PRA Group Inc: Form 10-Q for the period ended Sep 30, 2023

All references in this Quarterly Report on Form 10-Q (this "Quarterly Report") to "PRA Group," "we," "our," "us," "the Company" or similar terms are to PRA Group, Inc. and its subsidiaries.

Forward-Looking Statements:

This Quarterly Report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical fact are forward-looking statements, including statements regarding overall cash collection trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans, strategies and anticipated events or trends. Our results could differ materially from those expressed or implied by such forward-looking statements, or our forward-looking statements could be wrong, as a result of risks, uncertainties and assumptions, including the following:

• a deterioration in the economic or inflationary environment in the markets in which we operate;
• our inability to replace our portfolios of nonperforming loans with additional portfolios sufficient to operate efficiently and profitably and/or purchase nonperforming loans at appropriate prices;
• our inability to collect sufficient amounts on our nonperforming loans to fund our operations, including as a result of restrictions imposed by local, state, federal and international laws and regulations;
• changes in accounting standards and their interpretations;
• the recognition of significant decreases in our estimate of future recoveries on nonperforming loans;
• the impact of a disease outbreak, such as the COVID-19 pandemic, on the markets in which we operate and our inability to successfully manage the challenges associated with a disease outbreak, including epidemics, pandemics or similar widespread public health concerns;
• the occurrence of goodwill impairment charges;
• loss contingency accruals that are inadequate to cover actual losses;
• our inability to manage risks associated with our international operations;
• changes in local, state, federal or international laws or the interpretation of these laws, including tax, bankruptcy and collection laws;
• changes in the administrative practices of various bankruptcy courts;
• our inability to comply with existing and new regulations of the collection industry;
• investigations, reviews, or enforcement actions by governmental authorities, including the Consumer Financial Protection Bureau ("CFPB");
• our inability to comply with data privacy regulations such as the General Data Protection Regulation ("GDPR");
• adverse outcomes in pending litigation or administrative proceedings;
• our inability to retain, expand, renegotiate or replace our credit facilities and our inability to comply with the covenants under our financing arrangements;
• our inability to manage effectively our capital and liquidity needs, including as a result of changes in credit or capital markets;
• changes in interest or exchange rates;
• default by or failure of one or more of our counterparty financial institutions;
• disruptions of business operations caused by cybersecurity incidents or the underperformance or failure of information technology infrastructure, networks or communication systems; and
• the "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 ("2022 Form 10-K") and in other filings with the Securities and Exchange Commission.

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. Except as required by law, we assume no obligation to publicly update or revise our forward-looking statements after the date of this Quarterly Report and you should not expect us to do so.

Frequently Used Terms

We may use the following terminology throughout this Quarterly Report:

• "Buybacks" refers to purchase price refunded by the seller due to the return of ineligible accounts.
• "Cash collections" refers to collections on our nonperforming loan portfolios.
• "Cash receipts" refers to cash collections on our nonperforming loan portfolios, fees and revenue recognized from our class action claims recovery service.
• "Change in expected recoveries" refers to the differences of actual recoveries received when compared to expected recoveries and the net present value of changes in estimated remaining collections.
• "Core" accounts or portfolios refer to accounts or portfolios that are nonperforming loans and are not in an insolvent status upon acquisition. These accounts are aggregated separately from insolvency accounts.
• "Estimated remaining collections" or "ERC" refers to the sum of all future projected cash collections on our nonperforming loan portfolios.
• "Finance receivables" or "receivables" refers to the negative allowance for expected recoveries recorded on our balance sheet as an asset.
• "Insolvency" accounts or portfolios refer to accounts or portfolios of nonperforming loans that are in an insolvent status when we purchase them and, as such, are purchased as a pool of insolvent accounts. These accounts include IVAs, Trust Deeds in the UK, Consumer Proposals in Canada and bankruptcy accounts in the U.S., Canada, Germany and the UK.
• "Negative allowance" refers to the present value of cash flows expected to be collected on our finance receivables.
• "Portfolio acquisitions" refers to all nonperforming loan portfolios added as a result of a purchase, but also includes portfolios added as a result of a business acquisition.
• "Portfolio purchases" refers to all nonperforming loan portfolios purchased in the normal course of business and excludes those added as a result of business acquisitions.
• "Portfolio income" reflects revenue recorded due to the passage of time using the effective interest rate calculated based on the purchase price of nonperforming loan portfolios and estimated remaining collections.
• "Purchase price" refers to the cash paid to a seller to acquire nonperforming loans.
• "Purchase price multiple" refers to the total estimated collections (as defined below) on our nonperforming loan portfolios divided by purchase price.
• "Recoveries" refers to cash collections plus buybacks and other adjustments.
• "Total estimated collections" or "TEC" refers to actual cash collections plus estimated remaining collections on our nonperforming loan portfolios.

Overview

We are a global financial and business services company with operations in the Americas, Europe and Australia. Our primary business is the purchase, collection and management of portfolios of nonperforming loans. We are headquartered in Norfolk, Virginia, and as of September 30, 2023, employed 3,134 full-time equivalents. Our shares of common stock are traded on the NASDAQ Global Select Market under the symbol "PRAA".

