ENCORE CAPITAL GROUP INC

Previous wording

We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model generally 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 Europe.

Current wording

In Europe, our purchased defaulted debt portfolios primarily consist of paying and non-paying consumer loan accounts. We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model generally 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 Europe.

Previous wording

With lending surpassing pre-pandemic levels and with rising delinquency rates, we have seen an increase in supply. 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 at favorable levels as a result of elevated market supply. Issuers continue to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year. We believe growth in lending and rising delinquency rates will drive continued growth in supply.

Current wording

With lending reaching record levels and the highest U.S. charge-off rate in ten years, supply remains elevated at a record level. 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 third quarter remained at favorable levels as a result of elevated market supply. Issuers continue to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year. We believe growth in lending and rising delinquency rates will drive continued growth in supply.

Previous wording

While we have seen a resumption of sales activity across all of our European markets, underlying default rates are generally low by historic levels, and sales levels are expected to fluctuate from quarter to quarter. In general, supply remains slightly below pre-pandemic levels while portfolio pricing remains competitive across our European footprint.

Current wording

While we have seen a resumption of sales activity across all of our European markets, underlying default rates are generally low by historic levels, and sales levels are expected to fluctuate from quarter to quarter. In general, portfolio pricing remains competitive across our European footprint.

Previous wording

In the United States, capital deployment increased during the three and six months ended June 30, 2024, as compared to the corresponding periods in the prior year. The majority of our deployments in the U.S. come from forward flow agreements, and the timing, contract duration, and volumes for each contract can fluctuate leading to variation when comparing to prior periods. Portfolio purchases in the U.S. were robust as supply increased and pricing improved.

Current wording

In the United States, capital deployment increased during the three and nine months ended September 30, 2024, as compared to the corresponding periods in the prior year. The majority of our deployments in the U.S. come from forward flow agreements, and the timing, contract duration, and volumes for each contract can fluctuate leading to variation when comparing to prior periods. Portfolio purchases in the U.S. were robust as supply increased and pricing improved.

Previous wording

In Europe, capital deployment decreased during the three and six months ended June 30, 2024, as compared to the corresponding periods in the prior year, primarily driven by continued competitive pricing environment in Europe. The decreases were partially offset by the favorable impact from foreign currency translation driven by the weakening of the U.S. dollar against the British Pound.

Current wording

In Europe, capital deployment remained relatively consistent during the three months ended September 30, 2024, as compared to the corresponding period in the prior year. Capital deployment decreased during the nine months ended September 30, 2024, primarily driven by continued competitive pricing environment in Europe. The decrease was partially offset by the favorable impact from foreign currency translation driven by the weakening of the U.S. dollar against the British Pound.

Previous wording

Gross collections from purchased receivables increased by $70.2 million, or 14.7%, to $546.7 million during the three months ended June 30, 2024, as compared to $476.5 million during the three months ended June 30, 2023. Gross collections from purchased receivables increased by $118.7 million, or 12.6%, to $1,057.6 million during the six months ended June 30, 2024, as compared to $938.9 million during the six months ended June 30, 2023. The increases in collections in the United States were primarily a result of consistent increases in capital deployments in the United States in recent quarters. The increases in collections from purchased receivables in Europe were primarily due to the acquisition of portfolios with higher returns in recent periods. Additionally, collections in Europe were favorably impacted by foreign currency translation by approximately $4.6 million, during the six months ended June 30, 2024, primarily as a result of the weakening of the U.S. dollar against the British Pound by approximately 2.5% for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The foreign currency translation effect to collections in Europe was immaterial during the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Current wording

Gross collections from purchased receivables increased by $84.9 million, or 18.3%, to $550.3 million during the three months ended September 30, 2024, as compared to $465.3 million during the three months ended September 30, 2023. Gross collections from purchased receivables increased by $203.7 million, or 14.5%, to $1,607.9 million during the nine months ended September 30, 2024, as compared to $1,404.2 million during the nine months ended September 30, 2023. The increases in collections in the United States were primarily a result of consistent increases in capital deployments in the United States in recent quarters. The increases in collections from purchased receivables in Europe were primarily due to the acquisition of portfolios with higher returns in recent periods. Additionally, collections in Europe were favorably impacted by foreign currency translation by approximately $3.2 million and $7.8 million during the three and nine months ended September 30, 2024, respectively, primarily as a result of the weakening of the U.S. dollar against the British Pound.

