XNAS:PRAA Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012.

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 000-50058

 

 

Portfolio Recovery Associates, Inc.

 

 

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   75-3078675

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

120 Corporate Boulevard, Norfolk, Virginia   23502
(Address of principal executive offices)   (zip code)

(888) 772-7326

(Registrant’s telephone number, including area code)

 

 

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  x    NO  ¨

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

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

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding as of August 5, 2012

Common Stock, $0.01 par value   16,880,545

 

 

 


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

INDEX

 

         Page(s)  
PART I.  

FINANCIAL INFORMATION

  
Item 1.  

Financial Statements

     3   
 

Consolidated Balance Sheets (unaudited) as of June 30, 2012 and December 31, 2011

     3   
 

Consolidated Income Statements (unaudited) for the three and six months ended June 30, 2012 and 2011

     4   
 

Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June  30, 2012 and 2011

     5   
 

Consolidated Statement of Changes in Stockholders’ Equity (unaudited) for the six months ended June 30, 2012

     6   
 

Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2012 and 2011

     7   
 

Notes to Consolidated Financial Statements (unaudited)

     8-25   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     26-56   
Item 3.  

Quantitative and Qualitative Disclosure About Market Risk

     56-57   
Item 4.  

Controls and Procedures

     57   
PART II.  

OTHER INFORMATION

  
Item 1.  

Legal Proceedings

     57   
Item 1A.  

Risk Factors

     57   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     58   
Item 3.  

Defaults Upon Senior Securities

     58   
Item 4.  

Mine Safety Disclosure

     58   
Item 5.  

Other Information

     58   
Item 6.  

Exhibits

     58   
SIGNATURES      59   

 

2


Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS

June 30, 2012 and December 31, 2011

(unaudited)

(Amounts in thousands, except per share amounts)

 

     June 30,
2012
     December 31,
2011
 
Assets      

Cash and cash equivalents

   $ 42,621       $ 26,697   

Finance receivables, net

     966,508         926,734   

Accounts receivable, net

     8,580         7,862   

Property and equipment, net

     26,016         25,727   

Goodwill

     99,384         61,678   

Intangible assets, net

     22,364         14,596   

Other assets

     8,265         7,829   
  

 

 

    

 

 

 

Total assets

   $ 1,173,738       $ 1,071,123   
  

 

 

    

 

 

 
Liabilities and Equity      

Liabilities:

     

Accounts payable

   $ 10,508       $ 7,439   

Accrued expenses and other liabilities

     6,859         6,076   

Income taxes payable

     8,468         13,109   

Accrued payroll and bonuses

     11,588         16,036   

Net deferred tax liability

     190,639         193,898   

Line of credit

     292,000         220,000   

Long-term debt

     849         1,246   
  

 

 

    

 

 

 

Total liabilities

     520,911         457,804   
  

 

 

    

 

 

 

Commitments and contingencies (Note 13)

     

Redeemable noncontrolling interest

     19,381         17,831   
  

 

 

    

 

 

 

Stockholders’ equity:

     

Preferred stock, par value $0.01, authorized shares, 2,000, issued and outstanding shares - 0

     —           —     

Common stock, par value $0.01, 60,000 authorized shares, 16,879 issued and outstanding shares at June 30, 2012, and 17,134 issued and outstanding shares at December 31, 2011

     169         171   

Additional paid-in capital

     147,881         167,719   

Retained earnings

     485,075         427,598   

Accumulated other comprehensive income

     321         —     
  

 

 

    

 

 

 

Total stockholders’ equity

     633,446         595,488   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 1,173,738       $ 1,071,123   
  

 

 

    

 

 

 

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

 

3


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED INCOME STATEMENTS

For the three and six months ended June 30, 2012 and 2011

(unaudited)

(Amounts in thousands, except per share amounts)

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
     2012     2011     2012     2011  

Revenues:

        

Income recognized on finance receivables, net

   $ 132,587      $ 100,303      $ 256,812      $ 196,277   

Fee income

     15,298        14,492        31,218        30,295   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     147,885        114,795        288,030        226,572   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Compensation and employee services

     42,479        34,815        82,173        68,968   

Legal collection fees

     8,988        5,970        16,606        11,719   

Legal collection costs

     18,227        9,879        41,895        19,218   

Agent fees

     1,323        1,724        2,951        4,362   

Outside fees and services

     5,584        4,066        11,444        7,481   

Communications

     7,007        5,706        15,260        12,020   

Rent and occupancy

     1,656        1,438        3,268        2,835   

Depreciation and amortization

     3,555        3,316        7,210        6,532   

Other operating expenses

     4,470        3,501        8,206        6,353   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     93,289        70,415        189,013        139,488   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gain on sale of property

     —          1,157        —          1,157   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     54,596        45,537        99,017        88,241   

Other income and (expense):

        

Interest income

     7        —          8        —     

Interest expense

     (2,381     (2,635     (5,034     (5,502
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     52,222        42,902        93,991        82,739   

Provision for income taxes

     20,171        17,326        36,751        33,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 32,051      $ 25,576      $ 57,240      $ 49,285   

Adjustment for (income)/loss attributable to redeemable noncontrolling interest

     (36     (2     237        (590
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Portfolio Recovery Associates, Inc.

   $ 32,015      $ 25,574      $ 57,477      $ 48,695   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share attributable to Portfolio Recovery Associates, Inc:

        

Basic

   $ 1.88      $ 1.49      $ 3.36      $ 2.85   

Diluted

   $ 1.87      $ 1.48      $ 3.34      $ 2.83   

Weighted average number of shares outstanding:

        

Basic

     17,027        17,108        17,111        17,100   

Diluted

     17,133        17,225        17,200        17,212   

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

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three and six months ended June 30, 2012 and 2011

(unaudited)

(Amounts in thousands)

 

    

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 
     2012     2011     2012      2011  

Net income

   $ 32,051      $ 25,576      $ 57,240       $ 49,285   

Other comprehensive income:

         

Foreign currency translation adjustments

     (1,026     —          321         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other comprehensive income

     (1,026     —          321         —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income

     31,025        25,576        57,561         49,285   

Comprehensive loss/(income) attributable to noncontrolling interest

     (36     (2     237         (590
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income attributable to Portfolio Recovery Associates, Inc.

   $ 30,989      $ 25,574      $ 57,798       $ 48,695   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

 

5


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the six months ended June 30, 2012

(unaudited)

(Amounts in thousands)

 

                 Additional            Accumulated Other      Total  
     Common Stock     Paid-in     Retained      Comprehensive      Stockholders’  
     Shares     Amount     Capital     Earnings      Income      Equity  

Balance at December 31, 2011

     17,134      $ 171      $ 167,719      $ 427,598       $ —         $ 595,488   

Components of comprehensive income:

              

Net income attributable to Portfolio Recovery Associates, Inc.

     —          —          —          57,477         —           57,477   

Foreign currency translation adjustment

     —          —          —          —           321         321   

Vesting of nonvested shares

     77        1        (1     —           —           —     

Repurchase and cancellation of common stock

     (332     (3     (22,723     —           —           (22,726

Amortization of share-based compensation

     —          —          5,576        —           —           5,576   

Income tax benefit from share-based compensation

     —          —          1,435        —           —           1,435   

Employee stock relinquished for payment of taxes

     —          —          (2,077     —           —           (2,077

Adjustment of the noncontrolling interest measurement amount

     —          —          (2,048     —           —           (2,048
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balance at June 30, 2012

     16,879      $ 169      $ 147,881      $ 485,075       $ 321       $ 633,446   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

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

 

6


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 30, 2012 and 2011

(unaudited)

(Amounts in thousands)

 

    

Six Months Ended

June 30,

 
     2012     2011  

Cash flows from operating activities:

    

Net income

   $ 57,240      $ 49,285   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Amortization of share-based compensation

     5,576        4,622   

Depreciation and amortization

     7,210        6,532   

Deferred tax (benefit)/expense

     (3,244     23,171   

Gain on sale of property

     —          (1,157

Changes in operating assets and liabilities:

    

Other assets

     (121     (711

Accounts receivable

     1,320        2,249   

Accounts payable

     (432     2,100   

Income taxes

     (5,850     5,240   

Accrued expenses

     (3,016     528   

Accrued payroll and bonuses

     (4,447     (4,882
  

 

 

   

 

 

 

Net cash provided by operating activities

     54,236        86,977   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (2,952     (3,682

Proceeds from sale of property

     —          1,267   

Acquisition of finance receivables, net of buybacks

     (229,388     (194,906

Collections applied to principal on finance receivables

     193,608        146,721   

Business acquisition, net of cash acquired

     (48,653     —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (87,385     (50,600
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from exercise of options

     —          149   

Income tax benefit from share-based compensation

     1,435        459   

Proceeds from line of credit

     151,000        2,000   

Principal payments on line of credit

     (79,000     (52,000

Repurchases of common stock

     (22,726     —     

Distributions paid to noncontrolling interest

     —          (2,059

Principal payments on long-term debt

     (397     (539
  

 

 

   

 

 

 

Net cash provided by/(used in) financing activities

     50,312        (51,990
  

 

 

   

 

 

 

Effect of exchange rate on cash

     (1,239     —     

Net increase/(decrease) in cash and cash equivalents

     15,924        (15,613

Cash and cash equivalents, beginning of period

     26,697        41,094   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 42,621      $ 25,481   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid for interest

   $ 5,312      $ 5,256   

Cash paid for income taxes

     44,509        6,784   

Noncash investing and financing activities:

    

Adjustment of the noncontrolling interest measurement amount

   $ (2,048   $ (2,045

Distributions payable relating to noncontrolling interest

     261        247   

Employee stock relinquished for payment of taxes

     (2,077     —     

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

 

7


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

1. Organization and Business:

Portfolio Recovery Associates, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company”) is a specialized financial and business service company. Its primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. The Company also services receivables on behalf of clients on either a commission or transaction-fee basis and provides class action claims settlement recovery services and related payment processing to corporate clients.

The consolidated financial statements of the Company are prepared in accordance with U.S. generally accepted accounting principles and include the accounts of all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 “Segment Reporting” (“ASC 280”), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and therefore, it has one reportable segment, accounts receivable management, based on similarities among the operating units including homogeneity of services, service delivery methods and use of technology.

With the acquisition of Mackenzie Hall Holdings Limited, a limited company organized under the laws of England and Wales, and its subsidiaries (“MHH”) on January 16, 2012, the Company began doing business in the United Kingdom. The assets, liabilities and operations of the Company’s foreign subsidiary are recorded based on the functional currency of the entity. For MHH, the functional currency is the local currency, which is the Pound Sterling. Accordingly, the assets, liabilities and operations are translated, for consolidation purposes, from the local currency to the U.S. dollar reporting currency at period-end rates for assets and liabilities and generally at average rates for results of operations and cash flows. The resulting unrealized gains or losses are reported as a component of accumulated other comprehensive income. Realized gains and losses resulting from foreign currency transactions are recorded in “Other operating expenses” in the consolidated income statements.

The following table shows the amount of revenue generated for the three and six months ended June 30, 2012 and long-lived assets held at June 30, 2012 by geographical location (amounts in thousands):

 

    

As Of And For The Three Months

Ended June 30, 2012

    

As Of And For The Six Months

Ended June 30, 2012

 
     Revenues      Long-Lived
Assets
     Revenues      Long-Lived
Assets
 

United States

   $ 143,342       $ 24,333       $ 278,849       $ 24,333   

United Kingdom

     4,543         1,683         9,181         1,683   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 147,885       $ 26,016       $ 288,030       $ 26,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues are attributed to countries based on the location of the related operations and long-lived assets consist of net property and equipment. Prior to the acquisition of MHH on January 16, 2012, all revenue generated and long-lived assets held related to the Company’s United States operations.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated balance sheet as of June 30, 2012, its consolidated income statements and statements of comprehensive income for the three and six months ended June 30, 2012 and 2011, its consolidated statement of changes in stockholders’ equity for the six months ended June 30, 2012, and its consolidated statements of cash flows for the six months ended June 30, 2012 and 2011. The consolidated income statements of the Company for the three and six months ended June 30, 2012 may not be indicative of future results.

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Certain reclassifications have been made to prior year amounts to conform to the current year presentation. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed for the year ended December 31, 2011.

 

2. Finance Receivables, net:

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 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 its proprietary collection models, not be recognized as an adjustment of revenue or expense or on the balance sheet.

