Consumer Receivables Acquired for Liquidation

9 Months Ended

Jun. 30, 2011

Consumer Receivables Acquired for Liquidation [Abstract]

Consumer Receivables Acquired for Liquidation

Note 3: Consumer Receivables Acquired for Liquidation

Accounts acquired for liquidation are stated at their net estimated realizable value and consist primarily of defaulted consumer loans to individuals throughout the country and in Central and South America.

The Company accounts for its investments in consumer receivable portfolios, using either:

• the interest method; or

• the cost recovery method.

The Company accounts for its investment in finance receivables using the interest method under the guidance of FASB Accounting Standards Codification (“ASC”), Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC 310”). Under the guidance of ASC 310, static pools of accounts are established. These pools are aggregated based on certain common risk criteria. Each static pool is recorded at cost and is accounted for as a single unit for the recognition of income, principal payments and loss provision.

Once a static pool is established for a quarter, individual receivable accounts are not added to the pool (unless replaced by the seller) or removed from the pool (unless sold or returned to the seller). ASC 310 requires that the excess of the contractual cash flows over expected cash flows not be recognized as an adjustment of revenue or expense or on the balance sheet. ASC 310 initially freezes the internal rate of return, referred to as IRR, estimated when the accounts receivable are purchased, as the basis for subsequent impairment testing. Significant increases in actual or expected future cash flows may be recognized prospectively through an upward adjustment of the IRR over a portfolio’s remaining life. Any increase to the IRR then becomes the new benchmark for impairment testing. Rather than lowering the estimated IRR if the collection estimates are not received or projected to be received, the carrying value of a pool would be impaired, or written down to maintain the then current IRR. Under the interest method, income is recognized on the effective yield method based on the actual cash collected during a period and future estimated cash flows and timing of such collections and the portfolio’s cost. Revenue arising from collections in excess of anticipated amounts attributable to timing differences is deferred until such time as a review results in a change in the expected cash flows. The estimated future cash flows are reevaluated quarterly.

The Company uses the cost recovery method when collections on a particular pool of accounts cannot be reasonably predicted. Under the cost recovery method, no income is recognized until the cost of the portfolio has been fully recovered. A pool can become fully amortized (zero carrying balance on the balance sheet) while still generating cash collections. In such case, all cash collections are recognized as revenue when received.

The Company has liquidating experience in the fields of distressed credit card receivables, telecommunication receivables, consumer loan receivables, retail installment contracts, consumer receivables, litigation-related medical accounts, and auto deficiency receivables. The Company uses the interest method for accounting for asset acquisitions within these classes of receivables when it believes it can reasonably estimate the timing of the cash flows. In those situations where the Company diversifies its acquisitions into other asset classes in which the Company does not possess the same expertise or history, or the Company cannot reasonably estimate the timing of the cash flows, the Company utilizes the cost recovery method of accounting for those portfolios of receivables. At June 30, 2011, approximately $34.3 million of the consumer receivables acquired for liquidation are accounted for using the interest method, while approximately $87.9 million are accounted for using the cost recovery method, of which $80.9 million is concentrated in one portfolio, a $300 million portfolio purchase in March 2007 (the “Portfolio Purchase”).

The Company aggregates portfolios of receivables acquired sharing specific common characteristics which were acquired within a given quarter. The Company currently considers for aggregation portfolios of accounts, purchased within the same fiscal quarter, that generally meet the following characteristics:

• same issuer/originator;

• same underlying credit quality;

• similar geographic distribution of the accounts;

• similar age of the receivable; and

• same type of asset class (credit cards, telecommunication, etc.)

