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10-Q

Encore Capital Group Inc (ECPG)

10-Q 2020-08-05 For: 2020-06-30
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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________________________________________________________

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020 or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________to__________.

COMMISSION FILE NUMBER: 000-26489

ENCORE CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware 48-1090909
(State or other jurisdiction of<br>incorporation or organization) (IRS Employer<br>Identification No.)

350 Camino De La Reina, Suite 100

San Diego, California 92108

(Address of principal executive offices, including zip code)

(877) 445 - 4581

(Registrant’s telephone number, including area code)

(Not Applicable)

(Former name, former address and former fiscal year, if changed since last report)

_______________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 Par Value Per Share ECPG The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class Outstanding at July 29, 2020
Common Stock, $0.01 par value 31,338,800 shares

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ENCORE CAPITAL GROUP, INC.

INDEX TO FORM 10-Q

Page
PART I – FINANCIAL INFORMATION 3
Item 1— Consolidated Financial Statements (Unaudited) 3
Consolidated Statements of Financial Condition 3
Consolidated Statements of Operations 4
Consolidated Statements of ComprehensiveIncome 5
Consolidated Statements of Equity 6
Consolidated Statements of Cash Flows 8
Notes to Consolidated Financial Statements 9
Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies 9
Note 2: Earnings Per Share 12
Note 3: Fair Value Measurements 12
Note 4: Derivatives and Hedging Instruments 15
Note 5: Investment in Receivable Portfolios, Net 17
Note 6: Deferred Court Costs, Net 19
Note 7: Other Assets 20
Note 8: Borrowings 20
Note 9: Variable Interest Entities 24
Note 10: Income Taxes 25
Note 11: Commitments and Contingencies 26
Note 12: Segment and Geographic Information 26
Note 13: Goodwill and Identifiable Intangible Assets 27
Note14: Subsequent Events 28
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations 29
Item 3 – Quantitative and Qualitative Disclosures About Market Risk 57
Item 4 – Controls and Procedures 57
PART II – OTHER INFORMATION 58
Item 1 – Legal Proceedings 58
Item 1A – Risk Factors 58
Item 6 – Exhibits 58
SIGNATURES 59

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PART I – FINANCIAL INFORMATION

Item 1— Consolidated Financial Statements (Unaudited)

ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Financial Condition

(In Thousands, Except Par Value Amounts)

(Unaudited)

June 30,<br>2020 December 31,<br>2019
Assets
Cash and cash equivalents $ 293,800 $ 192,335
Investment in receivable portfolios, net 3,201,241 3,283,984
Deferred court costs, net — 100,172
Property and equipment, net 117,873 120,051
Other assets 289,916 329,223
Goodwill 838,024 884,185
Total assets $ 4,740,854 $ 4,909,950
Liabilities and Equity
Liabilities:
Accounts payable and accrued liabilities $ 218,471 $ 223,911
Borrowings 3,353,730 3,513,197
Other liabilities 126,266 147,436
Total liabilities 3,698,467 3,884,544
Commitments and Contingencies (Note 11)
Equity:
Convertible preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding — —
Common stock, $0.01 par value, 75,000 shares authorized, 31,288 and 31,097 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively 313 311
Additional paid-in capital 227,030 222,590
Accumulated earnings 963,698 888,058
Accumulated other comprehensive loss (152,190) (88,766)
Total Encore Capital Group, Inc. stockholders’ equity 1,038,851 1,022,193
Noncontrolling interest 3,536 3,213
Total equity 1,042,387 1,025,406
Total liabilities and equity $ 4,740,854 $ 4,909,950

The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”) included in the consolidated statements of financial condition above. Most assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs. The liabilities exclude amounts where creditors or beneficial interest holders have recourse to the general credit of the Company. See “Note 9: Variable Interest Entities” for additional information on the Company’s VIEs.

June 30,<br>2020 December 31,<br>2019
Assets
Cash and cash equivalents $ 15 $ 34
Investment in receivable portfolios, net 516,019 539,596
Other assets 4,836 4,759
Liabilities
Other liabilities $ 3 $ —
Borrowings 433,976 464,092

See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

(Unaudited)

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
Revenues
Revenue from receivable portfolios $ 335,287 $ 312,495 $ 692,652 $ 623,653
Changes in expected current and future recoveries 66,007 — (32,654) —
Servicing revenue 23,950 32,316 52,630 66,339
Other revenues 789 — 2,486 529
Total revenues 426,033 344,811 715,114 690,521
Allowance reversals on receivable portfolios, net 2,063 3,430
Total revenues, adjusted by net allowances 346,874 693,951
Operating expenses
Salaries and employee benefits 90,867 96,227 183,965 188,061
Cost of legal collections 37,356 51,448 103,635 100,475
Other operating expenses 28,275 29,546 55,439 59,160
Collection agency commissions 10,683 13,560 23,859 29,562
General and administrative expenses 28,618 32,620 60,495 72,167
Depreciation and amortization 10,542 9,741 20,827 19,736
Total operating expenses 206,341 233,142 448,220 469,161
Income from operations 219,692 113,732 266,894 224,790
Other expense
Interest expense (50,327) (63,913) (104,989) (118,880)
Other expense (3,011) (1,244) (1,572) (4,220)
Total other expense (53,338) (65,157) (106,561) (123,100)
Income before income taxes 166,354 48,575 160,333 101,690
Provision for income taxes (35,570) (11,753) (40,128) (15,426)
Net income 130,784 36,822 120,205 86,264
Net income attributable to noncontrolling interest (452) (161) (327) (349)
Net income attributable to Encore Capital Group, Inc. stockholders $ 130,332 $ 36,661 $ 119,878 $ 85,915
Earnings per share attributable to Encore Capital Group, Inc.:
Basic $ 4.15 $ 1.17 $ 3.82 $ 2.75
Diluted $ 4.13 $ 1.17 $ 3.79 $ 2.74
Weighted average shares outstanding:
Basic 31,413 31,225 31,361 31,193
Diluted 31,560 31,426 31,628 31,372

See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Comprehensive Income

(Unaudited, In Thousands)

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
Net income $ 130,784 $ 36,822 $ 120,205 $ 86,264
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on derivative instruments:
Unrealized gain (loss) on derivative instruments 948 (3,560) (4,103) (5,762)
Income tax effect (384) 849 1,113 1,021
Unrealized gain (loss) on derivative instruments, net of tax 564 (2,711) (2,990) (4,741)
Change in foreign currency translation:
Unrealized loss on foreign currency translation (2,032) (8,845) (63,070) (1,265)
Removal of other comprehensive loss in connection with divestiture 2,632 — 2,632 —
Unrealized gain (loss) on foreign currency translation, net of divestiture 600 (8,845) (60,438) (1,265)
Other comprehensive income (loss), net of tax: 1,164 (11,556) (63,428) (6,006)
Comprehensive income 131,948 25,266 56,777 80,258
Comprehensive loss (income) attributable to noncontrolling interest:
Net income attributable to noncontrolling interest (452) (161) (327) (349)
Unrealized loss (gain) on foreign currency translation 1 (7) 4 (434)
Comprehensive income attributable to noncontrolling interest: (451) (168) (323) (783)
Comprehensive income attributable to Encore Capital Group, Inc. stockholders $ 131,497 $ 25,098 $ 56,454 $ 79,475

See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Equity

(Unaudited, In Thousands)

Three Months Ended June 30, 2020
Common Stock Additional Paid-In Capital Accumulated Earnings Accumulated Other Comprehensive (Loss) Income Noncontrolling Interest Total Equity
Shares Par
Balance as of March 31, 2020 31,234 $ 312 $ 222,403 $ 833,366 $ (153,355) $ 3,085 $ 905,811
Net income — — — 130,332 — 452 130,784
Other comprehensive income, net of tax — — — — (1,467) (1) (1,468)
Issuance of share-based awards, net of shares withheld for employee taxes 54 1 (151) — — — (150)
Stock-based compensation — — 4,778 — — — 4,778
Other — — — — 2,632 — 2,632
Balance as of June 30, 2020 31,288 $ 313 $ 227,030 $ 963,698 $ (152,190) $ 3,536 $ 1,042,387
Three Months Ended June 30, 2019
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Common Stock Additional Paid-In Capital Accumulated Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Equity
Shares Par
Balance as of March 31, 2019 30,967 $ 310 $ 208,374 $ 769,443 $ (105,864) $ 2,294 $ 874,557
Net income — — — 36,661 — 161 36,822
Other comprehensive income, net of tax — — — — (11,563) 7 (11,556)
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes 13 — 521 — — — 521
Stock-based compensation — — 3,581 — — — 3,581
Other — — (968) — — — (968)
Balance as of June 30, 2019 30,980 $ 310 $ 211,508 $ 806,104 $ (117,427) $ 2,462 $ 902,957
Six Months Ended June 30, 2020
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Common Stock Additional Paid-In Capital Accumulated Earnings Accumulated Other Comprehensive (Loss) Income Noncontrolling Interest Total Equity
Shares Par
Balance as of December 31, 2019 31,097 $ 311 $ 222,590 $ 888,058 $ (88,766) $ 3,213 $ 1,025,406
Cumulative adjustment — — — (44,238) — — (44,238)
Net income — — — 119,878 — 327 120,205
Other comprehensive income, net of tax — — — — (66,056) (4) (66,060)
Issuance of share-based awards, net of shares withheld for employee taxes 191 2 (4,865) — — — (4,863)
Stock-based compensation — — 9,305 — — — 9,305
Other — — — — 2,632 — 2,632
Balance as of June 30, 2020 31,288 $ 313 $ 227,030 $ 963,698 $ (152,190) $ 3,536 $ 1,042,387

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Six Months Ended June 30, 2019
Common Stock Additional Paid-In Capital Accumulated Earnings Accumulated Other Comprehensive Loss Noncontrolling Interest Total Equity
Shares Par
Balance as of December 31, 2018 30,884 $ 309 $ 208,498 $ 720,189 $ (110,987) $ 1,679 $ 819,688
Net income — — — 85,915 — 349 86,264
Other comprehensive income, net of tax — — — — (6,440) 434 (6,006)
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes 96 1 (1,429) — — — (1,428)
Stock-based compensation — — 5,407 — — — 5,407
Other — — (968) — — — (968)
Balance as of June 30, 2019 30,980 $ 310 $ 211,508 $ 806,104 $ (117,427) $ 2,462 $ 902,957

See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Cash Flows

(Unaudited, In Thousands)

Six Months Ended June 30,
2020 2019
Operating activities:
Net income $ 120,205 $ 86,264
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 20,827 19,736
Other non-cash interest expense, net 12,127 16,233
Stock-based compensation expense 9,305 5,407
Deferred income taxes (17,101) 23,977
Changes in expected current and future recoveries 32,654 —
Allowance reversals on receivable portfolios, net — (3,430)
Other, net 4,923 17,323
Changes in operating assets and liabilities
Deferred court costs and other assets 11,917 23,739
Prepaid income tax and income taxes payable 41,748 (36,569)
Accounts payable, accrued liabilities and other liabilities (26,890) (43,860)
Net cash provided by operating activities 209,715 108,820
Investing activities:
Purchases of receivable portfolios, net of put-backs (350,658) (499,937)
Collections applied to investment in receivable portfolios, net 342,842 405,081
Purchases of property and equipment (13,028) (17,480)
Other, net 9,831 (3,352)
Net cash used in investing activities (11,013) (115,688)
Financing activities:
Proceeds from credit facilities 279,070 322,857
Repayment of credit facilities (315,622) (276,188)
Proceeds from senior secured notes — 460,512
Repayment of senior secured notes (32,500) (460,455)
Repayment of other debt (14,882) (17,410)
Other, net (3,634) (1,738)
Net cash (used in) provided by financing activities (87,568) 27,578
Net increase in cash and cash equivalents 111,134 20,710
Effect of exchange rate changes on cash and cash equivalents (9,669) (9,563)
Cash and cash equivalents, beginning of period 192,335 157,418
Cash and cash equivalents, end of period $ 293,800 $ 168,565
Supplemental disclosure of cash information:
Cash paid for interest $ 88,363 $ 92,053
Cash paid for taxes, net of refunds 16,292 24,112

See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies

Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. The Company also provides debt servicing and other portfolio management services to credit originators for non-performing loans.

Through Midland Credit Management, Inc. and its domestic affiliates (collectively, “MCM”), the Company is a market leader in portfolio purchasing and recovery in the United States. Through Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates (collectively, “Cabot”), the Company is one of the largest credit management services providers in Europe and a market leader in the United Kingdom and Ireland. These are the Company’s primary operations.

The Company also has investments and operations in Latin America and Asia-Pacific, which the Company refers to as “LAAP.” In August 2019, the Company completed the sale of Baycorp, which represented the Company’s investments and operations in Australia and New Zealand.

COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The COVID-19 outbreak and resulting containment measures implemented by governments around the world, as well as increased business uncertainty, have impacted the Company. The circumstances around the COVID-19 pandemic are rapidly evolving and will continue to impact the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to closely monitor the COVID-19 situation and update its assumptions accordingly.

Financial Statement Preparation and Presentation

The accompanying interim consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).

In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. The inputs into the judgments and estimates consider the economic implications of the COVID-19 pandemic on the Company’s critical and significant accounting estimates. Actual results could materially differ from those estimates.

Basis of Consolidation

The consolidated financial statements have been prepared in conformity with GAAP and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company also consolidates variable interest entities for which it is the primary beneficiary. The primary beneficiary has both (1) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (2) either the obligation to absorb losses or the right to receive benefits. Refer to “Note 9: Variable Interest Entities”, for further details. All intercompany transactions and balances have been eliminated in consolidation.

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Translation of Foreign Currencies

The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The resulting translation adjustments are recorded as a component of other comprehensive income or loss. Equity accounts are translated at historical rates, except for the change in retained earnings during the year which is the result of the income statement translation process. Intercompany transaction gains or losses at each period end arising from subsequent measurement of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation adjustments and recorded within other comprehensive income or loss. Translation gains or losses are the material components of accumulated other comprehensive income or loss and are reclassified to earnings upon the substantial sale or liquidation of investments in foreign operations.

Reclassifications

Certain immaterial reclassifications have been made to the consolidated financial statements to conform to the current year’s presentation.

Recently Adopted Accounting Pronouncement

On January 1, 2020, the Company adopted the new accounting standard for Financial Instruments - Credit Losses (“CECL”). CECL introduces a new impairment approach for credit loss recognition based on current expected lifetime losses rather than incurred losses. CECL applies to all financial assets carried at amortized costs, including the Company’s investment in receivable portfolios, which are defined as purchased credit deteriorated (“PCD”) financial assets under CECL. The adoption of CECL represents a significant change from the previous U.S. GAAP guidance relating to purchased credit impaired assets and resulted in changes to the Company’s accounting for its investment in receivable portfolios and the related income from the receivable portfolios.

As part of the adoption of CECL, the Company changed its accounting methodology for its court costs spent in its legal collection channel effective January 1, 2020. Previously, the Company capitalized its upfront court costs spent in its consolidated financial statements (“Deferred Court Costs”) and provided a reserve for those costs that it believed would ultimately be uncollectible. Effective January 1, 2020, the Company expenses all of its court costs as incurred. All expected cash flows, including all the expected collections from the legal channel, are included in the measurement of the negative allowance, or investment in receivable portfolios, at a discounted value. Upon transition, an adjustment was made to retained earnings to reflect the net change from an undiscounted to discounted value prior to writing-off uncollectible receivables and establishing a balance for discounted value of future recoveries of amounts expected to be collected.

The Company has not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The following table summarizes the cumulative effects of adopting the CECL guidance on the Company’s consolidated statements of financial condition at January 1, 2020 (in thousands):

Balance as of December 31, 2019 Adjustment Opening Balance as of January 1, 2020
Assets
Investment in receivable portfolios, net $ 3,283,984 $ 44,166 $ 3,328,150
Deferred court costs, net 100,172 (100,172) —
Liabilities
Other liabilities (for deferred tax liabilities) 147,436 (11,768) 135,668
Equity
Accumulated earnings 888,058 (44,238) 843,820

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Recent Accounting Pronouncements Not Yet Effective

In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848). The ASU provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The ASU is effective as of March 12, 2020 through December 31, 2022. We will evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional guidance on an ongoing basis. The ASU is currently not expected to have a material impact on our consolidated financial statements.

With the exception of the updated standard discussed above, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2020, as compared to the recent accounting pronouncements described in our Annual Report, that have significance, or potential significance, to the Company’s consolidated financial statements.

Accounting Policy Update

As a result of the adoption of CECL, the Company revised its following accounting policies effective January 1, 2020:

Investment in Receivable Portfolios

The Company purchases portfolios of loans that have experienced significant deterioration of credit quality since origination from banks and other financial institutions. These financial assets are defined as PCD assets under CECL. Under the PCD accounting model, the purchased assets are grossed-up to their face value with an offsetting allowance and noncredit discount allocated to the individual receivables as the unit of account is at the individual loan level. Since each loan is deeply delinquent and deemed uncollectible at the individual loan level, the Company applies its charge-off policy and fully writes-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables immediately after purchasing the portfolio. The Company then records a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which ultimately equals the amount paid for a portfolio purchase and presented as “Investment in receivable portfolios, net” in the Company’s consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) based on the purchase price of the portfolio and the expected future cash flows at the time of purchase. The amount of the negative allowance (i.e., investment in receivable portfolios) will not exceed the total amortized cost basis of the loans written-off.

Receivable portfolio purchases are aggregated into pools based on similar risk characteristics. Examples of risk characteristics include financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by geographic location. Once a pool is established, the portfolios will remain in the designated pool unless the underlying risk characteristics change. The purchase EIR of a pool will not change over the life of the pool even if expected future cash flows change.

Revenue is recognized for each static pool over the economic life of the pool. The Company makes significant assumptions in determining the economic life of a pool, including the reasonable and supportable economic forecast period based on asset type and geography, which considers the availability of forward-looking scenarios and their respective time horizons. In general, the Company forecasts recoveries over one or two years prior to reverting to historical averages at an estimate-level over the remaining life using various methodologies depending on the asset type and geography. The speed at which forecasts revert varies based on the spread between the forecast period and historical data. In addition, estimated recoveries include a qualitative component. The Company continues to evaluate the reasonable economic life of a pool and reversion method each reporting period. Revenue primarily includes two components: (1) accretion of the discount on the negative allowance due to the passage of time, and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries.

The Company measures expected future recoveries based on historical experience, current conditions, and reasonable and supportable forecasts. Factors that may change the expected future recoveries may include both internal as well as external factors. Internal factors include operational performance, such as capacity and the productivity of our collection staff. External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing laws or regulations, and macroeconomic conditions.

