Edgar Filing: ENCORE CAPITAL GROUP INC

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________________________________________________________

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2015


¨	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 incorporation or organization)	(IRS Employer Identification No.)

3111 Camino Del Rio North, Suite 103 San Diego, California	92108
(Address of principal executive offices)	(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)

_______________________________________________________________

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 x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨

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

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 October 29, 2015
Common Stock, $0.01 par value		25,273,825 shares

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ENCORE CAPITAL GROUP, INC.

INDEX TO FORM 10-Q



	Page
PART I – FINANCIAL INFORMATION	3

Item 1—Condensed Consolidated Financial Statements (Unaudited)	3

Condensed Consolidated Statements of Financial Condition	3

Condensed Consolidated Statements of Operations	4

Condensed Consolidated Statements of Comprehensive (Loss) Income	5

Condensed Consolidated Statements of Cash Flows	6

Notes to Condensed Consolidated Financial Statements	7

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	63

Item 4 – Controls and Procedures	63

PART II – OTHER INFORMATION	64

Item 1 – Legal Proceedings	64

Item 1A – Risk Factors	64

Item 6 – Exhibits	64

SIGNATURES	65

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PART I – FINANCIAL INFORMATION

Item 1—Condensed Consolidated Financial Statements (Unaudited)

ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Financial Condition

(In Thousands, Except Par Value Amounts)

(Unaudited)



	September 30, 2015			December 31, 2014
Assets
Cash and cash equivalents	$	175,220		$	124,163
Investment in receivable portfolios, net	2,323,224			2,143,560
Receivables secured by property tax liens, net	297,592			259,432
Property and equipment, net	63,042			66,969
Deferred court costs, net	74,054			60,412
Other assets	229,697			197,666
Goodwill	940,181			897,933
Total assets	$	4,103,010		$	3,750,135
Liabilities and equity
Liabilities:
Accounts payable and accrued liabilities	$	239,151		$	231,967
Debt	3,116,444			2,773,554
Other liabilities	87,735			79,675
Total liabilities	3,443,330			3,085,196
Commitments and contingencies
Redeemable noncontrolling interest	26,934			28,885
Redeemable equity component of convertible senior notes	6,881			9,073
Equity:
Convertible preferred stock, $.01 par value, 5,000 shares authorized, no shares issued and outstanding	—			—
Common stock, $.01 par value, 50,000 shares authorized, 25,274 shares and 25,794 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively	253			258
Additional paid-in capital	106,454			125,310
Accumulated earnings	544,477			498,354
Accumulated other comprehensive loss	(29,279		)	(922		)
Total Encore Capital Group, Inc. stockholders’ equity	621,905			623,000
Noncontrolling interest	3,960			3,981
Total equity	625,865			626,981
Total liabilities, redeemable equity and equity	$	4,103,010		$	3,750,135

The following table includes assets that can only be used to settle the liabilities of the Company’s consolidated variable interest entities (“VIEs”) and the creditors of the VIEs have no recourse to the Company. These assets and liabilities are included in the consolidated statements of financial condition above. See Note 11, “Variable Interest Entities” for additional information on the Company’s VIEs.



	September 30, 2015		December 31, 2014
Assets
Cash and cash equivalents	$	69,463	$	44,996
Investment in receivable portfolios, net	1,194,341		993,462
Receivables secured by property tax liens, net	88,206		108,535
Property and equipment, net	18,524		15,957
Deferred court costs, net	32,244		17,317
Other assets	43,733		80,264
Goodwill	715,877		671,434
Liabilities
Accounts payable and accrued liabilities	$	105,904	$	137,201
Debt	1,773,831		1,556,956
Other liabilities	21,411		8,724

See accompanying notes to condensed consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

(Unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Revenues
Revenue from receivable portfolios, net	$	265,523		$	251,785		$	799,934		$	737,584
Other revenues	14,558			13,445			42,080			38,943
Net interest income	7,715			8,052			21,801			19,691
Total revenues	287,796			273,282			863,815			796,218
Operating expenses
Salaries and employee benefits	64,976			61,175			200,269			183,667
Cost of legal collections	58,760			53,742			170,834			153,596
Other operating expenses	23,953			22,061			72,202			72,196
Collection agency commissions	9,381			9,517			28,532			25,275
General and administrative expenses	88,002			35,532			159,780			110,508
Depreciation and amortization	8,235			6,933			24,669			19,879
Total operating expenses	253,307			188,960			656,286			565,121
Income from operations	34,489			84,322			207,529			231,097
Other (expense) income
Interest expense	(47,816		)	(43,498		)	(136,369		)	(124,678		)
Other (expense) income	(924		)	(532		)	1,588			(192		)
Total other expense	(48,740		)	(44,030		)	(134,781		)	(124,870		)
(Loss) income before income taxes	(14,251		)	40,292			72,748			106,227
Benefit (provision) for income taxes	4,887			(10,154		)	(26,960		)	(35,906		)
Net (loss) income	(9,364		)	30,138			45,788			70,321
Net (income) loss attributable to noncontrolling interest	(1,595		)	197			335			6,755
Net (loss) income attributable to Encore Capital Group, Inc. stockholders	$	(10,959	)	$	30,335		$	46,123		$	77,076

