News Column

PORTFOLIO RECOVERY ASSOCIATES INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 6, 2014

Cautionary Statements Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995: This report contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks, uncertainties and assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are forward-looking statements, including statements regarding overall trends, gross margin trends, operating cost trends, liquidity and capital needs and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts. The risks, uncertainties and assumptions referred to above may include the following: a prolonged economic recovery or a deterioration in the economic or inflationary environment in the United States or Europe, including the



interest rate environment, may have an adverse effect on our collections,

results of operations, revenue and stock price or on the stability of the

financial system as a whole; changes in the credit or capital markets, which affect our ability to borrow money or raise capital;



our ability to integrate the Aktiv business;

our ability to manage risks associated with our international operations,

which risks will increase as a result of the Aktiv acquisition; our ability to recognize the anticipated synergies and benefits of the Aktiv acquisition;



our ability to purchase defaulted consumer receivables at appropriate prices;

our ability to replace our defaulted consumer receivables with additional

receivables portfolios;

our ability to obtain accurate and authentic account documents relating to

accounts that we acquire and the possibility that documents that we provide

could contain errors;

our ability to successfully acquire receivables of new asset types;

our ability to collect sufficient amounts on our defaulted consumer receivables;



changes in tax laws regarding earnings of our subsidiaries located outside

of the United States;

changes in bankruptcy or collection laws that could negatively affect our

business, including by causing an increase in certain types of bankruptcy

filings involving liquidations, which may cause our collections to decrease;



changes in state or federal laws or the administrative practices of various

bankruptcy courts, which may impact our ability to collect on our defaulted

receivables;

our ability to collect and enforce our finance receivables may be limited

under federal and state laws;

our ability to employ and retain qualified employees, especially collection

personnel, and our senior management team;

our work force could become unionized in the future, which could adversely

affect the stability of our production and increase our costs;

the degree, nature, and resources of our competition;

the possibility that we could incur goodwill or other intangible asset

impairment charges; our ability to retain existing clients and obtain new clients for our fee-for-service businesses;



our ability to comply with existing and new regulations of the collection

industry, the failure of which could result in penalties, fines, litigation, damage to our reputation or the suspension or termination of our ability to conduct our business;



changes in governmental laws and regulations which could increase our costs

and liabilities or impact our operations;

our ability to adjust to debt collection and debt buying regulations that

may be promulgated by the Consumer Financial Protection Bureau ("CFPB") and

the regulatory and enforcement activities of the CFPB;

the possibility that new business acquisitions prove unsuccessful or strain

or divert our resources;

our ability to maintain, renegotiate or replace our credit facility;

our ability to satisfy the restrictive covenants in our debt agreements;

our ability to manage risks associated with our international operations;

the possibility that compliance with foreign and U.S. laws and regulations

that apply to our international operations could increase our cost of doing

business in international jurisdictions;

the imposition of additional taxes on us;

changes in interest or exchange rates, which could reduce our net income,

and the possibility that future hedging strategies may not be successful,

which could adversely affect our results of operations and financial

condition, as could our failure to comply with hedge accounting principles

and interpretations;

the possibility that we could incur significant allowance charges on our

finance receivables;

our loss contingency accruals may not be adequate to cover actual losses;

our ability to manage growth successfully;

the possibility that we could incur business or technology disruptions or

cyber incidents, or not adapt to technological advances;

the possibility that we or our industry could experience negative publicity

or reputational attacks; and the risk factors listed from time to time in our filings with the Securities and Exchange Commission (the "SEC"). 23



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You should assume that the information appearing in this quarterly report is accurate only as of the date it was issued. Our business, financial condition, results of operations and prospects may have changed since that date. For a discussion of the risks, uncertainties and assumptions that could affect our future events, developments or results, you should carefully review the following "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as the discussion of "Business" and "Risk Factors" described in our 2013 Annual Report on Form 10-K, filed on February 28, 2014. Our forward-looking statements could be wrong in light of these and other risks, uncertainties and assumptions. The future events, developments or results described in this report could turn out to be materially different. Except as required by law, we assume no obligation to publicly update or revise our forward-looking statements after the date of this report and you should not expect us to do so. Investors should also be aware that while we do, from time to time, communicate with securities analysts and others, we do not, by policy, selectively disclose to them any material nonpublic information or other confidential commercial information. Accordingly, stockholders should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We do not, by policy, confirm forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not our responsibility. Definitions We use the following terminology throughout this document: "Allowance charges" refers to a reduction in income recognized on finance



receivables on pools of finance receivables whose cash collection estimates

are not received or projected to not be received.

"Amortization rate" refers to cash collections applied to principal on finance

receivables as a percentage of total cash collections.

"Buybacks" refers to purchase price refunded by the seller due to the return

of non-compliant accounts.

"Cash collections" refers to collections on our owned portfolios.

"Cash receipts" refers to collections on our owned portfolios plus fee income.

"Core" accounts or portfolios refer to accounts or portfolios that are

defaulted consumer receivables and are not in a bankrupt status upon purchase.

These accounts are aggregated separately from purchased bankruptcy accounts.

Unless otherwise noted, Core accounts do not include the accounts we purchase

in the United Kingdom.

"Estimated remaining collections" or "ERC" refers to the sum of all future

projected cash collections on our owned portfolios.

"Fee income" refers to revenues generated from our fee-for-service businesses.

"Income recognized on finance receivables" refers to income derived from our

owned debt portfolios.

"Income recognized on finance receivables, net" refers to income derived from

our owned debt portfolios and is shown net of allowance charges/reversals.

"Net finance receivable balance" is recorded on our balance sheet and refers

to the purchase price less principal amortization and net allowance

charges/reversals.

"Principal amortization" refers to cash collections applied to principal on

finance receivables.

"Purchase price" refers to the cash paid to a seller to acquire defaulted

consumer receivables, plus certain capitalized costs, less buybacks.

"Purchase price multiple" refers to the total estimated collections on owned

debt portfolios divided by purchase price.

"Purchased bankruptcy" accounts or portfolios refer to accounts or portfolios

that are in bankruptcy when we purchase them and as such are purchased as a

pool of bankrupt accounts.

"Total estimated collections" refers to the actual cash collections, including

cash sales, plus estimated remaining collections.

Overview

The Company is a financial and business services company. Our primary business is the purchase, collection and management of portfolios of defaulted consumer receivables. We also service receivables on behalf of clients on either a commission or transaction-fee basis and provide class action claims settlement recovery services and related payment processing to corporate clients. Our industry is highly regulated under various federal laws, including the Fair Debt Collection Practices Act, Fair Credit Reporting Act, Dodd-Frank Wall Street Reform and Consumer Protection Act, Telephone Consumer Protection Act and other federal and state laws. We are subject to inspections, examinations, supervision by regulators in each state in which we are licensed, and also by the CFPB. The CFPB is expected to adopt additional rules that will affect our industry, and has sought feedback on a wide range of debt collection issues. The Company has provided its input and feedback with written comments and through a number of meetings with CFPB staff. The Company is currently engaged in discussions with the CFPB with a view toward 24



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adopting certain practices or controls in the conduct of its business. There can be no assurance that new industry regulations or the outcome of these discussions would not have an adverse effect on our business.

On August 4, 2014, the Office of the Comptroller of the Currency ("OCC") issued risk guidance detailing the principles they expect financial institutions to follow in connection with the sale of consumer debt. The Company is currently in the process of evaluating the impact that this guidance may have on its business, if any. The Company is headquartered in Norfolk, Virginia, and employs approximately 3,567 team members. The Company's shares of common stock are traded on the NASDAQ Global Select Market under the symbol "PRAA." On July 16, 2014, the Company, through a wholly owned subsidiary, completed the purchase of the outstanding equity of Aktiv, a Norway-based company specializing in the acquisition and servicing of non-performing consumer loans throughout Europe and in Canada, for a purchase price of approximately $872.6 million, and assumed approximately $431.3 million of Aktiv's corporate debt, resulting in an acquisition of estimated total enterprise value of $1.3 billion. The Company financed the acquisition with cash of $217.7 million, $169.9 million in financing from an affiliate of the seller, and $485.0 million from the Company's domestic, revolving credit facility. A publicly traded company from 1997 until early 2012 (traded on the Oslo Stock Exchange under the symbol "AIK"), Aktiv has developed a mixed in-house and outsourced collection strategy. It maintains in-house servicing platforms in eight markets, and owns portfolios in fifteen markets. Aktiv has more than 20 years of experience and data in a wide variety of consumer asset classes, across an extensive geographic background. Aktiv has acquired more than 2,000 portfolios, with a face value of more than $38 billion. In 2013, Aktiv collected $318 million on its portfolios and purchased $248 million in new portfolios, up from $222 million in 2012. Aktiv's total assets were approximately $900 million at December 31, 2013.



This acquisition provided us entry into thirteen new markets, providing us additional geographical diversity in portfolio purchasing and collection. Aktiv's Chief Executive Officer and his executive team and the more than 400 Aktiv employees joined our workforce upon the closing of the transaction.

We anticipate total transaction costs of approximately $15 million. During the first and second quarters of 2014, we incurred approximately $4.4 million and $4.1 million, respectively, of the total estimated transaction costs of $15 million. Additionally, we recorded an unrealized foreign currency transaction loss as a result of us entering into foreign currency exchange rate forward contracts during the second quarter of 2014 to acquire 518 million Euros in anticipation of closing the acquisition of Aktiv. As a result of the strengthening U.S. dollar relative to the Euro as of June 30, 2014 relative to the period during which the contracts were entered into, an unrealized loss of $6.2 million on the forward contracts was recognized during the quarter. A corresponding liability was recorded and included in Accrued Expenses and Other Liabilities as of June 30, 2014. In the third quarter of 2014, we recorded an additional $2.0 million foreign currency transaction loss upon the settlement of these foreign currency exchange rate forward contracts. Our total borrowings are approximately $1.5 billion after closing the Aktiv acquisition, compared to the Company's total borrowings of $448.8 million at June 30, 2014. Earnings Summary During the second quarter of 2014, net income attributable to the Company was $37.5 million, or $0.74 per diluted share, compared with $43.6 million, or $0.85 per diluted share, in the second quarter of 2013. Total revenue was $197.3 million in the second quarter of 2014, up 7.9% from the second quarter of 2013. Revenues in the second quarter of 2014 consisted of $182.5 million in income recognized on finance receivables, net, and $14.8 million in fee income. Income recognized on finance receivables, net, in the second quarter of 2014 increased $13.9 million, or 8.3%, over the second quarter of 2013, primarily as a result of an increase in cash collections. Cash collections, which drives our finance receivable income, were $319.3 million in the second quarter of 2014, up 7.7%, or $22.9 million, as compared to the second quarter of 2013. During the second quarter of 2014, we incurred $2.3 million in net allowance reversals, compared with $1.2 million of net allowance reversals in the second quarter of 2013. Our performance has been positively impacted by operational efficiencies surrounding the cash collections process, including the continued refinement of account scoring analytics as it relates to both legal and non-legal collection channels. Additionally, we have continued to develop our internal legal collection staff resources, which enables us to place accounts into that channel that otherwise would have been prohibitively expensive for legal action and to collect these accounts more efficiently and profitably. 25