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The Company elected not to maintain its previously formed pool groups with amortized costs at transition. Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to the transition. The Company did not establish a negative allowance from ZBA pools as the Company elected the Transition Resource Group for Credit Losses’ practical expedient to retain the integrity of its legacy pools. All subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in the Company’s consolidated statements of operations. See “Note 5: Investment in Receivable Portfolios, Net” for further discussion of investment in receivable portfolios.

Deferred Court Costs

The Company pursues legal collections using a network of attorneys that specialize in collection matters and through its internal legal channel. The Company generally pursues collections through legal means only when it believes a consumer has sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In order to pursue legal collections, the Company is required to pay certain upfront costs to the applicable courts that are recoverable from the consumer. Effective January 1, 2020, the Company expenses all of its court costs as incurred and no longer capitalizes such costs as Deferred Court Costs. All expected cash flows, including all the expected collections from the legal channel, are included in the measurement of the negative allowance, or investment in receivable portfolios, at a discounted value.

Note 2: Earnings Per Share

Basic earnings per share is calculated by dividing net earnings attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, non-vested share awards, and the dilutive effect of the convertible and exchangeable senior notes, if applicable.

A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands, except per share amounts):

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
Net income attributable to Encore Capital Group, Inc. stockholders $ 130,332 $ 36,661 $ 119,878 $ 85,915
Total weighted-average basic shares outstanding 31,413 31,225 31,361 31,193
Dilutive effect of stock-based awards 147 201 267 179
Total weighted-average dilutive shares outstanding 31,560 31,426 31,628 31,372
Basic earnings per share $ 4.15 $ 1.17 $ 3.82 $ 2.75
Diluted earnings per share $ 4.13 $ 1.17 $ 3.79 $ 2.74

Anti-dilutive employee stock options outstanding were approximately 164,000 and 89,000 during the three and six months ended June 30, 2020, respectively. Anti-dilutive employee stock options outstanding were approximately 13,000 and 115,000 during each of the three and six months ended June 30, 2019, respectively.

Note 3: Fair Value Measurements

Fair value is defined as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The Company uses a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:

•Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.

•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

•Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.

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Financial Instruments Required To Be Carried At Fair Value

Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

Fair Value Measurements as of June 30, 2020
Level 1 Level 2 Level 3 Total
Assets
Foreign currency exchange contracts $ — $ 476 $ — $ 476
Interest rate cap contracts — 1,416 — 1,416
Liabilities
Interest rate swap agreements — (13,280) — (13,280)
Contingent consideration — — (27) (27)
Fair Value Measurements as of December 31, 2019
--- --- --- --- --- --- --- --- ---
Level 1 Level 2 Level 3 Total
Assets
Foreign currency exchange contracts $ — $ 1,473 $ — $ 1,473
Interest rate cap contracts — 2,460 — 2,460
Liabilities
Interest rate swap agreements — (9,116) — (9,116)
Contingent consideration — — (66) (66)

Derivative Contracts:

The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.

Contingent Consideration:

The Company carries certain contingent liabilities resulting from its mergers and acquisition activities. Certain sellers of the Company’s acquired entities could earn additional earn-out payments in cash based on the entities’ subsequent operating performance. The Company recorded the acquisition date fair values of these contingent liabilities, based on the likelihood of contingent earn-out payments, as part of the consideration transferred. The earn-out payments are subsequently remeasured to fair value at each reporting date based on actual and forecasted operating performance.

The following table provides a roll-forward of the fair value of contingent consideration for the six months ended June 30, 2020 and year ended December 31, 2019 (in thousands):

Amount
Balance as of December 31, 2018 $ 6,198
Change in fair value of contingent consideration (2,300)
Payment of contingent consideration (3,686)
Effect of foreign currency translation (146)
Balance as of December 31, 2019 66
Payment of contingent consideration (35)
Effect of foreign currency translation (4)
Balance as of June 30, 2020 $ 27

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Non-Recurring Fair Value Measurement:

Certain assets are measured at fair value on a nonrecurring basis. These assets include real estate-owned assets classified as held for sale at the lower of their carrying value or fair value less cost to sell. The fair value of the assets held for sale and estimated selling expenses were determined at the time of initial recognition using Level 3 measurements. The fair value estimate of the assets held for sale was approximately $40.7 million and $46.7 million as of June 30, 2020 and December 31, 2019, respectively.

Financial Instruments Not Required To Be Carried At Fair Value

The table below summarizes fair value estimates for the Company's financial instruments that are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.

The carrying amounts in the following table are included in the consolidated statements of financial condition as of June 30, 2020 and December 31, 2019 (in thousands):

June 30, 2020 December 31, 2019
Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value
Financial Assets
Investment in receivable portfolios, net $ 3,201,241 $ 3,682,533 $ 3,283,984 $ 3,464,050
Deferred court costs — — 100,172 100,172
Financial Liabilities
Encore convertible notes and exchangeable notes^(1)^ 648,686 663,418 642,547 693,708
Cabot senior secured notes^(2)^ 1,083,932 1,076,682 1,127,435 1,170,945

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(1)Carrying amount represents the portion of the convertible and exchangeable notes classified as debt, while estimated fair value pertains to the face amount of the notes.

(2)Carrying amount represents historical cost, adjusted for any related debt discount or debt premium.

Investment in Receivable Portfolios:

The fair value of investment in receivable portfolios is measured using Level 3 inputs by discounting the estimated future cash flows generated by its proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.

Deferred Court Costs:

Effective January 1, 2020, the Company no longer carries Deferred Court Costs as a result of its change in accounting policy. The fair value estimate for Deferred Court Costs as of December 31, 2019 involved Level 3 inputs as there was little observable market data available and management was required to use significant judgment in its estimates.

Borrowings:

The carrying value of the Company’s revolving credit and term loan facilities approximates fair value due to the short-term nature of the interest rate periods. The fair value of the Company’s senior secured notes was estimated using widely accepted valuation techniques, including discounted cash flow analyses using available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. Accordingly, the Company used Level 2 inputs for these debt instrument fair value estimates. The Company’s borrowings also include finance lease liabilities for which the carrying value approximates fair value.

Encore’s convertible notes and exchangeable notes and Cabot’s senior secured notes are carried at historical cost, adjusted for the debt discount. The fair value estimate for these convertible and exchangeable notes incorporates quoted market prices using Level 2 inputs.

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Note 4: Derivatives and Hedging Instruments

The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging.

The following table summarizes the fair value of derivative instruments as included in the Company’s consolidated statements of financial condition (in thousands):

June 30, 2020 December 31, 2019
Balance Sheet Location Fair Value Balance Sheet Location Fair Value
Derivatives designated as hedging instruments:
Interest rate cap contracts Other assets $ 1,416 Other assets $ 2,460
Foreign currency exchange contracts Other assets — Other assets 443
Interest rate swap agreements Other liabilities (13,280) Other liabilities (9,116)
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts Other assets 476 Other assets 1,030

Derivatives Designated as Hedging Instruments

The Company has operations in foreign countries which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company may enter into derivative financial instruments, principally foreign currency forward contracts with financial counterparties. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis.

Certain of the Company’s foreign currency forward contracts were designated as cash flow hedging instruments and qualified for hedge accounting treatment. Gains and losses arising from such contracts were recorded as a component of accumulated other comprehensive income (“OCI”) as gains and losses on derivative instruments, net of income taxes. The hedging gains and losses in OCI were subsequently reclassified into earnings in the same period in which the underlying transactions affected the Company’s earnings. If all or a portion of the forecasted transaction was cancelled, the accumulated gains or losses in OCI would be reclassified into earnings.

As of June 30, 2020, the Company had no outstanding forward contracts that were designated as cash flow hedging instruments. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the six months ended June 30, 2020 and 2019.

The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. Under the swap agreements, the Company receives floating interest rate payments and makes interest payments based on fixed interest rates. The Company designates its interest rate swap instruments as cash flow hedges. As of June 30, 2020, there were four interest rate swap agreements outstanding with a total notional amount of $324.0 million.

Previously, the Company held two interest rate cap contracts (the “2018 Caps”) that hedged the risk of GBP-LIBOR interest rate fluctuations for the Cabot Securitisation Senior Facility interest payments. In February 2020, the Company settled the 2018 Caps and ceased the hedge relationship, which resulted in the reclassification of the associated other comprehensive loss balance to interest expense for approximately $2.5 million during the first quarter of 2020.

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As of June 30, 2020, the Company held two interest rate cap contracts with a notional amount of approximately $883.3 million that are used to manage its risk related to interest rate fluctuations on the Company’s variable interest rate bearing debt. The interest rate cap hedging the fluctuations in three-month EURIBOR for the Cabot 2024 Floating Rate Notes (“2019 Cap”) has a notional amount of €400.0 million (approximately $449.3 million) and matures in 2024. The interest rate cap hedging the fluctuations in sterling overnight index average (“SONIA”) for the Cabot Securitisation UK Ltd senior facility agreement (“2020 Cap”) has a notional amount of £350.0 million (approximately $434.0 million) and matures in 2023. The 2019 Cap is structured as a series of European call options (“Caplets”) such that if exercised, the Company will receive a payment equal to 3-months EURIBOR on a notional amount equal to the hedged notional amount net of a fixed strike price. The 2020 Cap is also structured as a series of Caplets such that if exercised, the Company will receive a payment equal to SONIA on a notional amount equal to the hedged notional amount net of a fixed strike price. Each interest rate reset date, the Company will elect to exercise the Caplet or let it expire. The potential cash flows from each Caplet are expected to offset any variability in the cash flows of the interest payments to the extent SONIA or EURIBOR exceeds the strike price of the Caplets. The Company expects the hedge relationships to be highly effective and designates the 2019 Cap and 2020 Cap as cash flow hedge instruments.

The following tables summarize the effects of derivatives in cash flow hedging relationships designated as hedging instruments in the Company’s consolidated financial statements (in thousands):

Derivatives Designated as Hedging Instruments Gain (Loss) Recognized in OCI Location of Gain (Loss) Reclassified from OCI into Income (Loss) Gain (Loss) Reclassified from OCI into Income (Loss)
Three Months Ended June 30, Three Months Ended June 30,
2020 2019 2020 2019
Foreign currency exchange contracts $ 48 $ 456 Salaries and employee benefits $ (78) $ 80
Foreign currency exchange contracts 1 69 General and administrative expenses (6) 13
Interest rate swap agreements (558) (4,296) Interest expense (2,012) (444)
Interest rate cap contracts (735) (140) Interest expense (96) —
Derivatives Designated as Hedging Instruments Gain (Loss) Recognized in OCI Location of Gain (Loss) Reclassified from OCI into Income (Loss) Gain (Loss) Reclassified from OCI into Income (Loss)
--- --- --- --- --- --- --- --- --- --- --- ---
Six Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Foreign currency exchange contracts $ (341) $ 1,391 Salaries and employee benefits $ 49 $ (15)
Foreign currency exchange contracts (44) (9) General and administrative expenses 11 (71)
Interest rate swap agreements (7,265) (6,382) Interest expense (3,100) (864)
Interest rate cap contracts (2,131) (1,712) Interest expense (2,638) —

Derivatives Not Designated as Hedging Instruments

The Company enters into currency exchange forward contracts to reduce the effects of currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally mature within one to three months and are not designated as hedge instruments for accounting purposes. The Company continues to monitor the level of exposure of the foreign currency exchange risk and may enter into additional short-term forward contracts on an ongoing basis. The gains or losses on these derivative contracts are recognized in other income or expense based on the changes in fair value.

The following table summarizes the effects of derivatives in cash flow hedging relationships not designated as hedging instruments in the Company’s consolidated statements of operations (in thousands):

Amount of Gain Recognized in Income
Three Months Ended<br>June 30, Six Months Ended<br>June 30,
Derivatives Not Designated as Hedging Instruments Location of Gain Recognized in Income on Derivative 2020 2019 2020 2019
Foreign currency exchange contracts Other expense $ 2,028 $ 173 $ 3,971 $ 173

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Note 5: Investment in Receivable Portfolios, Net

As discussed in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies”, effective January 1, 2020, the Company accounts for its investment in receivable portfolios as PCD assets under CECL and changed its accounting policy for reimbursable court costs. As a result, the Company wrote-off the previous Deferred Court Costs balance that represented an undiscounted value of recoverable historic spend as a result of a loss-rate methodology, and established a discounted value of expected future recoveries of these reimbursable court costs, which is included in the beginning balance of the investment in receivable portfolios.

The table below illustrates the Company’s transition approach for its investment in receivable portfolios as of January 1, 2020 (in thousands):

Amount
Investment in receivable portfolios prior to transition $ 3,283,984
Initial transitioned deferred court costs 44,166
3,328,150
Allowance for credit losses 79,028,043
Amortized cost 82,356,193
Noncredit discount 132,533,142
Face value 214,889,335
Write-off of amortized cost (82,356,193)
Write-off of noncredit discount (132,533,142)
Negative allowance 3,328,150
Initial negative allowance from transition $ 3,328,150

The table below provides the detail on the establishment of negative allowance for expected recoveries of portfolios purchased during the periods presented (in thousands):

Three Months Ended<br>June 30, 2020 Six Months Ended<br>June 30, 2020
Purchase price $ 147,939 $ 362,052
Allowance for credit losses 371,424 892,618
Amortized cost 519,363 1,254,670
Noncredit discount 786,512 1,754,227
Face value 1,305,875 3,008,897
Write-off of amortized cost (519,363) (1,254,670)
Write-off of noncredit discount (786,512) (1,754,227)
Negative allowance 147,939 362,052
Negative allowance for expected recoveries - current period purchases $ 147,939 $ 362,052

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The following table summarizes the changes in the balance of the investment in receivable portfolios during the periods presented (in thousands):

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
Balance, beginning of period $ 3,166,018 $ 3,211,587 $ 3,328,150 $ 3,137,893
Purchases of receivable portfolios 147,939 242,697 362,052 505,032
Deconsolidation of receivable portfolios^(1)^ (2,822) — (2,822) —
Put-backs and Recalls (6,326) (1,395) (11,394) (5,095)
Disposals and transfers to assets held for sale (1,182) (2,327) (2,713) (5,916)
Cash collections (508,215) (514,881) (1,035,494) (1,028,734)
Revenue from receivable portfolios 335,287 312,495 692,652 623,653
Changes to expected current period recoveries 108,572 — 118,887 —
Changes to expected future period recoveries (42,565) — (151,541) —
Portfolios allowance reversal, net — 2,063 — 3,430
Foreign currency adjustments 4,535 (25,671) (96,536) (5,695)
Balance, end of period $ 3,201,241 $ 3,224,568 $ 3,201,241 $ 3,224,568
Revenue as a percentage of collections 66.0 % 60.7 % 66.9 % 60.6 %

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(1)Deconsolidation of receivable portfolios as a result of the Company’s divestiture of its investment in Brazil.

During the three months ended March 31, 2020, the Company reassessed its future forecasts of expected recoveries of receivable portfolios based on its best estimate of the potential impacts arising from the COVID-19 pandemic and recorded a provision for credit loss adjustment of $109.0 million. Based on the best information available to the Company at that time, the Company estimated that certain near-term future recoveries in 2020 would be delayed but that the majority of the portion of delayed collections would be recovered in 2021 and most of the remainder of those expected collections would be recovered in subsequent periods. During the three months ended June 30, 2020, the Company’s collections performance was significantly stronger than expected, which resulted in an over-performance against the updated forecast by $108.6 million. While the Company now has additional information with respect to the impact on collections of the COVID-19 pandemic, the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and spread of the pandemic and related actions taken by governments. When reassessing the future forecasts of expected lifetime recoveries in the second quarter, management considered historical and current collection performance, uncertainty in economic forecasts in the geographies in which the Company operates, and believes that most of the over-performance during the three months ended June 30, 2020 was a pull-forward of future expected recoveries rather than increased lifetime recoveries. As a result, the current period over-performance reduced estimated remaining collections (“ERC”), which in turn, when discounted to present value, resulted in a provision for credit loss adjustment of approximately $42.6 million during the three months ended June 30, 2020. The circumstances around this pandemic are evolving rapidly and will continue to impact the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to closely monitor the COVID-19 situation and update its assumptions accordingly.

Accretable yield represented the amount of revenue on purchased receivable portfolios the Company expected to recognize over the remaining life of its existing portfolios. The following table summarizes the change in accretable yield under the previous accounting guidance during the periods presented (in thousands):

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Balance as of December 31, 2018 $ 4,026,206
Revenue from receivable portfolios (311,158)
Allowance reversals on receivable portfolios, net (1,367)
Additions on existing portfolios, net 38,313
Additions for current purchases 285,637
Effect of foreign currency translation 26,461
Balance as of March 31, 2019 4,064,092
Revenue from receivable portfolios (312,495)
Allowance reversals on receivable portfolios, net (2,063)
Additions on existing portfolios, net 145,359
Additions for current purchases 277,556
Effect of foreign currency translation (46,526)
Balance as of June 30, 2019 $ 4,125,923

The following table summarizes the change in the valuation allowance for investment in receivable portfolios as accounted for under the previous accounting guidance during the periods presented (in thousands):

Three Months Ended<br>June 30, 2019 Six Months Ended<br>June 30, 2019
Balance as of beginning of period $ 59,428 $ 60,631
Provision for portfolio allowances 1,089 3,715
Reversal of prior allowances (3,152) (7,145)
Effect of foreign currency translation (161) 3
Balance as of end of period $ 57,204 $ 57,204

Note 6: Deferred Court Costs, Net

As discussed in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies”, effective January 1, 2020 and as part of the adoption of CECL, the Company changed its method of accounting for court costs spent in its legal collection channel. The Company now expenses all of its court costs as incurred and includes all expected recoveries, including the recoveries from the legal channel, in the measurement of the investment in receivable portfolios at a discounted value. As a result, the Company no longer carries Deferred Court Costs.

