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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q/A
Amendment No. 1
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010.
     
o   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   (I.R.S. Employer
incorporation or organization)   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 þ NO o
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 o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
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 November 3, 2010
Common Stock, $0.01 par value
    17,061,914  
 
 


 

EXPLANATORY NOTE
     The purpose of this Quarterly Report on Form 10-Q/A is to amend the Supplemental Performance Data section in Part I, Item 2, Part II, Items 1 and 1A and Item 5 of our Quarterly Report on Form 10-Q for the period ended September 30, 2010, which was filed with the Securities and Exchange Commission (the “SEC”) on November 9, 2010 (the “Original 10-Q”).
     The Amended Items have been amended and restated to respond to comments issued by the Staff of the Securities and Exchange Commission and to supplement and clarify previous disclosures. Except as stated herein, this Form 10-Q/A does not reflect events occurring after the filing of the Original 10-Q on November 9, 2010 and no attempt has been made in this Quarterly Report on Form 10-Q/A to modify or update other disclosures as presented in the Original 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with the Original 10-Q and our filings with the SEC subsequent to the filing of the Original 10-Q.
     Pursuant to the rules of the Securities and Exchange Commission, we have also included currently dated certifications from our principal executive and principal financial officers, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, attached as Exhibits 31.1, 31.2 and 32.1 to this report.
     No other changes have been made to the Original 10-Q.

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PORTFOLIO RECOVERY ASSOCIATES, INC.
INDEX

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Part I. FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Supplemental Performance Data
Owned Portfolio Performance:
     The following tables show certain data related to our owned portfolio. These tables describe the purchase price, cash collections and related multiples. Further, these tables disclose our entire portfolio, the portfolio of purchased bankrupt accounts and our entire portfolio less the impact of our purchased bankrupt accounts. 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 bankruptcy after we purchase them.
     The purchase price multiples for 2005 through 2008 described in the table below are lower than historical 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. This was the situation during 2005-2007 and this situation also extended into 2008 to the extent that deals purchased in 2008 were part of forward flow agreements priced in earlier periods.
     Additionally however, the way we initially book newly acquired pools of accounts and how we forecast future estimated collections for any given portfolio of accounts has evolved over the years due to a number of factors including the current economic situation. Since our revenue recognition under ASC 310-30 is driven by both 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 pace. Subsequent to the initial booking, as we gain collection experience and comfort with a pool of accounts, we continuously update ERC as time goes on. Since our inception, these processes have tended to cause the ratio of collections, including ERC, to purchase price multiple for any given year of buying to gradually increase over time. As a result, our estimate of lifetime collections to purchase price has shown relatively steady increases as pools have aged. Thus, all factors being equal in terms of pricing, one would naturally tend to see a higher collection to purchase price ratio from a pool of accounts that were six years from purchase than say a pool that was just two years from purchase.
     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 extracting additional cash from a discreet quantity and quality of accounts, and/or by extracting cash at a lower cost structure, we can put upward pressure on the collection to purchase price ratio and also on our operating margins. During 2008 and continuing through all of 2009, we made significant enhancements in our analytical abilities, management personnel and automated dialing capabilities, all with the intent to collect more cash at lower cost.

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Entire Portfolio ($ in thousands)
                                                                         
                    Unamortized           Percentage of   Percentage of Reserve   Actual Cash        
                    Purchase Price   Life to Date   Reserve   Allowance to Unamortized   Collections   Estimated   Total Estimated
Purchase   Purchase   Total Estimated   Balance at   Reserve   Allowance to   Purchase Price and   Including Cash   Remaining   Collections to
Period   Price(1)   Collections (2)   September 30, 2010 (3)   Allowance (4)   Purchase Price (5)   Reserve Allowance (6)   Sales   Collections (7)   Purchase Price (8)
 
1996
  $ 3,080     $ 10,094     $ 0     $ 0       0 %     0 %   $ 10,024     $ 70       328 %
1997
  $ 7,685     $ 25,244     $ 0     $ 0       0 %     0 %   $ 25,057     $ 187       328 %
1998
  $ 11,089     $ 36,913     $ 0     $ 0       0 %     0 %   $ 36,506     $ 407       333 %
1999
  $ 18,898     $ 68,282     $ 0     $ 0       0 %     0 %   $ 66,901     $ 1,381       361 %
2000
  $ 25,020     $ 113,442     $ 0     $ 0       0 %     0 %   $ 110,146     $ 3,296       453 %
2001
  $ 33,481     $ 169,035     $ 0     $ 0       0 %     0 %   $ 165,568     $ 3,467       505 %
2002
  $ 42,325     $ 187,309     $ 0     $ 0       0 %     0 %   $ 182,872     $ 4,437       443 %
2003
  $ 61,448     $ 248,438     $ 0     $ 0       0 %     0 %   $ 240,944     $ 7,494       404 %
2004
  $ 59,177     $ 184,196     $ 462     $ 1,225       2 %     2 %   $ 176,311     $ 7,885       311 %
2005
  $ 143,171     $ 309,500     $ 23,563     $ 15,985       11 %     10 %   $ 265,608     $ 43,892       216 %
2006
  $ 107,701     $ 218,553     $ 29,349     $ 17,695       16 %     14 %   $ 163,894     $ 54,659       203 %
2007
  $ 258,271     $ 505,819     $ 111,183     $ 17,165       7 %     6 %   $ 316,096     $ 189,723       196 %
2008
  $ 275,130     $ 538,306     $ 166,926     $ 18,895       7 %     6 %   $ 246,306     $ 292,000       196 %
2009
  $ 281,641     $ 713,656     $ 213,969     $ 0       0 %     0 %   $ 190,109     $ 523,547       253 %
YTD 2010
  $ 278,266     $ 585,030     $ 261,787     $ 0       0 %     0 %   $ 47,901     $ 537,129       210 %
 