Executive Overview

For the three months ended September 30, 2023, we had:

• Total portfolio purchases of $311.2 million.
• Total cash collections of $419.6 million.
• Cash efficiency ratio of 58.9%.
• Diluted earnings per share of $(0.31).

For the nine months ended September 30, 2023, we had:

• Total portfolio purchases of $869.2 million.
• Total cash collections of $1,250.2 million.
• Cash efficiency ratio of 58.2%.
• Diluted earnings per share of $(1.91).

As of September 30, 2023, we had estimated remaining collections of $6.0 billion.

We believe our cash forecast curves are appropriate given the information we have as of the date of this Quarterly Report. However, we continue to operate in an economic environment that includes elevated levels of inflation, rising interest rates, foreign exchange rate fluctuations, and concerns of a global recession. Given the continued weak economic conditions, we have experienced near-term pressure on cash collections in certain markets. Note that factors that can cause near-term collections pressure are also typically the same factors that historically have led to more portfolio supply, as consumers struggle to manage and pay down their debt. Volumes and pricing in the U.S. market are improving, and we increased our U.S. investment level for the fourth consecutive quarter. While the European market continues to be competitive, our European business continues to capitalize on stable investment volumes. We cannot predict the full extent to which these items will impact our business, results of operations and financial condition.

Results of Operations

The results of operations include the financial results of the Company and all of our subsidiaries. Certain prior year amounts have been reclassified for consistency with the current year presentation. The following table sets forth our Consolidated Income Statement amounts as a percentage of Total revenues for the periods indicated (dollars in thousands):

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Three Months Ended September 30, 2023 Compared To Three Months Ended September 30, 2022

Cash Collections

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

(1) Cash collections adjusted refers to 2022 foreign currency cash collections remeasured at 2023 average U.S. dollar exchange rates.

Cash collections were $419.6 million for the three months ended September 30, 2023, an increase of $7.3 million, or 1.8%, compared to $412.3 million for the three months ended September 30, 2022. The increase was primarily due to higher cash collections of $20.9 million, or 87.8%, in Brazil, and higher cash collections of $13.4 million, or 8.7%, in Europe, both driven by higher levels of purchasing in recent years. These increases were partially offset by lower cash collections of $16.9 million, or 14.0%, in U.S. call center and other collections, and lower cash collections of $4.1 million, or 12.9%, in Americas Insolvency cash collections, both largely due to lower purchasing levels in recent years. U.S. legal cash collections decreased $6.1 million, or 8.5%, reflecting lower volumes of accounts placed in the legal channel due to lower purchasing levels in recent years.

Revenues

Revenue generation for the periods indicated was as follows (amounts in thousands):

Total Portfolio Revenue

Total portfolio revenue was $212.1 million for the three months ended September 30, 2023, a decrease of $22.1 million, or 9.4%, compared to $234.2 million for the three months ended September 30, 2022. The decrease was largely driven by lower levels of cash overperformance and an increase to the ERC of certain older pools during the three months ended September 30, 2022, that did not recur during the three months ended September 30, 2023, partially offset by higher revenue from the impact of increased purchasing in South America and Europe.

Other Revenue

Other revenue was $4.3 million for the three months ended September 30, 2023, a decrease of $6.3 million, or 59.4%, compared to $10.6 million for the three months ended September 30, 2022. The decrease was primarily due to the timing of settlements in our claims processing company, Claims Compensation Bureau, LLC ("CCB").

Operating Expenses

Total operating expenses were $173.4 million for the three months ended September 30, 2023, a decrease of $0.6 million, or 0.4%, compared to $174.0 million for the three months ended September 30, 2022.

Legal Collection Costs

Legal collection costs consist primarily of costs paid to courts where a lawsuit is filed for the purpose of attempting to collect on an account. These costs were $20.8 million for the three months ended September 30, 2023, a decrease of $2.6 million, or 11.1%, compared to $23.4 million for the three months ended September 30, 2022. The decrease was primarily due to lower volumes of accounts placed in the legal channel in the U.S. compared to the three months ended September 30, 2022.

Agency Fees

Agency fees were $19.4 million for the three months ended September 30, 2023, an increase of $4.2 million, or 27.6%, compared to $15.2 million for the three months ended September 30, 2022. The increase was primarily due to the increase in cash collections in Brazil.

Outside Fees and Services

Outside fees and services expenses were $18.9 million for the three months ended September 30, 2023, a decrease of $5.7 million, or 23.2%, compared to $24.6 million for the three months ended September 30, 2022. The decrease was primarily due to higher corporate legal fees during the three months ended September 30, 2022.

Impairment of Real Estate

Impairment of real estate was $5.0 million for the three months ended September 30, 2023, due to an impairment charge associated with our decision to cease call center operations at one of our owned regional offices in the U.S. No impairment was recorded for the three months ended September 30, 2022. The property is being marketed for sale or lease.

Interest Expense, Net

Interest expense, net was $49.5 million for the three months ended September 30, 2023, an increase of $17.0 million, or 52.4%, compared to $32.5 million for the three months ended September 30, 2022, primarily reflecting a higher average debt balance and higher interest rates.

