UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

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

Commission File Number: 000-50058

Portfolio Recovery Associates, Inc.

Delaware		75-3078675
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(888) 772-7326

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 website, 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 definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller Reporting Company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES 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 April 30, 2010
Common Stock, $0.01 par value		16,968,632

 

 

PORTFOLIO RECOVERY ASSOCIATES, INC.

INDEX

			Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Consolidated Balance Sheets (unaudited) as of March 31, 2010 and December 31, 2009			3
Consolidated Income Statements (unaudited) For the three months ended March 31, 2010 and 2009			4
Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income (unaudited) For the three months ended March 31, 2010 and 2009			5
Consolidated Statements of Cash Flows (unaudited) For the three months ended March 31, 2010 and 2009			6
Notes to Consolidated Financial Statements (unaudited)			7-21
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			22-40
Item 3. Quantitative and Qualitative Disclosure About Market Risk			40
Item 4. Controls and Procedures			40-41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults Upon Senior Securities			42
Item 4. Other Information			42
Item 5. Exhibits			42
SIGNATURES			43

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED BALANCE SHEETS

March 31, 2010 and December 31, 2009
(unaudited)
(Amounts in thousands, except per share amounts)

		March 31,				December 31,
		2010				2009
Assets
Cash and cash equivalents		$	23,006			$	20,265
Finance receivables, net			742,484				693,462
Accounts receivable, net			8,752				9,169
Income taxes receivable			1,439				4,460
Property and equipment, net			21,925				21,864
Goodwill			49,053				29,299
Intangible assets, net			30,018				10,756
Other assets			5,773				5,158
Total assets		$	882,450			$	794,433
Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable		$	5,079			$	4,108
Accrued expenses and other liabilities			6,264				4,506
Accrued payroll and bonuses			8,298				11,633
Deferred tax liability			126,234				117,206
Line of credit			296,300				319,300
Long-term debt			1,334				1,499
Derivative instrument			809				701
Total liabilities			444,318				458,953
Commitments and contingencies (Note 13)
Stockholders’ equity:
Portfolio Recovery Associates, Inc. stockholders’ equity:
Preferred stock, par value $0.01, authorized shares, 2,000, issued and outstanding shares - 0			—				—
Common stock, par value $0.01, authorized shares, 30,000, 17,041 issued and 16,959 outstanding shares — at March 31, 2010, and 15,596 issued and 15,514 outstanding shares — at December 31, 2009.			170				155
Additional paid-in capital			154,975				82,400
Retained earnings			268,153				253,353
Accumulated other comprehensive loss, net of taxes			(494	)			(428	)
Total Portfolio Recovery Associates, Inc. stockholders’ equity			422,804				335,480
Noncontrolling interest			15,328				—
Total stockholders’ equity			438,132				335,480
Total liabilities and stockholders’ equity		$	882,450			$	794,433

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

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED INCOME STATEMENTS

For the three months ended March 31, 2010 and 2009
(unaudited)
(Amounts in thousands, except per share amounts)

		Three Months Ended
		March 31,
		2010				2009
Revenues:
Income recognized on finance receivables, net		$	67,951			$	51,276
Fee income			15,427				16,927
Total revenues			83,378				68,203
Operating expenses:
Compensation and employee services			29,642				26,663
Legal and agency fees and costs			13,338				12,118
Outside fees and services			2,829				2,111
Communications			5,058				3,472
Rent and occupancy			1,252				1,082
Other operating expenses			2,274				1,988
Depreciation and amortization			2,550				2,275
Total operating expenses			56,943				49,709
Income from operations			26,435				18,494
Other income and (expense):
Interest income			36				3
Interest expense			(2,180	)			(1,978	)
Income before income taxes			24,291				16,519
Provision for income taxes			9,486				6,447
Net income		$	14,805			$	10,072
Less net income attributable to noncontrolling interest			(5	)			—
Net income attributable to Portfolio Recovery Associates, Inc.		$	14,800			$	10,072
Net income per common share attributable to Portfolio Recovery Associates, Inc:
Basic		$	0.91			$	0.66
Diluted		$	0.91			$	0.66
Weighted average number of shares outstanding:
Basic			16,191				15,334
Diluted			16,203				15,367

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

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME

For the three months ended March 31, 2010
(unaudited)
(Amounts in thousands)

		Portfolio Recovery Associates, Inc. Stockholders' Equity
						Additional								Accumulated Other								Total
		Common				Paid-in				Retained				Comprehensive				Noncontrolling				Stockholders'
		Stock				Capital				Earnings				Loss, Net of Taxes				Interest				Equity
Balance at December 31, 2009		$	155			$	82,400			$	253,353			$	(428	)		$	—			$	335,480
Net income			—				—				14,800				—				5				14,805
Net unrealized change in:
Interest rate swap derivative, net of tax			—				—				—				(66	)			—				(66	)
Comprehensive income																							14,739
Vesting of nonvested shares			1				(1	)			—				—								—
Proceeds from stock offering, net of offering costs			14				71,674				—				—				—				71,688
Amortization of share-based compensation			—				880				—				—				—				880
Income tax benefit from share-based compensation			—				22				—				—				—				22
Acquisition of majority owned subsidiary on March 15, 2010			—				—				—				—				15,323				15,323
Balance at March 31, 2010		$	170			$	154,975			$	268,153			$	(494	)		$	15,328			$	438,132

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

PORTFOLIO RECOVERY ASSOCIATES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended March 31, 2010 and 2009
(unaudited)
(Amounts in thousands)

		Three Months Ended
		March 31,
		2010				2009
Cash flows from operating activities:
Net income		$	14,805			$	10,072
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of share-based compensation			880				1,998
Depreciation and amortization			2,550				2,275
Deferred tax expense			9,070				6,189
Changes in operating assets and liabilities:
Other assets			(613	)			(459	)
Accounts receivable			417				(339	)
Accounts payable			971				184
Income taxes			3,021				298
Accrued expenses			(242	)			(770	)
Accrued payroll and bonuses			(3,335	)			(3,154	)
Net cash provided by operating activities			27,524				16,294
Cash flows from investing activities:
Purchases of property and equipment			(1,706	)			(829	)
Acquisition of finance receivables, net of buybacks			(100,266	)			(51,365	)
Collections applied to principal on finance receivables			51,244				38,595
Business acquisition, net of cash acquired			(22,500	)			—
Contingent payment made for business acquisition			(100	)			(100	)
Net cash used in investing activities			(73,328	)			(13,699	)
Cash flows from financing activities:
Proceeds from exercise of options			—				84
Income tax benefit/(shortfall) from share-based compensation			22				(9	)
Proceeds from line of credit			70,500				15,000
Principal payments on line of credit			(93,500	)			(17,000	)
Proceeds from stock offering, net of offering costs			71,688				—
Proceeds from long-term debt			—				2,036
Principal payments on long-term debt			(165	)			(53	)
Principal payments on capital lease obligations			—				(5	)
Net cash provided by financing activities			48,545				53
Net increase in cash and cash equivalents			2,741				2,648
Cash and cash equivalents, beginning of period			20,265				13,901
Cash and cash equivalents, end of period		$	23,006			$	16,549
Supplemental disclosure of cash flow information:
Cash paid for interest		$	2,151			$	2,069
Cash paid for income taxes		$	61			$	1
Noncash investing and financing activities:
Net unrealized change in fair value of derivative instrument		$	(108	)		$	(451	)

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

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Organization and Business:

     Portfolio Recovery Associates, LLC (“PRA”) was formed on March 20, 1996. Portfolio Recovery Associates, Inc. (“PRA Inc”) was formed in August 2002. On November 8, 2002, PRA Inc completed its initial public offering (“IPO”) of common stock. As a result, all of the membership units and warrants of PRA were exchanged on a one to one basis for warrants and shares of a single class of common stock of PRA Inc. PRA Inc owns all outstanding membership units of PRA, PRA Holding I, LLC (“PRA Holding I”), PRA Holding II, LLC (“PRA Holding II”), PRA Holding III, LLC (“PRA Holding III”), PRA Receivables Management, LLC (formerly d/b/a Anchor Receivables Management) (“Anchor”), PRA Location Services, LLC (d/b/a IGS Nevada) (“IGS”), PRA Government Services, LLC (d/b/a RDS) (“RDS”) and MuniServices, LLC (d/b/a PRA Government Services) (“MuniServices”). On March 15, 2010, PRA Inc acquired 62% of the membership units of Claims Compensation Bureau, LLC (“CCB”). The business of PRA Inc, a Delaware corporation, and its subsidiaries (collectively, the “Company”) revolves around the detection, collection, and processing of both unpaid and normal-course receivables originally owed to credit grantors, governments, retailers and others. The Company’s primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. These accounts are purchased from sellers of finance receivables and collected by a highly skilled staff whose purpose is to locate and contact customers and arrange payment or resolution of their debts. The Company, through its Litigation Department, collects accounts judicially, either by using its own attorneys, or by contracting with independent attorneys throughout the country through whom the Company takes legal action to satisfy consumer debts. The Company also services receivables on behalf of clients on either a commission or transaction-fee basis. Clients include entities in the financial services, auto, retail, utility, health care and government sectors. Services provided to these clients include obtaining location information for clients in support of their collection activities (known as skip tracing), and the management of both delinquent and non-delinquent receivables for government entities. In addition, through its newly acquired CCB subsidiary, the Company provides class action claims settlement recovery services and related payment processing to its corporate clients.