Total
  $ 1,606,383     $ 3,913,817     $ 807,239     $ 70,965       4 %     4 %   $ 2,244,243     $ 1,669,574       244 %
 
Purchased Bankruptcy Portfolio ($ in thousands)
                                                                         
                    Unamortized           Percentage of   Percentage of Reserve   Actual Cash        
                    Purchase Price   Life to Date   Reserve   Allowance to Unamortized   Collections   Estimated   Total Estimated
Purchase   Purchase   Total Estimated   Balance at   Reserve   Allowance to   Purchase Price and   Including Cash   Remaining   Collections to
Period   Price(1)   Collections (2)   September 30, 2010 (3)   Allowance (4)   Purchase Price (5)   Reserve Allowance (6)   Sales   Collections (7)   Purchase Price (8)
 
1996-2003
  $ 0     $ 0     $ 0     $ 0       0 %     0 %   $ 0     $ 0       0 %
2004
  $ 7,469     $ 14,160     $ 13     $ 1,225       16 %     14 %   $ 14,113     $ 47       190 %
2005
  $ 29,302     $ 43,020     $ 340     $ 920       3 %     3 %   $ 42,577     $ 443       147 %
2006
  $ 17,643     $ 30,450     $ 269     $ 1,430       8 %     7 %   $ 28,321     $ 2,129       173 %
2007
  $ 78,933     $ 112,658     $ 31,286     $ 1,910       2 %     2 %   $ 74,210     $ 38,448       143 %
2008
  $ 108,603     $ 183,195     $ 72,428     $ 0       0 %     0 %   $ 78,709     $ 104,486       169 %
2009
  $ 156,094     $ 360,983     $ 132,970     $ 0       0 %     0 %   $ 75,372     $ 285,611       231 %
YTD 2010
  $ 172,703     $ 324,795     $ 167,846     $ 0       0 %     0 %   $ 21,327     $ 303,468       188 %
 
Total
  $ 570,747     $ 1,069,261     $ 405,152     $ 5,485       1 %     1 %   $ 334,629     $ 734,632     187 %
 
Entire Portfolio Less Purchased Bankruptcy Portfolio ($ in thousands)
                                                                         
                    Unamortized           Percentage of   Percentage of Reserve   Actual Cash        
                    Purchase Price   Life to Date   Reserve   Allowance to Unamortized   Collections   Estimated   Total Estimated
Purchase   Purchase   Total Estimated   Balance at   Reserve   Allowance to   Purchase Price and   Including Cash   Remaining   Collections to
Period   Price(1)   Collections (2)   September 30, 2010 (3)   Allowance (4)   Purchase Price (5)   Reserve Allowance (6)   Sales   Collections (7)   Purchase Price (8)
 
1996
  $ 3,080     $ 10,094     $ 0     $ 0       0 %     0 %   $ 10,024     $ 70       328 %
1997
  $ 7,685     $ 25,244     $ 0     $ 0       0 %     0 %   $ 25,057     $ 187       328 %
1998
  $ 11,089     $ 36,913     $ 0     $ 0       0 %     0 %   $ 36,506     $ 407       333 %
1999
  $ 18,898     $ 68,282     $ 0     $ 0       0 %     0 %   $ 66,901     $ 1,381       361 %
2000
  $ 25,020     $ 113,442     $ 0     $ 0       0 %     0 %   $ 110,146     $ 3,296       453 %
2001
  $ 33,481     $ 169,035     $ 0     $ 0       0 %     0 %   $ 165,568     $ 3,467       505 %
2002
  $ 42,325     $ 187,309     $ 0     $ 0       0 %     0 %   $ 182,872     $ 4,437       443 %
2003
  $ 61,448     $ 248,438     $ 0     $ 0       0 %     0 %   $ 240,944     $ 7,494       404 %
2004
  $ 51,708     $ 170,036     $ 449     $ 0       0 %     0 %   $ 162,198     $ 7,838       329 %
2005
  $ 113,869     $ 266,480     $ 23,223     $ 15,065       13 %     12 %   $ 223,032     $ 43,448       234 %
2006
  $ 90,058     $ 188,103     $ 29,080     $ 16,265       18 %     15 %   $ 135,572     $ 52,531       209 %
2007
  $ 179,338     $ 393,161     $ 79,897     $ 15,255       9 %     8 %   $ 241,887     $ 151,274       219 %
2008
  $ 166,527     $ 355,111     $ 94,498     $ 18,895       11 %     10 %   $ 167,597     $ 187,514       213 %
2009
  $ 125,547     $ 352,673     $ 80,999     $ 0       0 %     0 %   $ 114,737     $ 237,936       281 %
YTD 2010
  $ 105,563     $ 260,235     $ 93,941     $ 0       0 %     0 %   $ 26,573     $ 233,662       247 %
 