Previous wording

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 favorably impacted by foreign currency translation by approximately $3.7 million, during the six months ended June 30, 2024, primarily as a result of the weakening of the U.S. dollar against the British Pound by approximately 2.5% for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The foreign currency translation effect was immaterial to our operating results during the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Current wording

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 favorably impacted by foreign currency translation by approximately $2.5 million and $6.2 million during the three and nine months ended September 30, 2024, respectively, primarily as a result of the weakening of the U.S. dollar against the British Pound by approximately 2.7% and 2.6% for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023, respectively.

Previous wording

The increases in revenue recognized from portfolio basis during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, were primarily due to a higher portfolio basis (i.e. a higher investment in receivable balance) in the U.S. driven by a consistent higher volume of purchases in the past several quarters.

Current wording

The increases in revenue recognized from portfolio basis during the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, were primarily due to a higher portfolio basis (i.e. a higher investment in receivable balance) in the U.S. driven by a consistent higher volume of purchases in the past several quarters.

Previous wording

Recoveries above or below forecast represent over and under-performance in the reporting period, respectively. Collections during the three and six months ended June 30, 2024, over-performed the forecasted collections by approximately $27.4 million and $28.3 million, respectively. Collections during the three and six months ended June 30, 2023, under-performed the forecasted collections by approximately $0.5 million and $15.8 million, respectively.

Current wording

Recoveries above or below forecast represent over and under-performance in the reporting period, respectively. Collections during the three and nine months ended September 30, 2024, over-performed the forecasted collections by approximately $23.0 million and $51.3 million, respectively. Collections during the three and nine months ended September 30, 2023, under-performed the forecasted collections by approximately $4.3 million and $20.1 million, respectively.

Previous wording

When reassessing the forecasts of expected lifetime recoveries during the three and six months ended June 30, 2024, management considered, among other factors, historical and current collection performance, changes in consumer behavior, and the macroeconomic environment. Management believes that most of the current period collections over-performance was due to changes in timing of the estimated remaining collections, and therefore reduced the respective estimated remaining collections accordingly. These reductions, when discounted to present value, resulted in a net negative change in expected future recoveries of approximately $21.7 million and $35.0 million for the three and six months ended June 30, 2024, respectively. During the three and six months ended June 30, 2023, the Company recorded approximately $3.0 million in net negative change and $2.8 million in net positive change in expected future period recoveries, respectively.

Current wording

When reassessing the forecasts of expected lifetime recoveries during the three months ended September 30, 2024, management considered, among other factors, historical and current collection performance, changes in consumer behavior, and the macroeconomic environment. Most of the current period collections over-performance was from recent vintages acquired in 2023 and 2024 and did not trigger any significant forecasting adjustments to the estimated remaining collections. Therefore, no significant changes in future expected recoveries were recognized as a result of our recurring forecasting process. We recognized approximately $7.8 million of negative changes in expected future recoveries during the three and nine months ended September 30, 2024 resulting from the sale of certain portfolios associated with the exit of our secured non-performing mortgage loan business in Spain in September 2024. As a result of the above, we recorded net negative changes in expected future recoveries of approximately $10.3 million, and $45.2 million during the three and nine months ended September 30, 2024, respectively. During the three and nine months ended September 30, 2023, we recorded approximately $12.8 million and $9.9 million in net negative changes in expected future recoveries, respectively.