Net deferred court costs under the previous accounting method consisted of the following as of the date presented (in thousands):

December 31, 2019
Court costs advanced $ 891,207
Court costs recovered (369,043)
Court costs reserve (421,992)
Deferred court costs, net $ 100,172

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A roll-forward of the Company’s court cost reserve as accounted for under the previous accounting method is as follows (in thousands):

Three Months Ended<br>June 30, 2019 Six Months Ended<br>June 30, 2019
Balance as of beginning of period $ (399,991) $ (396,460)
Provision for court costs (23,635) (39,348)
Charge-offs 13,476 27,255
Effect of foreign currency translation 1,838 241
Balance as of end of period $ (408,312) $ (408,312)

Note 7: Other Assets

Other assets consist of the following (in thousands):

June 30,<br>2020 December 31,<br>2019
Operating lease right-of-use assets $ 70,597 $ 75,254
Identifiable intangible assets, net 44,636 51,371
Assets held for sale 40,743 46,717
Deferred tax assets 32,555 24,134
Service fee receivables 21,027 27,705
Prepaid expenses 20,779 22,272
Other financial receivables 12,194 17,308
Other 47,385 64,462
Total $ 289,916 $ 329,223

Note 8: Borrowings

The Company is in compliance in all material respects with all covenants under its financing arrangements as of June 30, 2020. The components of the Company’s consolidated borrowings were as follows (in thousands):

June 30,<br>2020 December 31,<br>2019
Encore revolving credit facility $ 528,000 $ 492,000
Encore term loan facility 164,033 171,677
Encore senior secured notes 276,250 308,750
Encore convertible notes and exchangeable notes 672,855 672,855
Less: debt discount (24,169) (30,308)
Cabot senior secured notes 1,085,279 1,129,039
Less: debt discount (1,347) (1,604)
Cabot senior revolving credit facility 203,349 285,749
Cabot securitisation senior facilities 433,976 464,092
Other 43,984 54,151
Finance lease liabilities 9,021 8,121
3,391,231 3,554,522
Less: debt issuance costs, net of amortization (37,501) (41,325)
Total $ 3,353,730 $ 3,513,197

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Encore Revolving Credit Facility and Term Loan Facility

The Company has a revolving credit facility (the “Revolving Credit Facility”) and term loan facility (the “Term Loan Facility,” and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”) pursuant to a Third Amended and Restated Credit Agreement dated December 20, 2016 (as amended, the “Restated Credit Agreement”). The total commitment for the Revolving Credit Facility is $884.2 million and matures in December 2021. The Term Loan Facility matures in December 2021 and the principal amortizes $15.3 million in 2020 with the remaining principal due in 2021.

Provisions of the Restated Credit Agreement as of June 30, 2020 include, but are not limited to:

•A Revolving Credit Facility with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted London Interbank Offered Rate (“LIBOR”), plus a spread that ranges from 250 to 300 basis points depending on the cash flow leverage ratio of Encore and its restricted subsidiaries as defined in the Restated Credit Agreement; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries. “Alternate base rate,” as defined in the Restated Credit Agreement, means the highest of (a) the per annum rate which the administrative agent publicly announces from time to time as its prime lending rate, (b) the federal funds effective rate from time to time, plus 0.5% per annum, (c) reserved adjusted LIBOR determined on a daily basis for a one month interest period, plus 1.0% per annum and (d) zero;

•A Term Loan Facility with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 250 to 300 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the cash flow leverage ratio of Encore and its restricted subsidiaries;

•A borrowing base under the Revolving Credit Facility equal to 35% of all eligible non-bankruptcy estimated remaining collections plus 55% of eligible estimated remaining collections for consumer receivables subject to bankruptcy;

•A maximum cash flow leverage ratio permitted of 3.00:1.00;

•A maximum cash flow first-lien leverage ratio of 2.00:1.00;

•A minimum interest coverage ratio of 1.75:1.00;

•The allowance of indebtedness in the form of senior secured notes not to exceed $350.0 million;

•The allowance of additional unsecured or subordinated indebtedness not to exceed $1.1 billion, including junior lien indebtedness not to exceed $400.0 million;

•Restrictions and covenants, which limit the payment of dividends and the incurrence of additional indebtedness and liens, among other limitations;

•Repurchases of up to $150.0 million of Encore’s common stock and permitted indebtedness after July 9, 2015, subject to compliance with certain covenants and available borrowing capacity;

•A pre-approved acquisition limit of $225.0 million per fiscal year;

•A basket to allow for investments not to exceed the greater of (1) 200% of the consolidated net worth of Encore and its restricted subsidiaries; and (2) an unlimited amount such that after giving effect to the making of any investment, the cash flow leverage ratio is less than 1.25:1:00;

•A basket to allow for investments in persons organized under the laws of Canada in the amount of $50.0 million;

•Collateralization by all assets of the Company, other than the assets of certain foreign subsidiaries and all unrestricted subsidiaries as defined in the Restated Credit Agreement.

As of June 30, 2020, the outstanding balance under the Revolving Credit Facility was $528.0 million, which bore a weighted average interest rate of 3.52% and 5.47% for the three months ended June 30, 2020 and 2019, respectively, and 4.01% and 5.48% for the six months ended June 30, 2020 and 2019, respectively. Available capacity under the Revolving Credit Facility, after taking into account borrowing base and applicable debt covenants, was $356.2 million as of June 30, 2020. As of June 30, 2020, the outstanding balance under the Term Loan Facility was $164.0 million.

On July 9, 2020, the Company entered into an amendment to the Restated Credit Agreement. Refer to “Note 14: Subsequent Events” for additional details of this amendment.

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Encore Senior Secured Notes

In August 2017, Encore entered into $325.0 million in senior secured notes with a group of insurance companies (the “Senior Secured Notes”). The Senior Secured Notes bear an annual interest rate of 5.625%, mature in 2024 and beginning in November 2019, require quarterly principal payments of $16.3 million. As of June 30, 2020, $276.3 million of the Senior Secured Notes remained outstanding.

The covenants and material terms in the purchase agreement for the Senior Secured Notes are substantially similar to those in the Restated Credit Agreement.

Encore Convertible Notes and Exchangeable Notes

The following table provides a summary of the principal balance, maturity date and interest rate for the Company’s convertible and exchangeable senior notes (the “Convertible Notes” or “Exchangeable Notes,” as applicable) ($ in thousands):

June 30,<br>2020 December 31,<br>2019 Maturity Date Interest Rate
2020 Convertible Notes^(1)^ $ 89,355 $ 89,355 Jul 1, 2020 3.000 %
2021 Convertible Notes 161,000 161,000 Mar 15, 2021 2.875 %
2022 Convertible Notes 150,000 150,000 Mar 15, 2022 3.250 %
Exchangeable Notes 172,500 172,500 Sep 1, 2023 4.500 %
2025 Convertible Notes 100,000 100,000 Oct 1, 2025 3.250 %
$ 672,855 $ 672,855

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(1)The 2020 Convertible Notes matured on July 1, 2020 and the Company repaid the outstanding principal in cash.

The Exchangeable Notes were issued by Encore Capital Europe Finance Limited (“Encore Finance”), a 100% owned finance subsidiary of Encore, and are fully and unconditionally guaranteed by Encore. Unless otherwise indicated in connection with a particular offering of debt securities, Encore will fully and unconditionally guarantee any debt securities issued by Encore Finance. Amounts related to Encore Finance are included in the consolidated financial statements of Encore subsequent to April 30, 2018, the date of the incorporation of Encore Finance.

Prior to the close of business on the business day immediately preceding their respective conversion or exchange date (listed below), holders may convert or exchange their Convertible Notes or Exchangeable Notes under certain circumstances set forth in the applicable indentures. On or after their respective conversion or exchange dates until the close of business on the scheduled trading day immediately preceding their respective maturity date, holders may convert or exchange their notes at any time. Certain key terms related to the convertible and exchangeable features as of June 30, 2020 are listed below:

2020 Convertible Notes 2021 Convertible Notes 2022 Convertible Notes 2023 Exchangeable Notes 2025 Convertible Notes
Initial conversion or exchange price $ 45.72 $ 59.39 $ 45.57 $ 44.62 $ 40.00
Closing stock price at date of issuance $ 33.35 $ 47.51 $ 35.05 $ 36.45 $ 32.00
Closing stock price date Jun 24, 2013 Mar 5, 2014 Feb 27, 2017 Jul 20, 2018 Sep 4, 2019
Conversion or exchange rate (shares per $1,000 principal amount) 21.8718 16.8386 21.9467 22.4090 25.0000
Conversion or exchange date Jan 1, 2020 Sep 15, 2020 Sep 15, 2021 Mar 1, 2023 Jul 1, 2025

In the event of conversion or exchange, holders of the Company’s Convertible Notes or Exchangeable Notes will receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company’s current intent is to settle conversions and exchanges through combination settlement (i.e., convertible or exchangeable into cash up to the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election and subject to certain restrictions contained in each of the indentures governing the Convertible Notes and Exchangeable Notes, for the remainder). As a result, and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion or exchange spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion or exchange spread has a dilutive effect when, during any quarter, the average share price of the Company’s common stock exceeds the initial conversion or exchange prices listed in the above table.

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The debt and equity components, the issuance costs related to the equity component, the stated interest rate, and the effective interest rate for each of the Convertible Notes and Exchangeable Notes at the time of the original offering are listed below (in thousands, except percentages):

2020 Convertible Notes^(1)^ 2021 Convertible Notes 2022 Convertible Notes 2023 Exchangeable Notes 2025 Convertible Notes
Debt component $ 140,247 $ 143,645 $ 137,266 $ 157,971 $ 91,024
Equity component $ 32,253 $ 17,355 $ 12,734 $ 14,009 $ 8,976
Equity issuance cost $ 1,106 $ 581 $ 398 $ — $ 224
Stated interest rate 3.000 % 2.875 % 3.250 % 4.500 % 3.250 %
Effective interest rate 6.350 % 4.700 % 5.200 % 6.500 % 5.000 %

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(1)The Company repurchased approximately $83.1 million aggregate principal amount of its 2020 Convertible Notes in August 2019 and paid-off the remaining $89.4 million 2020 Convertible Notes in cash when they matured on July 1, 2020.

The balances of the liability and equity components of all the Convertible Notes and Exchangeable Notes outstanding were as follows (in thousands):

June 30,<br>2020 December 31,<br>2019
Liability component—principal amount $ 672,855 $ 672,855
Unamortized debt discount (24,169) (30,308)
Liability component—net carrying amount $ 648,686 $ 642,547
Equity component $ 83,127 $ 83,127

The debt discount is being amortized into interest expense over the remaining life of the Convertible Notes and Exchangeable Notes using the effective interest rates. Interest expense related to the Convertible Notes and Exchangeable Notes was as follows (in thousands):

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Interest expense—stated coupon rate $ 5,799 $ 5,571 $ 11,598 $ 10,908
Interest expense—amortization of debt discount 3,095 3,244 6,139 6,365
Interest expense—Convertible Notes and Exchangeable Notes $ 8,894 $ 8,815 $ 17,737 $ 17,273

Hedge Transactions

In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company may be required to make in the event that the market price of the Company’s common stock becomes greater than the conversion or exchange prices of the Convertible Notes and the Exchangeable Notes, the Company maintains a hedge program that increases the effective conversion or exchange price for the 2020 Convertible Notes, the 2021 Convertible Notes and the Exchangeable Notes. The Company did not hedge the 2022 Convertible Notes or the 2025 Convertible Notes.

The details of the hedge program are listed below (in thousands, except conversion price):

2020 Convertible Notes 2021 Convertible Notes 2023 Exchangeable Notes
Cost of the hedge transaction(s) $ 18,113 $ 19,545 $ 17,785
Initial conversion or exchange price $ 45.72 $ 59.39 $ 44.62
Effective conversion or exchange price $ 61.55 $ 83.14 $ 62.48

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Cabot Senior Secured Notes

The following table provides a summary of the Cabot senior secured notes ($ in thousands):

June 30,<br>2020 December 31,<br>2019 Maturity Date Interest Rate
Floating rate senior secured notes due 2024 $ 449,296 $ 448,921 Jun 1, 2024 IBOR +6.375%
Senior secured notes due 2023 635,983 680,118 Oct 1, 2023 7.500
$ 1,085,279 $ 1,129,039

All values are in Euros.

Cabot Senior Revolving Credit Facility

Cabot Financial (UK) Limited (“Cabot Financial UK”) has an amended and restated senior secured revolving credit facility agreement (as amended and restated, the “Cabot Credit Facility”). As of June 30, 2020, the Cabot Credit Facility provided for a total committed facility of £375.0 million that expires in September 2023 and included the following key provisions:

•Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 3.00% per annum;

•A restrictive covenant that limits the loan to value ratio to 0.75 in the event that the Cabot Credit Facility is more than 20% utilized;

•A restrictive covenant that limits the super senior loan (i.e., the Cabot Credit Facility and any super priority hedging liabilities) to value ratio to 0.275; and

•Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens.

As of June 30, 2020, the outstanding borrowings under the Cabot Credit Facility were £164.0 million (approximately $203.3 million). The weighted average interest rate was 3.15% and 3.36% for the three months ended June 30, 2020 and 2019, respectively, and 3.36% for the six months ended June 30, 2020 and 2019. Available capacity under the Cabot Credit Facility, after taking into account borrowing base and applicable debt covenants, was £211.0 million (approximately $261.6 million) as of June 30, 2020.

Cabot Securitisation Senior Facility

Cabot’s wholly owned subsidiary Cabot Securitisation UK Ltd (“Cabot Securitisation”) has a senior facility for a committed amount of £350.0 million (as amended, the “Cabot Securitisation Senior Facility”). The Cabot Securitisation Senior Facility matures in March 2025. Funds drawn under the Cabot Securitisation Senior Facility bear interest at a rate per annum equal to SONIA plus a margin of 3.06% plus, for periods after March 15, 2023, a step-up margin ranging from zero to 1.00%.

As of June 30, 2020, the outstanding borrowings under the Cabot Securitisation Senior Facility were £350.0 million (approximately $434.0 million). The obligations of Cabot Securitisation under the Cabot Securitisation Senior Facility are secured by first ranking security interests over all of Cabot Securitisation’s property, assets and rights (including receivables purchased from Cabot Financial UK from time to time), the book value of which was approximately £408.5 million (approximately $506.5 million) as of June 30, 2020. The weighted average interest rate was 3.14% and 3.33% for the three and six months ended June 30, 2020 and 3.75% for the three and six months ended June 30, 2019.

Cabot Securitisation is a securitized financing vehicle and is a VIE for consolidation purposes. Refer to “Note 9: Variable Interest Entities”, for further details.

Note 9: Variable Interest Entities

A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb expected losses, or the right to receive expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company consolidates VIEs when it is the primary beneficiary.

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The Company evaluates its relationships with its VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary. A reconsideration event is significant if it changes the design of the entity or the entity’s equity investment at risk. Prior to the purchase of all of the outstanding equity of CCM not owned by the Company, CCM’s indirect holding Company Janus Holdings S.á r.l. (“Janus Holdings”) was a VIE. Upon completion of the Cabot Transaction on July 24, 2018 and the subsequent change in organizational structure, Janus Holdings no longer qualified as a VIE and CCM is consolidated via the voting interest model.

As of June 30, 2020, the Company’s VIEs include certain securitized financing vehicles and other immaterial special purpose entities that were created to purchase receivable portfolios in certain geographies. The Company is the primary beneficiary of these VIEs. The Company has the power to direct the activities of the VIEs which includes but is not limited to the ability to exercise discretion in the servicing of the financial assets.

Most assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the VIE.

Note 10: Income Taxes

The Company recorded income tax expense of $35.6 million and $11.8 million during the three months ended June 30, 2020 and 2019, respectively, and income tax expense of $40.1 million and $15.4 million during the six months ended June 30, 2020 and 2019, respectively.

The effective tax rates for the respective periods are shown below:

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
Federal provision 21.0 % 21.0 % 21.0 % 21.0 %
State provision 2.5 % 3.6 % 3.2 % 3.0 %
Foreign income taxed at different rates (0.4) % (3.8) % (0.3) % (2.3) %
Change in valuation allowance^(1)^ (0.2) % 2.6 % 2.3 % 2.2 %
Tax benefit from divestiture of foreign investment (1.8) % — % (1.9) % — %
Change in tax accounting method — % — % — % (8.9) %
Other 0.3 % 0.8 % 0.7 % 0.2 %
Effective tax rate 21.4 % 24.2 % 25.0 % 15.2 %

________________________

(1)Attributable to losses incurred at certain foreign subsidiaries with cumulative operating losses for tax purposes.

The Company utilized the discrete effective tax rate method (“discrete method”) for recording income taxes for the three and six months ended June 30, 2020. The Company believes the use of the discrete method is more appropriate than the application of the estimated annual effective tax rate (“AETR”) method due to uncertainty in estimating annual pre-tax earnings primarily due to the ongoing COVID-19 pandemic. The Company will re-evaluate the use of the discrete method each quarter until it is deemed appropriate to return to the AETR method.

The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2026. The impact of the tax holiday in Costa Rica for the three and six months ended June 30, 2020 and 2019, was immaterial.

The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of  $8.2 million as of June 30, 2020. These unrecognized tax benefits, if recognized, would result in a net tax benefit of $7.6 million as of June 30, 2020. There was no material change in gross unrecognized tax benefits from December 31, 2019.

The Company has not provided for applicable income or withholding taxes on the undistributed earnings from continuing operations for certain of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries as of June 30, 2020 was approximately $153.1 million. Such undistributed earnings are considered permanently reinvested. The Company does not provide deferred taxes on translation adjustments on unremitted earnings under the indefinite reversal exemption. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practical due to the complexities of a hypothetical calculation. Subsidiaries operating outside of the United States for which the Company does

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not consider under the indefinite reversal exemption have no material undistributed earnings or outside basis differences and therefore no U.S. taxes have been provided.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law in response to the COVID-19 pandemic. The CARES Act contains several corporate income tax provisions, including modifications to the limitation on business interest expense and net operating loss regulations, and provides for a payment delay of employer payroll taxes and income taxes. The CARES Act did not have a material impact on the Company’s effective tax rate or income tax provision for the three and six months ended June 30, 2020.

Note 11: Commitments and Contingencies

Litigation and Regulatory

The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act (“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to collect debts on which the statute of limitations has run, has made inaccurate or unsupported assertions of fact in support of its collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or changes in business practices. Many continue on for some length of time and involve substantial investigation, litigation, negotiation, and other expense and effort before a result is achieved, and during the process the Company often cannot determine the substance or timing of any eventual outcome.

As of June 30, 2020, there were no material developments in any of the legal proceedings disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

In certain legal proceedings, the Company may have recourse to insurance or third-party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. The Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. The Company continuously assesses the potential liability related to its pending litigation and regulatory matters and revises its estimates when additional information becomes available. The Company’s legal costs are recorded to expense as incurred. As of June 30, 2020, the Company has no material reserves for legal matters.

Purchase Commitments

In the normal course of business, the Company enters into forward flow purchase agreements and other purchase commitment agreements. As of June 30, 2020, the Company had entered into agreements to purchase receivable portfolios with a face value of approximately $2.3 billion for a purchase price of approximately $276.3 million.