Interest expense, net consisted of the following (amounts in thousands):

Income Tax Expense/(Benefit)

Income tax expense was $1.8 million for the three months ended September 30, 2023, a decrease of $9.3 million, or 83.8%, compared to $11.1 million for the three months ended September 30, 2022. We recorded income tax expense for the period despite incurring a quarterly pre-tax loss due to changes in our projected mix of income from different taxing jurisdictions. Tax expense was recorded during the period to reflect an estimated annual effective tax benefit rate. The decrease in income tax expense was primarily due to lower income before taxes during 2023 when compared to 2022. During the three months ended September 30, 2023, our effective tax benefit rate was 28.1%, compared to an effective tax rate of 28.9% for the three months ended September 30, 2022. The decrease in our effective tax rate was primarily due to changes in the mix of income from different taxing jurisdictions.

Nine Months Ended September 30, 2023 Compared To Nine Months Ended September 30, 2022

Cash Collections

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

(1) Cash collections adjusted refers to 2022 foreign currency cash collections remeasured at 2023 U.S. dollar exchange rates.

Cash collections were $1,250.2 million for the nine months ended September 30, 2023, a decrease of $87.2 million, or 6.5%, compared to $1,337.4 million for the nine months ended September 30, 2022. The decrease was primarily due to a decline of $98.7 million, or 23.5%, in U.S. call center and other cash collections, and lower cash collections of $21.4 million, or 21.2%, in Americas Insolvency collections, both largely due to lower purchasing levels in recent years. U.S. legal cash collections decreased $28.5 million, or 12.6%, reflecting lower volumes of accounts placed in the legal channel due to lower purchasing levels in recent years. These decreases were partially offset by higher cash collections in South America of $59.6 million, or 83.6%, due mainly to higher recent purchases.

Revenues

Revenue generation for the periods indicated was as follows (amounts in thousands):

Total Portfolio Revenue

Total portfolio revenue was $568.9 million for the nine months ended September 30, 2023, a decrease of $153.3 million, or 21.2%, compared to $722.2 million for the nine months ended September 30, 2022. The decrease was largely driven by lower purchasing, lower levels of cash overperformance and an increase to the ERC of certain pools during the nine months ended September 30, 2022, that did not recur during the nine months ended September 30, 2023. Additionally, and primarily impacting the first quarter of 2023, we experienced a softer tax season than we had anticipated, with U.S. collections lower than our expectations, which then prompted a reduction in ERC. This resulted in a negative $25.6 million net present value adjustment for our U.S. Core portfolio, with more than half of this adjustment related to the 2021 U.S. Core vintage.

Other revenue

Other revenue was $12.3 million for the nine months ended September 30, 2023, a decrease of $9.2 million, or 42.9%, compared to $21.5 million for the nine months ended September 30, 2022. The decrease was primarily due to the timing of settlements in CCB.

Operating Expenses

Operating expenses were $526.2 million for the nine months ended September 30, 2023, an increase of $9.0 million, or 1.7%, compared to $517.2 million for the nine months ended September 30, 2022.

Compensation and Employee Services

Compensation and employee services expenses were $217.7 million for the nine months ended September 30, 2023, an increase of $2.1 million, or 1.0%, compared to $215.6 million for the nine months ended September 30, 2022. The increase mainly reflects higher severance expenses of $8.6 million, partially offset by decreases in temporary labor and healthcare and other benefit expenses.

Legal Collection Costs

Legal collection costs were $66.2 million for the nine months ended September 30, 2023, an increase of $8.5 million, or 14.7%, compared to $57.7 million for the nine months ended September 30, 2022. The increase primarily reflects higher volumes of accounts placed in the legal channel in the U.S.

Agency Fees

Agency fees were $54.5 million for the nine months ended September 30, 2023, an increase of $7.1 million, or 15.0%, compared to $47.4 million for the nine months ended September 30, 2022. The increase was primarily due to the increase in cash collections in Brazil.

Outside Fees and Services

Outside fees and services expenses were $62.1 million for the nine months ended September 30, 2023, a decrease of $9.4 million, or 13.1%, compared to $71.5 million for the nine months ended September 30, 2022. The decrease reflects lower corporate legal costs and consulting fees.

Impairment of Real Estate

Impairment of real estate was $5.0 million for the nine months ended September 30, 2023, due to an impairment charge associated with our decision to cease call center operations at one of our owned regional offices in the U.S. No impairment was recorded for the nine months ended September 30, 2022. The property is being marketed for sale or lease.

Interest Expense, Net

Interest expense, net was $130.8 million for the nine months ended September 30, 2023, an increase of $35.0 million, or 36.6%, compared to $95.8 million for the nine months ended September 30, 2022, primarily reflecting a higher average debt balance and increased interest rates. Interest income increased $9.3 million primarily due to the cash we received and invested from the issuance of our Senior Notes due 2028 ("2028 Notes"), in the first quarter of 2023, substantially all of the net proceeds of which we used to retire our Convertible Senior Notes due 2023 ("2023 Notes") in the second quarter of 2023, in addition to higher interest rates earned on our bank account balances.

Interest expense, net consisted of the following (amounts in thousands):

Income Tax Expense/(Benefit)

Income tax benefit was $15.3 million for the nine months ended September 30, 2023, a decrease of $45.1 million, or 151.2%, compared to income tax expense of $29.8 million for the nine months ended September 30, 2022. The decrease in income tax expense was primarily due to lower income before taxes during the nine months ended September 30, 2023, which decreased $207.0 million, or 158.3%. During the nine months ended September 30, 2023, our effective tax benefit rate was 20.1%, compared to an effective tax rate of 22.8% for the nine months ended September 30, 2022. The decrease in our effective tax rate was mainly due to the timing of discrete items and changes in the mix of income from different taxing jurisdictions.