Previous wording

Servicing revenues remained relatively consistent during the three months ended June 30, 2024 as compared to the three months ended June 30, 2023. Service revenues decreased by approximately $2.1 million during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023. The decrease was primarily attributable to reduced demand from BPO clients.

Current wording

Servicing revenues increased by approximately $2.9 million during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. The increase was primarily attributable to increased demand from BPO clients. Service revenues remained relatively consistent during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023.

Previous wording

Other revenues increased during the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, primarily driven by increase of gains recognized on the sale of real estate assets.

Current wording

Other revenues remained relatively consistent during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023. Other revenues increased during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, primarily driven by increase of gains recognized on the sale of real estate assets.

Previous wording

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. The foreign currency translation effect was immaterial to our operating results during the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023, respectively.

Current wording

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 results were unfavorably impacted by foreign currency translation by approximately $1.8 million and $4.7 million during the three and nine months ended September 30, 2024, respectively, primarily as a result of the weakening of the U.S. dollar against the British Pound by approximately 2.7% and 2.6% for the three and nine months ended September 30, 2024 compared to the three and nine months ended September 30, 2023, respectively.

Previous wording

•An increase in salaries and bonus of approximately $7.8 million primarily due to an increase in overall headcount; and

Current wording

•An increase in salaries and bonus of approximately $8.9 million primarily due to an increase in overall headcount; and

Previous wording

•An increase in employee benefits and payroll taxes of approximately $2.1 million.

Current wording

•An increase in employee benefits and payroll taxes of approximately $2.8 million.

Previous wording

The increase in salaries and employee benefits during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, was primarily due to the following reasons:

Current wording

The increase in salaries and employee benefits during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to the following reasons:

Previous wording

•An increase in salaries and bonus of approximately $7.7 million primarily due to an increase in overall headcount; and

Current wording

•An increase in salaries and bonus of approximately $16.6 million primarily due to an increase in overall headcount; and

Previous wording

•An increase in employee benefits and payroll taxes of approximately $3.3 million.

Current wording

•An increase in employee benefits and payroll taxes of approximately $6.2 million.

Previous wording

The increases of cost of legal collections during the three and six months ended June 30, 2024, as compared to the three and six months ended June 30, 2023, were primarily due to increased legal placement in this channel in the U.S. The increases were partially offset by decreased contingent fees paid to our external network of attorneys as we grow our legal collection activities through our internal legal channel.

Current wording

The increases of cost of legal collections during the three and nine months ended September 30, 2024, as compared to the three and nine months ended September 30, 2023, were primarily due to increased legal placements in this channel in the U.S. The increase in cost of legal collections during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was partially offset by decreased contingent fees paid to our external network of attorneys as we grow our legal collection activities through our internal legal channel.

Previous wording

•Approximately $1.5 million of increased general and administrative expense include costs associated with our information technology, and consulting fees.

Current wording

•Approximately $2.9 million of increased general and administrative expense include costs associated with our information technology.

Previous wording

The increase in general and administrative expense during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, was primarily due to the following reasons:

Current wording

The increase in general and administrative expense during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, was primarily due to the following reasons:

Previous wording

•An increase in information technology expenses of approximately $3.1 million; and

Current wording

•An increase in information technology expenses of approximately $6.0 million; and

Previous wording

•The increase was partially offset by a decrease in legal expenses of approximately $1.9 million and a decrease in consulting fees of approximately $1.2 million.

Current wording

•The increase was partially offset by a decrease in consulting fees of approximately $1.5 million and a decrease in facilities fees of approximately $1.4 million.

Previous wording

The increase in other operating expenses during the three months and six months ended June 30, 2024, as compared to the three months ended June 30, 2023, was primarily due to an increase in postage and printing expenses of approximately $2.8 million and $4.9 million, respectively.