Note 12: Segment and Geographic Information

The Company conducts business through several operating segments that have similar economic and other qualitative characteristics and have been aggregated in accordance with authoritative guidance into one reportable segment, portfolio purchasing and recovery. Since the Company operates in one reportable segment, all required segment information can be found in the consolidated financial statements.

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The Company has operations in the United States, Europe and other foreign countries. The following table presents the Company’s total revenues by geographic area in which the Company operates (in thousands):

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
Total revenues^(1)^:
United States $ 286,767 $ 199,388 $ 494,985 $ 388,760
International
Europe^(2)^ 135,490 130,919 211,455 266,195
Other geographies 3,776 16,567 8,674 38,996
139,266 147,486 220,129 305,191
Total $ 426,033 $ 346,874 $ 715,114 $ 693,951

________________________

(1)Total revenues for periods in 2019 are adjusted by net allowances. Total revenues are attributed to countries based on consumer location.

(2)Based on the financial information that is used to produce the general-purpose financial statements, providing further geographic information is impracticable.

Note 13: Goodwill and Identifiable Intangible Assets

Goodwill is tested for impairment at the reporting unit level annually and in interim periods if certain events occur that indicate that the fair value of a reporting unit may be below its carrying value. Determining the number of reporting units and the fair value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and assumptions.

The Company performs its annual goodwill impairment testing in the fourth quarter of each year. During the impairment testing in 2019, both of the Company’s two reporting units had fair values substantially in excess of their carrying values. In addition to the annual impairment test, the Company is required to assess whether a triggering event has occurred which would require interim impairment testing. During the first quarter of 2020, the Company concluded that an interim quantitative impairment test was not required. During the second quarter of 2020, the Company updated its consideration of the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each of the reporting units. Further, the Company assessed the current market capitalization, forecasts and the amount of headroom in the 2019 impairment test. The Company determined that there were no impairment indicators for either of the reporting units as of June 30, 2020. Therefore, an interim quantitative impairment test was not performed.

Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill and long-lived assets. Adverse changes in the Company’s actual or expected operating results, market capitalization, business climate, economic factors or other negative events that may be outside the control of management could result in a material non-cash impairment charge in the future.

The Company’s goodwill is attributable to reporting units included in its portfolio purchasing and recovery segment. The following table summarizes the activity in the Company’s goodwill balance (in thousands):

Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Balance, beginning of period $ 839,301 $ 882,884 $ 884,185 $ 868,126
Effect of foreign currency translation (1,277) (17,357) (46,161) (2,599)
Balance, end of period $ 838,024 $ 865,527 $ 838,024 $ 865,527

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The Company’s acquired intangible assets are summarized as follows (in thousands):

As of June 30, 2020 As of December 31, 2019
Gross<br>Carrying<br>Amount Accumulated<br>Amortization Net<br>Carrying<br>Amount Gross<br>Carrying<br>Amount Accumulated<br>Amortization Net<br>Carrying<br>Amount
Customer relationships $ 60,802 $ (17,301) $ 43,501 $ 67,897 $ (18,191) $ 49,706
Developed technologies 4,301 (3,866) 435 4,734 (4,124) 610
Trade name and other 5,260 (4,560) 700 6,299 (5,244) 1,055
Total intangible assets $ 70,363 $ (25,727) $ 44,636 $ 78,930 $ (27,559) $ 51,371

Note 14: Subsequent Events

On July 1, 2020, the Company’s 2020 Convertible Notes matured and the Company repaid the outstanding principal of $89.4 million in cash.

On July 9, 2020, the Company entered into an amendment to the Restated Credit Agreement, which provided for, among other things:

•a $243.2 million increase in commitments under the revolving credit facility from $884.2 million to $1,127.4 million,

•a $24.8 million increase in the term loan facility from $164.0 million outstanding to $188.8 million outstanding,

•an extension of the maturity date from December 2021 to July 2023 for portions of the Senior Secured Credit Facilities as detailed below,

•an accordion feature that allows the Company to increase the Senior Secured Credit Facilities by an additional $250.0 million, and

•a London Interbank Offered Rate (“LIBOR”) floor of 0.75% for the new and extended portions of the Senior Secured Credit Facilities maturing in July 2023.

After giving effect to the amendment, the Senior Secured Credit Facilities mature in July 2023, except with respect to (1) $138.1 million of non-extended revolving commitments under the Revolving Credit Facility and (2) $8.1 million of non-extended term loans, each of which still mature in December 2021.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains “forward-looking statements” relating to Encore Capital Group, Inc. (“Encore”) and its subsidiaries (which we may collectively refer to as the “Company,” “we,” “our” or “us”) within the meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,” “may,” and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services, financing needs or plans or the impacts of the COVID-19 pandemic, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings, or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors including, but not limited to, those set forth in our Annual Report on Form 10-K under “Part I, Item 1A—Risk Factors” and those set forth in “Part II, Item 1A, Risk Factors” of this Quarterly Report could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties.

Our Business

We are an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. We primarily purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-performing loans.

Encore Capital Group, Inc. (“Encore”) has three primary business units: MCM, which consists of Midland Credit Management, Inc. and its subsidiaries and domestic affiliates; Cabot, which consists of Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates, and LAAP, which is comprised of our investments and operations in Latin America and Asia-Pacific.

MCM (United States)

Through MCM we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico.

Cabot (Europe)

Through Cabot we are one of the largest credit management services providers in Europe and a market leader in the United Kingdom and Ireland. Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a range of debt servicing offerings such as early stage collections, business process outsourcing (“BPO”), and contingent collections, including through Wescot Credit Services Limited (“Wescot”), a leading U.K. contingency debt collection and BPO services company.

LAAP (Latin America and Asia-Pacific)

We have purchased non-performing loans in Colombia, Peru, Mexico and Brazil (which was sold in April 2020). Additionally, we have invested in Encore Asset Reconstruction Company (“EARC”) in India.

To date, operating results from LAAP have not been significant to our total consolidated operating results. Our long-term growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business in the United States and United Kingdom and strengthening and developing our business in the rest of Europe.

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Recent Developments

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns (including court closures in certain jurisdictions). While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations for an indefinite period of time.

Government Regulation

There have been various governmental actions taken, or proposed, in response to the COVID-19 pandemic, such as limiting debt collections efforts and encouraging or requiring extensions, modifications or forbearance, with respect to certain loans and fees. In addition, in certain jurisdictions courts have closed and/or government actions have affected the litigation process. Government actions have not been consistent across jurisdictions and the efficacy and ultimate effect of such actions is not known. We continue to monitor federal, state and international regulatory developments in relation to the COVID-19 pandemic and their potential impact on our operations.

MCM (United States)

As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in our Annual Report on Form 10-K, our U.S. debt purchasing business and collection activities are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and prohibitions on unfair, deceptive or abusive debt collection practices.

Cabot (Europe)

As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in our Annual Report on Form 10-K, our operations in Europe are affected by foreign statutes, rules and regulations regarding debt collection and debt purchase activities. These statutes, rules, regulations, ordinances, guidelines and procedures are modified from time to time by the relevant authorities charged with their administration, which could affect the way we conduct our business.

Portfolio Purchasing and Recovery

MCM (United States)

In the United States, the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt portfolios. A small percentage of our capital deployment in the United States comprises of receivable portfolios subject to Chapter 13 and Chapter 7 bankruptcy proceedings.

We purchase receivables based on robust, account-level valuation methods and employ proprietary statistical and behavioral models across our domestic business. These methods and models allow us to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or strategies and align the accounts we purchase with our business channels to maximize future collections. As a result, we have been able to realize significant returns from the receivables we acquire. We maintain strong relationships with many of the largest financial service providers in the United States.

Cabot (Europe)

In Europe, our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan accounts. We also purchase certain secured mortgage portfolios and portfolios that are in insolvency status, in particular, individual voluntary arrangements.

We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows us to value portfolios accurately and quantify portfolio performance in order to maximize future collections. As a result, we have been able to realize significant returns from the assets we have acquired. We maintain strong relationships with many of the largest financial services providers in the United Kingdom and continue to expand in the United Kingdom and the rest of Europe with our acquisitions of portfolios and other credit management services providers.

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Purchases and Collections

Portfolio Pricing, Supply and Demand

MCM (United States)

Issuers have continued to sell predominantly fresh portfolios. Fresh portfolios are portfolios that are generally sold within six months of the consumer’s account being charged-off by the financial institution. Pricing in the second quarter remained favorable. Issuers continued to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year. We are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply.

We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high cost to operate due to regulatory pressure and because issuers are being more selective with buyers in the marketplace. We believe this favors larger participants, such as Encore, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements.

Cabot (Europe)

The U.K. market for charged-off portfolios has generally provided a relatively consistent pipeline of opportunities over the past few years, despite an ongoing historic low level of charge-off rates, as creditors have embedded debt sales as an integral part of their business models and consumer indebtedness has continued to grow since the financial crisis.

The Spanish debt market continues to be one of the largest in Europe with a significant amount of debt to be sold and serviced. In particular, we anticipate strong debt purchasing and servicing opportunities in the secured and small and medium enterprise asset classes given the backlog of non-performing debt that has accumulated in these sectors. Additionally, financial institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should further increase debt purchasing opportunities in Spain.

Across all of our European markets, we are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply of portfolios to purchase. Due to the COVID-19 pandemic, banks have decreased portfolio sales to address customers’ needs. As a result, we expect a lower level of supply available for purchase in the near-term.

Purchased Receivables by Geographic Location

The following table summarizes the geographic locations of receivable portfolios we purchased during the periods presented (in thousands):

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
MCM (United States) $ 124,823 $ 179,877 $ 310,075 $ 354,104
Cabot (Europe) 23,116 57,206 51,977 140,846
Other geographies — 5,614 — 10,082
Total purchases $ 147,939 $ 242,697 $ 362,052 $ 505,032

During the three months ended June 30, 2020, we invested $147.9 million to acquire receivable portfolios, with face values aggregating $1.3 billion, for an average purchase price of 11.3% of face value. The amount invested in receivable portfolios decreased $94.8 million, or 39.1%, compared with the $242.7 million invested during the three months ended June 30, 2019, to acquire receivable portfolios with face values aggregating $2.3 billion, for an average purchase price of 10.5% of face value.

During the six months ended June 30, 2020, we invested $362.1 million to acquire receivable portfolios, with face values aggregating $3.0 billion, for an average purchase price of 12.0% of face value. The amount invested in receivable portfolios decreased $143.0 million, or 28.3%, compared with the $505.0 million invested during the six months ended June 30, 2019, to acquire receivable portfolios with face values aggregating $4.0 billion, for an average purchase price of 12.5% of face value.

In the United States, capital deployment decreased during the three and six months ended June 30, 2020 as compared to the corresponding periods in the prior year. The majority of our deployments in the U.S. are in forward flow agreements, and the timing, contract duration, and volumes for each contract can fluctuate leading to variation when comparing to prior periods. A portion of the decrease in capital deployment in the U.S. for the three months ended June 30, 2020 resulted from our cautious approach to purchasing at the beginning of the quarter when the potential impacts of the COVID-19 pandemic were relatively unknown.

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In Europe, capital deployment decreased during the three and six months ended June 30, 2020 as compared to the corresponding periods in the prior year. The decreases were primarily the result of a relatively limited supply of portfolios during the three and six months ended June 30, 2020 and a heightened return expectation as a result of greater uncertainty relating to the future impact of the COVID-19 pandemic.

The average purchase price, as a percentage of face value, varies from period to period depending on, among other factors, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios.

Collections from Purchased Receivables by Channel and Geographic Location

We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections from third-party collection agencies that we utilize when we believe they can liquidate better or less expensively than we can or to supplement capacity in our internal call centers. The collection agencies channel also includes collections on accounts purchased where we maintain the collection agency servicing until the accounts can be placed in our internal collection channels. The following table summarizes the total collections from receivable portfolios by collection channel and geographic area (in thousands):

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
MCM (United States):
Call center and digital collections $ 248,853 $ 184,380 $ 463,091 $ 369,635
Legal collections 133,597 145,991 291,623 287,027
Collection agencies 3,602 2,920 6,067 6,223
Subtotal 386,052 333,291 760,781 662,885
Cabot (Europe):
Call center and digital collections 53,235 65,675 117,024 128,340
Legal collections 32,036 49,351 74,936 100,009
Collection agencies 31,100 43,233 68,514 90,710
Subtotal 116,371 158,259 260,474 319,059
Other geographies:
Call center and digital collections — 10,037 — 20,237
Legal collections — 1,267 — 2,797
Collection agencies 5,792 12,027 14,239 23,756
Subtotal 5,792 23,331 14,239 46,790
Total collections from purchased receivables $ 508,215 $ 514,881 $ 1,035,494 $ 1,028,734

Gross collections from purchased receivables decreased by $6.7 million, or 1.3%, to $508.2 million during the three months ended June 30, 2020, from $514.9 million during the three months ended June 30, 2019. Gross collections from purchased receivables increased slightly by $6.8 million, or 0.7%, to $1,035.5 million during the six months ended June 30, 2020, from $1,028.7 million during the six months ended June 30, 2019.

Gross collections from receivable portfolios in the United States increased significantly in both periods presented. The increases were primarily due to the acquisition of portfolios with higher returns in recent periods, the increase in our collection capacity, and our continued effort in improving liquidation. Our consumer centric collection approach and our capacity buildup are driving a higher proportion of call center and digital collections compared to legal collections in the United States.

The decreases in collections from purchased receivables in Europe were primarily due to the impacts of the COVID-19 pandemic, and the unfavorable impact of foreign currency translation, which was primarily the result of the strengthening of the U.S. dollar against the British Pound.

The decreases in collections from purchased receivables in other geographies were primarily due to the sale of our wholly-owned subsidiary Baycorp in August 2019.

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The COVID-19 pandemic and the resulting containment measures, including impacts to the legal collections process, negatively affected legal collections beginning in late March 2020 and could continue to affect legal collections and related costs depending on the duration and severity of the COVID-19 pandemic and the resulting containment measures. We are closely monitoring the impacts of the COVID-19 pandemic on collections and cost-to-collect.

Results of Operations

Results of operations, in dollars and as a percentage of total revenues, adjusted by net allowances, were as follows (in thousands, except percentages):

Three Months Ended June 30,
2020 2019
Revenues
Revenue from receivable portfolios $ 335,287 78.7 % $ 312,495 90.1 %
Changes in expected current and future recoveries 66,007 15.5 % — — %
Servicing revenue 23,950 5.6 % 32,316 9.3 %
Other revenues 789 0.2 % — — %
Total revenues 426,033 100.0 % 344,811 99.4 %
Allowance reversals on receivable portfolios, net 2,063 0.6 %
Total revenues, adjusted by net allowances 346,874 100.0 %
Operating expenses
Salaries and employee benefits 90,867 21.3 % 96,227 27.8 %
Cost of legal collections 37,356 8.8 % 51,448 14.8 %
Other operating expenses 28,275 6.6 % 29,546 8.5 %
Collection agency commissions 10,683 2.5 % 13,560 3.9 %
General and administrative expenses 28,618 6.7 % 32,620 9.4 %
Depreciation and amortization 10,542 2.5 % 9,741 2.8 %
Total operating expenses 206,341 48.4 % 233,142 67.2 %
Income from operations 219,692 51.6 % 113,732 32.8 %
Other expense
Interest expense (50,327) (11.8) % (63,913) (18.4) %
Other expense (3,011) (0.7) % (1,244) (0.4) %
Total other expense (53,338) (12.5) % (65,157) (18.8) %
Income before income taxes 166,354 39.1 % 48,575 14.0 %
Provision for income taxes (35,570) (8.3) % (11,753) (3.4) %
Net income 130,784 30.8 % 36,822 10.6 %
Net income attributable to noncontrolling interest (452) (0.1) % (161) 0.0 %
Net income attributable to Encore Capital Group, Inc. stockholders $ 130,332 30.7 % $ 36,661 10.6 %

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Six Months Ended June 30,
2020 2019
Revenues
Revenue from receivable portfolios $ 692,652 96.9 % $ 623,653 89.9 %
Changes in expected current and future recoveries (32,654) (4.6) % — — %
Servicing revenue 52,630 7.4 % 66,339 9.5 %
Other revenues 2,486 0.3 % 529 0.1 %
Total revenues 715,114 100.0 % 690,521 99.5 %
Allowance reversals on receivable portfolios, net 3,430 0.5 %
Total revenues, adjusted by net allowances 693,951 100.0 %
Operating expenses
Salaries and employee benefits 183,965 25.7 % 188,061 27.1 %
Cost of legal collections 103,635 14.5 % 100,475 14.5 %
Other operating expenses 55,439 7.8 % 59,160 8.5 %
Collection agency commissions 23,859 3.3 % 29,562 4.3 %
General and administrative expenses 60,495 8.5 % 72,167 10.4 %
Depreciation and amortization 20,827 2.9 % 19,736 2.8 %
Total operating expenses 448,220 62.7 % 469,161 67.6 %
Income from operations 266,894 37.3 % 224,790 32.4 %
Other expense
Interest expense (104,989) (14.7) % (118,880) (17.1) %
Other expense (1,572) (0.2) % (4,220) (0.6) %
Total other expense (106,561) (14.9) % (123,100) (17.7) %
Income before income taxes 160,333 22.4 % 101,690 14.7 %
Provision for income taxes (40,128) (5.6) % (15,426) (2.2) %
Net income 120,205 16.8 % 86,264 12.5 %
Net income attributable to noncontrolling interest (327) 0.0 % (349) (0.1) %
Net income attributable to Encore Capital Group, Inc. stockholders $ 119,878 16.8 % $ 85,915 12.4 %

Results of Operations—Cabot Credit Management Limited

The following table summarizes the operating results contributed by CCM (which does not consolidate the results of its European affiliate Grove Europe S.á r.l.) during the periods presented (in thousands):

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
Total revenues $ 130,518 $ 126,993 $ 210,482 $ 256,005
Total operating expenses (60,029) (67,908) (135,268) (138,407)
Income from operations 70,489 59,085 75,214 117,598
Interest expense (26,587) (37,817) (57,082) (66,772)
Other income 2,214 436 3,914 134
Income before income taxes 46,116 21,704 22,046 50,960
Provision for income taxes (7,937) (3,401) (5,843) (8,832)
Net income 38,179 18,303 16,203 42,128
Net income attributable to noncontrolling interest (452) (161) (327) (349)
Net income attributable to Encore Capital Group, Inc. stockholders $ 37,727 $ 18,142 $ 15,876 $ 41,779

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Comparison of Results of Operations

Revenues

Our revenues primarily include revenue recognized from engaging in debt purchasing and recovery activities. Effective January 1, 2020, we adopted the CECL accounting standard. Under CECL, we apply our charge-off policy and fully write-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables we acquire immediately after purchasing the portfolio. We then record a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which is presented as “Investment in receivable portfolios, net” in our consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) established based on the purchase price of the portfolio and the expected future cash flows at the time of purchase. Revenue generated by such activities primarily includes two components: (1) the accretion of the discount on the negative allowance due to the passage of time, which is included in “Revenue from receivable portfolios” and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries, and is presented in our consolidated statements of operations as “Changes to expected current and future recoveries.”

Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to our adoption of CECL. We did not establish a negative allowance for these pools as we elected the Transition Resource Group for Credit Losses’ practical expedient to retain the integrity of these legacy pools. Similar to how we treated ZBA collections prior to the adoption of CECL, all subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in our consolidated statements of operations.

Servicing revenue consists primarily of fee-based income earned on accounts collected on behalf of others, primarily credit originators. We earn fee-based income by providing debt servicing (such as early stage collections, BPO, contingent collections, trace services and litigation activities) to credit originators for non-performing loans.

Other revenues primarily include revenues recognized from the sale of real estate assets that are acquired as a result of our investments in non-performing secured residential mortgage portfolios in Europe and LAAP. Other revenues also include gains recognized on transfers of financial assets.

Under the previous accounting standard for purchased credit deteriorated assets, we incurred allowance charges when actual cash flows from our receivable portfolios underperform compared to our expectations or when there was a change in the timing of cash flows. We also recorded allowance reversals on pool groups that have historic allowance reserves when actual cash flows from these receivable portfolios outperform our expectations.

We have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The following table summarizes revenues for the periods presented (in thousands):

Three Months Ended June 30,
2020 2019 Change % Change
Revenue recognized from portfolio basis $ 321,693 $ 285,562 12.7 %
ZBA revenue 13,594 26,933 (13,339) (49.5) %
Revenue from receivable portfolios 335,287 312,495 22,792 7.3 %
Changes in expected current period recoveries 108,572
Changes in expected future period recoveries (42,565)
Changes in expected current and future recoveries 66,007
Servicing revenue 23,950 32,316 (8,366) (25.9) %
Other revenues 789 — 789 100.0 %
Total revenues $ 426,033 $ 344,811 23.6 %
Allowance reversals on receivable portfolios, net^(1)^ 2,063
Total revenues, adjusted by net allowances $ 346,874

All values are in US Dollars.

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(1)Amount includes $2.3 million of allowance reversals for zero-basis portfolios.

Six Months Ended June 30,
2020 2019 Change % Change
Revenue recognized from portfolio basis $ 662,508 $ 570,817 16.1 %
ZBA revenue 30,144 52,836 (22,692) (42.9) %
Revenue from receivable portfolios 692,652 623,653 68,999 11.1 %
Changes in expected current period recoveries 118,887
Changes in expected future period recoveries (151,541)
Changes in expected current and future recoveries (32,654)
Servicing revenue 52,630 66,339 (13,709) (20.7) %
Other revenues 2,486 529 1,957 369.9 %
Total revenues $ 715,114 $ 690,521 3.6 %
Allowance reversals on receivable portfolios, net^(1)^ 3,430
Total revenues, adjusted by net allowances $ 693,951

All values are in US Dollars.

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(1)Amount includes $4.6 million of allowance reversals for zero-basis portfolios.

Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international revenues, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international revenues. Our revenues were unfavorably impacted by foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound by 3.6% during the three months ended June 30, 2020 compared to the three months ended June 30, 2019, and by 2.7% for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The increases in revenue recognized from portfolio basis during the three and six months ended June 30, 2020 as compared to the three and six months ended June 30, 2019 were primarily due to higher expected total future cash flows resulting from a change in the expected economic life of static pool groups based on a lifetime expected recovery model upon the adoption of CECL which led to increased EIR, and increased expected total future cash flows resulting from a change in our accounting policy for court costs. Under our new accounting policy, all future expected cash flows, including the expected total recoveries in our legal channel, are included in the initial curve in the establishment of negative allowance, which in turn, increased the EIR.

As discussed above, ZBA revenue represents collections from our legacy ZBA pools. We expect our ZBA revenue to continue to decline as we collect on these legacy pools. Since our forecast period is on a rolling 15 year basis after the adoption of CECL, we do not expect to have new ZBA pools in the future.

Under CECL, changes to expected current period recoveries represent over and under-performance in the reporting period. Collections during the three and six months ended June 30, 2020 significantly outperformed the projected cash flows. We believe the collection over-performance was largely driven by the reduced near-term expected recoveries as a result of adjustments made to our projected cash flow forecast last quarter associated with the COVID-19 pandemic. The over-performance was also a result of our sustained improvements in portfolio collections driven by liquidation improvement initiatives.

During the three months ended March 31, 2020, we reassessed our future forecasts of expected recoveries of receivable portfolios based on our best estimate of the potential impacts arising from the COVID-19 pandemic and recorded a provision for credit loss adjustment of $109.0 million. Based on the best information available to us at that time, we estimated that certain near-term future recoveries in 2020 would be delayed but that the majority of the portion of delayed collections would be recovered in 2021 and most of the remainder of those expected collections would be recovered in subsequent periods. During the three months ended June 30, 2020, our collections performance was significantly stronger than expected, which resulted in an over-performance against the updated forecast by $108.6 million. While we now have additional information with respect to the impact on collections of the COVID-19 pandemic, the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and spread of the pandemic and related actions taken by governments. When reassessing the future forecasts of expected lifetime recoveries in the second quarter, management considered historical and current collection performance, uncertainty in economic forecasts in the geographies in which we operate, and believes that most of the over-performance during the three months ended June 30, 2020 was a pull-forward of future expected recoveries rather than increased lifetime recoveries. As a result, the current period over-performance reduced estimated remaining collections (“ERC”), which in turn, when discounted to present value, resulted in a provision for credit loss adjustment of approximately $42.6 million during the three months ended June 30, 2020. The circumstances around this pandemic are evolving rapidly and will continue to impact our business and our estimation of expected recoveries in future periods. We will continue to closely monitor the COVID-19 situation and update our assumptions accordingly.

The following tables summarize collections from purchased receivables, revenue from receivable portfolios, end of period receivable balance and other related supplemental data, by year of purchase (in thousands, except percentages):

Three Months Ended June 30, 2020 As of June 30, 2020
Collections Revenue from Receivable Portfolios Changes in Expected Current and Future Recoveries Investment in Receivable Portfolios Monthly EIR
United States:
ZBA $ 12,783 $ 12,793 $ — $ — — %
2011 6,219 5,258 986 2,037 88.6 %
2012 6,637 5,960 622 4,734 42.0 %
2013 16,139 13,980 2,280 11,673 40.5 %
2014 11,836 8,879 413 42,223 6.7 %
2015 18,192 8,294 2,315 66,266 3.8 %
2016 32,383 14,859 4,928 121,260 3.8 %
2017 53,067 27,126 8,826 160,945 5.2 %
2018 80,548 40,622 8,554 330,994 3.8 %
2019 102,208 68,373 8,973 576,090 3.8 %
2020 46,040 23,621 18,825 295,844 3.7 %
Subtotal 386,052 229,765 56,722 1,612,066 4.3 %
Europe:
ZBA 42 42 — — — %
2013 19,950 20,484 (682) 214,729 3.2 %
2014 18,197 16,611 2,604 186,825 3.0 %
2015 11,683 10,204 3,036 144,087 2.4 %
2016 10,511 10,089 2,164 125,458 2.8 %
2017 19,002 14,484 (222) 255,956 1.9 %
2018 17,453 14,193 (325) 303,117 1.6 %
2019 16,489 13,156 1,051 237,120 1.8 %
2020 3,044 2,611 1,325 51,822 2.3 %
Subtotal 116,371 101,874 8,951 1,519,114 2.3 %
Other geographies:
ZBA 762 759 — — — %
2014^(1)^ 1,349 318 48 46,925 102.6 %
2015^(1)^ 948 489 144 3,429 96.7 %
2016 446 398 40 1,801 7.2 %
2017^(1)^ 1,214 943 39 11,489 6.2 %
2018 1,034 707 64 6,168 3.7 %
2019 39 34 (1) 249 4.6 %
2020 — — — — — %
Subtotal 5,792 3,648 334 70,061 7.3 %
Total $ 508,215 $ 335,287 $ 66,007 $ 3,201,241 3.4 %

________________________

(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.

Three Months Ended June 30, 2019 As of June 30, 2019
Collections Revenue from Receivable Portfolios Net Reversal (Portfolio Allowance) Unamortized Balances Monthly EIR
United States:
ZBA $ 26,263 $ 23,947 $ 2,318 $ — — %
2011 3,112 2,381 304 2,001 31.4 %
2012 7,144 5,530 — 7,378 21.7 %
2013 22,711 18,560 — 18,679 28.7 %
2014 18,544 10,522 440 58,168 5.5 %
2015 22,772 9,001 — 95,565 2.9 %
2016 42,248 18,770 — 184,492 3.1 %
2017 66,756 33,886 — 246,610 4.2 %
2018 89,079 51,810 — 489,514 3.4 %
2019 34,662 21,980 — 338,767 3.2 %
Subtotal 333,291 196,387 3,062 1,441,174 4.0 %
Europe:
ZBA 102 103 — — — %
2013 28,361 22,370 — 234,929 3.1 %
2014 27,071 18,187 1 214,843 2.7 %
2015 17,905 10,544 73 166,609 2.0 %
2016 16,395 10,623 — 150,196 2.4 %
2017 30,252 16,579 — 315,346 1.7 %
2018 30,523 18,153 — 402,783 1.5 %
2019 7,650 5,245 — 136,094 1.7 %
Subtotal 158,259 101,804 74 1,620,800 2.1 %
Other geographies:
ZBA 2,883 2,883 — — — %
2014 879 207 — 64,284 12.2 %
2015 5,324 3,659 — 16,527 9.3 %
2016 3,667 1,891 (1,073) 21,924 2.6 %
2017 4,413 2,438 — 27,122 3.9 %
2018 4,676 2,573 — 23,865 3.4 %
2019 1,489 653 — 8,872 3.3 %
Subtotal 23,331 14,304 (1,073) 162,594 4.1 %
Total $ 514,881 $ 312,495 $ 2,063 $ 3,224,568 3.0 %
Six Months Ended June 30, 2020 As of June 30, 2020
--- --- --- --- --- --- --- --- --- --- --- ---
Collections Revenue from Receivable Portfolios Changes in Expected Current and Future Recoveries Investment in Receivable Portfolios Monthly EIR
United States:
ZBA $ 28,057 $ 28,067 $ — $ — — %
2011 13,468 12,123 771 2,037 88.6 %
2012 15,132 13,624 142 4,734 42.0 %
2013 33,826 32,116 (1,704) 11,673 40.5 %
2014 26,427 18,968 (1,613) 42,223 6.7 %
2015 36,494 17,603 1,236 66,266 3.8 %
2016 65,760 31,644 2,516 121,260 3.8 %
2017 108,502 57,976 7,723 160,945 5.2 %
2018 169,966 87,560 (7,075) 330,994 3.8 %
2019 204,742 140,421 6,869 576,090 3.8 %
2020 58,407 31,796 13,815 295,844 3.7 %
Subtotal 760,781 471,898 22,680 1,612,066 4.3 %
Europe:
ZBA 100 100 — — — %
2013 45,209 42,746 (6,988) 214,729 3.2 %
2014 41,468 34,498 (2,368) 186,825 3.0 %
2015 26,856 21,393 940 144,087 2.4 %
2016 23,613 21,348 (8,864) 125,458 2.8 %
2017 42,496 30,180 (9,914) 255,956 1.9 %
2018 40,111 29,855 (22,818) 303,117 1.6 %
2019 36,595 27,448 (6,582) 237,120 1.8 %
2020 4,026 4,011 1,574 51,822 2.3 %
Subtotal 260,474 211,579 (55,020) 1,519,114 2.3 %
Other geographies:
ZBA 1,980 1,977 — — — %
2014^(1)^ 2,523 863 29 46,925 102.6 %
2015^(1)^ 2,505 1,430 220 3,429 96.7 %
2016 1,417 1,084 (209) 1,801 7.2 %
2017^(1)^ 3,089 2,083 (284) 11,489 6.2 %
2018 2,614 1,662 (56) 6,168 3.7 %
2019 111 76 (14) 249 4.6 %
2020 — — — — — %
Subtotal 14,239 9,175 (314) 70,061 7.3 %
Total $ 1,035,494 $ 692,652 $ (32,654) $ 3,201,241 3.4 %

________________________

(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.

Six Months Ended June 30, 2019 As of June 30, 2019
Collections Revenue from Receivable Portfolios Net Reversal (Portfolio Allowance) Unamortized Balances Monthly EIR
United States:
ZBA $ 51,794 $ 47,217 $ 4,585 $ — — %
2011 5,876 4,661 304 2,001 31.4 %
2012 14,480 11,626 273 7,378 21.7 %
2013 44,745 37,739 (52) 18,679 28.7 %
2014 38,211 21,344 1,530 58,168 5.5 %
2015 47,740 19,197 — 95,565 2.9 %
2016 89,702 39,423 (896) 184,492 3.1 %
2017 144,050 69,512 — 246,610 4.2 %
2018 183,360 104,484 — 489,514 3.4 %
2019 42,927 27,872 — 338,767 3.2 %
Subtotal 662,885 383,075 5,744 1,441,174 4.0 %
Europe:
ZBA 193 194 — — — %
2013 58,471 45,667 — 234,929 3.1 %
2014 55,191 37,866 (174) 214,843 2.7 %
2015 37,414 21,691 (183) 166,609 2.0 %
2016 33,218 21,902 (29) 150,196 2.4 %
2017 62,554 33,945 — 315,346 1.7 %
2018 60,602 37,144 — 402,783 1.7 %
2019 11,416 8,238 — 136,094 1.5 %
Subtotal 319,059 206,647 (386) 1,620,800 2.1 %
Other geographies:
ZBA 5,425 5,425 — — — %
2014 1,824 4,861 — 64,284 12.2 %
2015 10,734 8,077 — 16,527 9.3 %
2016 7,906 3,958 (1,061) 21,924 2.6 %
2017 9,170 5,365 — 27,122 3.9 %
2018 9,807 5,437 (867) 23,865 3.4 %
2019 1,924 808 — 8,872 3.3 %
Subtotal 46,790 33,931 (1,928) 162,594 4.1 %
Total $ 1,028,734 $ 623,653 $ 3,430 $ 3,224,568 3.0 %

The decreases in servicing revenues during the three and six months ended June 30, 2020 as compared to the three and six months ended June 30, 2019 were primarily attributable to the sale of Baycorp in August 2019. Through Baycorp, we earned servicing revenues during the three and six months ended June 30, 2019. The decreases were also driven by the COVID-19 pandemic and the unfavorable impact of foreign currency translation, which was primarily the result of the strengthening of the U.S. dollar against the British Pound.

The increases in other revenues during the three and six months ended June 30, 2020 as compared to the three and six months ended June 30, 2019 were due to increased gains recognized upon sale of real estate assets that are acquired as a result of our investments in non-performing secured residential mortgage portfolios in Europe and LAAP.

Operating Expenses

The following table summarizes operating expenses for the periods presented (in thousands):

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Three Months Ended June 30,
2020 2019 Change % Change
Salaries and employee benefits $ 90,867 $ 96,227 (5.6) %
Cost of legal collections 37,356 51,448 (14,092) (27.4) %
Other operating expenses 28,275 29,546 (1,271) (4.3) %
Collection agency commissions 10,683 13,560 (2,877) (21.2) %
General and administrative expenses 28,618 32,620 (4,002) (12.3) %
Depreciation and amortization 10,542 9,741 801 8.2 %
Total operating expenses $ 206,341 $ 233,142 (11.5) %

All values are in US Dollars.

Six Months Ended June 30,
2020 2019 Change % Change
Salaries and employee benefits $ 183,965 $ 188,061 (2.2) %
Cost of legal collections 103,635 100,475 3,160 3.1 %
Other operating expenses 55,439 59,160 (3,721) (6.3) %
Collection agency commissions 23,859 29,562 (5,703) (19.3) %
General and administrative expenses 60,495 72,167 (11,672) (16.2) %
Depreciation and amortization 20,827 19,736 1,091 5.5 %
Total operating expenses $ 448,220 $ 469,161 (4.5) %

All values are in US Dollars.

Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international operating expenses, and the weakening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international operating expenses. Our operating expenses were favorably impacted by foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound by 3.6% for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, and by 2.7% for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Operating expenses are explained in more detail as follows:

Salaries and Employee Benefits

The decreases in salaries and employee benefits during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 were primarily due to the following reasons:

•Decrease in headcount in other geographies as a result of the sale of Baycorp in August 2019;

•The favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound;

•Partially offset by increased stock compensation due to adjustments to estimated vesting of certain performance-based awards.

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Cost of Legal Collections

Cost of legal collections primarily includes contingent fees paid to our external network of attorneys and the cost of litigation. We pursue legal collections using a network of attorneys that specialize in collection matters and through our internal legal channel. Under the agreements with our contracted attorneys, we advance certain out-of-pocket court costs. Effective January 1, 2020, we no longer capitalize upfront court costs and recognize a portion of court costs as expense based on a loss-rate methodology, but rather, we expense all court costs as incurred. Cost of legal collections does not include internal legal channel employee costs, which are included in salaries and employee benefits in our consolidated statements of operations.

Three Months Ended June 30,
2020 2019 Change % Change
Court costs $ 16,347 $ 24,335 (32.8) %
Legal collection fees 21,009 27,113 (6,104) (22.5) %
Total cost of legal collections $ 37,356 $ 51,448 (27.4) %

All values are in US Dollars.

Six Months Ended June 30,
2020 2019 Change % Change
Court costs $ 57,702 $ 44,814 28.8 %
Legal collection fees 45,933 55,661 (9,728) (17.5) %
Total cost of legal collections $ 103,635 $ 100,475 3.1 %

All values are in US Dollars.

The decrease in cost of legal collections during the three months ended June 30, 2020 compared to the three months ended June 30, 2019 was primarily due to the following reasons:

•Lower court costs as authorities implemented numerous measures to contain the outbreak of COVID-19 including court closures in certain jurisdictions;

•Reduced legal collection fees as a result of deceleration in the legal channel due to the COVID-19 pandemic;

•Partially offset by the increase in cost of legal collections due to the expensing of all court costs as incurred as discussed above.

The increase in cost of legal collections during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 was primarily due to the following reasons:

•No longer capitalizing upfront court costs but rather expensing all court costs as incurred;

•Partially offset by lower court costs spending due to court closures in certain jurisdictions.