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Fee income increased to $14.8 million in the second quarter of 2014 from $14.4 million in the second quarter of 2013, primarily due to higher fee income generated by Claims Compensation Bureau, LLC ("CCB") and PRA Government Services, LLC ("PGS"). This was partially offset by lower fee income generated in the second quarter of 2014 by Mackenzie Hall Holdings, Limited ("PRA UK"), PRA Location Services ("PLS") and Bankruptcy Services when compared to the second quarter of 2013. A summary of how our income was generated during the three months ended June 30, 2014 and 2013 is as follows: For the Three Months Ended June 30, ($ in thousands) 2014 2013 Cash collections $ 319,274$ 296,397 Amortization of finance receivables (139,055 ) (129,012 ) Net allowance reversals 2,299 1,185 Finance receivable income 182,518 168,570 Fee income 14,825 14,391 Total revenue $ 197,343$ 182,961 Operating expenses were $124.9 million in the second quarter of 2014, up 14.4% over the second quarter of 2013, due primarily to increases in compensation expense, legal collection costs, outside fees and services and other operating expenses. Compensation expense increased primarily as a result of larger staff sizes, increases in incentive compensation paid as a result of collector performance and normal pay increases. Compensation and employee services expenses increased as total employees grew 6.1% to 3,567 as of June 30, 2014, from 3,362 as of June 30, 2013. Legal collection costs increased from $22.7 million in the second quarter of 2013 to $25.4 million in the second quarter of 2014, an increase of $2.7 million, or 11.9%. This increase was the result of our continued expansion of the accounts brought into the legal collection process. Outside fees and services expenses increased $3.5 million, or 40.7%, which was mainly attributable to the $4.1 million of transaction costs incurred in the second quarter of 2014 related to the Aktiv acquisition. Other operating expenses increased from $5.7 million in the second quarter of 2013 to $7.7 million in the second quarter of 2014, an increase of $2.0 million, or 35.1%. Of the $2.0 million increase, $0.6 million was due to an increase in provision for doubtful accounts, $0.6 million was due to an increase in taxes, fees and licenses, $0.3 million was due to an increase in general office expenses and $0.3 million was due to an increase in accrued estimated contingent payments related to a previous acquisition. None of the remaining $0.2 million increase was attributable to any significant identifiable items. During the three months ended June 30, 2014, we acquired defaulted consumer receivables portfolios with an aggregate face value amount of $966.9 million at a cost of $109.2 million. During the three months ended June 30, 2013, we acquired defaulted consumer receivable portfolios with an aggregate face value of $3.19 billion at a cost of $200.5 million. In any period, we acquire defaulted consumer receivables that can vary dramatically in their age, type and ultimate collectability. We may pay significantly different purchase rates for purchased receivables within any period as a result of this quality fluctuation. In addition, market forces can drive pricing rates up or down in any period, irrespective of other quality fluctuations. As a result, the average purchase rate paid for any given period can fluctuate dramatically based on our particular buying activity in that period. However, regardless of the average purchase price and for similar time frames, we intend to target a similar internal rate of return, after direct expenses, in pricing our portfolio acquisitions; therefore, the absolute rate paid is not necessarily relevant to the estimated profitability of a period's buying. 26



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Results of Operations The results of operations include the financial results of the Company and all of our subsidiaries. The following table sets forth certain operating data as a percentage of total revenues for the periods indicated: For the Three Months Ended June 30,



For the Six Months Ended June 30,

2014 2013 2014 2013 Revenues: Income recognized on finance receivables, net 92.5 % 92.1 % 92.1 % 91.7 % Fee income 7.5 % 7.9 % 7.9 % 8.3 % Total revenues 100.0 % 100.0 % 100.0 % 100.0 % Operating expenses: Compensation and employee services 26.6 % 26.3 % 26.5 % 26.4 % Legal collection fees 5.8 % 5.8 % 5.7 % 6.0 % Legal collection costs 12.9 % 12.4 % 13.3 % 12.3 % Agent fees 0.7 % 0.7 % 0.7 % 0.8 % Outside fees and services 6.1 % 4.7 % 5.9 % 4.6 % Communication expenses 4.0 % 3.6 % 4.4 % 4.2 % Rent and occupancy 1.1 % 1.0 % 1.1 % 1.0 % Depreciation and amortization 2.1 % 1.9 % 2.1 % 2.0 % Other operating expenses 3.9 % 3.1 % 3.5 % 3.2 % Total operating expenses 63.2 % 59.5 % 63.2 % 60.5 % Income from operations 36.8 % 40.4 % 36.8 % 39.5 % Other expense: Interest expense 2.6 % 1.6 % 2.5 % 1.6 % Other expense 3.2 % - % 1.6 % - % Income before income taxes 31.1 % 38.8 % 32.7 % 38.0 % Provision for income taxes 12.0 % 15.0 % 12.7 % 14.8 % Net income 19.0 % 23.7 % 20.0 % 23.2 % Adjustment for loss attributable to redeemable noncontrolling interest - % 0.1 % - % 0.1 % Net income attributable to Portfolio Recovery Associates, Inc. 19.0 % 23.8 % 20.0 % 23.3 % Three Months Ended June 30, 2014 Compared To Three Months Ended June 30, 2013 Revenues Total revenues were $197.3 million for the three months ended June 30, 2014, an increase of $14.3 million, or 7.8%, compared to total revenues of $183.0 million for the three months ended June 30, 2013. Income Recognized on Finance Receivables, net Income recognized on finance receivables, net was $182.5 million for the three months ended June 30, 2014, an increase of $13.9 million, or 8.2%, compared to income recognized on finance receivables, net of $168.6 million for the three months ended June 30, 2013. The increase was primarily due to an increase in cash collections on our finance receivables to $319.3 million for the three months ended June 30, 2014, from $296.4 million for the three months ended June 30, 2013, an increase of $22.9 million, or 7.7%. Our finance receivables amortization rate, including net allowance charges, was 42.8% for the three months ended June 30, 2014 compared to 43.1% for the three months ended June 30, 2013. Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield, on portfolios purchased during the period, to be earned by the Company based on its proprietary buying models. Net reclassifications from nonaccretable difference to accretable yield primarily result from the Company's increase in its estimate of future cash flows. Increases in future cash flows may occur as portfolios age and actual cash collections exceed those originally expected. If those cash flows are determined to be incremental to the portfolio's original forecast, future projections of cash flows are generally increased resulting in higher expected revenue and hence increases in accretable yield. During the three months ended June 30, 2014 and 2013, the Company reclassified amounts from nonaccretable difference to accretable yield due primarily to increased cash collection forecasts relating to pools acquired from 2009-2013. When 27



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applicable, net reclassifications to nonaccretable difference from accretable yield result from the Company's decrease in its estimates of future cash flows and allowance charges that exceed the Company's increase in its estimate of future cash flows. Income recognized on finance receivables, net, is shown net of changes in valuation allowances recognized under FASB ASC Topic 310-30 "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"), which requires that a valuation allowance be recorded for significant decreases in expected cash flows or a change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the three months ended June 30, 2014, we recorded net allowance reversals of $2.3 million. On our Core portfolios, we recorded net allowance reversals of $3.3 million on portfolios purchased between 2005 and 2008, offset by net allowance charges of $0.9 million on portfolios purchased in 2010 and 2011. On our purchased bankruptcy portfolios, we recorded net allowance reversals of $0.4 million on portfolios primarily purchased in 2007 and 2008 offset by a net allowance charge of $0.5 million on Canadian portfolios purchased in 2014. For the three months ended June 30, 2013, we recorded net allowance reversals of $1.2 million, of which a charge of $0.6 million related to purchased bankruptcy portfolios primarily purchased in 2008, offset by reversals of $1.8 million related to Core portfolios purchased between 2005 and 2008. In any given period, we may be required to record valuation allowances due to pools of receivables underperforming our previous expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability, of purchased pools of defaulted consumer receivables include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability, of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (relating to the collection and movement of accounts on both our collection floor and external channels), and decreases in productivity related to turnover of our collection staff. Fee Income Fee income increased to $14.8 million for the three months ended June 30, 2014, from $14.4 million for the three months ended June 30, 2013, primarily due to higher fee income generated by CCB and PGS. This was partially offset by lower fee income generated in the second quarter of 2014 by PRA UK, PLS and Bankruptcy Services when compared to the second quarter of 2013. Income from Operations Income from operations was $72.5 million for the three months ended June 30, 2014, a decrease of $1.3 million or 1.8% compared to income from operations of $73.8 million for the three months ended June 30, 2013. Income from operations was 36.7% of total revenue for the three months ended June 30, 2014 compared to 40.4% for the three months ended June 30, 2013. Operating Expenses Operating expenses were $124.9 million for the three months ended June 30, 2014, an increase of $15.8 million or 14.5% compared to operating expenses of $109.1 million for the three months ended June 30, 2013. Operating expenses were 37.4% of cash receipts for the three months ended June 30, 2014 compared to 35.1% for the three months ended June 30, 2013. Compensation and Employee Services Compensation and employee services expenses were $52.5 million for the three months ended June 30, 2014, an increase of $4.3 million, or 8.9%, compared to compensation and employee services expenses of $48.2 million for the three months ended June 30, 2013. Compensation expense increased primarily as a result of larger staff sizes in addition to increases in incentive compensation and normal pay increases. Compensation and employee services expenses increased as total employees grew 6.1% to 3,567 as of June 30, 2014, from 3,362 as of June 30, 2013. Compensation and employee services expenses as a percentage of cash receipts increased to 15.7% for the three months ended June 30, 2014, from 15.5% of cash receipts for the three months ended June 30, 2013. Legal Collection Fees Legal collection fees represent contingent fees incurred for the cash collections generated by our independent third party attorney network. Legal collection fees were $11.4 million for the three months ended June 30, 2014, an increase of $0.8 million, or 7.5%, compared to legal collection fees of $10.6 million for the three months ended June 30, 2013. This increase was the result of an increase in cash collections from outside attorneys from $50.1 million in the three months ended June 30, 2013 to $55.0 28



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million for the three months ended June 30, 2014, an increase of $4.9 million, or 9.8%. Legal collection fees for both the three months ended June 30, 2014 and 2013 were 3.4% of cash receipts. Legal Collection Costs Legal collection costs consist of costs paid to courts where a lawsuit is filed and the cost of documents received from sellers of defaulted consumer receivables. Legal collection costs were $25.4 million for the three months ended June 30, 2014, an increase of $2.7 million, or 11.9%, compared to legal collection costs of $22.7 million for the three months ended June 30, 2013. Since the beginning of 2012, as a result of the refinement of our internal scoring methodology that expanded our account selections for legal action, we expanded the accounts brought into the legal collection process which resulted in significant initial expenses, which we expect to drive additional future cash collections and revenue. Legal collection costs for the three months ended June 30, 2014 were 7.6% of cash receipts, compared to 7.3% for the three months ended June 30, 2013. Agent Fees Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $1.5 million and $1.3 million for the three months ended June 30, 2014 and 2013, respectively. Outside Fees and Services Outside fees and services expenses were $12.1 million for the three months ended June 30, 2014, an increase of $3.5 million, or 40.7%, compared to outside fees and services expenses of $8.6 million for the three months ended June 30, 2013. The increase was mainly attributable to the $4.1 million of transaction costs incurred in the second quarter of 2014 related to the Aktiv acquisition. Communication Expenses Communication expenses were $8.0 million for the three months ended June 30, 2014, an increase of $1.3 million, or 19.4%, compared to communications expenses of $6.7 million for the three months ended June 30, 2013. The increase was primarily due to additional postage expense resulting from an increase in special collection letter campaigns as well as a larger customer base. The remaining increase was attributable to higher telephone expenses. Expenses related to customer mailings were responsible for 69.2%, or $0.9 million, of this increase, and the remaining 30.8%, or $0.4 million, was attributable to increases in telephone related charges. Rent and Occupancy Rent and occupancy expenses were $2.2 million for the three months ended June 30, 2014, an increase of $0.4 million, or 22.2%, compared to rent and occupancy expenses of $1.8 million for the three months ended June 30, 2013. The increase was primarily due to the additional space leased at our Norfolk headquarters during the second half of 2013 and the additional space leased as a result of the opening of our Texas call center in December of 2013. Depreciation and Amortization Depreciation and amortization expenses were $4.2 million for the three months ended June 30, 2014, an increase of $0.7 million, or 20.0%, compared to depreciation and amortization expenses of $3.5 million for the three months ended June 30, 2013. The increase was primarily due to a large investment in capital expenditures resulting from the additional space leased at our Norfolk headquarters during the second half of 2013, additional space leased as a result of the opening of our Texas call center in December of 2013, and the relocation of our PGS Birmingham operations in March of 2014. Other Operating Expenses Other operating expenses were $7.7 million for the three months ended June 30, 2014, an increase of $2.0 million, or 35.1%, compared to other operating expenses of $5.7 million for the three months ended June 30, 2013. Of the $2.0 million increase, $0.6 million was due to an increase in provision for doubtful accounts, $0.6 million was due to an increase in taxes, fees and licenses, $0.3 million was due to an increase in general office expenses and $0.3 million was due to an increase in accrued estimated contingent payments related to a previous acquisition. None of the remaining $0.2 million increase was attributable to any significant identifiable items. Interest Expense Interest expense was $5.1 million and $2.9 million for the three months ended June 30, 2014 and 2013, respectively. The increase was primarily due to the completion on August 13, 2013, through a private offering of $287.5 million in aggregate principal amount of the Company's 3.00% Convertible Senior Notes due 2020, offset by a decrease in average borrowings under our variable 29



