 2,126 27,341 $ 24,971 $ 18,619 $ 15,227 $ 14,942 $ 9,927 $ 19,588 $ 21,106 0.60 0.60 $ $ 0.55 0.55 $ $ 0.41 0.41 $ $ 0.34 0.34 $ $ 0.33 0.33 $ $ 0.22 0.22 $ $ 0.43 0.43 $ $ 0.47 0.47 45,413 45,748 45,410 45,645 45,387 45,495 45,338 45,419 45,304 45,394 45,302 45,440 45,283 45,449 45,231 45,370 Quarterly Balance Sheet Data Amounts in thousands Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 Mar 31, 2019 Dec 31, 2018 Sep 30, 2018 Jun 30, 2018 Mar 31, 2018 Cash and cash equivalents $ 119,774 $ 90,000 $ 105,496 $ 102,102 $ 98,695 $ 114,176 $ 71,570 $ 101,418 56,176 55,204 85,911 85,082 45,173 21,750 80,541 87,764 3,514,165 3,238,813 3,230,949 3,177,229 3,084,777 2,823,622 2,734,673 2,771,408 46,157 16,809 61,453 54,136 — 5,522 32,721 9,067 8,912 63,724 55,010 — 17,369 27,296 14,688 12,163 60,944 53,364 — 18,914 31,650 14,308 10,271 59,377 53,788 — 22,523 37,639 480,794 465,572 489,293 480,518 464,116 519,045 519,811 544,293 $ 4,423,891 $ 4,118,280 $ 4,165,414 $ 4,106,334 $ 3,909,559 $ 3,659,971 $ 3,598,318 $ 3,702,789 10,606 17,918 63,225 56,501 68,972 4,497 31,263 88,925 4,046 85,390 73,377 15,808 23,479 60,697 56,847 70,723 4,757 36,380 84,753 624 95,441 74,428 13,770 11,323 66,401 51,484 72,817 5,219 32,751 74,950 372 100,742 76,750 107,840 18,082 15,472 61,619 54,463 70,550 5,247 35,970 77,838 389 74,308 95,314 $ 4,258 $ 3,469 $ 3,279 $ 5,682 $ 6,110 $ 3,773 $ 5,090 $ 2,330 79,396 15,080 81,445 13,408 78,852 466 85,137 23,872 108,367 114,979 120,990 140,224 146,410 — — — Interest-bearing deposits 106,246 112,024 82,666 79,282 82,613 90,769 2,808,425 2,567,086 2,618,382 2,586,409 2,473,656 2,194,687 2,133,997 2,150,873 26,211 29,607 27,307 25,789 7,370 8,474 8,061 15,146 3,196,878 2,967,432 3,009,622 2,974,096 2,779,257 2,502,059 2,449,303 2,514,537 Redeemable noncontrolling interest — 4,535 4,935 6,199 6,333 6,955 8,322 9,697 Assets Investments Finance receivables, net Other receivables, net Income taxes receivable Deferred tax asset, net Property and equipment, net Right-of-use assets Goodwill Intangible assets, net Other assets Total assets Liabilities and Equity Liabilities: Accounts payable Accrued expenses Income taxes payable Deferred tax liability, net Lease liabilities Borrowings Other liabilities Total liabilities Equity: Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total stockholders' equity - PRA Group, Inc. 454 67,321 454 64,631 454 61,705 454 59,091 453 60,303 453 58,713 453 56,410 453 54,271 1,362,631 1,335,290 1,310,319 1,291,700 1,276,473 1,261,531 1,251,604 1,232,016 (261,018) (305,956) (252,124) (248,521) (242,109) (213,078) (209,167) (155,687) 1,169,388 1,094,419 1,120,354 1,102,724 1,095,120 1,107,619 1,099,300 1,131,053 (cid:49)oncontrolling interests 57,625 51,894 30,503 23,315 28,849 43,338 41,393 47,502 Total equity 1,227,013 1,146,313 1,150,857 1,126,039 1,123,969 1,150,957 1,140,693 1,178,555 Total liabilities and equity $ 4,423,891 $ 4,118,280 $ 4,165,414 $ 4,106,334 $ 3,909,559 $ 3,659,971 $ 3,598,318 $ 3,702,789 22 23 fp0052934_PRA_10k_2020_combined4.indd 24 4/20/2020 12:52:35 PM Cash and cash equivalents Finance receivables, net Total assets Borrowings Total equity Key Balance Sheet Data Amounts in thousands As of December 31, 2019 2018 2017 2016 2015 $ 119,774 $ 98,695 $ 120,516 $ 94,287 $ 71,372 3,514,165 4,423,891 2,808,425 1,227,013 3,084,777 3,909,559 2,473,656 1,123,969 2,776,199 3,700,972 2,170,182 1,140,717 2,309,513 3,165,157 1,784,101 918,321 2,202,113 2,990,567 1,717,129 839,747 Quarterly Income Statement Data Amounts in thousands, except per share amounts Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 Mar 31, 2019 Dec 31, 2018 Sep 30, 2018 Jun 30, 2018 Mar 31, 2018 Revenues: Income recognized on finance receivables Fee income Other revenue Total revenues $ 262,835 $ 247,471 $ 249,219 $ 238,836 $ 231,029 $ 223,228 $ 219,018 $ 218,624 4,297 2,001 2,391 152 2,707 131 6,374 667 4,686 1,027 2,561 99 2,342 158 5,327 157 269,133 250,014 252,057 245,877 236,742 225,888 221,518 224,108 (cid:49)et allowance charges (12,598) (4,136) (1,196) (6,095) (21,381) (8,285) (2,834) (925) Gain on sale of subsidiaries — — — — — — Interest expense, net (36,046) (35,864) (36,027) (33,981) (30,624) (31,124) (25,781) Operating expenses: Compensation and employee services Legal collection fees Legal collection costs Agency fees Outside fees and services Communication Rent and occupancy Depreciation and amortization Other operating expenses Total operating expenses Income from operations Other income and (expense): Foreign exchange gain/(loss) Other Income before income taxes Income tax expense (cid:49)et income Adjustment for net income attributable to noncontrolling interests (cid:49)et income attributable to PRA Group, Inc. (cid:49)et income per share attributable to PRA Group, Inc.: Weighted average number of shares Basic Diluted outstanding: Basic Diluted $ $ $ 75,671 13,822 34,411 15,979 15,239 9,722 4,586 4,123 12,198 185,751 70,784 75,317 14,083 31,395 12,788 16,733 10,310 4,414 4,046 12,102 181,188 64,690 79,808 14,297 33,121 13,013 16,293 10,824 4,491 4,723 10,926 187,496 63,365 79,645 13,059 35,229 14,032 15,248 13,201 4,363 4,572 11,585 190,934 48,848 595 (241) 35,092 4,073 31,019 5,406 (19) 34,213 6,665 27,548 (311) 248 27,275 5,075 22,200 6,264 (352) 20,779 3,867 16,912 79,123 11,501 33,281 9,088 17,068 10,645 4,319 5,092 13,030 183,147 32,214 26,575 (33,549) (4,553) (381) 20,306 1,980 18,326 78,350 10,428 30,769 8,350 15,701 10,240 4,270 4,776 10,602 173,486 44,117 — 626 222 14,341 1,789 12,552 80,690 10,343 18,695 8,138 14,565 10,782 4,003 4,525 11,628 163,369 55,315 1,690 (400) 25,481 3,857 21,624 81,237 10,669 22,243 8,278 14,158 11,557 4,314 4,929 12,184 169,569 53,614 1,293 243 29,369 6,137 23,232 3,678 2,577 3,581 1,685 3,384 2,625 2,036 2,126 27,341 $ 24,971 $ 18,619 $ 15,227 $ 14,942 $ 9,927 $ 19,588 $ 21,106 0.60 0.60 $ $ 0.55 0.55 $ $ 0.41 0.41 $ $ 0.34 0.34 $ $ 0.33 0.33 $ $ 0.22 0.22 $ $ 0.43 0.43 $ $ 0.47 0.47 45,413 45,748 45,410 45,645 45,387 45,495 45,338 45,419 45,304 45,394 45,302 45,440 45,283 45,449 45,231 45,370 Quarterly Balance Sheet Data Amounts in thousands Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 Mar 31, 2019 Dec 31, 2018 Sep 30, 2018 Jun 30, 2018 Mar 31, 2018 Assets Cash and cash equivalents $ 119,774 $ 90,000 $ 105,496 $ 102,102 $ 98,695 $ 114,176 $ 71,570 $ 101,418 Investments Finance receivables, net Other receivables, net Income taxes receivable Deferred tax asset, net Property and equipment, net Right-of-use assets Goodwill Intangible assets, net Other assets Total assets Liabilities and Equity Liabilities: Accounts payable Accrued expenses Income taxes payable Deferred tax liability, net Lease liabilities 56,176 55,204 85,911 85,082 45,173 21,750 80,541 87,764 3,514,165 3,238,813 3,230,949 3,177,229 3,084,777 2,823,622 2,734,673 2,771,408 10,606 17,918 63,225 56,501 68,972 15,808 23,479 60,697 56,847 70,723 13,770 11,323 66,401 51,484 72,817 18,082 15,472 61,619 54,463 70,550 46,157 16,809 61,453 54,136 — 9,067 8,912 63,724 55,010 — 14,688 12,163 60,944 53,364 — 14,308 10,271 59,377 53,788 — 480,794 465,572 489,293 480,518 464,116 519,045 519,811 544,293 4,497 31,263 4,757 36,380 5,219 32,751 5,247 35,970 5,522 32,721 17,369 27,296 18,914 31,650 22,523 37,639 $ 4,423,891 $ 4,118,280 $ 4,165,414 $ 4,106,334 $ 3,909,559 $ 3,659,971 $ 3,598,318 $ 3,702,789 $ 4,258 $ 3,469 $ 3,279 $ 5,682 $ 6,110 $ 3,773 $ 5,090 $ 2,330 88,925 4,046 85,390 73,377 84,753 624 95,441 74,428 74,950 372 100,742 76,750 107,840 77,838 389 79,396 15,080 81,445 13,408 78,852 466 85,137 23,872 108,367 114,979 120,990 140,224 146,410 74,308 95,314 — — — 82,666 79,282 82,613 90,769 Interest-bearing deposits 106,246 112,024 Borrowings Other liabilities Total liabilities 2,808,425 2,567,086 2,618,382 2,586,409 2,473,656 2,194,687 2,133,997 2,150,873 26,211 29,607 27,307 25,789 7,370 8,474 8,061 15,146 3,196,878 2,967,432 3,009,622 2,974,096 2,779,257 2,502,059 2,449,303 2,514,537 Redeemable noncontrolling interest — 4,535 4,935 6,199 6,333 6,955 8,322 9,697 Equity: Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total stockholders' equity - PRA Group, Inc. 454 67,321 454 64,631 454 61,705 454 59,091 453 60,303 453 58,713 453 56,410 453 54,271 1,362,631 1,335,290 1,310,319 1,291,700 1,276,473 1,261,531 1,251,604 1,232,016 (261,018) (305,956) (252,124) (248,521) (242,109) (213,078) (209,167) (155,687) 1,169,388 1,094,419 1,120,354 1,102,724 1,095,120 1,107,619 1,099,300 1,131,053 (cid:49)oncontrolling interests 57,625 51,894 30,503 23,315 28,849 43,338 41,393 47,502 Total equity 1,227,013 1,146,313 1,150,857 1,126,039 1,123,969 1,150,957 1,140,693 1,178,555 Total liabilities and equity $ 4,423,891 $ 4,118,280 $ 4,165,414 $ 4,106,334 $ 3,909,559 $ 3,659,971 $ 3,598,318 $ 3,702,789 22 23 fp0052934_PRA_10k_2020_combined4.indd 25 4/20/2020 12:52:35 PM Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations 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. Certain prior year amounts have been reclassified for consistency with the current period presentation. Revenues: Frequently Used Terms We 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 collections on our owned finance receivables portfolios plus fee income. "Core" accounts or portfolios refer to accounts or portfolios that are nonperforming loans and are not in an insolvent status upon 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. "Principal amortization" refers to cash collections applied to principal on finance receivables. "Purchase price" refers to the cash paid to a seller to acquire nonperforming loans, plus certain capitalized costs, less buybacks. "Purchase price multiple" refers to the total estimated collections (as defined below) on owned finance receivables portfolios divided by purchase price. "Total estimated collections" or "TEC" refers to actual cash collections, including cash sales, plus estimated remaining collections on our finance receivables portfolios. "Portfolio purchases" refers to all portfolios purchased in the normal course of business and excludes those purchased via business acquisitions. "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. Unless otherwise specified, references to 2019, 2018 and 2017 are for the years ended December 31, 2019, December 31, 2018 and December 31, 2017, respectively. The results of operations include the financial results of the Company and all of our subsidiaries. The following table sets forth consolidated income statement amounts as a percentage of total revenues for the periods indicated (dollars in thousands): 2019 2018 2017 Income recognized on finance receivables Fee income Other revenue Total revenues $ 998,361 98.2% $ 891,899 98.2% $ 795,435 96.0% 15,769 2,951 1.5 0.3 1,017,081 100.0 14,916 1,441 908,256 1.6 0.2 100.0 24,916 7,855 828,206 3.0 0.9 100.0 (cid:49)et allowance charges (24,025) (2.4) (33,425) (3.7) (11,898) (1.4) Operating expenses: Compensation and employee services 273,033 33.0 Legal collection fees Legal collection costs Agency fees Outside fees and services Communication Rent and occupancy Depreciation and amortization Other operating expenses Total operating expenses Income from operations Other income and (expense): Gain on sale of subsidiaries Interest expense, net Foreign exchange gain/(loss) Other Income before income taxes Income tax expense/(benefit) (cid:49)et income 310,441 55,261 134,156 55,812 63,513 44,057 17,854 17,464 46,811 745,369 247,687 11,954 (364) 117,359 19,680 97,679 11,521 86,158 $ 30.5 5.4 13.2 5.5 6.2 4.3 1.8 1.7 4.6 73.2 24.4 1.2 (0.1) 11.5 1.9 9.6 1.1 319,400 42,941 104,988 33,854 61,492 43,224 16,906 19,322 47,444 689,571 185,260 (944) (316) 89,497 13,763 75,734 10,171 65,563 — — 26,575 (141,918) (14.0) (121,078) 35.2 4.7 11.6 3.7 6.8 4.8 1.9 2.1 5.1 75.9 20.4 2.9 (13.3) (0.1) (0.1) 9.8 1.5 8.3 1.1 43,351 76,047 35,530 62,792 33,132 14,823 19,763 44,103 602,574 213,734 48,474 (98,041) (1,104) (2,790) 160,273 (10,852) 171,125 6,810 5.2 9.2 4.3 7.6 4.0 1.8 2.4 5.3 72.8 25.8 5.9 (11.8) (0.1) (0.3) 19.4 (1.3) 20.7 0.8 19.9% Adjustment for net income attributable to noncontrolling interests (cid:49)et income attributable to PRA Group, Inc. 8.5% $ 7.2% $ 164,315 24 25 fp0052934_PRA_10k_2020_combined4.indd 26 4/20/2020 12:52:35 PM Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations 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. The results of operations include the financial results of the Company and all of our subsidiaries. The following table sets forth consolidated income statement amounts as a percentage of total revenues for the periods indicated (dollars in thousands): 2019 2018 2017 Certain prior year amounts have been reclassified for consistency with the current period presentation. Revenues: Income recognized on finance receivables Fee income Other revenue Total revenues $ 998,361 98.2% $ 891,899 98.2% $ 795,435 96.0% 15,769 2,951 1.5 0.3 1,017,081 100.0 14,916 1,441 908,256 1.6 0.2 100.0 24,916 7,855 828,206 3.0 0.9 100.0 (cid:49)et allowance charges (24,025) (2.4) (33,425) (3.7) (11,898) (1.4) Operating expenses: Compensation and employee services Legal collection fees Legal collection costs Agency fees Outside fees and services Communication Rent and occupancy Depreciation and amortization Other operating expenses Total operating expenses Income from operations Other income and (expense): Gain on sale of subsidiaries Interest expense, net Foreign exchange gain/(loss) Other Income before income taxes Income tax expense/(benefit) (cid:49)et income Adjustment for net income attributable to noncontrolling interests (cid:49)et income attributable to PRA Group, Inc. 310,441 55,261 134,156 55,812 63,513 44,057 17,854 17,464 46,811 745,369 247,687 30.5 5.4 13.2 5.5 6.2 4.3 1.8 1.7 4.6 73.2 24.4 319,400 42,941 104,988 33,854 61,492 43,224 16,906 19,322 47,444 689,571 185,260 — — 26,575 (141,918) (14.0) (121,078) 11,954 (364) 117,359 19,680 97,679 11,521 86,158 $ 1.2 (0.1) 11.5 1.9 9.6 1.1 8.5% $ (944) (316) 89,497 13,763 75,734 10,171 65,563 273,033 33.0 35.2 4.7 11.6 3.7 6.8 4.8 1.9 2.1 5.1 75.9 20.4 2.9 (13.3) (0.1) (0.1) 9.8 1.5 8.3 1.1 43,351 76,047 35,530 62,792 33,132 14,823 19,763 44,103 602,574 213,734 48,474 (98,041) (1,104) (2,790) 160,273 (10,852) 171,125 6,810 7.2% $ 164,315 5.2 9.2 4.3 7.6 4.0 1.8 2.4 5.3 72.8 25.8 5.9 (11.8) (0.1) (0.3) 19.4 (1.3) 20.7 0.8 19.9% Frequently Used Terms We 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 collections on our owned finance receivables portfolios plus fee income. "Core" accounts or portfolios refer to accounts or portfolios that are nonperforming loans and are not in an insolvent status upon 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., "Principal amortization" refers to cash collections applied to principal on finance receivables. "Purchase price" refers to the cash paid to a seller to acquire nonperforming loans, plus certain capitalized costs, less "Purchase price multiple" refers to the total estimated collections (as defined below) on owned finance receivables "Total estimated collections" or "TEC" refers to actual cash collections, including cash sales, plus estimated remaining collections on our finance receivables portfolios. "Portfolio purchases" refers to all portfolios purchased in the normal course of business and excludes those purchased via "Portfolio acquisitions" refers to all portfolios added as a result of a purchase, but also includes portfolios added as a result business acquisitions. of a business acquisition. Canada, Germany and the UK. buybacks. portfolios divided by purchase price. Unless otherwise specified, references to 2019, 2018 and 2017 are for the years ended December 31, 2019, December 31, 2018 and December 31, 2017, respectively. 24 25 fp0052934_PRA_10k_2020_combined4.indd 27 4/20/2020 12:52:35 PM Cash Collections Cash collections were as follows for the periods indicated: (Amounts in millions) Americas Core Americas Insolvency Europe Core Europe Insolvency Total cash collections Cash collections adjusted (1) Cash collections on fully amortized pools Cash collections on pools on cost recovery (cid:49)et finance receivables on cost recovery at year-end Year Ended December 31, 2018 2017 2019 $ 1,141.5 180.9 480.1 38.8 $ 1,841.3 $ 1,841.3 47.1 13.5 33.7 $ 945.2 207.8 443.4 28.8 $ 1,625.2 $ 1,595.5 54.0 35.8 48.0 $ 860.9 222.5 407.0 22.2 $ 1,512.6 $ 1,518.7 57.6 37.7 166.6 Variances 2019 vs. 2018 196.3 $ (26.9) 36.7 10.0 216.1 $ 2018 vs. 2017 84.3 $ (14.7) 36.4 6.6 112.6 $ $ $ 245.8 (6.9) (22.3) (14.3) 76.8 (3.6) (1.9) (118.6) (1) Cash collections adjusted refers to 2018 cash collections remeasured using 2019 exchange rates and 2017 cash collections remeasured using 2018 exchange rates. (cid:49)et Allowance Charges Cash collections were $1,841.3 million in 2019, an increase of $216.1 million or 13.3%, compared to $1,625.2 million in 2018. The increase was largely due to our U.S. legal collections increasing $91.1 million, or 30.6%, due primarily to the increase in the number of accounts placed in the legal channel, and our U.S. call center and other collections increasing $48.6 million, or 8.5%, due primarily to higher Americas Core portfolio purchasing in 2018. Additionally, as a result of increased portfolio purchasing in South America and the acquisition of a business in Canada in the first quarter of 2019, Americas Core outside the U.S. cash collections increased $56.6 million or 73.8%. Furthermore, our Europe Core cash collections increased $36.7 million or 8.3%, due primarily to increased portfolio purchasing, the consolidation of a Polish fund in the third quarter of 2018, and operational improvements. These increases were partially offset by a decline of $26.9 million, or 13.0%, in Americas Insolvency cash collections caused mainly by investment volumes in the U.S. not offsetting the runoff of our older portfolios. Cash collections were $1,625.2 million in 2018, an increase of $112.6 million or 7.4%, compared to $1,512.6 million in 2017. The increase was largely due to U.S. call center collections increasing 15.7%, due primarily to record U.S. Core portfolio purchasing in 2018 and 2017, and U.S. legal collections increasing 8.0%. Additionally, Europe Core and Europe Insolvency cash collections increased 8.9% and 29.7%, respectively. The increase in Europe Core cash collections was primarily the result of increased portfolio purchasing in the fourth quarter of 2017 and 2018. These increases were partially offset by a 6.6% decline in Americas Insolvency cash collections caused mainly by a decline in portfolio buying in 2018 and the continued runoff of our older portfolios. Revenues Total revenues were $1,017.1 million in 2019, $908.3 million in 2018, and $828.2 million in 2017. A summary of how our revenues were generated during the years indicated is as follows (amounts in thousands): Cash collections Principal amortization Income recognized on finance receivables Fee income Other revenue Total revenues Income Recognized on Finance Receivables 2019 1,841,271 (842,910) 998,361 15,769 2,951 1,017,081 $ $ 2018 1,625,205 (733,306) 891,899 14,916 1,441 908,256 $ $ 2017 1,512,605 (717,170) 795,435 24,916 7,855 828,206 $ $ Income recognized on finance receivables was $998.4 million in 2019, an increase of $106.5 million or 11.9% compared to $891.9 million in 2018. The increase was primarily the result of the impact of recent Americas and Europe Core purchasing, sustained over-performance and related yield increases on pools broadly across all geographies, recent increased portfolio purchasing in South America, and the acquisition of a business in Canada in the first quarter of 2019. 26 27 fp0052934_PRA_10k_2020_combined4.indd 28 4/20/2020 12:52:35 PM Income recognized on finance receivables was $891.9 million in 2018, an increase of $96.5 million or 12.1% compared to $795.4 million in 2017. The increase was primarily the result of overperformance on select Americas Core and Europe Core portfolios which resulted in several yield increases on certain pools and the impact of record Americas Core purchasing in 2017 and 2018. This was partially offset by a decline in our Americas Insolvency revenue caused mainly by a decline in Americas Insolvency portfolio purchasing in 2018 and the continued runoff of our older portfolios. Fee income was $15.8 million in 2019, $14.9 million in 2018, and $24.9 million in 2017. The decrease of $10.0 million or 40.2% in 2018 was primarily due to the sale of our government services businesses and the sale of PRA Location Services, LLC Fee Income ("PLS") in 2017. Other Revenue Other revenue was $3.0 million in 2019, an increase of $1.6 million or 114.3% compared to $1.4 million in 2018, primarily reflecting the variability of our CCB business. Other revenue was $1.4 million in 2018, a decrease of $6.5 million or 82.3% compared to $7.9 million in 2017, primarily due to a decrease in revenue earned on our investments. (cid:49)et allowance charges are recorded for 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. In 2019, we recorded net allowance charges of $24.0 million consisting of $24.5 million on our Americas Core portfolios, primarily on vintages purchased between 2013-2015 and $0.6 million on our European portfolios partially offset by net allowance reversals of $1.1 million on our Americas Insolvency portfolios. In 2018, we recorded net allowance charges of $33.4 million consisting of $31.0 million on our Americas Core portfolios, primarily on vintages impacted most by the Consent Order and purchased between 2013-2015, $0.4 million on our Americas Insolvency portfolios, and $2.0 million on our European portfolios. In 2017, we recorded net allowance charges of $11.9 million consisting of $7.4 million on our Americas Core portfolios, $1.5 million on our Americas Insolvency portfolios, and $3.0 million on our European portfolios. Operating Expenses Compensation and Employee Services Total operating expenses were $745.4 million in 2019, $689.6 million in 2018, and $602.6 million in 2017. Compensation and employee service expenses were $310.4 million in 2019, a decrease of $9.0 million or 2.8% compared to $319.4 million in 2018. 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 and realize the impact of recent investments in technology. Total full-time equivalents decreased 17.9% to 4,412 as of December 31, 2019 from 5,377 as of December 31, 2018. Additionally, this category was impacted by the result of the sale of RCB operating platform in December 2018, which shifted certain expenses from fixed to variable and are now recorded as agency fees. Compensation and employee service expenses were $319.4 million in 2018, an increase of $46.4 million or 17.0% compared to $273.0 million in 2017. Compensation expense increased primarily as a result of larger average staff sizes due mainly to the expansion of our domestic collector workforce, partially offset by a decrease resulting from the sale of our government services businesses and PLS in 2017. Total full-time equivalents increased 4.3% to 5,377 as of December 31, 2018 from 5,154 as of December 31, 2017. 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 $55.3 million in 2019, $42.9 million in 2018, and $43.4 million in 2017. The increase of $12.4 million or 28.9% in 2019 was primarily due to a 44.5% 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 $134.2 million in 2019, an increase of $29.2 million or 27.8%, compared to $105.0 million in 2018. The increase was primarily due to additional court costs related to the expansion of the number of accounts placed in the legal channel in the U.S. This expansion was the result of a change in the nature of the accounts purchased, the regulatory environment and consumer behavior. Income recognized on finance receivables was $891.9 million in 2018, an increase of $96.5 million or 12.1% compared to $795.4 million in 2017. The increase was primarily the result of overperformance on select Americas Core and Europe Core portfolios which resulted in several yield increases on certain pools and the impact of record Americas Core purchasing in 2017 and 2018. This was partially offset by a decline in our Americas Insolvency revenue caused mainly by a decline in Americas Insolvency portfolio purchasing in 2018 and the continued runoff of our older portfolios. Fee Income Fee income was $15.8 million in 2019, $14.9 million in 2018, and $24.9 million in 2017. The decrease of $10.0 million or 40.2% in 2018 was primarily due to the sale of our government services businesses and the sale of PRA Location Services, LLC ("PLS") in 2017. Other Revenue Other revenue was $3.0 million in 2019, an increase of $1.6 million or 114.3% compared to $1.4 million in 2018, primarily reflecting the variability of our CCB business. Other revenue was $1.4 million in 2018, a decrease of $6.5 million or 82.3% compared to $7.9 million in 2017, primarily due to a decrease in revenue earned on our investments. (1) Cash collections adjusted refers to 2018 cash collections remeasured using 2019 exchange rates and 2017 cash collections remeasured using (cid:49)et Allowance Charges 2018 exchange rates. (cid:49)et allowance charges are recorded for 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. In 2019, we recorded net allowance charges of $24.0 million consisting of $24.5 million on our Americas Core portfolios, primarily on vintages purchased between 2013-2015 and $0.6 million on our European portfolios partially offset by net allowance reversals of $1.1 million on our Americas Insolvency portfolios. In 2018, we recorded net allowance charges of $33.4 million consisting of $31.0 million on our Americas Core portfolios, primarily on vintages impacted most by the Consent Order and purchased between 2013-2015, $0.4 million on our Americas Insolvency portfolios, and $2.0 million on our European portfolios. In 2017, we recorded net allowance charges of $11.9 million consisting of $7.4 million on our Americas Core portfolios, $1.5 million on our Americas Insolvency portfolios, and $3.0 million on our European portfolios. Operating Expenses Total operating expenses were $745.4 million in 2019, $689.6 million in 2018, and $602.6 million in 2017. Compensation and Employee Services Compensation and employee service expenses were $310.4 million in 2019, a decrease of $9.0 million or 2.8% compared to $319.4 million in 2018. 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 and realize the impact of recent investments in technology. Total full-time equivalents decreased 17.9% to 4,412 as of December 31, 2019 from 5,377 as of December 31, 2018. Additionally, this category was impacted by the result of the sale of RCB operating platform in December 2018, which shifted certain expenses from fixed to variable and are now recorded as agency fees. Cash collections were as follows for the periods indicated: Cash Collections (Amounts in millions) Americas Core Americas Insolvency Europe Core Europe Insolvency Total cash collections Cash collections adjusted (1) Cash collections on fully amortized pools Cash collections on pools on cost recovery (cid:49)et finance receivables on cost recovery at year-end Year Ended December 31, Variances 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 $ 1,141.5 $ $ 180.9 480.1 38.8 47.1 13.5 33.7 945.2 207.8 443.4 28.8 54.0 35.8 48.0 $ $ $ 860.9 222.5 407.0 22.2 57.6 37.7 166.6 196.3 $ (26.9) $ $ 36.7 10.0 216.1 245.8 (6.9) (22.3) (14.3) 84.3 (14.7) 36.4 6.6 112.6 76.8 (3.6) (1.9) (118.6) $ 1,841.3 $ 1,625.2 $ 1,512.6 $ 1,841.3 $ 1,595.5 $ 1,518.7 Cash collections were $1,841.3 million in 2019, an increase of $216.1 million or 13.3%, compared to $1,625.2 million in 2018. The increase was largely due to our U.S. legal collections increasing $91.1 million, or 30.6%, due primarily to the increase in the number of accounts placed in the legal channel, and our U.S. call center and other collections increasing $48.6 million, or 8.5%, due primarily to higher Americas Core portfolio purchasing in 2018. Additionally, as a result of increased portfolio purchasing in South America and the acquisition of a business in Canada in the first quarter of 2019, Americas Core outside the U.S. cash collections increased $56.6 million or 73.8%. Furthermore, our Europe Core cash collections increased $36.7 million or 8.3%, due primarily to increased portfolio purchasing, the consolidation of a Polish fund in the third quarter of 2018, and operational improvements. These increases were partially offset by a decline of $26.9 million, or 13.0%, in Americas Insolvency cash collections caused mainly by investment volumes in the U.S. not offsetting the runoff of our older portfolios. Cash collections were $1,625.2 million in 2018, an increase of $112.6 million or 7.4%, compared to $1,512.6 million in 2017. The increase was largely due to U.S. call center collections increasing 15.7%, due primarily to record U.S. Core portfolio purchasing in 2018 and 2017, and U.S. legal collections increasing 8.0%. Additionally, Europe Core and Europe Insolvency cash collections increased 8.9% and 29.7%, respectively. The increase in Europe Core cash collections was primarily the result of increased portfolio purchasing in the fourth quarter of 2017 and 2018. These increases were partially offset by a 6.6% decline in Americas Insolvency cash collections caused mainly by a decline in portfolio buying in 2018 and the continued runoff of our older Total revenues were $1,017.1 million in 2019, $908.3 million in 2018, and $828.2 million in 2017. A summary of how our revenues were generated during the years indicated is as follows (amounts in thousands): portfolios. Revenues Cash collections Principal amortization Income recognized on finance receivables Fee income Other revenue Total revenues Income Recognized on Finance Receivables 2019 2018 2017 $ 1,841,271 $ 1,625,205 $ 1,512,605 (842,910) 998,361 15,769 2,951 (733,306) 891,899 14,916 1,441 $ 1,017,081 $ 908,256 $ (717,170) 795,435 24,916 7,855 828,206 Income recognized on finance receivables was $998.4 million in 2019, an increase of $106.5 million or 11.9% compared to $891.9 million in 2018. The increase was primarily the result of the impact of recent Americas and Europe Core purchasing, sustained over-performance and related yield increases on pools broadly across all geographies, recent increased portfolio purchasing in South America, and the acquisition of a business in Canada in the first quarter of 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 $55.3 million in 2019, $42.9 million in 2018, and $43.4 million in 2017. The increase of $12.4 million or 28.9% in 2019 was primarily due to a 44.5% 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 $134.2 million in 2019, an increase of $29.2 million or 27.8%, compared to $105.0 million in 2018. The increase was primarily due to additional court costs related to the expansion of the number of accounts placed in the legal channel in the U.S. This expansion was the result of a change in the nature of the accounts purchased, the regulatory environment and consumer behavior. 26 27 fp0052934_PRA_10k_2020_combined4.indd 29 4/20/2020 12:52:35 PM million in 2018, an increase of $46.4 expenses million or 17.0% compared to $273.0 million in 2017. Compensation expense increased primarily as a result of larger average staff sizes due mainly to the expansion of our domestic collector workforce, partially offset by a decrease resulting from the sale of our government services businesses and PLS in 2017. Total full-time equivalents increased 4.3% to 5,377 as of December 31, 2018 from 5,154 as of December 31, 2017. Compensation were $319.4 employee service and Legal collection costs were $105.0 million in 2018, an increase of $29.0 million or 38.2%, compared to $76.0 million in 2017. The increase was primarily due to additional court costs related to the expansion of the number of accounts brought into the legal channel in the U.S. This expansion was the result of a change in the nature of the accounts purchased, the regulatory environment and consumer behavior. Interest expense, net was $121.1 million in 2018, an increase of $23.1 million or 23.6% compared to $98.0 million in 2017. The increase was primarily due to higher levels of average borrowings outstanding and higher average interest rates. Interest expense, net consisted of the following in 2019, 2018 and 2017 (amounts in thousands): Stated interest on debt obligations and unused line fees Coupon interest on convertible debt Amortization of convertible debt discount Amortization of loan fees and other loan costs Change in fair value on derivatives Interest income Interest expense, net (cid:49)et Foreign Currency Transaction Gains/(Losses) Twelve Months Ended December 31, Variances 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 $ 94,841 $ 83,983 $ 71,656 $ 10,858 $ 12,327 20,700 12,398 10,589 5,636 (2,246) 20,700 11,725 10,332 (2,532) (3,130) 15,870 8,583 9,569 (2,025) (5,612) — 673 257 8,168 884 4,830 3,142 763 (507) 2,482 $ 141,918 $ 121,078 $ 98,041 $ 20,840 $ 23,037 (cid:49)et foreign currency transaction gains/(losses) were $12.0 million, $(0.9) million, and $(1.1) million in 2019, 2018, and 2017, respectively. In any given period, we may incur foreign currency transaction losses or gains from transactions in currencies other than the functional currency. The $12.9 million increase in 2019 was primarily related to gains on U.S. Dollar linked investments held in Brazil and foreign currency gains in Europe. Other Expense Income Tax Expense/(Benefit) Other expense was $0.4 million in 2019, $0.3 million in 2018, and $2.8 million in 2017. In 2017, we incurred an other-than- temporary impairment charge of $1.7 million on one of our investments in private equity funds. Additionally, during 2017 we incurred a $1.0 million expense related to a performance guarantee on a Polish investment fund. Income tax expense/(benefit) was $19.7 million, $13.8 million, and $(10.9) million in 2019, 2018 and 2017, respectively. The increase from 2018 to 2019 was primarily driven by GILTI, which is included in the tax impact on international earnings disclosed in (cid:49)ote 13. The change from 2017 to 2018 was primarily attributable to a $73.8 million after-tax benefit recorded in 2017 as a result of the revaluation of our net deferred tax liability per the Tax Act. The effective tax rate increased from 15.4% in 2018 to 16.8% in 2019 primarily due to the GILTI taxes in the US. The effective tax rate for 2018 increased and the 2017 effective tax rate decreased compared to their respective prior years due to the revaluation of the deferred tax liability per the Tax Act. Our effective tax rate will vary from period to period due to these types of items. Agency Fees Agency fees primarily represent third-party collection fees. Agency fees were $55.8 million in 2019, an increase of $21.9 million or 64.6% compared to $33.9 million in 2018. The increase was primarily due to the sale of the RCB operating platform, which shifted certain expenses from fixed to variable and are now recorded as agency fees, the acquisition of a business in Canada in the first quarter of 2019, and higher volumes of servicing activity in areas where we utilize third-party collection agencies. Agency fees were $33.9 million in 2018, a decrease of $1.6 million or 4.5% compared to $35.5 million in 2017. The decrease was primarily due to the impact of the sale of PLS partially offset by an increase in third-party collection fees incurred by our international operations. Outside Fees and Services Outside fees and services expenses were $63.5 million in 2019, an increase of $2.0 million or 3.3% compared to $61.5 million in 2018. The increase was primarily the result of higher consulting fees and higher fees related to an increased number of debit card transactions, mostly offset by a decrease in litigation expenses. Outside fees and services expenses were $61.5 million in 2018, a decrease of $1.3 million or 2.1% compared to $62.8 million in 2017. The decrease was primarily the result of a decline in corporate legal expenses, due largely to legal costs not associated with normal operations incurred during 2017. This was partially offset by an increase in payment processing and debit card transactions and increased consulting fees. Communication Communication expenses primarily represent postage and telephone related expenses incurred as a result of our collection efforts. Communication expenses were $44.1 million in 2019, $43.2 million in 2018, and $33.1 million in 2017. The $10.1 million increase in 2018 was driven primarily by higher letter and call volume associated with record portfolio purchasing of Americas Core portfolios in 2017 and 2018 and additional U.S. collectors operating during 2018. Rent and Occupancy Rent and occupancy expenses were $17.9 million in 2019, $16.9 million in 2018, and $14.8 million in 2017. The $2.1 million increase in 2018 was primarily due to the opening of two new call centers in the U.S. in the fourth quarter of 2017 as well as the expansion of our European facilities. Depreciation and Amortization Depreciation and amortization expense was $17.5 million in 2019, $19.3 million in 2018, and $19.8 million in 2017. The $1.8 million or 9.3% decrease in 2019 was primarily due to the sale of the RCB operating platform which shifted certain expenses from fixed to variable partially offset by the addition of certain capital software projects. Other Operating Expenses Other operating expenses were $46.8 million in 2019, $47.4 million in 2018, and $44.1 million in 2017. The $3.3 million increase in 2018 was primarily due to an increase in corporate technology and software related expenses partially offset by a decrease as a result of the sale of our government services businesses and the sale of PLS in 2017. Gain on Sale of Subsidiaries We did not have any sales of subsidiaries during 2019. In 2018, we sold 79% of our interest in RCB's servicing platform which resulted in a gain of $26.6 million. In 2017, we sold our government services businesses and PLS which resulted in a combined gain of $48.5 million. Interest Expense, (cid:49)et Interest expense, net was $141.9 million in 2019, an increase of $20.8 million or 17.2% compared to $121.1 million in 2018. The increase was primarily due to higher levels of average borrowings to fund increased portfolio acquisitions paired with slightly higher interest rates and the impact of changes in the fair value of our derivatives. 