Under ASC 310-30 static pools of accounts may be established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, payments applied to principal and loss provision. Once a static 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). ASC 310-30, utilizing the interest method, initially freezes the yield, estimated when the accounts are purchased as the basis for subsequent impairment testing. The yield is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. Income on finance receivables is accrued quarterly based on each static 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. Any increase to the yield then becomes the new benchmark for impairment testing. Under ASC 310-30, rather than lowering the estimated yield if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current yield and is shown as a reduction in revenue in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables, net, on the consolidated balance sheets. Cash flows greater than the interest accrual will reduce the carrying value of the static 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 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. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Additionally, the Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. These cost recovery pools are not aggregated with other pools. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

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. At June 30, 2012 and 2011, the Company had unamortized purchased principal (purchase price) in pools accounted for under the cost recovery method of $0.6 million and $1.2 million, respectively; at December 31, 2011, the amount was $7.4 million.

The Company establishes valuation allowances, if necessary, for acquired accounts subject to ASC 310-10. Valuation allowances are established only subsequent to acquisition of the accounts. At June 30, 2012 and 2011, the Company had a valuation allowance against its finance receivables of $89.3 million and $82.7 million, respectively. At December 31, 2011, the valuation allowance was $86.6 million.

The Company implements the accounting for income recognized on finance receivables under ASC 310-30 as follows. The Company creates each accounting pool using its projections of estimated cash flows and expected economic life. The Company then computes the effective yield that fully amortizes the pool to the end of its expected economic life based on the current projections of estimated cash flows. As actual cash flow results are recorded, the Company balances those results to the data contained in its proprietary models to ensure accuracy, then reviews each pool watching for trends, actual performance versus projections and curve shape (a graphical depiction of the timing of cash flows), sometimes re-forecasting future cash flows utilizing the Company’s statistical models. The review process is primarily performed by the Company’s finance staff; however, the Company’s operational and statistical staffs are also involved, providing updated statistical input and cash projections to the finance staff. To the extent there is overperformance, the Company will either increase the yield or release the allowance and consider increasing future cash projections, if persuasive evidence indicates that the overperformance is considered to be a significant betterment. If the over performance is considered more of an acceleration of cash flows (a timing difference), the Company will: a) adjust estimated future cash flows downward which effectively extends the amortization period to fall within a reasonable expectation of the pool’s economic life, b) introduce some level of future cash adjustment as noted previously coupled with an increase in yield in order for the amortization period to fall within a reasonable expectation of the pool’s economic life, or c) take no action at all if the amortization period falls within a reasonable expectation of the pool’s expected economic life. To the extent there is underperformance, the Company will record an allowance if the underperformance is significant and will also consider revising estimated future cash flows based on current period information, or take no action if the pool’s amortization period is reasonable and falls within the currently projected economic life.

Changes in finance receivables, net for the three and six months ended June 30, 2012 and 2011 were as follows (amounts in thousands):

 

     Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
     June 30, 2012     June 30, 2011     June 30, 2012     June 30, 2011  

Balance at beginning of period

   $ 945,242      $ 866,992      $ 926,734      $ 831,330   

Acquisitions of finance receivables, net of buybacks

     121,246        88,501        233,339        194,906   

Foreign currency translation adjustment

     (142     —          43        —     

Cash collections

     (232,425     (176,281     (450,420     (342,998

Income recognized on finance receivables, net

     132,587        100,303        256,812        196,277   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash collections applied to principal

     (99,838     (75,978     (193,608     (146,721
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 966,508      $ 879,515      $ 966,508      $ 879,515   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

10


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

At the time of acquisition, the life of each pool is generally estimated to be between 60 to 96 months based on projected amounts and timing of future cash collections using the proprietary models of the Company. Based upon current projections, cash collections applied to principal on finance receivables as of June 30, 2012 are estimated to be as follows for the twelve months in the periods ending (amounts in thousands):

 

June 30, 2013

   $ 340,355   

June 30, 2014

     275,026   

June 30, 2015

     207,355   

June 30, 2016

     109,064   

June 30, 2017

     34,563   

June 30, 2018

     145   
  

 

 

 
   $ 966,508   
  

 

 

 

During the three and six months ended June 30, 2012, the Company purchased approximately $1.52 billion and $2.98 billion, respectively, in face value of charged-off consumer receivables. During the three and six months ended June 30, 2011, the Company purchased approximately $1.41 billion and $2.90 billion, respectively, in face value of charged-off consumer receivables. At June 30, 2012, the estimated remaining collections (“ERC”) on the receivables purchased in the three and six months ended June 30, 2012, were $232.2 million and $423.7 million, respectively. At June 30, 2012, ERC on the receivables purchased in the three and six months ended June 30, 2011, were $140.1 million and $296.3 million, respectively.

Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield to be earned by the Company based on its proprietary buying models. Reclassifications from nonaccretable difference to accretable yield primarily result from increases in the Company’s estimates of future cash flows. Reclassifications to nonaccretable difference from accretable yield result from decreases in the Company’s estimates of future cash flows and allowance charges that exceed any increases in the Company’s estimates of future cash flows. Changes in accretable yield for the three and six months ended June 30, 2012 and 2011 were as follows (amounts in thousands):

 

     Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
     June 30, 2012     June 30, 2011     June 30, 2012     June 30, 2011  

Balance at beginning of period

   $ 1,088,752      $ 926,278      $ 1,026,614      $ 892,188   

Income recognized on finance receivables, net

     (132,587     (100,303     (256,812     (196,277

Additions

     122,616        91,666        222,168        201,168   

Reclassifications from nonaccretable difference

     74,191        18,849        160,815        39,411   

Foreign currency translation adjustment

     (1,319     —          (1,132     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 1,151,653      $ 936,490      $ 1,151,653      $ 936,490   
  

 

 

   

 

 

   

 

 

   

 

 

 

A valuation allowance is recorded for significant decreases in expected cash flows or change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. In any given period, the Company may be required to record valuation allowances due to pools of receivables underperforming expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability of purchased pools of defaulted consumer receivables 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 which may have an impact on the collectability, and subsequently the overall profitability of purchased pools of defaulted consumer receivables would include necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relate to the collection and movement of accounts on both the collection floor of the Company and external channels), and decreases in productivity related to turnover and tenure of the Company’s collection staff.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The following is a summary of activity within the Company’s valuation allowance account, all of which relates to loans acquired with deteriorated credit quality, for the three and six months ended June 30, 2012 and 2011 (amounts in thousands):

 

     Three Months Ended June 30,  
     2012     2011  
           Purchased Bankruptcy                 Purchased Bankruptcy        
     Core Portfolio  (1)     Portfolio (2)     Total     Core Portfolio  (1)     Portfolio (2)     Total  

Valuation allowance - finance receivables:

            

Beginning balance

   $ 76,110      $ 10,955      $ 87,065      $ 71,830      $ 8,617      $ 80,447   

Allowance charges

     800        2,575        3,375        2,000        500        2,500   

Reversal of previous recorded allowance charges

     (1,060     (111     (1,171     (200     (17     (217
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net allowance charge

     (260     2,464        2,204        1,800        483        2,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 75,850      $ 13,419      $ 89,269      $ 73,630      $ 9,100      $ 82,730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance receivables, net (3):

   $ 473,340      $ 487,331      $ 960,671      $ 437,644      $ 441,871      $ 879,515   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Six Months Ended June 30,  
     2012     2011  
           Purchased Bankruptcy                 Purchased Bankruptcy        
     Core Portfolio  (1)     Portfolio (2)     Total     Core Portfolio  (1)     Portfolio (2)     Total  

Valuation allowance - finance receivables:

            

Beginning balance

   $ 76,580      $ 9,991      $ 86,571      $ 70,030      $ 6,377      $ 76,407   

Allowance charges

     2,150        3,675        5,825        4,850        2,950        7,800   

Reversal of previous recorded allowance charges

     (2,880     (247     (3,127     (1,250     (227     (1,477
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net allowance charge

     (730     3,428        2,698        3,600        2,723        6,323   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 75,850      $ 13,419      $ 89,269      $ 73,630      $ 9,100      $ 82,730   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance receivables, net:

   $ 473,340      $ 487,331      $ 960,671      $ 437,644      $ 441,871      $ 879,515   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) “Core” accounts or portfolios refer to accounts or portfolios that are defaulted consumer receivables and are not in a bankrupt status upon purchase. These accounts are aggregated separately from purchased bankruptcy accounts.
(2) “Purchased bankruptcy” accounts or portfolios refer to accounts or portfolios that are in bankruptcy status when purchased, and as such, are purchased as a pool of bankrupt accounts.
(3) At June 30, 2012, the MHH finance receivables balance was $5.8 million against which there was no valuation allowance recorded; therefore it is not included in this roll-forward.

 

3. Accounts Receivable, net:

Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, the current receivables aging, and current payment patterns. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The balance of the allowance for doubtful accounts at June 30, 2012 and December 31, 2011 was $2.7 million and $2.1 million, respectively. The Company does not have any off balance sheet credit exposure related to its customers.

 

4. Line of Credit:

On December 20, 2010, the Company entered into a credit agreement with Bank of America, N.A., as administrative agent, and a syndicate of lenders named therein (the “Credit Agreement”). Under the terms of the Credit Agreement, the credit facility includes an aggregate principal amount available of $407.5 million (subject to the borrowing base and applicable debt covenants) which consists of a $50 million fixed rate loan that matured on May 4, 2012, which was transferred from the Company’s then existing credit agreement, and a $357.5 million revolving credit facility that matures on December 20, 2014. The revolving credit facility automatically increased by $50 million upon the maturity and repayment of the fixed rate loan. The fixed rate loan bore interest at a rate of 6.8% per annum, payable monthly in arrears. The revolving loans accrue interest, at the option of the Company, at

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

either the base rate plus 1.75% per annum or the Eurodollar rate (as defined in the Credit Agreement) for the applicable term plus 2.75% per annum. The base rate is the highest of (a) the Federal Funds Rate plus 0.50%, (b) Bank of America’s prime rate, and (c) the Eurodollar rate plus 1.00%. Interest is payable on base rate loans quarterly in arrears and on Eurodollar loans in arrears on the last day of each interest period or, if such interest period exceeds three months, every three months. The Company’s revolving credit facility includes a $20 million swingline loan sublimit and a $20 million letter of credit sublimit. It also contains an accordion loan feature that allows the Company to request an increase of up to $142.5 million in the amount available for borrowing under the revolving credit facility, whether from existing or new lenders, subject to terms of the Credit Agreement. No existing lender is obligated to increase its commitment. On April 20, 2012, the Company closed a series of transactions to exercise a portion of the accordion loan feature of its existing credit facility with its administrative agent and its syndicate of lenders, thereby increasing the lenders’ commitments by $50,950,000, resulting in $458,450,000 aggregate principal amount available under the Company’s line of credit. The Company’s existing lenders under the Credit Agreement provided $40,950,000 of this increase, and $10,000,000 was provided by a new lender, which is now a party to the Credit Agreement. The Company may request additional increases of up to $91,550,000 under its credit facility. The Credit Agreement is secured by a first priority lien on substantially all of the Company’s assets. The Credit Agreement contains restrictive covenants and events of default including the following:

 

   

borrowings may not exceed 30% of the ERC of all its domestic eligible asset pools plus 75% of its eligible accounts receivable;

 

   

the consolidated leverage ratio (as defined in the Credit Agreement) cannot exceed 2.0 to 1.0 as of the end of any fiscal quarter;

 

   

consolidated Tangible Net Worth (as defined in the Credit Agreement) must equal or exceed $309,452,000 plus 50% of positive consolidated net income for each fiscal quarter beginning December 31, 2010, plus 50% of the net proceeds of any equity offering;

 

   

capital expenditures during any fiscal year cannot exceed $20 million;

 

   

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

 

   

stock repurchases during the term of the agreement cannot exceed $100 million;

 

   

permitted acquisitions (as defined in the Credit Agreement) during any fiscal year cannot exceed $100 million;

 

   

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

 

   

restrictions on changes in control.

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

The Company had $292.0 million and $220.0 million of borrowings outstanding on its credit facility as of June 30, 2012 and December 31, 2011, respectively, of which $50 million represented borrowing under the non-revolving fixed rate loan at December 31, 2011. At June 30, 2012, the Company’s borrowings under its revolving credit facility consisted of 30-day Eurodollar rate loans and base rate loans with a weighted average annual interest rate equal to 3.12%.