     The consolidated financial statements of the Company include the accounts of PRA Inc, PRA, PRA Holding I, PRA Holding II, PRA Holding III, Anchor, IGS, RDS, MuniServices and CCB. Under the guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280 “Segment Reporting” (“ASC 280”), the Company has determined that it has several operating segments that meet the aggregation criteria of ASC 280, and therefore, it has one reportable segment, receivables management, based on similarities among the operating units including homogeneity of services, service delivery methods and use of technology.

     The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”) and, therefore, do not include all information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the Company, however, the accompanying unaudited consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s consolidated balance sheet as of March 31, 2010, its consolidated income statements for the three months ended March 31, 2010 and 2009, its consolidated statement of changes in stockholders’ equity and comprehensive income for the three months ended March 31, 2010, and its consolidated statements of cash flows for the three months ended March 31, 2010 and 2009. The consolidated income statement of the Company for the three months ended March 31, 2010 may not be indicative of future results. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed for the year ended December 31, 2009.

2. Finance Receivables, net:

     The Company’s principal business consists of the acquisition and collection of pools of accounts that have experienced deterioration of credit quality between origination and the Company’s acquisition of the accounts. The amount paid for any pool reflects the Company’s determination that it is probable the Company will be unable to

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

collect all amounts due according to an account’s contractual terms. At acquisition, the Company reviews the portfolio both by account and aggregate pool to determine whether there is evidence of deterioration of credit quality since origination and if it is probable that the Company will be unable to collect all amounts due according to the account’s contractual terms. If both conditions exist, the Company determines whether each such account is to be accounted for individually or whether such accounts will be assembled into pools based on common risk characteristics. The Company considers expected prepayments and estimates the amount and timing of undiscounted expected principal, interest and other cash flows for each acquired portfolio and subsequently aggregates pools of accounts. The Company determines the excess of the pool’s scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference) based on the Company’s proprietary acquisition models. The remaining amount, representing the excess of the pool’s cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining life of the pool (accretable yield).

     The Company accounts for its investment in finance receivables under the guidance of FASB ASC Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”). Under ASC 310-30, static pools of accounts may be established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost, which includes certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, principal payments and loss provision. Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). ASC 310-30 requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. ASC 310-30 initially freezes the internal rate of return, referred to as IRR, estimated when the accounts are purchased as the basis for subsequent impairment testing. Significant increases in actual, or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Under ASC 310-30, rather than lowering the estimated IRR if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current IRR and is shown as a reduction in revenue in the consolidated income statements with a corresponding valuation allowance offsetting finance receivables, net, on the consolidated balance sheet. Income on finance receivables is accrued quarterly based on each static pool’s effective IRR. Quarterly cash flows greater than the interest accrual will reduce the carrying value of the static pool. This reduction in carrying value is defined as payments applied to principal (also referred to as finance receivable amortization). Likewise, cash flows that are less than the interest accrual will accrete the carrying balance. The Company generally does not allow accretion in the first six to twelve months; accordingly, the Company utilizes either the cost recovery method or cash method when necessary to prevent accretion as permitted by ASC 310-30. The IRR is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using the Company’s proprietary collection models. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In this case, all cash collections are recognized as revenue when received. Under the cash method, revenue is recognized as it would be under the interest method up to the amount of cash collections. Additionally, the Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. These pools are not aggregated with other portfolios. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio, or until such time that the Company considers the collections to be probable and estimable and begins to recognize income based on the interest method as described above. At March 31, 2010 and 2009, the Company had unamortized purchased principal (purchase price) in pools accounted for under the cost recovery method of $2,343,372 and $5,937,212, respectively.

     The Company establishes valuation allowances for all acquired accounts subject to ASC 310-30 to reflect only those losses incurred after acquisition (that is, the present value of cash flows initially expected at acquisition that are no longer expected to be collected). Valuation allowances are established only subsequent to acquisition of the accounts. At March 31, 2010 and 2009, the Company had an allowance against its finance receivables of $58,125,000 and $29,840,000, respectively.

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

     The Company implements the accounting for income recognized on finance receivables under ASC 310-30 as follows. The Company creates each accounting pool using its projections of estimated cash flows and expected economic life. The Company then computes the effective yield that fully amortizes the pool to the end of its expected economic life based on the current projections of estimated cash flows. As actual cash flow results are recorded, the Company balances those results to the data contained in its proprietary models to ensure accuracy, then reviews each accounting pool watching for trends, actual performance versus projections and curve shape, sometimes re-forecasting future cash flows utilizing the Company’s statistical models. The review process is primarily performed by the Company’s finance staff; however, the Company’s operational and statistical staffs may also be involved depending upon actual cash flow results achieved. To the extent there is overperformance, the Company will either increase the yield or release the allowance and consider increasing future cash projections, if persuasive evidence indicates that the overperformance is considered to be a significant betterment. If the overperformance is considered more of an acceleration of cash flows (a timing difference), the Company will adjust future cash flows downward which effectively extends the amortization period, or take no action at all if the amortization period is reasonable and falls within the pool’s expected economic life. In either case, yield may or may not be increased due to the time value of money (accelerated cash collections). To the extent there is underperformance, the Company will book an allowance if the underperformance is significant and will also consider revising future cash flows based on current period information, or take no action if the pool’s amortization period is reasonable and falls within the currently projected economic life.

     The Company capitalizes certain fees paid to third parties related to the direct acquisition of a portfolio of accounts. These fees are added to the acquisition cost of the portfolio and accordingly are amortized over the life of the portfolio using the interest method. The balance of the unamortized capitalized fees at March 31, 2010 and 2009 was $3,122,600 and $3,030,732, respectively. During the three months ended March 31, 2010, and 2009 the Company capitalized $161,621 and $164,206, respectively, of these direct acquisition fees. During the three months ended March 31, 2010, and 2009 the Company amortized $270,947 and $212,034, respectively, of these direct acquisition fees.

     The agreements to purchase the aforementioned receivables include general representations and warranties from the sellers covering account holder death or bankruptcy and accounts settled or disputed prior to sale. The representation and warranty period permitting the return of these accounts from the Company to the seller is typically 90 to 180 days. Any funds received from the seller of finance receivables as a return of purchase price are referred to as buybacks. Buyback funds are simply applied against the finance receivable balance received and are not included in the Company’s cash collections from operations. In some cases, the seller will replace the returned accounts with new accounts in lieu of returning the purchase price. In that case, the old account is removed from the pool and the new account is added.

     Changes in finance receivables, net for the three months ended March 31, 2010 and 2009 are as follows (amounts in thousands):

		Three Months Ended				Three Months Ended
		March 31, 2010				March 31, 2009
Balance at beginning of period		$	693,462			$	563,830
Acquisitions of finance receivables, net of buybacks			100,266				51,365
Cash collections			(119,195	)			(89,871	)
Income recognized on finance receivables, net			67,951				51,276
Cash collections applied to principal			(51,244	)			(38,595	)
Balance at end of period		$	742,484			$	576,600

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

     At the time of acquisition, the life of each pool is generally estimated to be between 84 to 96 months based on projected amounts and timing of future cash collections using the proprietary models of the Company. As of March 31, 2010, the Company had $742.5 million in net finance receivables. Based upon current projections, cash collections applied to principal are estimated to be as follows for the twelve months in the periods ending (amounts in thousands):

March 31, 2011		$	160,557
March 31, 2012			189,967
March 31, 2013			200,258
March 31, 2014			126,637
March 31, 2015			55,566
March 31, 2016			8,583
March 31, 2017			916
		$	742,484

     During the three months ended March 31, 2010 and 2009, the Company purchased approximately $1.89 billion and $960.9 million, respectively, in face value of charged-off consumer receivables. At March 31, 2010, the estimated remaining collections (“ERC”) on the receivables purchased in the three months ended March 31, 2010 and 2009 were $210.2 million and $91.7 million, respectively.

     Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of March 31, 2010 and 2009. Reclassifications from nonaccretable difference to accretable yield primarily result from the Company’s increase in its estimate of future cash flows. Reclassifications to nonaccretable difference from accretable yield results from the Company’s decrease in its estimates of future cash flows and allowance charges that exceed the Company’s increase in its estimate of future cash flows. Changes in accretable yield for the three months ended March 31, 2010 and 2009 were as follows (amounts in thousands):

		Three Months Ended				Three Months Ended
		March 31, 2010				March 31, 2009
Balance at beginning of period		$	721,984			$	551,735
Income recognized on finance receivables, net			(67,951	)			(51,276	)
Additions			122,510				67,178
Reclassifications from/(to) nonaccretable difference			17,102				(17,811	)
Balance at end of period		$	793,645			$	549,826

     The Company recorded net allowance charges on pools that had underperformed the Company’s most recent expectations during the three months ended March 31, 2010 and 2009 as follows (amounts in thousands):

		Three Months Ended				Three Months Ended
		March 31, 2010				March 31, 2009
Balance at beginning of period		$	51,255			$	23,620
Allowance charges recorded			6,875				6,445
Reversal of previously recorded allowance charges			(5	)			(225	)
Net allowance charge			6,870				6,220
Balance at end of period		$	58,125			$	29,840

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3. Accounts Receivable, net:

     Accounts receivable are recorded at the invoiced amount and do not bear interest. Amounts collected on accounts receivable are included in net cash provided by operating activities in the consolidated statements of cash flows. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and its customers’ financial condition, the amount of receivables in dispute, and the current receivables aging and current payment patterns. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The balance of the allowance for doubtful accounts at March 31, 2010 and December 31, 2009 was $3.3 million and $2.9 million, respectively. The Company does not have any off balance sheet credit exposure related to its customers.

4. Line of Credit:

     On November 29, 2005, the Company entered into a Loan and Security Agreement for a revolving line of credit. The agreement has been amended six times to add additional lenders and ultimately increase the total availability of credit under the line to $365 million. The agreement is a line of credit in an amount equal to the lesser of $365 million or 30% of the Company’s ERC of all its eligible asset pools. Borrowings under the revolving credit facility bear interest at a floating rate equal to the one month LIBOR Market Index Rate plus 1.40%, which was 1.65% at March 31, 2010. Of the $365 million facility, $50 million was locked in as an interest only term loan at a rate of 6.80% and expires on May 4, 2012. The remaining $315 million expires on May 2, 2011. The Company also pays an unused line fee equal to three-tenths of one percent, or 30 basis points, on any unused portion of the line of credit. The loan is collateralized by substantially all the tangible and intangible assets of the Company. The agreement provides as follows:

	•		monthly borrowings may not exceed 30% of ERC;
	•		funded debt to EBITDA (defined as net income, less income or plus loss from discontinued operations and extraordinary items, plus income taxes, plus interest expense, plus depreciation, depletion, amortization (including finance receivable amortization) and other non-cash charges) ratio must be less than 2.0 to 1.0 calculated on a rolling twelve-month average;
	•		tangible net worth must be at least 100% of tangible net worth reported at September 30, 2005, plus 25% of cumulative positive net income since the end of such fiscal quarter, plus 100% of the net proceeds from any equity offering without giving effect to reductions in tangible net worth due to repurchases of up to $100,000,000 of the Company’s common stock; and
	•		restrictions on change of control.

     As of March 31, 2010 and 2009, outstanding borrowings under the facility totaled $296.3 million and $266.3 million, respectively, of which $50.0 million was part of the non-revolving fixed rate sub-limit. As of March 31, 2010, the Company is in compliance with all of the covenants of the agreement.

5. Derivative Instrument:

     The Company may periodically enter into derivative financial instruments, typically interest rate swap agreements, to reduce its exposure to fluctuations in interest rates on variable-rate debt and their impact on earnings and cash flows. The Company does not utilize derivative financial instruments with a level of complexity or with a risk greater than the exposure to be managed nor does it enter into or hold derivatives for trading or speculative purposes. The Company periodically reviews the creditworthiness of the swap counterparty to assess the counterparty’s ability to honor its obligation. Counterparty default would expose the Company to fluctuations in variable interest rates. Based on the guidance of FASB ASC Topic 815 “Derivatives and Hedging” (“ASC 815”), the Company records derivative financial instruments at fair value on the consolidated balance sheet.

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

     On December 16, 2008, the Company entered into an interest rate forward rate swap transaction (the “Swap”) with J.P. Morgan Chase Bank, National Association pursuant to an ISDA Master Agreement, which contains customary representations, warranties and covenants. The Swap has an effective date of January 1, 2010, with an initial notional amount of $50.0 million. Under the Swap, the Company receives a floating interest rate based on 1-month LIBOR Market Index Rate and pays a fixed interest rate of 1.89% through maturity of the Swap on May 1, 2011. Notwithstanding the terms of the Swap, the Company is ultimately obligated for all amounts due and payable under the credit facility.

     The Company’s financial derivative instrument is designated and qualifies as a cash flow hedge, and the effective portion of the gain or loss on such hedge is reported as a component of other comprehensive income/(loss) in the consolidated financial statements. To the extent that the hedging relationship is not effective, the ineffective portion of the change in fair value of the derivative is recorded in other income (expense). The hedge was considered effective for the twelve months ended December 31, 2009 and for the three months ended March 31, 2010. Therefore, no amount has been recorded in the consolidated income statements related to the hedge’s ineffectiveness during 2009 or the three months ended March 31, 2010. Hedges that receive designated hedge accounting treatment are evaluated for effectiveness at the time that they are designated, as well as throughout the hedging period.

     The following table sets forth the fair value amounts of the derivative instrument held by the Company as of the dates indicated (amounts in thousands):

		March 31, 2010								December 31, 2009
		Asset Derivative				Liability Derivative				Asset Derivative				Liability Derivative
Derivative designated as a hedging instrument under ASC 815:
Interest rate swap contract		$	—			$	809			$	—			$	701
Total derivative		$	—			$	809			$	—			$	701

     Liability derivatives are recorded in the liability section of the accompanying consolidated balance sheets.

     The following table sets forth the (loss) recorded in Accumulated Other Comprehensive Loss (“AOCL”), net of tax, for the three months ended March 31, 2010, for derivatives held by the Company as well as any loss reclassified from AOCL into expense (amounts in thousands):

		For the three months ended March 31, 2010
		Amount of Loss
		Recognized in Other				Location of Loss				Amount of Loss
		Comprehensive Loss				Reclassified from				Reclassified from
		on Derivative				AOCL into Expense				AOCL into Expense
		(Effective Portion)				(Effective Portion)				(Effective Portion)
Derivative designated as hedging instruments under ASC 815:
Interest rate swap contract		$	(273	)		interest expense				$	(207	)
Total derivative		$	(273	)						$	(207	)

     Amounts in accumulated other comprehensive loss will be reclassified into earnings under certain situations; for example, if the occurrence of the transaction is no longer probable or no longer qualifies for hedge accounting. The Company expects to reclassify approximately $467,000 currently included in other accumulated other comprehensive loss into interest expense within the next 12 months.

6. Long-Term Debt:

     On February 6, 2009, the Company entered into a commercial loan agreement to finance computer software and equipment purchases in the amount of $2,036,114. The loan is collateralized by the related computer software and equipment. The loan is a three year loan with a fixed rate of 4.78% with monthly installments, including interest, of $60,823 beginning on March 31, 2009, and it matures on February 28, 2012.

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

7. Property and Equipment, net:

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

		March 31,				December 31,
		2010				2009
Software		$	16,877			$	16,542
Computer equipment			9,214				8,869
Furniture and fixtures			5,648				5,624
Equipment			7,060				6,040
Leasehold improvements			3,327				3,277
Building and improvements			6,045				6,045
Land			992				992
Accumulated depreciation and amortization			(27,238	)			(25,525	)
Property and equipment, net		$	21,925			$	21,864

     Depreciation and amortization expense, relating to property and equipment, for the three months ended March 31, 2010 and 2009 was $1,712,304 and $1,606,662, respectively.