Other Operating Expenses

The decreases in other operating expenses during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 were primarily due to the following reasons:

•Lower collection expenses primarily due to the sale of Baycorp in August 2019;

•The favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound;

•Reduced expenditures for temporary services and direct collection expenses.

Collection Agency Commissions

Collection agency commissions are predominately in Europe and Latin America and vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally. Commissions, as a percentage of collections in this channel also vary from period to period depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time, and commission rates for purchased bankruptcy portfolios are lower than the commission rates for charged-off credit card accounts.

The decreases in collections agency commissions during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 were primarily due to the following reasons:

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•The progressive decrement of portfolio collections in other geographies; and

•The favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound.

General and Administrative Expenses

The decreases in general and administrative expense during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 were primarily due to the following reasons:

•Reduced travel and facilities expenses, and consulting fees;

•Lower general and administrative expenses due to the sale of Baycorp in August 2019; and

•The favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound.

Depreciation and Amortization

The increases in depreciation and amortization expense during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 were primarily due to the following reasons:

•Increased depreciation expense primarily incurred at our U.S. facilities;

•Partially offset by the favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound.

Interest Expense

The following table summarizes our interest expense (in thousands):

Three Months Ended June 30,
2020 2019 Change % Change
Stated interest on debt obligations $ 44,127 $ 48,566 (9.1) %
Amortization of debt issuance costs 2,932 11,939 (9,007) (75.4) %
Amortization of debt discount 3,268 3,408 (140) (4.1) %
Total interest expense $ 50,327 $ 63,913 (21.3) %

All values are in US Dollars.

Six Months Ended June 30,
2020 2019 Change % Change
Stated interest on debt obligations $ 92,882 $ 96,884 (4.1) %
Amortization of debt issuance costs 5,710 15,265 (9,555) (62.6) %
Amortization of debt discount 6,397 6,731 (334) (5.0) %
Total interest expense $ 104,989 $ 118,880 (11.7) %

All values are in US Dollars.

The decreases in interest expense during the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 were primarily due to the following reasons:

•$9.0 million of Euro-denominated bond refinancing fees incurred during the three and six months ended June 30, 2019;

•The favorable impact of foreign currency translation, primarily by the strengthening of the U.S. dollar against the British Pound;

•Lower balances on the Encore Term Loan Facility, Encore Senior Secured Notes, and Cabot Credit Facilities;

•Decrease in London Interbank Offered Rate (“LIBOR”) which resulted in decreased interest expense for the Encore Revolving Credit Facility; and

•Partially offset by the effect from higher balances on the Encore Revolving Credit Facility.

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Other Expense

Other income or expense consists primarily of foreign currency exchange gains or losses, interest income, and gains or losses recognized on certain transactions outside of our normal course of business. Other expense was $3.0 million during the three months ended June 30, 2020 and $1.2 million during the three months ended June 30, 2019. Other expense was $1.6 million during the six months ended June 30, 2020 and $4.2 million during the six months ended June 30, 2019.

Other expense recognized during the three and six months ended June 30, 2020 primarily included a loss of $4.8 million as a result of the divestiture of our investment in Brazil. This loss was partially offset by other income from fair value changes for currency exchange forward contracts which were not designated as hedge instruments for accounting purposes. Other expense recognized during the three and six months ended June 30, 2019 was primarily due to foreign currency exchange losses.

Provision for Income Taxes

We recorded income tax expense of $35.6 million and $11.8 million during the three months ended June 30, 2020 and 2019, respectively, and income tax expense of $40.1 million and $15.4 million during the six months ended June 30, 2020 and 2019, respectively.

The effective tax rates for the respective periods are shown below:

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
Federal provision 21.0 % 21.0 % 21.0 % 21.0 %
State provision 2.5 % 3.6 % 3.2 % 3.0 %
Foreign income taxed at different rates (0.4) % (3.8) % (0.3) % (2.3) %
Change in valuation allowance^(1)^ (0.2) % 2.6 % 2.3 % 2.2 %
Tax benefit from divestiture of foreign investment (1.8) % — % (1.9) % — %
Change in tax accounting method — % — % — % (8.9) %
Other 0.3 % 0.8 % 0.7 % 0.2 %
Effective tax rate 21.4 % 24.2 % 25.0 % 15.2 %

________________________

(1)Attributable to losses incurred at certain foreign subsidiaries with cumulative operating losses for tax purposes.

We utilized the discrete effective tax rate method (“discrete method”) for recording income taxes for the three and six months ended June 30, 2020. We believe the use of the discrete method is more appropriate than the application of the estimated annual effective tax rate (“AETR”) method due to uncertainty in estimating annual pre-tax earnings primarily due to the ongoing COVID-19 pandemic. We will re-evaluate the use of the discrete method each quarter until it is deemed appropriate to return to the AETR method.

Our income tax expense includes deferred income taxes arising from temporary differences between the financial reporting and tax bases of assets and liabilities, and net operating losses. We regularly evaluate the realizability of our deferred income tax assets and assess the need for a valuation allowance, including considerations of whether it is more likely than not that the deferred income tax assets will be realized. The assessment of realizability requires significant judgement and our projections of future taxable income required to fully realize the recorded amount of deferred tax assets reflect numerous assumptions about our operating business and investments, and are subject to change as conditions change specific to our operating business, investments or general economic conditions. Adverse changes in certain jurisdictions could result in the need to record or increase the valuation allowance, resulting in a charge against earnings in the respective period.

Our subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2026. The impact of the tax holiday in Costa Rica for the three and six months ended June 30, 2020 and 2019, was immaterial.

We had gross unrecognized tax benefits, inclusive of penalties and interest, of $8.2 million as of June 30, 2020. These unrecognized tax benefits, if recognized, would result in a net tax benefit of $7.6 million as of June 30, 2020. There was no material change in gross unrecognized tax benefits from December 31, 2019.

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We have not provided for applicable income or withholding taxes on the undistributed earnings for certain of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries as of June 30, 2020 was approximately $153.1 million. Such undistributed earnings are considered permanently reinvested. We do not provide for deferred taxes on translation adjustments on unremitted earnings under the indefinite reversal exemption. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practical due to the complexities of a hypothetical calculation. Subsidiaries operating outside of the United States for which we do not consider under the indefinite reversal exemption have no material undistributed earnings or outside basis differences and therefore no U.S. taxes have been provided.

The UK Finance Act 2020 received Royal Assent in the United Kingdom on July 22, 2020, changing the corporate income tax rate from the previously enacted 17% to 19% effective on April 1, 2020. This change in tax rate is not expected to have a material impact to our financial results.

Non-GAAP Disclosure

In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles (“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.

Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments, and amortization methods, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.

Adjusted Earnings Per Share. Management uses non-GAAP adjusted net income and adjusted earnings per share attributable to Encore to assess operating performance and to highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. Adjusted net income attributable to Encore excludes non-cash interest and issuance cost amortization relating to our convertible notes and exchangeable notes, acquisition, integration and restructuring related expenses, amortization of certain acquired intangible assets and other charges or gains that are not indicative of ongoing operations.

The following table provides a reconciliation between net income and diluted earnings per share attributable to Encore calculated in accordance with GAAP, to adjusted net income and adjusted earnings per share attributable to Encore, respectively (in thousands, except per share data):

Three Months Ended June 30,
2020 2019
Per Diluted Share Per Diluted Share
GAAP net income attributable to Encore, as reported $ 4.13 $ 1.17
Adjustments:
Convertible notes and exchangeable notes non-cash interest and issuance cost amortization 4,048 0.13 4,038 0.13
Acquisition, integration and restructuring related expenses^(1)^ 4,776 0.15 1,318 0.04
Amortization of certain acquired intangible assets^(2)^ 1,791 0.06 1,837 0.06
Net gain on fair value adjustments to contingent consideration^(3)^ — — (2,199) (0.07)
Income tax effect of above non-GAAP adjustments and certain discrete tax items^(4)^ (4,097) (0.13) (1,388) (0.05)
Adjusted net income attributable to Encore $ 4.34 $ 1.28

All values are in US Dollars.

________________________

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(1)Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(2)We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution service providers. These intangible assets are valued at the time of the acquisition and amortized over their estimated lives. We believe that amortization of acquisition-related intangible assets, especially the amortization of an acquired company’s trade names and customer relationships, is the result of pre-acquisition activities. In addition, the amortization of these acquired intangibles is a non-cash static expense that is not affected by operations during any reporting period. As a result, the amortization of certain acquired intangible assets is excluded from our adjusted income attributable to Encore and adjusted earnings per share.

(3)Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to the Contingent Consideration section of “Note 3: Fair Value Measurements” in the notes to our consolidated financial statements for further details.

(4)Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the adjustment occurred. Additionally, we adjust for certain discrete tax items that are not indicative of our ongoing operations.

Six Months Ended June 30,
2020 2019
Per Diluted Share Per Diluted Share
GAAP net income attributable to Encore, as reported $ 3.79 $ 2.74
Adjustments:
Convertible notes and exchangeable notes non-cash interest and issuance cost amortization 8,025 0.25 8,040 0.26
Acquisition, integration and restructuring related expenses^(1)^ 4,963 0.16 2,526 0.08
Amortization of certain acquired intangible assets^(2)^ 3,434 0.11 3,714 0.12
Net gain on fair value adjustments to contingent consideration^(3)^ — — (2,199) (0.07)
Income tax effect of above non-GAAP adjustments and certain discrete tax items^(4)^ (5,347) (0.17) (2,771) (0.10)
Change in tax accounting method^(5)^ — — (9,070) (0.29)
Adjusted net income attributable to Encore $ 4.14 $ 2.74

All values are in US Dollars.

________________________

(1)Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

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(2)We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution service providers. These intangible assets are valued at the time of the acquisition and amortized over their estimated lives. We believe that amortization of acquisition-related intangible assets, especially the amortization of an acquired company’s trade names and customer relationships, is the result of pre-acquisition activities. In addition, the amortization of these acquired intangibles is a non-cash static expense that is not affected by operations during any reporting period. As a result, the amortization of certain acquired intangible assets is excluded from our adjusted income attributable to Encore and adjusted income per share.

(3)Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to the Contingent Consideration section of “Note 3: Fair Value Measurements” in the notes to our consolidated financial statements for further details.

(4)Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the adjustment occurred. Additionally, we adjust for certain discrete tax items that are not indicative of our ongoing operations.

(5)Amount represents the benefit from the tax accounting method change related to revenue reporting. We adjust for certain discrete tax items that are not indicative of our ongoing operations.

Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before discontinued operations, interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related expenses, and other charges or gains that are not indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented is as follows (in thousands):

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
GAAP net income, as reported $ 130,784 $ 36,822 $ 120,205 $ 86,264
Adjustments:
Interest expense 50,327 63,913 104,989 118,880
Interest income (559) (1,238) (1,559) (2,260)
Provision for income taxes 35,570 11,753 40,128 15,426
Depreciation and amortization 10,542 9,741 20,827 19,736
Stock-based compensation expense 4,778 3,581 9,305 5,407
Net gain on fair value adjustments to contingent consideration^(1)^ — (2,199) — (2,199)
Acquisition, integration and restructuring related expenses^(2)^ 4,776 1,318 4,963 2,526
Adjusted EBITDA $ 236,218 $ 123,691 $ 298,858 $ 243,780
Collections applied to principal balance^(3)^ $ 106,921 $ 200,323 $ 375,496 $ 401,651

________________________

(1)Amount represents the gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to the Contingent Consideration section of “Note 3: Fair Value Measurements” in the notes to our consolidated financial statements for further details.

(2)Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(3)For periods subsequent to January 1, 2020 amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) changes in expected recoveries. For periods prior to January 1, 2020, amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios.

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Adjusted Operating Expenses. Management utilizes adjusted operating expenses in order to facilitate a comparison of approximate costs to cash collections for our portfolio purchasing and recovery business. Adjusted operating expenses for our portfolio purchasing and recovery business are calculated by starting with GAAP total operating expenses and backing out operating expenses related to non-portfolio purchasing and recovery business, acquisition, integration and restructuring related operating expenses, stock-based compensation expense, settlement fees and related administrative expenses and other charges or gains that are not indicative of ongoing operations. Adjusted operating expenses related to our portfolio purchasing and recovery business for the periods presented are as follows (in thousands):

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
GAAP total operating expenses, as reported $ 206,341 $ 233,142 $ 448,220 $ 469,161
Adjustments:
Operating expenses related to non-portfolio purchasing and recovery business^(1)^ (42,386) (42,232) (83,875) (88,314)
Stock-based compensation expense (4,778) (3,581) (9,305) (5,407)
Gain on fair value adjustments to contingent consideration^(2)^ — 2,199 — 2,199
Acquisition, integration and restructuring related expenses^(3)^ 32 (1,318) (155) (2,526)
Adjusted operating expenses related to portfolio purchasing and recovery business $ 159,209 $ 188,210 $ 354,885 $ 375,113

________________________

(1)Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily engage in fee-based business, as well as corporate overhead not related to our portfolio purchasing and recovery business.

(2)Amount represents the gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to the Contingent Consideration section of “Note 3: Fair Value Measurements” in the notes to our consolidated financial statements for further details.

(3)Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

Cost per Dollar Collected

We utilize adjusted operating expenses in order to facilitate a comparison of approximate costs to cash collections from purchased receivables for our portfolio purchasing and recovery business. The following table summarizes our cost per dollar collected (defined as adjusted operating expenses as a percentage of collections from purchased receivables) by geographic location during the periods presented:

Three Months Ended<br>June 30, Six Months Ended<br>June 30,
2020 2019 2020 2019
United States 32.0 % 39.2 % 35.7 % 39.4 %
Europe 27.7 % 28.8 % 28.9 % 28.2 %
Other geographies 59.7 % 51.2 % 55.5 % 51.2 %
Overall cost per dollar collected 31.3 % 36.6 % 34.3 % 36.5 %

As discussed in the “Accounting Policy Update” section in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies” of the notes to the consolidated financial statements, effective January 1, 2020, we expense all court costs as incurred and no longer capitalize such costs as Deferred Court Costs based on a loss-rate methodology. This accounting policy change increased the cost-to-collect metric as compared to prior periods because the court costs expense recognized in prior periods only represented costs we did not expect to recover. The accounting policy change has no impact on the amount of court cost payments incurred.

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Despite the increase in expense due to the accounting policy change discussed above, cost-to-collect decreased during the periods presented, due to a combination of (1) continued improvement in operational efficiencies in the collection process and (2) a large reduction in legal channel spending due to court closures in certain jurisdictions as a result of the COVID-19 pandemic and (3) collection mix shifting towards non-legal collection, which has a lower cost-to-collect. Collections from other geographies continue to decline as we continue to focus on the U.S. and European markets. Cost-to-collect in LAAP is expected to stay at an elevated level and will continue to fluctuate over time.

Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on seasonality, product mix, acquisitions, foreign exchange rates, the cost of new operating initiatives, and the changing regulatory and legislative environment.

Supplemental Performance Data

The tables included in this supplemental performance data section include detail for purchases, collections and ERC by year of purchase.

Our collection expectations are based on account characteristics and economic variables. Additional adjustments are made to account for qualitative factors that may affect the payment behavior of our consumers and servicing related adjustments to ensure our collection expectations are aligned with our operations. We continue to refine our process of forecasting collections both domestically and internationally with a focus on operational enhancements. Our collection expectations vary between types of portfolio and geographic location. For example, in the U.K., due to the higher concentration of payment plans, as compared to the U.S. and other locations in Europe, we expect to receive streams of collections over longer periods of time. As a result, past performance of pools in certain geographic locations or of certain types of portfolio are not necessarily a suitable indicator of future results in other locations or for other types of portfolio.

The supplemental performance data presented in this section is impacted by foreign currency translation, which represents the effect of translating financial results where the functional currency of our foreign subsidiary is different than our U.S. dollar reporting currency. For example, the strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable reporting impact on our international purchases, collections, and ERC, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international purchases, collections, and ERC.

We utilize proprietary forecasting models to continuously evaluate the economic life of each pool.

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Cumulative Collections from Purchased Receivables to Purchase Price Multiple

The following table summarizes our receivable purchases and related gross collections by year of purchase (in thousands, except multiples):

Year of<br>Purchase Purchase<br><br>Price^(1)^ Cumulative Collections through June 30, 2020
<2011 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total^(2)^ Multiple^(3)^
United States:
<2011 $ 1,760,993 $ 3,222,155 $ 637,415 $ 458,336 $ 328,076 $ 236,557 $ 180,622 $ 129,676 $ 99,169 $ 80,397 $ 65,855 $ 27,872 $ 5,466,130 3.1
2011 383,797 — 123,596 301,949 226,521 155,180 112,906 77,257 56,287 41,148 33,445 13,591 1,141,880 3.0
2012 548,812 — — 187,721 350,134 259,252 176,914 113,067 74,507 48,832 37,327 15,163 1,262,917 2.3
2013 551,909 — — — 230,051 397,646 298,068 203,386 147,503 107,399 84,665 33,857 1,502,575 2.7
2014 517,720 — — — — 144,178 307,814 216,357 142,147 94,929 69,059 26,427 1,000,911 1.9
2015 499,318 — — — — — 105,610 231,102 186,391 125,673 85,042 36,494 770,312 1.5
2016 553,459 — — — — — — 110,875 283,035 234,690 159,279 65,760 853,639 1.5
2017 528,526 — — — — — — — 111,902 315,853 255,048 108,502 791,305 1.5
2018 631,100 — — — — — — — — 175,042 351,696 169,966 696,704 1.1
2019 677,933 — — — — — — — — — 174,693 204,742 379,435 0.6
2020 308,640 — — — — — — — — — — 58,407 58,407 0.2
Subtotal 6,962,207 3,222,155 761,011 948,006 1,134,782 1,192,813 1,181,934 1,081,720 1,100,941 1,223,963 1,316,109 760,781 13,924,215 2.0
Europe:
2013 619,079 — — — 134,259 249,307 212,129 165,610 146,993 132,663 113,228 45,266 1,199,455 1.9
2014 623,129 — — — — 135,549 198,127 156,665 137,806 129,033 105,337 41,468 903,985 1.5
2015 419,941 — — — — — 65,870 127,084 103,823 88,065 72,277 26,886 484,005 1.2
2016 258,218 — — — — — — 44,641 97,587 83,107 63,198 23,626 312,159 1.2
2017 461,571 — — — — — — — 68,111 152,926 118,794 42,496 382,327 0.8
2018 433,302 — — — — — — — — 49,383 118,266 40,111 207,760 0.5
2019 273,354 — — — — — — — — — 44,118 36,595 80,713 0.3
2020 51,976 — — — — — — — — — — 4,026 4,026 0.1
Subtotal 3,140,570 — — — 134,259 384,856 476,126 494,000 554,320 635,177 635,218 260,474 3,574,430 1.1
Other geographies:
2012 6,721 — — — 3,848 2,561 1,208 542 551 422 390 129 9,651 1.4
2013 29,568 — — — 6,617 17,615 10,334 4,606 3,339 2,468 1,573 479 47,031 1.6
2014 86,989 — — — — 9,652 16,062 18,403 9,813 7,991 6,472 2,764 71,157 0.8
2015 83,198 — — — — — 15,061 57,064 43,499 32,622 17,499 2,505 168,250 2.0
2016 64,450 — — — — — — 29,269 39,710 28,992 16,078 2,548 116,597 1.8
2017 49,670 — — — — — — — 15,471 23,075 15,383 3,089 57,018 1.1
2018 26,371 — — — — — — — — 12,910 15,008 2,614 30,532 1.2
2019 2,668 — — — — — — — — — 3,198 111 3,309 1.2
2020 — — — — — — — — — — — — — —
Subtotal 349,635 — — — 10,465 29,828 42,665 109,884 112,383 108,480 75,601 14,239 503,545 1.4
Total $ 10,452,412 $ 3,222,155 $ 761,011 $ 948,006 $ 1,279,506 $ 1,607,497 $ 1,700,725 $ 1,685,604 $ 1,767,644 $ 1,967,620 $ 2,026,928 $ 1,035,494 $ 18,002,190 1.7

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(1)Adjusted for Put-Backs and Recalls. Put-Backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.