(Loss) earnings per share attributable to Encore Capital Group, Inc.:

Basic	$	(0.43	)	$	1.17		$	1.79		$	2.99
Diluted	$	(0.43	)	$	1.11		$	1.71		$	2.79

Weighted average shares outstanding:
Basic	25,450			25,879			25,800			25,811
Diluted	25,450			27,332			26,912			27,622

See accompanying notes to condensed consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(Unaudited, In Thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Net (loss) income	$	(9,364	)	$	30,138		$	45,788		$	70,321
Other comprehensive (loss) income, net of tax:
Unrealized (loss) income on derivative instruments	(373		)	(134		)	(24		)	2,095
Unrealized loss on foreign currency translation	(14,110		)	(7,529		)	(28,333		)	(4,016		)
Other comprehensive loss, net of tax	(14,483		)	(7,663		)	(28,357		)	(1,921		)
Comprehensive (loss) income	(23,847		)	22,475			17,431			68,400
Comprehensive loss (income) attributable to noncontrolling interest:
Net (income) loss	(1,595		)	197			335			6,755
Unrealized loss on foreign currency translation	2,308			1,372			3,196			902
Comprehensive loss attributable to noncontrolling interests	713			1,569			3,531			7,657
Comprehensive (loss) income attributable to Encore Capital Group, Inc. stockholders	$	(23,134	)	$	24,044		$	20,962		$	76,057

See accompanying notes to condensed consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited, In Thousands)



	Nine Months Ended September 30,
	2015			2014
Operating activities:
Net income	$	45,788		$	70,321
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	24,669			19,879
Non-cash interest expense, net	27,455			20,989
Stock-based compensation expense	17,259			13,560
Deferred income taxes	(257		)	(11,863		)
Excess tax benefit from stock-based payment arrangements	(1,705		)	(11,422		)
Reversal of allowances on receivable portfolios, net	(3,958		)	(12,455		)
Changes in operating assets and liabilities
Deferred court costs and other assets	(41,354		)	(16,498		)
Prepaid income tax and income taxes payable	(45,776		)	2,402
Accounts payable, accrued liabilities and other liabilities	41,260			23,850
Net cash provided by operating activities	63,381			98,763
Investing activities:
Cash paid for acquisitions, net of cash acquired	(236,214		)	(495,519		)
Purchases of receivable portfolios, net of put-backs	(549,957		)	(666,470		)
Collections applied to investment in receivable portfolios, net	488,174			488,086
Originations and purchases of receivables secured by tax liens	(167,739		)	(108,739		)
Collections applied to receivables secured by tax liens	123,407			93,986
Purchases of property and equipment	(15,754		)	(13,598		)
Other, net	3,178			(1,987		)
Net cash used in investing activities	(354,905		)	(704,241		)
Financing activities:
Payment of loan costs	(7,316		)	(15,271		)
Proceeds from credit facilities	903,319			993,449
Repayment of credit facilities	(466,745		)	(878,883		)
Proceeds from senior secured notes	—			288,645
Repayment of senior secured notes	(11,250		)	(11,250		)
Proceeds from issuance of convertible senior notes	—			161,000
Proceeds from issuance of securitized notes	—			134,000
Repayment of securitized notes	(32,324		)	(20,599		)
Repayment of preferred equity certificates, net	—			(702		)
Purchases of convertible hedge instruments	—			(33,576		)
Repurchase of common stock	(33,185		)	(16,815		)
Taxes paid related to net share settlement of equity awards	(6,050		)	(19,356		)
Excess tax benefit from stock-based payment arrangements	1,705			11,422
Other, net	(2,299		)	987
Net cash provided by financing activities	345,855			593,051
Net increase in cash and cash equivalents	54,331			(12,427		)
Effect of exchange rate changes on cash and cash equivalents	(3,274		)	1,654
Cash and cash equivalents, beginning of period	124,163			126,213
Cash and cash equivalents, end of period	$	175,220		$	115,440
Supplemental disclosures of cash flow information:
Cash paid for interest	$	114,731		$	120,125
Cash paid for income taxes, net	72,306			54,452
Supplemental schedule of non-cash investing and financing activities:
Fixed assets acquired through capital lease	$	1,290		$	6,852