     The Company, in accordance with the guidance of FASB ASC Topic 350-40 “Internal-Use Software” (“ASC 350-40”), capitalizes qualifying computer software costs incurred during the application development stage and amortizes them over their estimated useful life of three to seven years on a straight-line basis beginning when the project is completed. Costs associated with preliminary project stage activities, training, maintenance and all other post implementation stage activities are expensed as incurred. The Company’s policy provides for the capitalization of certain direct payroll costs for employees who are directly associated with internal use computer software projects, as well as external direct costs of services associated with developing or obtaining internal use software. Capitalizable personnel costs are limited to the time directly spent on such projects. As of March 31, 2010, the Company has incurred and capitalized $3,231,179 of these direct payroll costs and external direct costs related to software developed for internal use. Of these costs, $1,971,224 is for projects that are in the development stage and, therefore are a component of Other Assets. Once the projects are completed, the costs will be transferred to Software and amortized over their estimated useful life of three to seven years. Amortization expense for the three months ended March 31, 2010 and 2009 was $59,532 and $22,136, respectively. The remaining unamortized costs relating to internally developed software at March 31, 2010 and 2009 were $961,804 and $310,582, respectively.

8. Acquisition of CCB:

     On March 15, 2010, the Company acquired 62% of the membership units of Claims Compensation Bureau, LLC (“CCB”). The remaining 38% of the membership units were acquired by Claims Compensation Bureau, Inc., CCB’s predecessor. Claims Compensation Bureau, Inc. was founded in 1996 and is a leading provider of class action claims settlement recovery services and related payment processing to corporate clients. CCB’s process allows clients to maximize settlement recoveries, in many cases participating in settlements they would otherwise not know existed. The company charges fees for its services and works with clients to identify, prepare and submit claims to class action administrators charged with dispersing class action settlement funds. The president and founder of CCB, as well as another member of its senior management, entered into long-term employment agreements with the Company. The consolidated income statement for the three months ended March 31, 2010 includes the results of operations of CCB from March 15, 2010 through March 31, 2010.

     The Company’s investment for the 62% ownership of CCB was paid for with $23.0 million in cash plus $2.0 million in deferred payments which are expected to be paid during 2010 if certain events occur. The deferred payments are included in the accrued expenses and other liabilities account on the consolidated balance sheet as of March 31, 2010. As part of the agreement, the Company has the right to purchase the remaining 38% of CCB over the next five years at certain multiples of EBITDA. In addition, the noncontrolling interest can require the

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Company to purchase its units at pre-defined multiples of EBITDA. Any future acquisitions by the Company of the noncontrolling interest will be accounted for as an equity transaction.

     In accordance with ASC Topic 810, “Consolidation”, the Company has consolidated all financial statement accounts of CCB in its consolidated balance sheet as of March 31, 2010 and its consolidated income statement for the three months ended March 31, 2010. The noncontrolling interest amount is included as a separate component of stockholders’ equity and represents the 38% interest not controlled by the Company. In addition, net income attributable to the noncontrolling interest is stated separately in the consolidated income statement for the three months ended March 31, 2010.

     The Company accounted for this purchase in accordance with ASC Topic 805, “Business Combinations”. Under this guidance, an entity is required to recognize the assets acquired, liabilities assumed, any noncontrolling interest in the acquiree, and the consideration given at their fair value on the acquisition date. The following table summarizes the fair value of the consideration given for CCB, as well as the fair value of the assets acquired, liabilities assumed, and the noncontrolling interest in the acquiree on the acquisition date (amounts in thousands):

Consideration:
Cash		$	23,000
Contingent consideration arrangement			2,000
Fair value of total consideration given		$	25,000

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

Contractual relationships		$	19,000
Tradenames			600
Non-compete agreements			500
Cash			500
Software			67
Other assets			2
Total identifiable net assets acquired:			20,669
Goodwill			19,654
Fair value of acquired business			40,323
Noncontrolling interest in CCB			15,323
Purchase price consideration given		$	25,000

     The fair value of the noncontrolling interest in CCB was determined as the percentage of the noncontrolling interest multiplied by the fair value of all assets which were derived from the acquisition of CCB on March 15, 2010.

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

9. Goodwill and Intangible Assets, net:

     In connection with the Company’s business acquisitions, the Company purchased certain tangible and intangible assets. Intangible assets purchased included client and customer relationships, non-compete agreements, trademarks and goodwill. In accordance FASB ASC Topic 350 “Intangibles-Goodwill and Other” (“ASC 350”), the Company is amortizing the following intangible assets over the estimated useful lives as indicated:

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Acquisition Date

Customer Relationships

Non-Compete Agreements

Trademarks

IGS

October 1, 2004

7 years

3 years

(1)

—

RDS

July 29, 2005

10 years

3 years

(1)

—

The Palmer Group

July 25, 2007

2.4 years

—

—

MuniServices

July 1, 2008

11 years

3 years

14 years

BPA

August 1, 2008

10 years

2.4 years

—

CCB(2)

March 15, 2010

6-9 years

3 years

14 years

     The combined original weighted average amortization period is 9.0 years. The Company reviews these relationships at least annually for impairment. Total amortization expense was $838,064 and $668,277 for the three months ended March 31, 2010, and 2009 respectively. In addition, goodwill, pursuant to ASC 350, is not amortized but rather is reviewed at least annually for impairment. During the fourth quarter of 2009, the Company underwent its annual review of goodwill. Based upon the results of this review, which was conducted as of October 1, 2009, no impairment charges to goodwill or the other intangible assets were necessary as of the date of this review. The Company believes that nothing has occurred since the review was performed through March 31, 2010 that would indicate a triggering event and thereby necessitate an impairment charge to goodwill or the other intangible assets. The Company will undergo its next annual goodwill review during the fourth quarter of 2010. At March 31, 2010 and December 31, 2009, the carrying value of goodwill was $49,052,460 and $29,298,717, respectively. The $19,753,743 increase in the carrying value of goodwill during the three months ended March 31, 2010 relates to the purchase of CCB on March 15, 2010 (see note 8), as well as additional purchase price paid of $100,000 relating to the acquisition of The Palmer Group on July 25, 2007.

10. Share-Based Compensation:

     The Company has a stock option and nonvested share plan. The Company created the 2002 Stock Option Plan (the “Plan”) on November 7, 2002. The Plan was amended in 2004 (the “Amended Plan”) to enable the Company to issue nonvested shares of stock to its employees and directors. The Amended Plan was approved by the Company’s shareholders at its Annual Meeting on May 12, 2004. On March 19, 2010 the Company adopted a 2010 Stock Plan, subject to the approval of its shareholders at the 2010 Annual Meeting. The 2010 Stock Plan is a further amendment to the Amended Plan, and contains, among other things, specific performance metrics with respect to performance-based stock awards. Up to 2,000,000 shares of common stock may be issued under the Amended Plan. The Amended Plan expires November 7, 2012.

     The Company follows the provisions of FASB ASC Topic 718 “Compensation-Stock Compensation” (“ASC 718”). As of March 31, 2010, total future compensation costs related to nonvested awards of nonvested shares (not including nonvested shares granted under the Long-Term Incentive Program (“LTI”)) is estimated to be $2.8 million with a weighted average remaining life of 2.5 years (not including nonvested shares granted under the LTI Programs). As of March 31, 2010, there are no future compensation costs related to stock options and the remaining vested stock options have a weighted average remaining life of 0.8 years. Based upon historical data, the Company used an annual forfeiture rate of 14% for stock options and 15-40% for nonvested shares for most of the employee grants. Grants made to key employee hires and directors of the Company were assumed to have no forfeiture rates associated with them due to the historically low turnover among this group.

     Total share-based compensation expense was $879,880 and $1,997,978 for the three months ended March 31, 2010, and 2009 respectively. The Company, in conjunction with the renewal of employment agreements with its Named Executive Officers and other senior executives, awarded nonvested shares which vested on January 1, 2009. As a result of the vesting of these shares, the Company recorded stock-based compensation expense in connection with these shares in the amount of approximately $1.4 million during the first quarter of 2009. Tax benefits

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

resulting from tax deductions in excess of share-based compensation expense recognized under the fair value recognition provisions of ASC 718 (windfall tax benefits) are credited to additional paid-in capital in the Company’s Consolidated Balance Sheets. Realized tax shortfalls are first offset against the cumulative balance of windfall tax benefits, if any, and then charged directly to income tax expense. The total tax benefit realized from share-based compensation was $123,787 and $633,353 for the three months ended March 31, 2010, and 2009 respectively.

Stock Options

     All options issued under the Amended Plan vest ratably over five years. Granted options expire seven years from grant date. Expiration dates range between November 7, 2009 and January 16, 2011. Options granted to a single person cannot exceed 200,000 in a single year. At March 31, 2010, 895,000 options have been granted under the Amended Plan, of which 118,955 have been cancelled. There were no antidilutive options outstanding for the three months ended March 31, 2010, and 2009 respectively.