28 29 fp0052934_PRA_10k_2020_combined4.indd 30 4/20/2020 12:52:35 PM Legal collection costs were $105.0 million in 2018, an increase of $29.0 million or 38.2%, compared to $76.0 Interest expense, net was $121.1 million in 2018, an increase of $23.1 million or 23.6% compared to $98.0 million in 2017. million in 2017. The increase was primarily due to additional court costs related to the expansion of the number of accounts brought The increase was primarily due to higher levels of average borrowings outstanding and higher average interest rates. into the legal channel in the U.S. This expansion was the result of a change in the nature of the accounts purchased, the regulatory Interest expense, net consisted of the following in 2019, 2018 and 2017 (amounts in thousands): Stated interest on debt obligations and unused line fees Coupon interest on convertible debt Amortization of convertible debt discount Amortization of loan fees and other loan costs Change in fair value on derivatives Interest income Interest expense, net (cid:49)et Foreign Currency Transaction Gains/(Losses) Twelve Months Ended December 31, Variances 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 $ 94,841 $ 83,983 $ 71,656 $ 10,858 $ 12,327 20,700 12,398 10,589 5,636 (2,246) 20,700 11,725 10,332 (2,532) (3,130) 15,870 8,583 9,569 (2,025) (5,612) — 673 257 8,168 884 4,830 3,142 763 (507) 2,482 $ 141,918 $ 121,078 $ 98,041 $ 20,840 $ 23,037 (cid:49)et foreign currency transaction gains/(losses) were $12.0 million, $(0.9) million, and $(1.1) million in 2019, 2018, and 2017, respectively. In any given period, we may incur foreign currency transaction losses or gains from transactions in currencies other than the functional currency. The $12.9 million increase in 2019 was primarily related to gains on U.S. Dollar linked investments held in Brazil and foreign currency gains in Europe. Other Expense Other expense was $0.4 million in 2019, $0.3 million in 2018, and $2.8 million in 2017. In 2017, we incurred an other-than- temporary impairment charge of $1.7 million on one of our investments in private equity funds. Additionally, during 2017 we incurred a $1.0 million expense related to a performance guarantee on a Polish investment fund. Income Tax Expense/(Benefit) Income tax expense/(benefit) was $19.7 million, $13.8 million, and $(10.9) million in 2019, 2018 and 2017, respectively. The increase from 2018 to 2019 was primarily driven by GILTI, which is included in the tax impact on international earnings disclosed in (cid:49)ote 13. The change from 2017 to 2018 was primarily attributable to a $73.8 million after-tax benefit recorded in 2017 as a result of the revaluation of our net deferred tax liability per the Tax Act. The effective tax rate increased from 15.4% in 2018 to 16.8% in 2019 primarily due to the GILTI taxes in the US. The effective tax rate for 2018 increased and the 2017 effective tax rate decreased compared to their respective prior years due to the revaluation of the deferred tax liability per the Tax Act. Our effective tax rate will vary from period to period due to these types of items. environment and consumer behavior. Agency Fees Agency fees primarily represent third-party collection fees. Agency fees were $55.8 million in 2019, an increase of $21.9 million or 64.6% compared to $33.9 million in 2018. The increase was primarily due to the sale of the RCB operating platform, which shifted certain expenses from fixed to variable and are now recorded as agency fees, the acquisition of a business in Canada in the first quarter of 2019, and higher volumes of servicing activity in areas where we utilize third-party collection agencies. Agency fees were $33.9 million in 2018, a decrease of $1.6 million or 4.5% compared to $35.5 million in 2017. The decrease was primarily due to the impact of the sale of PLS partially offset by an increase in third-party collection fees incurred by our international operations. Outside Fees and Services Outside fees and services expenses were $63.5 million in 2019, an increase of $2.0 million or 3.3% compared to $61.5 million in 2018. The increase was primarily the result of higher consulting fees and higher fees related to an increased number of debit card transactions, mostly offset by a decrease in litigation expenses. Outside fees and services expenses were $61.5 million in 2018, a decrease of $1.3 million or 2.1% compared to $62.8 million in 2017. The decrease was primarily the result of a decline in corporate legal expenses, due largely to legal costs not associated with normal operations incurred during 2017. This was partially offset by an increase in payment processing and debit card transactions and increased consulting fees. Communication Communication expenses primarily represent postage and telephone related expenses incurred as a result of our collection efforts. Communication expenses were $44.1 million in 2019, $43.2 million in 2018, and $33.1 million in 2017. The $10.1 million increase in 2018 was driven primarily by higher letter and call volume associated with record portfolio purchasing of Americas Core portfolios in 2017 and 2018 and additional U.S. collectors operating during 2018. Rent and occupancy expenses were $17.9 million in 2019, $16.9 million in 2018, and $14.8 million in 2017. The $2.1 million increase in 2018 was primarily due to the opening of two new call centers in the U.S. in the fourth quarter of 2017 as well Rent and Occupancy as the expansion of our European facilities. Depreciation and Amortization Depreciation and amortization expense was $17.5 million in 2019, $19.3 million in 2018, and $19.8 million in 2017. The $1.8 million or 9.3% decrease in 2019 was primarily due to the sale of the RCB operating platform which shifted certain expenses from fixed to variable partially offset by the addition of certain capital software projects. Other operating expenses were $46.8 million in 2019, $47.4 million in 2018, and $44.1 million in 2017. The $3.3 million increase in 2018 was primarily due to an increase in corporate technology and software related expenses partially offset by a decrease as a result of the sale of our government services businesses and the sale of PLS in 2017. We did not have any sales of subsidiaries during 2019. In 2018, we sold 79% of our interest in RCB's servicing platform which resulted in a gain of $26.6 million. In 2017, we sold our government services businesses and PLS which resulted in a Other Operating Expenses Gain on Sale of Subsidiaries combined gain of $48.5 million. Interest Expense, (cid:49)et Interest expense, net was $141.9 million in 2019, an increase of $20.8 million or 17.2% compared to $121.1 million in 2018. The increase was primarily due to higher levels of average borrowings to fund increased portfolio acquisitions paired with slightly higher interest rates and the impact of changes in the fair value of our derivatives. 28 29 fp0052934_PRA_10k_2020_combined4.indd 31 4/20/2020 12:52:35 PM 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 higher amortization rates and lower profitability. As portfolio pricing becomes more favorable on a relative basis, our profitability will tend to increase. Profitability within given Core portfolio types may also be impacted by the age and quality of the receivables, which impact the cost to collect those accounts. Fresher accounts, for example, typically carry lower associated collection expenses, while older accounts and lower balance accounts typically carry higher costs and, as a result, require higher purchase price multiples to achieve the same net profitability as fresher paper. Revenue recognition under ASC 310-30 is driven by estimates of the amount and timing of collections as well as the timing of those collections. We record new portfolio acquisitions based on our best estimate of the cash flows expected at acquisition, which reflects the uncertainties inherent in the acquisition of nonperforming loans and the results of our underwriting process. Subsequent to the initial booking, as we gain collection experience and confidence with a pool of accounts, we regularly update ERC. 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. We hold a beneficial interest in certain pools of finance receivables in Europe. Revenue recognition is under ASC Topic 310-20, "Receivables - (cid:49)onrefundable Fees and Other Costs" where we compute a life-to-date yield on a retrospective basis and apply it to the ERC of the portfolio. Revenue on these pools is included in income recognized on finance receivables. In addition, these portfolios are included in the tables below as they perform economically similar to finance receivables accounted for under ASC 310-30. The numbers presented in the following tables represent gross cash collections and do not reflect any costs to collect; therefore, they may not represent relative profitability. Due to all the factors described above, readers should be cautious when making comparisons of purchase price multiples among periods and between types of receivables. Purchase Price Multiples as of December 31, 2019 Amounts in thousands Purchase Period Purchase Price (1)(2) Americas Core 1996-2009 $ 930,026 $ 9,279 $ 42,102 $ 2,885,906 $ (cid:49)et Finance Receivables (3) ERC-Historical Period Exchange Rates (4) Total Estimated Collections (5) ERC-Current Period Exchange Rates (6) Current Estimated Purchase Price Multiple Original Estimated Purchase Price Multiple (7) Subtotal Americas Insolvency 1996-2009 5,002,100 1,594,787 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2012 2013 2014 2015 2016 2017 2014 2015 2016 2017 2018 2019 148,193 209,602 254,076 390,826 405,169 443,779 453,158 533,442 655,548 578,281 397,453 208,942 180,432 251,395 227,834 148,689 63,170 92,264 275,257 97,879 123,039 20,409 20,334 796,762 419,909 348,270 246,752 345,256 512,702 10,876 19,226 41,858 38,409 45,586 75,588 3,485 7,707 16,011 33,648 55,033 93,385 139,380 242,129 460,797 533,933 — — — — — 756 5,783 17,433 95,421 74,459 114,892 308,744 1,903,531 — — 188,892 161,210 190,927 157,850 269,292 488,468 306 3,083 12,507 24,417 39,424 74,258 28,669 48,551 60,711 94,733 152,639 226,865 354,399 521,715 852,246 1,048,207 3,430,837 917 1,181 973 953 2,143 3,598 9,917 22,491 121,498 93,120 144,228 401,019 3,831,856 875 431 823,116 345,214 333,375 232,858 407,945 730,704 1,061 5,970 18,160 28,931 46,969 93,518 535,684 739,158 680,352 931,194 929,179 965,671 1,081,376 1,167,831 1,338,876 1,191,940 12,447,167 835,958 546,872 370,103 392,377 354,923 218,044 87,773 116,896 348,811 127,257 157,675 3,556,689 16,003,856 40,542 24,995 2,278,261 748,127 578,421 351,216 522,374 779,136 18,155 29,294 60,651 47,604 56,199 98,439 310% 361% 353% 268% 238% 229% 218% 239% 219% 204% 206% 210% 262% 205% 156% 156% 147% 139% 127% 127% 130% 128% 199% 123% 286% 178% 166% 142% 151% 152% 167% 152% 145% 124% 123% 130% 42,102 28,669 48,551 60,711 94,733 150,012 226,755 349,699 519,181 848,727 1,053,332 3,422,472 917 1,181 973 953 2,143 3,578 9,917 22,501 121,498 93,120 144,279 401,060 3,823,532 709 343 704,192 314,643 332,857 229,035 413,728 739,345 941 5,262 18,272 28,707 47,240 95,509 195,931 2,930,783 6,754,315 238% 247% 245% 226% 211% 204% 205% 201% 193% 202% 206% 178% 184% 155% 136% 133% 124% 125% 123% 125% 127% 128% 187% 119% 208% 160% 167% 144% 148% 152% 129% 139% 130% 128% 123% 130% 2,710,394 1,456,639 2,874,518 5,323,072 2,734,852 Subtotal Total Americas Europe Core 2,066,354 7,068,454 2018 (8) 2019 Subtotal Europe Insolvency Subtotal Total Europe 231,543 2,941,937 153,995 1,610,634 194,609 3,069,127 310,342 5,633,414 Total PRA Group $ 10,010,391 $ 3,514,165 $ 6,900,983 $ 21,637,270 $ (1) Includes the acquisition date finance receivables portfolios that were acquired through our business acquisitions. (2) For our non-U.S. amounts, Purchase Price is presented at the exchange rate at the end of the quarter in which the pool was purchased. In addition, any purchase price adjustments that occur throughout the life of the pool are presented at the period-end exchange rate for the respective quarter of purchase. (3) For our non-U.S. amounts, (cid:49)et Finance Receivables are presented at the December 31, 2019 exchange rate. (4) For our non-U.S. amounts, ERC-Historical Period Exchange Rates is presented at the period-end exchange rate for the respective quarter of purchase. (5) For our non-U.S. amounts, TEC is presented at the period-end exchange rate for the respective quarter of purchase. (6) For our non-U.S. amounts, ERC-Current Period Exchange Rates is presented at the December 31, 2019 exchange rate. (7) The Original Purchase Price Multiple represents the purchase price multiple at the end of the year of acquisition. (8) Includes a $34.9 million finance receivables portfolio addition in the third quarter of 2018 relating to the accounting consolidation of a Polish investment fund. 30 31 fp0052934_PRA_10k_2020_combined4.indd 32 4/20/2020 12:52:35 PM 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 higher amortization rates and lower profitability. As portfolio pricing becomes more favorable on a relative basis, our profitability will tend to increase. Profitability within given Core portfolio types may also be impacted by the age and quality of the receivables, which impact the cost to collect those accounts. Fresher accounts, for example, typically carry lower associated collection expenses, while older accounts and lower balance accounts typically carry higher costs and, as a result, require higher purchase price multiples to achieve the same net profitability as fresher paper. Revenue recognition under ASC 310-30 is driven by estimates of the amount and timing of collections as well as the timing of those collections. We record new portfolio acquisitions based on our best estimate of the cash flows expected at acquisition, which reflects the uncertainties inherent in the acquisition of nonperforming loans and the results of our underwriting process. Subsequent to the initial booking, as we gain collection experience and confidence with a pool of accounts, we regularly update ERC. 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. We hold a beneficial interest in certain pools of finance receivables in Europe. Revenue recognition is under ASC Topic 310-20, "Receivables - (cid:49)onrefundable Fees and Other Costs" where we compute a life-to-date yield on a retrospective basis and apply it to the ERC of the portfolio. Revenue on these pools is included in income recognized on finance receivables. In addition, these portfolios are included in the tables below as they perform economically similar to finance receivables accounted for under ASC 310-30. The numbers presented in the following tables represent gross cash collections and do not reflect any costs to collect; therefore, they may not represent relative profitability. Due to all the factors described above, readers should be cautious when making comparisons of purchase price multiples among periods and between types of receivables. Purchase Price Multiples as of December 31, 2019 Amounts in thousands Purchase Period Purchase Price (1)(2) Americas Core (cid:49)et Finance Receivables (3) ERC-Historical Period Exchange Rates (4) Total Estimated Collections (5) ERC-Current Period Exchange Rates (6) Current Estimated Purchase Price Multiple Original Estimated Purchase Price Multiple (7) $ 310% 361% 353% 268% 238% 229% 218% 239% 219% 204% 206% 238% 247% 245% 226% 211% 204% 205% 201% 193% 202% 206% 42,102 28,669 48,551 60,711 94,733 150,012 226,755 349,699 519,181 848,727 1,053,332 3,422,472 917 1,181 973 953 2,143 3,598 9,917 22,491 121,498 93,120 144,228 401,019 3,831,856 — — — — — 756 5,783 17,433 95,421 74,459 114,892 308,744 1,903,531 397,453 208,942 180,432 251,395 227,834 148,689 63,170 92,264 275,257 97,879 123,039 2,066,354 7,068,454 930,026 $ 148,193 209,602 254,076 390,826 405,169 443,779 453,158 533,442 655,548 578,281 5,002,100 42,102 $ 28,669 48,551 60,711 94,733 152,639 226,865 354,399 521,715 852,246 1,048,207 3,430,837 9,279 $ 3,485 7,707 16,011 33,648 55,033 93,385 139,380 242,129 460,797 533,933 1,594,787 2,885,906 $ 535,684 739,158 680,352 931,194 929,179 965,671 1,081,376 1,167,831 1,338,876 1,191,940 12,447,167 1996-2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Subtotal Americas Insolvency 1996-2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Subtotal Total Americas Europe Core 2012 2013 2014 2015 2016 2017 2018 (8) 2019 Subtotal Europe Insolvency 2014 2015 2016 2017 2018 2019 Subtotal Total Europe Total PRA Group $ (1) (2) For our non-U.S. amounts, Purchase Price is presented at the exchange rate at the end of the quarter in which the pool was purchased. In addition, any 941 5,262 18,272 28,707 47,240 95,509 195,931 2,930,783 6,754,315 Includes the acquisition date finance receivables portfolios that were acquired through our business acquisitions. 835,958 546,872 370,103 392,377 354,923 218,044 87,773 116,896 348,811 127,257 157,675 3,556,689 16,003,856 917 1,181 973 953 2,143 3,578 9,917 22,501 121,498 93,120 144,279 401,060 3,823,532 18,155 29,294 60,651 47,604 56,199 98,439 310,342 5,633,414 21,637,270 $ 10,876 19,226 41,858 38,409 45,586 75,588 231,543 2,941,937 10,010,391 $ 306 3,083 12,507 24,417 39,424 74,258 153,995 1,610,634 3,514,165 $ 1,061 5,970 18,160 28,931 46,969 93,518 194,609 3,069,127 6,900,983 $ 709 343 704,192 314,643 332,857 229,035 413,728 739,345 2,734,852 40,542 24,995 2,278,261 748,127 578,421 351,216 522,374 779,136 5,323,072 875 431 823,116 345,214 333,375 232,858 407,945 730,704 2,874,518 20,409 20,334 796,762 419,909 348,270 246,752 345,256 512,702 2,710,394 — — 188,892 161,210 190,927 157,850 269,292 488,468 1,456,639 210% 262% 205% 156% 156% 147% 139% 127% 127% 130% 128% 178% 184% 155% 136% 133% 124% 125% 123% 125% 127% 128% 199% 123% 286% 178% 166% 142% 151% 152% 187% 119% 208% 160% 167% 144% 148% 152% 129% 139% 130% 128% 123% 130% 167% 152% 145% 124% 123% 130% purchase price adjustments that occur throughout the life of the pool are presented at the period-end exchange rate for the respective quarter of purchase. (3) For our non-U.S. amounts, (cid:49)et Finance Receivables are presented at the December 31, 2019 exchange rate. (4) For our non-U.S. amounts, ERC-Historical Period Exchange Rates is presented at the period-end exchange rate for the respective quarter of purchase. (5) For our non-U.S. amounts, TEC is presented at the period-end exchange rate for the respective quarter of purchase. (6) For our non-U.S. amounts, ERC-Current Period Exchange Rates is presented at the December 31, 2019 exchange rate. (7) The Original Purchase Price Multiple represents the purchase price multiple at the end of the year of acquisition. (8) Includes a $34.9 million finance receivables portfolio addition in the third quarter of 2018 relating to the accounting consolidation of a Polish investment fund. 30 31 fp0052934_PRA_10k_2020_combined4.indd 33 4/20/2020 12:52:35 PM Portfolio Financial Information For the Year Ended December 31, 2019 Amounts in thousands The following table, which excludes any proceeds from cash sales of finance receivables, illustrates historical cash collections, by year, on our portfolios. Cash (cid:49)et Allowance Charges/ (Reversals) (3) (cid:49)et Revenue (3)(4) (cid:49)et Finance Receivables as of December 31, 2019 (5) 9,279 3,485 7,707 16,011 33,648 55,033 93,385 139,380 242,129 460,797 533,933 1,594,787 $ Collections (3) Gross Revenue (3) Amortization (3) (3,700) $ 40 755 (370) 6,325 8,317 9,247 3,364 265 254 34 24,531 397,453 208,942 180,432 251,395 227,834 148,689 63,170 92,264 275,257 97,879 123,039 2,066,354 7,068,454 652 663 743 1,870 2,862 15,785 16,657 19,918 80,906 27,438 13,449 180,943 1,322,450 4,173 $ 1,112 1,967 3,936 10,378 17,639 31,123 52,390 127,961 165,817 46,987 463,483 18,705 $ 8,050 13,915 14,300 20,152 29,384 43,222 84,836 128,294 195,828 96,807 653,493 15,005 $ 8,090 14,670 13,930 26,477 37,701 52,469 88,200 128,559 196,082 96,841 678,024 19,178 $ 9,202 16,637 17,866 36,855 55,340 83,592 140,590 256,520 361,899 143,828 1,141,507 930,026 $ 148,193 209,602 254,076 390,826 405,169 443,779 453,158 533,442 655,548 578,281 5,002,100 Purchase Period Purchase Price (1)(2) Americas Core 1996-2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Subtotal Americas Insolvency 1996-2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Subtotal Total Americas Europe Core 2012 2013 2014 2015 2016 2017 2018 (6) 2019 Subtotal Europe Insolvency 2014 2015 2016 2017 2018 2019 Subtotal Total Europe Total PRA Group $ (1) (2) For our non-U.S. amounts, Purchase Price is presented at the exchange rate at the end of the quarter in which the pool was purchased. In addition, any — (72) (42) 522 — — 408 644 24,025 $ Includes the acquisition date finance receivables portfolios that were acquired through our business acquisitions. 10,876 19,226 41,858 38,409 45,586 75,588 231,543 2,941,937 10,010,391 $ 1,547 3,904 10,664 9,240 8,422 4,985 38,762 518,821 1,841,271 $ 652 663 743 1,870 2,862 9,476 6,221 5,299 20,754 8,210 5,264 62,014 740,038 652 663 743 1,870 2,862 9,166 6,221 6,759 20,754 8,210 5,264 63,164 716,657 — — — — — 6,309 10,436 14,619 60,152 19,228 8,185 118,929 582,412 — — — — — 310 — (1,460) — — — (1,150) 23,381 907 1,889 4,161 2,300 2,552 2,095 13,904 258,323 998,361 $ 640 2,015 6,503 6,940 5,870 2,890 24,858 260,498 842,910 $ 907 1,961 4,203 1,778 2,552 2,095 13,496 257,679 974,336 $ 20,409 20,334 796,762 419,909 348,270 246,752 345,256 512,702 2,710,394 1,450 820 123,296 36,174 25,683 12,424 26,645 17,691 244,183 1,450 820 121,450 32,821 28,594 14,239 27,309 17,736 244,419 1,450 901 172,885 66,074 57,989 44,085 88,699 47,976 480,059 — 81 51,435 33,253 29,395 29,846 61,390 30,240 235,640 — — (1,846) (3,353) 2,911 1,815 664 45 236 — — — — — 756 5,783 17,433 95,421 74,459 114,892 308,744 1,903,531 306 3,083 12,507 24,417 39,424 74,258 153,995 1,610,634 3,514,165 — — 188,892 161,210 190,927 157,850 269,292 488,468 1,456,639 purchase price adjustments that occur throughout the life of the pool are presented at the period-end exchange rate for the respective quarter of purchase. (3) For our non-U.S. amounts, amounts are presented using the average exchange rates during the current reporting period. (4) (cid:49)et Revenue refers to income recognized on finance receivables, net of allowance charges/(reversals). (5) For our non-U.S. amounts, net finance receivables are presented at the December 31, 2019 exchange rate. (6) Includes a $34.9 million finance receivables portfolio addition in the third quarter of 2018 relating to the accounting consolidation of a Polish investment fund. 32 33 fp0052934_PRA_10k_2020_combined4.indd 34 4/20/2020 12:52:36 PM Cash Collections by Year, By Year of Purchase (1) as of December 31, 2019 Amounts in thousands Cash Collections 47,076 113,554 109,873 61,971 174,461 56,901 82,014 152,908 173,589 101,614 55,946 108,513 146,198 247,849 92,660 Purchase Period Purchase Price (2)(3) 1996- 2009 Americas Core 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total 1996-2009 $ 930,026 $1,647,666 $ 295,679 $ 253,544 $ 201,640 $ 146,383 $ 101,829 $ 71,173 $ 45,734 $ 30,452 $ 23,272 $ 19,178 $ 2,836,550 Subtotal 5,002,100 1,647,666 342,755 429,069 542,875 656,508 752,995 844,768 837,196 860,927 945,179 1,141,507 9,001,445 Americas Insolvency 1996-2009 204,343 147,101 156,704 145,418 39,486 104,499 125,020 15,218 66,379 17,388 109,259 121,717 82,752 103,610 52,528 56,980 101,873 85,816 94,141 82,596 37,045 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 38,110 73,793 97,267 194,026 253,448 116,951 — — — — 7,617 43,649 76,915 80,079 81,679 50,880 3,395 — — — — 3,175 2,347 45,760 — — — — — — — — 4,297 2,954 24,515 48,711 59,981 120,789 170,311 228,432 138,723 — — — 3,629 5,008 35,996 60,715 63,386 44,313 17,892 18,869 — — — 2,198 1,326 246,365 100,263 40,368 — — — 3,921 4,366 6,175 — — — 15,587 31,991 40,042 78,880 114,219 185,898 256,531 107,327 — — 11,140 21,622 27,797 56,449 82,244 126,605 194,605 278,733 122,712 — 9,202 16,637 17,866 36,855 55,340 83,592 140,590 256,520 361,899 143,828 2,234 2,425 3,726 29,337 47,781 37,350 20,143 30,426 49,093 — — 2,038 1,239 86,156 78,915 17,894 — — 3,207 5,013 12,703 1,233 — — 1,103 1,352 1,584 4,284 21,948 28,759 19,769 25,047 97,315 6,700 — 1,996 1,331 80,858 72,603 56,033 24,326 — 2,620 4,783 12,856 7,862 642 — 652 663 743 1,870 2,862 15,785 16,657 19,918 80,906 27,438 13,449 1,450 901 66,074 57,989 44,085 88,699 47,976 1,547 3,904 10,664 9,240 8,422 4,985 507,017 690,607 619,641 836,462 768,222 741,478 730,449 642,580 484,611 143,828 835,040 545,692 369,129 391,424 352,780 214,132 77,856 94,260 227,314 34,138 13,449 37,097 22,752 379,111 249,875 118,012 113,025 47,976 15,597 21,020 42,398 18,335 9,064 4,985 — — — — — — — — — — — — — — — 5 — — — — — 5 2,066,354 204,343 186,587 276,421 354,205 469,866 458,451 344,214 249,808 222,515 207,861 180,943 3,155,214 7,068,454 1,852,009 529,342 705,490 897,080 1,126,374 1,211,446 1,188,982 1,087,004 1,083,442 1,153,040 1,322,450 12,156,659 11,604 8,995 7,068 5,641 8,540 153,180 291,980 220,765 206,255 172,885 1,291,430 2,941,937 11,604 16,063 167,366 350,513 404,982 429,163 472,165 518,821 2,370,677 7,251 14,462 22,156 28,763 38,762 111,399 $10,010,391 $1,852,009 $ 529,342 $ 705,490 $ 908,684 $1,142,437 $1,378,812 $1,539,495 $1,491,986 $1,512,605 $1,625,205 $1,841,271 $14,527,336 (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-U.S. amounts, Purchase Price is presented at the exchange rate at the end of the quarter in which the portfolio was purchased. In addition, any purchase price adjustments that occur throughout the life of the pool are presented at the period end exchange rate for the respective quarter of purchase. (4) Includes a $34.9 million finance receivables portfolio addition in the third quarter of 2018 relating to the accounting consolidation of a Polish investment 148,193 209,602 254,076 390,826 405,169 443,779 453,158 533,442 655,548 578,281 397,453 208,942 180,432 251,395 227,834 148,689 63,170 92,264 275,257 97,879 123,039 20,409 20,334 796,762 419,909 348,270 246,752 345,256 512,702 10,876 19,226 41,858 38,409 45,586 75,588 231,543 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Subtotal Total Americas Europe Core 2012 2013 2014 2015 2016 2017 2018 (4) 2019 2014 2015 2016 2017 2018 2019 Subtotal Total Europe Total PRA Group fund. Subtotal 2,710,394 Europe Insolvency 11,604 16,063 167,361 343,262 390,520 407,007 443,402 480,059 2,259,278 Portfolio Financial Information For the Year Ended December 31, 2019 Amounts in thousands Purchase Period Purchase Price (1)(2) Collections (3) Gross Revenue (3) Amortization (3) (Reversals) (3) (cid:49)et Revenue (3)(4) Cash (cid:49)et Allowance Charges/ (cid:49)et Finance Receivables as of December 31, 2019 (5) Americas Core 1996-2009 $ 930,026 $ 19,178 $ 15,005 $ 4,173 $ (3,700) $ 18,705 $ Subtotal 5,002,100 1,141,507 Americas Insolvency 1996-2009 Subtotal Total Americas Europe Core 2,066,354 7,068,454 180,943 1,322,450 148,193 209,602 254,076 390,826 405,169 443,779 453,158 533,442 655,548 578,281 397,453 208,942 180,432 251,395 227,834 148,689 63,170 92,264 275,257 97,879 123,039 20,409 20,334 796,762 419,909 348,270 246,752 345,256 512,702 10,876 19,226 41,858 38,409 45,586 75,588 231,543 2,941,937 9,202 16,637 17,866 36,855 55,340 83,592 140,590 256,520 361,899 143,828 652 663 743 1,870 2,862 15,785 16,657 19,918 80,906 27,438 13,449 1,450 901 172,885 66,074 57,989 44,085 88,699 47,976 1,547 3,904 10,664 9,240 8,422 4,985 38,762 518,821 8,090 14,670 13,930 26,477 37,701 52,469 88,200 128,559 196,082 96,841 678,024 652 663 743 1,870 2,862 9,476 6,221 5,299 20,754 8,210 5,264 62,014 740,038 1,450 820 121,450 32,821 28,594 14,239 27,309 17,736 907 1,889 4,161 2,300 2,552 2,095 13,904 258,323 1,112 1,967 3,936 10,378 17,639 31,123 52,390 127,961 165,817 46,987 463,483 — — — — — 6,309 10,436 14,619 60,152 19,228 8,185 118,929 582,412 — 81 51,435 33,253 29,395 29,846 61,390 30,240 640 2,015 6,503 6,940 5,870 2,890 24,858 260,498 40 755 (370) 6,325 8,317 9,247 3,364 265 254 34 24,531 — — — — — 310 — — — — (1,460) (1,150) 23,381 — — (1,846) (3,353) 2,911 1,815 664 45 236 — (72) (42) 522 — — 408 644 8,050 13,915 14,300 20,152 29,384 43,222 84,836 128,294 195,828 96,807 653,493 652 663 743 1,870 2,862 9,166 6,221 6,759 20,754 8,210 5,264 63,164 716,657 1,450 820 123,296 36,174 25,683 12,424 26,645 17,691 244,183 907 1,961 4,203 1,778 2,552 2,095 13,496 257,679 2,710,394 480,059 244,419 235,640 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2012 2013 2014 2015 2016 2017 2014 2015 2016 2017 2018 2019 2018 (6) 2019 Subtotal Europe Insolvency Subtotal Total Europe fund. Total PRA Group $ 10,010,391 $ 1,841,271 $ 998,361 $ 842,910 $ 24,025 $ 974,336 $ (1) Includes the acquisition date finance receivables portfolios that were acquired through our business acquisitions. (2) For our non-U.S. amounts, Purchase Price is presented at the exchange rate at the end of the quarter in which the pool was purchased. In addition, any purchase price adjustments that occur throughout the life of the pool are presented at the period-end exchange rate for the respective quarter of purchase. (3) For our non-U.S. amounts, amounts are presented using the average exchange rates during the current reporting period. (4) (cid:49)et Revenue refers to income recognized on finance receivables, net of allowance charges/(reversals). (5) For our non-U.S. amounts, net finance receivables are presented at the December 31, 2019 exchange rate. (6) Includes a $34.9 million finance receivables portfolio addition in the third quarter of 2018 relating to the accounting consolidation of a Polish investment 9,279 3,485 7,707 16,011 33,648 55,033 93,385 139,380 242,129 460,797 533,933 1,594,787 — — — — — 756 5,783 17,433 95,421 74,459 114,892 308,744 1,903,531 — — 188,892 161,210 190,927 157,850 269,292 488,468 1,456,639 306 3,083 12,507 24,417 39,424 74,258 153,995 1,610,634 3,514,165 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 December 31, 2019 Amounts in thousands Cash Collections Purchase Period Purchase Price (2)(3) 1996- 2009 Americas Core 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total 1996-2009 $ 930,026 $1,647,666 $ 295,679 $ 253,544 $ 201,640 $ 146,383 $ 101,829 $ 71,173 $ 45,734 $ 30,452 $ 23,272 $ 19,178 $ 2,836,550 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 148,193 209,602 254,076 390,826 405,169 443,779 453,158 533,442 655,548 578,281 — — — — — — — — — — 47,076 113,554 109,873 — — — — — — — — — 61,971 174,461 — — — — — — — — 56,901 — — — — — — — 82,014 152,908 173,589 101,614 — — — — — — 55,946 108,513 146,198 247,849 92,660 — — — — — 38,110 73,793 97,267 194,026 253,448 116,951 — — — — 24,515 48,711 59,981 120,789 170,311 228,432 138,723 — — — 15,587 31,991 40,042 78,880 114,219 185,898 256,531 107,327 — — 11,140 21,622 27,797 56,449 82,244 126,605 194,605 278,733 122,712 — 9,202 16,637 17,866 36,855 55,340 83,592 140,590 256,520 361,899 143,828 507,017 690,607 619,641 836,462 768,222 741,478 730,449 642,580 484,611 143,828 Subtotal 5,002,100 1,647,666 342,755 429,069 542,875 656,508 752,995 844,768 837,196 860,927 945,179 1,141,507 9,001,445 Americas Insolvency 1996-2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 397,453 208,942 180,432 251,395 227,834 148,689 63,170 92,264 275,257 97,879 123,039 204,343 147,101 156,704 145,418 — — — — — — — — — — 39,486 104,499 125,020 — — — — — — — — — 15,218 — — — — — — — — 66,379 17,388 — — — — — — — 109,259 121,717 82,752 103,610 52,528 — — — — — — 56,980 101,873 85,816 94,141 82,596 37,045 — — — — — 7,617 43,649 76,915 80,079 81,679 50,880 3,395 — — — — 3,629 5,008 35,996 60,715 63,386 44,313 17,892 18,869 — — — 2,234 2,425 3,726 29,337 47,781 37,350 20,143 30,426 49,093 — — 1,103 1,352 1,584 4,284 21,948 28,759 19,769 25,047 97,315 6,700 — 652 663 743 1,870 2,862 15,785 16,657 19,918 80,906 27,438 13,449 835,040 545,692 369,129 391,424 352,780 214,132 77,856 94,260 227,314 34,138 13,449 Subtotal 2,066,354 204,343 186,587 276,421 354,205 469,866 458,451 344,214 249,808 222,515 207,861 180,943 3,155,214 7,068,454 1,852,009 529,342 705,490 897,080 1,126,374 1,211,446 1,188,982 1,087,004 1,083,442 1,153,040 1,322,450 12,156,659 Subtotal 2,710,394 Europe Insolvency Total Americas Europe Core 2012 2013 2014 2015 2016 2017 2018 (4) 2019 2014 2015 2016 2017 2018 2019 Subtotal Total Europe Total PRA Group 20,409 20,334 796,762 419,909 348,270 246,752 345,256 512,702 10,876 19,226 41,858 38,409 45,586 75,588 231,543 2,941,937 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 11,604 — — — — — — — 8,995 7,068 5,641 8,540 3,175 2,347 — — — — — — 153,180 291,980 — — — — — 45,760 — — — — 2,198 1,326 246,365 100,263 40,368 — — — 2,038 1,239 1,996 1,331 1,450 901 37,097 22,752 220,765 206,255 172,885 1,291,430 86,156 78,915 17,894 — — 80,858 72,603 56,033 24,326 — 66,074 57,989 44,085 88,699 47,976 379,111 249,875 118,012 113,025 47,976 11,604 16,063 167,361 343,262 390,520 407,007 443,402 480,059 2,259,278 — — — — — — — — — — — — — — 5 — — — — — 5 4,297 2,954 — — — — 3,921 4,366 6,175 — — — 3,207 5,013 12,703 1,233 — — 2,620 4,783 12,856 7,862 642 — 1,547 3,904 10,664 9,240 8,422 4,985 15,597 21,020 42,398 18,335 9,064 4,985 7,251 14,462 22,156 28,763 38,762 111,399 11,604 16,063 167,366 350,513 404,982 429,163 472,165 518,821 2,370,677 $10,010,391 $1,852,009 $ 529,342 $ 705,490 $ 908,684 $1,142,437 $1,378,812 $1,539,495 $1,491,986 $1,512,605 $1,625,205 $1,841,271 $14,527,336 32 33 (1) For our non-U.S. amounts, cash collections are presented using the average exchange rates during the cash collection period. (2) (3) For our non-U.S. amounts, Purchase Price is presented at the exchange rate at the end of the quarter in which the portfolio was purchased. In addition, any Includes the acquisition date finance receivables portfolios that were acquired through our business acquisitions. (4) purchase price adjustments that occur throughout the life of the pool are presented at the period end exchange rate for the respective quarter of purchase. Includes a $34.9 million finance receivables portfolio addition in the third quarter of 2018 relating to the accounting consolidation of a Polish investment fund. fp0052934_PRA_10k_2020_combined4.indd 35 4/20/2020 12:52:36 PM Estimated Remaining Collections Collections Productivity (U.S. Portfolio) The following chart shows our ERC of $6,754.3 million at December 31, 2019 by geographical region (amounts in The following table displays certain collections productivity measures. millions). Cash Collections per Collector Hour Paid U.S. Portfolio Call center and other cash collections (1) 2019 2018 2017 2016 2015 $ $ $ $ $ 139 139 124 128 121 101 107 104 161 129 125 112 168 167 177 153 143 141 145 139 First Quarter Second Quarter Third Quarter Fourth Quarter (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 also includes the acquisition date finance receivable portfolios that were acquired through our business acquisitions. 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 2019 2018 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Americas Core $ 276,639 $ 279,902 $ 294,243 $ 290,723 $ 233,937 $ 231,253 $ 233,752 $ 246,237 Americas Insolvency 40,801 45,759 49,770 44,613 48,000 48,518 56,063 55,280 Europe Core 126,649 118,917 117,635 116,858 113,154 102,780 109,359 118,109 Europe Insolvency 12,520 8,639 8,626 8,977 7,618 6,731 7,460 6,954 Total Cash Collections $ 456,609 $ 453,217 $ 470,274 $ 461,171 $ 402,709 $ 389,282 $ 406,634 $ 426,580 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 2019 2018 The following table displays our quarterly portfolio acquisitions for the periods indicated. Portfolio Acquisitions by Geography and Type Amounts in thousands 2019 2018 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Americas Core $ 118,153 $ 168,185 $ 121,996 $ 169,189 $172,511 $ 170,426 $ 182,768 $ 131,427 Americas Insolvency Europe Core Europe Insolvency 22,650 218,919 42,613 26,311 64,728 19,772 26,092 136,344 4,715 48,243 94,283 7,134 52,871 231,810 33,661 17,151 45,754 4,159 16,651 19,403 2,577 13,436 18,000 5,392 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Portfolio Acquisitions $ 402,335 $ 278,996 $ 289,147 $ 318,849 $ 490,853 $ 237,490 $ 221,399 $ 168,255 Call Center and Other Collections External Legal Collections Internal Legal Collections Total U.S.-Core Cash Collections $ 139,399 $ 149,782 $ 160,479 $ 169,753 $ 134,543 $ 137,325 $ 143,527 $ 155,448 58,831 64,301 63,490 57,419 47,410 41,935 40,631 38,891 33,944 35,679 38,065 37,018 30,724 32,064 32,532 33,423 $ 232,174 $ 249,762 $ 262,034 $ 264,190 $ 212,677 $ 211,324 $ 216,690 $ 227,762 34 35 fp0052934_PRA_10k_2020_combined4.indd 36 4/20/2020 12:52:36 PM Estimated Remaining Collections millions). The following chart shows our ERC of $6,754.3 million at December 31, 2019 by geographical region (amounts in The following table displays certain collections productivity measures. Collections Productivity (U.S. Portfolio) Cash Collections per Collector Hour Paid U.S. Portfolio Call center and other cash collections (1) 2019 2018 2017 2016 2015 $ $ 139 139 124 128 $ 121 101 107 104 $ 161 129 125 112 $ 168 167 177 153 143 141 145 139 First Quarter Second Quarter Third Quarter Fourth Quarter (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 also includes the acquisition date finance receivable portfolios that were acquired through our business acquisitions. Seasonality Cash Collections 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. 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 2019 2018 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Americas Core $ 276,639 $ 279,902 $ 294,243 $ 290,723 $ 233,937 $ 231,253 $ 233,752 $ 246,237 Americas Insolvency 40,801 45,759 49,770 44,613 48,000 48,518 56,063 55,280 Europe Core 126,649 118,917 117,635 116,858 113,154 102,780 109,359 118,109 Europe Insolvency 12,520 8,639 8,626 8,977 7,618 6,731 7,460 6,954 Total Cash Collections $ 456,609 $ 453,217 $ 470,274 $ 461,171 $ 402,709 $ 389,282 $ 406,634 $ 426,580 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 2019 2018 Call Center and Other Collections External Legal Collections Internal Legal Collections Total U.S.-Core Cash Collections $ 139,399 $ 149,782 $ 160,479 $ 169,753 $ 134,543 $ 137,325 $ 143,527 $ 155,448 58,831 64,301 63,490 57,419 47,410 41,935 40,631 38,891 33,944 35,679 38,065 37,018 30,724 32,064 32,532 33,423 $ 232,174 $ 249,762 $ 262,034 $ 264,190 $ 212,677 $ 211,324 $ 216,690 $ 227,762 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Total Portfolio Acquisitions $ 402,335 $ 278,996 $ 289,147 $ 318,849 $ 490,853 $ 237,490 $ 221,399 $ 168,255 The following table displays our quarterly portfolio acquisitions for the periods indicated. Portfolio Acquisitions by Geography and Type Amounts in thousands 2019 2018 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Americas Core $ 118,153 $ 168,185 $ 121,996 $ 169,189 $172,511 $ 170,426 $ 182,768 $ 131,427 Americas Insolvency Europe Core Europe Insolvency 22,650 218,919 42,613 26,311 64,728 19,772 26,092 136,344 4,715 48,243 94,283 7,134 52,871 231,810 33,661 17,151 45,754 4,159 16,651 19,403 2,577 13,436 18,000 5,392 34 35 fp0052934_PRA_10k_2020_combined4.indd 37 4/20/2020 12:52:36 PM 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 54 million customer accounts in the U.S. of 2019. In December 2018, we sold 79% of our interest in RCB's servicing platform which provided us with approximately $40 million of net cash proceeds. We received 25% of the proceeds on December 20, 2018 and the remaining 75% in the first quarter U.S. Portfolio Acquisitions by Major Asset Type Amounts in thousands 2019 Q4 Q3 Q2 Q1 2018 Q4 Major Credit Cards Private Label Credit Cards Consumer Finance Auto Related Total $ 30,337 24.3% $ 50,500 40.1% $ 39,468 28.2% $ 43,440 27.0% $ 65,025 32.5% 85,351 68.4% 72,714 57.7% 2,046 6,991 1.7% 5.6% 2,090 638 1.7% 0.5% 70,536 28,649 1,407 50.4% 84,515 52.6% 100,633 50.3% 20.4% 2,424 1.5% 2,619 1.3% 1.0% 30,358 18.9% 31,892 15.9% $124,725 100.0% $125,942 100.0% $ 140,060 100.0% $160,737 100.0% $200,169 100.0% U.S. Portfolio Acquisitions by Delinquency Category Amounts in thousands 2019 Q4 Q3 Q2 Q1 2018 Q4 Fresh (1) Primary (2) Secondary (3) Tertiary (3) Other (4) Total Core $ 35,330 34.6% $ 27,600 27.1% $ 33,288 29.3% $ 51,212 45.6% $ 61,730 5,796 5.7% 52,899 51.8% 4,409 3,641 4.3% 3.6% 17,658 50,082 6,483 — 17.3% 49.2% 6.4% —% 40,027 34,920 5,733 — 35.1% 30.6% 5.0% —% 19,725 35,857 4,435 1,265 17.5% 31.9% 3.9% 1.1% 39,690 45,878 — — 42.0% 26.9% 31.1% —% —% 102,075 100.0% 101,823 100.0% 113,968 100.0% 112,494 100.0% 147,298 100.0% Insolvency 22,650 Total $ 124,725 24,119 $ 125,942 26,092 $ 140,060 48,243 $ 160,737 52,871 $ 200,169 (1) Fresh accounts are typically past due 120 to 270 days, charged-off by the credit originator and are either being sold prior to any post-charge-off collection activity or placement with a third-party for the first time. (2) Primary accounts are typically 360 to 450 days past due and charged-off and have been previously placed with one contingent fee servicer. (3) Secondary and tertiary accounts are typically more than 660 days past due and charged-off and have been placed with two or three contingent fee servicers. (4) Other accounts are typically two to three years or more past due and charged-off and have previously been worked by four or more contingent fee servicers. Liquidity and Capital Resources We manage our liquidity to help provide access to sufficient funding to meet our business needs and financial obligations. As of December 31, 2019, cash and cash equivalents totaled $119.8 million. Of the cash and cash equivalent balance as of December 31, 2019, $109.7 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 December 31, 2019, we had approximately $2.8 billion in borrowings outstanding with $474.6 million of availability under all of our credit facilities (subject to the borrowing base and applicable debt covenants). Considering borrowing base restrictions, as of December 31, 2019, the amount available to be drawn was $271.1 million. Of the $474.6 million of borrowing availability, $122.5 million was available under our European credit facility, and $349.2 million was available under our (cid:49)orth American credit facility. Of the $271.1 million available considering borrowing base restrictions, $121.8 million was available under our European credit facility, and $146.5 million was available under our (cid:49)orth American credit facility. For more information, see (cid:49)ote 6 to our Consolidated Financial Statements included in Item 8 of this Form 10-K. 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 $128.4 million as of December 31, 2019). Interest-bearing deposits as of December 31, 2019 were $106.2 million. We determined that we were in compliance with the covenants of our financing arrangements as of December 31, 2019. 