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rate credit facility for the three months ended June 30, 2014 compared to the same prior year period. The average borrowings on our variable rate credit facility were $192.5 million and $398.7 million for the three months ended June 30, 2014 and 2013, respectively. Other Expense Other expense was $6.2 million and $0.0 million for the three months ended June 30, 2014 and 2013, respectively. This increase was the result of a $6.2 million foreign currency transaction loss incurred as a result of us entering into foreign currency exchange rate forward contracts to acquire 518 million Euros in anticipation of closing the acquisition of Aktiv. As a result of the strengthening U.S. dollar relative to the Euro, an unrealized loss on the forward contracts was recognized in the second quarter of 2014. Provision for Income Taxes Provision for income taxes was $23.7 million for the three months ended June 30, 2014, a decrease of $3.8 million, or 13.8%, compared to provision for income taxes of $27.5 million for the three months ended June 30, 2013. The decrease is primarily due to a decrease of 13.7% in income before taxes for the three months ended June 30, 2014, compared to the three months ended June 30, 2013. During the three months ended June 30, 2014 and 2013, our effective tax rate remained relatively consistent at 38.7% and 38.8%, respectively. Six Months Ended June 30, 2014 Compared To Six Months Ended June 30, 2013 Revenues Total revenues were $391.3 million for the six months ended June 30, 2014, an increase of $38.8 million, or 11.0%, compared to total revenues of $352.5 million for the six months ended June 30, 2013. Income Recognized on Finance Receivables, net Income recognized on finance receivables, net was $360.5 million for the six months ended June 30, 2014, an increase of $37.1 million, or 11.5%, compared to income recognized on finance receivables, net of $323.4 million for the six months ended June 30, 2013. The increase was primarily due to an increase in cash collections on our finance receivables to $632.6 million for the six months ended June 30, 2014, from $571.9 million for the six months ended June 30, 2013, an increase of $60.7 million, or 10.6%. Our finance receivables amortization rate, including net allowance charges, was 43.0% for the six months ended June 30, 2014 compared to 43.5% for the six months ended June 30, 2013. Accretable yield represents the amount of income recognized on finance receivables the Company can expect to generate over the remaining life of its existing portfolios based on estimated future cash flows as of the balance sheet date. Additions represent the original expected accretable yield, on portfolios purchased during the period, to be earned by the Company based on its proprietary buying models. Net reclassifications from nonaccretable difference to accretable yield primarily result from the Company's increase in its estimate of future cash flows. Increases in future cash flows may occur as portfolios age and actual cash collections exceed those originally expected. If those cash flows are determined to be incremental to the portfolio's original forecast, future projections of cash flows are generally increased resulting in higher expected revenue and hence increases in accretable yield. During the six months ended June 30, 2014 and 2013, the Company reclassified amounts from nonaccretable difference to accretable yield due primarily to increased cash collection forecasts relating to pools acquired from 2009-2013. When applicable, net reclassifications to nonaccretable difference from accretable yield result from the Company's decrease in its estimates of future cash flows and allowance charges that exceed the Company's increase in its estimate of future cash flows. Income recognized on finance receivables, net, is shown net of changes in valuation allowances recognized under ASC 310-30, which requires that a valuation allowance be recorded for significant decreases in expected cash flows or a change in timing of cash flows which would otherwise require a reduction in the stated yield on a pool of accounts. For the six months ended June 30, 2014, we recorded net allowance reversals of $4.3 million. On our Core portfolios, we recorded net allowance reversals of $6.4 million on portfolios purchased between 2005 and 2008, offset by net allowance charges of $1.8 million on portfolios purchased in 2010 and 2011. On our purchased bankruptcy portfolios, we recorded net allowance reversals of $0.6 million on portfolios primarily purchased in 2007 and 2008, offset by net allowance charges of $0.5 million on Canadian portfolios purchased in 2014. We also recorded a net allowance charge of $0.5 million on our UK portfolios purchased in 2012. For the six months ended June 30, 2013, we recorded net allowance charges of $1.0 million, of which $5.1 million related to purchased bankruptcy portfolios primarily purchased in 2007 and 2008, offset by reversals of $4.1 million related to Core portfolios primarily purchased in 2005 and 2008. 30



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In any given period, we may be required to record valuation allowances due to pools of receivables underperforming our previous expectations. Factors that may contribute to the recording of valuation allowances may include both internal as well as external factors. External factors which may have an impact on the collectability, and subsequently to the overall profitability, of purchased pools of defaulted consumer receivables include: new laws or regulations relating to collections, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors which may have an impact on the collectability, and subsequently the overall profitability, of purchased pools of defaulted consumer receivables would include: necessary revisions to initial and post-acquisition scoring and modeling estimates, non-optimal operational activities (relating to the collection and movement of accounts on both our collection floor and external channels), and decreases in productivity related to turnover of our collection staff. Fee Income Fee income increased to $30.8 million for the six months ended June 30, 2014, from $29.2 million for the six months ended June 30, 2013, primarily due to higher fee income generated by CCB and PGS. This was partially offset by lower fee income generated in the first half of 2014 by PRA UK, PLS and Bankruptcy Services when compared to the prior year period. Income from Operations Income from operations was $144.1 million for the six months ended June 30, 2014, an increase of $4.4 million or 3.2% compared to income from operations of $139.7 million for the six months ended June 30, 2013. Income from operations was 36.8% of total revenue for the six months ended June 30, 2014 compared to 39.6% for the six months ended June 30, 2013. Operating Expenses Operating expenses were $247.2 million for the six months ended June 30, 2014, an increase of $34.4 million or 16.2% compared to operating expenses of $212.8 million for the six months ended June 30, 2013. Operating expenses were 37.3% of cash receipts for the six months ended June 30, 2014 compared to 35.4% for the six months ended June 30, 2013. Compensation and Employee Services Compensation and employee services expenses were $103.8 million for the six months ended June 30, 2014, an increase of $10.6 million, or 11.4%, compared to compensation and employee services expenses of $93.2 million for six months ended June 30, 2013. Compensation expense increased primarily as a result of larger staff sizes in addition to increases in incentive compensation and normal pay increases. Compensation and employee services expenses increased as total employees grew 6.1% to 3,567 as of June 30, 2014, from 3,362 as of June 30, 2013. Compensation and employee services expenses as a percentage of cash receipts increased to 15.7% for the six months ended June 30, 2014, from 15.5% of cash receipts for the six months ended June 30, 2013. Legal Collection Fees Legal collection fees represent contingent fees incurred for the cash collections generated by our independent third party attorney network. Legal collection fees were $22.2 million for the six months ended June 30, 2014, an increase of $1.1 million, or 5.2%, compared to legal collection fees of $21.1 million for the six months ended June 30, 2013. This increase was the result of an increase in cash collections from outside attorneys from $98.0 million in the six months ended June 30, 2013 to $106.0 million for the six months ended June 30, 2014, an increase of $8.0 million, or 8.2%. Legal collection fees for the six months ended June 30, 2014 were 3.3% of cash receipts, compared to 3.5% for the six months ended June 30, 2013. Legal Collection Costs Legal collection costs consist of costs paid to courts where a lawsuit is filed and the cost of documents received from sellers of defaulted consumer receivables. Legal collection costs were $52.0 million for the six months ended June 30, 2014, an increase of $8.8 million, or 20.4%, compared to legal collection costs of $43.2 million for the six months ended June 30, 2013. Since the beginning of 2012, as a result of the refinement of our internal scoring methodology that expanded our account selections for legal action, we expanded the accounts brought into the legal collection process which resulted in significant initial expenses, which we expect to drive additional future cash collections and revenue. Legal collection costs for the six months ended June 30, 2014 were 7.8% of cash receipts, compared to 7.2% for the six months ended June 30, 2013. Agent Fees Agent fees primarily represent costs paid to repossession agents to repossess vehicles. Agent fees were $2.9 million for both the six months ended June 30, 2014 and 2013. 31



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Outside Fees and Services Outside fees and services expenses were $22.9 million for the six months ended June 30, 2014, an increase of $6.8 million, or 42.2%, compared to outside fees and services expenses of $16.1 million for the six months ended June 30, 2013. The increase was mainly attributable to the $8.5 million of transaction costs incurred in the first half of 2014 related to the Aktiv acquisition. Communication Expenses Communication expenses were $17.1 million for the six months ended June 30, 2014, an increase of $2.3 million, or 15.5%, compared to communications expenses of $14.8 million for the six months ended June 30, 2013. The increase was primarily due to additional postage expense resulting from an increase in special collection letter campaigns as well as a larger customer base. The remaining increase was attributable to higher telephone expenses. Expenses related to customer mailings were responsible for 60.9%, or $1.4 million, of this increase, and the remaining 39.1%, or $0.9 million, was attributable to increases in telephone related charges. Rent and Occupancy Rent and occupancy expenses were $4.4 million for the six months ended June 30, 2014, an increase of $0.9 million, or 25.7%, compared to rent and occupancy expenses of $3.5 million for the six months ended June 30, 2013. The increase was primarily due to the additional space leased at our Norfolk headquarters during the second half of 2013 and the additional space leased as a result of the opening of our Texas call center in December of 2013. Depreciation and Amortization Depreciation and amortization expenses were $8.2 million for the six months ended June 30, 2014, an increase of $1.3 million, or 18.8%, compared to depreciation and amortization expenses of $6.9 million for the six months ended June 30, 2013. The increase was primarily due to a large investment in capital expenditures resulting from the additional space leased at our Norfolk headquarters during the second half of 2013 and the additional space leased as a result of the opening of our Texas call center in December of 2013. Other Operating Expenses Other operating expenses were $13.7 million for the six months ended June 30, 2014, an increase of $2.6 million, or 23.4%, compared to other operating expenses of $11.1 million for the six months ended June 30, 2013. Of the $2.6 million increase, $0.7 million was due to an increase in taxes, fees and licenses; $0.7 million was due to an increase in general office expenses; $0.7 million was due to an increase in repairs and maintenance; $0.5 million was due to an increase in provision for doubtful accounts; and $0.5 million was due to an increase in insurance expenses. This was offset by a decrease of $0.6 million in accrued estimated contingent payments related to a previous acquisition. None of the remaining $0.1 million increase was attributable to any significant identifiable items. Interest Expense Interest expense was $9.9 million and $5.6 million for the six months ended June 30, 2014 and 2013, respectively. The increase was primarily due to the completion on August 13, 2013, through a private offering of $287.5 million in aggregate principal amount of the Company's 3.00% Convertible Senior Notes due 2020, offset by a decrease in average borrowings under our variable rate credit facility for the six months ended June 30, 2014 compared to the same prior year period. The average borrowings on our variable rate credit facility were $193.7 million and $379.3 million for the six months ended June 30, 2014 and 2013, respectively. Other Expense Other expense was $6.2 million and $0.0 million for the six months ended June 30, 2014 and 2013, respectively. This increase was the result of a $6.2 million foreign currency transaction loss incurred as a result of us entering into foreign currency exchange rate forward contracts to acquire 518 million Euros in anticipation of closing the acquisition of Aktiv. As a result of the strengthening U.S. dollar relative to the Euro, an unrealized loss on the forward contracts was recognized in the second quarter of 2014. Provision for Income Taxes Provision for income taxes was $49.6 million for the six months ended June 30, 2014, a decrease of $2.6 million, or 5.0%, compared to provision for income taxes of $52.2 million for the six months ended June 30, 2013. The decrease is primarily due to a decrease of 4.6% in income before taxes for the six months ended June 30, 2014, compared to the six months ended June 30, 2013. During the six months ended June 30, 2014 and 2013, our effective tax rate remained relatively consistent at 38.8% and 38.9%, respectively. 32