     The Company granted no options during the three months ended March 31, 2010 and 2009. All of the stock options which have been granted under the Amended Plan were granted to employees of the Company except for 40,000 which were granted to non-employee directors. The total intrinsic value of options exercised during the three months ended March 31, 2010 and 2009 was approximately $0 and $45,000, respectively.

     The following summarizes all option related transactions from December 31, 2008 through March 31, 2010 (amounts in thousands, except per share amounts):

		Options				Weighted-Average				Weighted-Average
		Outstanding				Exercise Price				Fair Value
December 31, 2008			123			$	17.24			$	3.21
Exercised			(116	)			16.51				3.24
December 31, 2009			7				29.41				2.70
No activity			—				—				—
March 31, 2010			7			$	29.41			$	2.70

     The following information is as of March 31, 2010 (amounts in thousands, except per share amounts):

		Options Outstanding												Options Exercisable
										Weighted-Average												Weighted-Average
Exercise		Number				Average Remaining				Exercise Price Per				Aggregate				Number				Exercise Price Per				Aggregate
Prices		Outstanding				Contractual Life				Share				Intrinsic Value				Exercisable				Share				Intrinsic Value
$28.45 - $29.79			7				0.8				29.41				178				7				29.41				178
Total as of March 31, 2010			7				0.8			$	29.41			$	178				7			$	29.41			$	178

     The Company utilizes the Black-Scholes option pricing model to calculate the value of the stock options when granted. This model was developed to estimate the fair value of traded options, which have different characteristics than employee stock options. In addition, changes to the subjective input assumptions can result in materially different fair market value estimates. Therefore, the Black-Scholes model may not necessarily provide a reliable single measure of the fair value of employee stock options.

Nonvested Shares

     With the exception of the awards made pursuant to the LTI Program and a few employee and director grants, the terms of the nonvested share awards are similar to those of the stock option awards, wherein the nonvested shares vest ratably over five years and are expensed over their vesting period.

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

     The following summarizes all nonvested share transactions (excluding shares granted under the LTI Programs) from December 31, 2008 through March 31, 2010 (amounts in thousands, except per share amounts):

		Nonvested Shares				Weighted Average
		Outstanding				Price at Grant Date
December 31, 2008			98			$	41.60
Granted			70				34.22
Vested			(82	)			36.62
Cancelled			(5	)			42.20
December 31, 2009			81				40.24
Granted			43				48.20
Vested			(8	)			40.31
Cancelled			(5	)			38.96
March 31, 2010			111			$	43.36

     The total grant date fair value of shares vested during the three months ended March 31, 2010 and 2009 was $323,568 and $1,629,490, respectively.

Long-Term Incentive Programs

     Pursuant to the Amended Plan, on March 30, 2007, January 4, 2008, January 20, 2009 and January 14, 2010, the Compensation Committee approved the grant of 96,550, 80,000, 108,720 and 53,656 performance-based nonvested shares, respectively. All shares granted under the LTI Programs were granted to key employees of the Company. For both the 2007 and 2008 grants, no estimated compensation costs have been accrued or recognized because the achievements of the performance targets of the programs were either not met or deemed unlikely to be achieved. The 2009 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon diluted earnings per share (“EPS”) totals for 2009, the return on owners’ equity for the three year period beginning on January 1, 2009 and ending December 31, 2011, and the relative total shareholder return as compared to a peer group, for the same three year period. The number of shares vested can double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2009. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome. The EPS component of the 2009 plan was not achieved and therefore no compensation expense was recognized during 2009 or the three months ended March 31, 2010. In the future, if the Company believes that the remaining performance targets of the 2009 program will be achieved, an adjustment to the expense will be made at that time based on the probable outcome. The 2010 grant is performance based and cliff vests after the requisite service period of two to three years if certain financial goals are met. The goals are based upon diluted EPS totals for 2010, the return on owners’ equity for the three year period beginning on January 1, 2010 and ending December 31, 2012, and the relative total shareholder return as compared to a peer group for the same three year period. The number of shares vested can double if the financial goals are exceeded and no shares will vest if the financial goals are not met. The Company is expensing the nonvested share grant over the requisite service period of two to three years beginning on January 1, 2010. If the Company believes that the number of shares granted will be more or less than originally projected, an adjustment to the expense will be made at that time based on the probable outcome. At March 31, 2010, total future compensation costs related to nonvested share awards granted under the 2009 and 2010 LTI Programs are estimated to be approximately $4.4 million. The Company assumed a 7.5% forfeiture rate for this grant and the remaining shares have a weighted average life of 2.18 years at March 31, 2010.

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

11. Income Taxes:

     The Company follows the guidance of FASB ASC Topic 740 “Income Taxes” (“ASC 740”) as it relates to the provision for income taxes and uncertainty in income taxes. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The evaluation of a tax position in accordance with the guidance is a two-step process. The first step is recognition: the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. There were no unrecognized tax benefits at both March 31, 2010 and 2009.

     The Company was notified on June 21, 2007 that it was being examined by the Internal Revenue Service for the 2005 calendar year. The IRS has concluded its audit and on March 19, 2009 issued Form 4549-A, Income Tax Examination Changes for tax years ending December 31, 2007, 2006 and 2005. The IRS has proposed that cost recovery for tax revenue recognition does not clearly reflect taxable income and that unused line fees paid on credit facilities should be capitalized and amortized rather than taken as a current deduction. On April 22, 2009, the Company filed a formal protest of the findings contained in the examination report prepared by the IRS. The Company believes it has sufficient support for the technical merits of its positions and that it is more-likely-than-not these positions will ultimately be sustained; therefore, a reserve for uncertain tax positions is not necessary. If the Company is unsuccessful in its appeal, it might be required to pay the related deferred taxes and any potential interest in the near-term, possibly requiring additional financing from other sources.

     At March 31, 2010, the tax years subject to examination by the major taxing jurisdictions, including the Internal Revenue Service, are 2003 and 2005 and subsequent years. The 2003 tax year remains open to examination because of a net operating loss that originated in that year but was not fully utilized until the 2005 tax year. The 2005 tax year is extended through April 30, 2011.

     ASC 740 requires the recognition of interest, if the tax law would require interest to be paid on the underpayment of taxes, and recognition of penalties, if a tax position does not meet the minimum statutory threshold to avoid payment of penalties. Penalties and interest may be classified as either penalties and interest expense or income tax expense. Management has elected to classify accrued penalties and interest as income tax expense. No interest or penalties were accrued or reversed in the first three months of 2009 or 2010.

12. Earnings per Share:

     Basic EPS are computed by dividing net income available to common shareholders of Portfolio Recovery Associates, Inc. by weighted average common shares outstanding. Diluted EPS are computed using the same components as basic EPS with the denominator adjusted for the dilutive effect of stock options and nonvested share awards. Share-based awards that are contingent upon the attainment of performance goals are not included in the computation of diluted EPS until the performance goals have been attained. The following tables provide a reconciliation between the computation of basic EPS and diluted EPS for the three months ended March 31, 2010 and 2009 (amounts in thousands, except per share amounts):

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

		For the three months ended March 31,
						2010												2009
						Weighted Average												Weighted Average
		Net Income				Common Shares				EPS				Net Income				Common Shares				EPS
Basic EPS		$	14,800				16,191			$	0.91			$	10,072				15,334			$	0.66
Dilutive effect of stock options and nonvested share awards							12												33
Diluted EPS		$	14,800				16,203			$	0.91			$	10,072				15,367			$	0.66

     There were no antidilutive options outstanding for the three months ended March 31, 2010 and 2009.

13. Commitments and Contingencies:

Employment Agreements:

     The Company has employment agreements with all of its executive officers and with several members of its senior management group, most of which expire on December 31, 2011. Such agreements provide for base salary payments as well as bonuses which are based on the attainment of specific management goals. Future compensation under these agreements is approximately $10.8 million. The agreements also contain confidentiality and non-compete provisions.

Leases:

     The Company is party to various operating and capital leases with respect to its facilities and equipment. For further discussion of these leases please refer to the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed for the year ended December 31, 2009.

Forward Flow Agreements:

     The Company is party to several forward flow agreements that allow for the purchase of defaulted consumer receivables at pre-established prices. The maximum remaining amount to be purchased under forward flow agreements at March 31, 2010 is approximately $157.6 million.