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 (cid:49)orth American credit facility expires in May 2022. Our European credit facility expires in February 2021. Of our $425.0 million in long-term debt outstanding at December 31, 2019, $10.0 million in principal is due within one year. Additionally, the $287.5 million principal amount of the 3.00% Convertible Senior (cid:49)otes due 2020 is due August 1, 2020. Based upon our current availability considering borrowing base restrictions in (cid:49)orth America ($146.5 million), our cash on hand, our current ability to negotiate extensions or renew our lines of credit and 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 $497.5 million, as of December 31, 2019. The $497.5 million includes $226.0 million for the Americas and $271.5 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. On May 10, 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 will be included evenly into our tax filings over four years effective with tax year 2017. We estimate the related tax payments to be approximately $9.3 million per quarter through the year 2020. (cid:49)o interest or penalties were assessed as part of the settlement. We believe that funds generated from operations and from cash collections on finance receivables, together with existing cash and available borrowings under our revolving credit facilities will be sufficient to finance our operations, planned capital expenditures, forward flow purchase commitments, and additional portfolio purchases during the next twelve months. Business acquisitions, adverse outcomes in pending litigation or higher than expected levels of portfolio purchasing could require additional The following table summarizes our cash flow activity for the years ended December 31, 2019, 2018 and 2017 (amounts financing from other sources. Cash Flows Analysis in thousands): Total cash provided by (used in): Operating activities Investing activities Financing activities Effect of exchange rate on cash Operating Activities 2019 2018 2017 $ 133,388 $ 80,866 $ (441,190) 339,523 (6,609) (387,251) 294,926 (10,362) 15,475 (294,960) 295,698 10,016 (cid:49)et increase/(decrease) in cash and cash equivalents $ 25,112 $ (21,821) $ 26,229 The change in our cash flows from operating activities in 2019 was primarily due to cash collections recognized as revenue 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, depreciation and amortization, deferred taxes, hedged derivatives, and stock-based compensation and (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. 36 37 fp0052934_PRA_10k_2020_combined4.indd 38 4/20/2020 12:52:36 PM 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 54 million customer accounts in the U.S. U.S. Portfolio Acquisitions by Major Asset Type Amounts in thousands 2019 Q4 Q3 Q2 Q1 2018 Q4 2018 Q4 Major Credit Cards $ 30,337 24.3% $ 50,500 40.1% $ 39,468 28.2% $ 43,440 27.0% $ 65,025 32.5% Private Label Credit Cards Consumer Finance Auto Related Total 85,351 68.4% 72,714 57.7% 50.4% 84,515 52.6% 100,633 50.3% 2,046 6,991 1.7% 5.6% 2,090 638 1.7% 0.5% 20.4% 2,424 1.5% 2,619 1.3% 1.0% 30,358 18.9% 31,892 15.9% 70,536 28,649 1,407 $124,725 100.0% $125,942 100.0% $ 140,060 100.0% $160,737 100.0% $200,169 100.0% U.S. Portfolio Acquisitions by Delinquency Category Amounts in thousands 2019 Q4 Q3 Q2 Q1 Fresh (1) Primary (2) Tertiary (3) Other (4) Total Core Insolvency Total $ 35,330 34.6% $ 27,600 27.1% $ 33,288 29.3% $ 51,212 45.6% $ 61,730 5,796 5.7% Secondary (3) 52,899 51.8% 4,409 3,641 4.3% 3.6% 17,658 50,082 6,483 — 17.3% 49.2% 6.4% —% 40,027 34,920 5,733 — 35.1% 30.6% 5.0% —% 19,725 35,857 4,435 1,265 17.5% 31.9% 3.9% 1.1% 39,690 45,878 — — 42.0% 26.9% 31.1% —% —% 102,075 100.0% 101,823 100.0% 113,968 100.0% 112,494 100.0% 147,298 100.0% 22,650 $ 124,725 24,119 $ 125,942 26,092 $ 140,060 48,243 $ 160,737 52,871 $ 200,169 (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 (3) Secondary and tertiary accounts are typically more than 660 days past due and charged-off and have been placed with two or (4) Other accounts are typically two to three years or more past due and charged-off and have previously been worked by four fee servicer. three contingent fee servicers. or more contingent fee servicers. Liquidity and Capital Resources We manage our liquidity to help provide access to sufficient funding to meet our business needs and financial obligations. As of December 31, 2019, cash and cash equivalents totaled $119.8 million. Of the cash and cash equivalent balance as of December 31, 2019, $109.7 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 December 31, 2019, we had approximately $2.8 billion in borrowings outstanding with $474.6 million of availability under all of our credit facilities (subject to the borrowing base and applicable debt covenants). Considering borrowing base restrictions, as of December 31, 2019, the amount available to be drawn was $271.1 million. Of the $474.6 million of borrowing availability, $122.5 million was available under our European credit facility, and $349.2 million was available under our (cid:49)orth American credit facility. Of the $271.1 million available considering borrowing base restrictions, $121.8 million was available under our European credit facility, and $146.5 million was available under our (cid:49)orth American credit facility. For more information, see (cid:49)ote 6 to our Consolidated Financial Statements included in Item 8 of this Form 10-K. 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 $128.4 million as of December 31, 2019). Interest-bearing deposits as of December 31, 2019 were $106.2 million. In December 2018, we sold 79% of our interest in RCB's servicing platform which provided us with approximately $40 million of net cash proceeds. We received 25% of the proceeds on December 20, 2018 and the remaining 75% in the first quarter of 2019. We determined that we were in compliance with the covenants of our financing arrangements as of December 31, 2019. 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 (cid:49)orth American credit facility expires in May 2022. Our European credit facility expires in February 2021. Of our $425.0 million in long-term debt outstanding at December 31, 2019, $10.0 million in principal is due within one year. Additionally, the $287.5 million principal amount of the 3.00% Convertible Senior (cid:49)otes due 2020 is due August 1, 2020. Based upon our current availability considering borrowing base restrictions in (cid:49)orth America ($146.5 million), our cash on hand, our current ability to negotiate extensions or renew our lines of credit and 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 $497.5 million, as of December 31, 2019. The $497.5 million includes $226.0 million for the Americas and $271.5 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. On May 10, 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 will be included evenly into our tax filings over four years effective with tax year 2017. We estimate the related tax payments to be approximately $9.3 million per quarter through the year 2020. (cid:49)o interest or penalties were assessed as part of the settlement. We believe that funds generated from operations and from cash collections on finance receivables, together with existing cash and available borrowings under our revolving credit facilities will be sufficient to finance our operations, planned capital expenditures, forward flow purchase commitments, and additional portfolio purchases during the next twelve months. Business acquisitions, adverse outcomes in pending litigation or higher than expected levels of portfolio purchasing could require additional financing from other sources. Cash Flows Analysis The following table summarizes our cash flow activity for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands): Total cash provided by (used in): Operating activities Investing activities Financing activities Effect of exchange rate on cash 2019 2018 2017 $ 133,388 $ 80,866 $ (441,190) 339,523 (6,609) (387,251) 294,926 (10,362) 15,475 (294,960) 295,698 10,016 (cid:49)et increase/(decrease) in cash and cash equivalents $ 25,112 $ (21,821) $ 26,229 Operating Activities The change in our cash flows from operating activities in 2019 was primarily due to cash collections recognized as revenue 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, depreciation and amortization, deferred taxes, hedged derivatives, and stock-based compensation and (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. 36 37 fp0052934_PRA_10k_2020_combined4.indd 39 4/20/2020 12:52:36 PM (cid:49)et cash provided by operating activities increased $52.5 million or 65.0% in 2019 mainly driven by higher net income of Critical Accounting Policies and Estimates $21.9 million and a $26.6 million gain on sale in 2018 of RCB. Investing Activities Cash used in investing activities is normally driven by acquisitions of nonperforming loans and purchases of investments. Cash provided by investing activities is mainly driven by cash collections applied on finance receivables and proceeds from the sale of investments and subsidiaries. (cid:49)et cash used in investing activities increased $53.9 million or 13.9% in 2019, primarily from a $125.6 million increase in acquisitions of finance receivables, $57.6 million of cash used related to a business acquisition in the first quarter of 2019, a $40.7 million increase in purchases of investments, and $17.5 million related to the consolidation of a Polish investment fund in 2018. These activities were partially offset by a $109.6 million increase in collections applied to principal on finance receivables, a $49.1 million increase in proceeds from sales and maturities of investments, and $26.3 million in proceeds in the first quarter of 2019 from the sale of RCB 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 increased $44.6 million or 15.1% primarily from a $603.2 million increase in proceeds from our lines of credit, a $36.1 million increase from interest bearing deposits, and a $32.3 million increase in net contributions from noncontrolling interests, partially offset by a $628.1 million increase in payments on our lines of credit and long term debt. Undistributed Earnings of International Subsidiaries recognized immediately. 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 or 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 $109.7 million and $78.6 million as of December 31, 2019 and 2018, respectively. Refer to the (cid:49)ote 13 to our Consolidated Financial Statements included in Item 8 of this Form 10-K 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 of December 31, 2019 as defined by Item 303(a)(4) of Regulation S- K promulgated under the Exchange Act. Contractual Obligations Our contractual obligations as of December 31, 2019 were as follows (amounts in thousands): Contractual Obligations Operating leases Revolving credit (1) Long-term debt (2) Purchase commitments (3) Employment agreements Derivatives Total Payments due by period Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years $ 95,373 $ 11,846 $ 20,702 $ 13,411 $ 49,414 1,936,402 1,260,070 506,907 7,988 83,533 1,847,611 3,535 1,723 337,161 497,503 7,927 571,871 351,038 9,404 61 — — — — — $ 23,663 $ 3,830,403 $ $ 10,294 $ 10,222 948,264 $ 2,459,871 $ $ 3,047 371,031 $ $ 100 51,237 (1) Includes estimated interest and unused line fees due on our revolving credit facilities and assumes that the outstanding balances on the revolving credit facilities remain constant from the December 31, 2019 balances to maturity. (2) Includes scheduled interest and principal payments on our term loans and convertible senior notes. (3) Reflects the maximum remaining amount to be purchased under forward flow and other contracts for the purchase of nonperforming loans in the amount of $506.9 million. 38 fp0052934_PRA_10k_2020_combined4.indd 40 4/20/2020 12:52:36 PM Our consolidated financial statements have been prepared in accordance with GAAP. Our significant accounting policies are discussed in (cid:49)ote 1 to our Consolidated Financial Statements included in Item 8 of this Form 10-K. Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates, assumptions and judgments that affect the reported amounts of revenues, expenses, assets, and liabilities. Three of these policies are considered to be critical because they are important to the portrayal of our financial condition and results, and because they require management to make judgments and estimates that are difficult, subjective, and complex regarding matters that are inherently uncertain. We base our estimates on historical experience, current trends and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ significantly from actual results, the impact on our consolidated financial statements may be material. Management has reviewed these critical accounting policies with the Audit Committee of our board of directors. Revenue Recognition - Finance Receivables We account for the vast majority of our investment in finance receivables under the guidance of ASC 310-30. Revenue recognition for finance receivables accounted for under ASC 310-30 involves the use of estimates and the exercise of judgment on the part of management. These estimates include projections of the quantity and timing of future cash flows and economic lives of our pools of finance receivables. Significant changes in such estimates could result in increased revenue via yield increases which are recognized prospectively or increased allowance charges resulting from decreased cash flow estimates which are We implement the accounting for income recognized on finance receivables under ASC 310-30 as follows: We create each accounting pool using our projections of estimated cash flows and expected economic life. We then compute the effective yield that fully amortizes the pool over a reasonable expectation of its economic life based on the current projections of estimated cash flows. As actual cash flow results are recorded, we 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 utilizing our proprietary analytical models. Significant judgment is used in evaluating whether variances in actual performance are due to changes in the total amount or changes in the timing of expected cash flows. Significant changes in either may result in yield increases or allowance charges if necessary for the pool's amortization period to fall within a reasonable expectation of its economic life. Refer to (cid:49)ote 1 of our Consolidated Financial Statements included in Item 8 of this Form 10-K under Recently Issued Accounting Standards (cid:49)ot Yet Adopted for further information on revenue recognition of expected credit losses for loans effective January 1, 2020. Valuation of Acquired Intangibles and Goodwill In accordance with FASB ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), we amortize intangible assets over their estimated useful lives. Goodwill, pursuant to ASC 350, is not amortized but rather evaluated for impairment annually and more frequently if indicators of potential impairment exist. Goodwill is reviewed for potential impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment. Goodwill is evaluated for impairment either under the qualitative assessment option or the two-step test approach depending on facts and circumstances of a reporting unit, including the excess of fair value over carrying amount in the last valuation or changes in business environment. If we qualitatively determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. Otherwise, goodwill is evaluated for impairment using the two-step test, where the carrying amount of a reporting unit is compared to its fair value in Step 1; if the fair value exceeds the carrying amount, Step 2 is unnecessary. If the carrying amount exceeds the reporting unit’s fair value, this could indicate potential impairment and Step 2 of the goodwill evaluation process is required to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. When Step 2 is necessary, the fair value of individual assets and liabilities is determined using valuations (which in some cases may be based in part on third-party valuation reports), or other observable sources of fair value, as appropriate. If the carrying amount of goodwill exceeds its implied fair value, the excess is recognized as an impairment loss. 39 $21.9 million and a $26.6 million gain on sale in 2018 of RCB. Investing Activities Cash used in investing activities is normally driven by acquisitions of nonperforming loans and purchases of investments. Cash provided by investing activities is mainly driven by cash collections applied on finance receivables and proceeds from the sale of investments and subsidiaries. (cid:49)et cash used in investing activities increased $53.9 million or 13.9% in 2019, primarily from a $125.6 million increase in acquisitions of finance receivables, $57.6 million of cash used related to a business acquisition in the first quarter of 2019, a $40.7 million increase in purchases of investments, and $17.5 million related to the consolidation of a Polish investment fund in 2018. These activities were partially offset by a $109.6 million increase in collections applied to principal on finance receivables, a $49.1 million increase in proceeds from sales and maturities of investments, and $26.3 million in proceeds in the first quarter of 2019 from the sale of RCB 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 increased $44.6 million or 15.1% primarily from a $603.2 million increase in proceeds from our lines of credit, a $36.1 million increase from interest bearing deposits, and a $32.3 million increase in net contributions from noncontrolling interests, partially offset by a $628.1 million increase in payments on our lines of credit 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 or 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 $109.7 million and $78.6 million as of December 31, 2019 and 2018, respectively. Refer to the (cid:49)ote 13 to our Consolidated Financial Statements included in Item 8 of this Form 10-K for further information related to our income taxes and undistributed international earnings. We do not have any off-balance sheet arrangements as of December 31, 2019 as defined by Item 303(a)(4) of Regulation S- Off Balance Sheet Arrangements K promulgated under the Exchange Act. Contractual Obligations Contractual Obligations Operating leases Revolving credit (1) Long-term debt (2) Purchase commitments (3) Employment agreements Derivatives Total Payments due by period Total Less than 1 year 1 - 3 years 3 - 5 years More than 5 years $ 95,373 $ 11,846 $ 20,702 $ 13,411 $ 49,414 1,936,402 1,260,070 506,907 7,988 83,533 1,847,611 3,535 1,723 337,161 497,503 7,927 571,871 351,038 9,404 61 — — — — — $ 23,663 $ 3,830,403 $ $ 10,294 $ 10,222 3,047 948,264 $ 2,459,871 371,031 $ $ $ $ 100 51,237 (1) Includes estimated interest and unused line fees due on our revolving credit facilities and assumes that the outstanding balances on the revolving credit facilities remain constant from the December 31, 2019 balances to maturity. (2) Includes scheduled interest and principal payments on our term loans and convertible senior notes. (3) Reflects the maximum remaining amount to be purchased under forward flow and other contracts for the purchase of nonperforming loans in the amount of $506.9 million. 38 (cid:49)et cash provided by operating activities increased $52.5 million or 65.0% in 2019 mainly driven by higher net income of Critical Accounting Policies and Estimates Our consolidated financial statements have been prepared in accordance with GAAP. Our significant accounting policies are discussed in (cid:49)ote 1 to our Consolidated Financial Statements included in Item 8 of this Form 10-K. Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates, assumptions and judgments that affect the reported amounts of revenues, expenses, assets, and liabilities. Three of these policies are considered to be critical because they are important to the portrayal of our financial condition and results, and because they require management to make judgments and estimates that are difficult, subjective, and complex regarding matters that are inherently uncertain. We base our estimates on historical experience, current trends and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ significantly from actual results, the impact on our consolidated financial statements may be material. Management has reviewed these critical accounting policies with the Audit Committee of our board of directors. Revenue Recognition - Finance Receivables We account for the vast majority of our investment in finance receivables under the guidance of ASC 310-30. Revenue recognition for finance receivables accounted for under ASC 310-30 involves the use of estimates and the exercise of judgment on the part of management. These estimates include projections of the quantity and timing of future cash flows and economic lives of our pools of finance receivables. Significant changes in such estimates could result in increased revenue via yield increases which are recognized prospectively or increased allowance charges resulting from decreased cash flow estimates which are recognized immediately. We implement the accounting for income recognized on finance receivables under ASC 310-30 as follows: We create each accounting pool using our projections of estimated cash flows and expected economic life. We then compute the effective yield that fully amortizes the pool over a reasonable expectation of its economic life based on the current projections of estimated cash flows. As actual cash flow results are recorded, we 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 utilizing our proprietary analytical models. Significant judgment is used in evaluating whether variances in actual performance are due to changes in the total amount or changes in the timing of expected cash flows. Significant changes in either may result in yield increases or allowance charges if necessary for the pool's amortization period to fall within a reasonable expectation of its economic life. Refer to (cid:49)ote 1 of our Consolidated Financial Statements included in Item 8 of this Form 10-K under Recently Issued Accounting Standards (cid:49)ot Yet Adopted for further information on revenue recognition of expected credit losses for loans effective January 1, 2020. Our contractual obligations as of December 31, 2019 were as follows (amounts in thousands): Valuation of Acquired Intangibles and Goodwill In accordance with FASB ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), we amortize intangible assets over their estimated useful lives. Goodwill, pursuant to ASC 350, is not amortized but rather evaluated for impairment annually and more frequently if indicators of potential impairment exist. Goodwill is reviewed for potential impairment at the reporting unit level. A reporting unit is an operating segment or one level below an operating segment. Goodwill is evaluated for impairment either under the qualitative assessment option or the two-step test approach depending on facts and circumstances of a reporting unit, including the excess of fair value over carrying amount in the last valuation or changes in business environment. If we qualitatively determine it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, the two-step impairment test is unnecessary. Otherwise, goodwill is evaluated for impairment using the two-step test, where the carrying amount of a reporting unit is compared to its fair value in Step 1; if the fair value exceeds the carrying amount, Step 2 is unnecessary. If the carrying amount exceeds the reporting unit’s fair value, this could indicate potential impairment and Step 2 of the goodwill evaluation process is required to determine if goodwill is impaired and to measure the amount of impairment loss to recognize, if any. When Step 2 is necessary, the fair value of individual assets and liabilities is determined using valuations (which in some cases may be based in part on third-party valuation reports), or other observable sources of fair value, as appropriate. If the carrying amount of goodwill exceeds its implied fair value, the excess is recognized as an impairment loss. 39 fp0052934_PRA_10k_2020_combined4.indd 41 4/20/2020 12:52:36 PM 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 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. Recent Accounting Pronouncements For a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statements see (cid:49)ote 1 to our Consolidated Financial Statements included in Item 8 of this Form 10-K. Item 7A. 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 40 fp0052934_PRA_10k_2020_combined4.indd 42 4/20/2020 12:52:36 PM 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 December 31, 2019. Based on our current debt structure, assuming a 50 basis point decrease in interest rates, for example, interest expense over the following 12 months would decrease by an estimated $7.2 million. Assuming a 50 basis point increase in interest rates, interest expense over the following 12 months would increase by an estimated $7.4 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. Further, effective in the second quarter of 2018, we began to 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 December 31, 2019. 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. In 2019, we generated $343.8 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 purchasing 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 purchasing by currency. 41 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 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. Recent Accounting Pronouncements For a summary of recent accounting pronouncements and the anticipated effects on our consolidated financial statements see (cid:49)ote 1 to our Consolidated Financial Statements included in Item 8 of this Form 10-K. Item 7A. 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 December 31, 2019. Based on our current debt structure, assuming a 50 basis point decrease in interest rates, for example, interest expense over the following 12 months would decrease by an estimated $7.2 million. Assuming a 50 basis point increase in interest rates, interest expense over the following 12 months would increase by an estimated $7.4 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. Further, effective in the second quarter of 2018, we began to 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 December 31, 2019. 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. In 2019, we generated $343.8 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 purchasing 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 purchasing by currency. 40 41 fp0052934_PRA_10k_2020_combined4.indd 43 4/20/2020 12:52:36 PM Item 8. Financial Statements and Supplementary Data. See Item 6 for quarterly consolidated financial statements for 2019 and 2018. Index to Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Income Statements Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows (cid:49)otes to Consolidated Financial Statements 1 – General and Summary of Significant Accounting Policies 2 – Finance Receivables, net 3 – Investments 4 – Leases 5 – Goodwill and Intangible Assets, net 6 – Borrowings 7 – Property and Equipment, net 8 – Fair Value 9 – Derivatives 10 – Accumulated Other Comprehensive Income 11 – Share-Based Compensation 12 – Earnings Per Share 13 – Income Taxes 14 – Commitments and Contingencies 15 – Retirement Plans 16 – Redeemable (cid:49)oncontrolling interest 17 – Sales of Subsidiaries 43 45 46 47 48 49 50 50 57 59 60 61 62 66 66 69 70 70 72 73 75 76 76 77 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors PRA Group, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of PRA Group, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated income statements, statements of comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 2, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle Basis for Opinion As discussed in (cid:49)otes 1 and 4 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification (ASC) Topic 842, Leases. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. Assessment of income recognized on finance receivables and the valuation allowance and net allowance charges As discussed in (cid:49)otes 1 and 2 to the consolidated financial statements, the Company’s finance receivables balance as of December 31, 2019 was $3.5 billion and the related valuation allowance was $281.3 million. Income recognized on finance receivables for the year ended December 31, 2019 was $998.4 million and net allowances charges for the year ended December 31, 2019 were $24.0 million. The Company accounts for its investment in finance receivables and recognizes revenue under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, which involves the use of estimates and the exercise of judgment on the part of the Company. These estimates include projections of the amount and timing of future cash flows and economic lives of the pools of finance receivables. 42 43 fp0052934_PRA_10k_2020_combined4.indd 44 4/20/2020 12:52:36 PM Item 8. Financial Statements and Supplementary Data. See Item 6 for quarterly consolidated financial statements for 2019 and 2018. Index to Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Income Statements Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows (cid:49)otes to Consolidated Financial Statements 1 – General and Summary of Significant Accounting Policies 2 – Finance Receivables, net 3 – Investments 4 – Leases 6 – Borrowings 8 – Fair Value 9 – Derivatives 5 – Goodwill and Intangible Assets, net 7 – Property and Equipment, net 11 – Share-Based Compensation 12 – Earnings Per Share 13 – Income Taxes 14 – Commitments and Contingencies 15 – Retirement Plans 16 – Redeemable (cid:49)oncontrolling interest 17 – Sales of Subsidiaries 10 – Accumulated Other Comprehensive Income 43 45 46 47 48 49 50 50 57 59 60 61 62 66 66 69 70 70 72 73 75 76 76 77 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors PRA Group, Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of PRA Group, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated income statements, statements of comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 2, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in (cid:49)otes 1 and 4 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standards Codification (ASC) Topic 842, Leases. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which they relate. Assessment of income recognized on finance receivables and the valuation allowance and net allowance charges As discussed in (cid:49)otes 1 and 2 to the consolidated financial statements, the Company’s finance receivables balance as of December 31, 2019 was $3.5 billion and the related valuation allowance was $281.3 million. Income recognized on finance receivables for the year ended December 31, 2019 was $998.4 million and net allowances charges for the year ended December 31, 2019 were $24.0 million. The Company accounts for its investment in finance receivables and recognizes revenue under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, which involves the use of estimates and the exercise of judgment on the part of the Company. These estimates include projections of the amount and timing of future cash flows and economic lives of the pools of finance receivables. 42 43 fp0052934_PRA_10k_2020_combined4.indd 45 4/20/2020 12:52:37 PM Significant changes in such estimates could result in increased revenue through yield increases which are recognized prospectively or increased allowance charges resulting from decreased cash flow estimates which are recognized immediately. As actual cash flow results are recorded, the Company reviews each pool for trends, actual performance versus projections and curve shape (a graphical depiction of the timing of cash flows). The Company then re-forecasts future cash flows. We identified the assessment of income recognized on finance receivables and the valuation allowance and net allowance charges as a critical audit matter because it involved significant measurement uncertainty that required complex auditor judgment and specialized knowledge and experience. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. The future cash flows and economic lives of each pool have sensitivity such that minor changes could have had a significant impact on the total income recognized on finance receivables, and the valuation allowance and net allowance charges. Additionally, there was a high level of subjectivity in performing procedures related to the estimation of future cash flows and the economic lives used to determine (1) income recognized on finance receivables, including the yield rate, and (2) the valuation allowance and net allowance charges. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company's process to (1) develop estimates of future cash flows and determine the economic lives used to recognize income and (2) determine the valuation allowance and net allowance charges. We evaluated the Company’s process to develop the estimates by testing certain sources of data, factors, and assumptions. This included considering the relevance and reliability of such data, factors and assumptions including historical trends, operational factors related to the collections process, and actual performance versus projections. We compared the Company's historical cash collection estimates to actual results to assess the Company's ability to accurately forecast. In addition, we involved credit risk professionals with specialized industry knowledge and experience who assisted in: – – performing sensitivity analyses utilizing different assumptions of the future cash flows to assess the magnitude of the impact on the Company's income recognition on finance receivables, the valuation allowance and net allowance charges and economic lives; assessing the Company's estimates of future cash flows of a selection of pools of finance receivables, by comparing to historical trends and evaluating relevant metrics. We evaluated the collective results of the procedures performed to assess the sufficiency of the audit evidence obtained related to the Company’s income recognized on finance receivables and the valuation allowance and net allowance charges. /s/ KPMG We have served as the Company’s auditor since 2007. (cid:49)orfolk, Virginia March 2, 2020 Cash and cash equivalents Investments Finance receivables, net Other receivables, net Income taxes receivable Deferred tax asset, net Right-of-use assets Property and equipment, net Goodwill Intangible assets, net Other assets Liabilities: Accounts payable Accrued expenses Income taxes payable Deferred tax liability, net Lease liabilities Interest-bearing deposits Borrowings Other liabilities Total liabilities Redeemable noncontrolling interest Equity: outstanding PRA Group, Inc. Consolidated Balance Sheets December 31, 2019 and 2018 (Amounts in thousands, except per share amounts) Assets 2019 2018 $ 119,774 $ Total assets Liabilities and Equity 4,423,891 $ 3,909,559 $ $ 4,258 $ 56,176 3,514,165 10,606 17,918 63,225 68,972 56,501 480,794 4,497 31,263 88,925 4,046 85,390 73,377 106,246 2,808,425 26,211 3,196,878 — — 454 67,321 1,362,631 (261,018) 1,169,388 57,625 1,227,013 98,695 45,173 3,084,777 46,157 16,809 61,453 — 54,136 464,116 5,522 32,721 6,110 79,396 15,080 114,979 — 82,666 2,473,656 7,370 2,779,257 6,333 — 453 60,303 1,276,473 (242,109) 1,095,120 28,849 1,123,969 3,909,559 Preferred stock, $0.01 par value, 2,000 shares authorized, no shares issued and Common stock, $0.01 par value, 100,000 shares authorized, 45,416 shares issued and outstanding at December 31, 2019; 100,000 shares authorized, 45,304 shares issued and outstanding at December 31, 2018 Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total stockholders' equity - PRA Group, Inc. (cid:49)oncontrolling interests Total equity Total liabilities and equity $ 4,423,891 $ The accompanying notes are an integral part of these consolidated financial statements. 44 45 fp0052934_PRA_10k_2020_combined4.indd 46 4/20/2020 12:52:37 PM Significant changes in such estimates could result in increased revenue through yield increases which are recognized prospectively or increased allowance charges resulting from decreased cash flow estimates which are recognized immediately. As actual cash flow results are recorded, the Company reviews each pool for trends, actual performance versus projections and curve shape (a graphical depiction of the timing of cash flows). The Company then re-forecasts future cash flows. We identified the assessment of income recognized on finance receivables and the valuation allowance and net allowance charges as a critical audit matter because it involved significant measurement uncertainty that required complex auditor judgment and specialized knowledge and experience. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained. The future cash flows and economic lives of each pool have sensitivity such that minor changes could have had a significant impact on the total income recognized on finance receivables, and the valuation allowance and net allowance charges. Additionally, there was a high level of subjectivity in performing procedures related to the estimation of future cash flows and the economic lives used to determine (1) income recognized on finance receivables, including the yield rate, and (2) the valuation allowance and net allowance charges. The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company's process to (1) develop estimates of future cash flows and determine the economic lives used to recognize income and (2) determine the valuation allowance and net allowance charges. We evaluated the Company’s process to develop the estimates by testing certain sources of data, factors, and assumptions. This included considering the relevance and reliability of such data, factors and assumptions including historical trends, operational factors related to the collections process, and actual performance versus projections. We compared the Company's historical cash collection estimates to actual results to assess the Company's ability to accurately forecast. In addition, we involved credit risk professionals with specialized industry knowledge and experience who assisted in: – performing sensitivity analyses utilizing different assumptions of the future cash flows to assess the magnitude of the impact on the Company's income recognition on finance receivables, the valuation allowance and net allowance charges and economic lives; – assessing the Company's estimates of future cash flows of a selection of pools of finance receivables, by comparing to historical trends and evaluating relevant metrics. We evaluated the collective results of the procedures performed to assess the sufficiency of the audit evidence obtained related to the Company’s income recognized on finance receivables and the valuation allowance and net allowance charges. /s/ KPMG (cid:49)orfolk, Virginia March 2, 2020 We have served as the Company’s auditor since 2007. PRA Group, Inc. Consolidated Balance Sheets December 31, 2019 and 2018 (Amounts in thousands, except per share amounts) 2019 2018 Assets $ 119,774 $ 56,176 3,514,165 10,606 17,918 63,225 68,972 56,501 480,794 4,497 31,263 98,695 45,173 3,084,777 46,157 16,809 61,453 — 54,136 464,116 5,522 32,721 Cash and cash equivalents Investments Finance receivables, net Other receivables, net Income taxes receivable Deferred tax asset, net Right-of-use assets Property and equipment, net Goodwill Intangible assets, net Other assets 4,423,891 $ 3,909,559 $ $ Total assets Liabilities and Equity Liabilities: Accounts payable Accrued expenses Income taxes payable Deferred tax liability, net Lease liabilities Interest-bearing deposits Borrowings Other liabilities Total liabilities Redeemable noncontrolling interest 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, 45,416 shares issued and outstanding at December 31, 2019; 100,000 shares authorized, 45,304 shares issued and outstanding at December 31, 2018 Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total stockholders' equity - PRA Group, Inc. (cid:49)oncontrolling interests Total equity 4,258 $ 88,925 4,046 85,390 73,377 106,246 2,808,425 26,211 3,196,878 — — 454 67,321 1,362,631 (261,018) 1,169,388 57,625 1,227,013 6,110 79,396 15,080 114,979 — 82,666 2,473,656 7,370 2,779,257 6,333 — 453 60,303 1,276,473 (242,109) 1,095,120 28,849 1,123,969 3,909,559 Total liabilities and equity $ 4,423,891 $ The accompanying notes are an integral part of these consolidated financial statements. 44 45 fp0052934_PRA_10k_2020_combined4.indd 47 4/20/2020 12:52:37 PM Less comprehensive income attributable to noncontrolling interests Comprehensive income attributable to PRA Group, Inc. $ 67,249 $ 2,061 $ 237,651 The accompanying notes are an integral part of these consolidated financial statements. PRA Group, Inc. Consolidated Income Statements For the years ended December 31, 2019, 2018 and 2017 (Amounts in thousands, except per share amounts) PRA Group, Inc. Consolidated Statements of Comprehensive Income For the years ended December 31, 2019, 2018 and 2017 (Amounts in thousands) Revenues: Income recognized on finance receivables $ 998,361 $ 891,899 $ Fee income Other revenue Total revenues 15,769 2,951 1,017,081 14,916 1,441 908,256 795,435 24,916 7,855 828,206 2019 2018 2017 (cid:49)et allowance charges (24,025) (33,425) (11,898) (cid:49)et income Other comprehensive (loss)/income, net of tax: Currency translation adjustments Cash flow hedges Debt securities available-for-sale Other comprehensive (loss)/income Total comprehensive income 2019 2018 2017 $ 97,679 $ 75,734 $ 171,125 (6,359) (13,132) 39 (19,452) 78,227 10,978 (63,505) 67,858 44 (83) (63,544) 12,190 10,129 — — 67,858 238,983 1,332 Operating expenses: Compensation and employee services Legal collection fees Legal collection costs Agency fees Outside fees and services Communication Rent and occupancy Depreciation and amortization Other operating expenses Total operating expenses Income from operations Other income and (expense): Gain on sale of subsidiaries Interest expense, net Foreign exchange gain/(loss) Other Income before income taxes Income tax expense/(benefit) (cid:49)et income 310,441 55,261 134,156 55,812 63,513 44,057 17,854 17,464 46,811 745,369 247,687 — (141,918) 11,954 (364) 117,359 19,680 97,679 Adjustment for net income attributable to noncontrolling interests (cid:49)et income attributable to PRA Group, Inc. (cid:49)et income per share attributable to PRA Group, Inc.: Basic Diluted Weighted average number of shares outstanding: Basic Diluted $ $ $ $ $ $ 11,521 86,158 1.90 1.89 45,387 45,577 The accompanying notes are an integral part of these consolidated financial statements. 