Supplemental Performance Data

Finance Receivables Portfolio Performance

We purchase portfolios of nonperforming loans from a variety of credit originators or acquire portfolios through business acquisitions and segregate them into two main portfolio segments; Core or Insolvency, based on the status of the account upon acquisition. In addition, the accounts are segregated into geographical regions based upon where the account was acquired. Ultimately, accounts are aggregated into annual pools based on portfolio segment, geography, and year of acquisition. Portfolios of accounts that were in an insolvency status at the time of acquisition are represented in the Insolvency tables below. All other acquisitions of portfolios of accounts are included in our Core portfolio tables as represented below. Once an account is initially segregated, it is not later transferred from an Insolvency pool to a Core pool or vice versa, and the account continues to be accounted for as originally segregated regardless of any future changes in operational status. Specifically, if a Core account files for bankruptcy or insolvency protection after acquisition, we adjust our collection practices to comply with any respective bankruptcy or insolvency rules or policies; however, the account remains in the Core pool. In the event an insolvency account is dismissed from its bankruptcy or insolvency status whether voluntarily or involuntarily, we are typically free to pursue alternative collection activities; however, the account remains in the Insolvency pool.

The purchase price multiple represents our estimate of total cash collections over the original purchase price of the portfolio. Purchase price multiples can vary over time due to a variety of factors, including pricing competition, supply levels, paper type, age of the accounts acquired, mix of portfolios purchased, costs to collect, expected returns and changes in operational efficiency. For example, increased pricing due to elevated levels of competition or supply constraints negatively impacts purchase price multiples as we pay more to buy similar portfolios of nonperforming loans.

Further, there is a direct relationship between the price we pay for a portfolio, the purchase price multiple and the effective interest rate of the pool. When we pay more for a portfolio, the purchase price multiple and effective interest rates are generally lower. The opposite tends to occur when we pay less for a portfolio. Certain types of accounts have lower collection costs, and we generally pay more for these types of accounts, resulting in a lower purchase price multiple, while realizing similar net income margins when compared with other portfolio purchases. Within a given portfolio type, to the extent that lower purchase price multiples are the result of more competitive pricing, this will generally lead to lower profitability. As portfolio pricing becomes more favorable on a relative basis, our profitability will tend to increase. Profitability within given Core portfolio types may also be impacted by the age and quality of the accounts, which impact the cost to collect those accounts. Fresher accounts, for example, typically carry lower associated collection costs, while older accounts and lower balance accounts typically carry higher costs and, as a result, require higher purchase price multiples to achieve the same net profitability as fresher paper.

Revenue recognition is driven by estimates of the amount and timing of future cash collections. We record new portfolio acquisitions at the purchase price, which reflects the amount we expect to collect discounted at an effective interest rate. During the year of acquisition, portfolios are aggregated into annual pools, and the blended effective interest rate will change to reflect new buying and new cash flow estimates until the end of the year. At that time, the purchase price amount is fixed at the aggregated amounts paid to acquire the portfolio, the effective interest rate is fixed at the amount we expect to collect, discounted at the rate to equate purchase price to the recovery estimate, and the currency rates are fixed for purposes of comparability in future periods. Depending on the level of performance and expected future impacts from our operations, we may update ERC and TEC levels based on the results of our cash forecasting with the correlating adjustment to the purchase price multiple. We follow an established process to evaluate ERC. During the first year following purchase, we typically do not adjust our purchase price multiples. Following the initial years, as we gain collection experience and confidence with a pool of accounts, we may begin to adjust ERC and TEC. Over time, our TEC has often increased as pools have aged resulting in the ratio of TEC to purchase price for any given year of buying to gradually increase. Thus, all factors being equal in terms of pricing, one would typically tend to see a higher collection to purchase price ratio from a pool of accounts that was six years from acquisition than a pool that was just two years from acquisition.

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

Purchase Price Multiples as of September 30, 2023 Amounts in thousands

(1) Includes finance receivables portfolios that were acquired through the acquisition of Aktiv Kapital AS in 2014 (as described in our 2022 Form 10-K).

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

(3) Non-U.S. amounts are presented at the exchange rate at the end of the year in which the portfolio was purchased. In addition, any purchase price adjustments that occur throughout the life of the portfolio are presented at the year-end exchange rate for the respective year of purchase.

(4) Non-U.S. amounts are presented at the year-end exchange rate for the respective year of purchase.

(5) Non-U.S. amounts are presented at the September 30, 2023 exchange rate.

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

Portfolio Financial Information Year-to-date as of September 30, 2023 Amounts in thousands

(1) Includes finance receivables portfolios that were acquired through the acquisition of Aktiv Kapital AS in 2014 (as described in our 2022 Form 10-K).

(2) Non-U.S. amounts are presented using the average exchange rates during the current reporting period.

(3) Non-U.S. amounts are presented at the September 30, 2023 exchange rate.

