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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 September 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)
Delaware48-1090909
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 Par Value Per ShareECPGThe 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 filerAccelerated filerNon-accelerated filerSmaller 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.
ClassOutstanding at October 26, 2020
Common Stock, $0.01 par value31,344,685 shares



Table of Contents
ENCORE CAPITAL GROUP, INC.
INDEX TO FORM 10-Q
 
 Page



Table of Contents
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)
September 30,
2020
December 31,
2019
Assets
Cash and cash equivalents$169,983 $192,335 
Investment in receivable portfolios, net3,265,992 3,283,984 
Deferred court costs, net 100,172 
Property and equipment, net120,125 120,051 
Other assets309,296 329,223 
Goodwill866,657 884,185 
Total assets
$4,732,053 $4,909,950 
Liabilities and Equity
Liabilities:
Accounts payable and accrued liabilities$221,837 $223,911 
Borrowings3,252,101 3,513,197 
Other liabilities130,859 147,436 
Total liabilities
3,604,797 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, 31,345 and 31,097 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
313 311 
Additional paid-in capital227,113 222,590 
Accumulated earnings1,018,348 888,058 
Accumulated other comprehensive loss(121,098)(88,766)
Total Encore Capital Group, Inc. stockholders’ equity1,124,676 1,022,193 
Noncontrolling interest2,580 3,213 
Total equity
1,127,256 1,025,406 
Total liabilities and equity
$4,732,053 $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.
September 30,
2020
December 31,
2019
Assets
Cash and cash equivalents$238 $34 
Investment in receivable portfolios, net528,481 539,596 
Other assets4,773 4,759 
Liabilities
Borrowings452,299 464,092 
See accompanying notes to consolidated financial statements
3

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ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Operations
(In Thousands, Except Per Share Amounts)
(Unaudited)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Revenues
Revenue from receivable portfolios$342,489 $316,217 $1,035,141 $939,870 
Changes in expected current and future recoveries30,451  (2,203) 
Servicing revenue29,787 31,060 82,417 97,399 
Other revenues949 144 3,435 673 
Total revenues403,676 347,421 1,118,790 1,037,942 
Allowance reversals on receivable portfolios, net8,515 11,945 
Total revenues, adjusted by net allowances355,936 1,049,887 
Operating expenses
Salaries and employee benefits95,979 96,638 279,944 284,699 
Cost of legal collections60,383 48,971 164,018 149,446 
General and administrative expenses53,459 38,168 113,954 110,335 
Other operating expenses28,088 25,753 83,527 84,913 
Collection agency commissions12,703 17,343 36,562 46,905 
Depreciation and amortization10,609 10,000 31,436 29,736 
Goodwill impairment 10,718  10,718 
Total operating expenses261,221 247,591 709,441 716,752 
Income from operations142,455 108,345 409,349 333,135 
Other expense
Interest expense(67,962)(54,365)(172,951)(173,245)
Other income (expense)361 (11,546)(1,211)(15,766)
Total other expense(67,601)(65,911)(174,162)(189,011)
Income before income taxes74,854 42,434 235,187 144,124 
Provision for income taxes(19,747)(3,021)(59,875)(18,447)
Net income55,107 39,413 175,312 125,677 
Net income attributable to noncontrolling interest(457)(544)(784)(893)
Net income attributable to Encore Capital Group, Inc. stockholders$54,650 $38,869 $174,528 $124,784 
Earnings per share attributable to Encore Capital Group, Inc.:
Basic$1.74 $1.24 $5.56 $3.99 
Diluted$1.72 $1.23 $5.51 $3.97 
Weighted average shares outstanding:
Basic31,484 31,338 31,402 31,242 
Diluted31,826 31,657 31,672 31,459 
See accompanying notes to consolidated financial statements
4

Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited, In Thousands)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net income$55,107 $39,413 $175,312 $125,677 
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on derivative instruments:
Unrealized gain (loss) on derivative instruments118 (799)(3,985)(6,561)
Income tax effect7 169 1,120 1,190 
Unrealized gain (loss) on derivative instruments, net of tax125 (630)(2,865)(5,371)
Change in foreign currency translation:
Unrealized gain (loss) on foreign currency translation30,982 (31,864)(32,088)(33,129)
Removal of other comprehensive loss in connection with divestiture 3,814 2,632 3,814 
Unrealized gain (loss) on foreign currency translation, net of divestiture30,982 (28,050)(29,456)(29,315)
Other comprehensive income (loss), net of tax:31,107 (28,680)(32,321)(34,686)
Comprehensive income86,214 10,733 142,991 90,991 
Comprehensive loss (income) attributable to noncontrolling interest:
Net income attributable to noncontrolling interest(457)(544)(784)(893)
Unrealized gain on foreign currency translation(15)(51)(11)(485)
Comprehensive income attributable to noncontrolling interest:(472)(595)(795)(1,378)
Comprehensive income attributable to Encore Capital Group, Inc. stockholders$85,742 $10,138 $142,196 $89,613 
See accompanying notes to consolidated financial statements
5

