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Investment in Receivable Portfolios, Net
 9 Months Ended
Sep. 30, 2014
Receivables [Abstract]  
Investment in Receivable Portfolios, Net
Investment in Receivable Portfolios, Net
In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, discrete receivable portfolio purchases during a quarter are aggregated into pools based on common risk characteristics. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.
In compliance with the authoritative guidance, the Company accounts for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an internal rate of return (“IRR”) to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is an increase in subsequent expected cash flows. Subsequent increases in expected cash flows are recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows do not change the IRR, but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of comprehensive income as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition.
The Company utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. During the quarter ended September 30, 2014, the Company revised the forecasting methodology it uses to value and calculate IRRs on its portfolios in the United States by extending the collection forecasts from 84 or 96 months to 120 months. This change was made as a result of the Company’s increased confidence in its ability to forecast future cash collections to 120 months.  Extending the collection forecast did not result in a material increase to any quarterly pool group IRRs or revenue during the quarter. The Company has historically included collections to 120 months in its estimated remaining collection disclosures and when evaluating the economic returns of its portfolio purchases.
The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios, and for provision for loss or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances.
If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company accounts for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the purchase price of a Cost Recovery Portfolio has been fully recovered.
Accretable yield represents the amount of revenue the Company expects to generate over the remaining life of its existing investment in receivable portfolios based on estimated future cash flows. Total accretable yield is the difference between future estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis has been fully recovered are classified as zero basis cash flows.
The following table summarizes the Company’s accretable yield and an estimate of zero basis future cash flows at the beginning and end of the period presented (in thousands):
 
Accretable
Yield
 
Estimate of
Zero Basis
Cash Flows
 
Total
Balance at December 31, 2013
$
2,391,471

 
$
8,465

 
$
2,399,936

Revenue recognized, net
(231,057
)
 
(6,511
)
 
(237,568
)
Net additions on existing portfolios
92,325

 
8,555

 
100,880

Additions for current purchases(1)
591,205

 
—

 
591,205

Balance at March 31, 2014
2,843,944

 
10,509

 
2,854,453

Revenue recognized, net
(241,523
)
 
(6,708
)
 
(248,231
)
Net additions on existing portfolios
80,582

 
6,135

 
86,717

Additions for current purchases
218,047

 
—

 
218,047

Balance at June 30, 2014
2,901,050

 
9,936

 
2,910,986

Revenue recognized, net
(244,561
)
 
(7,224
)
 
(251,785
)
Net additions on existing portfolios
161,622

 
54,184

 
215,806

Additions for current purchases(2)
179,604

 
—

 
179,604

Balance at September 30, 2014
$
2,997,715

 
$
56,896

 
$
3,054,611

 
Accretable
Yield
 
Estimate of
Zero Basis
Cash Flows
 
Total
Balance at December 31, 2012
$
984,944

 
$
17,366

 
$
1,002,310

Revenue recognized, net
(135,072
)
 
(5,611
)
 
(140,683
)
Net additions on existing portfolios
173,634

 
7,061

 
180,695

Additions for current purchases
66,808

 
—

 
66,808

Balance at March 31, 2013
1,090,314

 
18,816

 
1,109,130

Revenue recognized, net
(144,186
)
 
(7,838
)
 
(152,024
)
Net additions on existing portfolios
30,458

 
10,784

 
41,242

Additions for current purchases(3)
645,865

 
—

 
645,865

Balance at June 30, 2013
1,622,451

 
21,762

 
1,644,213

Revenue recognized, net
(218,182
)
 
(7,205
)
 
(225,387
)
Net additions on existing portfolios
29,101

 
3,048

 
32,149

Additions for current purchases(4)
975,380

 
—

 
975,380

Balance at September 30, 2013
$
2,408,750

 
$
17,605

 
$
2,426,355

________________________
(1)
Includes $208.5 million of portfolios acquired in connection with the Marlin Acquisition discussed in Note 2, “Business Combinations.”
(2)
Includes $105.4 million of portfolios acquired in connection with the Atlantic Acquisition discussed in Note 2, “Business Combinations.”
(3)
Includes $383.4 million of portfolios acquired in connection with the merger with AACC.
(4)
Includes $559.0 million of portfolios acquired in connection with the Cabot Acquisition.
During the three months ended September 30, 2014, the Company purchased receivable portfolios with a face value of $4.0 billion for $299.5 million, or a purchase cost of 7.5% of face value. Purchases of charged-off credit card portfolios include $105.4 million of portfolios acquired in conjunction with the Atlantic Acquisition. The estimated future collections at acquisition for all portfolios purchased during the quarter amounted to $0.6 billion. During the three months ended September 30, 2013, the Company purchased receivable portfolios with a face value of $13.4 billion for $617.9 million, or a purchase cost of 4.6% of face value. This included $559.0 million of portfolios acquired in conjunction with the Cabot Acquisition. During the nine months ended September 30, 2014, the Company purchased receivable portfolios with a face value of $11.3 billion for $992.8 million, or a purchase cost of 8.8% of face value. Purchases of charged-off credit card portfolios include $105.4 million of portfolio acquired in connection with the Atlantic Acquisition and $208.5 million of portfolios acquired in conjunction with the Marlin Acquisition. The estimated future collections at acquisition for all portfolios purchased during the period amounted to $2.0 billion. During the nine months ended September 30, 2013, the Company purchased receivable portfolios with a face value of $83.9 billion for $1.1 billion, or a purchase cost of 1.3% of face value. Included in this amount is the purchase of receivables related to AACC of $383.4 million with a face value of $68.2 billion or a purchase cost of 0.6% of face value. The lower purchase rate for the AACC portfolio is due to the Company’s purchase of AACC which included all portfolios owned, including accounts that have no value. No value accounts would typically not be included in a portfolio purchase transaction, as the sellers would remove them from the accounts being sold to the Company prior to sale.
All collections realized after the net book value of a portfolio has been fully recovered (“Zero Basis Portfolios”) are recorded as revenue (“Zero Basis Revenue”). During the three months ended September 30, 2014 and 2013, Zero Basis Revenue was approximately $4.5 million and $4.2 million, respectively. During the nine months ended September 30, 2014 and 2013, Zero Basis Revenue was approximately $11.5 million and $13.6 million, respectively.
The following tables summarize the changes in the balance of the investment in receivable portfolios during the following periods (in thousands, except percentages):
 