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Supplemental Performance Data Domestic Finance Receivables Portfolio Performance: The following tables show certain data related to our domestic finance receivables portfolio. These tables describe the purchase price, actual cash collections and future estimates of cash collections, income recognized on finance receivables (gross and net of allowance charges/(reversals)), principal amortization, allowance charges/(reversals), net finance receivable balances, and the ratio of total estimated collections to purchase price (which we refer to as purchase price multiple). Further, these tables disclose our entire domestic portfolio, as well as its subsets: the portfolio of purchased bankrupt accounts and our Core portfolio. The accounts represented in the purchased bankruptcy tables are those portfolios of accounts that were bankrupt at the time of purchase. This contrasts with accounts that file for bankruptcy after we purchase them, which continue to be tracked in their corresponding Core portfolio. Core customers sometimes file for bankruptcy protection subsequent to our purchase of the related Core portfolio. When this occurs, we adjust our collection practices accordingly to comply with bankruptcy procedures; however, for accounting purposes, these accounts remain in the related Core portfolio. Conversely, bankrupt accounts may be dismissed voluntarily or involuntarily subsequent to our purchase of the related bankrupt portfolio. Dismissal occurs when the terms of the bankruptcy are not met by the petitioner. When this occurs, we are typically free to pursue collection outside of bankruptcy procedures; however, for accounting purposes, these accounts remain in the related bankruptcy pool. Our United Kingdom and Canadian portfolios are not included in these tables. Purchase price multiples can vary over time due to a variety of factors including pricing competition, supply levels, age of the receivables purchased, and changes in our operational efficiency. For example, increased pricing competition during the 2005 to 2008 period negatively impacted purchase price multiples of our Core portfolio compared to prior years. During the 2009 to 2010 period, for example, pricing disruptions occurred as a result of the economic downturn. This created unique and advantageous purchasing opportunities, particularly within the bankruptcy receivables market, relative to the prior four years. When competition increases and/or supply decreases, pricing often becomes negatively impacted relative to expected collections, and yields tend to trend lower. The opposite tends to occur when competition decreases and/or supply increases. Purchase price multiples can also vary among types of finance receivables. For example, we incur lower collection costs on our bankruptcy portfolio compared with our Core portfolio. This allows us in general to pay more for a bankruptcy portfolio, experience lower purchase price multiples, and yet generate similar internal rates of return when compared with a Core portfolio. Within a given portfolio type, to the extent that lower purchase price multiples are the result of more competitive pricing and lower yields, this will generally lead to higher amortization rates (payments applied to principal as a percentage of cash collections) and lower profitability. As portfolio pricing becomes more favorable on a relative basis, our profitability will tend to increase. Profitability within given Core portfolio types may also be impacted by the age and quality of the receivables, which impact the cost to collect those accounts. The numbers presented in the following tables represent gross cash collections and do not reflect any costs to collect; therefore, they may not represent relative profitability. We continue to make enhancements to our analytical abilities, with the intent to collect more cash at a lower cost. To the extent we can improve our collection operations by collecting additional cash from a discrete quantity and quality of accounts, and/or by collecting cash at a lower cost structure, we can positively impact profitability. Additionally, purchase price multiples can vary among periods due to our implementation of required accounting standards. Revenue recognition under ASC 310-30 is driven by estimates of total collections as well as the timing of those collections. We record new portfolio purchases using a higher confidence level for both estimated collection amounts and timing. Subsequent to the initial booking, as we gain collection experience and confidence with a pool of accounts, we continuously update ERC. These processes, along with the aforementioned operational enhancements, have tended to cause the ratio of ERC to purchase price for any given year of buying to gradually increase over time. As a result, our estimate of total collections to purchase price has generally, but not always, increased as pools have aged. Thus, all factors being equal in terms of pricing, one would typically tend to see a higher collection to purchase price ratio from a pool of accounts that was six years from purchase than say a pool that was just two years from purchase. Due to all the factors described above, readers should be cautious when making comparisons of purchase price multiples among periods and between types of receivables. 33



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Domestic Portfolio Data - Life-to-Date Entire Domestic Portfolio Inception through June 30, 2014 As of June 30, 2014 ($ in thousands) Income Actual Cash Income Recognized Collections Recognized on Finance Net Finance Estimated



Total Total Estimated

Purchase Purchase Including Cash on Finance Principal Allowance Receivables, Net Receivables Remaining Estimated Collections to Period Price Sales Receivables (1) Amortization Charges (1) Balance Collections



Collections Purchase Price

1996 $ 3,080 $ 10,214 $ 7,134 $ 3,080 $ - $ 7,134 $ - $ 13 $ 10,227 332% 1997 7,685 25,534 17,849 7,685 - 17,849 - 58 25,592 333% 1998 11,089 37,426 26,337 11,089 - 26,337 - 208 37,634 339% 1999 18,898 69,495 50,597 18,898 - 50,597 - 271 69,766 369% 2000 25,020 117,130 92,110 25,020 - 92,110 - 1,419 118,549 474% 2001 33,481 176,789 143,308 33,481 - 143,308 - 2,132 178,921 534% 2002 42,325 199,971 157,646 42,325 - 157,646 - 4,245 204,216 482% 2003 61,447 267,451 206,004 61,447 - 206,004 - 6,283 273,734 445% 2004 59,176 200,122 142,146 57,976 1,200 140,946 - 6,421 206,543 349% 2005 143,167 314,819 186,524 128,295 9,045 177,479 5,826 16,732 331,551 232% 2006 107,666 211,770 129,083 82,687 18,965 110,118 6,013 16,410 228,180 212% 2007 258,364 489,963 269,010 220,953 19,215 249,795 18,192 51,776 541,739 210% 2008 275,114 486,888 267,547 219,341 33,545 234,002 22,193 50,474 537,362 195% 2009 281,313 803,271 537,898 265,373 - 537,898 15,940 118,618 921,889 328% 2010 357,767 829,401 529,805 299,596 1,690 528,115 56,506 232,404 1,061,805 297% 2011 392,778 658,407 390,315 268,092 450 389,865 124,237 381,165 1,039,572 265% 2012 508,426 483,553 243,199 240,354 - 243,199 268,072 552,456 1,036,009 204% 2013 621,545 324,169 155,109 169,060 - 155,109 453,419 834,852 1,159,021 186% YTD 2014 253,011 32,552 13,719 18,833 - 13,719 234,218 401,885 434,437 172% Total $ 3,461,352$ 5,738,925$ 3,565,340$ 2,173,585$ 84,110$ 3,481,230$ 1,204,616$ 2,677,822$ 8,416,747 243%



(1) For purposes of the this table, income recognized on finance receivables

also includes approximately $1.7 million in gains on sales of finance

receivables acquired between 1996 and 2001 and sold between 1999 and 2002.

Purchased Bankruptcy Portfolio

Inception through June 30, 2014 As of June 30, 2014 ($ in thousands) Actual Cash Income Income Collections Recognized Recognized Net Finance Estimated Total Total Estimated Purchase Purchase Including Cash on Finance Principal Allowance on Finance Receivables Remaining



Estimated Collections to

Period Price Sales Receivables



Amortization Charges Receivables, Net Balance Collections Collections Purchase Price

1996- 2003 $ - $ - $ - $ - $ - $ - $ - $ - $



- -%

2004 7,468 14,538 8,269 6,269 1,200 7,069 - 60



14,598 195%

2005 29,301 43,699 14,793 28,906 370 14,423 26



95 43,794 149%

2006 17,627 31,716 14,892 16,824 750 14,142 52



197 31,913 181%

2007 78,526 104,523 35,701 68,822 9,385 26,316 319 1,585 106,108 135% 2008 108,584 165,351 71,443 93,908 13,150 58,293 1,525 3,747 169,098 156% 2009 156,027 442,339 288,084 154,255 - 288,084 1,771 38,516 480,855 308% 2010 209,160 445,475 265,757 179,718 - 265,757 29,442 90,572 536,047 256% 2011 181,784 208,701 91,630 117,071 - 91,630 64,713 117,697 326,398 180% 2012 252,363 170,889 56,324 114,565 - 56,324 137,798 177,121 348,010 138% 2013 229,189 93,104 28,618 64,486 - 28,618 164,703 210,702 303,806 133% YTD 2014 81,587 14,412 2,763 11,649 - 2,763 69,938 89,114 103,526 127% Total $ 1,351,616$ 1,734,747$ 878,274$ 856,473$ 24,855 $ 853,419 $ 470,287$ 729,406$ 2,464,153 182% 34



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Table of Contents Core Portfolio Inception through June 30, 2014 As of June 30, 2014 ($ in thousands) Income Actual Cash Income Recognized Collections Recognized on Finance Net Finance Estimated Total Total Estimated Purchase Purchase Including Cash on Finance Principal Allowance Receivables, Receivables Remaining



Estimated Collections to

Period Price Sales Receivables (1) Amortization Charges Net (1) Balance



Collections Collections Purchase Price

1996 $ 3,080 $ 10,214 $ 7,134 $ 3,080 $ - $ 7,134 $ - $ 13 $



10,227 332%

1997 7,685 25,534 17,849 7,685 - 17,849 - 58



25,592 333%

1998 11,089 37,426 26,337 11,089 - 26,337 - 208



37,634 339%

1999 18,898 69,495 50,597 18,898 - 50,597 - 271



69,766 369%

2000 25,020 117,130 92,110 25,020 - 92,110 - 1,419



118,549 474%

2001 33,481 176,789 143,308 33,481 - 143,308 - 2,132



178,921 534%

2002 42,325 199,971 157,646 42,325 - 157,646 - 4,245



204,216 482%

2003 61,447 267,451 206,004 61,447 - 206,004 - 6,283



273,734 445%

2004 51,708 185,584 133,876 51,708 - 133,876 - 6,361



191,945 371%

2005 113,866 271,120 171,731 99,389 8,675 163,056 5,800 16,637



287,757 253%

2006 90,039 180,054 114,191 65,863 18,215 95,976 5,961 16,213



196,267 218%

2007 179,838 385,440 233,309 152,131 9,830 223,479 17,873 50,191



435,631 242%

2008 166,530 321,537 196,104 125,433 20,395 175,709 20,668 46,727



368,264 221%

2009 125,286 360,932 249,814 111,118 - 249,814 14,169 80,102



441,034 352%

2010 148,607 383,926 264,048 119,878 1,690 262,358 27,064 141,832



525,758 354%

2011 210,994 449,706 298,685 151,021 450 298,235 59,524 263,468



713,174 338%

2012 256,063 312,664 186,875 125,789 - 186,875 130,274 375,335



687,999 269%

2013 392,356 231,065 126,491 104,574 - 126,491 288,716 624,150



855,215 218%

YTD 2014 171,424 18,140 10,956 7,184 - 10,956 164,280 312,771



330,911 193%

Total $ 2,109,736$ 4,004,178$ 2,687,065$ 1,317,113$ 59,255$ 2,627,810$ 734,329$ 1,948,416$ 5,952,594 282%

(1) For purposes of the this table, income recognized on finance receivables

also includes approximately $1.7 million in gains on sales of finance

receivables acquired between 1996 and 2001 and sold between 1999 and 2002.