Table of Contents
ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Equity
(Unaudited, In Thousands)

Three Months Ended September 30, 2020
Common StockAdditional Paid-In CapitalAccumulated EarningsAccumulated Other Comprehensive (Loss) IncomeNoncontrolling InterestTotal Equity
SharesPar
Balance as of June 30, 202031,288 $313 $227,030 $963,698 $(152,190)$3,536 $1,042,387 
Net income— — — 54,650 — 457 55,107 
Other comprehensive income, net of tax— — — — 31,092 15 31,107 
Purchase of noncontrolling interest— — (2,196)— — (1,428)(3,624)
Issuance of share-based awards, net of shares withheld for employee taxes57 0 (1,605)— — — (1,605)
Stock-based compensation— — 3,884 — — — 3,884 
Balance as of September 30, 202031,345 $313 $227,113 $1,018,348 $(121,098)$2,580 $1,127,256 

Three Months Ended September 30, 2019
Common StockAdditional Paid-In CapitalAccumulated EarningsAccumulated Other Comprehensive (Loss) IncomeNoncontrolling InterestTotal Equity
SharesPar
Balance as of June 30, 201930,980 $310 $211,508 $806,104 $(117,427)$2,462 $902,957 
Net income— — — 38,869 — 544 39,413 
Other comprehensive (loss) income, net of tax— — — — (32,545)51 (32,494)
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes79 1 (2,267)— — — (2,266)
Stock-based compensation— — 4,005 — — — 4,005 
Issuance of exchangeable notes— — 6,776 — — — 6,776 
Exchangeable notes hedge transactions— — 1,792 — — — 1,792 
Other— — — — 3,814 — 3,814 
Balance as of September 30, 201931,059 $311 $221,814 $844,973 $(146,158)$3,057 $923,997 

Nine Months Ended September 30, 2020
Common StockAdditional Paid-In CapitalAccumulated EarningsAccumulated Other Comprehensive (Loss) IncomeNoncontrolling InterestTotal Equity
SharesPar
Balance as of December 31, 201931,097 $311 $222,590 $888,058 $(88,766)$3,213 $1,025,406 
Cumulative adjustment— — — (44,238)— — (44,238)
Net income— — — 174,528 — 784 175,312 
Other comprehensive (loss) income, net of tax— — — — (34,964)11 (34,953)
Purchase of noncontrolling interest— — (2,196)— — (1,428)(3,624)
Issuance of share-based awards, net of shares withheld for employee taxes248 2 (6,470)— — — (6,468)
Stock-based compensation— — 13,189 — — — 13,189 
Other— — — — 2,632 — 2,632 
Balance as of September 30, 202031,345 $313 $227,113 $1,018,348 $(121,098)$2,580 $1,127,256 

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Nine Months Ended September 30, 2019
 Common StockAdditional Paid-In CapitalAccumulated EarningsAccumulated Other Comprehensive (Loss) IncomeNoncontrolling InterestTotal Equity
SharesPar
Balance as of December 31, 201830,884 $309 $208,498 $720,189 $(110,987)$1,679 $819,688 
Net income— — — 124,784 — 893 125,677 
Other comprehensive (loss) income, net of tax— — — — (38,985)485 (38,500)
Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes175 2 (3,696)— — — (3,694)
Stock-based compensation— — 9,412 — — — 9,412 
Issuance of exchangeable notes— — 6,776 — — — 6,776 
Exchangeable notes hedge transactions— — 1,792 — — — 1,792 
Other— — (968)— 3,814 — 2,846 
Balance as of September 30, 201931,059 $311 $221,814 $844,973 $(146,158)$3,057 $923,997 