Cash Collections by Year, By Year of Purchase (1) Year-to-date as of September 30, 2023 Amounts in millions

(1) Non-U.S. amounts are presented using the average exchange rates during the cash collection period.

(2) Includes finance receivables portfolios that were acquired through the acquisition of Aktiv Kapital AS in 2014 (as described in our 2022 Form 10-K).

(3) Includes the nonperforming loan portfolios that were acquired through our business acquisitions.

(4) Non-U.S. amounts are presented at the exchange rate at the end of the year in which the portfolio was purchased. In addition, any purchase price adjustments that occur throughout the life of the pool are presented at the year-end exchange rate for the respective year of purchase.

Estimated Remaining Collections

The following chart shows our ERC of $5,975.6 million at September 30, 2023 by geographical region (amounts in millions).

The following chart shows our ERC by year for the 12 month periods ending September 30, in each of the years presented below. The forecast amounts reflect our estimate at September 30, 2023 of how much we expect to collect on our portfolios. These estimates are translated to U.S. dollars at the September 30, 2023 exchange rate.

The following table displays our ERC by year for the 12 month periods ending September 30, in each of the years presented below, by year, by geography as of September 30, 2023 (amounts in thousands):

ERC By Year, By Geography

Seasonality

Customer payment patterns in all of the countries in which we operate can be affected by seasonal employment trends, income tax refunds, and holiday spending habits.

Cash Collections

The following table displays our quarterly cash collections by geography and portfolio type for the periods indicated (amounts in thousands):

Cash Collections by Geography and Type

The following table provides additional details on the composition of our Core cash collections for the periods indicated (amounts in thousands):

Cash Collections by Source - Core Portfolios Only

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Collections Productivity (U.S. Portfolio)

The following table displays a collections productivity measure for our U.S. Portfolios for the periods indicated:

Cash Collections per Collector Hour Paid U.S. Portfolio

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

Cash Efficiency Ratio

The following table displays our cash efficiency ratio for the periods indicated:

Cash Efficiency Ratio (1)

(1) Calculated by dividing cash receipts less operating expenses by cash receipts.

Portfolio Acquisitions

The following graph shows the purchase price of our portfolios by year since 2013. It also includes the acquisition date of nonperforming loan portfolios that were acquired through our business acquisitions. The 2023 total represents portfolio acquisitions through the nine months ended September 30, 2023, while the prior year totals are for the full year.

* 2014 includes portfolios acquired in connection with the acquisition of Aktiv Kapital AS in 2014 (as described in our 2022 Form 10-K).

The following table displays our quarterly portfolio acquisitions for the periods indicated (amounts in thousands):

Portfolio Acquisitions by Geography and Type

Portfolio Acquisitions by Stratification (U.S. Only)

The following table categorizes our quarterly U.S. portfolio acquisitions for the periods indicated into major asset type and delinquency category. Since our inception in 1996, we have acquired nearly 62 million customer accounts in the U.S. (amounts in thousands).

U.S Portfolio Acquisitions by Major Asset Type

U.S. Portfolio Acquisitions by Delinquency Category

(1) Fresh accounts are typically past due 120 to 270 days, charged-off by the credit originator and sold prior to any post-charge-off collection activity.

(2) Primary accounts are typically 240 to 450 days past due, charged-off and have been previously placed with one contingent fee servicer.

(3) Secondary accounts are typically 360 to 630 days past due, charged-off and have been previously placed with two contingent fee servicers.

(4) Other accounts are 480 days or more past due, charged-off and have previously been worked by three or more contingent fee servicers.

Non-GAAP Financial Measures

We report our financial results in accordance with U.S. generally accepted accounting principles ("GAAP"). However, our management uses certain non-GAAP financial measures, including adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA"), to evaluate our operating and financial performance as well as to set performance goals. We present Adjusted EBITDA because we consider it an important supplemental measure of operations and financial performance. Our management believes Adjusted EBITDA helps provide enhanced period-to-period comparability of operations and financial performance, as it excludes certain items whose fluctuations from period to period do not necessarily correspond to changes in the operations of our business, and is useful to investors as other companies in the industry report similar financial measures. Adjusted EBITDA should not be considered as an alternative to net income determined in accordance with GAAP. In addition, our calculation of Adjusted EBITDA may not be comparable to the calculation of similarly titled measures presented by other companies.

Adjusted EBITDA is calculated starting with our GAAP financial measure, net income attributable to PRA Group, Inc., and is adjusted for:

• income tax expense (or less income tax benefit);
• foreign exchange loss (or less foreign exchange gain);
• interest expense, net (or less interest income, net);
• other expense (or less other income);
• depreciation and amortization;
• impairment of real estate;
• net income attributable to noncontrolling interests; and
• recoveries applied to negative allowance less changes in expected recoveries.

The following table is a reconciliation of net income as reported in accordance with GAAP to Adjusted EBITDA for the last 12 months ("LTM") as of September 30, 2023 and for the year ended December 31, 2022 (amounts in thousands):

Reconciliation of Non-GAAP Financial Measures

(1) Other expense reflects non-operating related activity.