Total
  $ 1,035,636     $ 2,844,556     $ 402,087     $ 65,480       6 %     6 %   $ 1,909,614     $ 934,942       275 %
 
(1)   Purchase price refers to the cash paid to a seller to acquire defaulted consumer receivables, plus certain capitalized costs, less the purchase price refunded by the seller due to the return of non-compliant accounts (also defined as buybacks). Non-compliant refers to the contractual representations and warranties provided for in the purchase and sale contract between the seller and us. These representations and warranties from the sellers generally cover account holders’ death or bankruptcy and accounts settled or disputed prior to sale. The seller can replace or repurchase these accounts.
 
(2)   Total estimated collections refers to the actual cash collections, including cash sales, plus estimated remaining collections.

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(3)   Unamortized purchase price balance refers to the purchase price less finance receivable amortization over the life of the portfolio.
 
(4)   Life to date reserve allowance refers to the total amount of allowance charges incurred on our owned portfolios net of any reversals.
 
(5)   Percentage of reserve allowance to purchase price refers to the total amount of allowance charges incurred on our owned portfolios net of any reversals, divided by the purchase price.
 
(6)   Percentage of reserve allowance to unamortized purchase price and reserve allowance refers to the total amount of allowance charges incurred on our owned portfolios net of any reversals, divided by the sum of the unamortized purchase price and the life to date reserve allowance.
 
(7)   Estimated remaining collections refers to the sum of all future projected cash collections on our owned portfolios.
 
(8)   Total estimated collections to purchase price refers to the total estimated collections divided by the purchase price.
     The following table shows our net valuation allowances booked since we began accounting for our investment in finance receivables under the guidance of ASC 310-30.
($ in thousands)
                                                                         
    Purchase Period         Allowance
Allowance                                                                   Charge as
Period (1)   1996-2003   2004   2005   2006   2007   2008   2009-2010   Total   % of NFR (2)
 
Q1 05
  $     $     $     $     $     $     $     $     0.0%  
Q2 05
                                                    0.0 %
Q3 05
                                                    0.0 %
Q4 05
    200                                           200       0.1 %
Q1 06
                175                               175       0.1 %
Q2 06
    75             125                               200       0.1 %
Q3 06
    200             75                               275       0.1 %
Q4 06
                450                               450       0.2 %
Q1 07
    (245 )           610                               365       0.1 %
Q2 07
    90                                           90       0.0 %
Q3 07
    200       320       660                               1,180       0.4 %
Q4 07
    190       150       615       340                         1,295       0.3 %
Q1 08
    120       650       910       1,105                         2,785       0.6 %
Q2 08
    260       720             2,330       650                   3,960       0.8 %
Q3 08
    (90 )     60       325       1,135       2,350                   3,780       0.7 %
Q4 08
    (400 )     (140 )     1,805       2,600       4,380       620             8,865       1.6 %
Q1 09
    (225 )     35       1,150       910       2,300       2,050             6,220       1.1 %
Q2 09
    (230 )     (220 )     495       765       685       2,425             3,920       0.6 %
Q3 09
    (25 )     (190 )     1,170       1,965       340       4,750             8,010       1.2 %
Q4 09
    (120 )           1,375       1,220       110       6,900             9,485       1.4 %
Q1 10
                2,795       1,175       2,900                   6,870       0.9 %
Q2 10
          (80 )     1,600       2,100       700       2,000             6,320       0.8 %
Q3 10
          (80 )     1,650       2,050       2,750       150             6,520       0.8 %
         
Total
  $     $ 1,225     $ 15,985     $ 17,695     $ 17,165     $ 18,895     $     $ 70,965          
         
Portfolio
Purchases, net
  $ 203,026     $ 59,177     $ 143,171     $ 107,701     $ 258,271     $ 275,130     $ 559,907     $ 1,606,383          
         
(1)   Allowance period represents the quarter in which we recorded valuation allowances, net of any (reversals).
 
(2)   NFR refers to total net finance receivables as of the end of the allowance period presented.