The Company was in compliance with all covenants of its credit facility as of June 30, 2012 and December 31, 2011.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

5. Long-Term Debt:

On February 6, 2009, the Company entered into a commercial loan agreement to finance computer software and equipment purchases in the amount of approximately $2.0 million. The loan was collateralized by the related computer software and equipment. The loan was a three year loan with a fixed rate of 4.78% with monthly installments, including interest, of $60,823 beginning on June 30, 2009, and it matured on February 28, 2012.

On December 15, 2010, the Company entered into a commercial loan agreement to finance computer software and equipment purchases in the amount of approximately $1.6 million. The loan is collateralized by the related computer software and equipment. The loan is a three year loan with a fixed rate of 3.69% with monthly installments, including interest, of $46,108 beginning on January 15, 2011, and it matures on December 15, 2013.

 

6. Property and Equipment, net:

Property and equipment, at cost, consisted of the following as of the dates indicated (amounts in thousands):

 

     June 30,
2012
    December 31,
2011
 

Software

   $ 28,124      $ 25,252   

Computer equipment

     13,242        12,221   

Furniture and fixtures

     6,840        6,501   

Equipment

     8,252        7,798   

Leasehold improvements

     6,689        6,117   

Building and improvements

     7,008        6,987   

Land

     1,269        1,269   

Accumulated depreciation and amortization

     (45,408     (40,418
  

 

 

   

 

 

 

Property and equipment, net

   $ 26,016      $ 25,727   
  

 

 

   

 

 

 

Depreciation and amortization expense relating to property and equipment, for the three and six months ended June 30, 2012, was $2.1 million and $4.3 million, respectively. Depreciation and amortization expense relating to property and equipment, for the three and six months ended June 30, 2011, was $2.1 million and $4.0 million, respectively.

The Company, in accordance with the guidance of FASB ASC Topic 350-40 “Internal-Use Software” (“ASC 350-40”), capitalizes qualifying computer software costs incurred during the application development stage and amortizes them over their estimated useful life of three to seven years on a straight-line basis beginning when the project is completed. Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred. The Company’s policy provides for the capitalization of certain direct payroll costs for employees who are directly associated with internal use computer software projects, as well as external direct costs of services associated with developing or obtaining internal use software. Capitalizable personnel costs are limited to the time directly spent on such projects. As of June 30, 2012 and December 31, 2011, the Company has incurred and capitalized approximately $6.8 million and $6.1 million, respectively, of these direct payroll costs and external direct costs related to software developed for internal use. Of these costs, at June 30, 2012 and December 31, 2011, approximately $0.9 million and $1.3 million, respectively, is for projects that are in the development stage and, therefore are a component of “Other Assets.” Once the projects are completed, the costs will be transferred to Software and amortized over their estimated useful life of three to seven years. Amortization expense for the three and six months ended June 30, 2012, was approximately $0.3 million and $0.5 million, respectively. Amortization expense for the three and six months ended June 30, 2011, was approximately $0.2 million and $0.4 million, respectively. The remaining unamortized costs relating to internally developed software at June 30, 2012 and 2011 were approximately $3.8 million and $2.9 million, respectively. The amount at December 31, 2011 was approximately $3.3 million.

 

14


Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

7. Redeemable Noncontrolling Interest:

In accordance with ASC 810, the Company has consolidated all financial statement accounts of Claims Compensation Bureau, LLC (“CCB”) in its consolidated balance sheets as of June 30, 2012 and December 31, 2011, and its consolidated income statements for the three and six months ended June 30, 2012 and 2011. The redeemable noncontrolling interest amount is separately stated on the consolidated balance sheets and represents the 38% interest in CCB not owned by the Company. In addition, net income/loss attributable to the noncontrolling interest is stated separately in the consolidated income statements for the three and six months ended June 30, 2012 and 2011.

The Company has the right through February 28, 2015 to purchase the remaining 38% of CCB at certain multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”). In addition, beginning March 1, 2012 and ending February 28, 2018, the noncontrolling interest can require the Company to purchase its membership units in CCB at pre-defined multiples of EBITDA.

The Company applies the provisions of FASB ASC Topic 480-10-S99 “Distinguishing Liabilities from Equity” (“ASC 480-10-S99”), which provides guidance on the accounting for equity securities that are subject to mandatory redemption requirements or whose redemption is outside the control of the issuer. The noncontrolling interest “put” arrangement is accounted for under ASC 480-10-S99, as redemption under the “put” arrangement is outside the control of the Company. As such, the redeemable noncontrolling interest is recorded outside of “permanent” equity. The Company measures the redeemable noncontrolling interest at the greater of its ASC 480-10-S99 measurement amount (estimated redemption value of the “put” option embedded in the noncontrolling interest) or its measurement amount under the guidance of ASC 810. The ASC 810 measurement amount includes adjustments for the noncontrolling interest’s pro-rata share of earnings, losses and distributions, pursuant to the limited liability company agreement of CCB. Adjustments to the measurement amount are recorded to stockholders’ equity. The Company used a present value calculation to estimate the redemption value of the “put” option as of the reporting date. As such, for the three and six months ended June 30, 2012, the Company increased the redeemable noncontrolling interest by $0.8 million and $2.0 million, respectively, with a corresponding reduction of stockholders’ equity. For the three and six months ended June 30, 2011, the Company increased the redeemable noncontrolling interest by $1.1 million and $2.0 million, respectively, with a corresponding reduction of stockholders’ equity. If material, the Company adjusts the numerator of earnings per share calculations for the current period change in the excess of the noncontrolling interest’s ASC 480-10-S99 measurement amount over the greater of its ASC 810 measurement amount or the estimated fair value of the noncontrolling interest. The maximum estimated redemption value of the noncontrolling interest under the terms of the put arrangement, was $22.8 million as of June 30, 2012 and December 31, 2011.

The following table represents the changes in the redeemable noncontrolling interest for the three and six months ended June 30, 2012 and 2011 (amounts in thousands):

 

     Three Months Ended     Three Months Ended     Six Months Ended     Six Months Ended  
     June 30, 2012     June 30, 2011     June 30, 2012     June 30, 2011  

Balance at beginning of period

   $ 18,783      $ 15,253      $ 17,831      $ 14,449   

Net (loss)/income attributable to redeemable noncontrolling interest

     36        2        (237     590   

Distributions paid or payable

     (261     (247     (261     (1,016

Adjustment of the noncontrolling interest measurement amount

     823        1,060        2,048        2,045   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 19,381      $ 16,068      $ 19,381      $ 16,068   
  

 

 

   

 

 

   

 

 

   

 

 

 

In accordance with the limited liability company agreement of CCB, distributions due to the members of the LLC are accrued each quarter and are payable as soon as reasonably possible subsequent to each quarter end.

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

8. Goodwill and Intangible Assets, net:

In connection with the Company’s previous business acquisitions, the Company purchased certain tangible and intangible assets. Intangible assets purchased included client and customer relationships, non-compete agreements, trademarks and goodwill. Pursuant to ASC 350, goodwill is not amortized but rather is reviewed at least annually for impairment. During the fourth quarter of 2011, the Company underwent its annual review of goodwill. Based upon the results of this review, which was conducted as of October 1, 2011, no impairment charges to goodwill or the other intangible assets were necessary as of the date of this review. The Company believes that nothing has occurred since the review was performed through June 30, 2012 that would indicate a triggering event and thereby necessitate testing goodwill or the other intangible assets between annual tests. Accordingly, there were no impairment losses during the three or six months ended June 30, 2012 and 2011. The Company expects to perform its next annual goodwill review during the fourth quarter of 2012. At June 30, 2012 and December 31, 2011, the carrying value of goodwill was $99.4 million and $61.7 million, respectively. See Note 9 for more information. The following table represents the changes in goodwill for the three and six months ended June 30, 2012 and 2011 (amounts in thousands):

 

     Three Months Ended     Three Months Ended      Six Months Ended      Six Months Ended  
     June 30, 2012     June 30, 2011      June 30, 2012      June 30, 2011  

Balance at beginning of period

   $ 97,480      $ 61,678       $ 61,678       $ 61,678   

Acquisition of MHH

     —          —           34,270         —     

Adjustment to provisional amount

     3,060        —           3,060         —     

Foreign currency translation adjustment

     (1,156     —           376         —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Balance at end of period

   $ 99,384      $ 61,678       $ 99,384       $ 61,678   
  

 

 

   

 

 

    

 

 

    

 

 

 

Intangible assets, excluding goodwill, consist of the following at June 30, 2012 and December 31, 2011 (amounts in thousands):

 

     June 30, 2012      December 31, 2011  
     Gross Amount      Accumulated
Amortization
     Gross Amount      Accumulated
Amortization
 

Client and customer relationships

   $ 39,876       $ 20,197       $ 30,777       $ 17,950   

Non-compete agreements

     3,730         3,164         3,103         2,771   

Trademarks

     3,441         1,322         2,500         1,063   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 47,046       $ 24,683       $ 36,380       $ 21,784   
  

 

 

    

 

 

    

 

 

    

 

 

 

Increases in the gross amounts of intangible assets during the six months ended June 30, 2012 relate to the purchase of MHH on January 16, 2012. The combined original weighted average amortization period related to the acquired intangible assets of MHH is approximately 13 years. In accordance with ASC 350, the Company is amortizing the intangible assets over the estimated useful lives as indicated:

 

     Acquisition Date    Customer Relationships    Non-Compete Agreements    Trademarks

MHH

   January 16, 2012    15 years    1 year    3 years

Total intangible amortization expense for the three and six months ended June 30, 2012 was $1.4 million and $2.9 million, respectively. Total intangible amortization expense for the three and six months ended June 30, 2011 was $1.3 million and $2.5 million, respectively. The Company reviews intangible assets at least annually for impairment.

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

9. Business Acquisition:

On January 16, 2012, the Company acquired 100% of the equity interest in MHH. The transaction was completed in cash at a price of £33.5 million (approximately $51.3 million). The Company financed the acquisition with borrowings under its existing line of credit. Based in Kilmarnock, Scotland, MHH employs approximately 170 people and offers outsourced and contingent consumer debt recovery on behalf of banks, credit providers and debt purchasers, as well as distressed and dormant niche portfolio purchasing. The acquisition of MHH expands the Company’s presence into new geographical markets outside the United States, further diversifying its revenues and available service offerings.

The Company accounted for this purchase in accordance with ASC Topic 805, “Business Combinations.” Under this guidance, an entity is required to recognize the assets acquired, liabilities assumed and the consideration given at their fair value on the acquisition date. The following tables summarize the fair value of the consideration given for MHH, as well as the preliminary fair value of the assets acquired and liabilities assumed related to the acquisition.

Recognized amounts of identifiable assets and liabilities are as follows (amounts in thousands):

 

Purchase price

   $ 51,258   

Cash

     (2,605

Finance receivables, net

     (3,906

Accounts receivable

     (2,038

Prepaid expenses (included in other assets)

     (330

Customer relationships

     (8,875

Non-compete agreements

     (612

Trademarks

     (918

Fixed assets

     (814

Accounts payable

     3,500   

Accrued expenses

     1,461   

Income tax payable

     1,209   
  

 

 

 

Goodwill

   $ 37,330   
  

 

 

 

The Company is evaluating the purchase price allocations and at the time of the filing of this Form 10-Q, the valuation has not been completed. However, the Company has recorded provisional amounts for the assets acquired in its consolidated financial statements and will adjust the allocations relative to the fair value of the assets, as necessary, during the remainder of the one-year measurement period.

 

10. Share-Based Compensation:

The Company follows the provisions of FASB ASC Topic 718 “Compensation-Stock Compensation” (“ASC 718”) with respect to its stock plan. As of June 30, 2012, total future compensation costs related to nonvested awards of nonvested shares (not including nonvested shares granted under the Long-Term Incentive Program (“LTI”) is estimated to be $4.8 million with a weighted average remaining life for all nonvested shares of 2.2 years (not including nonvested shares granted under the LTI Programs). As of June 30, 2012, there are no future compensation costs related to stock options and there are no remaining vested stock options to be exercised.