Current wording

The increase in other operating expenses during the three months ended September 30, 2024, as compared to the three months ended September 30, 2023, was primarily due to an increase in postage and printing expenses and an increase in collections bank charges and trace agencies fees of approximately $3.1 million and $0.9 million, respectively. The increase in other operating expenses during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to an increase in postage and printing expenses and an increase in collections bank charges and trace agencies fees of approximately $8.0 million and $2.4 million, respectively.

Previous wording

Collection agency commissions are commissions paid to third-party collection agencies. Collections through the collections agencies channel are predominately in Europe and vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally. Commission rates vary 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. Collection agency commissions decreased by approximately $2.9 million and $3.6 million during the three and six months ended June 30, 2024 as compared to the three and six months ended June 30, 2023, respectively. The decreases were primarily due to fewer accounts placed with external agencies and favorable commission rates received from such agencies in Europe.

Current wording

Collection agency commissions are commissions paid to third-party collection agencies. Collections through the collections agencies channel are predominately in Europe and vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally. Commission rates vary 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. Collection agency commissions decreased by approximately $0.7 million and $4.3 million during the three and nine months ended September 30, 2024 as compared to the three and nine months ended September 30, 2023, respectively. The decreases were primarily due to fewer accounts placed with external agencies and favorable commission rates received from such agencies in Europe.

Previous wording

The decrease in depreciation and amortization expenses during the three and six months ended June 30, 2024, as compared to three and six months ended June 30, 2023, was primarily due to smaller depreciable and amortizable asset balances during the three and six months ended June 30, 2024, as compared to three and six months ended June 30, 2023. Depreciation expenses and amortization expenses decreased by approximately$2.1 million and $1.1 million during thethree months ended June 30, 2024 as compared to the three months ended June 30, 2023, and by approximately $3.9 million and $2.4 million during the six months ended June 30, 2024 as compared to the six months ended June 30, 2023, respectively.

Current wording

The decrease in depr eciation and amortization expenses during the three and nine months ended September 30, 2024, as compared to three and nine months ended September 30, 2023, was primarily due to smaller depreciable and amortizable asset balances during the three and nine months ended September 30, 2024, as compared to three and nine months ended September 30, 2023. Depreciation expenses and amortization expenses decreased by approximately $1.8 million and $1.2 million during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023, and by approximately $5.8 million and $3.5 million during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023, respectively.

Previous wording

•The effect resulting from increased average debt balance of approximately $5.7 million; and

Current wording

•The effect resulting from increased average debt balance of approximately $6.0 million; and

Previous wording

•The effect resulting from rising interest rates of approximately $7.8 million; and

Current wording

•The effect resulting from rising interest rates of approximately $9.1 million; and

Previous wording

•An unfavorable impact of foreign currency translation of approximately $0.7 million driven by the weakening of the U.S. dollar against the British Pound.

Current wording

•An unfavorable impact of foreign currency translation of approximately $0.6 million driven by the weakening of the U.S. dollar against the British Pound.

Previous wording

The increase in interest expense during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023, was primarily due to the following reasons:

Current wording

The increase in interest expense during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023, was primarily due to the following reasons:

Previous wording

•The effect resulting from increased average debt balance of approximately $11.7 million;

Current wording

•The effect resulting from increased average debt balance of approximately $17.7 million;

Previous wording

•The effect resulting from rising interest rates of approximately $5.0 million.

Current wording

•The effect resulting from rising interest rates of approximately $17.9 million; and

Previous wording

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 income, net, was $2.0 million and $4.7 million during thethree and six months ended June 30, 2024, respectively. Other expenses, net, was$1.8 million and $0.1 million during thethree and six months ended June 30, 2023, respectively. Interest income included in other income, net of other expense, was approximately $1.8 million and $3.1 million for thethree and six months ended June 30, 2024, respectively, and $1.1 million and $2.1 million for thethree and six months ended June 30, 2023, respectively.