Domestic Portfolio Data - Year to Date



Entire Domestic Portfolio

Year to Date June 30, 2014 As of June 30, 2014 ($ in thousands) Actual Cash Income Income Collections Recognized Recognized Net Finance Estimated Total



Total Estimated Purchase Purchase Including Cash on Finance Principal Allowance on Finance Receivables Remaining Estimated Collections to

Period Price Sales Receivables Amortization Charges Receivables, Net Balance Collections Collections Purchase Price 1996 $ 3,080 $ 6 $ 6 $ - $ - $ 6 $ - $ 13 $ 10,227 332% 1997 7,685 28 28 - - 28 - 58 25,592 333% 1998 11,089 75 75 - - 75 - 208 37,634 339% 1999 18,898 140 140 - - 140 - 271 69,766 369% 2000 25,020 465 465 - - 465 - 1,419 118,549 474% 2001 33,481 882 882 - - 882 - 2,132 178,921 534% 2002 42,325 1,494 1,494 - - 1,494 - 4,245 204,216 482% 2003 61,447 2,246 2,246 - - 2,246 - 6,283 273,734 445% 2004 59,176 1,846 1,846 - - 1,846 - 6,421 206,543 349% 2005 143,167 3,717 1,947 1,770 (1,710 ) 3,657 5,826 16,732 331,551 232% 2006 107,666 3,319 1,605 1,714 (1,750 ) 3,355 6,013 16,410 228,180 212% 2007 258,364 11,151 6,464 4,687 (1,465 ) 7,929 18,192 51,776 541,739 210% 2008 275,114 13,193 6,537 6,656 (2,100 ) 8,637 22,193 50,474 537,362 195% 2009 281,313 57,288 43,104 14,184 - 43,104 15,940 118,618 921,889 328% 2010 357,767 86,162 64,247 21,915 1,365 62,882 56,506 232,404 1,061,805 297% 2011 392,778 104,717 69,307 35,410 450 68,857 124,237 381,165 1,039,572 265% 2012 508,426 132,065 67,109 64,956 - 67,109 268,072 552,456 1,036,009 204% 2013 621,545 170,027 72,816 97,211 - 72,816 453,419 834,852 1,159,021 186% YTD 2014 253,011 32,552 13,719 18,833 13,719 234,218 401,885 434,437 172% Total $ 3,461,352$ 621,373$ 354,037$ 267,336$ (5,210 ) $ 359,247 $ 1,204,616$ 2,677,822$ 8,416,747 243% 35



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Purchased Bankruptcy Portfolio

Year to Date June 30, 2014 As of June 30, 2014 ($ in thousands) Actual Cash Income Income Collections Recognized Recognized Net Finance Estimated Total



Total Estimated Purchase Purchase Including Cash on Finance Principal Allowance on Finance Receivables Remaining Estimated

Collections to

Period Price Sales Receivables Amortization Charges Receivables, Net Balance Collections Collections Purchase Price 1996-2003 2004 7,468 46 46 - - 46 - 60 14,598 195% 2005 29,301 58 26 32 (40 ) 66 26 95 43,794 149% 2006 17,627 151 101 50 (50 ) 151 52 197 31,913 181% 2007 78,526 392 144 248 (430 ) 574 319 1,585 106,108 135% 2008 108,584 1,163 260 903 (100 ) 360 1,525 3,747 169,098 156% 2009 156,027 37,531 27,404 10,127 - 27,404 1,771 38,516 480,855 308% 2010 209,160 54,753 38,172 16,581 - 38,172 29,442 90,572 536,047 256% 2011 181,784 44,352 19,732 24,620 - 19,732 64,713 117,697 326,398 180% 2012 252,363 49,891 13,470 36,421 - 13,470 137,798 177,121 348,010 138% 2013 229,189 40,576 11,856 28,720 - 11,856 164,703 210,702 303,806 133% YTD 2014 81,587 14,412 2,763 11,649 2,763 69,938 89,114 103,526 127% Total $ 1,351,616$ 243,325$ 113,974$ 129,351$ (620 ) $ 114,594 $ 470,287$ 729,406$ 2,464,153 182% Core Portfolio Year to Date June 30, 2014 As of June 30, 2014 ($ in thousands) Actual Cash Income Income Collections Recognized Recognized Net Finance Estimated Total



Total Estimated Purchase Purchase Including Cash on Finance Principal Allowance on Finance Receivables Remaining Estimated

Collections to

Period Price Sales Receivables Amortization Charges Receivables, Net Balance Collections Collections Purchase Price 1996 $ 3,080 $ 6 $ 6 $ - $ - $ 6 $ - $ 13 $ 10,227 332% 1997 7,685 28 28 - - 28 - 58 25,592 333% 1998 11,089 75 75 - - 75 - 208 37,634 339% 1999 18,898 140 140 - - 140 - 271 69,766 369% 2000 25,020 465 465 - - 465 - 1,419 118,549 474% 2001 33,481 882 882 - - 882 - 2,132 178,921 534% 2002 42,325 1,494 1,494 - - 1,494 - 4,245 204,216 482% 2003 61,447 2,246 2,246 - - 2,246 - 6,283 273,734 445% 2004 51,708 1,800 1,800 - - 1,800 - 6,361 191,945 371% 2005 113,866 3,659 1,921 1,738 (1,670 ) 3,591 5,800 16,637 287,757 253% 2006 90,039 3,168 1,504 1,664 (1,700 ) 3,204 5,961 16,213 196,267 218% 2007 179,838 10,759 6,320 4,439 (1,035 ) 7,355 17,873 50,191 435,631 242% 2008 166,530 12,030 6,277 5,753 (2,000 ) 8,277 20,668 46,727 368,264 221% 2009 125,286 19,757 15,700 4,057 - 15,700 14,169 80,102 441,034 352% 2010 148,607 31,409 26,075 5,334 1,365 24,710 27,064 141,832 525,758 354% 2011 210,994 60,365 49,575 10,790 450 49,125 59,524 263,468 713,174 338% 2012 256,063 82,174 53,639 28,535 - 53,639 130,274 375,335 687,999 269% 2013 392,356 129,451 60,960 68,491 - 60,960 288,716 624,150 855,215 218% YTD 2014 171,424 18,140 10,956 7,184 - 10,956 164,280 312,771 330,911 193% Total $ 2,109,736$ 378,048$ 240,063$ 137,985$ (4,590 ) $ 244,653 $ 734,329$ 1,948,416$ 5,952,594 282% 36



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Domestic Portfolio Data - Current Quarter



Entire Domestic Portfolio

Quarter Ended June 30, 2014 As of June 30, 2014 ($ in thousands) Actual Cash Income Income Collections Recognized Recognized Net Finance Estimated Total



Total Estimated Purchase Purchase Including Cash on Finance Principal Allowance on Finance Receivables Remaining Estimated Collections to

Period Price Sales Receivables Amortization Charges Receivables, Net Balance Collections Collections Purchase Price 1996 $ 3,080 $ 3 $ 3 $ - $ - $ 3 $ - $ 13 $ 10,227 332% 1997 7,685 13 13 - - 13 - 58 25,592 333% 1998 11,089 42 42 - - 42 - 208 37,634 339% 1999 18,898 62 62 - - 62 - 271 69,766 369% 2000 25,020 213 213 - - 213 - 1,419 118,549 474% 2001 33,481 425 425 - - 425 - 2,132 178,921 534% 2002 42,325 743 743 - - 743 - 4,245 204,216 482% 2003 61,447 1,103 1,103 - - 1,103 - 6,283 273,734 445% 2004 59,176 907 907 - - 907 - 6,421 206,543 349% 2005 143,167 1,790 967 823 (925 ) 1,892 5,826 16,732 331,551 232% 2006 107,666 1,566 772 794 (930 ) 1,702 6,013 16,410 228,180 212% 2007 258,364 5,340 3,214 2,126 (1,230 ) 4,444 18,192 51,776 541,739 210% 2008 275,114 6,024 3,061 2,963 (600 ) 3,661 22,193 50,474 537,362 195% 2009 281,313 26,654 19,872 6,782 - 19,872 15,940 118,618 921,889 328% 2010 357,767 42,526 31,434 11,092 475 30,959 56,506 232,404 1,061,805 297% 2011 392,778 51,730 34,136 17,594 450 33,686 124,237 381,165 1,039,572 265% 2012 508,426 64,255 33,155 31,100 - 33,155 268,072 552,456 1,036,009 204% 2013 621,545 88,247 38,540 49,707 - 38,540 453,419 834,852 1,159,021 186% YTD 2014 253,011 22,385 10,102 12,283 - 10,102 234,218 401,885 434,437 172% Total $ 3,461,352$ 314,028$ 178,764$ 135,264$ (2,760 ) $ 181,524 $ 1,204,616$ 2,677,822$ 8,416,747 243%



Purchased Bankruptcy Portfolio

Quarter Ended June 30, 2014 As of June 30, 2014 ($ in thousands) Actual Cash Income Income Collections Recognized Recognized Net Finance Estimated Total



Total Estimated Purchase Purchase Including Cash on Finance Principal Allowance on Finance Receivables Remaining Estimated

Collections to

Period Price Sales Receivables Amortization Charges Receivables, Net Balance Collections Collections Purchase Price 1996-2003 $ - $ - $ - $ - $ - $ - $ - $ - $ - -% 2004 7,468 18 18 - - 18 - 60 14,598 195% 2005 29,301 26 11 15 (25 ) 36 26 95 43,794 149% 2006 17,627 57 32 25 (30 ) 62 52 197 31,913 181% 2007 78,526 185 69 116 (215 ) 284 319 1,585 106,108 135% 2008 108,584 506 119 387 (100 ) 219 1,525 3,747 169,098 156% 2009 156,027 17,150 12,471 4,679 - 12,471 1,771 38,516 480,855 308% 2010 209,160 27,622 19,150 8,472 - 19,150 29,442 90,572 536,047 256% 2011 181,784 23,059 10,572 12,487 - 10,572 64,713 117,697 326,398 180% 2012 252,363 25,506 6,553 18,953 - 6,553 137,798 177,121 348,010 138% 2013 229,189 21,281 6,089 15,192 - 6,089 164,703 210,702 303,806 133% YTD 2014 81,587 8,389 2,050 6,339 - 2,050 69,938 89,114 103,526 127% Total $ 1,351,616$ 123,799$ 57,134$ 66,665$ (370 ) $ 57,504 $ 470,287$ 729,406$ 2,464,153 182% 37



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Table of Contents Core Portfolio Quarter Ended June 30, 2014 As of June 30, 2014 ($ in thousands) Actual Cash Income Income Collections Recognized Recognized Net Finance Estimated Total



Total Estimated Purchase Purchase Including Cash on Finance Principal Allowance on Finance Receivables Remaining Estimated

Collections to

Period Price Sales Receivables Amortization Charges Receivables, Net Balance Collections Collections Purchase Price 1996 $ 3,080 $ 3 $ 3 $ - $ - $ 3 $ - $ 13 $ 10,227 332% 1997 7,685 13 13 - - 13 - 58 25,592 333% 1998 11,089 42 42 - - 42 - 208 37,634 339% 1999 18,898 62 62 - - 62 - 271 69,766 369% 2000 25,020 213 213 - - 213 - 1,419 118,549 474% 2001 33,481 425 425 - - 425 - 2,132 178,921 534% 2002 42,325 743 743 - - 743 - 4,245 204,216 482% 2003 61,447 1,103 1,103 - - 1,103 - 6,283 273,734 445% 2004 51,708 889 889 - - 889 - 6,361 191,945 371% 2005 113,866 1,764 956 808 (900 ) 1,856 5,800 16,637 287,757 253% 2006 90,039 1,509 740 769 (900 ) 1,640 5,961 16,213 196,267 218% 2007 179,838 5,155 3,145 2,010 (1,015 ) 4,160 17,873 50,191 435,631 242% 2008 166,530 5,518 2,942 2,576 (500 ) 3,442 20,668 46,727 368,264 221% 2009 125,286 9,504 7,401 2,103 - 7,401 14,169 80,102 441,034 352% 2010 148,607 14,904 12,284 2,620 475 11,809 27,064 141,832 525,758 354% 2011 210,994 28,671 23,564 5,107 450 23,114 59,524 263,468 713,174 338% 2012 256,063 38,749 26,602 12,147 - 26,602 130,274 375,335 687,999 269% 2013 392,356 66,966 32,451 34,515 - 32,451 288,716 624,150 855,215 218% YTD 2014 171,424 13,996 8,052 5,944 - 8,052 164,280 312,771 330,911 193% Total $ 2,109,736$ 190,229$ 121,630$ 68,599$ (2,390 ) $ 124,020 $ 734,329$ 1,948,416$ 5,952,594 282% The following graph shows the purchase price of our domestic portfolios by year for the last ten years. The purchase price number represents the cash paid to the seller, plus certain capitalized costs, less buybacks. [[Image Removed]] As shown in the above chart, the composition of our domestic purchased portfolios shifted in favor of bankrupt accounts in 2009 and 2010, before returning to equilibrium with Core in 2011 and 2012. In 2013 and the first half of 2014, Core purchases exceeded those of bankrupt accounts. We began buying bankrupt accounts during 2004 and slowly increased the volume of accounts we acquired through 2006 as we tested our models, refined our processes and validated our operating assumptions. After observing a high level of modeling confidence in our early purchases, we began increasing our level of purchases more dramatically commencing in 2007. Our ability to profitably purchase and liquidate pools of bankrupt accounts provides diversity to our distressed asset acquisition business. Although we generally buy bankrupt portfolios from many of the same consumer lenders from whom we acquire Core customer portfolios, the volumes and pricing characteristics as well as the competitors are different. Based upon market dynamics, the profitability of portfolios purchased in the bankrupt and Core markets may differ over time. We have found periods when 38