319,400 42,941 104,988 33,854 61,492 43,224 16,906 19,322 47,444 689,571 185,260 26,575 (121,078) (944) (316) 89,497 13,763 75,734 10,171 65,563 1.45 1.44 45,280 45,413 $ $ $ 273,033 43,351 76,047 35,530 62,792 33,132 14,823 19,763 44,103 602,574 213,734 48,474 (98,041) (1,104) (2,790) 160,273 (10,852) 171,125 6,810 164,315 3.60 3.59 45,671 45,823 46 47 fp0052934_PRA_10k_2020_combined4.indd 48 4/20/2020 12:52:37 PM PRA Group, Inc. Consolidated Income Statements For the years ended December 31, 2019, 2018 and 2017 (Amounts in thousands, except per share amounts) PRA Group, Inc. Consolidated Statements of Comprehensive Income For the years ended December 31, 2019, 2018 and 2017 (Amounts in thousands) Income recognized on finance receivables $ 998,361 $ 891,899 $ Other comprehensive (loss)/income, net of tax: 2019 2018 2017 (cid:49)et income (cid:49)et allowance charges (24,025) (33,425) (11,898) 15,769 2,951 1,017,081 14,916 1,441 908,256 Currency translation adjustments Cash flow hedges Debt securities available-for-sale Other comprehensive (loss)/income Total comprehensive income Less comprehensive income attributable to noncontrolling interests 2019 2018 2017 $ 97,679 $ 75,734 $ 171,125 (6,359) (13,132) 39 (19,452) 78,227 10,978 (63,505) 67,858 44 (83) (63,544) 12,190 10,129 — — 67,858 238,983 1,332 Comprehensive income attributable to PRA Group, Inc. $ 67,249 $ 2,061 $ 237,651 The accompanying notes are an integral part of these consolidated financial statements. Revenues: Fee income Other revenue Total revenues Operating expenses: Compensation and employee services Legal collection fees Legal collection costs Agency fees Outside fees and services Communication Rent and occupancy Depreciation and amortization Other operating expenses Total operating expenses Income from operations Other income and (expense): Gain on sale of subsidiaries Interest expense, net Foreign exchange gain/(loss) Other Income before income taxes Income tax expense/(benefit) (cid:49)et income Adjustment for net income attributable to noncontrolling interests (cid:49)et income attributable to PRA Group, Inc. (cid:49)et income per share attributable to PRA Group, Inc.: Weighted average number of shares outstanding: Basic Diluted Basic Diluted $ $ $ $ $ $ 11,521 86,158 1.90 1.89 45,387 45,577 The accompanying notes are an integral part of these consolidated financial statements. 795,435 24,916 7,855 828,206 273,033 43,351 76,047 35,530 62,792 33,132 14,823 19,763 44,103 602,574 213,734 48,474 (98,041) (1,104) (2,790) 160,273 (10,852) 171,125 6,810 164,315 3.60 3.59 45,671 45,823 310,441 55,261 134,156 55,812 63,513 44,057 17,854 17,464 46,811 745,369 247,687 — (141,918) 11,954 (364) 117,359 19,680 97,679 319,400 42,941 104,988 33,854 61,492 43,224 16,906 19,322 47,444 689,571 185,260 26,575 (121,078) (944) (316) 89,497 13,763 75,734 10,171 65,563 1.45 1.44 45,280 45,413 $ $ $ 46 47 fp0052934_PRA_10k_2020_combined4.indd 49 4/20/2020 12:52:37 PM PRA Group, Inc. Consolidated Statements of Changes in Equity For the years ended December 31, 2019, 2018 and 2017 (Amounts in thousands) PRA Group, Inc. Consolidated Statements of Cash Flows For the years ended December 31, 2019, 2018 and 2017 (Amounts in thousands) Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive (Loss) (cid:49)oncontrolling Interests Total Equity Balance at December 31, 2016 46,356 $ 464 $ 66,414 $ 1,050,525 $ (251,944) $ 52,862 $ 918,321 Cash flows from operating activities: (cid:49)et income activities: Adjustments to reconcile net income to net cash provided by operating 2019 2018 2017 $ 97,679 $ 75,734 $ 171,125 Components of comprehensive income, net of tax: (cid:49)et income Currency translation adjustment Distributions to noncontrolling interest Vesting of restricted stock Repurchase and cancellation of common stock Share-based compensation expense Excess income tax benefit from share- based compensation Employee stock relinquished for payment of taxes Component of convertible debt — — — 145 — — — 1 (1,312) (13) — — — — — — — — — — — (1) (44,896) 8,678 (3,022) 44,910 (18,213) 164,315 — — — — — — — — — 73,337 — — — — — — — 6,587 (7,202) (2,085) — — — — — — 170,902 66,135 (2,085) — (44,909) 8,678 (3,022) 44,910 (18,213) Balance at December 31, 2017 45,189 $ 452 $ 53,870 $ 1,214,840 $ (178,607) $ 50,162 $ 1,140,717 Cumulative effect of change in accounting principle - equity securities (1) Balance at January 1, 2018 Components of comprehensive income, net of tax: (cid:49)et income Currency translation adjustment Cash flow hedges Debt securities available-for-sale Distributions to noncontrolling interest Vesting of restricted stock Share-based compensation expense Employee stock relinquished for payment of taxes Purchase of noncontrolling interest — — — (3,930) — — (3,930) 45,189 $ 452 $ 53,870 $ 1,210,910 $ (178,607) $ 50,162 $ 1,136,787 — — — — — 115 — — — — — — — — 1 — — — — — — — — (1) 8,521 (2,087) — 65,563 — — — — — — — — — (63,463) 44 (83) — — — — — 10,171 (42) — — 75,734 (63,505) 44 (83) (33,271) (33,271) — — — 1,829 — 8,521 (2,087) 1,829 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: (cid:49)et income Currency translation adjustments Cash flow hedges Debt securities available-for-sale Distributions to noncontrolling interest Contributions from noncontrolling interest Vesting of restricted stock Share-based compensation expense Employee stock relinquished for payment of taxes Other — — — — — — 112 — — — — — — — — — 1 — — — — — — — — — (1) 10,717 (1,609) (2,089) 86,158 — — — — — — — — — — (5,816) (13,132) 39 — — — — — — 11,521 (543) — — (6,877) 24,675 — — — — 97,679 (6,359) (13,132) 39 (6,877) 24,675 — 10,717 (1,609) (2,089) Balance at December 31, 2019 45,416 $ 454 $ 67,321 $ 1,362,631 $ (261,018) $ 57,625 $ 1,227,013 (1) Refer to (cid:49)ote 3 for further detail. The accompanying notes are an integral part of these consolidated financial statements. 48 49 fp0052934_PRA_10k_2020_combined4.indd 50 4/20/2020 12:52:37 PM Share-based compensation expense Depreciation and amortization Gain on sale of subsidiaries Amortization of debt discount and issuance costs Impairment of investments Deferred tax benefit (cid:49)et unrealized foreign currency transactions Fair value in earnings for equity securities (cid:49)et allowance charges Other operating activities Changes in operating assets and liabilities: Other assets Other receivables, net Accounts payable Accrued expenses Other liabilities Income taxes (payable)/receivable, net Right of use asset/lease liability (cid:49)et cash provided by operating activities Cash flows from investing activities: Purchases of property and equipment Acquisition of finance receivables Collections applied to principal on finance receivables Business acquisition, net of cash acquired Cash received upon consolidation of Polish investment fund Proceeds from sale of subsidiaries, net Purchase of investments Proceeds from sales and maturities of investments (cid:49)et cash used in investing activities Cash flows from financing activities: Proceeds from lines of credit Principal payments on lines of credit Principal payments on notes payable and long-term debt Proceeds from long-term debt Proceeds from convertible debt Repurchases of common stock Tax withholdings related to share-based payments Payments of origination costs and fees Cash paid for purchase of portion of noncontrolling interest Distributions paid to noncontrolling interest Contributions from noncontrolling interest (cid:49)et increase/(decrease) in interest-bearing deposits Other financing activities (cid:49)et cash provided by financing activities Effect of exchange rate on cash (cid:49)et increase/(decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosure of cash flow information: Cash paid for interest Cash paid for income taxes 10,717 17,464 22,987 — — (37,561) (4,543) (5,826) 24,025 (234) 3,313 6,300 (2,070) (12,375) 11,632 1,149 731 133,388 (18,033) (1,231,351) 842,910 (57,610) — 31,177 (83,291) 75,008 (441,190) 1,340,700 (728,282) (313,165) — — — — (1,609) (1,255) (6,877) 24,675 27,427 (2,091) 339,523 (6,609) 25,112 98,695 123,807 119,424 68,979 119,774 4,033 123,807 $ $ $ $ $ $ $ $ 8,521 19,322 (26,575) 22,057 — (56,208) 5,730 (3,502) 33,425 — (2,180) (4,269) 1,321 9,390 (1,334) (566) — 80,866 (20,521) (1,105,759) 733,306 — 17,531 4,905 (42,622) 25,909 (387,251) 737,464 (403,348) (10,000) — — — (2,087) (2,260) (1,664) (14,486) (8,693) — — 294,926 (10,362) (21,821) 120,516 98,695 97,475 73,483 98,695 — 98,695 $ $ $ $ 8,678 19,763 (48,474) 18,152 1,745 (130,138) (1,098) — 11,898 (4,033) (460) (3,461) 2,743 (22,715) (5,752) (2,498) — 15,475 (22,840) (1,086,029) 717,170 — — 93,304 (6,688) 10,123 (294,960) 1,260,161 (1,549,833) (15,021) 310,000 345,000 (44,909) (3,022) (18,240) (1,429) 12,991 — — — 295,698 10,016 26,229 94,287 120,516 79,825 144,341 120,516 — 120,516 Cash, cash equivalents and restricted cash reconciliation: Cash and cash equivalents per Consolidated Balance Sheets Restricted cash included in Other Assets per Consolidated Balance Sheets Total cash, cash equivalents and restricted cash The accompanying notes are an integral part of these consolidated financial statements. PRA Group, Inc. Consolidated Statements of Changes in Equity For the years ended December 31, 2019, 2018 and 2017 (Amounts in thousands) Common Stock Shares Amount Additional Paid-in Capital Retained Earnings Accumulated Other (Loss) Comprehensive (cid:49)oncontrolling Interests Total Equity Balance at December 31, 2016 46,356 $ 464 $ 66,414 $ 1,050,525 $ (251,944) $ 52,862 $ 918,321 164,315 73,337 (1,312) (13) Balance at December 31, 2017 45,189 $ 452 $ 53,870 $ 1,214,840 $ (178,607) $ 50,162 $ 1,140,717 45,189 $ 452 $ 53,870 $ 1,210,910 $ (178,607) $ 50,162 $ 1,136,787 — (3,930) 65,563 (63,463) — 44 (83) (33,271) (33,271) Balance at December 31, 2018 45,304 $ 453 $ 60,303 $ 1,276,473 $ (242,109) $ 28,849 $ 1,123,969 86,158 (5,816) (13,132) Components of comprehensive income, net of tax: (cid:49)et income Currency translation adjustment Distributions to noncontrolling interest Vesting of restricted stock Repurchase and cancellation of common stock Share-based compensation expense Excess income tax benefit from share- based compensation Employee stock relinquished for payment of taxes Component of convertible debt Cumulative effect of change in accounting principle - equity securities (1) Balance at January 1, 2018 Components of comprehensive income, net of tax: (cid:49)et income Currency translation adjustment Cash flow hedges Debt securities available-for-sale Distributions to noncontrolling interest Vesting of restricted stock 115 Share-based compensation expense Employee stock relinquished for payment of taxes Purchase of noncontrolling interest Components of comprehensive income, net of tax: (cid:49)et income Currency translation adjustments Cash flow hedges Debt securities available-for-sale Distributions to noncontrolling interest Contributions from noncontrolling interest Vesting of restricted stock Share-based compensation expense Employee stock relinquished for payment of taxes Other (1) Refer to (cid:49)ote 3 for further detail. — — — 145 — — — — — — — — — — — — — — — — — — — 112 — — — — — — 1 — — — — — — — — — — 1 — — — — — — — — — 1 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (1) (44,896) 8,678 (3,022) 44,910 (18,213) — — — — — (1) 8,521 (2,087) — — — — — — — (1) 10,717 (1,609) (2,089) 48 — — — — — — — — — — — — — — — 39 — — — — — — 6,587 (7,202) (2,085) — — — — — — — — — — — — — — — — — — 10,171 (42) 1,829 11,521 (543) (6,877) 24,675 170,902 66,135 (2,085) — (44,909) 8,678 (3,022) 44,910 (18,213) (3,930) 75,734 (63,505) 44 (83) — 8,521 (2,087) 1,829 97,679 (6,359) (13,132) 39 (6,877) 24,675 — 10,717 (1,609) (2,089) Balance at December 31, 2019 45,416 $ 454 $ 67,321 $ 1,362,631 $ (261,018) $ 57,625 $ 1,227,013 The accompanying notes are an integral part of these consolidated financial statements. PRA Group, Inc. Consolidated Statements of Cash Flows For the years ended December 31, 2019, 2018 and 2017 (Amounts in thousands) Cash flows from operating activities: (cid:49)et income Adjustments to reconcile net income to net cash provided by operating activities: 2019 2018 2017 $ 97,679 $ 75,734 $ 171,125 Share-based compensation expense Depreciation and amortization Gain on sale of subsidiaries Amortization of debt discount and issuance costs Impairment of investments Deferred tax benefit (cid:49)et unrealized foreign currency transactions Fair value in earnings for equity securities (cid:49)et allowance charges Other operating activities Changes in operating assets and liabilities: Other assets Other receivables, net Accounts payable Income taxes (payable)/receivable, net Accrued expenses Other liabilities Right of use asset/lease liability Cash flows from investing activities: (cid:49)et cash provided by operating activities Purchases of property and equipment Acquisition of finance receivables Collections applied to principal on finance receivables Business acquisition, net of cash acquired Cash received upon consolidation of Polish investment fund Proceeds from sale of subsidiaries, net Purchase of investments Proceeds from sales and maturities of investments (cid:49)et cash used in investing activities Cash flows from financing activities: Proceeds from lines of credit Principal payments on lines of credit Principal payments on notes payable and long-term debt Proceeds from long-term debt Proceeds from convertible debt Repurchases of common stock Tax withholdings related to share-based payments Payments of origination costs and fees Cash paid for purchase of portion of noncontrolling interest Distributions paid to noncontrolling interest Contributions from noncontrolling interest (cid:49)et increase/(decrease) in interest-bearing deposits Other financing activities (cid:49)et cash provided by financing activities Effect of exchange rate on cash (cid:49)et increase/(decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental disclosure of cash flow information: Cash paid for interest Cash paid for income taxes Cash, cash equivalents and restricted cash reconciliation: Cash and cash equivalents per Consolidated Balance Sheets Restricted cash included in Other Assets per Consolidated Balance Sheets $ $ $ 10,717 17,464 — 22,987 — (37,561) (4,543) (5,826) 24,025 (234) 3,313 6,300 (2,070) (12,375) 11,632 1,149 731 133,388 (18,033) (1,231,351) 842,910 (57,610) — 31,177 (83,291) 75,008 (441,190) 1,340,700 (728,282) (313,165) — — — (1,609) — (1,255) (6,877) 24,675 27,427 (2,091) 339,523 (6,609) 25,112 98,695 123,807 119,424 68,979 119,774 4,033 123,807 8,521 19,322 (26,575) 22,057 — (56,208) 5,730 (3,502) 33,425 — (2,180) (4,269) 1,321 9,390 (1,334) (566) — 80,866 (20,521) (1,105,759) 733,306 — 17,531 4,905 (42,622) 25,909 (387,251) 737,464 (403,348) (10,000) — — — (2,087) (2,260) (1,664) (14,486) — (8,693) — 294,926 (10,362) (21,821) 120,516 98,695 97,475 73,483 98,695 — 98,695 $ $ $ $ 8,678 19,763 (48,474) 18,152 1,745 (130,138) (1,098) — 11,898 (4,033) (460) (3,461) 2,743 (22,715) (5,752) (2,498) — 15,475 (22,840) (1,086,029) 717,170 — — 93,304 (6,688) 10,123 (294,960) 1,260,161 (1,549,833) (15,021) 310,000 345,000 (44,909) (3,022) (18,240) — (1,429) — 12,991 — 295,698 10,016 26,229 94,287 120,516 79,825 144,341 120,516 — 120,516 $ $ $ $ Total cash, cash equivalents and restricted cash The accompanying notes are an integral part of these consolidated financial statements. $ 49 fp0052934_PRA_10k_2020_combined4.indd 51 4/20/2020 12:52:37 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements 1. General and Summary of Significant Accounting Policies: (cid:49)ature of operations: As used herein, the terms "PRA Group," the "Company," or similar terms refer to PRA Group, Inc. and its subsidiaries. PRAGroup, 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 of consumer bankruptcy accounts in the United States ("U.S."). Basis of presentation: 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. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. Realized results could differ from those estimates and assumptions. Reclassification of prior year presentation: Certain prior year amounts have been reclassified for consistency with the current year presentation. Foreign currency: Assets and liabilities have been translated to the reporting currency using the exchange rates in effect on the consolidated balance sheet dates. Equity accounts are translated at historical rates, except for the change in retained earnings during the year which is the result of the income statement translation process. Revenue and expense accounts are translated using the weighted average exchange rate during the period. The cumulative translation adjustments associated with the net assets of international subsidiaries are recorded in accumulated other comprehensive income (loss) in the accompanying consolidated statements of changes in equity. Segments: Under the guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") ASC Topic 280 "Segment Reporting" ("ASC 280"), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and, therefore, it has one reportable segment, accounts receivable management. This conclusion is based on similarities among the operating units, including economic characteristics, the nature of the products and services, the nature of the production processes, the types or class of customer for their products and services, the methods used to distribute their products, and services and the nature of the regulatory environment. Revenues and long-lived assets by geographical location: Revenue for the years ended December 31, 2019, 2018 and 2017, and long-lived assets held at December 31, 2019 and 2018, both for the U.S., the Company's country of domicile, and outside of the U.S. were (amounts in thousands): sheets. Accumulated other comprehensive loss: The Company records unrealized gains and losses on certain available-for-sale investments and foreign currency translation adjustments in other comprehensive income. Unrealized gains and losses on available for sale investments are reclassified to earnings as the gains or losses are realized upon sale of the securities. Translation gains or losses on foreign currency translation adjustments are reclassified to earnings upon the substantial sale or liquidation of investments in international operations. For the Company’s financial derivative instruments that are designated as hedging instruments, the change in fair value of the derivative is recorded in other comprehensive income. Investments: Debt Securities. The Company accounts for its investments in debt securities under the guidance of ASC Topic 320, "Investments-Debt Securities" ("ASC 320"). The Company determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale. Held-to-maturity securities are carried at amortized cost. Available for sale securities are carried at fair market value. Fair value is determined using quoted market prices. Unrealized gains and losses are included in comprehensive income and reported in stockholders' equity. If the fair value of the investment falls below its carrying amount and the decline is deemed to be other than temporary, the investment is written down, with a corresponding charge to earnings. Equity Securities. The Company accounts for its investments in equity securities in accordance with ASC Topic 321, “Investments-Equity Securities” (“ASC 321”), which requires that investments in equity securities be measured at fair value with changes in unrealized gains and losses reported in earnings. The Company's investment in equity securities have historically been carried at cost with income recognized in Other Revenue in the consolidated income statements when distributions, up to reported income, were received from the partnerships. As of first quarter of 2018, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), requires that investments in equity securities be measured at fair value with changes in unrealized gains and losses reported in earnings. See (cid:49)ote 3 for additional information. Equity Method Investments. Equity method investments that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee company depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Under the equity method of accounting, an investee company’s accounts are not reflected within the Company’s consolidated balance sheets and income statements; however, the Company’s share of the earnings or losses of the investee company is reflected in the caption ‘‘Other revenue’’ in the consolidated income statements. The Company’s carrying value in an equity method investee company is reflected in the caption ‘‘Investments’’ in the Company’s consolidated balance When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. Finance receivables and income recognition: The Company accounts for its investment in finance receivables under the guidance of ASC Topic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). 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. At acquisition, the Company reviews the accounts to determine whether there is evidence of deterioration of credit quality since origination, and if it is probable that the Company will be unable to collect all amounts due according to the loan's contractual terms. If both conditions exist, the Company then determines whether each such account is to be accounted for individually or whether such accounts will be assembled into pools based on common risk characteristics. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows (expected at acquisition) for each acquired portfolio based on the Company's proprietary models, and the Company subsequently aggregates portfolios of accounts into quarterly pools. The Company determines the excess of the pool's scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the pool's cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining estimated life of the pool (accretable yield). ASC 310-30 requires that the excess of the contractual cash flows over expected cash flows, based on the Company's estimates derived from proprietary collection models, not be (1) (cid:49)one of the countries included in "Others" comprise greater than 10% of the Company's consolidated revenues or long-lived assets. (2) 2019 includes right-of-use assets from the adoption of ASU 2016-02 on January 1, 2019. Refer to (cid:49)ote 4. 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 (cid:49)ote 3. It is impracticable for the Company to report further breakdowns of revenues from external customers by product or service. Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Concentrations of credit risk: Financial instruments, which potentially expose the Company to concentrations of credit recognized as an adjustment of revenue or expense or on the balance sheet. risk, consist primarily of cash, investments and finance receivables. 50 51 fp0052934_PRA_10k_2020_combined4.indd 52 4/20/2020 12:52:37 PM United States United Kingdom Others (1) Total 2019 Years Ended December 31, 2018 Revenues 2017 $ $ 673,264 120,377 223,440 1,017,081 $ $ 619,172 99,817 189,267 908,256 $ $ 560,278 81,322 186,606 828,206 $ $ 2018 2019 Long-Lived Assets (2) 112,233 3,553 9,687 125,473 48,581 1,543 4,012 54,136 As of December 31, $ $ PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements 1. General and Summary of Significant Accounting Policies: (cid:49)ature of operations: As used herein, the terms "PRA Group," the "Company," or similar terms refer to PRA Group, Inc. and its subsidiaries. PRAGroup, 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 of consumer bankruptcy accounts in the United States ("U.S."). Basis of presentation: 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. The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts and disclosures. Realized results could differ from those estimates and assumptions. current year presentation. Reclassification of prior year presentation: Certain prior year amounts have been reclassified for consistency with the Foreign currency: Assets and liabilities have been translated to the reporting currency using the exchange rates in effect on the consolidated balance sheet dates. Equity accounts are translated at historical rates, except for the change in retained earnings during the year which is the result of the income statement translation process. Revenue and expense accounts are translated using the weighted average exchange rate during the period. The cumulative translation adjustments associated with the net assets of international subsidiaries are recorded in accumulated other comprehensive income (loss) in the accompanying consolidated statements of changes in equity. Segments: Under the guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") ASC Topic 280 "Segment Reporting" ("ASC 280"), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and, therefore, it has one reportable segment, accounts receivable management. This conclusion is based on similarities among the operating units, including economic characteristics, the nature of the products and services, the nature of the production processes, the types or class of customer for their products and services, the methods used to distribute their products, and services and the nature of the regulatory environment. Revenues and long-lived assets by geographical location: Revenue for the years ended December 31, 2019, 2018 and 2017, and long-lived assets held at December 31, 2019 and 2018, both for the U.S., the Company's country of domicile, and outside of the U.S. were (amounts in thousands): United States United Kingdom Others (1) Total Years Ended December 31, As of December 31, 2019 2017 2019 2018 Long-Lived Assets (2) 2018 Revenues $ 673,264 $ 619,172 $ 560,278 $ 112,233 $ 120,377 223,440 99,817 189,267 81,322 186,606 3,553 9,687 $ 1,017,081 $ 908,256 $ 828,206 $ 125,473 $ 48,581 1,543 4,012 54,136 (1) (cid:49)one of the countries included in "Others" comprise greater than 10% of the Company's consolidated revenues or long-lived assets. (2) 2019 includes right-of-use assets from the adoption of ASU 2016-02 on January 1, 2019. Refer to (cid:49)ote 4. 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 (cid:49)ote 3. It is impracticable for the Company to report further breakdowns of revenues from external customers by product or service. Cash and cash equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Concentrations of credit risk: Financial instruments, which potentially expose the Company to concentrations of credit risk, consist primarily of cash, investments and finance receivables. Accumulated other comprehensive loss: The Company records unrealized gains and losses on certain available-for-sale investments and foreign currency translation adjustments in other comprehensive income. Unrealized gains and losses on available for sale investments are reclassified to earnings as the gains or losses are realized upon sale of the securities. Translation gains or losses on foreign currency translation adjustments are reclassified to earnings upon the substantial sale or liquidation of investments in international operations. For the Company’s financial derivative instruments that are designated as hedging instruments, the change in fair value of the derivative is recorded in other comprehensive income. Investments: Debt Securities. The Company accounts for its investments in debt securities under the guidance of ASC Topic 320, "Investments-Debt Securities" ("ASC 320"). The Company determines the appropriate classification of its investments in debt securities at the time of purchase and reevaluates such determinations at each balance sheet date. Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Debt securities for which the Company does not have the intent or ability to hold to maturity are classified as available for sale. Held-to-maturity securities are carried at amortized cost. Available for sale securities are carried at fair market value. Fair value is determined using quoted market prices. Unrealized gains and losses are included in comprehensive income and reported in stockholders' equity. If the fair value of the investment falls below its carrying amount and the decline is deemed to be other than temporary, the investment is written down, with a corresponding charge to earnings. Equity Securities. The Company accounts for its investments in equity securities in accordance with ASC Topic 321, “Investments-Equity Securities” (“ASC 321”), which requires that investments in equity securities be measured at fair value with changes in unrealized gains and losses reported in earnings. The Company's investment in equity securities have historically been carried at cost with income recognized in Other Revenue in the consolidated income statements when distributions, up to reported income, were received from the partnerships. As of first quarter of 2018, "Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities" ("ASU 2016-01"), requires that investments in equity securities be measured at fair value with changes in unrealized gains and losses reported in earnings. See (cid:49)ote 3 for additional information. Equity Method Investments. Equity method investments that are not consolidated, but over which the Company exercises significant influence, are accounted for under the equity method of accounting. Whether or not the Company exercises significant influence with respect to an investee company depends on an evaluation of several factors including, among others, representation on the investee company’s board of directors and ownership level, which is generally a 20% to 50% interest in the voting securities of the investee company. Under the equity method of accounting, an investee company’s accounts are not reflected within the Company’s consolidated balance sheets and income statements; however, the Company’s share of the earnings or losses of the investee company is reflected in the caption ‘‘Other revenue’’ in the consolidated income statements. The Company’s carrying value in an equity method investee company is reflected in the caption ‘‘Investments’’ in the Company’s consolidated balance sheets. When the Company’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company’s consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding. When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized. Finance receivables and income recognition: The Company accounts for its investment in finance receivables under the guidance of ASC Topic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). 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. At acquisition, the Company reviews the accounts to determine whether there is evidence of deterioration of credit quality since origination, and if it is probable that the Company will be unable to collect all amounts due according to the loan's contractual terms. If both conditions exist, the Company then determines whether each such account is to be accounted for individually or whether such accounts will be assembled into pools based on common risk characteristics. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows (expected at acquisition) for each acquired portfolio based on the Company's proprietary models, and the Company subsequently aggregates portfolios of accounts into quarterly pools. The Company determines the excess of the pool's scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the pool's cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining estimated life of the pool (accretable yield). ASC 310-30 requires that the excess of the contractual cash flows over expected cash flows, based on the Company's estimates derived from proprietary collection models, not be recognized as an adjustment of revenue or expense or on the balance sheet. 50 51 fp0052934_PRA_10k_2020_combined4.indd 53 4/20/2020 12:52:37 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements Each pool is recorded at cost and is accounted for as a single unit for the recognition of income, payments applied to principal and loss provision. Once a pool is established for a calendar quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). The yield is estimated and periodically recalculated based on the timing and amount of anticipated cash flows. Income on finance receivables is accrued quarterly based on each pool's effective yield. Significant increases in expected future cash flows may be recognized prospectively, through an upward adjustment of the yield, over a pool's remaining life. Under ASC 310-30, rather than lowering the estimated yield if the collection estimates are below previous expectations, the carrying value of a pool would be written down to maintain the then current yield and is shown as an allowance charge in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables on the consolidated balance sheets. Cash flows greater than the interest accrual will reduce the carrying value of the pool. This reduction in carrying value is defined as payments applied to principal (also referred to as principal amortization). Likewise, cash flows that are less than the interest accrual will accrete the carrying balance. Generally, the Company does not record accretion in the first six to twelve months of the estimated life of the pool; accordingly, the Company utilizes either the cost recovery method or cash method when necessary to prevent accretion as permitted by ASC 310-30. Under the cash method, revenue is recognized as it would be under the interest method up to the amount of cash collections. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the pool, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above. The Company also uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably estimated. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all subsequent cash collections are recognized as revenue when received. The Company records a valuation allowance when significant decreases in expected cash flows are identified or there are changes in the timing of expected cash flows that would otherwise require a reduction in the stated yield on a pool of accounts. Factors that may contribute to the recording of valuation allowances 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, non-optimal operational activities, and decreases in productivity related to turnover and tenure of the Company's collection staff. The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of accounts. These fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of the portfolio using the interest method. The agreements to purchase the aforementioned nonperforming loans include general representations and warranties from the sellers covering 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. Any funds received from the seller as a return of purchase price are referred to as buybacks. Buyback funds are applied against the finance receivable balance received and are not included in the Company's cash collections from operations. 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. Fee income recognition: The Company recognizes revenue from its class action claims recovery services when there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the amount is fixed or determinable, and collectability is reasonably assured. Property and equipment: Property and equipment, including improvements that significantly add to the productive capacity or extend useful life, are recorded at cost. Maintenance and repairs are expensed as incurred. Property and equipment are depreciated over their useful lives using the straight-line method of depreciation. Software and computer equipment are amortized or depreciated over three to five years. Furniture and fixtures are depreciated over five to ten years. Equipment is depreciated over five to seven years. Leasehold improvements are depreciated over the lesser of the useful life, which ranges from three to ten years, or the remaining term of the lease. Building improvements are depreciated straight-line over ten to thirty-nine years. When property is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is included in the income statement. Business combinations: The Company accounts for business combinations under the acquisition method in accordance with ASC 805, "Business Combinations" ("ASC 805"). The cost of an acquired company is assigned to the tangible and intangible assets acquired and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets acquired and liabilities assumed requires management to make estimates and use valuation techniques when market values are not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. Transaction costs associated with business combinations are expensed as incurred. Goodwill and intangible assets: Goodwill, in accordance with ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), is not amortized but rather is reviewed for impairment annually or more frequently if indicators of potential impairment exist. The Company performs its annual assessment 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, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income approach, which uses present value techniques, and the market approach, which uses market multiples from comparable transactions where the acquisition target has similar operating and investment characteristics to the reporting unit. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. See (cid:49)ote 5 for additional information. Convertible senior notes: The Company accounts for its 3.00% Convertible Senior (cid:49)otes due 2020 (the "2020 (cid:49)otes") and its 3.50% Convertible (cid:49)otes due 2023 (the "2023 (cid:49)otes" and, together with the 2020 (cid:49)otes, the "(cid:49)otes") in accordance with ASC 470-20, "Debt with Conversion and Other Options" ("ASC 470-20"). ASC 470-20 requires that, for convertible debt instruments that must be settled fully or partially in cash upon conversion, issuers must separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component, using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification under ASC 815-40, "Derivatives and Hedging - Contracts in an Entity's Own Equity." Transaction costs incurred with third parties are allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. For diluted earnings per share purposes, based upon the Company's intent and ability to settle conversions of the (cid:49)otes through a combination of cash and shares, 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 for the 2020 (cid:49)otes or $46.24 for the 2023 (cid:49)otes, neither of which occurred during the respective periods from when the (cid:49)otes were issued through December 31, 2019. Income taxes: The Company follows the guidance of ASC Topic 740 "Income Taxes" ("ASC 740") as it relates to the provision for income taxes and uncertainty in income taxes. Accordingly, the Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is estimated using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carry- forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The evaluation of a tax position in accordance with the guidance is a two-step process. The first step is recognition: the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 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. The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense when positions are not met. 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 the Company subsequently realizes 52 53 fp0052934_PRA_10k_2020_combined4.indd 54 4/20/2020 12:52:37 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements Each pool is recorded at cost and is accounted for as a single unit for the recognition of income, payments applied to principal and loss provision. Once a pool is established for a calendar quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). The yield is estimated and periodically recalculated based on the timing and amount of anticipated cash flows. Income on finance receivables is accrued quarterly based on each pool's effective yield. Significant increases in expected future cash flows may be recognized prospectively, through an upward adjustment of the yield, over a pool's remaining life. Under ASC 310-30, rather than lowering the estimated yield if the collection estimates are below previous expectations, the carrying value of a pool would be written down to maintain the then current yield and is shown as an allowance charge in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables on the consolidated balance sheets. Cash flows greater than the interest accrual will reduce the carrying value of the pool. This reduction in carrying value is defined as payments applied to principal (also referred to as principal amortization). Likewise, cash flows that are less than the interest accrual will accrete the carrying balance. Generally, the Company does not record accretion in the first six to twelve months of the estimated life of the pool; accordingly, the Company utilizes either the cost recovery method or cash method when necessary to prevent accretion as permitted by ASC 310-30. Under the cash method, revenue is recognized as it would be under the interest method up to the amount of cash collections. