Purchased Receivables and Revenue Recognition

6 Months Ended

Jun. 30, 2012

Purchased Receivables and Revenue Recognition [Abstract]

Purchased Receivables and Revenue Recognition

3. Purchased Receivables and Revenue Recognition

Purchased receivables are receivables that have been charged-off as uncollectible by the originating organization and many times have been subject to previous collection efforts. The Company acquires pools of homogenous accounts which are the rights to the unrecovered balances owed by individual debtors through such purchases. The receivable portfolios are purchased at a substantial discount (generally more than 90%) from their face values due to a deterioration of credit quality since origination and are initially recorded at the Company’s acquisition cost, which equals fair value at the acquisition date. Financing for purchasing is provided by cash generated from operations and from borrowings on the Company’s revolving credit facility.

The Company accounts for its investment in purchased receivables using the Interest Method when the Company has reasonable expectations of the timing and amount of cash flows expected to be collected. Accounts purchased may be aggregated into one or more static pools within each quarter, based on a similar risk rating and one or more predominant risk characteristics. The risk rating, which is provided by a third party, is similar for all accounts since the Company’s purchased receivables have all been charged-off by the credit originator. Accounts typically have one or more other predominant risk characteristics. The Company therefore aggregates most accounts purchased within each quarter. Each static pool of accounts retains its own identity and does not change over the remainder of its life. Each static pool is accounted for as a single unit for revenue recognition.

Collections on each static pool are allocated to revenue and principal reduction based on an internal rate of return (“IRR”). The IRR is the rate of return that each static pool requires to amortize the cost or carrying value of the pool to zero over its estimated life. Each pool’s IRR is determined by estimating future cash flows, which are based on historical collection data for pools with similar characteristics. In addition, the estimated future cash flows may also be impacted by internal or external factors. Internal factors that may have an impact on estimated future cash flows include (a) revisions to initial and post-acquisition recovery scoring and modeling estimates, (b) operational strategies, and (c) changes in productivity related to turnover and tenure of the Company’s collection staff. External factors that may have an impact on the estimated future cash flows include (a) overall market pricing for new purchases, (b) new laws or regulations relating to collection efforts or new interpretations of existing laws or regulations and (c) the overall condition of the economy.

The actual life of each pool may vary, but will generally range between 36 and 84 months depending on the expected collection period. Monthly cash flows greater than revenue recognized will reduce the carrying value of each static pool. Monthly cash flows lower than revenue recognized will increase the carrying value of each static pool. Each static pool is reviewed at least quarterly and compared to historical trends and operational data to determine whether it is performing as expected. This review is used to determine future estimated cash flows. If revised cash flow estimates are greater than original estimates, the IRR is increased prospectively to reflect the revised estimate of cash flows over the remaining life of the static pool. If revised cash flow estimates are less than original estimates, the IRR remains unchanged and an impairment is recognized. If cash flow estimates increase in periods subsequent to recording an impairment, reversal of the previously recognized impairment is made prior to any increases to the IRR.

Agreements to purchase receivables typically include general representations and warranties from the sellers covering the accuracy of seller provided information regarding the receivables, the origination and servicing of the receivables in compliance with applicable consumer protection laws and regulations, free and clear title to the receivables, obligor, death, bankruptcy, fraud and settled or paid receivables prior to sale. The agreements typically permit the return of certain receivables from the Company back to the seller. The general time frame to return receivables is within 90 to 180 days from the date of the purchase agreement. Proceeds from returns, also referred to as buybacks, are applied against the carrying value of the static pool.

The cost recovery method is used when collections on a particular portfolio cannot be reasonably predicted. When appropriate, the cost recovery method may be used for pools that previously had an IRR assigned to them. Under the cost recovery method, no revenue is recognized until the Company has fully collected the cost of the portfolio. As of June 30, 2012, the Company had two unamortized pools on the cost recovery method with an aggregate carrying value of $16,796. As of December 31, 2011, the Company had six unamortized pools on the cost recovery method with an aggregate carrying value of $215,036.