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bankrupt accounts were more profitable and other times when Core accounts were more profitable. From 2004 through 2008, our bankruptcy buying fluctuated between 13% and 39% of our total portfolio purchasing. In 2009, for the first time in our history, bankruptcy purchasing exceeded that of our Core buying, at 55% of total portfolio purchasing and during 2010 this percentage increased to 59%. This occurred as severe dislocations in the financial markets, coupled with legislative uncertainty, caused pricing in the bankruptcy market to decline substantially, thereby driving our strategy to make advantageous bankruptcy portfolio acquisitions during this period. For 2011 and 2012, our bankruptcy buying leveled off and represented 48% and 50% of our total domestic portfolio purchasing and in 2013 and the first half of 2014, it declined to 38% and 32%, respectively, of our total domestic portfolio purchasing. In order to collect our Core portfolios, we generally need to employ relatively higher amounts of labor and incur additional collection costs to generate each dollar of cash collections as compared with bankruptcy portfolios. In order to achieve acceptable levels of net return on investment (after direct expenses), we are generally targeting a total cash collections to purchase price multiple in the 1.75-3.0x range. On the other hand, bankrupt accounts generate the majority of cash collections through the efforts of the U.S. bankruptcy courts and trustees. In this process, cash is remitted to our Company with no corresponding cost other than the cost of filing claims at the time of purchase, court fees associated with the filing of ownership claim transfers and general administrative costs for monitoring the progress of each account through the bankruptcy process. As a result, overall collection costs are much lower for us when liquidating a pool of bankrupt accounts as compared to a pool of Core accounts, but conversely the price we pay for bankrupt accounts is generally higher than Core accounts. We generally target similar returns on investment (measured after direct expenses) for bankrupt and Core portfolios at any given point in the market cycles. However, because of the lower related collection costs, we can pay more for bankrupt portfolios, which causes the estimated total cash collections to purchase price multiples of bankrupt pools generally to be in the 1.2-2.0x range. In summary, compared to a similar investment in a pool of Core accounts, to the extent both pools had identical targeted returns on investment (measured after direct expenses), the bankrupt pool would be expected to generate less revenue, less direct expenses, similar operating income, and a higher operating margin. In addition, collections on younger, newly filed bankrupt accounts tend to be of a lower magnitude in the earlier months when compared to Core charge-off accounts. This lower level of early period collections is due to the fact that we primarily purchase portfolios of accounts that represent unsecured claims in bankruptcy, and these unsecured claims are scheduled to begin paying out after payment of the secured and priority claims. As a result of the administrative processes regarding payout priorities within the court-administered bankruptcy plans, unsecured creditors do not generally begin receiving meaningful collections on unsecured claims until 12 to 18 months after the bankruptcy filing date. Therefore, to the extent that we purchase portfolios with more recent bankruptcy filing dates, as we did to a significant extent commencing in 2009, we would expect to experience a delay in cash collections compared with Core charged-off portfolios. We utilize a long-term approach to collecting our owned portfolios of receivables. This approach has historically caused us to realize significant cash collections and revenues from purchased portfolios of finance receivables years after they are originally acquired. As a result, we have in the past been able to temporarily reduce our level of current period acquisitions without a corresponding negative current period impact on cash collections and revenue. 39



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The following tables, which exclude any proceeds from cash sales of finance receivables, demonstrate our ability to realize significant multi-year cash collection streams on our domestic portfolios.

Cash Collections By Year, By Year of Purchase - Entire Domestic Portfolio (in thousands) Purchase Purchase Cash Collection Period Period Price 1996-2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD 2014 Total 1996 $ 3,080$ 9,414$ 237$ 102$ 83$ 78$ 68$ 100$ 39$ 24$ 6$ 10,151 1997 7,685 22,803 597 437 346 215 216 187 112 84 28 25,025 1998 11,089 32,889 1,415 882 616 397 382 332 241 173 75 37,402 1999 18,898 57,198 3,032 2,243 1,533 1,328 1,139 997 709 483 140 68,802 2000 25,020 87,520 8,067 5,202 3,604 3,198 2,782 2,554 1,927 1,349 465 116,668 2001 33,481 119,238 16,048 10,011 6,164 5,299 4,422 3,791 3,104 2,339 882 171,298 2002 42,325 119,570 24,729 16,527 9,772 7,444 6,375 5,844 4,768 3,433 1,494 199,956 2003 61,447 126,654 43,728 30,695 18,818 13,135 10,422 8,945 7,477 5,331 2,246 267,451 2004 59,176 64,494 40,424 30,750 19,339 13,677 9,944 8,522 6,604 4,522 1,846 200,122 2005 143,167 18,968 75,145 69,862 49,576 33,366 23,733 17,234 13,302 9,916 3,717 314,819 2006 107,666 - 22,971 53,192 40,560 29,749 22,494 18,190 12,560 8,735 3,319 211,770 2007 258,364 - - 42,263 115,011 94,805 83,059 67,088 47,136 29,450 11,151 489,963 2008 275,114 - - - 61,277 107,974 100,337 89,344 71,806 42,957 13,193 486,888 2009 281,313 - - - - 57,338 177,407 187,119 177,273 146,846 57,288 803,271 2010 357,767 - - - - - 86,562 218,053 234,893 203,731 86,162 829,401 2011 392,778 - - - - - - 77,190 240,840 235,660 104,717 658,407 2012 508,426 - - - - - - - 74,289 277,199 132,065 483,553 2013 621,545 - - - - - - - - 154,142 170,027 324,169 YTD 2014 253,011 - - - - - - - - - 32,552 32,552



Total $ 3,461,352$ 658,748$ 236,393$ 262,166$ 326,699$ 368,003$ 529,342$ 705,490$ 897,080$ 1,126,374$ 621,373$ 5,731,668

Cash Collections By Year, By Year of Purchase - Purchased Bankruptcy Portfolio (in thousands) Purchase Purchase Cash Collection Period Period Price 1996-2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD 2014 Total 2004 $ 7,468 5,297 3,956 2,777 1,455 496 164 149 108 90 46 $ 14,538 2005 29,301 3,777 15,500 11,934 6,845 3,318 1,382 466 250 169 58 43,699 2006 17,627 - 5,608 9,455 6,522 4,398 2,972 1,526 665 419 151 31,716 2007 78,526 - - 2,850 27,972 25,630



22,829 16,093 7,551 1,206 392 104,523 2008 108,584

- - - 14,024 35,894



37,974 35,690 28,956 11,650 1,163 165,351 2009 156,027

- - - - 16,635



81,780 102,780 107,888 95,725 37,531 442,339 2010 209,160

- - - - - 39,486 104,499 125,020 121,717 54,753 445,475 2011 181,784 - - - - - - 15,218 66,379 82,752 44,352 208,701 2012 252,363 - - - - - - 17,388 103,610 49,891 170,889 2013 229,189 - - - - - - - - 52,528 40,576 93,104 YTD 2014 81,587 14,412 14,412



Total $ 1,351,616$ 9,074$ 25,064$ 27,016$ 56,818$ 86,371$ 186,587$ 276,421$ 354,205$ 469,866$ 243,325$ 1,734,747

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Cash Collections By Year, By Year of Purchase - Core Portfolio

(in thousands) Purchase Purchase Cash Collection Period Period Price 1996-2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD 2014 Total 1996 $ 3,080$ 9,414$ 237$ 102$ 83$ 78$ 68$ 100$ 39$ 24$ 6$ 10,151 1997 7,685 22,803 597 437 346 215 216 187 112 84 28 25,025 1998 11,089 32,889 1,415 882 616 397 382 332 241 173 75 37,402 1999 18,898 57,198 3,032 2,243 1,533 1,328 1,139 997 709 483 140 68,802 2000 25,020 87,520 8,067 5,202 3,604 3,198 2,782 2,554 1,927 1,349 465 116,668 2001 33,481 119,238 16,048 10,011 6,164 5,299 4,422 3,791 3,104 2,339 882 171,298 2002 42,325 119,570 24,729 16,527 9,772 7,444 6,375 5,844 4,768 3,433 1,494 199,956 2003 61,447 126,654 43,728 30,695 18,818 13,135 10,422 8,945 7,477 5,331 2,246 267,451 2004 51,708 59,197 36,468 27,973 17,884 13,181 9,780 8,373 6,496 4,432 1,800 185,584 2005 113,866 15,191 59,645 57,928 42,731 30,048 22,351 16,768 13,052 9,747 3,659 271,120 2006 90,039 - 17,363 43,737 34,038 25,351 19,522 16,664 11,895 8,316 3,168 180,054 2007 179,838 - - 39,413 87,039 69,175 60,230 50,995 39,585 28,244 10,759 385,440 2008 166,530 - - - 47,253 72,080 62,363 53,654 42,850 31,307 12,030 321,537 2009 125,286 - - - - 40,703 95,627 84,339 69,385 51,121 19,757 360,932 2010 148,607 - - - - - 47,076 113,554 109,873 82,014 31,409 383,926 2011 210,994 - - - - - - 61,972 174,461 152,908 60,365 449,706 2012 256,063 - - - - - - - 56,901 173,589 82,174 312,664 2013 392,356 - - - - - - - - 101,614 129,451 231,065 YTD 2014 171,424 - - - -



- - - - - 18,140 18,140 Total $ 2,109,736$ 649,674$ 211,329$ 235,150$ 269,881$ 281,632$ 342,755$ 429,069$ 542,875$ 656,508$ 378,048$ 3,996,921

When we acquire a new pool of finance receivables, our estimates typically result in a 60-96 month projection of cash collections, depending on the type of finance receivables acquired. The following chart shows our historical cash collections (including cash sales of finance receivables) in relation to the aggregate of the total estimated collection projections made at the time of each respective pool purchase, adjusted for buybacks, for the last ten years. [[Image Removed]] 41



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Primarily as a result of the downturn in the economy, the decline in the availability of consumer credit, our efforts to help customers establish reasonable payment plans, and improvements in our collections capabilities which have allowed us to profitably collect on accounts with lower balances or lower quality, the average payment size has decreased over the past several years. However, due to improved scoring and segmentation, together with enhanced productivity, we have been able to realize increased amounts of cash collections by generating enough incremental payments to overcome the decrease in payment size. The decreasing average payment size trend moderated during 2012, and the average payment size was stable during 2013 and the first half of 2014. Portfolios by Type and Geography (Domestic Portfolio Only) The following table categorizes our life to date domestic portfolio purchases as of June 30, 2014, into the major asset types represented (amounts in thousands): Original Purchase Account Type No. of Accounts % Face Value (1) % Price (2) % Major Credit Cards 19,463 55 % $ 54,860,685 68 % $ 2,345,266 66 % Consumer Finance 6,705 18 8,666,806 11 149,744 4 Private Label Credit Cards 8,750 25 11,860,970 15 912,268 26 Auto Deficiency 672 2 4,789,915 6 142,243 4 Total 35,590 100 % $ 80,178,376 100 % $ 3,549,521 100 %



(1) "Face Value" represents the original face amount purchased from sellers and

has not been reduced by any adjustments including payments and buybacks.

(2) "Original Purchase Price" represents the cash paid to sellers to acquire

portfolios of defaulted consumer receivables and has not been reduced by any adjustments, including payments and buybacks.



The following table summarizes our life to date domestic portfolio purchases as of June 30, 2014, into the delinquency categories represented (amounts in thousands).