The Company uses a variety of qualitative and quantitative factors to estimate collections and the timing thereof. This analysis includes the following variables:

• the number of collection agencies previously attempting to collect the receivables in the portfolio;

• the average balance of the receivables, as higher balances might be more difficult to collect while low balances might not be cost effective to collect;

• the age of the receivables, as older receivables might be more difficult to collect or might be less cost effective. On the other hand, the passage of time, in certain circumstances, might result in higher collections due to changing life events of some individual debtors;

• past history of performance of similar assets;

• time since charge-off;

• payments made since charge-off;

• the credit originator and its credit guidelines;

• our ability to analyze accounts and resell accounts that meet our criteria for resale;

• the locations of the debtors, as there are better states to attempt to collect in and ultimately the Company has better predictability of the liquidations and the expected cash flows. Conversely, there are also states where the liquidation rates are not as favorable and that is factored into our cash flow analysis;

• financial condition of the seller;

• jobs or property of the debtors found within portfolios. In our business model, this is of particular importance. Debtors with jobs or property are more likely to repay their obligation and, conversely, debtors without jobs or property are less likely to repay their obligation; and

• the ability to obtain timely customer statements from the original issuer.

The Company obtains and utilizes, as appropriate, input, including, but not limited to, monthly collection projections and liquidation rates from our third party collection agencies and attorneys, as further evidentiary matter, to assist in evaluating and developing collection strategies and in evaluating and modeling the expected cash flows for a given portfolio.

The following tables summarize the changes in the balance sheet of the investment in receivable portfolios during the following periods.

	For the Nine Months Ended June 30, 2011
				Cost
	Interest			Recovery
	Method			Method			Total
Balance, beginning of period	$	46,348,000		$	100,683,000		$	147,031,000
Acquisitions of receivable portfolios, net		6,146,000			690,000			6,836,000
Net cash collections from collection of consumer receivables acquired for liquidation		(48,834,000	)		(15,556,000	)		(64,390,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation		(349,000	)		—			(349,000	)
Impairment		(49,000	)		—			(49,000	)
Effect of foreign currency translation		—			56,000			56,000
Finance income recognized (1)		30,998,000			2,068,000			33,066,000
Balance, end of period	$	34,260,000		$	87,941,000		$	122,201,000
Finance income as a percentage of collections		63.0	%		13.3	%		51.1	%

(1) Includes approximately $26.9 million derived from fully amortized portfolios.

	For the Nine Months Ended June 30, 2010
				Cost
	Interest			Recovery
	Method			Method			Total
Balance, beginning of period	$	70,650,000		$	137,611,000		$	208,261,000
Acquisitions of receivable portfolios, net		3,043,000			291,000			3,334,000
Net cash collections from collection of consumer receivables acquired for liquidation		(56,801,000	)		(20,908,000	)		(77,709,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation		(3,173,000	)		(4,000	)		(3,177,000	)
Effect of foreign currency translation		—			47,000			47,000
Finance income recognized (1)		32,975,000			1,222,000			34,197,000
Balance, end of period	$	46,694,000		$	118,259,000		$	164,953,000
Finance income as a percentage of collections		55.0	%		5.8	%		42.3	%

(1) Includes approximately $25.6 million derived from fully amortized portfolios.

	For the Three Months Ended June 30, 2011
				Cost
	Interest			Recovery
	Method			Method			Total
Balance, beginning of period	$	38,814,000		$	92,090,000		$	130,904,000
Acquisitions of receivable portfolios, net		1,616,000			217,000			1,833,000
Net cash collections from collections of consumer receivables acquired for liquidation		(16,553,000	)		(5,077,000	)		(21,630,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation		(106,000	)		—			(106,000	)
Effect of foreign currency translation		—			30,000			30,000
Finance income recognized (1)		10,489,000			681,000			11,170,000
Balance, end of period	$	34,260,000		$	87,941,000		$	122,201,000
Finance income as a percentage of collections		63.0	%		13.4	%		51.4	%

(1) Includes approximately $9.1 million derived from fully amortized portfolios.

