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Investment in Receivable Portfolios, Net
 9 Months Ended
Sep. 30, 2015
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 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. We further group these static pools by geographic region or location. 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. 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 (7)
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(2)
120,729

 
39,607

 
160,336

Additions for current purchases, net(2)
85,692

 
—

 
85,692

Balance at March 31, 2015
2,951,203

 
90,428

 
3,041,631

Revenue recognized, net(1)
(243,425
)
 
(26,876
)
 
(270,301
)
Net additions on existing portfolios(2)
91,294

 
74,586

 
165,880

Additions for current purchases, net(2), (3)
395,032

 
—

 
395,032

Balance at June 30, 2015
3,194,104

 
138,138

 
3,332,242

Revenue recognized, net(1)
(233,680
)
 
(31,843
)
 
(265,523
)
Net additions on existing portfolios(2), (4)
(3,548
)
 
117,918

 
114,370

Additions for current purchases, net(2)
149,255

 
—

 
149,255

Balance at September 30, 2015
$
3,106,131

 
$
224,213

 
$
3,330,344

 
Accretable
Yield
 
Estimate of
Zero Basis
Cash Flows
 
Total (7)
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(2)
92,325

 
8,555

 
100,880

Additions for current purchases, net(2), (5)
591,205

 
—

 
591,205

Balance at March 31, 2014
2,843,944

 
10,509

 
2,854,453

Revenue recognized, net(1)
(241,523
)
 
(6,708
)
 
(248,231
)
Net additions on existing portfolios(2)
80,582

 
6,135

 
86,717

Additions for current purchases, net(2)
218,047

 
—

 
218,047

Balance at June 30, 2014
2,901,050

 
9,936

 
2,910,986

Revenue recognized, net(1)
(244,561
)
 
(7,224
)
 
(251,785
)
Net additions on existing portfolios(2)
161,622

 
54,184

 
215,806

Additions for current purchases, net(2), (6)
179,604

 
—

 
179,604

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

 
$
56,896

 
$
3,054,611

________________________
(1)
Revenue recognized on Zero Basis Portfolios includes portfolio allowances and reversals.
(2)
Includes effect of foreign currency translation.
(3)
Includes $216.0 million of portfolios acquired in connection with the dlc Acquisition.
(4)
Includes impact of CFPB settlement of approximately $22.2 million.
(5)
Includes $208.5 million of portfolios acquired in connection with the Marlin Acquisition.
(6)
Includes $105.4 million of portfolios acquired in connection with the Atlantic Acquisition.
(7)
Estimated remaining collections and accretable yield include anticipated collections beyond the 120 month collection forecast for United States portfolios.
During the three months ended September 30, 2015, the Company purchased receivable portfolios with a face value of $2.1 billion for $187.2 million, or a purchase cost of 9.0% of face value. The estimated future collections at acquisition for all portfolios purchased during the quarter amounted to $336.4 million. 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 during the three months ended September 30, 2014, include $105.4 million of portfolios acquired in connection with the Atlantic Acquisition. The estimated future collections at acquisition for all portfolios purchased during the quarter amounted to $606.3 million.
During the nine months ended September 30, 2015, the Company purchased receivable portfolios with a face value of $8.7 billion for $731.1 million, or a purchase cost of 8.4% of face value. Purchases of charged-off credit card portfolios during the nine months ended September 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 period amounted to $1.3 billion. 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 during the nine months ended September 30, 2014, include $208.5 million of portfolios acquired in connection with the Marlin Acquisition and $105.4 million of portfolios acquired in connection with the Atlantic Acquisition. The estimated future collections at acquisition for all portfolios purchased during the period amounted to $2.0 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 September 30, 2015 and 2014, Zero Basis Revenue was approximately $31.8 million and $7.2 million, respectively. During the nine months ended September 30, 2015 and 2014, Zero Basis Revenue was approximately $74.3 million and $20.4 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 September 30, 2015
 
Accrual Basis
Portfolios
 
Cost Recovery
Portfolios
 
Zero Basis
Portfolios
 
Total
Balance, beginning of period
$
2,343,864

 
$
7,903

 
$
—

 
$
2,351,767

Purchases of receivable portfolios
187,180

 
—

 
—

 
187,180

Gross collections(1)
(388,822
)
 