Business Acquisition:

     In connection with the Company’s acquisition of 62% of the membership units of CCB on March 15, 2010, the Company acquired the right to purchase the remaining 38% of the membership units of CCB not held by the Company at a predetermined price within the next five years. Also, Claims Compensation Bureau, Inc., the holder of such remaining 38% interest in CCB can require the Company to purchase its interest during the period beginning on March 1, 2012 and ending on February 28, 2018. While the actual amount or timing of any future payment is unknown at this time, the maximum amount of consideration to be paid for such 38% interest is $22.8 million. In addition, the Company expects to pay the $2.0 million deferred portion of the acquisition date consideration for its 62% interest in CCB within the next nine months, upon the occurrence of certain events.

Litigation:

     The Company is from time to time subject to routine legal claims and proceedings, most of which are incidental to the ordinary course of its business. The Company initiates lawsuits against consumers and is occasionally countersued by them in such actions. Also, consumers, either individually, as a member of a class action, or through a governmental entity on behalf of consumers, may initiate litigation against the Company, in which they allege that the Company has violated a state or federal law in the process of collecting on an account. From time to time, other types of lawsuits are brought against the Company. While it is not expected that these or any other legal proceedings or claims in which the Company is involved will, either individually or in the aggregate,

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

have a material adverse impact on the Company’s results of operations, liquidity or its financial condition, the matter described below falls outside of the normal parameters of the Company’s routine legal proceedings.

     PRA is currently a defendant in two separate purported class action counterclaims entitled: (1) PRA v. Barkwell, 4:09-cv-00113-CDL, which was originally filed in the Superior Court of Muscogee County, Georgia and subsequently removed to the United States District Court for the Middle District of Georgia; and (2) PRA v. Freeman, 10-CVD-1003, filed in the District Court for Wake County, North Carolina. The counterclaims allege that in pursuing arbitration claims against Barkwell, Freeman and other consumer debtors, pursuant to the terms and conditions of their respective cardholder agreements, PRA breached a duty of good faith and fair dealing and made negligent misrepresentations concerning its “arbitration practices.” The plaintiffs are seeking, among other things, to vacate the arbitration awards that PRA has obtained before the National Arbitration Forum and have PRA disgorge the amounts collected with respect to such awards. It is not possible at this time to accurately estimate the possible loss, if any. PRA believes it has meritorious defenses to the allegations made in these counterclaims and intends to defend itself vigorously against them.

     PRA is currently a defendant in a purported enforcement action brought by the Attorney General for the State of Missouri that is currently pending in the Circuit Court for St. Louis, Missouri. The action seeks relief for Missouri consumers that have allegedly been injured as a result of certain collection practices of PRA. It is not possible at this time to estimate the possible loss, if any. PRA has vehemently denied any wrongdoing with respect to the allegations in the complaint and believes it has meritorious defenses to each allegation in the complaint.

14. Estimated Fair Value of Financial Instruments:

     The accompanying consolidated financial statements include various estimated fair value information as of March 31, 2010 and December 31, 2009, as required by FASB ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC 820”). ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also requires the consideration of differing levels of inputs in the determination of fair values. Based upon the fact there are no quoted prices in active markets or other observable market data, the Company used unobservable inputs for computation of the fair value of finance receivables, net. Disclosure of the estimated fair values of financial instruments often requires the use of estimates. The Company uses the following methods and assumptions to estimate the fair value of financial instruments.

     Cash and cash equivalents: The carrying amount approximates fair value.

     Finance receivables, net: The Company records purchased receivables at cost, which represents a significant discount from the contractual receivable balances due. The cost of the receivables is reduced as cash is received based upon the guidance of ASC 310-30. The carrying amount of finance receivables, net, as of March 31, 2010 was approximately $742 million. The Company computed the fair value of these receivables using proprietary pricing models that the Company utilizes to make portfolio purchase decisions. As of March 31, 2010, using the aforementioned methodology, the Company computed the approximate fair value to be $946 million.

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

     Line of credit: The carrying amount approximates fair value, as the interest rates approximate the rate currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers.

     Derivative instrument: The interest rate swap is recorded at fair value, which is determined using pricing models developed based on the LIBOR swap rate and other observable market data, adjusted for nonperformance risk of both the counterparty and the Company. This instrument is valued using level two inputs per ASC 820.

PORTFOLIO RECOVERY ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

15.

Recent Accounting Pronouncements:

     In June 2009, the FASB issued guidance on accounting for transfers of financial assets to improve the reporting for the transfer of financial assets. The guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company adopted the guidance during the first quarter of 2010 which had no material impact on its consolidated financial statements.

     In June 2009, the FASB issued guidance on consolidation of variable interest entities to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company adopted the guidance during the first quarter of 2010 which had no material impact on its consolidated financial statements.

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

Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:

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

	•		changes in the economic or inflationary environment which have an adverse effect on the ability of consumers to pay their debts or on the stability of the financial system as a whole;
	•		our ability to purchase defaulted consumer receivables at appropriate prices;
	•		changes in the business practices of credit originators in terms of selling defaulted consumer receivables or outsourcing defaulted consumer receivables to third-party contingent fee collection agencies;
	•		changes in government regulations that affect our ability to collect sufficient amounts on our acquired or serviced receivables;
	•		changes in or interpretation of tax laws;
	•		deterioration in economic conditions in the United States that may have an adverse effect on our collections, results of operations, revenue and stock price;
	•		changes in bankruptcy or collection agency laws that could negatively affect our business;
	•		our ability to employ and retain qualified employees, especially collection and information technology personnel;
	•		our work force could become unionized in the future, which could adversely affect the stability of our production and increase our costs;
	•		changes in the credit or capital markets, which affect our ability to borrow money or raise capital to purchase or service defaulted consumer receivables;
	•		the degree and nature of our competition;
	•		our ability to comply with the provisions of the Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder;
	•		our ability to retain existing clients and obtain new clients for our fee-for-service businesses;
	•		the sufficiency of our funds generated from operations, existing cash and available borrowings to finance our current operations; and
	•		the risk factors listed from time to time in our filings with the Securities and Exchange Commission (the “SEC”).

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

     For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as the discussion of “Business” and “Risk Factors” described in our 2009 Annual Report on Form 10-K, filed on February 16, 2010.

     Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. We have no obligation to publicly update or revise our forward-looking statements after the date of this report and you should not expect us to do so.

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

Results of Operations

     Our business revolves around the detection, collection and processing of both unpaid and normal-course receivables originally owed to credit grantors, governments, retailers and others. The results of operations include the financial results of Portfolio Recovery Associates, Inc. and all of our subsidiaries who are all in the receivables management business. Under the guidance of the FASB ASC Topic 280 “Segment Reporting” (“ASC 280”), we have determined that we have several operating segments that meet the aggregation criteria of ASC 280, and therefore, we have one reportable segment, receivables management, based on similarities among the operating units including homogeneity of services, service delivery methods and use of technology.

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

		For the Three Months
		Ended March 31,
		2010				2009
Revenues:
Income recognized on finance receivables, net			81.5	%			75.2	%
Fee income			18.5	%			24.8	%
Total revenues			100.0	%			100.0	%
Operating expenses:
Compensation and employee services			35.6	%			39.1	%
Legal and agency fees and costs			16.0	%			17.8	%
Outside fees and services			3.4	%			3.1	%
Communications			6.1	%			5.1	%
Rent and occupancy			1.5	%			1.6	%
Other operating expenses			2.7	%			2.9	%
Depreciation and amortization			3.1	%			3.3	%
Total operating expenses			68.4	%			72.9	%
Income from operations			31.6	%			27.1	%
Other income and (expense):
Interest income			0.0	%			0.0	%
Interest expense			(2.6	%)			(2.9	%)
Income before income taxes			29.0	%			24.2	%
Provision for income taxes			11.4	%			9.5	%
Net income			17.6	%			14.7	%

     We use the following terminology throughout our reports: “Cash Receipts” refers to all collections of cash, regardless of the source. “Cash Collections” refers to collections on our owned portfolios only, exclusive of fee income and sales of finance receivables. “Fee Income” refers to revenues generated from our contingent fee and fee-for-service subsidiaries.

Three Months Ended March 31, 2010 Compared To Three Months Ended March 31, 2009

Revenues

     Total revenues were $83.4 million for the three months ended March 31, 2010, an increase of $15.2 million or 22.3% compared to total revenues of $68.2 million for the three months ended March 31, 2009.