Total share-based compensation expense was approximately $3.3 million and $5.6 million for the three and six months ended June 30, 2012, respectively. Total share-based compensation expense was approximately $2.0 million and $4.6 million for the three and six months ended June 30, 2011, respectively. Tax benefits resulting from tax deductions in excess of share-based compensation expense recognized under the provisions of ASC 718 (windfall tax benefits) are credited to additional paid-in capital in the Company’s Consolidated Balance Sheets. Realized tax shortfalls, if any, are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense. The total tax benefit realized from share-based compensation was approximately $0.1 million and $2.8 million for the three and six months ended June 30, 2012, respectively. The total tax benefit realized from share-based compensation was approximately $0.5 million and $1.5 million for the three and six months ended June 30, 2011, respectively.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Nonvested Shares

With the exception of the awards made pursuant to the LTI Program and a few employee and director grants, the nonvested shares generally vest ratably over three to five years and are expensed over their vesting period. These grants were made to key employees and directors of the Company and, therefore, were assumed to have no forfeiture rates associated with them due to the historically low turnover among this group.

The following summarizes all nonvested share transactions (excluding shares granted under the LTI Programs) from December 31, 2010 through June 30, 2012 (amounts in thousands, except per share amounts):

 

     Nonvested Shares
Outstanding
    Weighted-Average
Price at Grant  Date
 

December 31, 2010

     91      $ 47.89   

Granted

     48        76.59   

Vested

     (53     55.97   

Cancelled

     (5     50.34   
  

 

 

   

 

 

 

December 31, 2011

     81        59.31   

Granted

     48        63.18   

Vested

     (27     60.55   
  

 

 

   

 

 

 

June 30, 2012

     102      $ 60.84   
  

 

 

   

 

 

 

The total grant date fair value of shares vested during the three and six months ended June 30, 2012 was approximately $0.4 million and $1.6 million, respectively. The total grant date fair value of shares vested during the three and six months ended June 30, 2011 was approximately $0.9 million and $2.6 million, respectively.

Long-Term Incentive Programs

Pursuant to the Company’s stock plan, on January 20, 2009, January 14, 2010, January 14, 2011 and January 9, 2012, the Compensation Committee approved the grant of 108,720, 53,656, 73,914, and 65,647 performance and market based nonvested shares, respectively. All shares granted under the LTI Programs were granted to key employees of the Company. The 2009 grant was performance based and cliff vested after the requisite service period if certain financial goals were met. The goals were based upon diluted earnings per share (“EPS”) totals for 2009, the return on stockholders’ equity for the three year period beginning on January 1, 2009 and ending December 31, 2011, and the relative total stockholder return as compared to a peer group for the same three year period. The Company expensed the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2009. The EPS component of the 2009 plan was not achieved and therefore no compensation expense was recognized relative to this component. The return on owners’ equity and relative total stockholder return components have been achieved at 98% and 145%, respectively, and the awards were paid to participants during the first quarter of 2012.

The 2010 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon diluted EPS totals for 2010, the return on stockholders’ equity for the three year period beginning on January 1, 2010 and ending December 31, 2012, and the relative total stockholder return as compared to a peer group for the same three year period. For each component, the number of shares vested can double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The EPS component of the 2010 plan was achieved at 190% and these shares vested at 50% on December 31, 2011 and the remaining 50% will vest on December 31, 2012. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2010. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

The 2011 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon the Company’s EBITDA for 2011, the return on stockholders’ equity for the three year period beginning on January 1, 2011 and ending December 31, 2013, and the relative total stockholder return as compared to a peer group for the same three year period. For each component, the number of shares vested can double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2011. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome. The EBITDA component of the 2011 plan was achieved at 200% and these shares will vest 50% on December 31, 2012 and 50% December 31, 2013.

The 2012 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon the Company’s EBITDA for 2012, the return on stockholders’ equity for the three year period beginning on January 1, 2012 and ending December 31, 2014, and the relative total stockholder return as compared to a peer group for the same three year period. For each component, the number of shares vested can double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2012. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome.

At June 30, 2012, total future compensation costs, assuming the current estimated levels are achieved, related to nonvested share awards granted under the 2010, 2011 and 2012 LTI Programs are estimated to be approximately $8.9 million. The Company assumed a 7.5% forfeiture rate for this grant and the remaining shares have a weighted average life of 1.51 years at June 30, 2012.

 

11. Income Taxes:

The Company follows the guidance of FASB ASC Topic 740 “Income Taxes” (“ASC 740”) as it relates to the provision for income taxes and uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. There were no unrecognized tax benefits at both June 30, 2012 and 2011.

The U.S. Internal Revenue Service (the “IRS”) examined the Company’s tax returns for the 2005 calendar year. The IRS concluded the audit and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes, for tax years ended December 31, 2007, 2006 and 2005. The IRS has asserted that cost recovery for tax revenue recognition does not clearly reflect taxable income and that unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current deduction. 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 ultimately be sustained; therefore, a reserve for uncertain tax positions is not necessary. On April 22, 2009, the Company filed a formal protest of the findings contained in the examination report prepared by the IRS. On August 26, 2011, the IRS issued a Notice of Deficiency for the tax years ended December 31, 2007, 2006, and 2005. The Company subsequently filed a petition in United States Tax Court to which the IRS responded on January 12, 2012. If the Company is unsuccessful in United States Tax Court, it can appeal to the federal Circuit Court of Appeals. Payment of the assessed taxes and interest could have an adverse affect on the Company’s financial condition, be material to the Company’s results of operations, and possibly require additional financing from other sources. In accordance with the U.S. Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), underpayments of federal tax accrue interest, compounded daily, at the applicable federal short term rate plus three percentage points. An additional two percentage points applies to large corporate underpayments of $100,000 or more to periods after the applicable date as defined in the Internal Revenue Code. The Company files taxes in multiple state jurisdictions; therefore, any underpayment of state tax will accrue interest in accordance with the respective state statute. In 2011, the IRS expanded the audit to include the tax years ended December 31, 2010, 2009 and 2008.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

At June 30, 2012, the tax years subject to examination by the major taxing jurisdictions, including the IRS, are 2003, 2005 and subsequent years. The 2003 tax year remains open to examination because of a net operating loss that originated in that year but was not fully utilized until the 2005 tax year. The examination periods for the 2007, 2006 and 2005 tax years were extended through December 31, 2011; however, because the IRS issued the Notice of Deficiency for those tax periods prior to December 31, 2011, the period for assessment is suspended until a decision of the Tax Court becomes final. The examination period for the 2008 tax year has been extended through January 18, 2013.

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. No interest or penalties were accrued or reversed in the three or six month periods ended June 30, 2012 or 2011.

 

12. Earnings per Share:

Basic EPS are computed by dividing net income available to common stockholders of Portfolio Recovery Associates, 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 stock options and nonvested share awards. Share-based awards that are contingent upon the attainment of performance goals are not included in the computation of diluted EPS until the performance goals have been attained. The dilutive effect of stock options and nonvested shares is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options and vesting of nonvested shares would be used to purchase common shares at the average market price for the period. The assumed proceeds include the windfall tax benefit that would be received upon assumed exercise. The following tables provide a reconciliation between the computation of basic EPS and diluted EPS for the three and six months ended June 30, 2012 and 2011 (amounts in thousands, except per share amounts):

 

     For the Three Months Ended June 30,  
     2012      2011  
     Net Income
attributable to Portfolio
Recovery Associates, Inc.
     Weighted Average
Common Shares
     EPS      Net Income
attributable to Portfolio
Recovery Associates, Inc.
     Weighted Average
Common Shares
     EPS  

Basic EPS

   $ 32,015         17,027       $ 1.88       $ 25,574         17,108       $ 1.49   

Dilutive effect of nonvested share awards

        106               117      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 32,015         17,133       $ 1.87       $ 25,574         17,225       $ 1.48   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Six Months Ended June 30,  
     2012      2011  
     Net Income
attributable to  Portfolio
Recovery Associates, Inc.
     Weighted Average
Common Shares
     EPS      Net Income
attributable to  Portfolio
Recovery Associates, Inc.
     Weighted Average
Common Shares
     EPS  

Basic EPS

   $ 57,477         17,111       $ 3.36       $ 48,695         17,100       $ 2.85   

Dilutive effect of nonvested share awards

        89               112      
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted EPS

   $ 57,477         17,200       $ 3.34       $ 48,695         17,212       $ 2.83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were no antidilutive options outstanding for the three or six months ended June 30, 2012 and 2011.

 

13. Commitments and Contingencies:

Employment Agreements:

The Company has employment agreements, most of which expire on December 31, 2014, with all of its executive officers and with several members of its senior management group. Such agreements provide for base salary payments as well as bonuses which are based on the attainment of specific management goals. Future compensation under these agreements is approximately $14.5 million. The agreements also contain confidentiality and non-compete provisions.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Leases:

The Company is party to various operating leases with respect to its facilities and equipment. The future minimum lease payments at June 30, 2012 is approximately $22.3 million.

Forward Flow Agreements:

The Company is party to several forward flow agreements that allow for the purchase of defaulted consumer receivables at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at June 30, 2012 is approximately $238.3 million.

Redeemable Noncontrolling Interest:

In connection with the Company’s acquisition of 62% of the membership units of CCB on March 15, 2010, the Company acquired the right through February 28, 2015 to purchase, at a predetermined price, the remaining 38% of the membership units of CCB not held by the Company. Also, the owners of the noncontrolling interest can require the Company to purchase their respective interest during the period beginning on March 1, 2012 and ending on February 28, 2018. While the actual amount or timing of any future payment is unknown at this time, the maximum amount of consideration to be paid for the 38% interest is $22.8 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:

The Company is from time to time subject to routine legal claims and proceedings, most of which are incidental to the ordinary course of its business. The Company initiates lawsuits against customers and is occasionally countersued by them in such actions. Also, customers, either individually, as members of a class action, or through a governmental entity on behalf of customers, may initiate litigation against the Company in which they allege that the Company has violated a state or federal law in the process of collecting on an account. From time to time, other types of lawsuits are brought against the Company.

The Company accrues 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. 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 the pending litigation disclosed below, 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 may be more than the current estimate.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Subject to the inherent uncertainties involved in such proceedings, the Company believes, based upon its current knowledge and after consultation with counsel, that the legal proceedings currently pending against it, including those that fall outside of the Company’s routine legal proceedings, should not, either individually or in the aggregate, have a material adverse impact on the Company’s financial condition. However, it is possible, in light of the uncertainties involved in such proceedings or due to unexpected future developments, that an unfavorable resolution of a legal proceeding or claim could occur which may be material to the Company’s results of operations for a particular period. The matters described below fall outside of the normal parameters of the Company’s routine legal proceedings.

As previously disclosed, the Company was been named as defendant in a number of putative class action cases, each of which alleging that the Company violated the Telephone Consumer Protection Act (“TCPA”) by calling consumers’ cellular telephones without their prior express consent. On December 21, 2011, the United States District Panel on Multi-District Litigation entered an order transferring these matters into one consolidated proceeding in the United States District Court for the Southern District of California. On June 22, 2012, the putative class plaintiffs filed their consolidated complaint in the matter, now styled as In re Portfolio Recovery Associates, LLC Telephone Consumer Protection Act Litigation, case No. 11-md-02295.

This matter has not yet proceeded on whether or not to certify a class or on the merits of the allegations, and no demand has been made. Additionally, even if a class is ultimately certified, further discovery must take place in order to determine its size. Therefore, any potential loss for these and other similar TCPA matters cannot be estimated at this time. However, in the event that a class is eventually certified and the Company neither settles nor prevails on these matters, or settles for a significant amount, the Company’s damages, when aggregated, could potentially exceed its established liability, and could be material to the Company’s financial condition, results of operations or cash flows for any particular reporting period.

The U.S. Internal Revenue Service (the “IRS”) examined the Company’s tax returns for the 2005 calendar year. The IRS concluded the audit and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes, for tax years ended December 31, 2007, 2006 and 2005. The IRS has asserted that cost recovery for tax revenue recognition does not clearly reflect taxable income and that unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current deduction. 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 ultimately be sustained; therefore, a reserve for uncertain tax positions is not necessary. On April 22, 2009, the Company filed a formal protest of the findings contained in the examination report prepared by the IRS. On August 26, 2011, the IRS issued a Notice of Deficiency for the tax years ended December 31, 2007, 2006, and 2005. The Company subsequently filed a petition in United States Tax Court to which the IRS responded on January 12, 2012. If the Company is unsuccessful in tax court, it can appeal to the federal Circuit Court of Appeals. Refer to Note 11 “Income Taxes” for additional information.