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     The following graph shows the purchase price of our owned portfolios by year and includes the year to date acquisition amount for the nine months ended September 30, 2010. The purchase price number represents the cash paid to the seller to acquire defaulted consumer receivables, plus certain capitalized costs, less the purchase price refunded by the seller due to the return of non-compliant accounts.
(BAR GRAPH)
     As shown in the above chart, the composition of our purchased portfolios has shifted in favor of bankrupt accounts in recent years. We began buying bankrupt accounts during 2004 and slowly increased the volume of accounts we acquired through 2006 as we tested our models, refined our processes and proved out our operating assumptions. After observing a high level of modeling confidence in our early purchases, we began increasing our level of purchases more dramatically during the period from 2007 through the third quarter of 2010.
     Our ability to profitably purchase and liquidate pools of bankrupt accounts provides diversity to our distressed asset acquisition business. Although we generally buy bankrupt assets from many of the same consumer lenders from whom we acquire charged off (“Core”) consumer accounts, the volumes and pricing characteristics as well as the competitors are different. Based upon market dynamics, the profitability of pools purchased in the bankrupt and Core markets may differ over time. We have found periods when bankrupt accounts were more profitable and other times when Core accounts were more profitable. From 2004 through 2008, our bankruptcy buying fluctuated between 13% and 39% of our total portfolio purchasing in those years. In 2009, for the first time in our history, bankruptcy purchasing exceeded that of our Core buying, finishing at 55% of total portfolio purchasing for the year. This occurred as severe dislocations in the financial markets, coupled with legislative uncertainty, caused pricing in the bankruptcy market to decline substantially thereby driving our strategy to make advantageous bankruptcy portfolio acquisitions during this period.
     In order to collect our Core portfolios, we generally need to employ relatively higher amounts of labor and incur additional collection costs to generate each dollar of cash collections as compared with bankruptcy portfolios. In order to achieve acceptable levels of net return on investment (after direct expenses), we are generally targeting a total cash collections to purchase price multiple in the 2.5-3.0x range. On the other hand, bankrupt accounts generate the majority of cash collections through the efforts of the U.S. bankruptcy courts. In this process, cash is remitted to our Company with no corresponding cost other than the cost of filing claims at the time of purchase and general administrative costs for monitoring the progress of each account through the bankruptcy process. As a result, overall collection costs are much lower for us when liquidating a pool of bankrupt accounts as compared to a pool of Core accounts, but conversely the price we pay for bankrupt accounts is generally higher than Core accounts. We generally target similar returns on investment (measured after direct expenses) for bankrupt and Core portfolios at any given point in the market cycles. However, because of the lower related collection costs, we can pay more for bankrupt portfolios, which causes the estimated total cash collections to purchase price multiples of bankrupt pools to be in the 1.4-2.0x range generally. In summary, compared to a pool of Core accounts, to the

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extent both pools had identical targeted returns on investment (measured after direct expenses), the bankrupt pool would be expected to generate less revenue, a lower yield, less direct expenses, similar operating income, and a higher operating margin.
     In addition, collections on younger, newly filed bankrupt accounts tend to be of a lower magnitude in the earlier months when compared to Core charge-off accounts. This lower level of early period collections is due to the fact that 1) we purchase primarily accounts that represent unsecured claims in bankruptcy, and 2) these unsecured claims are scheduled to begin paying out after the secured and priority claims. As a result of the administrative processes regarding payout priorities within the court-administered bankruptcy plans, unsecured creditors do not generally begin receiving meaningful collections on unsecured claims until 12 to 18 months after the bankruptcy filing date. Therefore, to the extent that we purchase portfolios with more recent bankruptcy filing dates, as we did to a significant extent in 2009 and 2010, we would expect to experience a delay in cash collections compared with Core charged-off accounts.
     We utilize a long-term approach to collecting our owned pools of receivables. This approach has historically caused us to realize significant cash collections and revenues from purchased pools of finance receivables years after they are originally acquired. As a result, we have in the past been able to reduce our level of current period acquisitions without a corresponding negative current period impact on cash collections and revenue.
     The following table, which excludes any proceeds from cash sales of finance receivables, demonstrates our ability to realize significant multi-year cash collection streams on our owned pools:
Cash Collections By Year, By Year of Purchase — Entire Portfolio
($in thousands)
                                                                                                         
Purchase   Purchase                                           Cash Collection Period                    
Period   Price   1996-2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   YTD 2010   Total
 