Income Recognized on Finance Receivables, net

     Income recognized on finance receivables, net was $68.0 million for the three months ended March 31, 2010, an increase of $16.7 million or 32.6% compared to income recognized on finance receivables, net of $51.3 million for the three months ended March 31, 2009. The increase was primarily due to an increase in our cash collections on our owned defaulted consumer receivables to $119.2 million for the three months ended March 31, 2010 compared to $89.9 million for the three months March 31, an increase of $29.3 million or 32.6%. During the three months ended March 31, 2010, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $1.89 billion at a cost of $102.6 million. During the three months ended March 31, 2009, we acquired defaulted consumer receivable portfolios with an aggregate face value of $960.9 million at a cost of $52.4 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of the average purchase price and for similar time frames, we intend to target a similar internal rate of return, after direct expenses, in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to estimated profitability of a period’s buying.

     Income recognized on finance receivables, net is shown net of changes in valuation allowances recognized under FASB ASC Topic 310-30 “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), which requires that a valuation allowance be recorded for significant decreases in expected cash flows or change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the three months ended March 31, 2010, we recorded net allowance charges of $6,870,000. For the three months ended March 31, 2009, we recorded net allowance charges of $6,220,000. In any given period, we may be required to record valuation allowances due to pools of receivables underperforming our expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability of purchased pools of defaulted consumer receivables would include: overall market pricing for pools of consumer receivables (which is driven by both supply and demand), new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (which relates to the collection and movement of accounts on both our collection floor and external channels), as well as decreases in productivity related to turnover and tenure of our collection staff. Due to the extraordinary deterioration of the U.S. economy beginning in the fourth quarter of 2008, our collection efforts have become more challenging, which has exacerbated the typical effects of these external and internal factors. These combined factors have contributed to the valuation allowances that we have recorded during the three months ended March 31, 2010.

Fee Income

     Fee income was $15.4 million for the three months ended March 31, 2010, a decrease of $1.5 million or 8.9% compared to fee income of $16.9 million for the three months ended March 31, 2009. Fee income decreased as a result of a decrease in revenue generated by our IGS fee-for-service business and MuniServices government revenue enhancement and services business, partially offset by an increase in revenue generated by our RDS government processing and collection business as compared to the prior year period.

Operating Expenses

     Total operating expenses were $56.9 million for the three months ended March 31, 2010, an increase of $7.2 million or 14.5% compared to total operating expenses of $49.7 million for the three months ended March 31, 2009. Total operating expenses, including compensation and employee services expenses, were 42.3% of cash receipts for the three months ended March 31, 2010 compared to 46.5% for the same period in 2009.

Compensation and Employee Services

     Compensation and employee services expenses were $29.6 million for the three months ended March 31, 2010, an increase of $2.9 million or 10.9% compared to compensation and employee services expenses of $26.7 million for the three months ended March 31, 2009. This increase is mainly due to an overall increase in our owned portfolio collection staff as well as the hiring of non-collection personnel mainly due to the expansion of our information technology department. Compensation and employee services expenses increased as total employees grew 12.8% to 2,329 as of March 31, 2010 from 2,065 as of March 31, 2009. Compensation and employee services expenses as a percentage of cash receipts decreased to 22.0% for the three months ended March 31, 2010 from 25.0% of cash receipts for the same period in 2009.

Legal and Agency Fees and Costs

     Legal and agency fees and costs expenses were $13.3 million for the three months ended March 31, 2010, an increase of $1.2 million or 9.9% compared to legal and agency fees and costs of $12.1 million for the three months ended March 31, 2009. Of the $1.2 million increase, $2.0 million was attributable to an increase in legal fees and costs incurred resulting from accounts referred to both our in-house attorneys and outside independent contingent fee attorneys. This was offset by a $0.8 million decrease mainly attributable to a decrease in agency fees incurred by our IGS subsidiary. Total outside legal expenses paid to independent contingent fee attorneys for the three months ended March 31, 2010 were 42.3% of legal cash collections generated by independent contingent fee attorneys compared to 37.6% for the three months ended March 31, 2009. Outside legal fees and costs paid to independent contingent fee attorneys increased from $6.7 million for the three months ended March 31, 2009 to $8.8 million, an increase of $2.1 million or 31.3%, for the three months ended March 31, 2010. Additionally, as disclosed previously, we also effectuate legal collections using our own in-house attorneys. Total legal expenses incurred by our in-house attorneys for the three months ended March 31, 2010 were 8.3% of legal cash collections generated by our in-house attorneys compared to 26.7% for the three months ended March 31, 2009. Legal fees and costs incurred by our in-house attorneys were $0.9 million for the three months ended March 31, 2010 and 2009.

Outside Fees and Services

     Outside fees and services expenses were $2.8 million for the three months ended March 31, 2010, an increase of $0.7 million or 33.3% compared to outside legal and other fees and services expenses of $2.1 million for the three months ended March 31, 2009. The $0.7 million increase was attributable to an increase in other outside fees and services and corporate legal expense.

Communications

     Communications expenses were $5.1 million for the three months ended March 31, 2010, an increase of $1.6 million or 45.7% compared to communications expenses of $3.5 million for the three months ended March 31, 2009. The increase was mainly due to a growth in mailings due to an increase in special letter campaigns which increased by $1.6 million for the three months ended March 31, 2010 when compared to the year ago period.

Rent and Occupancy

     Rent and occupancy expenses were $1.3 million for the three months ended March 31, 2010, an increase of $0.2 million or 18.2% compared to rent and occupancy expenses of $1.1 million for the three months ended March 31, 2009. The increase was primarily due to relocation of our IGS business to another location, the expansion of our Hampton, VA call center and increased utility charges.

Other Operating Expenses

     Other operating expenses were $2.3 million for the three months ended March 31, 2010, an increase of $0.3 million or 15.0% compared to other operating expenses of $2.0 million for the three months ended March 31, 2009. The increase was mainly due to increases in various expenses when compared to the prior year period. No individual item represents a significant portion of the overall increase.

Depreciation and Amortization

     Depreciation and amortization expenses were $2.6 million for the three months ended March 31, 2010, an increase of $0.3 million or 13.0% compared to depreciation and amortization expenses of $2.3 million for the three months ended March 31, 2009. The increase is mainly due to additional amortization expense incurred relating to the intangible assets of our newly acquired CCB subsidiary as well as continued capital expenditures on equipment, software, and computers related to our growth and systems upgrades.

Interest Income

     Interest income was $36,000 for the three months ended March 31, 2010, an increase of $33,000 compared to interest income of $3,000 for the three months ended March 31, 2009. This increase is the result of interest earned and a refund received on the overpayment of federal income tax.

Interest Expense

     Interest expense was $2.2 million for the three months ended March 31, 2010, a increase of $0.2 million compared to interest expense of $2.0 million for the three months ended March 31, 2009. The increase was mainly due to an increase in our average borrowings under our revolving credit facility for the three months ended March 31, 2010 compared to the same period in 2009 as well as the interest expense paid during 2010 relating to the interest rate swap offset by a decrease in our weighted average interest rate which decreased to 2.35% for the three months ended March 31, 2010 as compared to 2.78% for the three months ended March 31, 2009.

Provision for Income Taxes

     Income tax expense was $9.5 million for the three months ended March 31, 2010, an increase of $3.1 million or 48.4% compared to income tax expense of $6.4 million for the three months ended March 31, 2009. The increase is mainly due to an increase of 47.0% in income before taxes for the three months ended March 31, 2010 when compared to the same period in 2009. The effective tax rate of 39.1% for the three months ended March 31, 2010 was comparable to the effective tax rate of 39.0% for the same period in 2009.

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), internal rates of return (“IRRs”) 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 collection amount 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 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 IRRs, 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 expand. 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.