(2)Cumulative collections from inception through June 30, 2020, excluding collections on behalf of others.

(3)Cumulative Collections Multiple (“Multiple”) through June 30, 2020 refers to collections as a multiple of purchase price.

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Total Estimated Collections from Purchased Receivables to Purchase Price Multiple

The following table summarizes our purchases, resulting historical gross collections, and estimated remaining gross collections from purchased receivables, by year of purchase (in thousands, except multiples):

Purchase Price^(1)^ Historical<br><br>Collections^(2)^ Estimated <br>Remaining <br>Collections Total Estimated<br>Gross Collections Total Estimated Gross<br>Collections to<br>Purchase Price
United States:
<2011 $ 1,760,993 $ 5,466,130 $ 136,727 $ 5,602,857 3.2
2011 383,797 1,141,880 67,530 1,209,410 3.2
2012 548,812 1,262,917 76,765 1,339,682 2.4
2013^(3)^ 551,909 1,502,575 211,777 1,714,352 3.1
2014^(3)^ 517,720 1,000,911 138,287 1,139,198 2.2
2015 499,318 770,312 147,952 918,264 1.8
2016 553,459 853,639 272,843 1,126,482 2.0
2017 528,526 791,305 424,388 1,215,693 2.3
2018 631,100 696,704 699,385 1,396,089 2.2
2019 677,933 379,435 1,225,516 1,604,951 2.4
2020 308,640 58,407 689,851 748,258 2.4
Subtotal 6,962,207 13,924,215 4,091,021 18,015,236 2.6
Europe:
2013^(3)^ 619,079 1,199,455 859,064 2,058,519 3.3
2014^(3)^ 623,129 903,985 647,093 1,551,078 2.5
2015^(3)^ 419,941 484,005 414,943 898,948 2.1
2016 258,218 312,159 331,622 643,781 2.5
2017 461,571 382,327 568,662 950,989 2.1
2018 433,302 207,760 620,338 828,098 1.9
2019 273,354 80,713 521,199 601,912 2.2
2020 51,976 4,026 125,964 129,990 2.5
Subtotal 3,140,570 3,574,430 4,088,885 7,663,315 2.4
Other geographies:
2012 6,721 9,651 309 9,960 1.5
2013 29,568 47,031 1,539 48,570 1.6
2014 86,989 71,157 50,491 121,648 1.4
2015 83,198 168,250 17,807 186,057 2.2
2016 64,450 116,597 8,206 124,803 1.9
2017 49,670 57,018 30,976 87,994 1.8
2018 26,371 30,532 12,296 42,828 1.6
2019 2,668 3,309 515 3,824 1.4
2020 — — — — —
Subtotal 349,635 503,545 122,139 625,684 1.8
Total $ 10,452,412 $ 18,002,190 $ 8,302,045 $ 26,304,235 2.5

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(1)Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments. Put-Backs and Recalls represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.

(2)Cumulative collections from inception through June 30, 2020, excluding collections on behalf of others.

(3)Includes portfolios acquired in connection with certain business combinations.

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Estimated Remaining Gross Collections by Year of Purchase

The following table summarizes our estimated remaining gross collections from purchased receivable portfolios and estimated future cash flows from real estate-owned assets by year of purchase (in thousands):

Estimated Remaining Gross Collections by Year of Purchase^(1)^
2020^(3)^ 2021 2022 2023 2024 2025 2026 2027 2028 >2028 Total^(2)^
United States:
<2011 $ 21,270 $ 39,383 $ 25,204 $ 17,496 $ 12,114 $ 8,246 $ 5,561 $ 3,684 $ 2,272 $ 1,497 $ 136,727
2011 10,494 18,286 11,863 8,328 5,863 4,135 2,921 2,069 1,470 2,101 67,530
2012 11,709 21,201 13,334 9,328 6,562 4,625 3,266 2,311 1,640 2,789 76,765
2013^(4)^ 27,765 56,540 37,572 26,544 18,802 13,336 9,462 6,715 4,768 10,273 211,777
2014^(4)^ 20,724 38,885 24,046 16,545 11,387 8,030 5,681 4,024 2,853 6,112 138,287
2015 25,073 40,373 26,799 17,907 12,008 7,950 5,435 3,828 2,702 5,877 147,952
2016 46,293 76,902 46,432 31,704 22,074 15,335 10,474 7,342 5,163 11,124 272,843
2017 72,704 119,204 76,679 48,814 33,024 22,841 15,787 10,960 7,724 16,651 424,388
2018 123,089 208,035 130,638 83,883 52,785 34,722 22,907 15,097 9,871 18,358 699,385
2019 208,324 384,594 207,586 129,623 88,517 61,172 43,469 31,721 23,032 47,478 1,225,516
2020 78,923 182,968 160,937 90,058 55,489 37,568 25,411 17,992 12,930 27,575 689,851
Subtotal 646,368 1,186,371 761,090 480,230 318,625 217,960 150,374 105,743 74,425 149,835 4,091,021
Europe:
2013^(4)^ 45,229 93,809 88,740 83,497 76,633 69,150 61,994 55,516 50,826 233,670 859,064
2014^(4)^ 38,719 78,597 72,434 66,492 58,996 52,425 44,306 39,112 35,060 160,952 647,093
2015^(4)^ 25,706 52,020 46,861 42,322 37,626 33,705 29,145 25,021 22,438 100,099 414,943
2016 20,641 57,803 51,703 36,936 31,373 26,140 21,846 17,984 15,143 52,053 331,622
2017 38,821 86,199 77,984 64,934 54,474 45,113 37,482 32,398 26,415 104,842 568,662
2018 39,104 93,018 79,889 68,659 59,330 50,974 43,843 37,421 31,003 117,097 620,338
2019 35,870 79,678 71,010 60,570 50,263 41,274 34,125 29,136 24,957 94,316 521,199
2020 6,155 19,893 19,315 15,621 12,872 10,448 8,700 6,889 5,726 20,345 125,964
Subtotal 250,245 561,017 507,936 439,031 381,567 329,229 281,441 243,477 211,568 883,374 4,088,885
Other geographies:
2012 79 148 82 — — — — — — — 309
2013 334 604 396 205 — — — — — — 1,539
2014 3,174 9,417 7,533 6,748 5,685 4,267 2,507 1,427 1,299 8,434 50,491
2015 1,736 3,320 2,806 2,536 1,702 1,115 820 719 621 2,432 17,807
2016 1,906 3,313 1,831 628 259 172 97 — — — 8,206
2017 3,633 7,389 5,271 3,794 2,011 1,778 1,331 763 668 4,338 30,976
2018 2,180 3,853 2,558 1,772 876 470 307 201 79 — 12,296
2019 103 174 108 72 49 9 — — — — 515
2020 — — — — — — — — — — —
Subtotal 13,145 28,218 20,585 15,755 10,582 7,811 5,062 3,110 2,667 15,204 122,139
Portfolio ERC 909,758 1,775,606 1,289,611 935,016 710,774 555,000 436,877 352,330 288,660 1,048,413 8,302,045
REO ERC^(5)^ 12,325 32,838 18,128 8,275 6,620 1,533 65 — — — 79,784
Total ERC $ 922,083 $ 1,808,444 $ 1,307,739 $ 943,291 $ 717,394 $ 556,533 $ 436,942 $ 352,330 $ 288,660 $ 1,048,413 $ 8,381,829

________________________

(1)As of June 30, 2020, ERC for Zero Basis Portfolios include approximately $136.7 million for purchased consumer and bankruptcy receivables in the United States. ERC for Zero Basis Portfolios in Europe and other geographies was immaterial.

(2)Represents the expected remaining gross cash collections over a 180-month period. As of June 30, 2020, ERC for 84-month and 120-month periods were:

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84-Month ERC 120-Month ERC
United States $ 3,818,465 $ 4,012,375
Europe 2,876,901 3,472,945
Other geographies 102,826 110,630
Portfolio ERC $ 6,798,192 $ 7,595,950
REO ERC $ 79,784 $ 79,784
Total ERC $ 6,877,976 $ 7,675,734

(3)Amount for 2020 consists of six months data from July 1, 2020 to December 31, 2020.

(4)Includes portfolios acquired in connection with certain business combinations.

(5)Real estate-owned assets ERC includes approximately $77.8 million and $2.0 million of estimated future cash flows for Europe and Other Geographies, respectively.

Estimated Future Collections Applied to Principal

As of June 30, 2020, we had $3.2 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows (in thousands):

Years Ending December 31, United States Europe Other Geographies Total
2020^(1)^ $ 213,151 $ 45,340 $ 6,266 $ 264,757
2021 503,325 181,588 16,051 700,964
2022 323,691 177,631 13,138 514,460
2023 189,744 153,392 8,368 351,504
2024 119,816 134,777 6,018 260,611
2025 80,203 116,596 4,699 201,498
2026 54,114 98,558 2,791 155,463
2027 38,151 85,497 1,585 125,233
2028 27,300 75,280 1,367 103,947
2029 19,178 67,113 1,299 87,590
2030 13,606 62,906 1,299 77,811
2031 9,831 62,278 1,299 73,408
2032 7,343 63,709 1,299 72,351
2033 5,898 68,709 1,299 75,906
2034 5,343 76,771 1,299 83,413
2035 1,372 48,969 1,984 52,325
Total $ 1,612,066 $ 1,519,114 $ 70,061 $ 3,201,241

________________________

(1)Amount for 2020 consists of six months data from July 1, 2020 to December 31, 2020.

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Purchases by Quarter

The following table summarizes the receivable portfolios we purchased by quarter, and the respective purchase prices and fair value (in thousands):

Quarter # of<br>Accounts Face Value Purchase <br>Price
Q1 2018 973 $ 1,799,804 $ 276,762
Q2 2018 1,031 2,870,456 359,580
Q3 2018 706 1,559,241 248,691
Q4 2018 766 2,272,113 246,865
Q1 2019 854 1,732,977 262,335
Q2 2019 778 2,307,711 242,697
Q3 2019 1,255 5,313,092 259,910
Q4 2019 803 2,241,628 234,916
Q1 2020 943 1,703,022 214,113
Q2 2020 754 1,305,875 147,939

Liquidity and Capital Resources

Liquidity

The following table summarizes our cash flow activities for the periods presented (in thousands):

Six Months Ended June 30,
2020 2019
(Unaudited)
Net cash provided by operating activities $ 209,715 $ 108,820
Net cash used in investing activities (11,013) (115,688)
Net cash (used in) provided by financing activities (87,568) 27,578

Operating Cash Flows

Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in expected recoveries, allowance charges and stock-based compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.

Net cash provided by operating activities increased $100.9 million for the six months ended June 30, 2020 as compared to the prior period, mainly driven by significant increase in net income, changes in expected recoveries compared to the prior year net allowance reversals, and the change in prepaid income tax and income taxes payable.

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Investing Cash Flows

Cash used in investing activities is primarily affected by receivable portfolio purchases offset by collection proceeds applied to the principal of our receivable portfolios.

Net cash used in investing activities decreased $104.7 million for the six months ended June 30, 2020 as compared to the prior period, mainly driven by reduced purchasing volume. Receivable portfolio purchases, net of put-backs, were $350.7 million and $499.9 million during the six months ended June 30, 2020 and 2019, respectively. Collection proceeds applied to the principal of our receivable portfolios, net, were $342.8 million and $405.1 million during the six months ended June 30, 2020 and 2019, respectively.

Financing Cash Flows

Net cash used in financing activities was $87.6 million during the six months ended June 30, 2020, and net cash provided by financing activities was $27.6 million during the six months ended June 30, 2019. Financing cash flows are generally affected by borrowings under our credit facilities and proceeds from various debt offerings, offset by repayments of amounts outstanding under our credit facilities and repayments of various notes. Borrowings under our credit facilities were $279.1 million and $322.9 million during the six months ended June 30, 2020 and 2019, respectively. Repayments of amounts outstanding under our credit facilities were $315.6 million and $276.2 million during the six months ended June 30, 2020 and 2019, respectively. Repayment of senior secured notes was $32.5 million and $460.5 million during the six months ended June 30, 2020 and 2019, respectively. The repayment of senior secured notes during the six months ended June 30, 2019 was made using approximately $460.5 million of proceeds received from the issuance of Cabot’s senior secured notes due 2024.

Capital Resources

Historically, we have met our cash requirements by utilizing our cash flows from operations, cash collections from our investment in receivable portfolios, bank borrowings, debt offerings, and equity offerings. Depending on the capital markets, we consider additional financings to fund our operations and acquisitions. We continue to explore possible synergies with respect to Cabot, including in connection with potential debt financing options. From time to time, we may repurchase outstanding debt or equity and/or restructure or refinance debt obligations. Our primary cash requirements have included the purchase of receivable portfolios, entity acquisitions, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes.

Currently, all of our portfolio purchases are funded with cash from operations, cash collections from our investment in receivable portfolios, and our bank borrowings. On July 9, 2020, we amended our revolving credit facility and term loan facility (together, the “Senior Secured Credit Facilities”), which increased the total commitments of the revolving credit facility to $1,127.4 million, increased the term loan facility to $188.8 million, and extended the maturity date for portions of the Senior Secured Facilities from December 2021 to July 2023.

Additionally, we paid-off $89.4 million of convertible senior notes that matured on July 1, 2020 using cash on hand.

We are in material compliance with all covenants under our financing arrangements. See “Note 8: Borrowings” to our consolidated financial statements for a further discussion of our debt.

Our cash and cash equivalents as of June 30, 2020 consisted of $167.6 million held by U.S.-based entities and $126.2 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated. However, we believe that our U.S. sources of cash and liquidity are sufficient to meet our business needs in the United States.

Included in cash and cash equivalents is cash that was collected on behalf of, and remains payable to, third-party clients. The balance of cash held for clients was $21.1 million as of June 30, 2020.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from our consumers, and other risks detailed in Risk Factors. However, we believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, cash collections from our investment in receivable portfolios, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities. Our future cash needs will depend on our acquisitions of portfolios and businesses.

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Rates. As of June 30, 2020, there had not been a material change in any of the foreign currency risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Interest Rates. As of June 30, 2020, there had not been a material change in the interest rate risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Item 4 – Controls and Procedures

Attached as exhibits to this Form 10-Q are the certifications required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended. This section includes information concerning the controls and controls evaluation referred to in the certifications.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”) and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and accordingly, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on their most recent evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

Except as noted below there were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On January 1, 2020, we adopted the new accounting standard for Financial Instruments - Credit Losses (“CECL”). As a result, we implemented changes to policies, processes, systems, and controls over estimating the allowance for credit losses.

We have not experienced any material impact to our internal controls over financial reporting due to the COVID-19 pandemic even though many of our employees are working remotely. We are continually monitoring and assessing the impact of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Information with respect to this item may be found in “Note 11, Commitments and Contingencies,” to the consolidated financial statements.

Item 1A – Risk Factors

There is no material change in the information reported under “Part I-Item 1A-Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and “Part II-Item 1A-Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Item 6 – Exhibits

Number Description
3.1.1 Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1/A filed on June 14, 1999, File No. 333-77483)
3.1.2 Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 4, 2002, File No. 000-26489)
3.1.3 Second Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.1.3 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2019)
3.3 Bylaws, as amended through February 8, 2011 (incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed on February 14, 2011)
10.1+ Non-Employee Director Compensation Program Guidelines, effective June 17, 2020 (filed herewith)
31.1 Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2 Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. (filed herewith)
101.SCH XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101
  • Management contract or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ENCORE CAPITAL GROUP, INC.
By: /s/ Jonathan C. Clark
Jonathan C. Clark
Executive Vice President,
Chief Financial Officer and Treasurer

Date: August 5, 2020

59

Document

Exhibit 10.1

ENCORE CAPITAL GROUP, INC.

NON-EMPLOYEE DIRECTOR COMPENSATION PROGRAM GUIDELINES

Approved by the Board of Directors on June 17, 2020

ENCORE CAPITAL GROUP, INC.

NON-EMPLOYEE DIRECTOR COMPENSATION PROGRAM GUIDELINES

Table of Contents

Section 1  Definitions

Section 2  Purpose of Guidelines

Section 3  Term of Guidelines; Amendment and Termination of Guidelines

Section 4  Administration

Section 5  Eligibility and Participation

Section 6  Compensation

Section 7  Miscellaneous

ENCORE CAPITAL GROUP, INC.

NON-EMPLOYEE DIRECTOR COMPENSATION PROGRAM GUIDELINES

1.0DEFINITIONS

The following terms shall have the following meanings unless the context indicates otherwise:

1.1“2017 Plan” shall mean the Company’s 2013 Incentive Compensation Plan or the 2017 Incentive Award Plan, as applicable, as such plans may be amended, modified, or supplemented from time to time, and any successors to such plans.

1.2“Annual Meeting Date” shall mean the date of the Company’s annual meeting of shareholders for a given calendar year.

1.3“Beneficiary” shall mean a beneficiary or beneficiaries designated in writing by a Non-Employee Director to receive any compensation under these Guidelines in the event of a Non-Employee Director’s death. If no Beneficiary is designated by the Non-Employee Director, then the Non-Employee Director’s estate shall be deemed to be the Non-Employee’s Beneficiary.