1996
  $ 3,080     $ 7,295     $ 730     $ 496     $ 398     $ 285     $ 210     $ 237     $ 102     $ 83     $ 78     $ 48     $ 9,962  
1997
    7,685       15,138       2,630       1,829       1,324       1,022       860       597       437       346       215       151       24,549  
1998
    11,089       16,981       5,152       3,948       2,797       2,200       1,811       1,415       882       616       397       281       36,480  
1999
    18,898       18,207       12,090       9,598       7,336       5,615       4,352       3,032       2,243       1,533       1,328       875       66,209  
2000
    25,020       6,894       19,498       19,478       16,628       14,098       10,924       8,067       5,202       3,604       3,198       2,093       109,684  
2001
    33,481             13,048       28,831       28,003       26,717       22,639       16,048       10,011       6,164       5,299       3,317       160,077  
2002
    42,325                   15,073       36,258       35,742       32,497       24,729       16,527       9,772       7,444       4,819       182,861  
2003
    61,448                         24,308       49,706       52,640       43,728       30,695       18,818       13,135       7,915       240,945  
2004
    59,177                               18,019       46,475       40,424       30,750       19,339       13,677       7,622       176,306  
2005
    143,171                                     18,968       75,145       69,862       49,576       33,366       18,691       265,608  
2006
    107,701                                           22,971       53,192       40,560       29,749       17,422       163,894  
2007
    258,271                                                 42,263       115,011       94,805       64,017       316,096  
2008
    275,130                                                       61,277       107,974       77,055       246,306  
2009
    281,641                                                             57,338       132,771       190,109  
YTD 2010
    278,266                                                                   47,901       47,901  
 
Total
  $ 1,606,383     $ 64,515     $ 53,148     $ 79,253     $ 117,052     $ 153,404     $ 191,376     $ 236,393     $ 262,166     $ 326,699     $ 368,003     $ 384,978     $ 2,236,987  
 
Cash Collections By Year, By Year of Purchase — Purchased Bankruptcy only Portfolio
($in thousands)
                                                                                                         
Purchase   Purchase                                           Cash Collection Period                    
Period   Price   1996-2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   YTD 2010   Total
 
2004
  $ 7,469     $     $     $     $     $ 743     $ 4,554     $ 3,956     $ 2,777     $ 1,455     $ 496     $ 132     $ 14,113  
2005
    29,302                                     3,777       15,500       11,934       6,845       3,318       1,203       42,577  
2006
    17,643                                           5,608       9,455       6,522       4,398       2,338       28,321  
2007
    78,933                                                 2,850       27,972       25,630       17,758       74,210  
2008
    108,603                                                       14,024       35,894       28,791       78,709  
2009
    156,094                                                             16,635       58,737       75,372  
YTD 2010
    172,703                                                                   21,327       21,327  
 
Total
  $ 570,747     $     $     $     $     $ 743     $ 8,331     $ 25,064     $ 27,016     $ 56,818     $ 86,371     $ 130,286     $ 334,629  
 

8


 

Cash Collections By Year, By Year of Purchase — Entire Portfolio less Purchased Bankruptcy Portfolio
($ in thousands)
                                                                                                         
Purchase   Purchase                                           Cash Collection Period                    
Period   Price   1996-2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   YTD 2010   Total
 
1996
  $ 3,080     $ 7,295     $ 730     $ 496     $ 398     $ 285     $ 210     $ 237     $ 102     $ 83     $ 78     $ 48     $ 9,962  
1997
    7,685       15,138       2,630       1,829       1,324       1,022       860       597       437       346       215       151       24,549  
1998
    11,089       16,981       5,152       3,948       2,797       2,200       1,811       1,415       882       616       397       281       36,480  
1999
    18,898       18,207       12,090       9,598       7,336       5,615       4,352       3,032       2,243       1,533       1,328       875       66,209  
2000
    25,020       6,894       19,498       19,478       16,628       14,098       10,924       8,067       5,202       3,604       3,198       2,093       109,684  
2001
    33,481             13,048       28,831       28,003       26,717       22,639       16,048       10,011       6,164       5,299       3,317       160,077  
2002
    42,325                   15,073       36,258       35,742       32,497       24,729       16,527       9,772       7,444       4,819       182,861  
2003
    61,448                         24,308       49,706       52,640       43,728       30,695       18,818       13,135       7,915       240,945  
2004
    51,708                               17,276       41,921       36,468       27,973       17,884       13,181       7,490       162,193  
2005
    113,869                                     15,191       59,645       57,928       42,731       30,048       17,489       223,032  
2006
    90,058                                           17,363       43,737       34,038       25,351       15,083       135,572  
2007
    179,338                                                 39,413       87,039       69,175       46,260       241,887  
2008
    166,527                                                       47,253       72,080       48,264       167,597  
2009
    125,547                                                             40,703       74,034       114,737  
YTD 2010
    105,563                                                                   26,573       26,573  
 
Total
  $ 1,035,636     $ 64,515     $ 53,148     $ 79,253     $ 117,052     $ 152,661     $ 183,045     $ 211,329     $ 235,150     $ 269,881     $ 281,632     $ 254,692     $ 1,902,358  
 
     When we acquire a new pool of finance receivables, our estimates typically result in an 84 - 96 month projection of cash collections. The following chart shows our historical cash collections (including cash sales of finance receivables) in relation to the aggregate of the total estimated collection projections made at the time of each respective pool purchase, adjusted for buybacks.
(GRAPH)
     Primarily as a result of the downturn in the economy, the decline in the availability of consumer credit, our efforts to help customers establish reasonable payment plans, and improvements in our collections capabilities which have allowed us to profitably collect on accounts with lower balances or lower quality, our average payment size has decreased over the past several years. However, due to improved scoring and segmentation, together with enhanced productivity, we have been able to generate increased amounts of cash collections by generating enough incremental payments to overcome the decrease in payment size.
Owned Portfolio Personnel Performance:
     We measure the productivity of each collector each month, breaking results into groups of similarly tenured collectors. The following tables display various productivity measures that we track.

