Note 6: 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 consumer 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 generally 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. The collection forecast of each pool is generally estimated to be between 84 to 96 months based on the expected collection period of each pool. The Company often experiences collections beyond the 84 to 96 month collection forecast. As of March 31, 2012, the total estimated remaining collections beyond the 84 to 96 month collection forecast was $104.2 million.

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 income 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, 2011	$	821,527		$	32,676		$	854,203
Revenue recognized, net		(119,340	)		(7,065	)		(126,405	)
Net additions to existing portfolios⁽¹⁾		131,039			3,608			134,647
Additions for current purchases⁽¹⁾		119,533			—			119,533

Balance at March 31, 2012	$	952,759		$	29,219		$	981,978

⁽¹⁾	Estimated remaining collections include anticipated collections beyond the 84 to 96 month collection forecast.


	Accretable Yield			Estimate of Zero Basis Cash Flows			Total
Balance at December 31, 2010	$	739,785		$	4,274		$	744,059
Revenue recognized, net		(101,709	)		(3,617	)		(105,326	)
Net additions to existing portfolios		18,715			2,948			21,663
Additions for current purchases		93,098			—			93,098

Balance at March 31, 2011	$	749,889		$	3,605		$	753,494

During the three months ended March 31, 2012, the Company purchased receivable portfolios with a face value of $2.9 billion for $130.5 million, or a purchase cost of 4.5% of face value. The estimated future collections at acquisition for these portfolios amounted to $235.9 million. During the three months ended March 31, 2011, the Company purchased receivable portfolios with a face value of $2.9 billion for $90.7 million, or a purchase cost of 3.1% of face value. The estimated future collections at acquisition for these portfolios amounted to $178.4 million.

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 March 31, 2012 and 2011, approximately $6.0 million and $3.0 million, respectively, were recognized as revenue on portfolios for which the related cost basis has been fully recovered.

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 March 31, 2012
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	716,454		$	—		$	—		$	716,454
Purchases of receivable portfolios		130,463			—			—			130,463
Gross collections⁽¹⁾		(223,943	)		—			(7,065	)		(231,008	)
Put-backs and recalls⁽²⁾		(734	)		—			—			(734	)
Revenue recognized		120,746			—			6,032			126,778
(Portfolio allowances) portfolio allowance reversals, net		(1,406	)		—			1,033			(373	)

Balance, end of period	$	741,580		$	—		$	—		$	741,580

Revenue as a percentage of collections⁽³⁾		53.9	%		0.0	%		85.4	%		54.9	%


	Three Months Ended March 31, 2011
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	644,753		$	—		$	—		$	644,753
Purchases of receivable portfolios		90,675			—			—			90,675
Gross collections⁽¹⁾		(187,417	)		—			(3,617	)		(191,034	)
Put-backs and recalls⁽²⁾		(900	)		—			—			(900	)
Revenue recognized		107,804			—			3,020			110,824
(Portfolio allowances) portfolio allowance reversals, net		(6,095	)		—			597			(5,498	)

Balance, end of period	$	648,820		$	—		$	—		$	648,820

Revenue as a percentage of collections⁽³⁾		57.5	%		0.0	%		83.5	%		58.0	%

⁽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.

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 March 31,
	2012			2011
Balance at beginning of period	$	109,494		$	98,671
Provision for portfolio allowances		1,759			6,095
Reversal of prior allowance		(1,386	)		(597	)

Balance at end of period	$	109,867		$	104,169

The Company currently utilizes various business channels for the collection of its receivables. The following table summarizes the total collections by collection channel (in thousands):


	Three Months Ended March 31,
	2012		2011
Collection sites	$	109,870	$	88,541
Legal collections		109,572		88,488
Collection agencies		11,586		13,990
Other		—		54

	$	231,028	$	191,073