Additionally, we evaluate our business using certain ratios that use Adjusted EBITDA, including Debt to Adjusted EBITDA, which is calculated by dividing borrowings by Adjusted EBITDA. The following table reflects our ratios of Debt to Adjusted EBITDA for the LTM as of September 30, 2023 and for the year ended December 31, 2022 (amounts in thousands):

Debt to Adjusted EBITDA

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Liquidity and Capital Resources

We actively manage our liquidity to help provide access to sufficient funding to meet our business needs and financial obligations.

Sources of Liquidity

Cash and cash equivalents. As of September 30, 2023, cash and cash equivalents totaled $105.2 million, of which $88.8 million consisted of cash on hand related to international operations with indefinitely reinvested earnings. See the "Undistributed Earnings of International Subsidiaries" section below for more information.

Borrowings. At September 30, 2023, we had the following committed amounts, amounts outstanding and availability under our credit facilities (amounts in thousands):

(1) Available borrowings after calculation of current borrowing base, which may be used for general corporate purposes, including portfolio purchases.

(2) Includes North American and Colombian revolving credit facilities.

(3) Subject to debt covenants, including advance rates ranging from 35-55% of applicable ERC.

On June 1, 2023, we used substantially all of the net proceeds received from the 2028 Notes to retire the 2023 Notes. We used the remainder of the net proceeds to repay a portion of the outstanding borrowings under the domestic revolving credit facility under our North America Credit Agreement.

Interest-bearing deposits. Per the terms of our European credit facility, we are permitted to obtain interest-bearing deposit funding of up to SEK 1.2 billion (the equivalent of approximately $109.8 million as of September 30, 2023). Interest-bearing deposits as of September 30, 2023 were $100.5 million.

Furthermore, we have the ability to slow the purchase of nonperforming loans if necessary, and use the net cash flow generated from our cash collections from our portfolio of existing nonperforming loans to temporarily service our debt and fund existing operations. For example, we invested $850.0 million in portfolio acquisitions in 2022. The portfolios acquired in 2022 generated $109.4 million of cash collections, representing only 6.3% of 2022 cash collections.

Uses of Liquidity and Material Cash Requirements

Forward Flows. Contractual obligations over the next year are primarily related to portfolio purchase commitments. As of September 30, 2023, we have forward flow commitments in place for the purchase of nonperforming loans with a maximum purchase price of $538.0 million, comprised of $356.4 million for the Americas and Australia and $181.6 million for Europe. These amounts are based on sellers' estimates of future forward flow sales and are dependent on actual delivery compared to these estimates. Accordingly, amounts purchased under these agreements may vary and are often less than the maximum amounts. We may also enter into new or renewed forward flow commitments and/or close on spot purchase transactions in addition to the current forward flow agreements.

Borrowings. Of our $2.8 billion in borrowings at September 30, 2023, estimated interest, unused fees and principal payments for the next 12 months are $193.8 million, of which, $10.0 million relates to principal on the term loan under our North American Credit Agreement. Beyond 12 months, our principal payment obligations related to debt maturities occur between one and six years. Many of our financing arrangements include covenants with which we must comply. As of September 30, 2023, we determined that we were in compliance with these covenants.

Share Repurchases. On February 25, 2022, we completed our $230.0 million share repurchase program. Also on February 25, 2022, our Board of Directors approved a new share repurchase program under which we are authorized to repurchase up to $150.0 million of our outstanding common stock. Repurchases may be made from time-to-time in open market transactions, through privately negotiated transactions, in block transactions, through purchases made in accordance with trading plans adopted under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") or other methods, subject to market and/or other conditions and applicable regulatory requirements. The new share repurchase program has no stated expiration date and does not obligate us to repurchase any specified amount of shares, remains subject to the discretion of our Board of Directors and, subject to compliance with applicable laws, may be modified, suspended or discontinued at any time. As of September 30, 2023, we had $67.7 million remaining for share repurchases under the new program, which is subject to restrictive covenants contained in our credit facilities and senior note indentures. Considering these covenants, we did not repurchase any common stock during the three months ended September 30, 2023. For more information, see Item 2 included in Part II of this Quarterly Report.

Leases. Our leases have remaining lease terms of one to 11 years. As of September 30, 2023, we had $51.7 million in lease liabilities, of which approximately $10.0 million matures within the next 12 months. For more information, see Note 5 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.

Derivatives. Derivative financial instruments are entered into to reduce our exposure to fluctuations in interest rates on variable rate debt and foreign currency exchange rates. As of September 30, 2023, we had $3.4 million of derivative liabilities, all of which mature within the next 12 months. For more information, see Note 7 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.

We believe that funds generated from operations and from cash collections on nonperforming loan portfolios, together with existing cash, available borrowings under our revolving credit facilities and access to the capital markets will be sufficient to finance our operations, planned capital expenditures, forward flow purchase commitments, debt maturities and additional portfolio purchases during the next 12 months and beyond. We may seek to access the debt or equity capital markets as we deem appropriate, market conditions permitting. Business acquisitions or higher than expected levels of portfolio purchasing could require additional financing from other sources.

Cash Flow Analysis

The following table summarizes our cash flow activity for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 (amounts in thousands):

Operating Activities

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

Net cash used in operating activities of $118.3 million for the nine months ended September 30, 2023 increased $114.9 million from net cash used in operating activities of $3.4 million for the nine months ended September 30, 2022. The increase was primarily driven by the impact of unrealized foreign currency transactions; higher cash paid for operating expenses, interest and taxes; and lower cash collections recognized as income.