Entire Portfolio ($ in thousands)

										Percentage of				Unamortized				Percentage of Reserve				Actual Cash
						Life to Date				Reserve				Purchase Price				Allowance to Unamortized				Collections				Estimated								Total Estimated
Purchase		Purchase				Reserve				Allowance to				Balance at				Purchase Price and				Including Cash				Remaining				Total Estimated				Collections to
Period		Price (1)				Allowance (2)				Purchase Price (3)				March 31, 2010 (4)				Reserve Allowance (5)				Sales				Collections (6)				Collections (7)				Purchase Price (8)
1996		$	3,080			$	0				0	%		$	0				0	%		$	9,991			$	69			$	10,060				327	%
1997		$	7,685			$	0				0	%		$	0				0	%		$	24,977			$	251			$	25,228				328	%
1998		$	11,089			$	0				0	%		$	0				0	%		$	36,332			$	533			$	36,865				332	%
1999		$	18,898			$	0				0	%		$	0				0	%		$	66,349			$	1,424			$	67,773				359	%
2000		$	25,020			$	0				0	%		$	0				0	%		$	108,880			$	3,861			$	112,741				451	%
2001		$	33,481			$	0				0	%		$	0				0	%		$	163,442			$	3,936			$	167,378				500	%
2002		$	42,325			$	0				0	%		$	0				0	%		$	179,844			$	5,086			$	184,930				437	%
2003		$	61,448			$	0				0	%		$	0				0	%		$	235,987			$	9,529			$	245,516				400	%
2004		$	59,179			$	1,385				2	%		$	661				68	%		$	171,495			$	10,667			$	182,162				308	%
2005		$	143,172			$	12,735				9	%		$	31,054				29	%		$	253,909			$	60,452			$	314,361				220	%
2006		$	107,731			$	13,545				13	%		$	37,189				27	%		$	152,874			$	69,485			$	222,359				206	%
2007		$	258,341			$	13,715				5	%		$	135,538				9	%		$	274,816			$	234,649			$	509,465				197	%
2008		$	275,189			$	16,745				6	%		$	189,152				8	%		$	196,170			$	346,084			$	542,254				197	%
2009		$	283,501			$	0				0	%		$	246,809				0	%		$	99,588			$	579,919			$	679,507				240	%
YTD 2010		$	102,652			$	0				0	%		$	102,081				0	%		$	3,803			$	210,184			$	213,987				208	%
Total		$	1,432,791			$	58,125				4	%		$	742,484				7	%		$	1,978,457			$	1,536,129			$	3,514,586				245	%

Purchased Bankruptcy Portfolio ($ in thousands)

										Percentage of				Unamortized				Percentage of Reserve				Actual Cash
						Life to Date				Reserve				Purchase Price				Allowance to Unamortized				Collections				Estimated								Total Estimated
Purchase		Purchase				Reserve				Allowance to				Balance at				Purchase Price and				Including Cash				Remaining				Total Estimated				Collections to
Period		Price (1)				Allowance (2)				Purchase Price (3)				March 31, 2010 (4)				Reserve Allowance (5)				Sales				Collections (6)				Collections (7)				Purchase Price (8)
1996		$	0			$	0				0	%		$	0				0	%		$	0			$	0			$	0				0	%
1997		$	0			$	0				0	%		$	0				0	%		$	0			$	0			$	0				0	%
1998		$	0			$	0				0	%		$	0				0	%		$	0			$	0			$	0				0	%
1999		$	0			$	0				0	%		$	0				0	%		$	0			$	0			$	0				0	%
2000		$	0			$	0				0	%		$	0				0	%		$	0			$	0			$	0				0	%
2001		$	0			$	0				0	%		$	0				0	%		$	0			$	0			$	0				0	%
2002		$	0			$	0				0	%		$	0				0	%		$	0			$	0			$	0				0	%
2003		$	0			$	0				0	%		$	0				0	%		$	0			$	0			$	0				0	%
2004		$	7,469			$	1,285				17	%		$	4				100	%		$	14,023			$	57			$	14,080				189	%
2005		$	29,302			$	895				3	%		$	887				50	%		$	41,871			$	1,212			$	43,083				147	%
2006		$	17,643			$	1,530				9	%		$	566				73	%		$	26,787			$	2,432			$	29,219				166	%
2007		$	78,933			$	1,310				2	%		$	40,405				3	%		$	62,445			$	50,911			$	113,356				144	%
2008		$	108,612			$	0				0	%		$	82,472				0	%		$	59,021			$	124,071			$	183,092				169	%
2009		$	158,535			$	0				0	%		$	148,183				0	%		$	31,764			$	307,520			$	339,284				214	%
YTD 2010		$	71,514			$	0				0	%		$	71,514				0	%		$	1,651			$	137,503			$	139,154				195	%
Total		$	472,008			$	5,020				1	%		$	344,031				1	%		$	237,562			$	623,706			$	861,268				182	%

Entire Portfolio Less Purchased Bankruptcy Portfolio ($ in thousands)

										Percentage of				Unamortized				Percentage of Reserve				Actual Cash
						Life to Date				Reserve				Purchase Price				Allowance to Unamortized				Collections				Estimated								Total Estimated
Purchase		Purchase				Reserve				Allowance to				Balance at				Purchase Price and				Including Cash				Remaining				Total Estimated				Collections to
Period		Price (1)				Allowance (2)				Purchase Price (3)				March 31, 2010 (4)				Reserve Allowance (5)				Sales				Collections (6)				Collections (7)				Purchase Price (8)
1996		$	3,080			$	0				0	%		$	0				0	%		$	9,991			$	69			$	10,060				327	%
1997		$	7,685			$	0				0	%		$	0				0	%		$	24,977			$	251			$	25,228				328	%
1998		$	11,089			$	0				0	%		$	0				0	%		$	36,332			$	533			$	36,865				332	%
1999		$	18,898			$	0				0	%		$	0				0	%		$	66,349			$	1,424			$	67,773				359	%
2000		$	25,020			$	0				0	%		$	0				0	%		$	108,880			$	3,861			$	112,741				451	%
2001		$	33,481			$	0				0	%		$	0				0	%		$	163,442			$	3,936			$	167,378				500	%
2002		$	42,325			$	0				0	%		$	0				0	%		$	179,844			$	5,086			$	184,930				437	%
2003		$	61,448			$	0				0	%		$	0				0	%		$	235,987			$	9,529			$	245,516				400	%
2004		$	51,710			$	100				0	%		$	657				13	%		$	157,472			$	10,610			$	168,082				325	%
2005		$	113,870			$	11,840				10	%		$	30,167				28	%		$	212,038			$	59,240			$	271,278				238	%
2006		$	90,088			$	12,015				13	%		$	36,623				25	%		$	126,087			$	67,053			$	193,140				214	%
2007		$	179,408			$	12,405				7	%		$	95,133				12	%		$	212,371			$	183,738			$	396,109				221	%
2008		$	166,577			$	16,745				10	%		$	106,680				14	%		$	137,149			$	222,013			$	359,162				216	%
2009		$	124,966			$	0				0	%		$	98,626				0	%		$	67,824			$	272,399			$	340,223				272	%
YTD 2010		$	31,138			$	0				0	%		$	30,567				0	%		$	2,152			$	72,681			$	74,833				240	%
Total		$	960,783			$	53,105				6	%		$	398,453				12	%		$	1,740,895			$	912,423			$	2,653,318				276	%

     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 Period		1996-2000				2001				2002				2003				2004				2005				2006				2007				2008				2009-2010				Total
Q1 05		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Q2 05			—				—				—				—				—				—				—				—				—				—			$	—
Q3 05			—				—				—				—				—				—				—				—				—				—			$	—
Q4 05			—				200				—				—				—				—				—				—				—				—			$	200
Q1 06			—				—				—				—				—				175				—				—				—				—			$	175
Q2 06			—				75				—				—				—				125				—				—				—				—			$	200
Q3 06			—				200				—				—				—				75				—				—				—				—			$	275
Q4 06			—				—				—				—				—				450				—				—				—				—			$	450
Q1 07			—				(245	)			—				—				—				610				—				—				—				—			$	365
Q2 07			—				70				—				20				—				—				—				—				—				—			$	90
Q3 07			—				50				—				150				320				660				—				—				—				—			$	1,180
Q4 07			—				—				—				190				150				615				340				—				—				—			$	1,295
Q1 08			—				—				—				120				650				910				1,105				—				—				—			$	2,785
Q2 08			—				(140	)			—				400				720				—				2,330				650				—				—			$	3,960
Q3 08			—				(30	)			—				(60	)			60				325				1,135				2,350				—				—			$	3,780
Q4 08			—				(75	)			—				(325	)			(140	)			1,805				2,600				4,380				620				—			$	8,865
Q1 09			—				(105	)			—				(120	)			35				1,150				910				2,300				2,050				—			$	6,220
Q2 09			—				—				—				(230	)			(220	)			495				765				685				2,425				—			$	3,920
Q3 09			—				—				—				(25	)			(190	)			1,170				1,965				340				4,750				—			$	8,010
Q4 09			—				—				—				(120	)			—				1,375				1,220				110				6,900				—			$	9,485
Q1 10			—				—				—				—				—				2,795				1,175				2,900				—				—			$	6,870
Total		$	—			$	—			$	—			$	—			$	1,385			$	12,735			$	13,545			$	13,715			$	16,745			$	—			$	58,125
Portfolio Purchases, net		$	65,772			$	33,481			$	42,325			$	61,448			$	59,179			$	143,172			$	107,731			$	258,341			$	275,189			$	386,153			$	1,432,791