See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited, In Thousands)
 Nine Months Ended September 30,
 20202019
Operating activities:
Net income$175,312 $125,677 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization31,436 29,736 
Expense related to financing19,791 3,496 
Other non-cash interest expense, net22,725 24,049 
Stock-based compensation expense13,189 9,412 
Deferred income taxes(15,070)5,012 
Goodwill impairment 10,718 
Changes in expected current and future recoveries2,203  
Allowance reversals on receivable portfolios, net (11,945)
Other, net24,469 20,218 
Changes in operating assets and liabilities
Deferred court costs and other assets14,267 45,415 
Prepaid income tax and income taxes payable(11,226)(21,240)
Accounts payable, accrued liabilities and other liabilities(27,114)(43,602)
Net cash provided by operating activities249,982 196,946 
Investing activities:
Purchases of receivable portfolios, net of put-backs(517,959)(757,101)
Collections applied to investment in receivable portfolios, net540,101 588,259 
Purchases of property and equipment(22,658)(30,712)
Other, net8,091 1,596 
Net cash provided by (used in) investing activities7,575 (197,958)
Financing activities:
Payment of loan and debt refinancing costs(48,676)(8,777)
Proceeds from credit facilities1,695,914 481,105 
Repayment of credit facilities(2,051,764)(440,992)
Proceeds from senior secured notes410,820 460,512 
Repayment of senior secured notes(152,430)(460,455)
Proceeds from issuance of convertible and exchangeable senior notes 100,000 
Repayment of convertible senior notes(89,355)(84,600)
Other, net(32,400)(15,480)
Net cash (used in) provided by financing activities(267,891)31,313 
Net (decrease) increase in cash and cash equivalents(10,334)30,301 
Effect of exchange rate changes on cash and cash equivalents(12,018)(1,042)
Cash and cash equivalents, beginning of period192,335 157,418 
Cash and cash equivalents, end of period$169,983 $186,677 
Supplemental disclosure of cash information:
Cash paid for interest$148,059 $131,873 
Cash paid for taxes, net of refunds87,154 31,419 

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, 2019AdjustmentOpening Balance as of January 1, 2020
Assets
Investment in receivable portfolios, net$3,283,984 $44,166 $3,328,150 
Deferred court costs, net100,172 (100,172) 
Liabilities
Other liabilities (for deferred tax liabilities)147,436 (11,768)135,668 
Equity
Accumulated earnings888,058 (44,238)843,820 
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Recent Accounting Pronouncements Not Yet Effective
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt — Debt with Conversion and Other Options (“Subtopic 470-20”) and Derivatives and Hedging — Contracts in Entity’s Own Equity (“Subtopic 815-40”): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The ASU simplifies the accounting for convertible instruments by removing certain models in Subtopic 470-20 and revises the guidance in Subtopic 815-40 to simplify the accounting for contracts in an entity’s own equity. The ASU also amends the guidance to improve the consistency of earnings per share calculations, which requires the if-converted method be used for convertible instruments. ASU 2020-06 is effective for reporting periods beginning after December 15, 2021 with early adoption permitted for reporting periods beginning after December 15, 2020. The amendment is to be adopted through either a modified retrospective or fully retrospective method of transition. Under ASU 2020-06, the Company’s convertible and exchangeable notes will no longer be bifurcated to a debt component and an equity component, instead, they will be carried as a single liability. The interest expense recognized on the convertible and exchangeable notes will be based on coupon rates, rather than higher effective interest rates. As a result, the Company will recognize lower interest expense. Additionally, the if-converted method will not substantially change the dilutive effect for convertible instruments that require net share settlement, only in-the-money shares will be included in the dilutive effect. Based on the preliminary assessment, the Company believes that ASU 2020-06 will have a significant impact on its consolidated financial statements and is in the process of determining the adoption approach and whether or not to early adopt.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. 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 standards discussed above, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 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
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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 annually. 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.
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
September 30,
Nine Months Ended
September 30,
 2020201920202019
Net income attributable to Encore Capital Group, Inc. stockholders$54,650 $38,869 $174,528 $124,784 
Total weighted-average basic shares outstanding31,484 31,338 31,402 31,242 
Dilutive effect of stock-based awards342 319 270 217 
Total weighted-average dilutive shares outstanding31,826 31,657 31,672 31,459 
Basic earnings per share$1.74 $1.24 $5.56 $3.99 
Diluted earnings per share$1.72 $1.23 $5.51 $3.97 
Anti-dilutive employee stock options outstanding were approximately 13,000 and 64,000 during the three and nine months ended September 30, 2020, respectively. Anti-dilutive employee stock options outstanding were approximately 13,000 and 81,000 during the three and nine months ended September 30, 2019, respectively.
Note 3: Fair Value Measurements
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Fair value is defined as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date (i.e., the “exit price”). The Company uses a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions.
Financial Instruments Required To Be Carried At Fair Value
Financial assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 Fair Value Measurements as of September 30, 2020
 Level 1Level 2Level 3Total
Assets
Interest rate cap contracts$ $854 $ $854 
Liabilities
Interest rate swap agreements (6,625) (6,625)
Cross-currency swap agreements (6,686) (6,686)
Contingent consideration  (2,655)(2,655)