Current wording

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 income, net, was $1.6 million and $6.3 million during thethree and nine months ended September 30, 2024, respectively. Other income, net, was$5.1 million and $5.1 million during thethree and nine months ended September 30, 2023, respectively. Interest income included in other income, net of other expense, was approximately $1.9 million and $5.0 million for thethree and nine months ended September 30, 2024, respectively, and $1.3 million and $3.4 million for thethree and nine months ended September 30, 2023, respectively.

Previous wording

For the three and six months ended June 30, 2024, the differences between our effective tax rate and the federal statutory rate were primarily due to state income taxes. For the three months ended June 30, 2023 the difference between our effective tax rate and the federal statutory rate was primarily due to state taxes and a foreign adjustment. For the six months ended June 30, 2023, the difference between our effective tax rate and the federal statutory rate was primarily due to state income taxes, an accrual related to state tax filing positions, and other foreign adjustments.

Current wording

For the three and nine months ended September 30, 2024, the differences between our effective tax rate and the federal statutory rate were primarily due to state income taxes. For the three months ended September 30, 2023 the difference between our effective tax rate and the federal statutory rate was primarily due to the recording of valuation allowances in certain foreign jurisdictions. For the nine months ended September 30, 2023, the difference between our effective tax rate and the federal statutory rate was primarily due to state income taxes, an accrual related to state tax filing positions, and other foreign adjustments.

Previous wording

(1)As of June 30, 2024, ERC for Zero Basis Portfolios include approximately $48.0 million for purchased consumer and bankruptcy receivables in the United States. ERC for Zero Basis Portfolios in Europe and other geographies was immaterial. ERC also includes approximately $41.1 million from cost recovery portfolios, primarily in other geographies.

Current wording

(1)As of September 30, 2024, ERC for Zero Basis Portfolios include approximately $44.1 million for purchased consumer and bankruptcy receivables in the United States. ERC for Zero Basis Portfolios in Europe and other geographies was immaterial. ERC also includes approximately $33.1 million from cost recovery portfolios, primarily in other geographies.

Previous wording

(3)Amount for 2024 consists of six months data from July 1, 2024 to December 31, 2024.

Current wording

(3)Amount for 2024 consists of three months data from October 1, 2024 to December 31, 2024.

Previous wording

(6)Real estate-owned assets ERC includes approximately $101.3 million and $0.7 million of estimated future cash flows for Europe and Other Geographies, respectively.

Current wording

(6)Real estate-owned (“REO”) assets ERC includes approximately $77.7 million and $0.6 million of estimated future cash flows for Europe and Other Geographies, respectively.

Previous wording

As of June 30, 2024, we had $3.6 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows(in thousands):

Current wording

As of September 30, 2024, we had $3.7 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows(in thousands):

Previous wording

(1)Amount for 2024 consists of six months data from July 1, 2024 to December 31, 2024.

Current wording

(1)Amount for 2024 consists of three months data from October 1, 2024 to December 31, 2024.

Previous wording

Net cash provided by operating activities was $86.7 million and $62.6 million during the six months ended June 30, 2024 and 2023, respectively. Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in recoveries, 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. Changes in recoveries increased the operating cash flows by $6.7 million and $13.0 million during the six months ended June 30, 2024 and 2023, respectively. Refer to “Note 5: Investment in Receivable Portfolios, Net” in the notes to our consolidated financial statements for discussion relating to changes in recoveries.

Current wording

Net cash provided by operating activities was $132.6 million and $116.2 million during the nine months ended September 30, 2024 and 2023, respectively. Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in recoveries, 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. Adjusting for the changes in recoveries resulted in a decrease in operating cash flows by $6.0 million during the nine months ended September 30, 2024 and an increase in operating cash flows by $30.1 million during the nine months ended September 30, 2023. Refer to “Note 5: Investment in Receivable Portfolios, Net” in the notes to our consolidated financial statements for discussion relating to changes in recoveries.