	For the Three Months Ended June 30, 2010
				Cost
	Interest			Recovery
	Method			Method			Total
Balance, beginning of period	$	54,375,000		$	124,239,000		$	178,614,000
Acquisitions of receivable portfolios, net		—			63,000			63,000
Net cash collections from collections of consumer receivables acquired for liquidation		(18,825,000	)		(6,538,000	)		(25,363,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation		(433,000	)		—			(433,000	)
Effect of foreign currency translation		—			30,000			30,000
Finance income recognized (1)		11,577,000			465,000			12,042,000
Balance, end of period	$	46,694,000		$	118,259,000		$	164,953,000
Finance income as a percentage of collections		60.1	%		7.1	%		46.7	%

(1) Includes approximately $9.2 million derived from fully amortized portfolios.

As of June 30, 2011, the Company had $122,201,000 in Consumer Receivables acquired for Liquidation, of which $34,260,000 are being accounted for on the accrual basis. Based upon current projections, net cash collections, applied to principal for accrual basis portfolios will be as follows for the twelve months in the periods ending:

September 30, 2011 (three months ending)	$	5,143,000
September 30, 2012		17,125,000
September 30, 2013		8,016,000
September 30, 2014		3,855,000
September 30, 2015		1,024,000
September 30, 2016		740,000
September 30, 2017		185,000
Subtotal		36,088,000
Deferred revenue		(1,828,000	)
Total	$	34,260,000

Accretable yield represents the amount of income the Company can expect to generate over the remaining life of its existing portfolios based on estimated future net cash flows as of June 30, 2011. The Company adjusts the accretable yield upward when it believes, based on available evidence, that portfolio collections will exceed amounts previously estimated. Changes in accretable yield for the nine months and three months ended June 30, 2011 and 2010 are as follows:

	Nine Months			Nine Months
	Ended			Ended
	June 30, 2011			June 30, 2010
Balance at beginning of period	$	15,255,000		$	25,875,000
Income recognized on finance receivables, net		(30,998,000	)		(32,975,000	)
Additions representing expected revenue from purchases		1,698,000			1,080,000
Reclassifications from nonaccretable difference		24,597,000			22,948,000
Balance at end of period	$	10,552,000		$	16,928,000

	Three Months			Three Months
	Ended			Ended
	June 30, 2011			June 30, 2010
Balance at beginning of period	$	12,342,000		$	20,513,000
Income recognized on finance receivables, net		(10,488,000	)		(11,577,000	)
Additions representing expected revenue from purchases		460,000			—
Reclassifications from nonaccretable difference		8,238,000			7,992,000
Balance at end of period	$	10,552,000		$	16,928,000

During the three and nine month periods ended June 30, 2011, the Company purchased $4.1 million and $17.8 million, respectively, of face value of charged-off consumer receivables at a cost of $1.8 million and $6.8 million, respectively. During the third quarter of fiscal year 2011, most of the portfolios purchased were classified under the interest method.

The following table summarizes collections on a gross basis as received by our third-party collection agencies and attorneys, less commissions and direct costs for the nine and three month periods ended June 31, 2011 and 2010, respectively:

	For the Nine Months Ended
	June 30,
	2011		2010
Gross collections (1)	$	100,566,000	$	123,590,000
Commissions and fees (2)		35,827,000		42,704,000
Net collections	$	64,739,000	$	80,886,000

	For the Three Months Ended
	June 30,
	2011		2010
Gross collections (1)	$	33,559,000	$	39,828,000
Commissions and fees (2)		11,824,000		14,032,000
Net collections	$	21,735,000	$	25,796,000

(1)	Gross collections include: collections by third-party collection agencies and attorneys, collections from our internal efforts and collections represented by account sales.
(2)	Commissions and fees are the contractual commission earned by third party collection agencies and attorneys, and direct costs associated with the collection effort, generally court costs. Includes a 3% fee charged by a servicer on substantially all gross collections received by the Company in connection with the Portfolio Purchase (see Note 5).