Investing Activities

Cash provided by investing activities is primarily driven by recoveries applied to our negative allowance. Cash used in investing activities primarily relates to acquisitions of nonperforming loans and net investment activity.

Net cash provided by/(used in) investing activities decreased $375.0 million for the nine months ended September 30, 2023, primarily driven by an increase of $313.5 million in purchases of finance receivables, an increase of $57.8 million in purchases of investments and a decrease of $70.3 million in recoveries applied to the negative allowance. These items were partially offset by an increase of $58.2 million in proceeds from sales and maturities of investments.

Financing Activities

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

Net cash provided by/(used in) financing activities increased $518.3 million during the nine months ended September 30, 2023, primarily driven by proceeds from the issuance of our 2028 Notes of $400.0 million, a $351.9 million increase from net payments on our lines of credit in the prior year to net draws on our lines of credit in the current year and a decrease in our purchases of common stock of $111.4 million. These items were partially offset by the retirement of our 2023 Notes in the amount of $345.0 million.

Undistributed Earnings of International Subsidiaries

We intend to use predominantly all of our accumulated and future undistributed earnings of international subsidiaries to expand operations outside the U.S.; therefore, such undistributed earnings of international subsidiaries are considered to be indefinitely reinvested outside the U.S. Accordingly, no provision for income tax and withholding tax has been provided thereon. If management's intentions change and eligible undistributed earnings of international subsidiaries are repatriated or deemed repatriated due to intercompany loans, we could be subject to additional income taxes and withholding taxes. This could result in a higher effective tax rate in the period in which such a decision is made to repatriate accumulated or future undistributed international earnings. Changes in intercompany loan balances are expected to have little or no tax impact. The amount of cash on hand related to international operations with indefinitely reinvested earnings was $88.8 million and $75.3 million as of September 30, 2023 and December 31, 2022, respectively. Refer to Note 11 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report for further information related to our income taxes and undistributed international earnings.

Recent Accounting Pronouncements

For a summary of recent accounting pronouncements and the anticipated effects on our Consolidated Financial Statements see Note 13 to our Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report.

Critical Accounting Estimates

Our Consolidated Financial Statements have been prepared in accordance with GAAP. Some of our significant accounting policies require that we use estimates, assumptions and judgments that affect the reported amounts of revenues, expenses, assets and liabilities. For a discussion of our significant accounting policies, refer to Note 1 to our Consolidated Financial Statements included in Item 8 of our 2022 Form 10-K.

We consider accounting estimates to be critical if (1) the accounting estimates made involve a significant level of estimation uncertainty and (2) have had or are reasonably likely to have a material impact on our financial condition or results of operations. We base our estimates on historical experience, current trends and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ significantly from actual results, the impact on our Consolidated Financial Statements may be material.

We have determined that the following accounting policies involve critical estimates:

Revenue Recognition - Finance Receivables

Revenue recognition for finance receivables involves the use of estimates and the exercise of judgment on the part of management. These estimates include projections of the amount and timing of cash collections we expect to receive from our pools of accounts. We review individual pools for trends, actual performance versus projections and curve shape (a graphical depiction of the amount and timing of cash collections). We then project ERC and then apply a discounted cash flow methodology to our ERC. Adjustments to ERC may include adjustments reflecting recent collection trends, our view of current and future economic conditions, changes in collection assumptions or other timing related adjustments that could impact TEC.

Significant changes in our cash flow estimates could result in increased or decreased revenue as we immediately recognize the discounted value of such changes using the constant effective interest rate of the pool. Generally, adjustments to estimated cash forecasts for performance experienced in the current period result in an adjustment to revenue at an amount less than the impact of the performance in the period due to the effects of discounting. Additionally, cash collection forecast increases will generally result in more revenue being recognized and cash collection forecast decreases in less revenue being recognized over the life of the pool.

Valuation of Goodwill

In accordance with FASB ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), we evaluate goodwill for impairment annually and more frequently if indicators of potential impairment exist. Goodwill is reviewed for potential impairment at the reporting unit level.

Goodwill is evaluated for impairment either under the qualitative assessment option or using a quantitative approach depending on facts and circumstances of a reporting unit, including the excess of fair value over carrying amount in the last valuation, changes in the business environment and changes of the reporting unit or its composition. If upon evaluation of the qualitative factors, we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we are required to determine the reporting unit’s fair value and record as an impairment loss the amount the carrying value exceeds fair value, not to exceed the total amount of goodwill allocated to the respective reporting unit.

We determine the fair value of a reporting unit by applying the approaches prescribed under ASC Topic 820 "Fair Value Measurements and Disclosures": the income approach and the market approach. Depending on the availability of public data and suitable comparable transaction data, we may or may not use the market approach or we may emphasize the results from the approach differently. Under the income approach, we estimate the fair value of a reporting unit based on the present value of estimated future cash flows and a residual terminal value. Cash flow projections are based on management's estimates of growth rates, operating margins, necessary working capital and capital expenditure requirements, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit's ability to execute on the projected cash flows. Under the market approach, we estimate fair value based on prices and other relevant market transactions involving comparable publicly traded companies with operating and investment characteristics similar to the reporting unit.