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the pool, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above. The Company also uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably estimated. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all subsequent cash collections are recognized as revenue when received. The Company records a valuation allowance when significant decreases in expected cash flows are identified or there are changes in the timing of expected cash flows that would otherwise require a reduction in the stated yield on a pool of accounts. Factors that may contribute to the recording of valuation allowances 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, non-optimal operational activities, and decreases in productivity related to turnover and tenure of the Company's collection staff. method. The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of accounts. These fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of the portfolio using the interest The agreements to purchase the aforementioned nonperforming loans include general representations and warranties from the sellers covering 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. Any funds received from the seller as a return of purchase price are referred to as buybacks. Buyback funds are applied against the finance receivable balance received and are not included in the Company's cash collections from operations. 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. Fee income recognition: The Company recognizes revenue from its class action claims recovery services when there is persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, the amount is fixed or determinable, and collectability is reasonably assured. Property and equipment: Property and equipment, including improvements that significantly add to the productive capacity or extend useful life, are recorded at cost. Maintenance and repairs are expensed as incurred. Property and equipment are depreciated over their useful lives using the straight-line method of depreciation. Software and computer equipment are amortized or depreciated over three to five years. Furniture and fixtures are depreciated over five to ten years. Equipment is depreciated over five to seven years. Leasehold improvements are depreciated over the lesser of the useful life, which ranges from three to ten years, or the remaining term of the lease. Building improvements are depreciated straight-line over ten to thirty-nine years. When property is sold or retired, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is included in the income statement. Business combinations: The Company accounts for business combinations under the acquisition method in accordance with ASC 805, "Business Combinations" ("ASC 805"). The cost of an acquired company is assigned to the tangible and intangible assets acquired and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets acquired and liabilities assumed requires management to make estimates and use valuation techniques when market values are not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. Transaction costs associated with business combinations are expensed as incurred. Goodwill and intangible assets: Goodwill, in accordance with ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), is not amortized but rather is reviewed for impairment annually or more frequently if indicators of potential impairment exist. The Company performs its annual assessment 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, management conducts a two-step quantitative goodwill impairment test. The first step of the impairment test involves comparing the fair value of the applicable reporting unit with its carrying value. The Company estimates the fair values of its reporting units using a combination of the income approach, which uses present value techniques, and the market approach, which uses market multiples from comparable transactions where the acquisition target has similar operating and investment characteristics to the reporting unit. If the carrying amount of a reporting unit exceeds the reporting unit's fair value, management performs the second step of the goodwill impairment test. The second step of the goodwill impairment test involves comparing the implied fair value of the affected reporting unit's goodwill with the carrying value of that goodwill. The amount by which the carrying value of the goodwill exceeds its implied fair value, if any, is recognized as an impairment loss. See (cid:49)ote 5 for additional information. Convertible senior notes: The Company accounts for its 3.00% Convertible Senior (cid:49)otes due 2020 (the "2020 (cid:49)otes") and its 3.50% Convertible (cid:49)otes due 2023 (the "2023 (cid:49)otes" and, together with the 2020 (cid:49)otes, the "(cid:49)otes") in accordance with ASC 470-20, "Debt with Conversion and Other Options" ("ASC 470-20"). ASC 470-20 requires that, for convertible debt instruments that must be settled fully or partially in cash upon conversion, issuers must separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component, using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification under ASC 815-40, "Derivatives and Hedging - Contracts in an Entity's Own Equity." Transaction costs incurred with third parties are allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. For diluted earnings per share purposes, based upon the Company's intent and ability to settle conversions of the (cid:49)otes through a combination of cash and shares, 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 for the 2020 (cid:49)otes or $46.24 for the 2023 (cid:49)otes, neither of which occurred during the respective periods from when the (cid:49)otes were issued through December 31, 2019. Income taxes: The Company follows the guidance of ASC Topic 740 "Income Taxes" ("ASC 740") as it relates to the provision for income taxes and uncertainty in income taxes. Accordingly, the Company records a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is estimated using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carry- forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The evaluation of a tax position in accordance with the guidance is a two-step process. The first step is recognition: the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 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. The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense when positions are not met. 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 the Company subsequently realizes 52 53 fp0052934_PRA_10k_2020_combined4.indd 55 4/20/2020 12:52:37 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings. The estimate of income tax expense involves significant judgment in evaluating 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. Beginning with the 2017 tax year, the Company utilizes a new tax accounting method to recognize net finance receivables income. Under the new method, a portion of the annual collections amortize principal and the remaining portion is taxable income. The deferred tax liability related to the difference in timing between the new method and the cost recovery method will be incorporated evenly into the Company’s tax filings over four years. For additional information, see (cid:49)ote 13. Advertising costs: Advertising costs are expensed when incurred. Leases: The Company accounts for leases in accordance with the provisions of FASB issued ASU 2016-02, "Leases (Topic 842) Section A - Leases: Amendments to the FASB Account Standards Codification" ("ASU 2016-02"). ASU 2016-02 requires that a lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted ASC 842 on January 1, 2019 using the alternative method which resulted in the recording of operating lease right-of-use ("ROU") assets and lease liabilities of $72.1 million and $75.8 million, respectively. The Company's balance sheets for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance. The Company elected to apply the package of practical expedients permitted within the new standard, which among other things, allows it to carry forward the historical lease classification. In addition, the Company elected the practical expedient to exclude short-term leases (lease terms of less than one year) from its ROU assets and lease liabilities. The Company's operating lease portfolio primarily includes corporate offices and call centers. The majority of its leases have remaining lease terms of one year to twenty years, some of which include options to extend the leases for five years, and others include options to terminate the leases within one year. Exercises of lease renewal options are typically at the Company's sole discretion and are included in its ROU assets and lease liabilities based upon whether the Company is reasonably certain of exercising the renewal options. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company used its incremental borrowing rate as of January 1, 2019 to calculate the present value of the lease payments of its existing leases at adoption. Share-based compensation: The Company accounts for share-based compensation in accordance with the provisions of ASC Topic 718 "Compensation-Stock Compensation" ("ASC 718"). ASC 718 requires that compensation expense associated with share equity awards be recognized in the income statement. The Company determines stock-based compensation expense for all share-based payment awards based on the measurement date fair value. The Company has certain share awards that include market conditions that affect vesting. The fair value of these shares is estimated using a lattice model. Compensation cost is not adjusted if the market condition is not met, as long as the requisite service is provided. The Company estimates a forfeiture rate for most equity share grants based on historical experience. Time-based equity share awards generally vest between one and three years from the grant date and are expensed on a straight-line basis over the vesting period. Equity share awards that contain a performance metric, are expensed over the requisite service period, generally three years, in accordance with the performance level achieved at each reporting period. See (cid:49)ote 11 for additional information. 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 follows the guidance of ASC Topic 815 "Derivatives and Hedging" ("ASC 815") to account for its derivatives. All of the Company's outstanding derivative financial instruments are recognized in the balance sheet at their fair values. The effect on earnings from recognizing the fair values of these derivative financial instruments depends on their intended use, their hedge designation, and their effectiveness in offsetting changes in the fair values of the exposures they are hedging. Changes in the fair values of instruments designated to reduce or eliminate adverse fluctuations in the fair values of recognized assets and liabilities and unrecognized firm commitments are reported currently in earnings along with changes in the fair values of the hedged items. Changes in the effective portions of the fair values of instruments used to reduce or eliminate adverse fluctuations in cash flows of anticipated or forecasted transactions are reported in equity as a component of accumulated other comprehensive income. Amounts in accumulated other comprehensive income are reclassified to earnings when the related hedged items affect earnings or the anticipated transactions are no longer probable. Changes in the fair values of derivative instruments that are not designated as hedges or do not qualify for hedge accounting treatment are reported currently in earnings. The Company realizes gains and losses from derivative instruments in the same financial statement line item as the hedged item/forecasted transaction. Changes in unrealized gains and losses for derivatives not designated in a hedge accounting relationship are recorded directly in earnings each period and are also recorded in the same financial statement line item as the hedged item/forecasted transaction. Cash flows from the settlement of derivatives, including both economic hedges and those designated in hedge accounting relationships, appear in the consolidated statements of cash flows in the same categories as the cash flows of the hedged item. For derivative financial instruments accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which effectiveness of the hedge will be assessed. The Company formally assesses, both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in fair value or cash flows of the related underlying exposures. Any ineffective portion of the change in fair value of the instruments is recognized immediately in earnings. The Company discontinues the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. See (cid:49)ote 9 for additional information. Use of estimates: The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates have been made by management with respect to the timing and amount of future cash collections of the Company's finance receivables portfolios. Actual results could differ from these estimates making it reasonably possible that a change in these estimates could occur within one year. Commitments and contingencies: The Company is subject to various claims and contingencies related to lawsuits, certain taxes, and commitments under contractual and other obligations. The Company recognizes liabilities for contingencies and commitments when a loss is probable and estimable. The Company expenses related legal costs as incurred. For additional information, see (cid:49)ote 14. Estimated fair value of financial instruments: The Company applies the provisions of ASC Topic 820 "Fair Value Measurements and Disclosures" ("ASC 820"). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values. Disclosure of the estimated fair values of financial instruments often requires the use of estimates. See (cid:49)ote 8 for additional information. Recent accounting pronouncements: Recently Issued Accounting Standards Adopted: Codification Improvements to Leases In February 2016, the FASB issued ASU 2016-02 which requires that a lessee should recognize a liability to make lease payments and a ROU representing its right to use the underlying asset for the lease term on the balance sheet. In July 2018, FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases" and ASU 2018-11, "Leases (Topic 842) Targeted Improvements" which among other things, allowed for an alternative transition method which eliminated the requirement to restate the earliest prior period presented in an entity's financial statements. Entities that elected this transition option, including the Company, were required to adopt the new lease standard using the modified retrospective transition method required by the standard, but recognized a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The Company adopted the new leasing standard on January 1, 2019 and as a result recorded operating lease ROU assets and lease liabilities of $72.1 million and $75.8 million, respectively. The adoption of the standard did not have any other material impact on the Company's consolidated financial statements. 54 55 fp0052934_PRA_10k_2020_combined4.indd 56 4/20/2020 12:52:38 PM deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings. The estimate of income tax expense involves significant judgment in evaluating 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. Beginning with the 2017 tax year, the Company utilizes a new tax accounting method to recognize net finance receivables income. Under the new method, a portion of the annual collections amortize principal and the remaining portion is taxable income. The deferred tax liability related to the difference in timing between the new method and the cost recovery method will be incorporated evenly into the Company’s tax filings over four years. For additional information, see (cid:49)ote 13. Advertising costs: Advertising costs are expensed when incurred. Leases: The Company accounts for leases in accordance with the provisions of FASB issued ASU 2016-02, "Leases (Topic 842) Section A - Leases: Amendments to the FASB Account Standards Codification" ("ASU 2016-02"). ASU 2016-02 requires that a lessee should recognize a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. The Company adopted ASC 842 on January 1, 2019 using the alternative method which resulted in the recording of operating lease right-of-use ("ROU") assets and lease liabilities of $72.1 million and $75.8 million, respectively. The Company's balance sheets for reporting periods beginning on or after January 1, 2019 are presented under the new guidance, while prior periods amounts are not adjusted and continue to be reported in accordance with previous guidance. The Company elected to apply the package of practical expedients permitted within the new standard, which among other things, allows it to carry forward the historical lease classification. In addition, the Company elected the practical expedient to exclude short-term leases (lease terms of less than one year) from its ROU assets and lease liabilities. The Company's operating lease portfolio primarily includes corporate offices and call centers. The majority of its leases have remaining lease terms of one year to twenty years, some of which include options to extend the leases for five years, and others include options to terminate the leases within one year. Exercises of lease renewal options are typically at the Company's sole discretion and are included in its 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. at adoption. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company used its incremental borrowing rate as of January 1, 2019 to calculate the present value of the lease payments of its existing leases Share-based compensation: The Company accounts for share-based compensation in accordance with the provisions of ASC Topic 718 "Compensation-Stock Compensation" ("ASC 718"). ASC 718 requires that compensation expense associated with share equity awards be recognized in the income statement. The Company determines stock-based compensation expense for all share-based payment awards based on the measurement date fair value. The Company has certain share awards that include market conditions that affect vesting. The fair value of these shares is estimated using a lattice model. Compensation cost is not adjusted if the market condition is not met, as long as the requisite service is provided. The Company estimates a forfeiture rate for most from the grant date and are expensed on a straight-line basis over the vesting period. Equity share awards that contain a performance metric, are expensed over the requisite service period, generally three years, in accordance with the performance level achieved at each reporting period. See (cid:49)ote 11 for additional information. 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 follows the guidance of ASC Topic 815 "Derivatives and Hedging" ("ASC 815") to account for its derivatives. All of the Company's outstanding derivative financial instruments are recognized in the balance sheet at their fair values. The effect on earnings from recognizing the fair values of these derivative financial instruments depends on their intended use, their hedge designation, and their effectiveness in offsetting changes in the fair values of the exposures they are hedging. Changes in the fair values of instruments designated to reduce or eliminate adverse fluctuations in the fair values of recognized assets and PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements liabilities and unrecognized firm commitments are reported currently in earnings along with changes in the fair values of the hedged items. Changes in the effective portions of the fair values of instruments used to reduce or eliminate adverse fluctuations in cash flows of anticipated or forecasted transactions are reported in equity as a component of accumulated other comprehensive income. Amounts in accumulated other comprehensive income are reclassified to earnings when the related hedged items affect earnings or the anticipated transactions are no longer probable. Changes in the fair values of derivative instruments that are not designated as hedges or do not qualify for hedge accounting treatment are reported currently in earnings. The Company realizes gains and losses from derivative instruments in the same financial statement line item as the hedged item/forecasted transaction. Changes in unrealized gains and losses for derivatives not designated in a hedge accounting relationship are recorded directly in earnings each period and are also recorded in the same financial statement line item as the hedged item/forecasted transaction. Cash flows from the settlement of derivatives, including both economic hedges and those designated in hedge accounting relationships, appear in the consolidated statements of cash flows in the same categories as the cash flows of the hedged item. For derivative financial instruments accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective, and the manner in which effectiveness of the hedge will be assessed. The Company formally assesses, both at inception and at each reporting period thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in fair value or cash flows of the related underlying exposures. Any ineffective portion of the change in fair value of the instruments is recognized immediately in earnings. The Company discontinues the use of hedge accounting prospectively when (1) the derivative instrument is no longer effective in offsetting changes in fair value or cash flows of the underlying hedged item; (2) the derivative instrument expires, is sold, terminated, or exercised; or (3) designating the derivative instrument as a hedge is no longer appropriate. See (cid:49)ote 9 for additional information. Use of estimates: The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates have been made by management with respect to the timing and amount of future cash collections of the Company's finance receivables portfolios. Actual results could differ from these estimates making it reasonably possible that a change in these estimates could occur within one year. Commitments and contingencies: The Company is subject to various claims and contingencies related to lawsuits, certain taxes, and commitments under contractual and other obligations. The Company recognizes liabilities for contingencies and commitments when a loss is probable and estimable. The Company expenses related legal costs as incurred. For additional information, see (cid:49)ote 14. Estimated fair value of financial instruments: The Company applies the provisions of ASC Topic 820 "Fair Value Measurements and Disclosures" ("ASC 820"). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values. Disclosure of the estimated fair values of financial instruments often requires the use of estimates. See (cid:49)ote 8 for additional information. Recent accounting pronouncements: equity share grants based on historical experience. Time-based equity share awards generally vest between one and three years Recently Issued Accounting Standards Adopted: Codification Improvements to Leases In February 2016, the FASB issued ASU 2016-02 which requires that a lessee should recognize a liability to make lease payments and a ROU representing its right to use the underlying asset for the lease term on the balance sheet. In July 2018, FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases" and ASU 2018-11, "Leases (Topic 842) Targeted Improvements" which among other things, allowed for an alternative transition method which eliminated the requirement to restate the earliest prior period presented in an entity's financial statements. Entities that elected this transition option, including the Company, were required to adopt the new lease standard using the modified retrospective transition method required by the standard, but recognized a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption rather than in the earliest period presented. The Company adopted the new leasing standard on January 1, 2019 and as a result recorded operating lease ROU assets and lease liabilities of $72.1 million and $75.8 million, respectively. The adoption of the standard did not have any other material impact on the Company's consolidated financial statements. 54 55 fp0052934_PRA_10k_2020_combined4.indd 57 4/20/2020 12:52:38 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements Statement of Cash Flows- Classification of Certain Cash Receipts and Cash Payments In August 2016, FASB issued ASU 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)" ("ASU 2016-15"). ASU 2016-15 reduces diversity in practice of how certain transactions are classified in the statement of cash flows. The new guidance clarifies the classification of cash activity related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions received from equity-method investments, and beneficial interests in securitization transactions. The guidance also describes a predominance principle in which cash flows with aspects of more than one class that cannot be separated should be classified based on the activity that is likely to be the predominant source or use of cash flow. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2018. The new standard must be adopted using a retrospective transition method. The Company adopted ASU 2016-15 in the first quarter of 2019 which had no material impact on its consolidated financial statements. Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). Under existing GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded income tax effects resulting from the 2017 Tax Cuts and Jobs Act ("Tax Act"). The amendments in this ASU also require certain disclosures about stranded income tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company’s provisional adjustments recorded during the year ended December 31, 2017 to account for the impact of the Tax Act did not result in stranded tax effects. The Company adopted ASU 2018-02 in the first quarter of 2019 which had no material impact on its consolidated financial statements. Recently Issued Accounting Standards (cid:49)ot Yet Adopted: Financial Instruments - Credit Losses In June 2016, FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13"), which introduces 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 existing GAAP, including for purchased credit impaired ("PCI") assets, and introduces the concept of purchased credit deteriorated (“PCD”) financial assets. The Company's PCI assets currently accounted for under existing GAAP will be accounted for as PCD financial 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 (cid:49)ovember 2019, FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (“ASU 2019-11”), which amends the PCD financial 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 and 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. Based on the guidance in ASU 2016-13 and 2019-11, substantially all the Company’s PCI assets will transition using the PCD guidance; the Company will gross up the amortized cost of the PCI assets by adding the allowance for credit losses estimated at transition. The Company will then immediately write off the amortized cost basis of individual accounts and establish a negative allowance for expected recoveries. The immediate writeoff and subsequent recognition of estimated recoveries are expected to have no impact on the Company’s statement of income, balance sheet or retained earnings at the date of adoption. The Company will estimate expected recoveries using a discounted cash flow approach and will recognize income over the estimated life of the pool at an effective interest rate. Subsequent changes (favorable and unfavorable) in expected cash flows will be recognized in current period earnings by adjusting the present value of the expected recoveries. PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements Subsequent to adoption, ASU 2016-13 and ASU 2019-11 represent a significant change from existing GAAP and are expected to result in material changes to the Company’s accounting for its finance receivables, including recognizing revenue at a fixed rate and recognizing both positive and negative changes to the forecast as an adjustment to current period earnings. The guidance will be effective prospectively for the Company as of January 1, 2020. Implementation efforts, including model finalization and drafting of accounting and internal control policies and procedures are nearly complete. Intangibles - Goodwill and Other In January 2017, FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 eliminates Step 2 of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for annual and interim periods beginning after December 15, 2019, and early adoption was permitted for interim or annual goodwill impairment tests performed after January 1, 2017. Based on the Company's most recent goodwill impairment assessment, there were no reporting units for which it was more-likely-than-not that the carrying amount of a reporting unit exceeded its respective fair value; therefore, the Company believes that ASU 2017-04 would not have an impact on its consolidated financial statements or related disclosures. If subsequent to adoption, the carrying amount of a reporting unit exceeds its respective fair value, the Company would be required to recognize an impairment charge. The Company will adopt this standard on January 1, 2020 and does not expect that the adoption of these amendments will have a material effect on its 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 standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company will adopt this standard on January 1, 2020 and expects the adoption of ASU 2018-13 will result in additional and modified disclosures in its consolidated financial statements without any financial 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 our consolidated financial statements and expects it to result in additional and modified disclosures. The Company does not expect that any other recently issued accounting pronouncements will have a material effect on its Changes in finance receivables, net, for the years ended December 31, 2019 and 2018, were as follows (amounts in thousands): Balance at beginning of year Acquisitions of finance receivables (1) Addition relating to consolidation of Polish investment fund Foreign currency translation adjustment Cash collections Income recognized on finance receivables (cid:49)et allowance charges Balance at end of year made during the first quarter of 2019. 2019 2018 $ 3,084,777 $ 1,274,317 — 22,006 998,361 (24,025) 2,776,199 1,105,423 34,871 (64,985) 891,899 (33,425) (1,841,271) (1,625,205) $ 3,514,165 $ 3,084,777 (1) Includes portfolio purchases adjusted for buybacks and acquisition related costs and portfolios from the acquisition of a business in Canada consolidated financial statements. Fair Value Measurement impact. Income Taxes consolidated financial statements. 2. Finance Receivables, net: 56 57 fp0052934_PRA_10k_2020_combined4.indd 58 4/20/2020 12:52:38 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements Statement of Cash Flows- Classification of Certain Cash Receipts and Cash Payments In August 2016, FASB issued ASU 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments (Topic 230)" ("ASU 2016-15"). ASU 2016-15 reduces diversity in practice of how certain transactions are classified in the statement of cash flows. The new guidance clarifies the classification of cash activity related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions received from equity-method investments, and beneficial interests in securitization transactions. The guidance also describes a predominance principle in which cash flows with aspects of more than one class that cannot be separated should be classified based on the activity that is likely to be the predominant source or use of cash flow. ASU 2016-15 is effective for the Company for fiscal years beginning after December 15, 2018. The new standard must be adopted using a retrospective transition method. The Company adopted ASU 2016-15 in the first quarter of 2019 which had no material impact on its consolidated financial statements. Reclassification of Certain Tax Effects From Accumulated Other Comprehensive Income In February 2018, the FASB issued ASU 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"). Under existing GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded income tax effects resulting from the 2017 Tax Cuts and Jobs Act ("Tax Act"). The amendments in this ASU also require certain disclosures about stranded income tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company’s provisional adjustments recorded during the year ended December 31, 2017 to account for the impact of the Tax Act did not result in stranded tax effects. The Company adopted ASU 2018-02 in the first quarter of 2019 which had no material impact on its consolidated financial statements. Recently Issued Accounting Standards (cid:49)ot Yet Adopted: Financial Instruments - Credit Losses In June 2016, FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13"), which introduces 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 existing GAAP, including for purchased credit impaired ("PCI") assets, and introduces the concept of purchased credit deteriorated (“PCD”) financial assets. The Company's PCI assets currently accounted for under existing GAAP will be accounted for as PCD financial 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 (cid:49)ovember 2019, FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses” (“ASU 2019-11”), which amends the PCD financial 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 and 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. Based on the guidance in ASU 2016-13 and 2019-11, substantially all the Company’s PCI assets will transition using the PCD guidance; the Company will gross up the amortized cost of the PCI assets by adding the allowance for credit losses estimated at transition. The Company will then immediately write off the amortized cost basis of individual accounts and establish a negative allowance for expected recoveries. The immediate writeoff and subsequent recognition of estimated recoveries are expected to have no impact on the Company’s statement of income, balance sheet or retained earnings at the date of adoption. The Company will estimate expected recoveries using a discounted cash flow approach and will recognize income over the estimated life of the pool at an effective interest rate. Subsequent changes (favorable and unfavorable) in expected cash flows will be recognized in current period earnings by adjusting the present value of the expected recoveries. PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements Subsequent to adoption, ASU 2016-13 and ASU 2019-11 represent a significant change from existing GAAP and are expected to result in material changes to the Company’s accounting for its finance receivables, including recognizing revenue at a fixed rate and recognizing both positive and negative changes to the forecast as an adjustment to current period earnings. The guidance will be effective prospectively for the Company as of January 1, 2020. Implementation efforts, including model finalization and drafting of accounting and internal control policies and procedures are nearly complete. Intangibles - Goodwill and Other In January 2017, FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment" ("ASU 2017-04"). ASU 2017-04 eliminates Step 2 of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 is effective for annual and interim periods beginning after December 15, 2019, and early adoption was permitted for interim or annual goodwill impairment tests performed after January 1, 2017. Based on the Company's most recent goodwill impairment assessment, there were no reporting units for which it was more-likely-than-not that the carrying amount of a reporting unit exceeded its respective fair value; therefore, the Company believes that ASU 2017-04 would not have an impact on its consolidated financial statements or related disclosures. If subsequent to adoption, the carrying amount of a reporting unit exceeds its respective fair value, the Company would be required to recognize an impairment charge. The Company will adopt this standard on January 1, 2020 and does not expect that the adoption of these amendments will have a material effect 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 standard is effective for all entities for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company will adopt this standard on January 1, 2020 and expects the adoption of ASU 2018-13 will result in additional and modified disclosures in its consolidated financial statements without any financial impact. 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 our consolidated financial statements and expects it to result in additional and modified disclosures. The Company does not expect that any other recently issued accounting pronouncements will have a material effect on its consolidated financial statements. 2. Finance Receivables, net: Changes in finance receivables, net, for the years ended December 31, 2019 and 2018, were as follows (amounts in thousands): Balance at beginning of year Acquisitions of finance receivables (1) Addition relating to consolidation of Polish investment fund Foreign currency translation adjustment Cash collections Income recognized on finance receivables (cid:49)et allowance charges Balance at end of year 2019 2018 $ 3,084,777 $ 1,274,317 — 22,006 2,776,199 1,105,423 34,871 (64,985) (1,841,271) (1,625,205) 998,361 (24,025) 891,899 (33,425) $ 3,514,165 $ 3,084,777 (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. 56 57 fp0052934_PRA_10k_2020_combined4.indd 59 4/20/2020 12:52:38 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements During the year ended December 31, 2019, the Company acquired finance receivable portfolios with a face value of $11.7 billion for $1.3 billion as compared to the same period last year with a face value of $9.2 billion for $1.1 billion. At December 31, 2019, the estimated remaining collections ("ERC") on the receivables acquired during the years ended December 31, 2019 and 2018 were $2.0 billion and $1.4 billion, respectively. At December 31, 2019 and 2018, ERC was $6.8 billion and $6.1 billion, respectively. At the time of acquisition and each quarter thereafter, the life of each pool is estimated based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon current projections, estimated cash collections expected to be applied to principal are as follows for the twelve-month periods ending December 31, (amounts in thousands): 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Thereafter Total ERC expected to be applied to principal $ 831,769 672,699 500,597 368,332 263,785 193,831 156,456 135,238 125,673 116,008 149,777 $ 3,514,165 At December 31, 2019 and 2018, the Company had aggregate net finance receivables balances in pools accounted for under the cost recovery method of $33.7 million and $48.0 million, respectively. Accretable yield represents the amount of income on finance receivables the Company can expect to recognize over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield, on portfolios acquired during the period. (cid:49)et reclassifications from nonaccretable difference to accretable yield primarily result from the increase in the Company's estimate of future cash flows. When applicable, net reclassifications to nonaccretable difference from accretable yield result from the decrease in the Company's estimates of future cash flows and allowance charges that together exceed the increase in the Company's estimate of future cash flows. Changes in accretable yield for the years ended December 31, 2019 and 2018 were as follows (amounts in thousands): Balance at beginning of year Income recognized on finance receivables (cid:49)et allowance charges Additions from portfolio acquisitions Reclassifications from nonaccretable difference Foreign currency translation adjustment Balance at end of year 2019 2018 $ 3,058,445 $ (998,361) 24,025 943,887 205,464 6,671 2,927,866 (891,899) 33,425 876,112 194,992 (82,051) $ 3,240,131 $ 3,058,445 The following is a summary of activity within the Company's valuation allowance account, all of which relates to loans acquired with deteriorated credit quality, for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands): Beginning balance Allowance charges Reversal of previous recorded allowance charges (cid:49)et allowance charges Foreign currency translation adjustment Ending balance 3. Investments: 2019 2018 2017 257,148 $ 225,555 $ 211,465 38,662 (14,637) 24,025 122 48,856 (15,431) 33,425 (1,832) 13,826 (1,928) 11,898 2,192 281,295 $ 257,148 $ 225,555 $ $ Investments consisted of the following at December 31, 2019 and 2018 (amounts in thousands): 2019 2018 $ $ 5,052 $ 5,077 7,218 33,677 10,229 56,176 $ 7,973 21,753 10,370 45,173 Debt securities Available-for-sale Equity securities Private equity funds Mutual funds Equity method investments Total investments Debt Securities Available-for-Sale fair value. (amounts in thousands): Available-for-sale Government bonds Available-for-sale Government bonds Equity Securities Government bonds: The Company's investments in government bonds are classified as available-for-sale and are stated at The amortized cost and estimated fair value of investments in debt securities at December 31, 2019 and 2018 were as follows Amortized Cost Gains Losses Value Gross Unrealized Gross Unrealized Aggregate Fair December 31, 2019 5,095 $ — $ 43 $ 5,052 Amortized Cost Gains Losses Value Gross Unrealized Gross Unrealized Aggregate Fair December 31, 2018 5,160 $ — $ 83 $ 5,077 $ $ Investments in private equity funds: Investments in private equity funds represent limited partnerships in which the Company has less than a 3% interest. In the first quarter of 2018, the Company adopted ASU 2016-01. Upon adoption of ASU 2016-01, the investments are carried at the fair value reported by the fund manager. The Company recorded a cumulative effect adjustment of $3.9 million, net of tax, to beginning retained earnings for the unrealized loss on the investment. 