From time to time, the Company receives subpoenas and other requests for information from regulators or governmental authorities who are investigating the Company’s debt collection activities. The Company makes every effort to respond appropriately to such requests and cooperate fully with each investigation. Subsequent to June 30, 2012, the Company was notified of one such regulator’s interest in resolving its investigation. The Company has not yet had sufficient time to properly evaluate the resolution, as proposed, or to determine whether it would be material.

Excluding the above matters and other putative class action suits which the Company believes are not material, the high end of the range of potential litigation losses in excess of the Company’s established liability is estimated by management to be less than $1,000,000 as of June 30, 2012. Notwithstanding our attempt to estimate a range of possible losses in excess of the Company’s established liability based on current information, actual future losses may exceed both the Company’s established liability and the range of potential litigation losses disclosed above.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

14. Fair Value Measurements and Disclosures:

In accordance with the disclosure requirements of FASB ASC Topic 825, “Financial Instruments” (“ASC 825”), the table below summarizes fair value estimates for the Company’s financial instruments. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company. The carrying amounts in the table are recorded in the consolidated balance sheet under the indicated captions (amounts in thousands):

 

     June 30, 2012      December 31, 2011  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial assets:

           

Cash and cash equivalents

   $ 42,621       $ 42,621       $ 26,697       $ 26,697   

Finance receivables, net

     966,508         1,542,523         926,734         1,269,277   

Financial liabilities:

           

Line of credit

   $ 292,000       $ 292,000       $ 220,000       $ 220,000   

Long-term debt

     849         849         1,246         1,246   

As of June 30, 2012, and December 31, 2011, the Company did not account for any financial assets or financial liabilities at fair value. As defined by FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values. 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.

Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments:

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

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

 

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Table of Contents

PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Line 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.

Long-term debt: The carrying amount approximates fair value, as the interest rates approximate the rate currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers. Accordingly, the Company uses Level 2 inputs for its fair value estimates.

 

15. Stockholders’ Equity:

On February 2, 2012, the Board of Directors of the Company authorized a share repurchase program of up to $100 million of the Company’s outstanding shares of common stock. The program is administered by a special committee of the Company’s Board of Directors. Repurchases would depend on prevailing market conditions and other factors. The repurchase program may be suspended or discontinued at any time. During the first six months of 2012, the Company repurchased and retired 331,449 shares at an average price of $68.56 (including acquisition costs).

 

16. Recent Accounting Pronouncements:

In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The amendments in ASU 2011-04 generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles and International Financial Reporting Standards. The provisions of ASU 2011-04 are effective prospectively for interim and annual periods beginning after December 15, 2011. Early adoption is prohibited. The Company adopted ASU 2011-04 on January 1, 2012, and has included the required disclosures in its notes to its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income” (Topic 220) to amend its accounting guidance on the presentation of other comprehensive income (“OCI”) in an entity’s financial statements. The amended guidance eliminates the option to present the components of OCI as part of the statement of changes in stockholders’ equity and provides two options for presenting OCI: in a statement included in the statements of comprehensive income or in a separate statement immediately following the statements of comprehensive income. The amendments do not change the guidance for the items that have to be reported in OCI or when an item of OCI has to be moved into net income. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted ASU 2011-05 on January 1, 2012, and has included the required disclosures in its consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangibles-Goodwill and Other” (Topic 350): “Testing Goodwill for Impairment” to amend the accounting guidance on goodwill impairment testing. The amended guidance reduces the complexity and costs of goodwill impairment testing by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amended guidance also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The amendments are effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company adopted ASU 2011-08 on January 1, 2012 which had no material impact on its consolidated financial statements.

 

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PORTFOLIO RECOVERY ASSOCIATES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

In July 2012, the FASB issued ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” to amend the accounting guidance on intangible asset impairment testing. The ASU permits entities to perform an optional qualitative assessment for determining whether it is more likely than not that an indefinite-lived intangible asset is impaired. The guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company is evaluating the impact of the ASU; however, it is not expected to have a significant impact on its consolidated financial statements.

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

 

   

a prolonged economic recovery or a deterioration in the economic or inflationary environment in the United States or the United Kingdom, including the interest rate environment, that may have an adverse effect on our collections, results of operations, revenue and stock price or on the stability of the financial system as a whole;

 

   

our ability to purchase defaulted consumer receivables at appropriate prices;

 

   

our ability to replace our defaulted consumer receivables with additional receivables portfolios;

 

   

our ability to obtain accurate and authentic account documents relating to accounts that we acquire and the possibility that documents that we provide could contain errors;

 

   

our ability to successfully acquire receivables of new asset types;

 

   

changes in the business practices of credit originators in terms of selling defaulted consumer receivables;

 

   

changes in government regulations that affect our ability to collect sufficient amounts on our defaulted consumer receivables;

 

   

changes in or interpretation of tax laws or adverse results of tax audits;

 

   

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

 

   

our ability to employ and retain qualified employees, especially collection personnel, and our senior management team;

 

   

our work force could become unionized in the future, which could adversely affect the stability of our production and increase our costs;

 

   

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

 

   

the degree and nature of our competition;

 

   

the possibility that we could incur goodwill impairment charges;

 

   

our ability to retain existing clients and obtain new clients for our fee-for-service businesses;

 

   

our ability to comply with regulations of the collection industry;

 

   

our ability to successfully operate and/or integrate new business acquisitions;

 

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our ability to maintain, renegotiate or replace our credit facility;

 

   

our ability to satisfy the restrictive covenants in our debt agreements;

 

   

our ability to manage risks associated with our international operations acquired on January 16, 2012;

 

   

the imposition of additional taxes on us;

 

   

changes in interest rates, which could reduce our net income, and the possibility that future hedging strategies may not be successful, which could adversely affect our results of operations and financial condition, as could our failure to comply with hedge accounting principles and interpretations;

 

   

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

 

   

our ability to manage growth successfully;

 

   

the possibility that we could incur business or technology disruptions, or not adapt to technological advances;

 

   

the possibility that we or our industry could experience negative publicity or reputational attacks;

 

   

the sufficiency of our funds generated from operations, existing cash and available borrowings to finance our current operations; and

 

   

the risk factors listed from time to time in our filings with the SEC.

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

For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as the discussion of “Business” and “Risk Factors” described in our 2011 Annual Report on Form 10-K, filed on February 28, 2012.

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 this report could turn out to be materially different. We have no obligation to publicly update or revise our forward-looking statements after the date of this report and you should not expect us to do so.

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

Definitions:

 

 

“Allowance charges” refers to a reduction in income recognized on finance receivables on pools of finance receivables whose cash collection estimates are not received or projected to not be received.

 

 

“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 non-compliant accounts.

 

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“Cash collections” refers to collections from customers on our owned portfolios.

 

 

“Cash receipts” refers to collections on our owned portfolios plus fee income.

 

 

“Core” accounts or portfolios refer to accounts or portfolios that are defaulted consumer receivables and are not in a bankrupt status upon purchase. These accounts are aggregated separately from purchased bankruptcy accounts. Core accounts do not include the accounts we purchase in the United Kingdom.

 

 

“EBITDA” refers to earnings before interest, taxes, depreciation and amortization.

 

 

“Estimated remaining collections” refers to the sum of all future projected cash collections on our owned portfolios.

 

 

“Fee income” refers to revenues generated from our fee-for-service subsidiaries.

 

 

“Income recognized on finance receivables” refers to income derived from our owned debt portfolios.

 

 

“Income recognized on finance receivables, net” refers to income derived from our owned debt portfolios and is shown net of allowance charges.

 

 

“Net finance receivable balance” is recorded on our balance sheet and refers to the purchase price less principal amortization and net allowance charges.

 

 

“Principal amortization” refers to cash collections applied to principal on finance receivables.

 

 

“Purchase price” refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain capitalized costs, less buybacks.

 

 

“Purchased bankruptcy” accounts or portfolios refer to accounts or portfolios that are in bankruptcy when we purchase them and as such are purchased as a pool of bankrupt accounts.

 

 

“Total estimated collections” refers to the actual cash collections, including cash sales, plus estimated remaining collections.

 

 

“Total estimated collections to purchase price” refers to the total estimated collections divided by the purchase price.

Overview

The Company is a specialized financial and business services company. Our primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. We also service receivables on behalf of clients on either a commission or transaction-fee basis as well as providing class action claims settlement recovery services and related payment processing to corporate clients.

The Company is headquartered in Norfolk, Virginia, and employs approximately 3,000 team members. The Company’s shares of common stock are traded on the NASDAQ Global Select Market under the symbol “PRAA.”

On January 16, 2012, we acquired 100% of the equity interest in MHH. Based in Kilmarnock, Scotland, MHH employs approximately 170 people and offers outsourced and contingent consumer debt recovery on behalf of banks, credit providers and debt purchasers, as well as distressed and dormant niche portfolio purchasing.

Earnings Summary

During the second quarter of 2012, net income attributable to the Company was $32.0 million, or $1.87 per diluted share, compared with $25.6 million, or $1.48 per diluted share, in the second quarter of 2011. Total revenue was $147.9 million in the second quarter of 2012, up 28.8% from the same quarter one year earlier. Revenues in the recently completed quarter consisted of $132.6 million in income recognized on finance receivables, net of allowance charges, and $15.3 million in fee income. Income recognized on finance receivables, net of allowance charges, increased $32.3 million, or 32.2%, over the same period in 2011, primarily as a result of a significant increase in cash collections. Cash collections were $232.4 million in the second quarter of 2012, up 31.8% or $56.1 million as compared to the second quarter of 2011. During the quarter, we recorded $2.2 million in net allowance

 

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charges, compared with $2.3 million in the comparable quarter of 2011. Our performance has been positively impacted by operational efficiencies surrounding the cash collections process, including the continued refinement of dialer technology and account scoring analytics as it relates to both legal and non-legal collection channels. Additionally, we have continued to develop our internal legal collection staff resources, which enables us to place accounts into that channel that otherwise would have been prohibitively expensive for legal action and to collect these accounts more efficiently and profitably.

Fee income increased from $14.5 million in the second quarter of 2011 to $15.3 million in the second quarter of 2012 primarily due to the acquisition of MHH in the first quarter of 2012 offset by declines in revenue generated by our PRA Government Services (“PRA GS”) business and our PRA Location Services (“PLS”). The decline from GS is mainly attributable to a decline in revenue generated from state sales and use tax programs. The decline from PLS is due primarily to the adverse impact of the economic slowdown on automobile financing and related collateral recovery activities.

A summary of how our income was generated during the three months ended June 30, 2012 and 2011 is as follows:

 

    

For the Three Months Ended

June 30,

 
($ in thousands)    2012     2011  

Cash collections

   $ 232,425      $ 176,281   

Amortization of finance receivables

     (97,634     (73,695

Allowance charges

     (2,204     (2,283
  

 

 

   

 

 

 

Finance receivable income

     132,587        100,303   

Fee income

     15,298        14,492   
  

 

 

   

 

 

 

Total revenue

   $ 147,885      $ 114,795   
  

 

 

   

 

 

 

Operating expenses were $93.3 million in the second quarter of 2012, up 32.5% over the second quarter of 2011, due primarily to increases in compensation expense, legal collection costs, legal collection fees, outside fees and services and communications expense. Compensation expense increased primarily as a result of larger staff sizes, including the acquisition of MHH on January 16, 2012. Compensation and employee services expenses increased as total employees grew 21.1% to 3,032 as of June 30, 2012, from 2,504 as of June 30, 2011. Legal collection costs were $18.2 million for the three months ended June 30, 2012 compared to $9.9 million for the three months ended June 30, 2011, an increase of $8.3 million or 83.8%. This increase was the result of an increased portfolio size as well as a refinement of our internal scoring methodology that expanded our account selections for legal action. This strategy to expand the accounts brought into the legal collection process resulted in significant initial expenses, which is expected to help drive additional future cash collections and revenue. Legal collection fees increased from $6.0 million in the second quarter of 2011 to $9.0 million in the second quarter of 2012, an increase of $3.0 million or 50.0%. This increase was the result of an increase in cash collections from outside attorneys from $27.3 million in the three months ended June 30, 2011 to $41.5 million for the three months ended June 30, 2012, an increase of $14.2 million or 52.0%. Outside fees and services increased primarily as a result of legal related expenses as well as increases in costs related to software development. Communication expenses increased primarily due to a growth in mailings resulting from an increase in special letter campaigns and a greater number of finance receivables to work.