Although not its usual business practice, the Company may periodically sell, on a non-recourse basis, all or a portion of a pool to unaffiliated parties. The Company does not have any significant continuing involvement with those accounts subsequent to sale. Proceeds of these sales are compared to the carrying value of the accounts and a gain or loss is recognized on the difference between proceeds received and the carrying value, which is included in “Gain on sale of purchased receivables” in the accompanying consolidated statements of operations. The agreements to sell receivables typically include general representations and warranties.

Changes in purchased receivables portfolios were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Beginning balance, net	$	330,110,309		$	326,248,663		$	348,710,787		$	321,318,255
Investment in purchased receivables, net of buybacks		58,749,862			49,433,895			79,672,911			95,611,528
Cost of sale of purchased receivables sold		(88,031	)		—			(88,031	)		—
Cash collections		(91,868,994	)		(89,171,558	)		(193,001,869	)		(180,456,492	)
Purchased receivable revenues, net		58,452,674			54,424,454			120,062,022			104,462,163
Ending balance, net	$	355,355,820		$	340,935,454		$	355,355,820		$	340,935,454

Accretable yield represents the amount of revenue the Company expects over the remaining life of existing portfolios. Nonaccretable yield represents the difference between the remaining expected cash flows and the total contractual obligation outstanding, or face value, of purchased receivables. Changes in accretable yield were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2011			2010
Beginning balance (1)	$	499,482,592		$	433,008,010		$	478,230,548		$	427,464,854
Revenue recognized on purchased receivables, net		(58,452,674	)		(54,424,454	)		(120,062,022	)		(104,462,163	)
Additions due to purchases		67,233,751			65,402,928			96,599,746			124,853,067
Reclassifications from nonaccretable yield		(12,159,024	)		15,871,545			41,336,373			12,002,271
Ending balance (1)	$	496,104,645		$	459,858,029		$	496,104,645		$	459,858,029

(1) Accretable yield is a function of estimated remaining cash flows based on expected work effort and historical collections. Refer to Forward-Looking Statements on page 21 and Critical Accounting Policies on page 42 for further information regarding these estimates.

Changes in purchased receivables portfolios under the cost recovery method were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Beginning balance	$	101,290		$	650,738		$	215,036		$	962,461
Reclassifications from amortizing pools		—			474,849			—			838,956
Buybacks, impairments and resale adjustments		(2,244	)		(19	)		(2,244	)		(233	)
Cash collections prior to becoming fully amortized		(82,250	)		(846,788	)		(195,996	)		(1,522,404	)
Ending balance	$	16,796		$	278,780		$	16,796		$	278,780

During the three and six months ended June 30, 2012, the Company recorded net impairment reversals of purchased receivables of $4,395,500 and $8,892,200, respectively. During the three and six months ended June 30, 2011, the Company recorded net impairment reversals of $2,001,400 and $918,800, respectively. Net impairment reversals increased revenue and the carrying value of purchased receivable portfolios in the period in which they were recorded. Impairments are accounted for as a valuation allowance against the carrying value of purchased receivables and may be reversed in future periods, which reduce the valuation allowance.

Changes in the purchased receivables valuation allowance were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Beginning balance	$	50,939,200		$	82,187,300		$	55,914,400		$	87,323,300
Impairments		1,710,000			67,900			1,710,000			2,838,900
Reversal of impairments		(6,105,500	)		(2,069,300	)		(10,602,200	)		(3,757,700	)
Deductions (1)		—			(8,432,300	)		(478,500	)		(14,650,900	)
Ending balance	$	46,543,700		$	71,753,600		$	46,543,700		$	71,753,600

(1) Deductions represent valuation allowances on purchased receivable portfolios that became fully amortized during the period; therefore, the balance is removed from the valuation allowance since it can no longer be reversed.