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 the same fiscal quarter are aggregated into pools based on common risk characteristics. Common risk characteristics include risk ratings (e.g. FICO or similar scores), financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card and telecom, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by geographic region or location. Portfolios acquired in business combinations are also grouped into these pools. During any fiscal quarter in which the Company has an acquisition of an entity that has portfolio, the entire historical portfolio of the acquired company is aggregated into the pool groups for that quarter, based on common characteristics, resulting in pools for that quarter that may consist of several different vintages of portfolio. 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 operations 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. For purposes of calculating IRRs, the collection forecast of each pool is estimated to be up to 120 months.

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 portfolio allowance reversals 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
December 31, 2015	$	3,047,640		$	223,031		$	3,270,671
Revenue recognized, net	(238,547		)	(31,547		)	(270,094		)
Net additions on existing portfolios	39,538			8,071			47,609
Additions for current purchases, net	193,654			—			193,654
Effect of foreign currency translation	(64,330		)	470			(63,860		)
Balance at March 31, 2016	2,977,955			200,025			3,177,980
Revenue recognized, net	(233,714		)	(33,738		)	(267,452		)
Net additions on existing portfolios	59,459			95,135			154,594
Additions for current purchases, net	183,217			—			183,217
Effect of foreign currency translation	(181,223		)	245			(180,978		)
Balance at June 30, 2016	$	2,805,694		$	261,667		$	3,067,361



	Accretable Yield			Estimate of Zero Basis Cash Flows			Total
Balance at December 31, 2014	$	2,993,321		$	66,392		$	3,059,713
Revenue recognized, net	(248,539		)	(15,571		)	(264,110		)
Net additions on existing portfolios	228,560			39,661			268,221
Additions for current purchases, net	85,907			—			85,907
Effect of foreign currency translation	(108,046		)	(54		)	(108,100		)
Balance at March 31, 2015	2,951,203			90,428			3,041,631
Revenue recognized, net	(243,425		)	(26,876		)	(270,301		)
Net additions on existing portfolios	(40,337		)	74,587			34,250
Additions for current purchases, net	395,009			—			395,009
Effect of foreign currency translation	131,654			(1		)	131,653
Balance at June 30, 2015	$	3,194,104		$	138,138		$	3,332,242

During the three months ended June 30, 2016, the Company purchased receivable portfolios with a face value of $2.8 billion for $233.1 million, or a purchase cost of 8.2% of face value. The estimated future collections at acquisition for all portfolios purchased during the three months ended June 30, 2016 amounted to $416.9 million. During the three months ended June 30, 2015, the Company purchased receivable portfolios with a face value of $5.5 billion for $418.8 million, or a purchase cost of 7.6% of face value. Purchases of charged-off credit card portfolios during the three months ended June 30, 2015, include $216.0 million of portfolios acquired in connection with the dlc Acquisition. The estimated future collections at acquisition for all portfolios purchased during the three months ended June 30, 2015, amounted to $806.5 million.

During the six months ended June 30, 2016, the Company purchased receivable portfolios with a face value of $6.4 billion for $489.9 million, or a purchase cost of 7.7% of face value. The estimated future collections at acquisition for all portfolios purchased during the six months ended June 30, 2016 amounted to $875.5 million. During the six months ended June 30, 2015, the Company purchased receivable portfolios with a face value of $6.6 billion for $543.9 million, or a purchase cost of 8.3% of face value. Purchases of charged-off credit card portfolios during the six months ended June 30, 2015, include $216.0 million of portfolios acquired in connection with the dlc Acquisition. The estimated future collections at acquisition for all portfolios purchased during the six months ended June 30, 2015, amounted to $1.0 billion.

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 June 30, 2016 and 2015, Zero Basis Revenue was approximately $33.7 million and $26.9 million, respectively. During the six months ended June 30, 2016 and 2015, Zero Basis Revenue was approximately $65.3 million and $42.4 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 June 30, 2016
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	2,482,855		$	4,123		$	—		$	2,486,978
Purchases of receivable portfolios	233,116			—			—			233,116
Transfer of portfolios	(96		)	96			—			—
Gross collections⁽¹⁾	(399,498		)	(724		)	(33,878		)	(434,100		)
Put-backs and Recalls⁽²⁾	(3,692		)	(5		)	140			(3,557		)
Foreign currency adjustments	(80,432		)	136			—			(80,296		)
Revenue recognized	233,010			—			31,963			264,973
Portfolio allowance reversals, net	704			—			1,775			2,479
Balance, end of period	$	2,465,967		$	3,626		$	—		$	2,469,593
Revenue as a percentage of collections⁽³⁾	58.3		%	0.0		%	94.3		%	61.0		%

	Three Months Ended June 30, 2015
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	2,029,335		$	9,072		$	—		$	2,038,407
Purchases of receivable portfolios	418,780			—			—			418,780
Gross collections⁽¹⁾	(409,339		)	(1,253		)	(26,732		)	(437,324		)
Put-backs and Recalls⁽²⁾	(1,458		)	(1		)	(164		)	(1,623		)
Foreign currency adjustments	63,121			85			20			63,226
Revenue recognized	242,618			—			23,323			265,941
Portfolio allowance reversals, net	807			—			3,553			4,360
Balance, end of period	$	2,343,864		$	7,903		$	—		$	2,351,767
Revenue as a percentage of collections⁽³⁾	59.3		%	0.0		%	87.2		%	60.8		%

________________________


(1)	Does not include amounts collected on behalf of others.


(2)	Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).


(3)	Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.



	Six Months Ended June 30, 2016
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	2,436,054		$	4,615		$	—		$	2,440,669
Purchases of receivable portfolios	489,869			—			—			489,869
Transfer of portfolios	(96		)	96			—			—
Gross collections⁽¹⁾	(815,225		)	(1,357		)	(65,323		)	(881,905		)
Put-backs and Recalls⁽²⁾	(16,577		)	(11		)	38			(16,550		)
Foreign currency adjustments	(100,319		)	283			—			(100,036		)
Revenue recognized	471,088			—			61,788			532,876
Portfolio allowance reversals, net	1,173			—			3,497			4,670
Balance, end of period	$	2,465,967		$	3,626		$	—		$	2,469,593
Revenue as a percentage of collections⁽³⁾	57.8		%	0.0		%	94.6		%	60.4		%

	Six Months Ended June 30, 2015
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	2,131,084		$	12,476		$	—		$	2,143,560
Purchases of receivable portfolios	543,934			—			—			543,934
Gross collections⁽¹⁾	(816,895		)	(3,225		)	(42,275		)	(862,395		)
Put-backs and Recalls⁽²⁾	(3,975		)	(19		)	(192		)	(4,186		)
Foreign currency adjustments	(2,248		)	(1,329		)	20			(3,557		)
Revenue recognized	491,157			—			36,035			527,192
Portfolio allowance reversals, net	807			—			6,412			7,219
Balance, end of period	$	2,343,864		$	7,903		$	—		$	2,351,767
Revenue as a percentage of collections⁽³⁾	60.1		%	0.0		%	85.2		%	61.1		%

________________________


(1)	Does not include amounts collected on behalf of others.


(2)	Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement. Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement.


(3)	Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.

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 June 30,						Six Months Ended June 30,
	2016			2015			2016			2015
Balance at beginning of period	$	58,397		$	72,814		$	60,588		$	75,673
Reversal of prior allowances	(2,479		)	(4,360		)	(4,670		)	(7,219		)
Balance at end of period	$	55,918		$	68,454		$	55,918		$	68,454