Results of Operations

The results of operations include the financial results of Portfolio Recovery Associates, Inc. and all of our subsidiaries, all of which are in the receivables management business. Under the guidance of the FASB ASC Topic 280 “Segment Reporting” (“ASC 280”), we have determined that we have several operating segments that meet the aggregation criteria of ASC 280, and therefore, we have one reportable segment, accounts receivable management, based on similarities among the operating units including homogeneity of services, service delivery methods and use of technology.

 

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The following table sets forth certain operating data as a percentage of total revenues for the periods indicated:

 

    

For the Three Months

Ended June 30,

   

For the Six Months

Ended June 30,

 
     2012     2011     2012     2011  

Revenues:

        

Income recognized on finance receivables, net

     89.7     87.4     89.2     86.6

Fee income

     10.3     12.6     10.8     13.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100.0     100.0     100.0     100.0

Operating expenses:

        

Compensation and employee services

     28.7     30.3     28.5     30.4

Legal collection fees

     6.1     5.2     5.8     5.2

Legal collection costs

     12.3     8.6     14.5     8.5

Agent fees

     0.9     1.5     1.0     1.9

Outside fees and services

     3.8     3.5     4.0     3.3

Communication expenses

     4.7     5.0     5.3     5.3

Rent and occupancy

     1.1     1.3     1.1     1.3

Depreciation and amortization

     2.4     2.9     2.5     2.9

Other operating expenses

     3.0     3.0     2.8     2.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     63.0     61.3     65.5     61.6

Gain on sale of property

     0.0     1.0     0.0     0.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     37.0     39.7     34.5     38.9

Other income and (expense):

        

Interest income

     0.0     0.0     0.0     0.0

Interest expense

     (1.6 %)      (2.3 %)      (1.7 %)      (2.4 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     35.4     37.4     32.8     36.5

Provision for income taxes

     13.6     15.1     12.8     14.8
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     21.8     22.3     20.0     21.7

Less net loss/(income) attributable to redeemable noncontrolling interest

     0.0     (0.0 %)      0.1     (0.3 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Portfolio Recovery Associates, Inc.

     21.8     22.3     20.1     21.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2012 Compared To Three Months Ended June 30, 2011

Revenues

Total revenues were $147.9 million for the three months ended June 30, 2012, an increase of $33.1 million, or 28.8%, compared to total revenues of $114.8 million for the three months ended June 30, 2011.

Income Recognized on Finance Receivables, net

Income recognized on finance receivables, net was $132.6 million for the three months ended June 30, 2012, an increase of $32.3 million, or 32.2%, compared to income recognized on finance receivables, net of $100.3 million for the three months ended June 30, 2011. The increase was primarily due to an increase in cash collections on our finance receivables to $232.4 million for the three months ended June 30, 2012, from $176.3 million for the three months ended June 30, 2011, an increase of $56.1 million or 31.8%. During the three months ended June 30, 2012, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $1.5 billion at a cost of $125.1 million. During the three months ended June 30, 2011, we acquired defaulted consumer receivable portfolios with an aggregate face value of $1.4 billion at a cost of $89.5 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of the average purchase price and for similar time frames, we intend to target a similar internal rate of return, after direct expenses, in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to the estimated profitability of a period’s buying.

 

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Income recognized on finance receivables, net is shown net of changes in valuation allowances recognized under FASB ASC Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), which requires that a valuation allowance be recorded for significant decreases in expected cash flows or a change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the three months ended June 30, 2012, we recorded net allowance charges of $2.2 million, of which $2.5 million related to purchased bankruptcy portfolios primarily purchased in 2007, offset by a net allowance reversal of $0.3 million on Core portfolios. In any given period, we may be required to record valuation allowances due to pools of receivables underperforming our expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability, of purchased pools of defaulted consumer receivables include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability, of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (relating to the collection and movement of accounts on both our collection floor and external channels), as well as decreases in productivity related to turnover and tenure of our collection staff.

Fee Income

Fee income was $15.3 million for the three months ended June 30, 2012, an increase of $0.8 million, or 5.5%, compared to fee income of $14.5 million for the three months ended June 30, 2011. Fee income increased primarily due to the acquisition of MHH in the first quarter of 2012 offset by declines in revenue generated by our PRA GS business and our PLS business. The decline from PRA GS is mainly attributable to a decline in revenue generated from state sales and use tax programs. The decline from PLS is due primarily to the adverse impact of the economic slowdown on automobile financing and related collateral recovery activities.

Operating Expenses

Total operating expenses were $93.3 million for the three months ended June 30, 2012, an increase of $22.9 million or 32.5% compared to total operating expenses of $70.4 million for the three months ended June 30, 2011. Total operating expenses were 37.7% of cash receipts for the three months ended June 30, 2012 compared to 36.9% for the same period in 2011.

Compensation and Employee Services

Compensation and employee services expenses were $42.5 million for the three months ended June 30, 2012, an increase of $7.7 million, or 22.1%, compared to compensation and employee services expenses of $34.8 million for the three months ended June 30, 2011. Compensation expense increased primarily as a result of larger staff sizes, including the addition of new employees as a result of the acquisition of MHH on January 16, 2012. Compensation and employee services expenses increased as total employees grew 21.1% to 3,032 as of June 30, 2012, from 2,504 as of June 30, 2011. Compensation and employee services expenses as a percentage of cash receipts decreased to 17.2% for the three months ended June 30, 2012, from 18.3% of cash receipts for the same period in 2011.

Legal Collection Fees

Legal collection fees represent the contingent fees for the cash collections generated by our independent third party attorney network. Legal collection fees were $9.0 million for the three months ended June 30, 2012, an increase of $3.0 million, or 50.0%, compared to legal collection fees of $6.0 million for the three months ended June 30, 2011. This increase was the result of an increase in our external legal collections which increased $14.2 million or 52.0%, from $27.3 million for the three months ended June 30, 2011 to $41.5 million for the three months ended June 30, 2012. Legal collection fees for the three months ended June 30, 2012 were 3.6% of cash receipts, compared to 3.1% for the three months ended June 30, 2011.

 

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Legal Collection Costs

Legal collection costs are costs paid to courts where a lawsuit is filed. It also includes the cost of documents received from sellers of defaulted consumer receivables. Legal collection costs were $18.2 million for the three months ended June 30, 2012, an increase of $8.3 million, or 83.8%, compared to legal collection costs of $9.9 million for the three months ended June 30, 2011. This increase was the result of an increased portfolio size as well as a refinement of our internal scoring methodology that expanded our account selections for legal action. This strategy to expand the accounts brought into the legal collection process resulted in significant initial expenses, which is expected to help drive additional future cash collections and revenue. These legal collection costs represent 7.4% and 5.2% of cash receipts for the three month periods ended June 30, 2012 and 2011, respectively.

Agent Fees

Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $1.3 million for the three months ended June 30, 2012, a decrease of $0.4 million, or 23.5%, compared to agent fees of $1.7 million for the three months ended June 30, 2011. The decrease was primarily due to a decline in agent fees related to reduced business activity associated with PLS.

Outside Fees and Services

Outside fees and services expenses were $5.6 million for the three months ended June 30, 2012, an increase of $1.5 million or 36.6% compared to outside fees and services expenses of $4.1 million for the three months ended June 30, 2011. Of the $1.5 million increase, $0.3 million increase was attributable to an increase in corporate legal expense and the remaining $1.2 million increase was mainly attributable to other outside fees and services including increases in non-capitalized software development costs.

Communication Expenses

Communication expenses were $7.0 million for the three months ended June 30, 2012, an increase of $1.3 million, or 22.8%, compared to communications expenses of $5.7 million for the three months ended June 30, 2011. The increase was primarily due to additional postage expense resulting from an increase in special letter campaigns. The remaining increase was attributable to higher telephone expenses driven by a greater number of finance receivables to work, as well as a significant expansion of our dialer capacity and a resulting increase in the number of collection calls made. Mailings were responsible for 76.9% or $1.0 million of this increase, while the remaining 23.1% or $0.3 million was attributable to increased call volumes and other telephone related charges.

Rent and Occupancy

Rent and occupancy expenses were $1.7 million for the three months ended June 30, 2012, an increase of $0.3 million, or 21.4%, compared to rent and occupancy expenses of $1.4 million for the three months ended June 30, 2011. The increase was primarily due to the additional space leased for our Birmingham call center operations, the addition of our MHH foreign operations as well as increased utility charges.

Depreciation and Amortization

Depreciation and amortization expenses were $3.6 million for the three months ended June 30, 2012, an increase of $0.3 million or 9.1% compared to depreciation and amortization expenses of $3.3 million for the three months ended June 30, 2011. The increase was primarily due to the additional depreciation and amortization expense incurred as a result of the acquisition of the tangible and intangible assets of MHH.

Other Operating Expenses

Other operating expenses were $4.5 million for the three months ended June 30, 2012, an increase of $1.0 million or 28.6% compared to other operating expenses of $3.5 million for the three months ended June 30, 2011. Of the $1.0 million increase, $0.4 million was due to an increase in bad debt expense and $0.3 million was due to an increase in travel and travel related expenses when compared to same prior year period. None of the remaining $0.3 million increase was attributable to any significant identifiable items.

 

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Interest Income

Interest income was $7,000 and $0 for the three months ended June 30, 2012 and 2011, respectively.

Interest Expense

Interest expense was $2.4 million for the three months ended June 30, 2012, a decrease of $0.2 million compared to interest expense of $2.6 million for the three months ended June 30, 2011. The decrease was primarily due to a decrease in our average borrowings under our revolving credit facility for the three months ended June 30, 2012 compared to the same period in 2011, in addition to a decrease in our weighted average interest rate, which decreased to 3.3% for the three months ended June 30, 2012, compared to 3.7% for the three months ended June 30, 2011.

Provision for Income Taxes

Income tax expense was $20.2 million for the three months ended June 30, 2012, an increase of $2.9 million, or 16.8%, compared to income tax expense of $17.3 million for the three months ended June 30, 2011. The increase is primarily due to an increase of 21.7% in income before taxes for the three months ended June 30, 2012, compared to the same period in 2011, offset by a decrease in the effective tax rate to 38.6% for the three months ended June 30, 2012, compared to an effective tax rate of 40.4% for the same period in 2011. The decrease in the effective tax rate is primarily attributable to a decrease in the state effective tax rate due to a change in the mix of income apportionment between various states as well as the impact of state tax credits.

Six Months Ended June 30, 2012 Compared To Six Months Ended June 30, 2011

Revenues

Total revenues were $288.0 million for the six months ended June 30, 2012, an increase of $61.4 million, or 27.1%, compared to total revenues of $226.6 million for the six months ended June 30, 2011.

Income Recognized on Finance Receivables, net

Income recognized on finance receivables, net was $256.8 million for the six months ended June 30, 2012, an increase of $60.5 million, or 30.8%, compared to income recognized on finance receivables, net of $196.3 million for the six months ended June 30, 2011. The increase was primarily due to an increase in cash collections on our finance receivables to $450.4 million for the six months ended June 30, 2012, from $343.0 million for the six months ended June 30, 2011, an increase of $107.4 million or 31.3%. During the six months ended June 30, 2012, excluding the initial investment in the MHH portfolio, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $3.0 billion at a cost of $236.5 million. During the six months ended June 30, 2011, we acquired defaulted consumer receivable portfolios with an aggregate face value of $2.9 billion at a cost of $197.4 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of the average purchase price and for similar time frames, we intend to target a similar internal rate of return, after direct expenses, in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to the estimated profitability of a period’s buying.

Income recognized on finance receivables, net is shown net of changes in valuation allowances recognized under FASB ASC Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), which requires that a valuation allowance be recorded for significant decreases in expected cash flows or a change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the six months ended June 30, 2012, we recorded net allowance charges of $2.7 million, of which $3.4 million related to purchased bankruptcy portfolios primarily purchased in 2007, offset by a net allowance reversal of $0.7 million on Core portfolios. In any given period, we may be required to record valuation allowances due to pools of receivables underperforming our expectations. Factors that may contribute to the recording of valuation allowances

 

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may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability, of purchased pools of defaulted consumer receivables include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability, of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (relating to the collection and movement of accounts on both our collection floor and external channels), as well as decreases in productivity related to turnover and tenure of our collection staff.