1.4“Board" shall mean the Board of Directors of the Company.

1.5“Business Day” means any day that is not a Saturday, Sunday, or other day on which banking corporations in San Diego, California, are authorized or required by law to close.

1.6“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, including applicable regulations promulgated thereunder.

1.7“Committee” shall mean the Board’s Compensation Committee.

1.8“Company” shall mean Encore Capital Group, Inc., a Delaware corporation.

1.9“Deferred Compensation Plan” means the Company’s Non-Employee Director Deferred Stock Compensation Plan, as such plan may be amended, modified, or supplemented from time to time, and any successor to such plan.

1.10“Director Service Year” shall mean the period beginning on a given Annual Meeting Date and ending on the date immediately preceding the next Annual Meeting Date.

1.11“Effective Date” shall mean June 17, 2020.

1.12“Equity Award” shall mean either a Stock Award or an RSU Award.

1.13“Equity Award Agreement" shall mean a written agreement between the Company and a Non-Employee Director that establishes the terms, conditions, restrictions and/or limitations applicable to an Equity Award in addition to those established by these Guidelines and by the Committee's exercise of its administrative powers; provided, however, that if a Non-Employee Director defers receipt of any Equity Award pursuant to the Deferred Compensation Plan, then such Non-Employee Director’s deferral election, coupled with the terms and conditions set forth in the Deferred Compensation Plan, shall be deemed to constitute an “Equity Award Agreement.”

1.14“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, including applicable regulations promulgated thereunder.

1.15“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended from time to time, including applicable regulations thereunder.

1.16“Fair Market Value of a Share" shall mean:

(a)if Shares are readily tradable on a national securities exchange or other market system, the closing price of a Share on the principal trading market for the Shares on the date of calculation (or on the last preceding trading date if Shares were not traded on such date), or

(b)if Shares are not readily tradable on a national securities exchange or other market system:

(i)the book value of a Share as of the last day of the last completed fiscal quarter preceding the date of calculation; or

(ii)any other value as otherwise determined in good faith by the Board.

1.17“Guidelines” shall mean the Encore Capital Group, Inc. Non-Employee Director Compensation Program Guidelines.

1.18“Non-Employee Director” shall mean a member of the Board who is not an employee of the Company.

1.19“Quarterly Payment Date” shall mean September 1st, December 1st, March 1st, and June 1st in a given Director Service Year. By way of example, if the Annual Meeting Date for 20XX is June 15, 20XX and the Annual Meeting Date for 20YY is June 16, 20YY, then the “Quarterly Payment Dates” for the Director Service Year beginning on June 15, 20XX and ending on June 16, 20YY will be September 1, 20XX, December 1, 20XX, March 1, 20YY, and June 1, 20YY.

1.20“RSU Award” shall mean an Equity Award granted in the form of restricted stock units, and which shall be paid in Shares to the Non-Employee Director (or to his or her Beneficiary) pursuant to the terms of the Equity Award Agreement evidencing such Equity Award.

1.21“Share” shall mean a share of the Company’s common stock, $.01 par value.

1.22“Stock Award” shall mean an Equity Award granted in the form of Shares, and which shall be delivered to the Non-Employee Director (or his or her Beneficiary) in accordance with Section 6 below.

1.23“Stock Ownership and Retention Guidelines” means the Company’s Stock Ownership and Retention Guidelines as adopted by the Board, as such guidelines may be amended, supplemented, and modified from time to time.

1.24“Treasury Regulation” shall mean the regulations promulgated under the Code by the United States Department of the Treasury, as amended from time to time.

1.25“Voting Members” shall have the meaning set forth in Section 6.4.

2.0PURPOSE OF GUIDELINES

2.1Purpose. The purpose of these Guidelines is to implement and administer the Company’s compensation program for Non-Employee Directors, which was originally adopted by the Board on December 7, 2011; amended by the Committee on May 13, 2014; further amended by the Board on December 17, 2014, effective January 1, 2015; further amended by the Board on April 21, 2016, effective June 1, 2016; further amended by the Board on December 6, 2017, effective on January 1, 2018; further amended by the Board on August 28, 2018, effective on September 1, 2018; and further amended by the Board on the Effective Date.

2.2ERISA. The director compensation program is not intended to be an employee benefit plan under ERISA, and thus the program and these Guidelines are intended to not be subject to ERISA.

2.3Code Section 409A. The program and these Guidelines are intended to be fully compliant with Code Section 409A.

3.0TERM OF GUIDELINES; AMENDMENT AND TERMINATION OF GUIDELINES

3.1Term. These Guidelines shall be effective as of the Effective Date and shall terminate only when terminated by the Committee in accordance with Section 3.2 below.

3.2Termination of Guidelines. The Committee may suspend or terminate these Guidelines at any time with or without prior notice; provided, however, that no action authorized by this Section 3.2 shall reduce the amount of any outstanding Equity Award or otherwise adversely change the terms and conditions thereof without the Non-Employee Director’s prior written consent.

3.3Amendment of Guidelines. The Committee may amend these Guidelines at any time with or without prior notice; provided, however, that no action authorized by this Section 3.3 shall reduce the amount of any outstanding Equity Award or otherwise adversely change the terms and conditions thereof without the Non-Employee Director’s prior written consent.

3.4Amendment or Cancellation of Equity Award Agreements. Subject to the provisions of the 2017 Plan, the Committee may amend or modify any Equity Award Agreement at any time; provided, however, that if the amendment or modification adversely affects the Non-Employee Director, such amendment or modification shall be by mutual agreement between the Committee and the Non-Employee Director or such other persons as may then have an interest therein.

3.5Restrictions to Amendment of Guidelines. Notwithstanding anything contained in these Guidelines to the contrary, any amendment to these Guidelines or to any Equity Award Agreement that would result in compensation payable under these Guidelines to be subject to the penalty tax imposed by Code Section 409A shall be null and void and of no effect as if these Guidelines had never been amended.

4.0ADMINISTRATION

4.1Responsibility. The Committee shall have the responsibility, in its sole discretion, to control, operate, manage and administer these Guidelines in accordance with its terms.

4.2Award Agreement. Each Equity Award granted under these Guidelines shall be evidenced by an Equity Award Agreement, which shall be signed by an authorized officer of the Company and the Non-Employee Director; provided, however, that in the event of any conflict between a provision of these Guidelines or the 2017 Plan and any provision of an Award Agreement, the provisions of these Guidelines or the 2017 Plan, as the case may be, shall control and prevail.

4.3Authority of the Committee. The Committee shall have all the discretionary authority that may be necessary or helpful to enable it to discharge its responsibilities with respect to these Guidelines, including but not limited to the following:

(a)to determine eligibility for participation in these Guidelines;

(b)to determine the number of Shares underlying an Equity Award granted under these Guidelines;

(c)to grant Equity Awards to, and to enter into Award Agreements with, Non-Employee Directors;

(d)to supply any omission, correct any defect, or reconcile any inconsistency in these Guidelines in such manner and to such extent as it shall deem appropriate in its sole discretion to carry the same into effect;

(e)to issue administrative guidelines as an aid to administer these Guidelines and make changes in such administrative guidelines as it from time to time deems proper;

(f)to make rules for carrying out and administering these Guidelines and make changes in such rules as it from time to time deems proper;

(g)to the extent permitted under these Guidelines, grant waivers of Guidelines terms, conditions, restrictions, and limitations;

(h)to maintain these Guidelines’ full compliance with the 2017 Plan and Code Section 409A; and

(i)to take any and all other actions it deems necessary or advisable for the proper operation or administration of these Guidelines.

4.4Action by the Committee. The Committee may act only by a majority of its members. Any determination of the Committee may be made, without a meeting, by a writing or writings signed by all of the members of the Committee. In addition, the Committee may authorize any one or more of its members or an officer of the Company to execute and deliver documents on behalf of the Committee.

4.5Delegation of Authority. The Committee may delegate to one or more of its members, or to one or more agents, such administrative duties as it may deem advisable; provided, however, that any such delegation shall be in writing. In addition, the Committee, or any person to whom it has delegated duties under this Section 4.5, may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under these Guidelines. The Committee may employ such legal or other counsel, consultants and agents as it may deem desirable for the administration of these Guidelines and may rely upon any opinion or computation received from any such counsel, consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company.

4.6Determinations and Interpretations by the Committee. All determinations and interpretations made by the Committee shall be binding and conclusive on all Non-Employee Directors and their heirs, successors, and legal representatives.

4.7Liability. No member of the Committee and no employee of the Company shall be liable for any act or failure to act hereunder, except in circumstances involving his or her bad faith, gross negligence or willful misconduct, or for any act or failure to act hereunder by any other member or employee or by any agent to whom duties in connection with the administration of these Guidelines have been delegated.

4.8Indemnification. The Company shall indemnify members of the Committee and any agent of the Committee against any and all liabilities or expenses to which they may be subjected by reason of any act or failure to act with respect to their duties on behalf of these Guidelines, except in circumstances involving such person's bad faith, gross negligence or willful misconduct.

5.0ELIGIBILITY AND PARTICIPATION

5.1Eligibility. All Non-Employee Directors shall be eligible to participate in the Company’s director compensation program and to receive compensation in accordance with these Guidelines.

5.2Participation. Each Non-Employee Director shall participate in the Company’s director compensation program and receive compensation in accordance with these Guidelines.

5.3Waiver of Compensation under These Guidelines. A Non-Employee Director may waive all or a portion of his or her compensation under these Guidelines at any time, provided that such waiver is in writing and provided that such waiver does not violate Code Section 409A.

6.0COMPENSATION

6.1Annual Cash Compensation. For each Director Service Year, each Non-Employee Director shall receive the following cash compensation for their annual service on the Board:

(a)An annual cash retainer of $65,000;

(b)If the Non-Employee Director is Chairman of the Board, an additional annual cash retainer of $120,000;

(c)If the Non-Employee Director is the chair of the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, Risk Committee or any other standing committee of the Board, an annual cash retainer of $25,000 for each position as chair;

(d)If the Non-Employee Director is a member (but not chair) of the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee, Risk Committee, or any other standing committee established by the Board, an annual cash retainer of $10,000 for each position as member; and

(e)A $1,000 per meeting committee service fee for each committee of the Board on which the Non-Employee Director serves, for any committee meeting starting with the seventh (7th) meeting of such committee in a Director Service Year.

The cash payments under Sections 6.1(a), 6.1(b), 6.1(c), and 6.1(d) shall be paid quarterly, in arrears, as follows: 25% of each applicable payment shall be paid on or before the 5th Business Day following each Quarterly Payment Date for such Director Service Year. On each Quarterly Payment Date in a given Director Service Year, the Company shall determine the number of meetings held by each committee of the Board during such Director Service Year and, if such committee has met seven or more times during such Director Service Year, then the Company will also make cash payments to the members of such committee under Section 6.1(e) on such Quarterly Payment Date. If a Non-Employee Director’s service on the Board, on a given committee, or as Chairman of the Board or chair of a committee is less than the entire Director Service Year, then the above amounts shall be prorated to reflect the Non-Employee Director’s actual period of service on the Board, on a given committee, or as Chairman of the Board or chair of a given committee.

6.2Equity Awards. In addition to the annual cash compensation set forth in Section 6.1, for each Director Service Year, each Non-Employee Director shall receive an annual Equity Award retainer with a grant date fair market value equal to $130,000, to be granted on the 5th Business Day following the Annual Meeting Date for such Director Service Year; provided that if a person becomes a Non-Employee Director on a date other than the Annual Meeting Date for such Director Service Year, then the annual Equity Award retainer amount will be prorated to reflect the number of days remaining in such Director Service Year and the prorated annual Equity Award shall be granted on the 5th Business Day following the date the Non-Employee Director becomes a member of the Board.

6.3Terms and Conditions of Equity Awards. The Committee, in its sole discretion, may grant either Stock Awards or RSU Awards, or a combination of both. Equity Awards shall have the following terms and conditions:

(a)Each Equity Award shall be issued pursuant to and shall be subject to the 2017 Plan.

(b)Each Equity Award (other than Stock Awards) shall be evidenced by an Equity Award Agreement signed by the Non-Employee Director to whom it is granted and an authorized official of the Company.

(c)The number of shares underlying each Equity Award shall be determined by dividing the applicable dollar amount of the Equity Award by the Fair Market Value of a Share on the date of grant, rounded down to whole Shares (i.e., any fractional shares shall be disregarded);

(d)Equity Awards shall be fully vested on the date of grant;

(e)Subject to the following sentence, all Shares underlying all Equity Awards granted to any Non-Employee Director shall be subject to the Stock Ownership and Retention Guidelines. Notwithstanding the foregoing, however, if the Equity Award is a Stock Award that is not deferred by the Non-Employee Director pursuant to Section 6.6, then the Non-Employee Director may sell a portion of the Shares issued pursuant to such Stock Award equal to an amount that would satisfy statutory minimum federal (including FICA and Social Security), state and local tax withholding requirements;

(f)If the award is a Stock Award that is not deferred pursuant to Section 6.6 below, then Shares (including appropriate legends if in certificate form) shall be issued in the Non-Employee Director’s name as soon as practicable after the applicable grant date;

(g)If the award is an RSU Award that is not further deferred pursuant to Section 6.6 below, Shares underlying such RSU Award shall be issued to the Non-Employee Director within 10 Business Days following the date that the Non-Employee Director is no longer a member of the Board;

(h)Stock Awards that have not been deferred pursuant to Section 6.6 shall have full voting and dividend rights in the same manner and to the same extent as such rights are extended to the Company’s shareholders; and

(i)RSU Awards shall have no voting rights but shall have dividend equivalent rights as set forth in the Equity Award Agreements for such RSU Awards.

6.4Clawback. Notwithstanding anything contained in these Guidelines to the contrary, if a Non-Employee Director is determined, in the sole discretion of the affirmative vote of not less than a majority of the entire membership of the Board (excluding the Non-Employee Director whose compensation is at issue) (the “Voting Members”), by a resolution duly adopted by the Voting Members, to have not earned all or a portion of any compensation received from the Company because the Non-Employee Director has acted in a manner that is not in the Company’s best interests or has failed to act in a manner that is in the Company’s best interests during such member’s tenure on the Board or as a result of his or her failure to complete a full term of Board service for any reason, then, at the sole discretion of the Voting Members, any cash or Equity Award, or any portion thereof as determined by the Voting Members, held by such Non-Employee Director, shall as of the date of the adoption of such resolution be subject to forfeiture and all rights of the Non-Employee Director to or with respect to such forfeited cash and/or Equity Award shall terminate. With respect to any cash compensation or Shares actually received by such Non-Employee Director, if so resolved by the Voting Members in accordance with these Guidelines, at the Voting Members’ sole discretion, the Non-Employee Director may be required to pay back to the Company all or any portion of such cash compensation or deliver back to the Company all or any portion of such Shares as determined by the Voting Members. In the event that the Voting Members’ determination is based upon such Non-Employee Director’s action or inaction, as described above, then the Voting Members may consider whether any such repayment shall be assessed based on compensation received either at or after the time of the action or inaction. The Voting Members may also consider, if relevant, whether a prorated amount should be calculated for service rendered as a Board member, if the Non-Employee Director resigns before completing his or her service period as contemplated by periodic compensation payments.

6.5Expenses. The Company shall promptly reimburse a Non-Employee Director for his or her reasonable expenses reasonably incurred in connection with his or her service to the Board and the Company, subject to the Company’s reimbursement policy and the submission of written receipts or other valid documentation.

6.6Deferral. A Non-Employee Director may defer any compensation paid or granted under these Guidelines pursuant to the Deferred Compensation Plan.

6.7Stock Ownership and Retention Guidelines. Each Non-Employee Director will be subject to the Company’s Stock Ownership and Retention Guidelines.

7.0MISCELLANEOUS

7.1Listing of Awards and Related Matters. If at any time the Committee determines that the listing, registration or qualification of Equity Awards on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory authority, is necessary or desirable as a condition of, or in connection with, the granting of an Equity Award, such Equity Award may not be exercised, distributed or paid out, as the case may be, in whole or in part, unless such listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Committee.

7.2No Right, Title, or Interest in Company Assets. Non-Employee Directors shall have no right, title, or interest whatsoever in or to any investments that the Company may make to aid it in meeting its obligations under these Guidelines. Nothing contained in these Guidelines, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and any Non-Employee Director, beneficiary, legal representative or any other person. To the extent that any person acquires a right to receive payments from the Company under these Guidelines, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as expressly set forth in these Guidelines.

7.3No Right to Continued Service. A Non-Employee Director's rights, if any, to continue to serve the Company as a member of the Board or otherwise shall not be enlarged or otherwise affected by these Guidelines, and the Company reserves the right to terminate the Non-Employee Director’s service to the Company in accordance with Company’s by-laws.

7.4Awards Subject to Foreign Laws. The Committee may grant Equity Awards to individual Non-Employee Directors who are subject to the tax and/or other laws of nations other than the United States, and such Equity Awards may have terms and conditions as determined by the Committee as necessary to comply with applicable foreign laws. The Committee may take any action that it deems advisable to obtain approval of such Equity Awards by the appropriate foreign governmental entity; provided, however, that no such Equity Awards may be granted pursuant to this Section 7.4 and no action may be taken which would result in a violation of the Exchange Act or any other applicable law.

7.5Governing Law. The Guidelines, all cash compensation and Equity Awards granted hereunder, and all actions taken in connection herewith shall be governed by and construed in accordance with the laws of the State of Delaware without reference to principles of conflict of laws, except as superseded by applicable federal law.

* * * * *

Document

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Ashish Masih, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Encore Capital Group, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  1. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By: /S/ ASHISH MASIH
Ashish Masih<br>President and Chief Executive Officer

Date: August 5, 2020

Document

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, Jonathan C. Clark, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Encore Capital Group, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

  1. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

By: /S/ JONATHAN C. CLARK
Jonathan C. Clark<br>Executive Vice President, Chief Financial Officer and Treasurer

Date: August 5, 2020

Document

Exhibit 32.1

ENCORE CAPITAL GROUP, INC.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Encore Capital Group, Inc. (the “Company”) on Form 10-Q for the period ended June 30, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2)The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company.

/s/ ASHISH MASIH
Ashish Masih
President and Chief Executive Officer

August 5, 2020

/s/ JONATHAN C. CLARK
Jonathan C. Clark
Executive Vice President,<br>Chief Financial Officer and Treasurer

August 5, 2020

This certification accompanies the above described Report and is being furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall be not be deemed filed as part of the Report.

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