9


 

Number of Collectors by Tenure
                                                 
    One year + (1)
    2005   2006   2007   2008   2009   2010
     
Q1
    319       331       340       314       488       690  
Q2
    319       342       360       348       587       711  
Q3
    324       324       397       410       604       742  
Q4
    327       340       327       452       638        
                                                 
    Less than one year (2)
    2005   2006   2007   2008   2009   2010
     
Q1
    345       360       435       688       621       686  
Q2
    330       372       481       744       612       681  
Q3
    268       402       475       631       585       642  
Q4
    364       375       553       739       676        
                                                 
    Total (2)
    2005   2006   2007   2008   2009   2010
     
Q1
    664       691       775       1,002       1,109       1,376  
Q2
    649       714       841       1,092       1,199       1,392  
Q3
    592       726       872       1,041       1,189       1384  
Q4
    691       715       880       1,191       1,314        
 
(1)   Calculated based on actual employees (collectors) with one year of service or more.
 
(2)   Calculated using total hours worked by all collectors, including those in training to produce a full time equivalent “FTE.”
     The tables below contain our past five years of collector productivity metrics as defined by calendar quarter.
QTD Cash Collections per Hour Paid (1)
                                                 
    Total cash collections
    2005   2006   2007   2008   2009   2010
     
Q1
  $ 136     $ 152     $ 156     $ 133     $ 147     $ 182  
Q2
  $ 138     $ 146     $ 142     $ 136     $ 143     $ 188  
Q3
  $ 135     $ 145     $ 131     $ 134     $ 144     $ 200  
Q4
  $ 126     $ 142     $ 119     $ 123     $ 148        
                                                 
    Non-legal cash collections (2)
    2005   2006   2007   2008   2009   2010
     
Q1
  $ 96     $ 106     $ 108     $ 96     $ 118     $ 154  
Q2
  $ 92     $ 99     $ 96     $ 99     $ 116     $ 160  
Q3
  $ 88     $ 98     $ 88     $ 99     $ 119     $ 170  
Q4
  $ 82     $ 94     $ 80     $ 94     $ 123        
                                                 
    Non-bankruptcy cash collections (3)
    2005   2006   2007   2008   2009   2010
     
Q1
  $ 132     $ 141     $ 141     $ 116     $ 120     $ 135  
Q2
  $ 132     $ 132     $ 129     $ 115     $ 114     $ 127  
Q3
  $ 129     $ 129     $ 120     $ 110     $ 111     $ 127  
Q4
  $ 120     $ 127     $ 107     $ 98     $ 109        

10


 

                                                 
    Non-legal/non-bankruptcy cash collections (4)
    2005   2006   2007   2008   2009   2010
     
Q1
  $ 92     $ 95     $ 92     $ 79     $ 90     $ 106  
Q2
  $ 85     $ 85     $ 83     $ 78     $ 87     $ 100  
Q3
  $ 82     $ 82     $ 76     $ 76     $ 87     $ 97  
Q4
  $ 77     $ 80     $ 68     $ 69     $ 84        
 
(1)   Cash collections (assigned and unassigned) divided by total hours paid (including holiday, vacation and sick time) to collectors (including those in training).
 
(2)   Represents total cash collections less external legal cash collections.
 
(3)   Represents total cash collections less purchased bankruptcy cash collections from trustee-administered accounts.
 
(4)   Represents total cash collections less external legal cash collections and less purchased bankruptcy cash collections from trustee-administered accounts.
     Cash collections have substantially exceeded income recognized on finance receivables in each quarter since our formation. The following chart illustrates the consistent excess of our cash collections on our owned portfolios over the income recognized on finance receivables, net on a quarterly basis. The difference between cash collections and income recognized is referred to as payments applied to principal. It is also referred to as finance receivable amortization. This finance receivable amortization is the portion of cash collections that is used to recover the cost of the portfolio investment represented on the balance sheet.
(PERFORMANCE GRAPH)
 
(1)   Includes cash collections on finance receivables only and excludes cash proceeds from sales of defaulted consumer receivables.
     The following table displays our quarterly cash collections by source, for the periods indicated.
                                                                         
Cash Collection Source ($ in thousands)   Q32010   Q22010   Q12010   Q42009   Q32009   Q22009   Q12009   Q42008   Q32008
 
Call Center & Other Collections
  $ 51,711     $ 54,477     $ 56,987     $ 45,365     $ 48,590     $ 50,052     $ 50,914     $ 41,268     $ 43,949  
External Legal Collections
    20,217       18,819       18,276       15,496       15,330       16,527       17,790       18,424       21,590  
Internal Legal Collections
    12,130       11,362       10,714       7,570       6,196       4,263       3,539       2,652       2,106  
Purchased Bankruptcy Collections
    53,319       43,748       33,219       26,855       22,251       19,637       17,628       16,904       15,362  

11


 

Rollforward of Net Finance Receivables
     The following table shows the changes in finance receivables, including the amounts paid to acquire new portfolios (amounts in thousands).
                                 