Fee Income

Fee income was $31.2 million for the six months ended June 30, 2012, an increase of $0.9 million, or 3.0%, compared to fee income of $30.3 million for the six months ended June 30, 2011. Fee income increased primarily due to the acquisition of MHH in the first quarter of 2012 offset by declines in revenue generated by our PRA GS business and our PLS business. The decline from PRA GS is mainly attributable to a decline in revenue generated from state sales and use tax programs. The decline from PLS is due primarily to the adverse impact of the economic slowdown on automobile financing and related collateral recovery activities.

Operating Expenses

Total operating expenses were $189.0 million for the six months ended June 30, 2012, an increase of $49.5 million or 35.5% compared to total operating expenses of $139.5 million for the six months ended June 30, 2011. Total operating expenses were 39.2% of cash receipts for the six months ended June 30, 2012 compared to 37.4% for the same period in 2011.

Compensation and Employee Services

Compensation and employee services expenses were $82.2 million for the six months ended June 30, 2012, an increase of $13.2 million, or 19.1%, compared to compensation and employee services expenses of $69.0 million for the six months ended June 30, 2011. Compensation expense increased primarily as a result of larger staff sizes, including the addition of new employees as a result of the acquisition of MHH on January 16, 2012. Compensation and employee services expenses increased as total employees grew 21.1% to 3,032 as of June 30, 2012, from 2,504 as of June 30, 2011. Compensation and employee services expenses as a percentage of cash receipts decreased to 17.1% for the six months ended June 30, 2012, from 18.5% of cash receipts for the same period in 2011.

Legal Collection Fees

Legal collection fees represent the contingent fees for the cash collections generated by our independent third party attorney network. Legal collection fees were $16.6 million for the six months ended June 30, 2012, an increase of $4.9 million, or 41.9%, compared to legal collection fees of $11.7 million for the six months ended June 30, 2011. This increase was the result of an increase in our external legal collections which increased $23.6 million or 44.8%, from $52.7 million for the six months ended June 30, 2011 to $76.3 million for the six months ended June 30, 2012. Legal collection fees for the six months ended June 30, 2012 were 3.4% of cash receipts, compared to 3.1% for the six months ended June 30, 2011.

Legal Collection Costs

Legal collection costs are costs paid to courts where a lawsuit is filed. It also includes the cost of documents received from sellers of defaulted consumer receivables. Legal collection costs were $41.9 million for the six months ended June 30, 2012, an increase of $22.7 million, or 118.2%, compared to legal collection costs of $19.2 million for the six months ended June 30, 2011. This increase was the result of an increased portfolio size as well as a refinement of our internal scoring methodology that expanded our account selections for legal action. This strategy to expand the accounts brought into the legal collection process resulted in significant initial expenses, which is expected to help drive additional future cash collections and revenue. These legal collection costs represent 8.7% and 5.1% of cash receipts for the six month periods ended June 30, 2012 and 2011, respectively.

 

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Agent Fees

Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $3.0 million for the six months ended June 30, 2012, a decrease of $1.4 million, or 31.8%, compared to agent fees of $4.4 million for the six months ended June 30, 2011. The decrease was primarily due to a decline in agent fees related to reduced business activity associated with PLS.

Outside Fees and Services

Outside fees and services expenses were $11.4 million for the six months ended June 30, 2012, an increase of $3.9 million or 52.0% compared to outside fees and services expenses of $7.5 million for the six months ended June 30, 2011. Of the $3.9 million increase, $1.4 million increase was attributable to an increase in corporate legal expense and the remaining $2.5 million increase was attributable to other outside fees and services including increases in non-capitalized software development costs.

Communication Expenses

Communication expenses were $15.3 million for the six months ended June 30, 2012, an increase of $3.3 million, or 27.5%, compared to communications expenses of $12.0 million for the six months ended June 30, 2011. The increase was primarily due to additional postage expense resulting from an increase in special letter campaigns. The remaining increase was attributable to higher telephone expenses driven by a greater number of finance receivables to work, as well as a significant expansion of our dialer capacity and a resulting increase in the number of calls generated by the dialer. Mailings were responsible for 87.9% or $2.9 million of this increase, while the remaining 12.1% or $0.4 million was attributable to increased call volumes and other telephone related charges.

Rent and Occupancy

Rent and occupancy expenses were $3.3 million for the six months ended June 30, 2012, an increase of $0.5 million, or 17.9%, compared to rent and occupancy expenses of $2.8 million for the six months ended June 30, 2011. The increase was primarily due to the additional space leased for our Birmingham call center operations, the addition of our MHH foreign operations as well as increased utility charges.

Depreciation and Amortization

Depreciation and amortization expenses were $7.2 million for the six months ended June 30, 2012, an increase of $0.7 million or 10.8% compared to depreciation and amortization expenses of $6.5 million for the six months ended June 30, 2011. The increase was primarily due to the additional depreciation and amortization expense incurred as a result of the acquisition of the tangible and intangible assets of MHH.

Other Operating Expenses

Other operating expenses were $8.2 million for the six months ended June 30, 2012, an increase of $1.8 million or 28.1% compared to other operating expenses of $6.4 million for the six months ended June 30, 2011. Of the $1.8 million increase, $0.7 increase was primarily attributable to additional taxes, fees and licenses and other operating expenses incurred by our MHH, $0.4 million was due to an increase in bad debt expense and $0.5 million was due to an increase in travel and travel related expenses when compared to same prior year period. None of the remaining $0.2 million increase was attributable to any significant identifiable items.

Interest Income

Interest income was $8,000 and $0 for the six months ended June 30, 2012 and 2011, respectively.

Interest Expense

Interest expense was $5.0 million for the six months ended June 30, 2012, a decrease of $0.5 million compared to interest expense of $5.5 million for the six months ended June 30, 2011. The decrease was primarily due to a decrease in our average borrowings under our revolving credit facility for the six months ended June 30, 2012

 

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compared to the same period in 2011, in addition to a decrease in our weighted average interest rate, which decreased to 3.5% for the six months ended June 30, 2012, compared to 3.7% for the six months ended June 30, 2011.

Provision for Income Taxes

Income tax expense was $36.8 million for the six months ended June 30, 2012, an increase of $3.3 million, or 9.9%, compared to income tax expense of $33.5 million for the six months ended June 30, 2011. The increase is primarily due to an increase of 13.6% in income before taxes for the six months ended June 30, 2012, compared to the same period in 2011, partially offset by a decrease in the effective tax rate to 39.1% for the six months ended June 30, 2012, compared to an effective tax rate of 40.4% for the same period in 2011. The decrease in the effective tax rate is primarily attributable to a decrease in the state effective tax rate due to a change in the mix of income apportionment between various states as well as the impact of state tax credits.

 

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Below are certain key financial data and ratios for the periods indicated:

FINANCIAL HIGHLIGHTS

 

    

Three Months Ended

June 30,

    %
Change
   

Six Months Ended

June 30,

    %
Change
 
   2012     2011       2012     2011    

EARNINGS (in thousands)

            

Income recognized on finance receivables, net

   $ 132,587      $ 100,303        32   $ 256,812      $ 196,277        31

Fee income

     15,298        14,492        6     31,218        30,295        3

Total revenues

     147,885        114,795        29     288,030        226,572        27

Operating expenses

     93,289        70,415        32     189,013        139,488        36

Income from operations

     54,596        45,537        20     99,017        88,241        12

Net interest expense

     2,374        2,635        -10     5,026        5,502        -9

Net income

     32,051        25,576        25     57,240        49,285        16

Net income attributable to Portfolio Recovery Associates, Inc.

     32,015        25,574        25     57,477        48,695        18

PERIOD-END BALANCES (in thousands)

            

Cash and cash equivalents

   $ 42,621      $ 25,481        67   $ 42,621      $ 25,481        67

Finance receivables, net

     966,508        879,515        10     966,508        879,515        10

Goodwill and intangible assets, net

     121,748        77,643        57     121,748        77,643        57

Total assets

     1,173,738        1,021,617        15     1,173,738        1,021,617        15

Line of credit

     292,000        250,000        17     292,000        250,000        17

Total liabilities

     520,911        463,153        12     520,911        463,153        12

Total equity

     633,446        542,396        17     633,446        542,396        17

FINANCE RECEIVABLE COLLECTIONS (dollars in thousands)

            

Cash collections

   $ 232,425      $ 176,281        32   $ 450,420      $ 342,998        31

Principal amortization without allowance charges

     97,634        73,695        32     190,910        140,398        36

Principal amortization with allowance charges

     99,838        75,978        31     193,608        146,721        32

Principal amortization w/ allowance charges as % of cash collections:

            

Including fully amortized pools

     43.0     43.1     0     43.0     42.8     0

Excluding fully amortized pools

     44.4     45.7     -3     44.6     45.5     -2

ALLOWANCE FOR FINANCE RECEIVABLES (dollars in thousands)

            

Balance at period-end

   $ 89,269      $ 82,730        8   $ 89,269      $ 82,730        8

Allowance charge

     2,204        2,283        -3     2,698        6,323        -57

Allowance charge to period-end net finance receivables

     0.23     0.26     -12     0.28     0.72     -61

Allowance charge to net finance receivable income

     1.66     2.28     -27     1.05     3.22     -67

Allowance charge to cash collections

     0.95     1.30     -27     0.60     1.84     -68

PURCHASES OF FINANCE RECEIVABLES (1) (dollars in thousands)

            

Purchase price - core

   $ 69,512      $ 52,323        33   $ 121,616      $ 113,617        7

Face value - core

     1,033,331        1,034,898        0     2,005,599        2,043,656        -2

Purchase price - bankruptcy

     53,460        37,204        44     110,352        83,811        32

Face value - bankruptcy

     448,244        378,051        19     816,691        860,993        -5

Purchase price - total

     122,972        89,527        37     231,968        197,428        17

Face value - total

     1,481,575        1,412,949        5     2,822,290        2,904,648        -3

Number of portfolios - total

     105        76        38     187        155        21

ESTIMATED REMAINING COLLECTIONS (1) (in thousands)

            

Estimated remaining collections - core

   $ 1,305,641      $ 1,072,777        22   $ 1,305,641      $ 1,072,777        22

Estimated remaining collections - bankruptcy

     802,353        743,228        8     802,353        743,228        8

Estimated remaining collections - total

     2,107,994        1,816,005        16     2,107,994        1,816,005        16

SHARE DATA (share amounts in thousands)

            

Net income per common share - diluted

   $ 1.87      $ 1.48        26   $ 3.34      $ 2.83        18

Weighted average number of shares outstanding - diluted

     17,133        17,225        -1     17,200        17,212        0

Shares repurchased

     300,849        —          100     331,449        —          100

Average price paid per share repurchased (including acquisitions costs)

   $ 68.62        —          100   $ 68.56        —          100

Closing market price

   $ 91.26      $ 84.79        8   $ 91.26      $ 84.79        8

RATIOS AND OTHER DATA (dollars in thousands)

            

Return on average equity (2)

     20.34     19.20     6     18.54     18.74     -1

Return on revenue (3)

     21.67     22.28     -3     19.87     21.75     -9

Operating margin (4)

     36.92     39.67     -7     34.38     38.95     -12

Operating expense to cash receipts (5)

     37.66     36.91     2     39.24     37.37     5

Debt to equity (6)

     46.33     46.43     0     46.33     46.43     0

Number of collectors

     1,952        1,517        29     1,952        1,517        29

Number of employees

     3,032        2,504        21     3,032        2,504        21

Cash receipts (5)

   $ 247,723      $ 190,773        30   $ 481,639      $ 373,293        29

Line of credit - unused portion at period end

     166,450        157,500        6     166,450        157,500        6

 

(1) Domestic portfolio only
(2) Calculated as annualized net income divided by average equity for the period
(3) Calculated as net income divided by total revenues
(4) Calculated as income from operations divided by total revenues
(5) “Cash receipts” is defined as cash collections plus fee income
(6) For purposes of this ratio, “debt” equals the line of credit balance plus long-term debt

 

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FINANCIAL HIGHLIGHTS

 

     For the Quarter Ended  
     June 30
2012
    March 31
2012
    December 31
2011
    September 30
2011
    June 30
2011
 

EARNINGS (in thousands)

          

Income recognized on finance receivables, net

   $ 132,587      $ 124,226      $ 102,743      $ 102,875      $ 100,303   

Fee income

     15,298        15,920        15,344        11,401        14,492   

Total revenues

     147,885        140,146        118,087        114,276        114,795   

Operating expenses

     93,289        95,725        72,134        70,447        70,415   

Income from operations

     54,596        44,421        45,953        43,830        45,537   

Net interest expense

     2,374        2,652        2,512        2,548        2,635   

Net income

     32,051        25,189        26,666        25,193        25,576   

Net income attributable to Portfolio Recovery Associates, Inc.