Three Months Ended September 30, 2014
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
1,978,493

 
$
9,492

 
$
—

 
$
1,987,985

Purchases of receivable portfolios(1)
297,800

 
1,709

 
—

 
299,509

Transfer of portfolios
(11,519
)
 
11,519

 
—

 
—

Gross collections(2)
(395,945
)
 
(4,056
)
 
(7,219
)
 
(407,220
)
Put-backs and recalls
(2,817
)
 
1,278

 
(5
)
 
(1,544
)
Foreign currency adjustments
(55,865
)
 
(1,418
)
 
—

 
(57,283
)
Revenue recognized
241,502

 
—

 
4,480

 
245,982

Portfolio allowance reversals, net
3,059

 
—

 
2,744

 
5,803

Balance, end of period
$
2,054,708

 
$
18,524

 
$
—

 
$
2,073,232

Revenue as a percentage of collections(3)
61.0
%
 
0.0
%
 
62.1
%
 
60.4
%
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2013
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
1,090,922

 
$
5,776

 
$
—

 
$
1,096,698

Purchases of receivable portfolios(4)
616,779

 
1,073

 
—

 
617,852

Transfer of portfolios
—

 
—

 
—

 
—

Gross collections(2)
(371,482
)
 
(983
)
 
(7,205
)
 
(379,670
)
Put-backs and recalls
(755
)
 
(242
)
 
—

 
(997
)
Foreign currency adjustments
36,372

 
—

 
—

 
36,372

Revenue recognized
218,182

 
—

 
4,227

 
222,409

Portfolio allowance reversals, net
—

 
—

 
2,978

 
2,978

Balance, end of period
$
1,590,018

 
$
5,624

 
$
—

 
$
1,595,642

Revenue as a percentage of collections(3)
58.7
%
 
0.0
%
 
58.7
%
 
58.6
%

 
Nine Months Ended September 30, 2014
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
1,585,587

 
$
4,662

 
$
—

 
$
1,590,249

Purchases of receivable portfolios(1)(5)
991,127

 
1,709

 
—

 
992,836

Transfer of portfolios
(18,682
)
 
18,682

 
—

 
—

Gross collections(2)
(1,186,431
)
 
(6,305
)
 
(20,438
)
 
(1,213,174
)
Put-backs and recalls
(11,640
)
 
875

 
(5
)
 
(10,770
)
Foreign currency adjustments
(22,394
)
 
(1,099
)
 
—

 
(23,493
)
Revenue recognized
713,656

 
—

 
11,473

 
725,129

Portfolio allowance reversals, net
3,485

 
—

 
8,970

 
12,455

Balance, end of period
$
2,054,708

 
$
18,524

 
$
—

 
$
2,073,232

Revenue as a percentage of collections(3)
60.2
%
 
0.0
%
 
56.1
%
 
59.8
%
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2013
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
873,119

 
$
—

 
$
—

 
$
873,119

Purchases of receivable portfolios (4)(6)
1,098,663

 
1,073

 
—

 
1,099,736

Transfer of portfolios
(6,649
)
 
6,649

 
—

 
—

Gross collections(2)
(905,751
)
 
(1,825
)
 
(20,652
)
 
(928,228
)
Put-backs and recalls
(2,512
)
 
(273
)
 
(2
)
 
(2,787
)
Foreign currency adjustments
35,708

 
—

 
—

 
35,708

Revenue recognized
496,804

 
—

 
13,632

 
510,436

Portfolio allowance reversals, net
636

 
—

 
7,022

 
7,658

Balance, end of period
$
1,590,018

 
$
5,624

 
$
—

 
$
1,595,642

Revenue as a percentage of collections(3)
54.8
%
 
0.0
%
 
66.0
%
 
55.0
%
________________________
(1)
Purchases of portfolio receivables include $105.4 million acquired in connection with the Atlantic Acquisition in August 2014 discussed in Note 2, “Business Combinations.”
(2)
Does not include amounts collected on behalf of others.
(3)
Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.
(4)
Includes $559.0 million of portfolios acquired in connection with the Cabot Acquisition.
(5)
Includes $208.5 million acquired in connection with the Marlin Acquisition in February 2014 discussed in Note 2, “Business Combinations.”
(6)
Includes $383.4 million of portfolios acquired in connection with the merger with AACC.
The following table summarizes the change in the valuation allowance for investment in receivable portfolios during the periods presented (in thousands):
 
Valuation Allowance
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
86,428

 
$
100,593

 
$
93,080

 
$
105,273

Provision for portfolio allowances
—

 
—

 
—

 
479

Reversal of prior allowances
(5,803
)
 
(2,978
)
 
(12,455
)
 
(8,137
)
Balance at end of period
$
80,625

 
$
97,615

 
$
80,625

 
$
97,615