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 experiencing collections beyond 84 or 96 months and an 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’s IRR or revenue for 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 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, 2014	$	2,993,321		$	66,392		$	3,059,713
Revenue recognized, net⁽¹⁾	(248,539		)	(15,571		)	(264,110		)
Net additions on existing portfolios	120,729			39,607			160,336
Additions for current purchases	85,692			—			85,692
Balance at March 31, 2015	$	2,951,203		$	90,428		$	3,041,631



	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⁽¹⁾	(231,057		)	(6,511		)	(237,568		)
Net additions on existing portfolios	92,325			8,555			100,880
Additions for current purchases⁽²⁾	591,205			—			591,205
Balance at March 31, 2014	$	2,843,944		$	10,509		$	2,854,453

________________________


(1)	Revenue recognized on Zero Basis Portfolios includes portfolio allowance reversals.


(2)	Includes $208.5 million of portfolios acquired in connection with the Marlin Acquisition.

During the three months ended March 31, 2015, the Company purchased receivable portfolios with a face value of $1.0 billion for $125.2 million, or a purchase cost of 12.0% of face value. The estimated future collections at acquisition for all portfolios purchased during the period amounted to $197.5 million. During the three months ended March 31, 2014, the Company purchased receivable portfolios with a face value of $4.3 billion for $467.6 million, or a purchase cost of 10.9% of face value. Purchases of charged-off credit card portfolios during the three months ended March 31, 2014, include $208.5 million of portfolios acquired in conjunction with the Marlin Acquisition. The estimated future collections at acquisition for all portfolios purchased during the quarter 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 March 31, 2015 and 2014, Zero Basis Revenue was approximately $15.6 million and $6.5 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 March 31, 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	125,154			—			—			125,154
Gross collections⁽¹⁾	(407,556		)	(1,972		)	(15,543		)	(425,071		)
Put-backs and Recalls⁽²⁾	(2,517		)	(18		)	(28		)	(2,563		)
Foreign currency adjustments	(65,369		)	(1,414		)	—			(66,783		)
Revenue recognized	248,539			—			12,712			261,251
Portfolio allowance reversals, net	—			—			2,859			2,859
Balance, end of period	$	2,029,335		$	9,072		$	—		$	2,038,407
Revenue as a percentage of collections⁽³⁾	61.0		%	0.0		%	81.8		%	61.5		%

	Three Months Ended March 31, 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 ⁽⁴⁾	467,565			—			—			467,565
Gross collections⁽¹⁾	(389,503		)	(660		)	(6,511		)	(396,674		)
Put-backs and Recalls⁽²⁾	(3,235		)	(149		)	—			(3,384		)
Foreign currency adjustments	8,706			—			—			8,706
Revenue recognized	230,747			—			3,591			234,338
Portfolio allowance reversals, net	310			—			2,920			3,230
Balance, end of period	$	1,900,177		$	3,853		$	—		$	1,904,030
Revenue as a percentage of collections⁽³⁾	59.2		%	0.0		%	55.2		%	59.1		%

________________________


(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 (“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.


(4)	Includes $208.5 million acquired in connection with the Marlin Acquisition in February 2014.

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,
	2015			2014
Balance at beginning of period	$	75,673		$	93,080
Reversal of prior allowances	(2,859		)	(3,230		)
Balance at end of period	$	72,814		$	89,850