Original Purchase Account Type No. of Accounts % Face Value (1) % Price (2) % Fresh 3,531 10 % $ 8,265,667 10 % $ 916,529 26 % Primary 4,865 14 9,348,255 12 525,325 15 Secondary 6,582 18 9,623,594 12 413,967 12 Tertiary 4,336 12 6,332,022 8 106,421 3 Bankruptcy Trustees 5,643 16 23,234,316 29 1,419,822 40 Other 10,633 30 23,374,522 29 167,457 4 Total 35,590 100 % $ 80,178,376 100 % $ 3,549,521 100 %



(1) "Face Value" represents the original face amount purchased from sellers and

has not been reduced by any adjustments including payments and buybacks.

(2) "Original Purchase Price" represents the cash paid to sellers to acquire

portfolios of defaulted consumer receivables and has not been reduced by any adjustments, including payments and buybacks. We review the geographic distribution of accounts within a portfolio because we have found that state specific laws and rules can have an effect on the collectability of accounts located there. In addition, economic factors and bankruptcy trends vary regionally and are factored into our maximum purchase price equation. 42



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The following table summarizes our life to date domestic portfolio purchases as of June 30, 2014, by geographic location (amounts in thousands):

Original Purchase



Geographic Distribution No. of Accounts % Face Value (1)

% Price (2) % California 3,834 11 % $ 10,577,857 13 % $ 444,497 13 % Texas 4,917 14 8,636,354 11 306,890 9 Florida 2,836 8 7,535,141 9 314,639 9 New York 2,017 6 4,682,272 6 183,926 5 Ohio 1,656 5 3,011,723 4 146,789 4 Pennsylvania 1,278 4 2,914,763 4 127,309 4 Illinois 1,348 4 2,873,523 4 139,617 4 North Carolina 1,282 4 2,818,113 4 123,650 3 Georgia 1,170 3 2,654,644 3 139,207 4 Other(3) 15,252 41 34,473,986 42 1,622,997 45 Total 35,590 100 % $ 80,178,376 100 % $ 3,549,521 100 %



(1) "Face Value" represents the original face amount purchased from sellers and

has not been reduced by any adjustments, including payments and buybacks.

(2) "Original Purchase Price" represents the cash paid to sellers to acquire

portfolios of defaulted consumer receivables and has not been reduced by any adjustments, including payments and buybacks.



(3) Each state included in "Other" represents less than 3% of the face value of

total defaulted consumer receivables.

Collections Productivity (Domestic Portfolio Only) The following tables display various collections productivity measures that we track. The tables below contain our collector productivity metrics as defined by calendar quarter. Cash Collections per Collector Hour Paid (Domestic Portfolio Only) Core cash collections (1) 2014 2013 (5) 2012 2011 2010 Q1 $ 223$ 193$ 166$ 162$ 135 Q2 220 190 169 154 127 Q3 - 191 171 152 127 Q4 - 190 150 137 129 Total cash collections (2) 2014 2013 (5) 2012 2011 2010 Q1 $ 337$ 304$ 258$ 241$ 182 Q2 354 315 275 243 188 Q3 - 310 279 249 200 Q4 - 308 245 228 204 Non-legal cash collections (3) 2014 2013 (5) 2012 2011 2010 Q1 $ 282$ 251$ 216$ 204$ 154 Q2 293 261 225 205 160 Q3 - 259 230 212 170 Q4 - 256 200 194 174 43



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Non-legal/non-bankruptcy cash collections (4) 2014 2013 (5) 2012 2011 2010 Q1 $ 167$ 140$ 125$ 125$ 106 Q2 158 137 120 116 100 Q3 - 140 122 115 97 Q4 - 138 105 103 98



(1) Represents total cash collections less purchased bankruptcy cash

collections from trustee-administered accounts. This metric includes cash

collections from purchased bankruptcy accounts administered by the Core

call center collection floor as well as cash collections generated by our

internal staff of legal collectors. This calculation does not include hours

paid to our internal staff of legal collectors or to employees processing

the bankruptcy-required notifications to trustees. (2) Represents total cash collections (assigned and unassigned) divided by



total hours paid (including holiday, vacation and sick time) to collectors

(including those in training).

(3) Represents total cash collections less external legal cash collections.

This metric includes internal legal collections and all bankruptcy collections and excludes any hours associated with either of those functions.



(4) Represents total cash collections less external legal cash collections and

less purchased bankruptcy cash collections from trustee-administered

accounts. This metric does not include any labor hours associated with the

bankruptcy or legal (internal or external) functions but does include

internally-driven cash collections from the internal legal channel.

(5) Due to a change in our calculation methodology, figures for the first and

second quarter of 2013 have been revised to conform to current period presentation. Consolidated Finance Receivables Portfolio Performance: The following chart illustrates the excess of our cash collections on our owned portfolios over income recognized on finance receivables on a quarterly basis. The difference between cash collections and income recognized on finance receivables is referred to as payments applied to principal. It is also referred to as amortization of purchase price. This amortization is the portion of cash collections that is used to recover the cost of the portfolio investment represented on the balance sheet. [[Image Removed]] (1) Includes cash collections on finance receivables only and excludes cash proceeds from sales of defaulted consumer receivables.



Seasonality

Cash collections tend to be higher in the first and second quarters of the year and lower in the third and fourth quarters of the year, due to customer payment patterns in connection with seasonal employment trends, income tax refunds and holiday spending habits. Historically, our growth has partially offset the impact of this seasonality. 44



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The following table displays our quarterly cash collections by source, for the periods indicated. Cash Collection Source ($ in thousands) Q2-2014 Q1-2014 Q4-2013 Q3-2013 Q2-2013 Q1-2013 Q4-2012 Q3-2012 Call Center and Other Collections $ 95,072$ 97,736$ 84,375$ 89,512$ 90,229$ 89,037$ 72,624$ 72,394 External Legal Collections 55,011 50,990 46,066 48,274



50,131 47,910 41,521 39,913 Internal Legal Collections

45,090 43,939 34,101 33,288



30,365 29,283 23,968 25,650 Bankruptcy Court Trustee Payments 124,101 120,702 114,384 120,577

125,672 109,233 91,098 91,095 Total Cash Collections $ 319,274$ 313,367$ 278,926$ 291,651$ 296,397$ 275,463$ 229,211$ 229,052 Rollforward of Net Finance Receivables The following table shows the changes in finance receivables, net, including the amounts paid to acquire new portfolios (amounts in thousands). Three Months Ended June 30, Six Months Ended June 30, 2014 2013 2014 2013 Balance at beginning of year $ 1,253,961$ 1,169,747$ 1,239,191$ 1,078,951 Acquisitions of finance receivables (1) 102,081 194,958 252,168 407,347 Foreign currency translation adjustment 309 (19 ) 389 (941 ) Cash collections applied to principal on finance receivables (2) (136,756 ) (127,827 ) (272,153 ) (248,498 ) Balance at end of period $ 1,219,595$ 1,236,859$ 1,219,595$ 1,236,859 Estimated Remaining Collections $ 2,701,939$ 2,636,229 $



2,701,939 $ 2,636,229

Liquidity and Capital Resources Historically, our primary sources of cash have been cash flows from operations, bank borrowings, and convertible debt and equity offerings. Cash has been used for acquisitions of finance receivables, corporate acquisitions, repurchase of our common stock, repayments of bank borrowings, operating expenses, purchases of property and equipment, and working capital to support our growth. As of June 30, 2014, cash and cash equivalents totaled $270.5 million, compared to $162.0 million at December 31, 2013. We had no debt outstanding on the revolving portion of our credit facility which represents availability of $650.0 million (subject to the borrowing base and applicable debt covenants). In addition, at June 30, 2014 we had $190.0 million outstanding on the floating rate term loan portion of our credit facility. We have in place forward flow commitments for the purchase of defaulted consumer receivables over the next twelve months of approximately $159.6 million as of June 30, 2014. Additionally we may enter into new or renewed flow commitments in the next twelve months and close on spot transactions in addition to the aforementioned flow agreements. We believe that funds generated from operations and from cash collections on finance receivables, together with existing cash and available borrowings under our credit facility will be sufficient to finance our operations, planned capital expenditures, the aforementioned forward flow commitments, and additional, normal-course portfolio purchasing during the next twelve months. Business acquisitions or higher than normal levels of portfolio purchasing could require additional financing from other sources. On July 16, 2014, we completed the purchase of the outstanding equity of Aktiv, for a purchase price of approximately $872.6 million, and assumed approximately $431.3 million of Aktiv's corporate debt, resulting in an acquisition of estimated total enterprise value of $1.3 billion. We financed the transaction with cash of $217.7 million, $169.9 million in financing from an affiliate of the seller, and $485.0 million from our domestic, revolving credit facility. For domestic income tax purposes, we recognize revenue using the cost recovery method with respect to our debt purchasing business. The IRS has audited and issued a Notice of Deficiency for the tax years ended December 31, 2007, 2006 and 2005. It has asserted that tax revenue recognition using the cost recovery method does not clearly reflect taxable income. We have filed a petition in the United States Tax Court and believe we have sufficient support for the technical merits of our positions. If we are unsuccessful in the United States Tax Court, we can appeal to the federal Circuit Court of Appeals. On July 7, 2014, the IRS issued a Notice of Deficiency for the tax years ended December 31, 2012, 2011, 2010, 2009 and 2008 related to cost recovery. If judicial 45



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appeals prove unsuccessful, we may ultimately be required to pay the related deferred taxes, and possibly interest and penalties, which may require additional financing from other sources. In accordance with the Internal Revenue Code, underpayments of federal tax accrue interest, compounded daily, at the applicable federal short term rate plus three percentage points. An additional two percentage points applies to large corporate underpayments of $100,000 or more to periods after the applicable date as defined in the Internal Revenue Code. Deferred tax liabilities related to this item were $228.8 million at June 30, 2014. Cash generated from operations is dependent upon our ability to collect on our finance receivables. Many factors, including the economy and our ability to hire and retain qualified collectors and managers, are essential to our ability to generate cash flows. Fluctuations in these factors that cause a negative impact on our business could have a material impact on our future cash flows. Our operating activities provided cash of $102.4 million and $97.3 million for the six months ended June 30, 2014 and 2013, respectively. In these periods, cash from operations was generated primarily from net income earned through cash collections and fee income received for the period. The increase was due in part to a decrease in income tax payments, partially offset by a decrease in cash compensation payments. Our investing activities provided cash of $6.8 million and used cash of $165.5 million during the six months ended June 30, 2014 and 2013, respectively. Cash provided by investing activities is primarily driven by cash collections applied to principal on finance receivables. Cash used in investing activities is primarily driven by acquisitions of defaulted consumer receivables and purchases of property and equipment. The majority of the decrease in cash used in investing activities was due to a decrease in acquisitions of finance receivables, from $407.3 million for the six months ended June 30, 2013 to $252.2 million for the six months ended June 30, 2014, partially offset by an increase in collections applied to principal on finance receivables from $248.5 million for the six months ended June 30, 2013 to $272.2 million for the six months ended June 30, 2014. Our financing activities used cash of $0.8 million and provided cash of $79.2 million during the six months ended June 30, 2014 and 2013, respectively. Cash is normally provided by draws on our line of credit. Cash used in financing activities is primarily driven by principal payments on our line of credit, principal payments on long-term debt and repurchases of our common stock. The decrease in cash provided by financing activities was due primarily due to changes in the net borrowings on our credit facility. We had no borrowings on our credit facility during the six months ended June 30, 2014, compared to net borrowings of $89.0 million during the six months ended June 30, 2013. Cash paid for interest was $7.6 million and $5.6 million for the six months ended June 30, 2014 and 2013, respectively. Interest was paid on our revolving credit facility, long-term debt and convertible debt. Cash paid for income taxes was $25.4 million and $52.8 million for the six months ended June 30, 2014 and 2013, respectively. Borrowings On December 19, 2012, we entered into the Credit Agreement. The Credit Agreement contained an accordion loan feature that allowed us to request an increase of up to $214.5 million in the amount available for borrowing under the revolving credit facility, whether from existing or new lenders, subject to terms of the Credit Agreement. The Credit Agreement was amended and modified during 2013 and again on April 1, 2014. On April 1, 2014, we entered into the Commitment Increase Agreements to exercise the accordion feature. The Commitment Increase Agreements expanded the maximum amount of revolving credit availability under the Credit Agreement by $214.5 million, elevated the revolving credit commitments of certain lenders and added three new lenders to the Credit Agreement. Given effect to the $214.5 million increase in the amount of revolving credit availability pursuant to the Commitment Increase Agreements, the total credit facility under the Credit Agreement now includes an aggregate principal amount of $840.0 million (subject to compliance with a borrowing base and applicable debt covenants), which consists of (i) a $190.0 million term loan, (ii) a $630 million domestic revolving credit facility, and (iii) a $20 million multi-currency revolving credit facility. The facilities all mature on December 19, 2017. Our revolving credit facility includes a $20.0 million swingline loan sublimit and a $20.0 million letter of credit sublimit. The Credit Agreement is secured by a first priority lien on substantially all of our assets. Borrowings outstanding on our credit facility at June 30, 2014 consisted of $190.0 million outstanding on the term loan with an annual interest rate as of June 30, 2014 of 2.65%. The revolving credit facility also bears an unused line fee of 0.375% per annum, payable quarterly in arrears. On August 13, 2013, we completed the private offering of $287.5 million in aggregate principal amount of the Notes. The Notes were issued pursuant to the Indenture. The Indenture contains customary terms and covenants, including certain events of default after which the Notes may be due and payable immediately. The Notes are senior unsecured obligations of the Company. Interest on the Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year, beginning as of February 1, 2014. 46



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We were in compliance with all covenants of our credit facilities and the Indenture as of June 30, 2014 and December 31, 2013.