As of September 30, 2023, we had goodwill of $412.5 million, consisting primarily of $385.6 million in our Debt Buying and Collection ("DBC") reporting unit.

We performed our most recent annual review, using a qualitative assessment, as of October 1, 2022, and concluded that goodwill was not impaired. At that time, we estimated that our DBC reporting unit's fair value exceeded its carrying value by a substantial margin. As of September 30, 2023, our quarterly impairment assessment did not identify the occurrence of any triggering events, and we determined our goodwill was not more-likely-than-not impaired. The Company will perform a quantitative goodwill impairment test of the reporting unit as of October 1, 2023, our next annual testing date.

While we concluded goodwill was not more-likely-than-not impaired as of September 30, 2023, we did identify a heightened risk for future impairment of the goodwill allocated to our DBC reporting unit, considering macroeconomic conditions, higher interest rates and their impact on discount rates, recent financial performance, and the recent decline in our stock price. Should these factors worsen, they could adversely impact the fair value of the reporting unit, and we may have to record impairment charges in future periods.

Income Taxes

We are subject to income taxes throughout the U.S. and in numerous international jurisdictions. These tax laws are complex and are subject to different interpretations by the taxpayer and the relevant government taxing authorities. When determining our domestic and non-U.S. income tax expense, we make judgments about the application of these inherently complex laws.

We record a tax provision for the anticipated tax consequences of the reported results of operations. The provision for income taxes is estimated using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.

We exercise significant judgment in estimating the potential exposure to unresolved tax matters and apply a more likely than not criteria approach for recording tax benefits related to uncertain tax positions in the application of the complex tax laws. While actual results could vary, we believe we have adequate tax accruals with respect to the ultimate outcome of such unresolved tax matters. We record interest and penalties related to unresolved tax matters as a component of income tax expense when the more likely than not standards are met.

If all or part of the deferred tax assets are determined not to be realizable in the future, we would establish a valuation allowance and charge to earnings the impact in the period such a determination is made. If we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings. The establishment or release of a valuation allowance does not have an impact on cash, nor does such an allowance preclude the use of loss carryforwards or other deferred tax assets in future periods. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position. For further information regarding our uncertain tax positions, refer to Note 13 to our Consolidated Financial Statements included in Item 8 of our 2022 Form 10-K.

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

Interest Rate Risk

We are subject to interest rate risk from outstanding borrowings on our variable rate credit facilities. As such, our consolidated financial results are subject to fluctuations due to changes in the market rate of interest. We assess this interest rate risk by estimating the increase or decrease in interest expense that would occur due to a change in short-term interest rates. The borrowings on our variable rate credit facilities were approximately $1.8 billion as of September 30, 2023. Based on our debt structure at September 30, 2023, assuming a 50 basis point decrease in interest rates, interest expense over the following 12 months would decrease by an estimated $5.1 million. Assuming a 50 basis point increase in interest rates, interest expense over the following 12 months would increase by an estimated $5.1 million.

To reduce the exposure to changes in the market rate of interest and to comply with the terms of our European revolving credit facility, we have entered into interest rate derivative contracts for a portion of our borrowings under our floating rate financing arrangements. Considering these contracts in addition to our fixed rate borrowings, as of September 30, 2023, we were 66% hedged on a notional basis. We apply hedge accounting to all of our interest rate derivative contracts. By applying hedge accounting, changes in market value are reflected as adjustments in Other comprehensive (loss)/income. All derivatives to which we have applied hedge accounting were evaluated and remained highly effective at September 30, 2023. Terms of the interest rate derivative contracts require us to receive a variable interest rate and pay a fixed interest rate. The sensitivity calculations above consider the impact of our interest rate derivative contracts and zero interest rate floors on revolving loans under our North America, UK and European credit facilities.

Currency Exchange Risk

We operate internationally and enter into transactions denominated in various foreign currencies. During the three months ended September 30, 2023, we generated $111.0 million of revenues from operations outside the U.S. and used 12 functional currencies, excluding the U.S. dollar. Weakness in one particular currency might be offset by strength in other currencies over time.

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

Foreign currency gains and losses are primarily the result of the re-measurement of transactions in certain other currencies into an entity's functional currency. Foreign currency gains and losses are included as a component of other income and (expense) in our Consolidated Income Statements. From time to time, we may elect to enter into foreign exchange derivative contracts to reduce these variations in our Consolidated Income Statements.

When an entity's functional currency is different than the reporting currency of its parent, foreign currency translation adjustments may occur. Foreign currency translation adjustments are included as a component of other comprehensive (loss)/income in our Consolidated Statements of Comprehensive Income and as a component of equity in our Consolidated Balance Sheets.

We have taken measures to mitigate the impact of foreign currency fluctuations. We have organized our European operations such that portfolio ownership and collections generally occur within the same entity. Our UK and European credit facilities are multi-currency facilities, allowing us to better match funding and portfolio acquisitions by currency. We actively monitor the value of our finance receivables by currency. In the event adjustments are required to our liability composition by currency, we may, from time to time, execute re-balancing foreign exchange contracts to more closely align funding and portfolio acquisitions by currency.

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. We conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on this evaluation, the principal executive officer and principal financial officer have concluded that, as of September 30, 2023, our disclosure controls and procedures were effective.

Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.