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. 58 59 fp0052934_PRA_10k_2020_combined4.indd 60 4/20/2020 12:52:38 PM 2019, the estimated remaining collections ("ERC") on the receivables acquired during the years ended December 31, 2019 and 2018 were $2.0 billion and $1.4 billion, respectively. At December 31, 2019 and 2018, ERC was $6.8 billion and $6.1 billion, At the time of acquisition and each quarter thereafter, the life of each pool is estimated based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon current projections, estimated cash collections expected to be applied to principal are as follows for the twelve-month periods ending December 31, (amounts in respectively. thousands): 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Thereafter Total ERC expected to be applied to principal $ 3,514,165 At December 31, 2019 and 2018, the Company had aggregate net finance receivables balances in pools accounted for under the cost recovery method of $33.7 million and $48.0 million, respectively. original expected accretable yield, on portfolios acquired during the period. (cid:49)et reclassifications from nonaccretable difference to accretable yield primarily result from the increase in the Company's estimate of future cash flows. When applicable, net reclassifications to nonaccretable difference from accretable yield result from the decrease in the Company's estimates of future cash flows and allowance charges that together exceed the increase in the Company's estimate of future cash flows. Changes in accretable yield for the years ended December 31, 2019 and 2018 were as follows (amounts in thousands): Balance at beginning of year Income recognized on finance receivables (cid:49)et allowance charges Additions from portfolio acquisitions Reclassifications from nonaccretable difference Foreign currency translation adjustment Balance at end of year (998,361) 24,025 943,887 205,464 6,671 2,927,866 (891,899) 33,425 876,112 194,992 (82,051) $ 3,240,131 $ 3,058,445 PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements During the year ended December 31, 2019, the Company acquired finance receivable portfolios with a face value of $11.7 The following is a summary of activity within the Company's valuation allowance account, all of which relates to loans billion for $1.3 billion as compared to the same period last year with a face value of $9.2 billion for $1.1 billion. At December 31, acquired with deteriorated credit quality, for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands): $ 831,769 672,699 500,597 368,332 263,785 193,831 156,456 135,238 125,673 116,008 149,777 Beginning balance Allowance charges Reversal of previous recorded allowance charges (cid:49)et allowance charges Foreign currency translation adjustment Ending balance 3. Investments: 2019 2018 2017 257,148 $ 225,555 $ 211,465 38,662 (14,637) 24,025 122 48,856 (15,431) 33,425 (1,832) 13,826 (1,928) 11,898 2,192 281,295 $ 257,148 $ 225,555 $ $ Investments consisted of the following at December 31, 2019 and 2018 (amounts in thousands): Debt securities Available-for-sale Equity securities Private equity funds Mutual funds Equity method investments Total investments Debt Securities Available-for-Sale 2019 2018 $ $ 5,052 $ 5,077 7,218 33,677 10,229 56,176 $ 7,973 21,753 10,370 45,173 Accretable yield represents the amount of income on finance receivables the Company can expect to recognize over the Government bonds: The Company's investments in government bonds are classified as available-for-sale and are stated at remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the fair value. The amortized cost and estimated fair value of investments in debt securities at December 31, 2019 and 2018 were as follows (amounts in thousands): 2019 2018 $ 3,058,445 $ Available-for-sale Government bonds Available-for-sale Government bonds Equity Securities Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Aggregate Fair Value December 31, 2019 5,095 $ — $ 43 $ 5,052 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Aggregate Fair Value December 31, 2018 5,160 $ — $ 83 $ 5,077 $ $ Investments in private equity funds: Investments in private equity funds represent limited partnerships in which the Company has less than a 3% interest. In the first quarter of 2018, the Company adopted ASU 2016-01. Upon adoption of ASU 2016-01, the investments are carried at the fair value reported by the fund manager. The Company recorded a cumulative effect adjustment of $3.9 million, net of tax, to beginning retained earnings for the unrealized loss on the investment. 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. 58 59 fp0052934_PRA_10k_2020_combined4.indd 61 4/20/2020 12:52:38 PM Total future minimum lease payments 5. Goodwill and Intangible Assets, net: 2019 2020 2021 2022 2023 Thereafter was necessary. thousands): Goodwill: Changes: Acquisition Sale of subsidiary $ $ 11,470 11,451 10,809 7,287 6,189 7,866 55,072 2019 2018 18,831 — (2,153) 16,678 — (36,053) (26,344) (62,397) PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements Unrealized gains and losses: (cid:49)et unrealized gains on equity securities were $5.8 million and $3.5 million for the twelve future minimum lease payments for operating leases at December 31, 2018, were as follows for the years ending December 31, months ended December 31, 2019 and December 31, 2018, respectively on the Company's equity securities. (amounts in thousands): Equity Method Investments Effective December 20, 2018, the Company has an 11.7% interest in RCB Investimentos S.A. ("RCB"), a servicing platform for nonperforming loans in Brazil, which 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. Refer to (cid:49)ote 17 for additional information. 4. Leases: The components of lease expense for the year ended December 31, 2019 was as follows (amounts in thousands): Operating lease cost Short-term lease cost Total lease cost December 31, 2019 $ $ 12,008 2,973 14,981 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 or more frequently if indicators of impairment exist. The Company performed an annual review of goodwill as of October 1, 2019 and concluded that no goodwill impairment Supplemental cash flow information and non-cash activity related to leases for the year ended December 31, 2019 were as follows (amounts in thousands): The following table represents the changes in goodwill for the years ended December 31, 2019 and 2018 (amounts in Cash paid for amounts included in the measurement of operating lease liabilities ROU assets obtained in exchange for operating lease obligations December 31, 2019 $ $ 11,438 80,725 Lease term and discount rate information related to operating leases were as follows as of the date indicated: Balance at beginning of period $ 464,116 $ 526,513 Weighted-average remaining lease terms (years) Weighted-average discount rate December 31, 2019 10.7 4.9% Foreign currency translation adjustment (cid:49)et change in goodwill Balance at end of period $ 480,794 $ 464,116 The $18.8 million addition to goodwill during the year ended December 31, 2019, is related to the acquisition of a business The Company leases office space and equipment under operating leases. Lease expense was $15.0 million, $13.6 million in Canada during the first quarter. The $36.1 million decrease in goodwill during the year ended December 31, 2018, is a result and $11.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. of the sale of a portion of RCB's servicing platform in December of 2018. Maturities of lease liabilities at December 31, 2019, are as follows for the years ending December 31, (amounts in thousands): Intangible assets, excluding goodwill, consisted of the following at December 31, 2019 and 2018 (amounts in thousands): 2020 2021 2022 2023 2024 Thereafter Total lease payments Less imputed interest Total Operating Leases 11,846 11,378 9,324 7,132 6,279 49,414 95,373 (21,996) 73,377 $ $ $ As previously disclosed in the Company's Form 10-K for the year ended December 31, 2018 and under the previous lease accounting standard (which excludes the impact of the Company's intent to exercise renewal options as required by ASU 2016-02), 60 61 fp0052934_PRA_10k_2020_combined4.indd 62 4/20/2020 12:52:38 PM Client and customer relationships (cid:49)on-compete agreements Trademarks Technology Total 2019 2018 Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization 12,072 $ 8,242 $ 11,806 $ 6,993 439 400 1,679 183 362 1,306 — 400 1,548 — 345 894 14,590 $ 10,093 $ 13,754 $ 8,232 $ $ The Company amortizes the intangible assets over their estimated useful lives. Total amortization expense for the years ended December 31, 2019, 2018 and 2017 was $1.6 million, $4.3 million and $4.3 million, respectively. The Company reviews intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and the carrying amount exceeds its fair value. PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements Unrealized gains and losses: (cid:49)et unrealized gains on equity securities were $5.8 million and $3.5 million for the twelve months ended December 31, 2019 and December 31, 2018, respectively on the Company's equity securities. future minimum lease payments for operating leases at December 31, 2018, were as follows for the years ending December 31, (amounts in thousands): Equity Method Investments Effective December 20, 2018, the Company has an 11.7% interest in RCB Investimentos S.A. ("RCB"), a servicing platform for nonperforming loans in Brazil, which 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. Refer to (cid:49)ote 17 for additional information. The components of lease expense for the year ended December 31, 2019 was as follows (amounts in thousands): 2019 2020 2021 2022 2023 Thereafter Total future minimum lease payments 5. Goodwill and Intangible Assets, net: $ $ 11,470 11,451 10,809 7,287 6,189 7,866 55,072 Supplemental cash flow information and non-cash activity related to leases for the year ended December 31, 2019 were as follows (amounts in thousands): Cash paid for amounts included in the measurement of operating lease liabilities ROU assets obtained in exchange for operating lease obligations Lease term and discount rate information related to operating leases were as follows as of the date indicated: Weighted-average remaining lease terms (years) Weighted-average discount rate The Company leases office space and equipment under operating leases. Lease expense was $15.0 million, $13.6 million and $11.8 million for the years ended December 31, 2019, 2018 and 2017, respectively. 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 or more frequently if indicators of impairment exist. The Company performed an annual review of goodwill as of October 1, 2019 and concluded that no goodwill impairment was necessary. The following table represents the changes in goodwill for the years ended December 31, 2019 and 2018 (amounts in thousands): Goodwill: 2019 2018 Balance at beginning of period $ 464,116 $ 526,513 Changes: Acquisition Sale of subsidiary December 31, 2019 Foreign currency translation adjustment (cid:49)et change in goodwill 18,831 — (2,153) 16,678 — (36,053) (26,344) (62,397) Balance at end of period $ 480,794 $ 464,116 The $18.8 million addition to goodwill during the year ended December 31, 2019, is related to the acquisition of a business in Canada during the first quarter. The $36.1 million decrease in goodwill during the year ended December 31, 2018, is a result of the sale of a portion of RCB's servicing platform in December of 2018. Maturities of lease liabilities at December 31, 2019, are as follows for the years ending December 31, (amounts in thousands): Intangible assets, excluding goodwill, consisted of the following at December 31, 2019 and 2018 (amounts in thousands): Client and customer relationships (cid:49)on-compete agreements Trademarks Technology Total 2019 2018 Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization 12,072 $ 8,242 $ 11,806 $ 6,993 439 400 1,679 183 362 1,306 — 400 1,548 — 345 894 14,590 $ 10,093 $ 13,754 $ 8,232 $ $ The Company amortizes the intangible assets over their estimated useful lives. Total amortization expense for the years ended December 31, 2019, 2018 and 2017 was $1.6 million, $4.3 million and $4.3 million, respectively. The Company reviews intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable and the carrying amount exceeds its fair value. 60 61 fp0052934_PRA_10k_2020_combined4.indd 63 4/20/2020 12:52:38 PM As previously disclosed in the Company's Form 10-K for the year ended December 31, 2018 and under the previous lease accounting standard (which excludes the impact of the Company's intent to exercise renewal options as required by ASU 2016-02), December 31, 2019 December 31, 2019 Operating Leases 12,008 2,973 14,981 11,438 80,725 10.7 4.9% 11,846 11,378 9,324 7,132 6,279 49,414 95,373 (21,996) 73,377 $ $ $ $ $ $ $ 4. Leases: Operating lease cost Short-term lease cost Total lease cost 2020 2021 2022 2023 2024 Thereafter Total lease payments Less imputed interest Total PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements The future amortization of intangible assets is estimated to be as follows for the years ending December 31, (amounts in interest at a rate per annum equal to the Canadian Prime Rate plus 1.50%. The revolving credit facilities also bear an unused line thousands): 2020 2021 2022 2023 2024 Thereafter Total 6. Borrowings: $ $ 1,402 880 750 707 758 — 4,497 The Company's borrowings consisted of the following as of the dates indicated (amounts in thousands): subject to no default or event of default, cash dividends and distributions during any fiscal year cannot exceed $20.0 Americas revolving credit Europe revolving credit Term loans Convertible senior notes Less: Debt discount and issuance costs Total December 31, 2019 December 31, 2018 $ 772,037 $ 1,017,465 425,000 632,500 2,847,002 (38,577) $ 2,808,425 $ 598,279 561,882 740,551 632,500 2,533,212 (59,556) 2,473,656 The following principal payments are due on the Company's borrowings at December 31, 2019 for the years ending December 31, (amounts in thousands): 2020 2021 2022 2023 2024 and thereafter Total $ $ 298,603 1,028,568 1,174,831 345,000 — 2,847,002 The Company believes it was in compliance with the covenants of its financing arrangements as of December 31, 2019. (cid:49)orth 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 “(cid:49)orth American Credit Agreement”) with Bank of America, (cid:49).A., as administrative agent, Bank of America, (cid:49)ational Association, acting through its Canada branch, as the Canadian administrative agent, and a syndicate of lenders named therein. In the fourth quarter of 2018, the Company entered into a First Amendment (the "First Amendment") to the (cid:49)orth American Credit Agreement which, among other things, increased the domestic revolving credit facility by $363.0 million and expanded the accordion feature to allow the Company to increase the original principal amount of the commitments under the (cid:49)orth American Credit Agreement by an additional $500.0 million, subject to certain terms and conditions. The total credit facility under the (cid:49)orth American Credit Agreement includes an aggregate principal amount of $1,543.0 million (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a fully-funded $425.0 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 (cid:49)orth 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 (cid:49)orth 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 62 63 fp0052934_PRA_10k_2020_combined4.indd 64 4/20/2020 12:52:38 PM • • • • • • • • fee of 0.375% per annum, payable quarterly in arrears. The loans under the (cid:49)orth American Credit Agreement mature May 5, 2022. As of December 31, 2019, the unused portion of the (cid:49)orth American Credit Agreement was $349.2 million. Considering borrowing base restrictions as of December 31, 2019, the amount available to be drawn was $146.5 million. The (cid:49)orth American Credit Agreement is secured by a first priority lien on substantially all of the Company's (cid:49)orth American assets. The (cid:49)orth 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 the 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; million; of the prior year's consolidated net income; permitted acquisitions by non-loan parties); subject to no default or event of default, stock repurchases during any fiscal year cannot exceed $100.0 million plus 50% permitted acquisitions during any fiscal year cannot exceed $250.0 million (with a $50.0 million per year sublimit for 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 (cid:49)otes); the Company must maintain positive consolidated income from operations during any fiscal quarter; and restrictions on changes in control. The outstanding balances and weighted average interest rates by type of borrowing under the credit facility as of the dates indicated are as follows (dollar amounts in thousands): December 31, 2019 December 31, 2018 Amount Outstanding Amount Outstanding Weighted Average Interest Rate Weighted Average Interest Rate Term loan $ Revolving credit facilities 425,000 768,800 4.30% $ 4.31% 435,000 598,279 5.02% 4.97% European Revolving Credit Facility On October 23, 2014, European subsidiaries of the Company ("PRA Europe") entered into a credit agreement with D(cid:49)B Bank ASA for a Multicurrency Revolving Credit Facility (such agreement as later amended or modified, the "European Credit Agreement"). In the first quarter of 2019, the Company entered into the Fifth Amendment and Restatement Agreement to its European Credit Agreement which, among other things, merged the term loan facility with the revolving credit facility and increased all applicable margins for the interest payable under the multicurrency revolving credit facility by 5 basis points. Under the terms of the European Credit Agreement, the credit facility includes an aggregate amount of approximately $1.1 billion (subject to the borrowing base), accrues interest at the Interbank Offered Rate ("IBOR") plus 2.70% - 3.80% (as determined by the LTV 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, 2021. The European Credit Agreement also includes an overdraft facility in the aggregate amount of $40.0 million (subject to the borrowing base), which accrues interest (per currency) at the daily rates as published by the facility agent, bears a facility line fee of 0.125% per quarter, payable quarterly in arrears, and matures February 19, 2021. As of December 31, 2019, the unused portion of the European Credit Agreement (including the overdraft facility) was $122.5 million. Considering borrowing base restrictions and other covenants as of December 31, 2019, the amount available to be drawn under the European Credit Agreement (including the overdraft facility) was $121.8 million. The European Credit Agreement is secured by the shares of most of the Company's European subsidiaries and all intercompany loans receivable in Europe. The European Credit Agreement contains restrictive covenants and events of default including the following: • • • the LTV Ratio cannot exceed 75%; 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 (cid:49)ordic AB cannot exceed SEK 1.2 billion; and PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements 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 (cid:49)orth American Credit Agreement mature May 5, 2022. As of December 31, 2019, the unused portion of the (cid:49)orth American Credit Agreement was $349.2 million. Considering borrowing base restrictions as of December 31, 2019, the amount available to be drawn was $146.5 million. The (cid:49)orth American Credit Agreement is secured by a first priority lien on substantially all of the Company's (cid:49)orth American assets. The (cid:49)orth 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 the 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 (cid:49)otes); the Company must maintain positive consolidated income from operations during any fiscal quarter; and restrictions on changes in control. The outstanding balances and weighted average interest rates by type of borrowing under the credit facility as of the dates indicated are as follows (dollar amounts in thousands): December 31, 2019 December 31, 2018 The future amortization of intangible assets is estimated to be as follows for the years ending December 31, (amounts in The Company's borrowings consisted of the following as of the dates indicated (amounts in thousands): thousands): 2020 2021 2022 2023 2024 Thereafter Total 6. Borrowings: Total 2020 2021 2022 2023 Total 2024 and thereafter Americas revolving credit Europe revolving credit Term loans Convertible senior notes Less: Debt discount and issuance costs December 31, 2019 December 31, 2018 $ 772,037 $ 1,017,465 425,000 632,500 2,847,002 (38,577) $ 2,808,425 $ $ $ $ $ 1,402 880 750 707 758 — 4,497 598,279 561,882 740,551 632,500 2,533,212 (59,556) 2,473,656 298,603 1,028,568 1,174,831 345,000 — 2,847,002 The following principal payments are due on the Company's borrowings at December 31, 2019 for the years ending December 31, (amounts in thousands): Term loan Revolving credit facilities $ Amount Outstanding 425,000 768,800 European Revolving Credit Facility Weighted Average Interest Rate 5.02% 4.97% Amount Outstanding 435,000 598,279 Weighted Average Interest Rate The Company believes it was in compliance with the covenants of its financing arrangements as of December 31, 2019. (cid:49)orth 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 “(cid:49)orth American Credit Agreement”) with Bank of America, (cid:49).A., as administrative agent, Bank of America, (cid:49)ational Association, acting through its Canada branch, as the Canadian administrative agent, and a syndicate of lenders named therein. In the fourth quarter of 2018, the Company entered into a First Amendment (the "First Amendment") to the (cid:49)orth American Credit Agreement which, among other things, increased the domestic revolving credit facility by $363.0 million and expanded the accordion feature to allow the Company to increase the original principal amount of the commitments under the (cid:49)orth American Credit Agreement by an additional $500.0 million, subject to certain terms and conditions. The total credit facility under the (cid:49)orth American Credit Agreement includes an aggregate principal amount of $1,543.0 million (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a fully-funded $425.0 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 (cid:49)orth 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 (cid:49)orth 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 On October 23, 2014, European subsidiaries of the Company ("PRA Europe") entered into a credit agreement with D(cid:49)B Bank ASA for a Multicurrency Revolving Credit Facility (such agreement as later amended or modified, the "European Credit Agreement"). In the first quarter of 2019, the Company entered into the Fifth Amendment and Restatement Agreement to its European Credit Agreement which, among other things, merged the term loan facility with the revolving credit facility and increased all applicable margins for the interest payable under the multicurrency revolving credit facility by 5 basis points. Under the terms of the European Credit Agreement, the credit facility includes an aggregate amount of approximately $1.1 billion (subject to the borrowing base), accrues interest at the Interbank Offered Rate ("IBOR") plus 2.70% - 3.80% (as determined by the LTV 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, 2021. The European Credit Agreement also includes an overdraft facility in the aggregate amount of $40.0 million (subject to the borrowing base), which accrues interest (per currency) at the daily rates as published by the facility agent, bears a facility line fee of 0.125% per quarter, payable quarterly in arrears, and matures February 19, 2021. As of December 31, 2019, the unused portion of the European Credit Agreement (including the overdraft facility) was $122.5 million. Considering borrowing base restrictions and other covenants as of December 31, 2019, the amount available to be drawn under the European Credit Agreement (including the overdraft facility) was $121.8 million. The European Credit Agreement is secured by the shares of most of the Company's European subsidiaries and all intercompany loans receivable in Europe. The European Credit Agreement contains restrictive covenants and events of default including the following: • • • the LTV Ratio cannot exceed 75%; 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 (cid:49)ordic AB cannot exceed SEK 1.2 billion; and 62 63 fp0052934_PRA_10k_2020_combined4.indd 65 4/20/2020 12:52:38 PM 4.30% $ 4.31% PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements • PRA Europe's cash collections must meet certain thresholds, measured on a quarterly basis. The outstanding balances and weighted average interest rates by type of borrowing under the European Credit Agreement as the dates indicated are as follows (dollar amounts in thousands): December 31, 2019 December 31, 2018 Term loan Revolving credit facility Amount Outstanding — $ 1,017,465 Colombian Revolving Credit Facility Weighted Average Interest Rate —% $ 4.31% Amount Outstanding 305,551 561,882 Weighted Average Interest Rate 3.75% 4.10% On September 17, 2019, PRA Group Colombia Holding SAS ("PRA Colombia"), entered into a credit agreement with Bancolombia in an aggregate amount of approximately $6.0 million. As of December 31, 2019, the outstanding balance under the credit agreement was approximately $3.2 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 Bancolombia which are subject to certain limitations regarding withdrawal and usage and are included within other assets on the consolidated balance sheet. As of December 31, 2019, the unused portion of the Colombia Credit Agreement was $2.8 million. Convertible Senior (cid:49)otes 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 (cid:49)otes due August 1, 2020 (the "2020 (cid:49)otes"). The 2020 (cid:49)otes 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 (cid:49)otes may be due and payable immediately. The 2020 (cid:49)otes are senior unsecured obligations of the Company. Interest on the 2020 (cid:49)otes is payable semi-annually, in arrears, on February 1 and August 1 of each year, beginning on February 1, 2014. Prior to February 1, 2020, the 2020 (cid:49)otes will be convertible only upon the occurrence of specified events. As of December 31, 2019, the the Company did not have the right to redeem the 2020 (cid:49)otes and the Company did not believe that any of the conditions allowing holders of the 2020 (cid:49)otes to convert their notes had occurred. All conversions occurring on or after February 1, 2020, shall be settled using the Settlement Method as defined in the indenture. The conversion rate for the 2020 (cid:49)otes is initially 15.2172 shares per $1,000 principal amount of 2020 (cid:49)otes, 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 (cid:49)otes 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 (cid:49)otes 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 (cid:49)otes 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 issuance cost as debt issuance cost and the remaining $0.9 million as equity issuance cost. Convertible Senior (cid:49)otes 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 (cid:49)otes due June 1, 2023 (the "2023 (cid:49)otes" and, together with the 2020 (cid:49)otes, the "(cid:49)otes"). The 2023 (cid:49)otes 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 (cid:49)otes may be due and payable immediately. The 2023 (cid:49)otes are senior unsecured obligations of the Company. Interest on the 64 65 fp0052934_PRA_10k_2020_combined4.indd 66 4/20/2020 12:52:39 PM 2023 (cid:49)otes is payable semi-annually, in arrears, on June 1 and December 1 of each year, beginning on December 1, 2017. Prior to March 1, 2023, the 2023 (cid:49)otes will be convertible only upon the occurrence of specified events. On or after March 1, 2023, the 2023 (cid:49)otes will be convertible at any time. The Company has the right, at its election, to redeem all or any part of the outstanding 2023 (cid:49)otes 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 December 31, 2019, the Company does not believe that any of the conditions allowing holders of the 2023 (cid:49)otes to convert their notes had occurred. The conversion rate for the 2023 (cid:49)otes is initially 21.6275 shares per $1,000 principal amount of 2023 (cid:49)otes, 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 (cid:49)otes 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 (cid:49)otes 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 (cid:49)otes 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 issuance cost as debt issuance cost and the remaining $1.3 million as equity issuance The balances of the liability and equity components of the (cid:49)otes outstanding were as follows as of the dates indicated cost. (amounts in thousands): Liability component - principal amount Unamortized debt discount Liability component - net carrying amount Equity component Interest expense - stated coupon rate Interest expense - amortization of debt discount Total interest expense - convertible senior notes Interest Expense, (cid:49)et The debt discount is being amortized into interest expense over the remaining life of the 2020 (cid:49)otes and the 2023 (cid:49)otes using the effective interest rate, which is 4.92% and 6.20%, respectively. Interest expense related to the (cid:49)otes was as follows for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands): December 31, 2019 December 31, 2018 $ $ $ 632,500 (31,414) 601,086 76,216 $ $ $ 632,500 (43,812) 588,688 76,216 2019 2018 2017 20,700 $ 20,700 $ 12,398 11,725 33,098 $ 32,425 $ 15,870 8,583 24,453 $ $ $ $ The Company incurs interest expense on its borrowings, interest-bearing deposits, and interest rate derivative agreements. The Company earns interest income on certain of its cash and cash equivalents and its interest rate derivative agreements. Interest expense, net, was as follows for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands): Interest expense Interest (income) Interest expense, net 2019 2018 2017 144,165 (2,247) 141,918 $ $ 124,208 (3,130) 121,078 $ $ 103,653 (5,612) 98,041 • PRA Europe's cash collections must meet certain thresholds, measured on a quarterly basis. The outstanding balances and weighted average interest rates by type of borrowing under the European Credit Agreement as the dates indicated are as follows (dollar amounts in thousands): December 31, 2019 December 31, 2018 Amount Outstanding Amount Outstanding Weighted Average Interest Rate Weighted Average Interest Rate Term loan Revolving credit facility $ — 1,017,465 —% $ 4.31% 305,551 561,882 3.75% 4.10% Colombian Revolving Credit Facility On September 17, 2019, PRA Group Colombia Holding SAS ("PRA Colombia"), entered into a credit agreement with Bancolombia in an aggregate amount of approximately $6.0 million. As of December 31, 2019, the outstanding balance under the credit agreement was approximately $3.2 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 Bancolombia which are subject to certain limitations regarding withdrawal and usage and are included within other assets on the consolidated balance sheet. As of December 31, 2019, the unused portion of the Colombia Credit Agreement was $2.8 million. Convertible Senior (cid:49)otes 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 (cid:49)otes due August 1, 2020 (the "2020 (cid:49)otes"). The 2020 (cid:49)otes 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 (cid:49)otes may be due and payable immediately. The 2020 (cid:49)otes are senior unsecured obligations of the Company. Interest on the 2020 (cid:49)otes is payable semi-annually, in arrears, on February 1 and August 1 of each year, beginning on February 1, 2014. Prior to February 1, 2020, the 2020 (cid:49)otes will be convertible only upon the occurrence of specified events. As of December 31, 2019, the the Company did not have the right to redeem the 2020 (cid:49)otes and the Company did not believe that any of the conditions allowing holders of the 2020 (cid:49)otes to convert their notes had occurred. All conversions occurring on or after February 1, 2020, shall be settled using the Settlement Method as defined in the indenture. The conversion rate for the 2020 (cid:49)otes is initially 15.2172 shares per $1,000 principal amount of 2020 (cid:49)otes, 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 (cid:49)otes 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 (cid:49)otes 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 (cid:49)otes 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 issuance cost as debt issuance cost and the remaining $0.9 million as equity issuance cost. Convertible Senior (cid:49)otes due 2023 PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements 2023 (cid:49)otes is payable semi-annually, in arrears, on June 1 and December 1 of each year, beginning on December 1, 2017. Prior to March 1, 2023, the 2023 (cid:49)otes will be convertible only upon the occurrence of specified events. On or after March 1, 2023, the 2023 (cid:49)otes will be convertible at any time. The Company has the right, at its election, to redeem all or any part of the outstanding 2023 (cid:49)otes 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 December 31, 2019, the Company does not believe that any of the conditions allowing holders of the 2023 (cid:49)otes to convert their notes had occurred. The conversion rate for the 2023 (cid:49)otes is initially 21.6275 shares per $1,000 principal amount of 2023 (cid:49)otes, 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 (cid:49)otes 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 (cid:49)otes 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 (cid:49)otes 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 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 (cid:49)otes outstanding were as follows as of the dates indicated (amounts in thousands): Liability component - principal amount Unamortized debt discount Liability component - net carrying amount Equity component December 31, 2019 December 31, 2018 $ $ $ 632,500 (31,414) 601,086 76,216 $ $ $ 632,500 (43,812) 588,688 76,216 The debt discount is being amortized into interest expense over the remaining life of the 2020 (cid:49)otes and the 2023 (cid:49)otes using the effective interest rate, which is 4.92% and 6.20%, respectively. Interest expense related to the (cid:49)otes was as follows for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands): Interest expense - stated coupon rate Interest expense - amortization of debt discount Total interest expense - convertible senior notes Interest Expense, (cid:49)et 2019 2018 2017 $ $ 20,700 $ 20,700 $ 12,398 11,725 33,098 $ 32,425 $ 15,870 8,583 24,453 The Company incurs interest expense on its borrowings, interest-bearing deposits, and interest rate derivative agreements. The Company earns interest income on certain of its cash and cash equivalents and its interest rate derivative agreements. Interest expense, net, was as follows for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands): On May 26, 2017, the Company completed the private offering of $345.0 million in aggregate principal amount of its 3.50% Convertible Senior (cid:49)otes due June 1, 2023 (the "2023 (cid:49)otes" and, together with the 2020 (cid:49)otes, the "(cid:49)otes"). The 2023 (cid:49)otes 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 (cid:49)otes may be due and payable immediately. The 2023 (cid:49)otes are senior unsecured obligations of the Company. Interest on the Interest expense Interest (income) Interest expense, net 64 65 2019 2018 2017 $ $ 144,165 (2,247) 141,918 $ $ 124,208 (3,130) 121,078 $ $ 103,653 (5,612) 98,041 fp0052934_PRA_10k_2020_combined4.indd 67 4/20/2020 12:52:39 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements 7. Property and Equipment, net: The carrying amounts in the table are recorded in the consolidated balance sheets at December 31, 2019 and December 31, Property and equipment, at cost, consisted of the following as of December 31, 2019 and 2018 (amounts in thousands): Software Computer equipment Furniture and fixtures Equipment Leasehold improvements Building and improvements Land Accumulated depreciation and amortization Assets in process Property and equipment, net 2019 2018 $ 62,758 $ 20,847 16,324 13,869 16,709 7,900 1,296 (93,207) 10,005 $ 56,501 $ 64,670 22,153 16,061 12,390 16,556 7,431 1,296 (92,877) 6,456 54,136 Depreciation and amortization expense relating to property and equipment for the years ended December 31, 2019, 2018 and 2017 was $15.9 million, $15.1 million and $15.4 million, respectively. 8. Fair Value: As defined by ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values. 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 (cid:49)ot 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. 2018 (amounts in thousands): Financial assets: Cash and cash equivalents Finance receivables, net Financial liabilities: Interest-bearing deposits Revolving lines of credit Term loans Convertible senior notes December 31, 2019 December 31, 2018 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value 119,774 3,514,165 106,246 1,789,502 425,000 601,086 119,774 $ 98,695 $ 98,695 3,645,610 3,084,777 3,410,475 106,246 1,789,502 425,000 648,968 82,666 1,160,161 740,551 588,688 82,666 1,160,161 740,551 557,122 Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The carrying amount and estimates of the fair value of the Company's debt obligations outlined above do not include any related debt issuance costs associated with the debt obligations. The Company uses the following methods and assumptions to estimate the fair value of financial instruments: Cash and cash equivalents: The carrying amount approximates fair value and quoted prices for identical assets 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 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 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 Convertible senior notes: The fair value estimates for the (cid:49)otes 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 (cid:49)otes classified as debt, while estimated fair value pertains to the face amount of the (cid:49)otes. value estimates. for its fair value estimates. estimates. 66 67 fp0052934_PRA_10k_2020_combined4.indd 68 4/20/2020 12:52:39 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements 7. Property and Equipment, net: The carrying amounts in the table are recorded in the consolidated balance sheets at December 31, 2019 and December 31, Property and equipment, at cost, consisted of the following as of December 31, 2019 and 2018 (amounts in thousands): 2019 2018 $ 62,758 $ 20,847 16,324 13,869 16,709 7,900 1,296 (93,207) 10,005 $ 56,501 $ 64,670 22,153 16,061 12,390 16,556 7,431 1,296 (92,877) 6,456 54,136 Software Computer equipment Furniture and fixtures Equipment Leasehold improvements Building and improvements Land Assets in process Property and equipment, net 8. Fair Value: Accumulated depreciation and amortization Depreciation and amortization expense relating to property and equipment for the years ended December 31, 2019, 2018 and 2017 was $15.9 million, $15.1 million and $15.4 million, respectively. As defined by ASC 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values. 