    Three Months     Three Months     Nine Months     Nine Months  
    Ended     Ended     Ended     Ended  
    September 30,     September 30,     September 30,     September 30,  
    2010     2009     2010     2009  
Balance at beginning of period
  $ 775,606     $ 624,592     $ 693,462     $ 563,830  
Acquisitions of finance receivables, net of buybacks (1)
    88,984       74,318       273,858       210,116  
Cash collections applied to principal on finance receivables (2)
    (57,351 )     (38,031 )     (160,081 )     (113,067 )
 
                       
 
                               
Balance at end of period
  $ 807,239     $ 660,879     $ 807,239     $ 660,879  
 
                       
 
                               
Estimated Remaining Collections (“ERC”) (3)
  $ 1,669,574     $ 1,331,912     $ 1,669,574     $ 1,331,912  
 
                       
 
(1)   Agreements to purchase receivables typically include general representations and warranties from the sellers covering account holders’ death or bankruptcy and accounts settled or disputed prior to sale. The seller can replace or repurchase these accounts. We refer to repurchased accounts as buybacks. We also capitalize certain acquisition related costs.
 
(2)   Cash collections applied to principal (also referred to as finance receivable amortization) on finance receivables consists of cash collections less income recognized on finance receivables, net.
 
(3)   Estimated Remaining Collections refers to the sum of all future projected cash collections on our owned portfolios. ERC is not a balance sheet item; however, it is provided here for informational purposes.
Seasonality
     We depend on the ability to collect on our owned and serviced defaulted consumer receivables. Cash collections tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters of the year, due to consumer payment patterns in connection with seasonal employment trends, income tax refunds and holiday spending habits. Historically, our growth has partially masked the impact of this cash collections seasonality.
Quarterly Cash Collections (1)
($ in millions)
(BAR GRAPH)
 
(1)   Includes cash collections on finance receivables only and excludes cash proceeds from sales of defaulted consumer receivables.

12


 

Portfolios by Type and Geography
     The following table categorizes our life to date owned portfolios at September 30, 2010 into the major asset types represented (amounts in thousands):
                                 
                    Life to Date Purchased Face        
                    Value of Defaulted Consumer        
Asset Type   No. of Accounts     %     Receivables (1)     %  
Major Credit Cards
    14,220       59.8 %   $ 38,321,385       72.3 %
Consumer Finance
    5,285       22.2 %     6,195,641       11.7 %
Private Label Credit Cards
    3,776       15.9 %     5,171,199       9.8 %
Auto Deficiency
    510       2.1 %     3,278,611       6.2 %
 
                       
 
                               
Total:
    23,791       100.0 %     52,966,836       100.0 %
 
                       
 
(1)   The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks.
     The following chart shows details of our life to date buying activity as of September 30, 2010 (amounts in thousands). We actively seek to purchase both bankrupt and non-bankrupt accounts at any point in the delinquency cycle.
                                 
                    Life to Date Purchased Face        
                    Value of Defaulted Consumer        
Account Type   No. of Accounts     %     Receivables (1)     %  
Fresh
    1,320       5.5 %   $ 4,109,213       7.8 %
Primary
    3,620       15.2 %     6,212,667       11.7 %
Secondary
    3,825       16.1 %     6,121,552       11.6 %
Tertiary
    3,937       16.5 %     5,017,483       9.5 %
BK Trustees
    3,439       14.5 %     15,174,713       28.6 %
Other
    7,650       32.2 %     16,331,208       30.8 %
 
                       
 
                               
Total:
    23,791       100.0 %   $ 52,966,836       100.0 %
 
                       
 
(1)   The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks.
     We also review the geographic distribution of accounts within a portfolio because we have found that certain states have more debtor-friendly laws than others and, therefore, are less desirable from a collectability perspective. In addition, economic factors and bankruptcy trends vary regionally and are factored into our maximum purchase price equation.