 Fair Value Measurements as of December 31, 2019
 Level 1Level 2Level 3Total
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.
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The following table provides a roll-forward of the fair value of contingent consideration for the nine months ended September 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, 201966 
Issuance of contingent consideration in connection with acquisition2,653 
Payment of contingent consideration(35)
Effect of foreign currency translation(29)
Balance as of September 30, 2020$2,655 
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 September 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 September 30, 2020 and December 31, 2019 (in thousands):
 September 30, 2020December 31, 2019
 Carrying AmountEstimated Fair ValueCarrying AmountEstimated Fair Value
Financial Assets
Investment in receivable portfolios, net$3,265,992 $3,729,831 $3,283,984 $3,464,050 
Deferred court costs  100,172 100,172 
Financial Liabilities
Convertible notes and exchangeable notes(1)
561,714 625,410 642,547 693,708 
Senior secured notes(2)
1,536,351 1,547,920 1,127,435 1,170,945 
_______________________
(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 the Company’s 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.
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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 Company’s convertible notes, exchangeable notes and senior secured notes are carried at historical cost, adjusted for the debt discount. The fair value estimate for the convertible and exchangeable notes incorporates quoted market prices using Level 2 inputs. The fair value of the senior secured notes is 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 carrying value of the Company’s senior secured revolving credit facility agreement approximates fair value due to the short-term nature of the interest rate period. The Company’s borrowings also include finance lease liabilities for which the carrying value approximates fair value.
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):
 September 30, 2020December 31, 2019
Balance Sheet LocationFair ValueBalance Sheet LocationFair Value
Derivatives designated as hedging instruments:
Interest rate cap contractsOther assets$854 Other assets$2,460 
Foreign currency exchange contractsOther assets Other assets443 
Interest rate swap agreementsOther liabilities(6,625)Other liabilities(9,116)
Cross-currency swap agreementsOther liabilities(6,686)Other liabilities 
Derivatives not designated as hedging instruments:
Foreign currency exchange contractsOther assets Other assets1,030 
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.
The Company held certain foreign currency forward contracts designated as cash flow hedging instruments that matured in June 2020. As of September 30, 2020, the Company had no outstanding forward contracts that were designated as cash flow hedging instruments. No gains or losses were reclassified from other comprehensive income into earnings as a result of forecasted transactions that failed to occur during the nine months ended September 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. Previously, the Company held four interest rate swap agreements that hedged the risk of USD-LIBOR interest rate fluctuations for the Encore revolving credit facility and term loan facility. As part of the financing transactions completed in September 2020, the Company settled two of the interest rate swap agreements. As of September 30, 2020, there were two interest rate swap agreements outstanding with a total notional amount of $200.2 million. The Company expects to reclassify approximately $9.1 million of net derivative loss from OCI into earnings relating to interest rate swaps within the next 12 months.
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In connection with the financing transactions discussed above, the Company entered into cross-currency swap agreements, which are used to manage foreign currency exchange risk by converting fixed-rate Euro-denominated borrowings including periodic interest payments and the payment of principal at maturity to fixed-rate USD debt and are accounted for as cash flow hedges. As of September 30, 2020, there were four cross-currency swap agreements outstanding with a total notional amount of €350.0 million (approximately $410.4 million). The Company expects to reclassify approximately $4.6 million of net derivative loss from OCI into earnings relating to cross-currency swaps within the next 12 months.
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.
As of September 30, 2020, the Company held two interest rate cap contracts with a notional amount of approximately $921.3 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 $469.0 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 $452.3 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 Company expects to reclassify approximately $0.4 million of net derivative loss from OCI into earnings relating to interest rate caps within the next 12 months.
The following tables summarize the effects of derivatives in cash flow hedging relationships designated as hedging instruments in the Company’s consolidated financial statements (in thousands):
Derivatives Designated as Hedging InstrumentsGain (Loss) Recognized in OCILocation of Gain (Loss) Reclassified from OCI into IncomeGain (Loss) Reclassified from OCI into Income
Three Months Ended September 30,Three Months Ended September 30,
2020201920202019
Foreign currency exchange contracts$ $(323)Salaries and employee benefits$ $198 
Foreign currency exchange contracts (48)General and administrative expenses 27 
Interest rate swap agreements(140)(800)Interest expense(2,458)(742)
Interest rate cap contracts(624)(145)Interest expense(103) 
Cross-currency swap agreements(6,779) Interest expense / Other income (expense)(