Undistributed Earnings of Foreign Subsidiaries We intend to use remaining accumulated and future undistributed earnings of foreign subsidiaries to expand operations outside the United States; therefore, such undistributed earnings of foreign subsidiaries are considered to be indefinitely reinvested outside the United States. Accordingly, no provision for U.S. federal and state income tax has been provided thereon. If management intentions change and eligible undistributed earnings of foreign subsidiaries are repatriated, taxes would be accrued and paid on such earnings. Stockholders' Equity Stockholders' equity was $952.3 million at June 30, 2014 and $869.5 million at December 31, 2013. The increase was primarily attributable to $78.3 million in net income attributable to the Company during the six months ended June 30, 2014. Contractual Obligations Our contractual obligations as of June 30, 2014 were as follows (amounts in thousands): Payments due by period Less More than 1 1 - 3 3 - 5 than 5 Contractual Obligations Total year years years years Operating leases $ 31,488$ 7,137$ 12,041$ 8,407$ 3,903 Line of credit (1) 8,552 2,458 4,875 1,219 - Long-term debt (2) 548,228 26,495 75,695 149,913 296,125 Purchase commitments (3) 182,164 179,773 2,178 213 - Employment agreements 6,376 6,376 - - - Total $ 776,808$ 222,239$ 94,789$ 159,752$ 300,028



(1) This amount includes estimated unused line fees due on the line of credit

and assumes that the balance on the line of credit remains constant from

the June 30, 2014 balance of $0.0 million.

(2) This amount includes scheduled interest and principal payments on our term

loan and our convertible debt.

(3) This amount includes the maximum remaining amount to be purchased under

forward flow contracts for the purchase of charged-off consumer debt in the

amount of approximately $159.6 million.

Off-Balance Sheet Arrangements We do not have any off balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Recent Accounting Pronouncements In March 2013, the FASB issued ASU 2013-05, which defines the treatment of the release of cumulative translation adjustments upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. ASU 2013-05 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. Early adoption is permitted and prior periods should not be adjusted. We adopted ASU 2013-05 in the first quarter of 2014 which had no material impact on our consolidated financial statements. In April 2014, FASB issued ASU 2014-08, that amends the requirements for reporting discontinued operations. ASU 2014-08 requires the disposal of a component of an entity or a group of components of an entity to be reported in discontinued operations if the disposal represents a strategic shift that will have a major effect on the entity's operations and financial results. ASU 2014-08 also requires additional disclosures about discontinued operations and disclosures about the disposal of a significant component of an entity that does not qualify as a discontinued operation. ASU 2014-08 is effective prospectively for reporting periods beginning after December 15, 2014, with early adoption permitted. We are evaluating the potential impacts of the new standard. In May 2014, FASB issued ASU 2014-09, that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also amends the required disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts 47



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with customers. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, with early application not permitted. We are evaluating our implementation approach and the potential impacts of the new standard on our existing revenue recognition policies and procedures. In June 2014, FASB issued ASU 2014-12, which requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. We are evaluating the potential impacts of the new standard on our existing stock-based compensation awards. Critical Accounting Policies Our consolidated financial statements have been prepared in accordance with U.S. GAAP. Our significant accounting policies are discussed in Note 1 of the Notes to the Consolidated Financial Statements of our 2013 Annual Report on Form 10-K filed on February 28, 2014. Our significant accounting policies are fundamental to understanding our results of operations and financial condition because they require that we use estimates, assumptions and judgments that affect the reported amounts of revenues, expenses, assets, and liabilities.



Three of these policies are considered to be critical because they are important to the portrayal of our financial condition and results, and because they require management to make judgments and estimates that are difficult, subjective, and complex regarding matters that are inherently uncertain.

We base our estimates on historical experience, current trends and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. If these estimates differ significantly from actual results, the impact on our consolidated financial statements may be material.



Management has reviewed these critical accounting policies with the Company's Audit Committee.

Revenue Recognition - Finance Receivables

We account for our investment in finance receivables under the guidance of ASC 310-30. We acquire portfolios of accounts that have experienced deterioration of credit quality between origination and our acquisition of the accounts. The amount paid for a portfolio reflects our determination that it is probable we will be unable to collect all amounts due according to an account's contractual terms. At acquisition, we review the accounts to determine whether there is evidence of deterioration of credit quality since origination, and if it is probable that we will be unable to collect all amounts due according to the loan's contractual terms. If both conditions exist, we then determine whether each such account is to be accounted for individually or whether such accounts will be assembled into pools based on common risk characteristics. We consider expected prepayments and estimate the amount and timing of undiscounted expected principal, interest and other cash flows (expected at acquisition) for each acquired portfolio based on our proprietary models, and then subsequently aggregate portfolios of accounts into pools. We determine the excess of the pool's scheduled contractual principal and contractual interest payments over all cash flows expected at acquisition as an amount that should not be accreted (nonaccretable difference). The remaining amount, representing the excess of the pool's cash flows expected to be collected over the amount paid, is accreted into income recognized on finance receivables over the remaining estimated life of the pool (accretable yield). ASC 310-30 requires that the excess of the contractual cash flows over expected cash flows, based on our estimates derived from our proprietary collection models, not be recognized as an adjustment of revenue or expense or on the balance sheet. Each accounting pool is recorded at cost, which may include certain direct costs of acquisition paid to third parties, and is accounted for as a single unit for the recognition of income, payments applied to principal and loss provision. Once an accounting pool is established for a calendar 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 310-30, utilizing the interest method, initially freezes the yield, estimated when the accounts are purchased, as the basis for subsequent impairment testing. The yield is estimated and periodically recalculated based on the timing and amount of anticipated cash flows using our proprietary collection models. Income on finance receivables is accrued quarterly based on each accounting pool's effective yield. Significant increases in expected future cash flows may be recognized prospectively, through an upward adjustment of the yield, over a pool's remaining life. Any increase to the yield then becomes the new benchmark for impairment testing. Under ASC 310-30, rather than lowering the estimated yield if the collection estimates are not received or projected to be received, the carrying value of a pool would be written down to maintain the then current yield and is shown as a reduction in revenue in the consolidated income statements with a corresponding 48



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valuation allowance offsetting finance receivables, net, on the consolidated balance sheets. Cash flows greater than the interest accrual will reduce the carrying value of the accounting pool. This reduction in carrying value is defined as payments applied to principal (also referred to as principal amortization). Likewise, cash flows that are less than the interest accrual will accrete the carrying balance. Generally, we do not record accretion in the first six to twelve months of the estimated life of the pool; accordingly, we utilize either the cost recovery method or cash method when necessary to prevent accretion as permitted by ASC 310-30. Under the cash method, revenue is recognized as it would be under the interest method up to the amount of cash collections. Under the cost recovery method, no revenue is recognized until we have fully collected the cost of the pool, or until such time that we consider the collections to be probable and estimable and begin to recognize income based on the interest method as described above. We also use the cost recovery method when collections on a particular pool of accounts cannot be reasonably estimated. 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.



We establish valuation allowances, if necessary, for acquired accounts subject to ASC 310-10. Valuation allowances are established only subsequent to acquisition of the accounts.

We implement the accounting for income recognized on finance receivables under ASC 310-30 as follows. We create each accounting pool using our projections of estimated cash flows and expected economic life. We then compute the effective yield that fully amortizes the pool over a reasonable expectation of its economic life based on the current projections of estimated cash flows. As actual cash flow results are recorded, we balance those results to the data contained in our proprietary models to ensure accuracy, then review each pool watching for trends, actual performance versus projections and curve shape (a graphical depiction of the timing of cash flows), regularly re-forecasting future cash flows utilizing our statistical models. The review process is primarily performed by our finance staff; however, our operational and statistical staff is also involved, providing updated statistical input and cash projections to the finance staff. If there is a significant increase in expected cash flows, we will recognize the effect of the increase prospectively through an increase in yield. If a valuation allowance had been previously recognized for that pool, the allowance is reversed before recording any prospective yield adjustments. If the over performance is considered more of an acceleration of cash flows (a timing difference), we will: a) adjust estimated future cash flows downward which effectively extends the amortization period to fall within a reasonable expectation of the pool's economic life, b) adjust future cash flow projections as noted previously coupled with an increase in yield in order for the amortization period to fall within a reasonable expectation of the pool's economic life, or c) take no action at all if the amortization period falls within a reasonable expectation of the pool's expected economic life. To the extent there is underperformance, we will record an allowance if the underperformance is significant and will also consider revising estimated future cash flows based on current period information, or take no action if the pool's amortization period is reasonable and falls within the currently projected economic life.



Valuation of Acquired Intangibles and Goodwill

In accordance with ASC Topic 350, "Intangibles-Goodwill and Other" ("ASC 350"), we amortize intangible assets over their estimated useful lives. Goodwill, pursuant to ASC 350, is not amortized but rather is reviewed for impairment annually or earlier if indicators of potential impairment exist. The review of goodwill for potential impairment is highly subjective and requires that: (1) goodwill is allocated to various reporting units of our business to which it relates; and (2) we estimate the fair value of those reporting units to which the goodwill relates and then determine the book value of those reporting units. During the review, we also consider qualitative factors that may have an impact on the final assessment regarding potential impairment. If the estimated fair value of reporting units with allocated goodwill is determined to be less than their book value, we are required to estimate the fair value of all identifiable assets and liabilities of those reporting units in a manner similar to a purchase price allocation for an acquired business.



This may require independent valuation of certain unrecognized assets. Once this process is complete, the amount of goodwill impairment, if any, can be determined.

Income Taxes

We follow the guidance of ASC 740 as it relates to the provision for income taxes and uncertainty in income taxes. Accordingly, we record a tax provision for the anticipated tax consequences of the reported results of operations. In accordance with ASC 740, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities, and for operating losses and tax credit carry-forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled. The evaluation of a tax position in accordance with the guidance is a two-step process. The first step is recognition: the enterprise determines whether it is more-likely-than-not that a tax position will be sustained upon examination, including 49



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resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. We record interest and penalties related to unrecognized tax benefits as a component of income tax expense. In the event that all or part of the deferred tax assets are determined not to be realizable in the future, a valuation allowance would be established and charged to earnings in the period such determination is made. If we subsequently realize deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in a positive adjustment to earnings or a decrease in goodwill in the period such determination is made. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our results of operations and financial position. For domestic income tax purposes, we recognize revenue using the cost recovery method with respect to our debt purchasing business. We believe cost recovery to be an acceptable method for companies in the bad debt purchasing industry. Under the cost recovery method, collections on finance receivables are applied first to principal to reduce the finance receivables to zero before any income is recognized.


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