Consumer Receivables Acquired For Liquidation

12 Months Ended

Sep. 30, 2011

Consumer Receivables Acquired For Liquidation [Abstract]

CONSUMER RECEIVABLES ACQUIRED FOR LIQUIDATION

NOTE C — 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 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 ASC 310. Under the guidance of ASC 310, static pools of accounts are established and 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). ASC310 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. ASC310 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 this case, all cash collections are recognized as revenue when received.

The Company’s extensive liquidating experience is in the field of distressed credit card receivables, telecommunication receivables, consumer loan receivables, retail installment contracts, consumer receivables, 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 where 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 September 30, 2011, approximately $31.2 million of the consumer receivables acquired for liquidation are accounted for using the interest method, while approximately $84.0 million are accounted for using the cost recovery method, of which $78.3 million is concentrated in one portfolio, 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;

• the Company’s ability to analyze accounts and resell accounts that meet the Company’s 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 the Company’s cash flow analysis;

• jobs or property of the debtors found within portfolios. In the Company’s 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 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 Year Ended September 30, 2011
	Interest Method Portfolios			Cost Recovery Portfolios			Total
Balance, beginning of period	$	46,348,000		$	100,683,000		$	147,031,000
Acquisitions of receivable portfolios, net		6,620,000			815,000			7,435,000
Net cash collections from collection of consumer receivables acquired for liquidation		(61,247,000	)		(19,568,000	)		(80,815,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation		(390,000	)		—			(390,000	)
Impairments		(49,000	)		(672,000	)		(721,000	)
Effect of foreign currency translation		—			45,000			45,000
Finance income recognized(1)		39,911,000			2,699,000			42,610,000
Balance, end of period	$	31,193,000		$	84,002,000		$	115,195,000
Revenue as a percentage of collections		64.8	%		13.8	%		52.5	%

(1) Includes $34.3 million derived from fully amortized pools.

	For the Year Ended September 30, 2010
	Interest Method Portfolios			Cost Recovery Portfolios			Total
Balance, beginning of period	$	70,650,000		$	137,611,000		$	208,261,000
Acquisitions of receivable portfolios, net		7,698,000			291,000			7,989,000
Net cash collections from collection of consumer receivables acquired for liquidation(1)		(72,398,000	)		(26,036,000	)		(98,434,000	)
Net cash collections represented by account sales of consumer receivables acquired for liquidation		(3,481,000	)		(4,000	)		(3,485,000	)
Impairments		—			(13,029,000	)		(13,029,000	)
Effect of foreign currency translation		—			97,000			97,000
Finance income recognized(1)		43,879,000			1,753,000			45,632,000
Balance, end of period	$	46,348,000		$	100,683,000		$	147,031,000
Revenue as a percentage of collections		57.8	%		6.7	%		44.8	%

(1) Includes $34.3 million derived from fully amortized pools.

As of September 30, 201, the Company had $115,195,000 in consumer receivables acquired for liquidation, of which $31,193,000 are accounted for on the interest method. Based upon current projections, net cash collections, applied to principal for interest method portfolios are estimated as follows for the twelve months in the periods ending:

September 30, 2012	$	18,059,000
September 30, 2013		8,344,000
September 30, 2014		3,705,000
September 30, 2015		749,000
September 30, 2016		620,000
September 30, 2017		30,000
		31,507,000
Deferred revenue		(314,000	)
Total	$	31,193,000

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

	Year Ended September 30, 2011
Balance at beginning of period, October 1, 2010	$	15,255,000
Income recognized on finance receivables, net		(39,911,000	)
Additions representing expected revenue from purchases		1,824,000
Reclassifications from non-accretable difference(1)		30,305,000
Balance at end of period, September 30, 2011	$	7,473,000

	Year Ended September 30, 2010
Balance at beginning of period, October 1, 2009	$	25,875,000
Income recognized on finance receivables, net		(43,208,000	)
Additions representing expected revenue from purchases		2,424,000
Reclassifications from non-accretable difference(1)		30,164,000
Balance at end of period, September 30, 2010	$	15,255,000

(1) Includes portfolios that became zero based portfolios during the period, removal of zero basis portfolios from the accretable yield calculation and, other immaterial impairments and accretions based on the certain collection curves being extended.

During the year ended September 30, 2011, the Company invested $7.5 million in receivables totaling $19.5 million in face value. During the year ended September 30, 2010, the Company invested approximately $8.0 million in receivables totaling $269 million in face value. The estimated remaining net collections on the receivables purchased and classified under the interest method ($6.6 million) during the fiscal year ended September 30, 2011, are $7.1 million.

The following table summarizes collections on a gross basis as received by the Company’s third-party collection agencies and attorneys, less commissions and direct costs for the years ended September 30, 2011, 2010 and 2009, respectively.

	For the Years Ended, September 30,
	2011		2010		2009
Gross collections(1)	$	129,688,000	$	157,574,000	$	224,528,000
Commissions and fees(2)		48,483,000		55,654,000		77,119,000
Net collections	$	81,205,000	$	101,920,000	$	147,409,000

(1) Gross collections include: collections from third-party collection agencies and attorneys, collections from in-house efforts and collections represented by account sales.

(2) Commissions and fees are the contractual commissions earned by third party collection agencies and attorneys, and direct costs associated with the collection effort- generally court costs. The Company expects to continue to purchase portfolios and utilize third party collection agencies and attorney networks.

Finance income recognized on net collections represented by account sales was $0.2 million, $1.2 million and $3.1 million for the fiscal years ended September 30, 2011, 2010 and 2009, respectively.