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 (cid:49)ot 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. 2018 (amounts in thousands): Financial assets: Cash and cash equivalents Finance receivables, net Financial liabilities: Interest-bearing deposits Revolving lines of credit Term loans Convertible senior notes December 31, 2019 December 31, 2018 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value 119,774 3,514,165 106,246 1,789,502 425,000 601,086 119,774 $ 98,695 $ 98,695 3,645,610 3,084,777 3,410,475 106,246 1,789,502 425,000 648,968 82,666 1,160,161 740,551 588,688 82,666 1,160,161 740,551 557,122 Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The carrying amount and estimates of the fair value of the Company's debt obligations outlined above do not include any related debt issuance costs associated with the debt obligations. The Company uses the following methods and assumptions to estimate the fair value of financial instruments: Cash and cash equivalents: The carrying amount approximates fair value and quoted prices for identical assets in active markets. Accordingly, the Company estimates the fair value of cash and cash equivalents using Level 1 inputs. Finance receivables, net: The Company estimates the fair value of these receivables using proprietary pricing models that the Company utilizes to make portfolio acquisition decisions. Accordingly, the Company's fair value estimates use Level 3 inputs as there is little observable market data available and management is required to use significant judgment in its estimates. Interest-bearing deposits: The carrying amount approximates fair value due to the short-term nature of the deposits and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates. Revolving lines of credit: The carrying amount approximates fair value due to the short-term nature of the interest rate periods and the observable quoted prices for similar instruments in active markets. Accordingly, the Company uses Level 2 inputs for its fair value estimates. Term 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 (cid:49)otes 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 (cid:49)otes classified as debt, while estimated fair value pertains to the face amount of the (cid:49)otes. 66 67 fp0052934_PRA_10k_2020_combined4.indd 69 4/20/2020 12:52:39 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements Financial Instruments Required To Be Carried At Fair Value The carrying amounts in the following table are measured at fair value on a recurring basis in the accompanying consolidated The following table summarizes the fair value of derivative instruments in the consolidated balance sheets (amounts in balance sheets at December 31, 2019 and 2018 (amounts in thousands): Assets: Available-for-sale investments Government bonds Fair value through net income investments Mutual funds Derivative contracts (recorded in other assets) Liabilities: Derivative contracts (recorded in other liabilities) Assets: Available-for-sale investments Government bonds Fair value through net income investments Mutual funds Derivative contracts (recorded in other assets) Available-for-sale investments Fair Value Measurements as of December 31, 2019 Level 1 Level 2 Level 3 Total $ 5,052 $ — $ — $ 5,052 33,677 — — — 875 23,663 — — — 33,677 875 23,663 Fair Value Measurements as of December 31, 2018 Level 1 Level 2 Level 3 Total $ $ $ $ 5,077 21,753 — — $ — $ 5,077 — $ 3,334 — $ — 21,753 3,334 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. Effective in the second quarter of 2018, the Company began to apply hedge accounting to certain of its derivative contracts. By applying hedge accounting, changes in market value are reflected as adjustments in other comprehensive income. The hedges were evaluated and remained highly effective at December 31, 2019 and have initial terms of two to seven years. Investments measured using net asset value Private equity funds: This class of investments consists of private equity funds that invest primarily in loans and securities including single-family residential debt; corporate debt products; and financially-oriented, real estate-rich and other operating companies in the Americas, Western Europe, and Japan. These investments are subject to certain restrictions regarding transfers and withdrawals. The investments cannot be redeemed with the funds. Instead, the nature of the investments in this class is that 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 six years. The fair value of these private equity funds following the application of the (cid:49)AV practical expedient was $7.2 million and $8.0 million as of December 31, 2019 and December 31, 2018, respectively. 68 69 fp0052934_PRA_10k_2020_combined4.indd 70 4/20/2020 12:52:39 PM 9. Derivatives: thousands): Derivatives designated as hedging instruments: Derivatives not designated as hedging instruments: Interest rate contracts Interest rate contracts Foreign currency contracts Foreign currency contracts Interest rate contracts Derivatives designated as hedging instruments: December 31, 2019 December 31, 2018 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Other assets $ 323 Other assets $ Other liabilities 17,807 Other liabilities Other assets Other liabilities Other assets 552 Other assets 5,856 Other liabilities — Other assets 44 — 2,555 — 735 Changes in the fair value of derivative contracts designated as cash flow hedging instruments are recognized in other comprehensive income ("OCI"). As of December 31, 2019 and December 31, 2018, the notional amount of interest rate contracts designated as cash flow hedging instruments was $959.0 million and $260.8 million, respectively. Derivatives designated as cash flow hedging instruments were evaluated and remained highly effective at December 31, 2019 and have initial terms of two to seven years. The Company estimates that approximately $3.4 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 years ended December 31, 2019, 2018 and 2017 (amounts in thousands): Derivatives designated as cash flow hedging instruments 2019 2018 2017 Interest rate contracts $ (14,311) $ 44 $ — Gain or (loss) recognized in OCI, net of tax Gain or (loss) reclassified from OCI into income Location of gain or (loss) reclassified from OCI into income 2019 2018 2017 Interest expense, net $ (1,457) $ — $ — Derivatives not designated as hedging instruments: Changes in fair value of derivative contracts not designated as hedging instruments are recognized in earnings. As of December 31, 2019, the Company no longer had interest rate swap contracts not designated as hedging instruments. As of December 31, 2018, the notional amount of interest rate contracts not designated as hedging instruments was $169.7 million. 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 December 31, 2019 and December 31, 2018, the notional amount of foreign currency contracts that are not designated as hedging instruments was $469.9 million and $144.7 million, respectively. Fair Value Measurements as of December 31, 2019 Level 1 Level 2 Level 3 Total $ 5,052 $ — $ — $ 5,052 33,677 — — — 875 23,663 — — — 33,677 875 23,663 Fair Value Measurements as of December 31, 2018 Level 1 Level 2 Level 3 Total $ $ $ $ 5,077 — $ — $ 5,077 21,753 — — $ 3,334 — $ — 21,753 3,334 Assets: Available-for-sale investments Government bonds Fair value through net income investments Mutual funds Liabilities: Derivative contracts (recorded in other assets) Derivative contracts (recorded in other liabilities) Assets: Available-for-sale investments Government bonds Fair value through net income investments Mutual funds Derivative contracts (recorded in other assets) Available-for-sale investments Accordingly, the Company uses Level 1 inputs. Fair value through net income investments Government bonds: Fair value of the Company's investment in government bonds is estimated using quoted market prices. 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 Effective in the second quarter of 2018, the Company began to apply hedge accounting to certain of its derivative contracts. By applying hedge accounting, changes in market value are reflected as adjustments in other comprehensive income. The hedges were evaluated and remained highly effective at December 31, 2019 and have initial terms of two to seven years. Investments measured using net asset value Private equity funds: This class of investments consists of private equity funds that invest primarily in loans and securities including single-family residential debt; corporate debt products; and financially-oriented, real estate-rich and other operating companies in the Americas, Western Europe, and Japan. These investments are subject to certain restrictions regarding transfers and withdrawals. The investments cannot be redeemed with the funds. Instead, the nature of the investments in this class is that 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 six years. The fair value of these private equity funds following the application of the (cid:49)AV practical expedient was $7.2 million and $8.0 million as of December 31, 2019 and December 31, 2018, respectively. PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements Financial Instruments Required To Be Carried At Fair Value 9. Derivatives: The carrying amounts in the following table are measured at fair value on a recurring basis in the accompanying consolidated The following table summarizes the fair value of derivative instruments in the consolidated balance sheets (amounts in balance sheets at December 31, 2019 and 2018 (amounts in thousands): thousands): December 31, 2019 December 31, 2018 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments: Interest rate contracts Interest rate contracts Other assets $ 323 Other assets $ Other liabilities 17,807 Other liabilities Derivatives not designated as hedging instruments: Foreign currency contracts Foreign currency contracts Interest rate contracts Other assets Other liabilities Other assets 552 Other assets 5,856 Other liabilities — Other assets 44 — 2,555 — 735 Derivatives designated as hedging instruments: Changes in the fair value of derivative contracts designated as cash flow hedging instruments are recognized in other comprehensive income ("OCI"). As of December 31, 2019 and December 31, 2018, the notional amount of interest rate contracts designated as cash flow hedging instruments was $959.0 million and $260.8 million, respectively. Derivatives designated as cash flow hedging instruments were evaluated and remained highly effective at December 31, 2019 and have initial terms of two to seven years. The Company estimates that approximately $3.4 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 years ended December 31, 2019, 2018 and 2017 (amounts in thousands): Gain or (loss) recognized in OCI, net of tax Derivatives designated as cash flow hedging instruments 2019 2018 2017 Interest rate contracts $ (14,311) $ 44 $ — Location of gain or (loss) reclassified from OCI into income 2019 2018 2017 Interest expense, net $ (1,457) $ — $ — Gain or (loss) reclassified from OCI into income inputs, including interest rate curves and other factors. Accordingly, the Company uses Level 2 inputs for its fair value estimates. Derivatives not designated as hedging instruments: Changes in fair value of derivative contracts not designated as hedging instruments are recognized in earnings. As of December 31, 2019, the Company no longer had interest rate swap contracts not designated as hedging instruments. As of December 31, 2018, the notional amount of interest rate contracts not designated as hedging instruments was $169.7 million. 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 December 31, 2019 and December 31, 2018, the notional amount of foreign currency contracts that are not designated as hedging instruments was $469.9 million and $144.7 million, respectively. 68 69 fp0052934_PRA_10k_2020_combined4.indd 71 4/20/2020 12:52:39 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements The following table summarizes the effects of derivatives not designated as hedging instruments on the Company’s Total share-based compensation expense was $10.7 million, $8.5 million and $8.7 million for the years ended December 31, consolidated income statements for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands): Derivatives not designated as hedging instruments Location of gain or (loss) recognized in income 2019 2018 2017 (cid:49)onvested Shares Amount of gain or (loss) recognized in income Foreign currency contracts Foreign currency contracts Interest rate contracts Foreign exchange gain/(loss) $ (7,008) $ 4,011 $ Interest expense, net Interest expense, net (3,875) (492) (549) 2,082 — — — 10. Accumulated Other Comprehensive Loss: The following table provides details about the reclassifications out of accumulated other comprehensive loss for the year ended December 31, 2019 (amounts in thousands): Gains and losses on cash flow hedges 2019 Affected line in the consolidated income statement Interest rate swaps Income tax effect of item above Total losses on cash flow hedges $ $ (1,457) Interest expense, net 278 Income tax expense/(benefit) (1,179) (cid:49)et of tax The following table represents the changes in accumulated other comprehensive loss by component after tax, for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands): 2019, 2018 and 2017, respectively. The Company recognizes all excess tax benefits and tax deficiencies in the income statement when the awards vest or are settled. The total tax benefit realized from share-based compensation was approximately $1.2 million, $1.7 million and $3.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, total future compensation expense related to grants of nonvested share grants to employees and directors (not including nonvested shares granted under the Long-Term Incentive ("LTI") program), is estimated to be $8.6 million with a weighted average remaining life for all nonvested shares of 1.6 years. Grants made to key employees and directors of the Company were assumed to have no forfeiture rates associated with them due to the historically low turnover among this group. With the exception of the grants made pursuant to the LTI program and a few employee and director grants, the nonvested shares vest ratably generally over one to three years and are expensed over their vesting period. The following summarizes all nonvested share activity, excluding those related to the LTI program, from December 31, 2016 through December 31, 2019 (amounts in thousands, except per share amounts): December 31, 2016 December 31, 2017 December 31, 2018 Granted Vested Canceled Granted Vested Canceled Granted Vested Canceled December 31, 2019 (cid:49)onvested Shares Outstanding Weighted-Average Price at Grant Date $ 303 195 (173) (27) 298 254 (151) (22) 379 329 (167) (9) 532 $ 38.19 33.70 37.49 43.05 35.25 36.39 35.13 35.02 34.85 28.47 34.81 31.01 30.97 The total grant date fair value of shares vested, excluding those granted under the LTI program, during the years ended December 31, 2019, 2018 and 2017, was $5.8 million, $5.3 million and $6.5 million, respectively. Long-Term Incentive Program Pursuant to the Plan, the Compensation Committee may grant time-vested and performance-based nonvested shares. All shares granted under the LTI program were granted to key employees of the Company. Ending balance December 31, 2016 Other comprehensive loss before reclassifications Reclassifications, net (cid:49)et current period other comprehensive loss 73,337 — 73,337 (178,607) $ — (63,463) — Debt Securities Available-for-Sale Cash Flow Hedges Currency Translation Adjustments Accumulated Other Comprehensive Loss (1) (251,944) $ — $ — $ — — — — $ (251,944) $ Ending balance December 31, 2017 $ Reclassification of unrealized loss on debt securities Other comprehensive loss before reclassifications Reclassifications, net (cid:49)et current period other comprehensive loss Ending balance December 31, 2018 Other comprehensive loss before reclassifications $ Reclassifications, net (cid:49)et current period other comprehensive loss Ending balance December 31, 2019 $ — — — — $ (22) (61) — (83) (83) $ 39 — — 44 — 44 44 (63,463) (242,070) $ $ (14,311) 1,179 (5,816) — 39 (44) $ (13,132) (13,088) $ (5,816) (247,886) $ 73,337 — 73,337 (178,607) (22) (63,480) — (63,502) (242,109) (20,088) 1,179 (18,909) (261,018) (1) (cid:49)et of a $4.4 million deferred tax benefit for unrealized losses from cash flow hedges for the year ended December 31, 2019. 11. Share-Based Compensation: The Company has an Omnibus Incentive Plan (the "Plan") that is intended to assist the Company in attracting and retaining selected individuals to serve as employees and directors, who are expected to contribute to the Company's success and to achieve long-term objectives that will benefit stockholders of the Company. The Plan enables the Company to award shares of the Company's common stock to select employees and directors, not to exceed 5,400,000 shares as authorized by the Plan. 70 71 fp0052934_PRA_10k_2020_combined4.indd 72 4/20/2020 12:52:39 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements The following table summarizes the effects of derivatives not designated as hedging instruments on the Company’s consolidated income statements for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands): Amount of gain or (loss) recognized in income Total share-based compensation expense was $10.7 million, $8.5 million and $8.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. The Company recognizes all excess tax benefits and tax deficiencies in the income statement when the awards vest or are settled. The total tax benefit realized from share-based compensation was approximately $1.2 million, $1.7 million and $3.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. Derivatives not designated as hedging instruments income 2019 2018 2017 Location of gain or (loss) recognized in (cid:49)onvested Shares Foreign currency contracts Foreign currency contracts Interest rate contracts Foreign exchange gain/(loss) $ (7,008) $ 4,011 $ Interest expense, net Interest expense, net (3,875) (492) (549) 2,082 — — — 10. Accumulated Other Comprehensive Loss: The following table provides details about the reclassifications out of accumulated other comprehensive loss for the year ended December 31, 2019 (amounts in thousands): Gains and losses on cash flow hedges 2019 Affected line in the consolidated income statement Interest rate swaps Income tax effect of item above Total losses on cash flow hedges $ $ (1,457) Interest expense, net 278 Income tax expense/(benefit) (1,179) (cid:49)et of tax The following table represents the changes in accumulated other comprehensive loss by component after tax, for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands): Ending balance December 31, 2016 $ — $ — $ (251,944) $ (251,944) Debt Securities Currency Translation Accumulated Other Available-for-Sale Cash Flow Hedges Adjustments Comprehensive Loss (1) Ending balance December 31, 2017 $ — $ — $ (178,607) $ — — — (22) (61) — (83) 39 — 39 — — — — 44 — 44 44 (14,311) 1,179 (13,132) (13,088) $ 73,337 — 73,337 — — (63,463) (63,463) (5,816) — (5,816) 73,337 — 73,337 (178,607) (22) (63,480) — (63,502) (242,109) (20,088) 1,179 (18,909) (261,018) Other comprehensive loss before reclassifications Reclassifications, net (cid:49)et current period other comprehensive loss Reclassification of unrealized loss on debt securities Other comprehensive loss before reclassifications Reclassifications, net (cid:49)et current period other comprehensive loss Other comprehensive loss before reclassifications Reclassifications, net (cid:49)et current period other comprehensive loss 2019. 11. Share-Based Compensation: Ending balance December 31, 2019 $ (44) $ (247,886) $ (1) (cid:49)et of a $4.4 million deferred tax benefit for unrealized losses from cash flow hedges for the year ended December 31, The Company has an Omnibus Incentive Plan (the "Plan") that is intended to assist the Company in attracting and retaining selected individuals to serve as employees and directors, who are expected to contribute to the Company's success and to achieve long-term objectives that will benefit stockholders of the Company. The Plan enables the Company to award shares of the Company's common stock to select employees and directors, not to exceed 5,400,000 shares as authorized by the Plan. Ending balance December 31, 2018 $ (83) $ $ (242,070) $ As of December 31, 2019, total future compensation expense related to grants of nonvested share grants to employees and directors (not including nonvested shares granted under the Long-Term Incentive ("LTI") program), is estimated to be $8.6 million with a weighted average remaining life for all nonvested shares of 1.6 years. Grants made to key employees and directors of the Company were assumed to have no forfeiture rates associated with them due to the historically low turnover among this group. With the exception of the grants made pursuant to the LTI program and a few employee and director grants, the nonvested shares vest ratably generally over one to three years and are expensed over their vesting period. The following summarizes all nonvested share activity, excluding those related to the LTI program, from December 31, 2016 through December 31, 2019 (amounts in thousands, except per share amounts): December 31, 2016 Granted Vested Canceled December 31, 2017 Granted Vested Canceled December 31, 2018 Granted Vested Canceled December 31, 2019 (cid:49)onvested Shares Outstanding Weighted-Average Price at Grant Date $ 303 195 (173) (27) 298 254 (151) (22) 379 329 (167) (9) 532 $ 38.19 33.70 37.49 43.05 35.25 36.39 35.13 35.02 34.85 28.47 34.81 31.01 30.97 The total grant date fair value of shares vested, excluding those granted under the LTI program, during the years ended December 31, 2019, 2018 and 2017, was $5.8 million, $5.3 million and $6.5 million, respectively. Long-Term Incentive Program Pursuant to the Plan, the Compensation Committee may grant time-vested and performance-based nonvested shares. All shares granted under the LTI program were granted to key employees of the Company. 70 71 fp0052934_PRA_10k_2020_combined4.indd 73 4/20/2020 12:52:39 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements The following table summarizes all LTI share activity from December 31, 2016 through December 31, 2019 (amounts in 13. Income Taxes: thousands, except per share amounts): December 31, 2016 Granted at target level Adjustments for actual performance Vested Canceled December 31, 2017 Granted at target level Adjustments for actual performance Vested Canceled December 31, 2018 Granted at target level Adjustments for actual performance Vested Canceled December 31, 2019 (cid:49)onvested LTI Shares Outstanding Weighted-Average Price at Grant Date following (amounts in thousands): The income tax expense/(benefit) recognized for the years ended December 31, 2019, 2018 and 2017 is comprised of the $ 425 192 5 (51) (99) 472 121 (74) (19) (46) 454 168 (172) — (3) 447 $ 39.57 33.50 60.00 40.80 20.91 41.06 39.40 52.47 52.47 32.31 33.27 28.28 28.98 — 35.87 33.03 The total grant date fair value of LTI shares vested during the years ended December 31, 2019, 2018 and 2017, was $0.0 million, $1.0 million and $2.1 million, respectively. At December 31, 2019, total future compensation expense, assuming the current estimated performance levels are achieved, related to nonvested shares granted under the LTI program is estimated to be approximately $4.5 million. The Company assumed a 15.0% forfeiture rate for these grants and the remaining shares have a weighted average remaining life of 1.2 years at December 31, 2019. 12. 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 conversion spread of the (cid:49)otes and nonvested share awards, if dilutive. There has been no dilutive effect of the (cid:49)otes since issuance through December 31, 2019. Share-based awards that are contingent upon the attainment of performance goals are included in the computation of diluted EPS if the effect is dilutive. The dilutive effect of nonvested shares is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the vesting of nonvested shares would be used to purchase common shares at the average market price for the period. The following table provides a reconciliation between the computation of basic EPS and diluted EPS for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands, except per share amounts): (cid:49)et Income Attributable to PRA Group, Inc. 2019 Weighted Average Common Shares (cid:49)et Income Attributable to PRA Group, Inc. EPS 2018 Weighted Average Common Shares (cid:49)et Income Attributable to PRA Group, Inc. EPS 2017 Weighted Average Common Shares EPS Basic EPS $ 86,158 45,387 $ 1.90 $ 65,563 45,280 $ 1.45 $ 164,315 45,671 $ 3.60 Dilutive effect of nonvested share awards — 190 (0.01) — 133 (0.01) — 152 (0.01) Diluted EPS $ 86,158 45,577 $ 1.89 $ 65,563 45,413 $ 1.44 $ 164,315 45,823 $ 3.59 There were no antidilutive options outstanding as of December 31, 2019, 2018 and 2017. 72 73 fp0052934_PRA_10k_2020_combined4.indd 74 4/20/2020 12:52:39 PM For the year ended December 31, 2019: Current tax expense Deferred tax (benefit) Total income tax expense For the year ended December 31, 2018: Current tax expense Deferred tax (benefit) Total income tax expense/(benefit) For the year ended December 31, 2017: Current tax expense Deferred tax (benefit) Total income tax (benefit)/expense Federal State International Total 41,391 (27,311) 14,080 23,444 (19,527) 3,917 $ $ $ $ $ $ $ $ $ $ $ 6,390 (6,030) 360 9,026 (15,268) 9,460 (4,220) 5,240 $ $ 37,501 $ (21,413) (6,242) $ 16,088 $ 57,241 (37,561) 19,680 69,971 (56,208) 13,763 $ $ $ $ $ 77,656 (112,118) (34,462) $ 16,543 (2,051) 14,492 25,087 $ 119,286 (15,969) 9,118 $ (130,138) (10,852) On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the “Tax Act.” The main impact of the Tax Act was a reduction of the U.S. federal corporate tax rate from 35% to 21% and the current taxation of international entities. (cid:49)ew legislation and authoritative guidance on the Tax Act is still being released that may impact tax amounts recorded in the financial statements. Under U.S. GAAP, the Company made an accounting policy election to treat taxes due related to GILTI as a current-period expense when incurred. A reconciliation of the Company's expected tax expense at the statutory federal tax rate to actual tax expense/(benefit) for the years ended December 31, 2019, 2018 and 2017 is as follows (amounts in thousands): Income tax expense at statutory federal rates State tax expense/(benefit), net of federal tax benefit Tax impact on international earnings Federal rate change Other 2019 2018 2017 $ 24,645 $ 18,794 $ 161 (7,326) — 2,200 (5,098) 206 (719) 580 56,095 9,072 (4,953) (73,779) 2,713 Total income tax expense/(benefit) $ 19,680 $ 13,763 $ (10,852) PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements The following table summarizes all LTI share activity from December 31, 2016 through December 31, 2019 (amounts in 13. Income Taxes: (cid:49)onvested LTI Shares Outstanding Weighted-Average Price at Grant Date following (amounts in thousands): The income tax expense/(benefit) recognized for the years ended December 31, 2019, 2018 and 2017 is comprised of the $ 425 192 5 (51) (99) 472 121 (74) (19) (46) 454 168 (172) — (3) 447 $ 39.57 33.50 60.00 40.80 20.91 41.06 39.40 52.47 52.47 32.31 33.27 28.28 28.98 — 35.87 33.03 For the year ended December 31, 2019: Current tax expense Deferred tax (benefit) Total income tax expense For the year ended December 31, 2018: Current tax expense Deferred tax (benefit) Total income tax expense/(benefit) For the year ended December 31, 2017: Current tax expense Deferred tax (benefit) Total income tax (benefit)/expense Federal State International Total $ $ $ $ $ $ 41,391 (27,311) 14,080 23,444 (19,527) 3,917 77,656 (112,118) $ $ $ $ $ (34,462) $ $ $ $ 6,390 (6,030) 360 9,026 (15,268) 9,460 (4,220) 5,240 $ $ 37,501 $ (21,413) (6,242) $ 16,088 $ 57,241 (37,561) 19,680 69,971 (56,208) 13,763 16,543 (2,051) 14,492 $ $ 25,087 $ 119,286 (15,969) 9,118 $ (130,138) (10,852) On December 22, 2017, the United States government enacted comprehensive tax legislation commonly referred to as the “Tax Act.” The main impact of the Tax Act was a reduction of the U.S. federal corporate tax rate from 35% to 21% and the current taxation of international entities. (cid:49)ew legislation and authoritative guidance on the Tax Act is still being released that may impact tax amounts recorded in the financial statements. Under U.S. GAAP, the Company made an accounting policy election to treat taxes due related to GILTI as a current-period expense when incurred. A reconciliation of the Company's expected tax expense at the statutory federal tax rate to actual tax expense/(benefit) for the years ended December 31, 2019, 2018 and 2017 is as follows (amounts in thousands): Income tax expense at statutory federal rates State tax expense/(benefit), net of federal tax benefit Tax impact on international earnings Federal rate change Other $ 24,645 $ 161 (7,326) — 2,200 $ 18,794 (5,098) 206 (719) 580 Total income tax expense/(benefit) $ 19,680 $ 13,763 $ 56,095 9,072 (4,953) (73,779) 2,713 (10,852) 2019 2018 2017 thousands, except per share amounts): Adjustments for actual performance Adjustments for actual performance December 31, 2016 Granted at target level Vested Canceled December 31, 2017 Granted at target level Vested Canceled December 31, 2018 Granted at target level Vested Canceled December 31, 2019 Adjustments for actual performance The total grant date fair value of LTI shares vested during the years ended December 31, 2019, 2018 and 2017, was $0.0 million, $1.0 million and $2.1 million, respectively. At December 31, 2019, total future compensation expense, assuming the current estimated performance levels are achieved, related to nonvested shares granted under the LTI program is estimated to be approximately $4.5 million. The Company assumed a 15.0% forfeiture rate for these grants and the remaining shares have a weighted average remaining life of 1.2 years at December 31, 2019. 12. 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 conversion spread of the (cid:49)otes and nonvested share awards, if dilutive. There has been no dilutive effect of the (cid:49)otes since issuance through December 31, 2019. Share-based awards that are contingent upon the attainment of performance goals are included in the computation of diluted EPS if the effect is dilutive. The dilutive effect of nonvested shares is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the vesting of nonvested shares would be used to purchase common shares at the average market price for the period. The following table provides a reconciliation between the computation of basic EPS and diluted EPS for the years ended December 31, 2019, 2018 and 2017 (amounts in thousands, except per share amounts): (cid:49)et Income Attributable to PRA Group, Inc. 2019 Weighted Average Common Shares (cid:49)et Income Attributable to PRA Group, Inc. EPS 2018 Weighted Average Common Shares (cid:49)et Income Attributable to PRA Group, Inc. EPS 2017 Weighted Average Common Shares EPS Basic EPS $ 86,158 45,387 $ 1.90 $ 65,563 45,280 $ 1.45 $ 164,315 45,671 $ 3.60 Dilutive effect of nonvested share awards Diluted EPS $ 86,158 45,577 $ 1.89 $ 65,563 45,413 $ 1.44 $ 164,315 45,823 $ 3.59 — 190 (0.01) — 133 (0.01) — 152 (0.01) There were no antidilutive options outstanding as of December 31, 2019, 2018 and 2017. 72 73 fp0052934_PRA_10k_2020_combined4.indd 75 4/20/2020 12:52:40 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements The Company recognized a net deferred tax liability of $22.2 million and $53.5 million as of December 31, 2019 and 2018, The Company's international subsidiaries had $401.5 million and $116.8 million of net operating loss carryforwards as of respectively. The components of the net deferred tax liability are as follows (amounts in thousands): Deferred tax assets: Employee compensation (cid:49)et operating loss carryforward Accrued liabilities Interest Finance receivable revenue recognition - international Right of use asset Other Valuation allowance Total deferred tax asset Deferred tax liabilities: Property and Equipment Intangible assets and goodwill Lease liability Convertible debt Finance receivable revenue recognition - IRS settlement Finance receivable revenue recognition - domestic Total deferred tax liability (cid:49)et deferred tax liability As of December 31, 2019 2018 $ 6,085 93,068 — 10,477 21,343 16,045 12,009 (80,739) 78,288 (5,362) (2,999) (15,107) (7,843) (36,959) (32,183) (100,453) (22,165) $ 4,670 24,210 1,850 10,559 37,005 — 2,721 (14,512) 66,503 (5,556) (5,435) — (10,998) (74,296) (23,744) (120,029) (53,526) $ $ A valuation allowance for deferred tax assets is recognized and charged to earnings in the period such determination is made, if it is determined that it is more likely than not that the deferred tax asset will not be realized. If the Company subsequently realized 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 determination for a valuation allowance is made on a jurisdiction by jurisdiction basis. At December 31, 2019 and 2018, the valuation allowance, relating mainly to net operating losses, capital losses and deferred interest expense in (cid:49)orway, Poland, and Luxembourg, was $80.7 million and $14.5 million respectively. The increase in the valuation allowance is primarily due to recording net operating losses in Luxembourg that were interpreted to be restricted by law. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining net deferred tax assets. 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 will be 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. ASC 740 requires the recognition of interest if the tax law would require interest to be paid on the underpayment of taxes, and recognition of penalties if a tax position does not meet the minimum statutory threshold to avoid payment of penalties. The Company believes it has sufficient support for the technical merits of its positions and that it is more likely than not these positions will be sustained. Accordingly, the Company has not accrued for interest or penalties on any of its tax positions. At December 31, 2019, the tax years subject to examination by the major federal, state and international taxing jurisdictions are 2014 and subsequent years. As of December 31, 2019, the cumulative unremitted earnings of the Company's international subsidiaries were approximately $52.3 million. 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. It is impracticable to determine the total amount of unrecognized deferred taxes with respect to these indefinitely reinvested earnings. 74 75 fp0052934_PRA_10k_2020_combined4.indd 76 4/20/2020 12:52:40 PM December 31, 2019 and 2018, respectively. There are $283.7 million and $45.8 million of valuation allowances recorded to offset those losses as of December 31, 2019 and 2018, respectively. The net operating losses do not expire under most local laws and the remaining jurisdictions allow for a seven to twenty year carryforward period. 14. Commitments and Contingencies: Employment Agreements: The Company has entered into employment agreements, most 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. As of December 31, 2019, estimated future compensation under these agreements was approximately $8.0 million. The agreements also contain confidentiality and non-compete provisions. Outside the U.S., employment agreements are in place with employees pursuant to local country regulations. Generally, these agreements do not have expiration dates and therefore it is impractical to estimate the amount of future compensation under these agreements. Accordingly, the future compensation under these agreements is not included in the $8.0 million total above. The Company is party to various operating leases with respect to its facilities and equipment. The future maturities of lease liabilities at December 31, 2019 totaled approximately $95.4 million. 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 December 31, 2019 was Leases: Forward Flow Agreements: approximately $506.9 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, most of which are incidental to the ordinary course of the Company's 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 December 31, 2019, where the range of loss can be estimated, was not material. PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements The Company recognized a net deferred tax liability of $22.2 million and $53.5 million as of December 31, 2019 and 2018, respectively. The components of the net deferred tax liability are as follows (amounts in thousands): Finance receivable revenue recognition - international Deferred tax assets: Employee compensation (cid:49)et operating loss carryforward Accrued liabilities Interest Right of use asset Other Valuation allowance Total deferred tax asset Deferred tax liabilities: Property and Equipment Intangible assets and goodwill Lease liability Convertible debt Finance receivable revenue recognition - IRS settlement Finance receivable revenue recognition - domestic Total deferred tax liability (cid:49)et deferred tax liability As of December 31, 2019 2018 $ 6,085 $ 93,068 — 10,477 21,343 16,045 12,009 (80,739) 78,288 (5,362) (2,999) (15,107) (7,843) (36,959) (32,183) (100,453) $ (22,165) $ 4,670 24,210 1,850 10,559 37,005 — 2,721 (14,512) 66,503 (5,556) (5,435) — (10,998) (74,296) (23,744) (120,029) (53,526) A valuation allowance for deferred tax assets is recognized and charged to earnings in the period such determination is made, if it is determined that it is more likely than not that the deferred tax asset will not be realized. If the Company subsequently realized 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 determination for a valuation allowance is made on a jurisdiction by jurisdiction basis. At December 31, 2019 and 2018, the valuation allowance, relating mainly to net operating losses, capital losses and deferred interest expense in (cid:49)orway, Poland, and Luxembourg, was $80.7 million and $14.5 million respectively. The increase in the valuation allowance is primarily due to recording net operating losses in Luxembourg that were interpreted to be restricted by law. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the remaining net deferred tax assets. 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 will be 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. ASC 740 requires the recognition of interest if the tax law would require interest to be paid on the underpayment of taxes, and recognition of penalties if a tax position does not meet the minimum statutory threshold to avoid payment of penalties. The Company believes it has sufficient support for the technical merits of its positions and that it is more likely than not these positions will be sustained. Accordingly, the Company has not accrued for interest or penalties on any of its tax positions. At December 31, 2019, the tax years subject to examination by the major federal, state and international taxing jurisdictions are 2014 and subsequent years. As of December 31, 2019, the cumulative unremitted earnings of the Company's international subsidiaries were approximately $52.3 million. 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. It is impracticable to determine the total amount of unrecognized deferred taxes with respect to these indefinitely reinvested earnings. The Company's international subsidiaries had $401.5 million and $116.8 million of net operating loss carryforwards as of December 31, 2019 and 2018, respectively. There are $283.7 million and $45.8 million of valuation allowances recorded to offset those losses as of December 31, 2019 and 2018, respectively. The net operating losses do not expire under most local laws and the remaining jurisdictions allow for a seven to twenty year carryforward period. 14. Commitments and Contingencies: Employment Agreements: The Company has entered into employment agreements, most 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. As of December 31, 2019, estimated future compensation under these agreements was approximately $8.0 million. The agreements also contain confidentiality and non-compete provisions. Outside the U.S., employment agreements are in place with employees pursuant to local country regulations. Generally, these agreements do not have expiration dates and therefore it is impractical to estimate the amount of future compensation under these agreements. Accordingly, the future compensation under these agreements is not included in the $8.0 million total above. Leases: The Company is party to various operating leases with respect to its facilities and equipment. The future maturities of lease liabilities at December 31, 2019 totaled approximately $95.4 million. Forward Flow Agreements: The Company is party to several forward flow agreements that allow for the purchase of nonperforming loans at pre- established prices. The maximum remaining amount to be purchased under forward flow agreements at December 31, 2019 was approximately $506.9 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, most of which are incidental to the ordinary course of the Company's 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 December 31, 2019, where the range of loss can be estimated, was not material. 