     32,015        25,462        26,590        25,506        25,574   

PERIOD-END BALANCES (in thousands)

          

Cash and cash equivalents

   $ 42,621      $ 28,068      $ 26,697      $ 30,035      $ 25,481   

Finance receivables, net

     966,508        945,242        926,734        919,478        879,515   

Goodwill and intangible assets, net

     121,748        124,659        76,274        76,426        77,643   

Total assets

     1,173,738        1,142,026        1,071,123        1,064,104        1,021,617   

Line of credit

     292,000        265,000        220,000        260,000        250,000   

Total liabilities

     520,911        502,531        457,804        478,915        463,153   

Total equity

     633,446        620,712        595,488        568,305        542,396   

FINANCE RECEIVABLE COLLECTIONS (dollars in thousands)

          

Cash collections

   $ 232,425      $ 217,996      $ 180,324      $ 182,168      $ 176,281   

Principal amortization without allowance charges

     97,634        93,276        74,481        78,552        73,695   

Principal amortization with allowance charges

     99,838        93,770        77,581        79,293        75,978   

Principal amortization w/ allowance charges as % of cash collections:

          

Including fully amortized pools

     43.0     43.0     43.0     43.5     43.1

Excluding fully amortized pools

     44.4     44.8     44.9     45.7     45.7

ALLOWANCE FOR FINANCE RECEIVABLES (dollars in thousands)

          

Balance at period-end

   $ 89,269      $ 87,065      $ 86,571      $ 83,471      $ 82,730   

Allowance charge

     2,204        494        3,100        741        2,283   

Allowance charge to period-end net finance receivables

     0.23     0.05     0.33     0.08     0.26

Allowance charge to net finance receivable income

     1.66     0.40     3.02     0.72     2.28

Allowance charge to cash collections

     0.95     0.23     1.72     0.41     1.30

PURCHASES OF FINANCE RECEIVABLES (1) (dollars in thousands)

          

Purchase price - core

   $ 69,512      $ 52,104      $ 42,532      $ 57,240      $ 52,323   

Face value - core

     1,033,331        972,268        829,232        5,027,874        1,034,898   

Purchase price - bankruptcy

     53,460        56,892        46,360        64,848        37,204   

Face value - bankruptcy

     448,244        368,447        376,094        654,508        378,051   

Purchase price - total

     122,972        108,996        88,892        122,088        89,527   

Face value - total

     1,481,575        1,340,715        1,205,326        5,682,382        1,412,949   

Number of portfolios - total

     105        82        83        95        76   

ESTIMATED REMAINING COLLECTIONS (1) (in thousands)

          

Estimated remaining collections - core

   $ 1,305,641      $ 1,226,292      $ 1,159,086      $ 1,154,406      $ 1,072,777   

Estimated remaining collections - bankruptcy

     802,353        796,161        794,262        770,886        743,228   

Estimated remaining collections - total

     2,107,994        2,022,453        1,953,348        1,925,292        1,816,005   

SHARE DATA (share amounts in thousands)

          

Net income per common share - diluted

   $ 1.87      $ 1.47      $ 1.54      $ 1.48      $ 1.48   

Weighted average number of shares outstanding - diluted

     17,133        17,267        17,269        17,228        17,225   

Shares repurchased

     300,849        30,600        —          —          —     

Average price paid per share repurchased (including acquisitions costs)

   $ 68.62      $ 68.02        —          —          —     

Closing market price

   $ 91.26      $ 71.72      $ 67.52      $ 62.22      $ 84.79   

RATIOS AND OTHER DATA (dollars in thousands)

          

Return on average equity (2)

     20.34     16.70     18.18     18.27     19.20

Return on revenue (3)

     21.67     17.97     22.58     22.05     22.28

Operating margin (4)

     36.92     31.70     38.91     38.35     39.67

Operating expense to cash receipts (5)

     37.66     40.92     36.87     36.39     36.91

Debt to equity (6)

     46.33     42.84     37.15     46.02     46.43

Number of collectors

     1,952        1,934        1,658        1,520        1,517   

Number of employees

     3,032        3,014        2,641        2,504        2,504   

Cash receipts (5)

   $ 247,723      $ 233,916      $ 195,668      $ 193,569      $ 190,773   

Line of credit - unused portion at period end

     166,450        142,500        187,500        147,500        157,500   

 

(1) Domestic portfolio only
(2) Calculated as annualized net income divided by average equity for the period
(3) Calculated as net income divided by total revenues
(4) Calculated as income from operations divided by total revenues
(5) “Cash receipts” is defined as cash collections plus fee income
(6) For purposes of this ratio, “debt” equals the line of credit balance plus long-term debt

 

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Supplemental Performance Data

Domestic Finance Receivables Portfolio Performance:

The following tables show certain data related to our domestic finance receivables portfolio. These tables describe the purchase price, actual cash collections and future estimates of cash collections, income recognized on finance receivables (gross and net of allowance charges), principal amortization, allowance charges, net finance receivable balances and related multiples. Further, these tables disclose our entire domestic portfolio, as well as its subsets: the portfolio of purchased bankrupt accounts and our Core portfolio. The accounts represented in the purchased bankruptcy tables are those portfolios of accounts that were bankrupt at the time of purchase. This contrasts with accounts that file for bankruptcy after we purchase them, which continue to be tracked in their corresponding Core portfolio. Our United Kingdom portfolio is not significant and is therefore not included in these tables.

Core customers sometimes file for bankruptcy protection subsequent to our purchase of the related Core portfolio. When this occurs, we adjust our collection practices accordingly to comply with bankruptcy procedures; however, for accounting purposes, these accounts remain in the related Core portfolio. Conversely, bankrupt accounts may be dismissed voluntarily or involuntarily subsequent to our purchase of the related bankrupt portfolio. Dismissal occurs when the terms of the bankruptcy are not met by the petitioner. When this occurs, we are typically free to pursue collection outside of bankruptcy procedures; however, for accounting purposes, these accounts remain in the related bankruptcy pool.

The purchase price multiples (the ratio of total estimated collections to purchase price) from 2005 through the second quarter of 2012 described in the tables below are lower than multiples in previous years. This trend is primarily, but not entirely, related to pricing competition. When competition increases, and/or supply decreases so that pricing becomes negatively impacted on a relative basis (total lifetime collections in relation to purchase price), yields tend to trend lower. The opposite occurs when pricing trends are favorable.

To the extent that lower purchase price multiples are the ultimate result of more competitive pricing and lower yields, this will generally lead to higher amortization rates (payments applied to principal as a percentage of cash collections), lower operating margins and ultimately lower profitability. As portfolio pricing becomes more favorable on a relative basis, our profitability will tend to increase. It is important to consider, however, that to the extent we can improve our collection operations by collecting additional cash from a discreet quantity and quality of accounts, and/or by collecting cash at a lower cost structure, we can positively impact the collection to purchase price ratio and operating margins. We continue to make significant enhancements to our analytical abilities, management personnel and capabilities, all with the intent to collect more cash at lower cost.

Additionally, however, the processes we employ to initially book newly acquired pools of accounts and forecast future estimated collections for any given portfolio of accounts has evolved over the years due to a number of factors including economic conditions. Our revenue recognition under ASC 310-30 is driven by estimates of the ultimate magnitude of estimated lifetime collections as well as the timing of those collections. We have progressed towards booking new portfolio purchases using a higher confidence level for both estimated collection amounts and timing. Subsequent to the initial booking, as we gain collection experience and comfort with a pool of accounts, we continuously update ERC. These processes, along with the aforementioned operational enhancements, have tended to cause the ratio of collections, including ERC, to purchase price for any given year of buying to gradually increase over time. As a result, our estimate of lifetime collections to purchase price has generally, but not always, shown relatively steady increases as pools have aged. Thus, all factors being equal in terms of pricing, one would typically tend to see a higher collection to purchase price ratio from a pool of accounts that was six years from purchase than say a pool that was just two years from purchase.

 

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Domestic Portfolio Data – Life-to-Date

Entire Portfolio

 

      Inception through June 30, 2012     As of June 30, 2012  
($ in thousands)     Actual Cash
Collections
Including Cash
Sales
    Income
Recognized
on Finance
Receivables
    Principal
Amortization
    Allowance
Charges
    Income
Recognized

on Finance
Receivables, Net
    Net Finance
Receivables
Balance
    Estimated
Remaining
Collections
    Total
Estimated
Collections
    Total Estimated
Collections to
Purchase Price
 

Purchase Period

  Purchase
Price
                   
                   
                   

1996

  $ 3,080      $ 10,164      $ 7,041      $ 3,123      $ 0      $ 7,041      $ 0      $ 60      $ 10,224        332

1997

    7,685        25,362        17,258        8,104        0        17,258        0        121        25,483        332

1998

    11,089        37,059        26,073        10,986        0        26,073        0        522        37,581        339

1999

    18,898        68,559        49,385        19,174        0        49,385        0        1,127        69,686        369

2000

    25,020        114,480        89,283        25,197        0        89,283        0        3,039        117,519        470

2001

    33,481        172,207        137,855        34,352        0        137,855        0        4,308        176,515        527

2002

    42,325        192,918        150,594        42,324        0        150,594        0        7,399        200,317        473

2003

    61,448        256,522        195,074        61,448        0        195,074        0        13,296        269,818        439

2004

    59,176        190,819        132,842        57,977        1,200        131,642        0        13,107        203,926        345

2005

    143,169        295,027        177,077        117,950        15,879        161,198        9,339        16,923        311,950        218

2006

    107,693        194,265        121,146        73,119        21,065        100,081        13,508        23,221        217,486        202

2007

    258,391        429,798        237,512        192,286        21,730        215,782        44,370        79,877        509,675        197

2008

    275,153        398,512        231,042        167,470        29,395        201,647        78,254        129,372        527,884        192

2009

    281,441        515,276        333,154        182,122        0        333,154        99,319        296,651        811,927        288

2010

    358,153        426,544        244,803        181,741        0        244,803        176,437        447,682        874,226        244

2011

    395,809        196,685        112,958        83,727        0        112,958        312,084        657,805        854,490        216

2012

    231,878        15,560        10,991        4,569        0        10,991        227,360        413,484        429,044        185
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,313,889      $ 3,539,757      $ 2,274,088      $ 1,265,669      $ 89,269      $ 2,184,819      $ 960,671      $ 2,107,994      $ 5,647,751        244
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Purchased Bankruptcy Portfolio   
      Inception through June 30, 2012     As of June 30, 2012  
($ in thousands)     Actual Cash
Collections
Including Cash
Sales
    Income
Recognized
on Finance
Receivables
    Principal
Amortization
    Allowance
Charges
    Income
Recognized
on Finance
Receivables, Net
    Net Finance
Receivables
Balance
    Estimated
Remaining
Collections
    Total
Estimated
Collections
    Total Estimated
Collections to
Purchase Price
 

Purchase Period

  Purchase
Price
                   
                   
                   

1996 - 2003

  $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0      $ 0        0

2004

    7,468        14,357        8,089        6,268        1,200        6,889        0        107        14,464        194

2005

    29,301        43,362        14,697        28,665        584        14,113        52        115        43,477        148

2006

    17,645        30,852        14,355        16,497        1,050        13,305        98        427        31,279        177

2007

    78,547        100,483        34,868        65,615        8,285        26,583        4,647        5,754        106,237        135

2008

    108,608        139,513        65,882        73,631        2,300        63,582        32,677        44,316        183,829        169

2009

    156,056        255,753        163,392        92,361        0        163,392        63,694        152,226        407,979        261

2010

    209,228        205,714        110,544        95,170        0        110,544        114,058        204,536 <