13


 

     The following chart sets forth our overall life to date portfolio of defaulted consumer receivables geographically at September 30, 2010 (amounts in thousands):
                                                 
                    Life to Date Purchased Face             Original Purchase Price of        
                    Value of Defaulted             Defaulted Consumer        
Geographic Distribution   No. of Accounts     %     Consumer Receivables (1)     %     Receivables (2)     %  
California
    2,444       10 %   $ 6,799,417       13 %   $ 197,164       12 %
Texas
    3,768       16 %     6,118,228       12 %     153,383       9 %
Florida
    1,864       8 %     5,059,455       10 %     145,930       9 %
New York
    1,401       6 %     3,283,264       6 %     94,105       6 %
Pennsylvania
    830       3 %     2,014,301       4 %     64,247       4 %
North Carolina
    842       4 %     1,865,383       4 %     55,885       3 %
Illinois
    935       4 %     1,852,381       3 %     62,859       4 %
Ohio
    825       3 %     1,842,272       3 %     68,544       4 %
Georgia
    748       3 %     1,708,829       3 %     64,948       4 %
New Jersey
    552       2 %     1,512,003       3 %     47,417       3 %
Michigan
    632       3 %     1,432,679       3 %     50,993       3 %
Virginia
    655       3 %     1,141,459       2 %     39,343       2 %
Tennessee
    501       2 %     1,105,474       2 %     41,156       3 %
Arizona
    399       2 %     1,070,902       2 %     31,577       2 %
Massachusetts
    423       2 %     1,023,540       2 %     30,855       2 %
South Carolina
    416       2 %     946,733       2 %     27,430       2 %
Other (3)
    6,556       27 %     14,190,516       26 %     466,934       28 %
 
                                   
 
                                               
Total:
    23,791       100 %   $ 52,966,836       100 %   $ 1,642,770       100 %
 
                                   
 
(1)   The “Life to Date Purchased Face Value of Defaulted Consumer Receivables” represents the original face amount purchased from sellers and has not been decremented by any adjustments including payments and buybacks.
 
(2)   The “Original Purchase Price of Defaulted Consumer Receivables” represents the cash paid to sellers to acquire portfolios of defaulted consumer receivables.
 
(3)   Each state included in “Other” represents less than 2% of the face value of total defaulted consumer receivables.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
     We are from time to time subject to routine legal claims and proceedings, most of which are incidental to the ordinary course of our business. We initiate lawsuits against consumers and are occasionally countersued by them in such actions. Also, consumers, either individually, as members of a class action, or through a governmental entity on behalf of consumers, may initiate litigation against us, in which they allege that we have violated a state or federal law in the process of collecting on an account. From time to time, other types of lawsuits are brought against us. We maintain appropriate levels of errors and omissions insurance coverage to protect us against financial losses associated with potential litigation involving us, and while it is not expected that these or any other legal proceedings or claims in which we are involved will, either individually or in the aggregate, have a material adverse impact on our results of operations, liquidity or our financial condition, the matters described below falls outside of the normal parameters of our routine legal proceedings.
     As previously disclosed, we are a defendant in another purported class action related to matters previously brought before NAF, styled PRA v. Freeman (Case No.: 10-CVD-1003) which was filed in the District Court for Wake County, North Carolina on or about March 26, 2010. The court in PRA v. Freeman recently heard arguments on the motion to dismiss that the Company had filed earlier this year and has informed the parties that the matter will be dismissed, pending submission of an appropriate order. We anticipate submitting such an order and having the matter dismissed imminently.
     As previously disclosed, we were a defendant in a purported enforcement action brought by the Attorney General for the State of Missouri. The action, filed in August 2009, sought relief for Missouri consumers that had allegedly been injured as a result of certain of our alleged collection practices. We denied any wrongdoing with respect to the allegations in the complaint and on June 25, 2010, the Missouri Circuit Court dismissed the matter in its entirety. On July 26, 2010, the Missouri Attorney General filed a notice of appeal.

14


 

Item 1A. Risk Factors
     An investment in our common stock involves a high degree of risk. You should carefully consider the specific risk factors listed under Part I, Item 1A of our 2009 Annual Report on Form 10-K/A filed on December 17, 2010, together with all other information included or incorporated in our reports filed with the SEC. Any such risks may materialize, and additional risks not known to us, or that we now deem immaterial, may arise. In such event, our business, financial condition, results of operations or prospects could be materially adversely affected. If that occurs, the market price of our common stock could fall, and you could lose all or part of your investment.
Item 5. Exhibits
31.1   Section 302 Certifications of Chief Executive Officer.
 
31.2   Section 302 Certifications of Chief Financial Officer.
 
32.1   Section 906 Certifications of Chief Executive Officer and Chief Financial Officer.

15


 

SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  PORTFOLIO RECOVERY ASSOCIATES, INC.
(Registrant)
 
 
Date: December 17, 2010  By:   /s/ Steven D. Fredrickson    
    Steven D. Fredrickson   
    Chief Executive Officer, President and
Chairman of the Board of Directors
(Principal Executive Officer) 
 
 
     
Date: December 17, 2010  By:   /s/ Kevin P. Stevenson    
    Kevin P. Stevenson   
    Chief Financial and Administrative Officer, Executive Vice President, Treasurer and Assistant Secretary (Principal Financial and Accounting Officer)   
 

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