74 75 fp0052934_PRA_10k_2020_combined4.indd 77 4/20/2020 12:52:40 PM 17. Sales of Subsidiaries: On December 20, 2018, the Company sold 79% of its interest in RCB, a servicing platform for nonperforming loans in Brazil for $40.0 million. The Company recognized a pre-tax gain of $26.6 million, which includes a gain of $5.4 million on its 11.7% retained interest. The Company received 25% of the proceeds in the fourth quarter of 2018 and the remaining 75% in the first quarter of 2019. The fair value of the retained interest was estimated based on the transaction price. The Company accounts for its remaining interest in RCB as an equity method investment. As part of the Company’s strategy to focus on its primary business, the purchase, collection and management of portfolios of nonperforming loans, the Company sold its government services businesses: PRA Government Services, LLC; MuniServices, LLC; and PRA Professional Services, LLC in the first quarter of 2017, for $91.5 million in cash plus additional consideration for certain balance sheet items. The pre-tax gain on sale was approximately $46.8 million. During the second quarter of 2017, the Company sold its vehicle location, skip tracing and collateral recovery business, PRA Location Services, LLC, for $4.5 million which resulted in a pre-tax gain on sale of approximately $1.6 million. PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements 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 potential recoveries under the Company's insurance policies or third-party indemnities which is included in other receivables, net at December 31, 2019. The matters described below fall outside of the normal parameters of the Company's routine legal proceedings. Multi-State Investigation On (cid:49)ovember 17, 2015, the Company received civil investigative demands from multiple state Attorney General offices ("AGOs") broadly relating to its U.S. debt collection practices. The Company believes that it has fully cooperated with the investigations and discussed potential resolution of the investigations with the AGOs. In these discussions, the AGOs have taken positions with which the Company disagrees, including positions related to penalties, restitution and/or the adoption of new practices and controls in the conduct of the Company's business. If the Company is unable to resolve its differences with the AGOs, it is possible that one or more individual state AGOs may file claims against the Company. As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, the Company settled certain claims with the Massachusetts Office of the Attorney General on (cid:49)ovember 6, 2019. The range of loss with respect to the remaining investigations, if any, cannot be estimated at this time. Iris Pounds v. Portfolio Recovery Associates, LLC On (cid:49)ovember 21, 2016, Iris Pounds filed suit against the Company in Durham County, (cid:49)orth Carolina alleging violations of the (cid:49)orth Carolina Prohibited Practices by Collection Agencies Act. The purported class consists of all individuals against whom the Company had obtained a judgment by default in (cid:49)orth Carolina on or after October 1, 2009. On December 9, 2016, the Company removed the matter to the United States District Court for the Middle District of (cid:49)orth Carolina (the "District Court"). On March 28, 2018, the District Court entered an order remanding the matter to the (cid:49)orth Carolina state court, which the Fourth Circuit Court of Appeals affirmed on May 17, 2018. On January 11, 2019, the Company filed motions to compel arbitration with the (cid:49)orth Carolina state court, which was denied. The Company is seeking review of the (cid:49)orth Carolinas state court's decision to deny the Company's motion to compel arbitration. The range of loss, if any, cannot be estimated at this time due to the uncertainty surrounding liability, class certification and the interpretation of statutory damages. Telephone Consumer Protection Act Litigation On January 25, 2017, the Company resolved the matter of In Re Portfolio Recovery Associates, LLC Telephone Consumer Protection Act Litigation, which consisted of a number of class actions and single plaintiff claims consolidated by order of the Panel for Multi-District Litigation ("MDL"). While the settlement disposed of a large number of claims, several hundred class members opted out ("Opt-Out Plaintiffs") of that settlement. Many of these Opt-Out Plaintiffs have been consolidated before the MDL appointed court, the United States District Court for the Southern District of California, and are pending a determination on cross-motions for summary judgment. The range of loss, if any, cannot be estimated at this time due to the uncertainty surrounding liability. 15. Retirement Plans: The Company sponsors defined contribution plans primarily in the U.S. and Europe. The U.S. plan is organized as a 401(k) plan under which all employees over eighteen years of age are eligible to make voluntary contributions to the plan up to 100% of their compensation, subject to IRS limitations, after completing six months of service, as defined in the plan. The Company makes matching contributions of up to 4% of an employee's salary. For the defined contribution plans in Europe, the Company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Total compensation expense related to the Company's contributions was $5.9 million, $6.3 million and $5.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. 16. Redeemable (cid:49)oncontrolling Interest: With the acquisition of DTP S.A. in 2016, the Company acquired a 20% owned Polish securitization fund (the "Fund"). Under ASC 810-10, the Company had determined it had control over this Fund and as such consolidated the operations of the Fund. As of December 31, 2019, 100% of the ownership interests were redeemed. 76 77 fp0052934_PRA_10k_2020_combined4.indd 78 4/20/2020 12:52:40 PM PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements PRA Group, Inc. (cid:49)otes to Consolidated Financial Statements 17. Sales of Subsidiaries: On December 20, 2018, the Company sold 79% of its interest in RCB, a servicing platform for nonperforming loans in Brazil for $40.0 million. The Company recognized a pre-tax gain of $26.6 million, which includes a gain of $5.4 million on its 11.7% retained interest. The Company received 25% of the proceeds in the fourth quarter of 2018 and the remaining 75% in the first quarter of 2019. The fair value of the retained interest was estimated based on the transaction price. The Company accounts for its remaining interest in RCB as an equity method investment. As part of the Company’s strategy to focus on its primary business, the purchase, collection and management of portfolios of nonperforming loans, the Company sold its government services businesses: PRA Government Services, LLC; MuniServices, LLC; and PRA Professional Services, LLC in the first quarter of 2017, for $91.5 million in cash plus additional consideration for certain balance sheet items. The pre-tax gain on sale was approximately $46.8 million. During the second quarter of 2017, the Company sold its vehicle location, skip tracing and collateral recovery business, PRA Location Services, LLC, for $4.5 million which resulted in a pre-tax gain on sale of approximately $1.6 million. 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 potential recoveries under the Company's insurance policies or third-party indemnities which is included in other receivables, net at December 31, 2019. The matters described below fall outside of the normal parameters of the Company's routine legal proceedings. Multi-State Investigation On (cid:49)ovember 17, 2015, the Company received civil investigative demands from multiple state Attorney General offices ("AGOs") broadly relating to its U.S. debt collection practices. The Company believes that it has fully cooperated with the investigations and discussed potential resolution of the investigations with the AGOs. In these discussions, the AGOs have taken positions with which the Company disagrees, including positions related to penalties, restitution and/or the adoption of new practices and controls in the conduct of the Company's business. If the Company is unable to resolve its differences with the AGOs, it is possible that one or more individual state AGOs may file claims against the Company. As previously reported in the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, the Company settled certain claims with the Massachusetts Office of the Attorney General on (cid:49)ovember 6, 2019. The range of loss with respect to the remaining investigations, if any, cannot be estimated at this time. Iris Pounds v. Portfolio Recovery Associates, LLC On (cid:49)ovember 21, 2016, Iris Pounds filed suit against the Company in Durham County, (cid:49)orth Carolina alleging violations of the (cid:49)orth Carolina Prohibited Practices by Collection Agencies Act. The purported class consists of all individuals against whom the Company had obtained a judgment by default in (cid:49)orth Carolina on or after October 1, 2009. On December 9, 2016, the Company removed the matter to the United States District Court for the Middle District of (cid:49)orth Carolina (the "District Court"). On March 28, 2018, the District Court entered an order remanding the matter to the (cid:49)orth Carolina state court, which the Fourth Circuit Court of Appeals affirmed on May 17, 2018. On January 11, 2019, the Company filed motions to compel arbitration with the (cid:49)orth Carolina state court, which was denied. The Company is seeking review of the (cid:49)orth Carolinas state court's decision to deny the Company's motion to compel arbitration. The range of loss, if any, cannot be estimated at this time due to the uncertainty surrounding liability, class certification and the interpretation of statutory damages. Telephone Consumer Protection Act Litigation On January 25, 2017, the Company resolved the matter of In Re Portfolio Recovery Associates, LLC Telephone Consumer Protection Act Litigation, which consisted of a number of class actions and single plaintiff claims consolidated by order of the Panel for Multi-District Litigation ("MDL"). While the settlement disposed of a large number of claims, several hundred class members opted out ("Opt-Out Plaintiffs") of that settlement. Many of these Opt-Out Plaintiffs have been consolidated before the MDL appointed court, the United States District Court for the Southern District of California, and are pending a determination on cross-motions for summary judgment. The range of loss, if any, cannot be estimated at this time due to the uncertainty surrounding liability. 15. Retirement Plans: The Company sponsors defined contribution plans primarily in the U.S. and Europe. The U.S. plan is organized as a 401(k) plan under which all employees over eighteen years of age are eligible to make voluntary contributions to the plan up to 100% of their compensation, subject to IRS limitations, after completing six months of service, as defined in the plan. The Company makes matching contributions of up to 4% of an employee's salary. For the defined contribution plans in Europe, the Company pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. Total compensation expense related to the Company's contributions was $5.9 million, $6.3 million and $5.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. 16. Redeemable (cid:49)oncontrolling Interest: With the acquisition of DTP S.A. in 2016, the Company acquired a 20% owned Polish securitization fund (the "Fund"). Under ASC 810-10, the Company had determined it had control over this Fund and as such consolidated the operations of the Fund. As of December 31, 2019, 100% of the ownership interests were redeemed. 76 77 fp0052934_PRA_10k_2020_combined4.indd 79 4/20/2020 12:52:40 PM Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. (cid:49)one. Item 9A. 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 Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-K. Based on this evaluation, the principal executive officer and principal financial officer have concluded that, as of December 31, 2019, our disclosure controls and procedures were effective. Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on its assessment under this framework, management has determined that our internal control over financial reporting was effective as of December 31, 2019. Our independent registered public accounting firm, KPMG LLP, has issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2019, which is included herein. Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors PRA Group, Inc.: Opinion on Internal Control Over Financial Reporting We have audited PRA Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated income statements, statements of comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 2, 2020 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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. /s/ KPMG (cid:49)orfolk, Virginia March 2, 2020 78 79 fp0052934_PRA_10k_2020_combined4.indd 80 4/20/2020 12:52:40 PM Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. (cid:49)one. Item 9A. 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 Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Form 10-K. Based on this evaluation, the principal executive officer and principal financial officer have concluded that, as of December 31, 2019, our disclosure controls and procedures were effective. Management’s Report on Internal Control Over Financial Reporting. Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is defined in Exchange Act Rules 13a-15(f) and 15d-15(f) as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of our internal control over financial reporting based on the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on its assessment under this framework, management has determined that our internal control over financial reporting was effective as of December 31, 2019. Our independent registered public accounting firm, KPMG LLP, has issued an audit report on the effectiveness of our internal control over financial reporting as of December 31, 2019, which is included herein. Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors PRA Group, Inc.: Opinion on Internal Control Over Financial Reporting We have audited PRA Group, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated income statements, statements of comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 2, 2020 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. 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. /s/ KPMG (cid:49)orfolk, Virginia March 2, 2020 78 79 fp0052934_PRA_10k_2020_combined4.indd 81 4/20/2020 12:52:40 PM Item 9B. Other Information. (cid:49)one. Item 10. Directors, Executive Officers and Corporate Governance. PART III The information required by Item 10 is incorporated herein by reference to the sections labeled "Executive Officers," "Security Ownership of Certain Beneficial Owners and Management," "Our Board and Its Committees," "Election of Directors," "Corporate Governance-Code of Conduct," and "Report of the Audit Committee" in our definitive Proxy Statement for use in connection with the Company's 2020 Annual Meeting of Stockholders (the "Proxy Statement"). Item 11. Executive Compensation. The information required by Item 11 is incorporated herein by reference to the sections labeled "Compensation Discussion and Analysis" and "Compensation Committee Report" in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters. The information required by Item 12 is incorporated herein by reference to the section labeled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. Form of Employment Agreement between PRA Group, Inc. and Certain Executives effective January 1, 2018 (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by Item 13 is incorporated herein by reference to the sections labeled "Policy for Approval of Related Party Transactions" and "Director Independence" in the Proxy Statement. Item 14. Principal Accountant Fees and Services. Employment Agreement, dated December 19, 2014, by and between Christopher Graves and PRA Group, Inc. (Incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on Employment Agreement, dated June 21, 2016, by and between Peter M. Graham and PRA Group, Inc. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on The information required by Item 14 is incorporated herein by reference to the section labeled "Fees Paid to KPMG" in the 10.7* Form of Performance Stock Unit Agreement (Incorporated by reference to Exhibit 10.1 of the Quarterly Report Proxy Statement. PART IV Item 15. Exhibits and Financial Statement Schedules. (a) Financial Statements. The following financial statements are included in Item 8 of this Form 10-K: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Income Statements Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows (cid:49)otes to Consolidated Financial Statements 43 45 46 47 48 49 50 (b) Exhibits. 2.1 3.1 3.2 4.1 Equity Exchange Agreement between Portfolio Recovery Associates, L.L.C. and Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 2.1 of Amendment (cid:49)o. 2 to the Registration Statement on Form S-1 (Registration (cid:49)o. 333-99225) filed on October 30, 2002). Fourth Amended and Restated Certificate of Incorporation of PRA Group, Inc. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on October 29, 2014). Amended and Restated By-Laws of PRA Group, Inc. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on May 22, 2015). Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of Amendment (cid:49)o. 1 to the Registration Statement on Form S-1 (Registration (cid:49)o. 333-99225) filed on October 15, 2002). 80 81 fp0052934_PRA_10k_2020_combined4.indd 82 4/20/2020 12:52:40 PM Form of Warrant (Incorporated by reference to Exhibit 4.2 of Amendment (cid:49)o. 2 to the Registration Statement on Form S-1 (Registration (cid:49)o. 333-99225) filed on October 30, 2002). Indenture dated August 13, 2013 between Portfolio Recovery Associates, Inc. and Wells Fargo Bank, (cid:49)ational Association, as trustee (Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on August 14, 2013). Indenture dated May 26, 2017 between PRA Group, Inc. and Regions Bank, as trustee (Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on May 26, 2017). Description of the Registrant's Securities Registered pursuant to Section 12 of the Securities Exchange Act of 1934 (filed herewith). Executive Chairman Agreement, dated February 23, 2017, by and between Steven D. Fredrickson and PRA Group, Inc. (Incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2017). First Amended Executive Chairman Agreement dated as of May 18, 2018, by and between PRA Group, Inc., and Steven D. Fredrickson (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on August 8, 2018). Employment Agreement, dated February 23, 2017, by and between Kevin P. Stevenson and PRA Group, Inc. (Incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on 4.2 4.3 4.4 4.5 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* May 10, 2017). January 2, 2018). January 5, 2015). June 22, 2016). on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2017). 10.8* Form of Restricted Stock Unit Agreement (Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2017). 10.9* Form of Performance Stock Unit Agreement (Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2018). 10.10* 10.11* Settlement Agreement dated June 4, 2018 among PRA Group (UK) Limited and Tikendra Patel (Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on August 8, 2018). Service Agreement dated February 19, 2014 between Aktiv Kapital UK LTD and Tikendra Patel (Incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on August 8, 2018). 10.12 Amended and Restated Credit Agreement dated as of May 5, 2017 among PRA Group, Inc. as a borrower and a guarantor, PRA Group Canada, Inc., as a borrower, the domestic subsidiaries of PRA Group, Inc., as the guarantors, the Canadian subsidiaries of PRA Group Canada, Inc. party thereto from time to time, as Canadian guarantors, the lenders party thereto, Bank of America, (cid:49).A., as administrative Agent, swing line lender and an l/ c issuer, Bank of America, (cid:49).A., acting through its Canada branch, as Canadian administrative agent, Capital One, (cid:49).A., Fifth Third Bank and Suntrust Bank, as co-syndication agents, D(cid:49)B Capital LLC, I(cid:49)G Capital, the Bank of Tokyo Mitsubishi Ufj, Ltd. and Regions Bank, as co-senior managing agents, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Capital One, (cid:49).A., Fifth Third Bank and Suntrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on August 9, 2017). 10.13 First Amendment to Credit Agreement, dated as of October 4, 2018, among PRA Group, Inc., PRA Group Canada Inc., the Guarantors, the Lenders party thereto, Bank of America, (cid:49).A., as Administrative Agent, and Bank of America, (cid:49).A., acting through its Canada branch, as Canadian Administrative Agent (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on October 9, 2018). 10.14 Multicurrency Revolving Credit Agreement dated as of October 23, 2014. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on October 29, 2014). 10.15 First Amendment and Restatement Agreement to the Multicurrency Revolving Credit Agreement dated as of October 23, 2014. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on June 16, 2015). Item 9B. Other Information. (cid:49)one. Item 10. Directors, Executive Officers and Corporate Governance. PART III The information required by Item 10 is incorporated herein by reference to the sections labeled "Executive Officers," "Security Ownership of Certain Beneficial Owners and Management," "Our Board and Its Committees," "Election of Directors," "Corporate Governance-Code of Conduct," and "Report of the Audit Committee" in our definitive Proxy Statement for use in connection with the Company's 2020 Annual Meeting of Stockholders (the "Proxy Statement"). Item 11. Executive Compensation. The information required by Item 11 is incorporated herein by reference to the sections labeled "Compensation Discussion and Analysis" and "Compensation Committee Report" in the Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters. The information required by Item 12 is incorporated herein by reference to the section labeled "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by Item 13 is incorporated herein by reference to the sections labeled "Policy for Approval of Related Party Transactions" and "Director Independence" in the Proxy Statement. Item 14. Principal Accountant Fees and Services. The information required by Item 14 is incorporated herein by reference to the section labeled "Fees Paid to KPMG" in the Proxy Statement. PART IV Item 15. Exhibits and Financial Statement Schedules. (a) Financial Statements. The following financial statements are included in Item 8 of this Form 10-K: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Income Statements Consolidated Statements of Comprehensive Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows (cid:49)otes to Consolidated Financial Statements 43 45 46 47 48 49 50 (b) Exhibits. 2.1 3.1 3.2 4.1 Equity Exchange Agreement between Portfolio Recovery Associates, L.L.C. and Portfolio Recovery Associates, Inc. (Incorporated by reference to Exhibit 2.1 of Amendment (cid:49)o. 2 to the Registration Statement on Form S-1 (Registration (cid:49)o. 333-99225) filed on October 30, 2002). Fourth Amended and Restated Certificate of Incorporation of PRA Group, Inc. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on October 29, 2014). Amended and Restated By-Laws of PRA Group, Inc. (Incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on May 22, 2015). Form of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of Amendment (cid:49)o. 1 to the Registration Statement on Form S-1 (Registration (cid:49)o. 333-99225) filed on October 15, 2002). 4.2 4.3 4.4 4.5 10.1* 10.2* 10.3* 10.4* 10.5* 10.6* 10.7* 10.8* 10.9* 10.10* 10.11* 10.12 10.13 10.14 10.15 Form of Warrant (Incorporated by reference to Exhibit 4.2 of Amendment (cid:49)o. 2 to the Registration Statement on Form S-1 (Registration (cid:49)o. 333-99225) filed on October 30, 2002). Indenture dated August 13, 2013 between Portfolio Recovery Associates, Inc. and Wells Fargo Bank, (cid:49)ational Association, as trustee (Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on August 14, 2013). Indenture dated May 26, 2017 between PRA Group, Inc. and Regions Bank, as trustee (Incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on May 26, 2017). Description of the Registrant's Securities Registered pursuant to Section 12 of the Securities Exchange Act of 1934 (filed herewith). Executive Chairman Agreement, dated February 23, 2017, by and between Steven D. Fredrickson and PRA Group, Inc. (Incorporated by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2017). First Amended Executive Chairman Agreement dated as of May 18, 2018, by and between PRA Group, Inc., and Steven D. Fredrickson (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on August 8, 2018). Employment Agreement, dated February 23, 2017, by and between Kevin P. Stevenson and PRA Group, Inc. (Incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2017). Form of Employment Agreement between PRA Group, Inc. and Certain Executives effective January 1, 2018 (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on January 2, 2018). Employment Agreement, dated December 19, 2014, by and between Christopher Graves and PRA Group, Inc. (Incorporated by reference to Exhibit 10.5 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on January 5, 2015). Employment Agreement, dated June 21, 2016, by and between Peter M. Graham and PRA Group, Inc. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on June 22, 2016). Form of Performance Stock Unit Agreement (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2017). Form of Restricted Stock Unit Agreement (Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2017). Form of Performance Stock Unit Agreement (Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2018). Settlement Agreement dated June 4, 2018 among PRA Group (UK) Limited and Tikendra Patel (Incorporated by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on August 8, 2018). Service Agreement dated February 19, 2014 between Aktiv Kapital UK LTD and Tikendra Patel (Incorporated by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on August 8, 2018). Amended and Restated Credit Agreement dated as of May 5, 2017 among PRA Group, Inc. as a borrower and a guarantor, PRA Group Canada, Inc., as a borrower, the domestic subsidiaries of PRA Group, Inc., as the guarantors, the Canadian subsidiaries of PRA Group Canada, Inc. party thereto from time to time, as Canadian guarantors, the lenders party thereto, Bank of America, (cid:49).A., as administrative Agent, swing line lender and an l/ c issuer, Bank of America, (cid:49).A., acting through its Canada branch, as Canadian administrative agent, Capital One, (cid:49).A., Fifth Third Bank and Suntrust Bank, as co-syndication agents, D(cid:49)B Capital LLC, I(cid:49)G Capital, the Bank of Tokyo Mitsubishi Ufj, Ltd. and Regions Bank, as co-senior managing agents, and Merrill Lynch, Pierce, Fenner & Smith Incorporated, Capital One, (cid:49).A., Fifth Third Bank and Suntrust Robinson Humphrey, Inc., as joint lead arrangers and joint bookrunners (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on August 9, 2017). First Amendment to Credit Agreement, dated as of October 4, 2018, among PRA Group, Inc., PRA Group Canada Inc., the Guarantors, the Lenders party thereto, Bank of America, (cid:49).A., as Administrative Agent, and Bank of America, (cid:49).A., acting through its Canada branch, as Canadian Administrative Agent (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on October 9, 2018). Multicurrency Revolving Credit Agreement dated as of October 23, 2014. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on October 29, 2014). First Amendment and Restatement Agreement to the Multicurrency Revolving Credit Agreement dated as of October 23, 2014. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on June 16, 2015). 80 81 fp0052934_PRA_10k_2020_combined4.indd 83 4/20/2020 12:52:40 PM 10.16 10.17 10.18 10.19 10.20* 10.21* 10.22 10.23 21.1 23.1 24.1 31.1 31.2 32.1 Second Amendment and Restatement Agreement to the Multicurrency Revolving Credit Agreement dated as of October 23, 2014. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on February 25, 2016). Third Amendment and Restatement Agreement to the Multicurrency Revolving Credit Agreement, dated as of September 2, 2016, by and among PRA Group Europe Holding S.à r.l. and D(cid:49)B Bank ASA. (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on (cid:49)ovember 8, 2016). Fourth Amendment and Restatement Agreement to the Term and Multicurrency Revolving Credit Facility Agreement, dated as of January 23, 2018, by and among PRA Group Europe Holding S.à r.l., PRA Group Europe Holding S.à r.l., Luxembourg, Zug Branch and D(cid:49)B Bank ASA (Incorpored by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2018). Fifth Amendment and Restatement Agreement to the Multicurrency Revolving Credit Facility Agreement, dated as of March 25, 2019, by and among PRA Group Europe Holding S.à r.l., PRA Group Europe Holding S.à r.l., Luxembourg, Zug Branch and D(cid:49)B Bank ASA (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2019). 2013 Annual Bonus Plan (Incorporated by reference to the Proxy Statement on Schedule 14A (File (cid:49)o. 000-50058) filed on April 19, 2013). 2013 Omnibus Incentive Plan (Incorporated by reference to the Proxy Statement on Schedule 14A (File (cid:49)o. 000-50058) filed on April 19, 2013). Deed of (cid:49)ovation, Amendment and Restatement, dated May 5, 2014, by and between Geveran Trading Co. Ltd and Portfolio Recovery Associates, Inc., PRA Holding IV, LLC and Tekagel Invest 742 AS (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 8, 2014). (cid:49)ovated, Amended and Restated Sale and Purchase Agreement, dated May 5, 2014, for the Sale and Purchase of Aktiv Kapital AS (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 8, 2014). Subsidiaries of PRA Group, Inc. (filed herewith). Consent of KPMG LLP (filed herewith). Powers of Attorney (included on signature page) (filed herewith). Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith). Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith). Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith). 101.I(cid:49)S Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate. Item 16. Form 10-K Summary. (cid:49)one. Pursuant to the requirements of Section 13 or 15(d) 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. SIG(cid:49)ATURES PRA Group, Inc. (Registrant) By: /s/ Kevin P. Stevenson Kevin P. Stevenson President and Chief Executive Officer (Principal Executive Officer) K(cid:49)OW ALL ME(cid:49) BY THESE PRESE(cid:49)TS, that each of the undersigned whose signature appears below constitutes and appoints Kevin P. Stevenson and Peter M. Graham, his true and lawful attorneys-in-fact, with full power of substitution and resubstitution for him and on his behalf, and in his name, place and stead, in any and all capacities to execute and sign any and all amendments or post-effective amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof and the registrant hereby confers like authority on its behalf. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 2, 2020 March 2, 2020 March 2, 2020 By: /s/ Kevin P. Stevenson Kevin P. Stevenson President, Chief Executive Officer and Director (Principal Executive Officer) By: /s/ Peter M. Graham Peter M. Graham Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 82 83 fp0052934_PRA_10k_2020_combined4.indd 84 4/20/2020 12:52:41 PM 10.16 10.17 10.18 10.19 10.22 10.23 21.1 23.1 24.1 31.1 31.2 32.1 Second Amendment and Restatement Agreement to the Multicurrency Revolving Credit Agreement dated as of October 23, 2014. (Incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K (File (cid:49)o. 000-50058) filed on February 25, 2016). Third Amendment and Restatement Agreement to the Multicurrency Revolving Credit Agreement, dated as of September 2, 2016, by and among PRA Group Europe Holding S.à r.l. and D(cid:49)B Bank ASA. (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on (cid:49)ovember 8, 2016). Fourth Amendment and Restatement Agreement to the Term and Multicurrency Revolving Credit Facility Agreement, dated as of January 23, 2018, by and among PRA Group Europe Holding S.à r.l., PRA Group Europe Holding S.à r.l., Luxembourg, Zug Branch and D(cid:49)B Bank ASA (Incorpored by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2018). Fifth Amendment and Restatement Agreement to the Multicurrency Revolving Credit Facility Agreement, dated as of March 25, 2019, by and among PRA Group Europe Holding S.à r.l., PRA Group Europe Holding S.à r.l., Luxembourg, Zug Branch and D(cid:49)B Bank ASA (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 10, 2019). 10.20* 2013 Annual Bonus Plan (Incorporated by reference to the Proxy Statement on Schedule 14A (File (cid:49)o. 10.21* 2013 Omnibus Incentive Plan (Incorporated by reference to the Proxy Statement on Schedule 14A (File (cid:49)o. 000-50058) filed on April 19, 2013). 000-50058) filed on April 19, 2013). Deed of (cid:49)ovation, Amendment and Restatement, dated May 5, 2014, by and between Geveran Trading Co. Ltd and Portfolio Recovery Associates, Inc., PRA Holding IV, LLC and Tekagel Invest 742 AS (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 8, 2014). (cid:49)ovated, Amended and Restated Sale and Purchase Agreement, dated May 5, 2014, for the Sale and Purchase of Aktiv Kapital AS (Incorporated by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q (File (cid:49)o. 000-50058) filed on May 8, 2014). Subsidiaries of PRA Group, Inc. (filed herewith). Consent of KPMG LLP (filed herewith). Powers of Attorney (included on signature page) (filed herewith). Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (filed herewith). herewith). Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes Oxley Act of 2002 (filed herewith). 101.I(cid:49)S Inline XBRL Instance Document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * Denotes management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate. (cid:49)one. Item 16. Form 10-K Summary. Pursuant to the requirements of Section 13 or 15(d) 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. SIG(cid:49)ATURES March 2, 2020 PRA Group, Inc. (Registrant) By: /s/ Kevin P. Stevenson Kevin P. Stevenson President and Chief Executive Officer (Principal Executive Officer) K(cid:49)OW ALL ME(cid:49) BY THESE PRESE(cid:49)TS, that each of the undersigned whose signature appears below constitutes and appoints Kevin P. Stevenson and Peter M. Graham, his true and lawful attorneys-in-fact, with full power of substitution and resubstitution for him and on his behalf, and in his name, place and stead, in any and all capacities to execute and sign any and all amendments or post-effective amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact or any of them or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof and the registrant hereby confers like authority on its behalf. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 2, 2020 March 2, 2020 By: /s/ Kevin P. Stevenson Kevin P. Stevenson President, Chief Executive Officer and Director (Principal Executive Officer) By: /s/ Peter M. Graham Peter M. Graham Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 82 83 fp0052934_PRA_10k_2020_combined4.indd 85 4/20/2020 12:52:41 PM March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 By: /s/ Steven D. Fredrickson Steven D. Fredrickson Director By: /s/ Vikram A. Atal Vikram A. Atal Director By: /s/ Danielle M. Brown Danielle M. Brown Director By: /s/ Marjorie M. Connelly Marjorie M. Connelly Director By: /s/ John H. Fain John H. Fain Director By: /s/ Penelope W. Kyle Penelope W. Kyle Director By: /s/ James A. (cid:49)ussle James A. (cid:49)ussle Director By: /s/ Geir Olsen Geir Olsen Director By: /s/ Scott M. Tabakin Scott M. Tabakin Director By: /s/ Lance L. Weaver Lance L. Weaver Director 84 fp0052934_PRA_10k_2020_combined4.indd 86 4/20/2020 12:52:41 PM Exhibit 31.1 I, Kevin P. Stevenson, certify that: 1. 2. I have reviewed this annual report on Form 10-K of PRA Group, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; principles; (b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. March 2, 2020 By: /s/ Kevin P. Stevenson Kevin P. Stevenson President and Chief Executive Officer (Principal Executive Officer) March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 March 2, 2020 By: /s/ Steven D. Fredrickson Steven D. Fredrickson Director By: /s/ Vikram A. Atal Vikram A. Atal Director By: /s/ Danielle M. Brown Danielle M. Brown Director By: /s/ Marjorie M. Connelly Marjorie M. Connelly Director By: /s/ John H. Fain John H. Fain Director By: /s/ Penelope W. Kyle Penelope W. Kyle Director By: /s/ James A. (cid:49)ussle James A. (cid:49)ussle Director By: /s/ Geir Olsen Geir Olsen Director By: /s/ Scott M. Tabakin Scott M. Tabakin Director By: /s/ Lance L. Weaver Lance L. Weaver Director 84 Exhibit 31.1 I, Kevin P. Stevenson, certify that: 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of PRA Group, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. March 2, 2020 By: /s/ Kevin P. Stevenson Kevin P. Stevenson President and Chief Executive Officer (Principal Executive Officer) fp0052934_PRA_10k_2020_combined4.indd 87 4/20/2020 12:52:41 PM Exhibit 31.2 I, Peter M. Graham, certify that: 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of PRA Group, Inc.; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. March 2, 2020 By: /s/ Peter M. Graham Peter M. Graham Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) CERTIFICATIO(cid:49) PURSUA(cid:49)T TO 18 U.S.C. SECTIO(cid:49) 1350, AS ADOPTED PURSUA(cid:49)T TO SECTIO(cid:49) 906 OF THE SARBA(cid:49)ES-OXLEY ACT OF 2002 In connection with the Annual Report of PRA Group, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kevin P. Stevenson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations By: /s/ Kevin P. Stevenson Kevin P. Stevenson President and Chief Executive Officer (Principal Executive Officer) CERTIFICATIO(cid:49) PURSUA(cid:49)T TO 18 U.S.C. SECTIO(cid:49) 1350, AS ADOPTED PURSUA(cid:49)T TO SECTIO(cid:49) 906 OF THE SARBA(cid:49)ES-OXLEY ACT OF 2002 In connection with the Annual Report of PRA Group, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter M. Graham, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations Exhibit 32.1 of the Company. March 2, 2020 of the Company. March 2, 2020 By: /s/ Peter M. Graham Peter M. Graham Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) fp0052934_PRA_10k_2020_combined4.indd 88 4/20/2020 12:52:41 PM Exhibit 31.2 I, Peter M. Graham, certify that: I have reviewed this annual report on Form 10-K of PRA Group, Inc.; 1. 2. 3. 4. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: Exhibit 32.1 CERTIFICATIO(cid:49) PURSUA(cid:49)T TO 18 U.S.C. SECTIO(cid:49) 1350, AS ADOPTED PURSUA(cid:49)T TO SECTIO(cid:49) 906 OF THE SARBA(cid:49)ES-OXLEY ACT OF 2002 In connection with the Annual Report of PRA Group, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kevin P. Stevenson, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. being prepared; principles; (b) Designed such internal controls over financial reporting, or caused such internal controls over financial reporting to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with generally accepted accounting (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is March 2, 2020 By: /s/ Kevin P. Stevenson Kevin P. Stevenson President and Chief Executive Officer (Principal Executive Officer) CERTIFICATIO(cid:49) PURSUA(cid:49)T TO 18 U.S.C. SECTIO(cid:49) 1350, AS ADOPTED PURSUA(cid:49)T TO SECTIO(cid:49) 906 OF THE SARBA(cid:49)ES-OXLEY ACT OF 2002 In connection with the Annual Report of PRA Group, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter M. Graham, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. (a) All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and March 2, 2020 (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. March 2, 2020 By: /s/ Peter M. Graham Peter M. Graham Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) By: /s/ Peter M. Graham Peter M. Graham Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) fp0052934_PRA_10k_2020_combined4.indd 89 4/20/2020 12:52:41 PM fp0052934_PRA_10k_2020_combined4.indd 90 4/20/2020 12:52:41 PM 

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