(1,126
)
 
(31,805
)
 
(421,753
)
Put-backs and Recalls(2)
(5,677
)
 
(1
)
 
(37
)
 
(5,715
)
Foreign currency adjustments
(52,505
)
 
(1,273
)
 
—

 
(53,778
)
Revenue recognized
240,039

 
—

 
28,745

 
268,784

Portfolio (allowance) reversals, net(3)
(6,358
)
 
—

 
3,097

 
(3,261
)
Balance, end of period
$
2,317,721

 
$
5,503

 
$
—

 
$
2,323,224

Revenue as a percentage of collections(4)
61.7
%
 
0.0
%
 
90.4
%
 
63.7
%
 
 
 
 
 
 
 
 
 
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(5)
297,800

 
1,709

 
—

 
299,509

Transfer of portfolios
(11,519
)
 
11,519

 
—

 
—

Gross collections(1)
(395,945
)
 
(4,056
)
 
(7,219
)
 
(407,220
)
Put-backs and Recalls(2)
(1,530
)
 
(9
)
 
(5
)
 
(1,544
)
Foreign currency adjustments
(55,869
)
 
(1,414
)
 
—

 
(57,283
)
Revenue recognized
241,502

 
—

 
4,480

 
245,982

Portfolio allowance reversals, net
3,059

 
—

 
2,744

 
5,803

Balance, end of period
$
2,055,991

 
$
17,241

 
$
—

 
$
2,073,232

Revenue as a percentage of collections(4)
61.0
%
 
0.0
%
 
62.1
%
 
60.4
%
 
Nine Months Ended September 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(6)
731,114

 
—

 
—

 
731,114

Gross collections(1)
(1,205,717
)
 
(4,351
)
 
(74,080
)
 
(1,284,148
)
Put-backs and Recalls(2)
(9,652
)
 
(20
)
 
(229
)
 
(9,901
)
Foreign currency adjustments
(54,753
)
 
(2,602
)
 
20

 
(57,335
)
Revenue recognized
731,196

 
—

 
64,780

 
795,976

Portfolio (allowance) reversals, net(3)
(5,551
)
 
—

 
9,509

 
3,958

Balance, end of period
$
2,317,721

 
$
5,503

 
$
—

 
$
2,323,224

Revenue as a percentage of collections(4)
60.6
%
 
0.0
%
 
87.4
%
 
62.0
%
 
 
 
 
 
 
 
 
 
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(5), (7)
991,127

 
1,709

 
—

 
992,836

Transfer of portfolios
(18,682
)
 
18,682

 
—

 
—

Gross collections(1)
(1,186,431
)
 
(6,305
)
 
(20,438
)
 
(1,213,174
)
Put-backs and Recalls(2)
(10,353
)
 
(412
)
 
(5
)
 
(10,770
)
Foreign currency adjustments
(22,398
)
 
(1,095
)
 
—

 
(23,493
)
Revenue recognized
713,656

 
—

 
11,473

 
725,129

Portfolio allowance reversals, net
3,485

 
—

 
8,970

 
12,455

Balance, end of period
$
2,055,991

 
$
17,241

 
$
—

 
$
2,073,232

Revenue as a percentage of collections(4)
60.2
%
 
0.0
%
 
56.1
%
 
59.8
%
________________________
(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)
Portfolio allowance reversal, net includes a portfolio allowance of $8.3 million related to the CFPB settlement as discussed in Note 13, “Commitments and Contingencies.”
(4)
Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.
(5)
Includes $105.4 million acquired in connection with the Atlantic Acquisition in August 2014.
(6)
Includes $216.0 million acquired in connection with the dlc Acquisition in June 2015.
(7)
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 September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Balance at beginning of period
$
68,454

 
$
86,428

 
$
75,673

 
$
93,080

Provision for portfolio allowances
8,322

 
—

 
8,322

 
—

Reversal of prior allowances
(5,061
)
 
(5,803
)
 
(12,280
)
 
(12,455
)
Balance at end of period
$
71,715

 
$
80,625

 
$
71,715

 
$
80,625