See accompanying notes to condensed consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Notes to Condensed 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 for consumers and property owners 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, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings. Encore, through certain subsidiaries, is a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico. Encore’s subsidiary, Janus Holdings Luxembourg S.a.r.l. (“Janus Holdings”), through its indirectly held U.K.-based subsidiary Cabot Credit Management Limited and its subsidiaries (collectively, “Cabot”), is a market leader in credit management services in the United Kingdom, historically specializing in portfolios consisting of higher balance, semi-performing accounts. Cabot’s acquisition of Marlin Financial Group Limited (“Marlin”) in February 2014, provides Cabot with substantial litigation-enhanced collection capabilities for non-performing accounts, and Cabot continued to expand in the United Kingdom with its acquisition of Hillesden Securities Ltd and its subsidiaries (“dlc”) in June 2015. Encore’s majority-owned subsidiary, Grove Holdings (“Grove”), is a U.K.-based leading specialty investment firm focused on consumer non-performing loans, including insolvencies (in particular, individual voluntary arrangements, or “IVAs”) in the United Kingdom and bank and non-bank receivables in Spain. Encore’s majority-owned subsidiary, Refinancia S.A. (“Refinancia”), through its subsidiaries, is a market leader in debt collection and management in Colombia and Peru. In addition, through Encore’s subsidiary, Propel Acquisition, LLC and its subsidiaries (collectively, “Propel”), the Company assists property owners who are delinquent on their property taxes by structuring affordable monthly payment plans and purchases delinquent tax liens directly from selected taxing authorities. In October 2015, the Company completed the acquisition of a controlling stake in Baycorp Holdings Pty Limited (“Baycorp”), one of Australasia's leading debt resolution specialists. The acquisition of Baycorp expands the Company’s operations into Australia and New Zealand and its global reach into 13 countries.

Portfolio Purchasing and Recovery

United States

The Company purchases receivable portfolios based on robust, account-level valuation methods and employs a suite of proprietary statistical and behavioral models across the full extent of its operations. These methods and models allow the Company to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with its methods or goals and precisely align the accounts it purchases with its operational channels to maximize future collections. As a result, the Company has been able to realize significant returns from the receivables it acquires. The Company maintains strong relationships with many of the largest financial service providers in the United States.

The Company uses insights discovered during its purchasing process to build account collection strategies. The Company’s proprietary consumer-level collectability analysis is the primary determinant of whether an account will be actively serviced post-purchase. The Company continuously refines this analysis to determine the most effective collection strategy to pursue for each account it owns. After its preliminary analysis, the Company seeks to collect on only a fraction of the accounts it purchases, through one or more of its collection channels. The channel identification process is analogous to a funneling system, where the Company first differentiates those consumers who it believes are not able to pay from those who are able to pay. Consumers who the Company believes are financially incapable of making any payments, facing extenuating circumstances or hardships (such as medical issues), serving in the military, or currently receiving social security as their only source of income are excluded from the next step of its collection process and are designated as inactive. The remaining pool of accounts in the funnel then receives further evaluation. At that point, the Company analyzes and determines a consumer’s perceived willingness to pay. Based on that analysis, the Company will pursue collections through letters and/or phone calls to its consumers. Despite its efforts to reach consumers and work out a settlement option, only a small number of consumers who are contacted choose to engage with the Company. Those who do are often offered deep discounts on their obligations, or are presented with payment plans that are better suited to meet their daily cash flow needs. The majority of contacted consumers, however, do not respond to the Company’s calls or letters, and therefore the Company must then make the difficult decision whether or not to pursue collections through legal means.

The Company continually monitors applicable changes to laws governing statutes of limitations and disclosures to consumers. The Company maintains policies, system controls, and processes designed to ensure that accounts past the applicable statute of limitations do not get placed into legal collections. Additionally, in written and verbal communications

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with consumers, the Company provides disclosures to the consumer that the account is past its applicable statute of limitations and, therefore, the Company will not pursue collections through legal means.

Europe

Cabot: Through Cabot, portfolio receivables are purchased using a proprietary pricing model. This model allows Cabot to value portfolios with a high degree of accuracy and quantify portfolio performance in order to maximize future collections. As a result, Cabot has been able to realize significant returns from the assets it has acquired. Cabot maintains strong relationships with many of the largest financial service providers in the United Kingdom.

Cabot also uses insights discovered during its purchasing process to build account-level collection strategies. Cabot’s proprietary consumer-level collectability analysis is a determinant of how an account will be serviced post-purchase. Cabot continuously refines this analysis to determine the most effective customer engagement strategy to pursue for each account it owns to ensure that customers are treated fairly and the most suitable engagement and collection strategy for each individual customer is deployed. Cabot has concentrated on buying high-balance financial services debt, both paying and non-paying. Cabot establishes contact with consumers, in order to convey payment arrangements and gauge the willingness of these consumers to continue to pay. Consumers who Cabot believes are financially incapable of making any payments, those having negative disposable income, or those experiencing hardships, are managed outside of normal collection routines.

The remaining pool of accounts then receives further evaluation. Cabot analyzes and estimates a consumer’s perceived willingness to pay. Based on that analysis, Cabot tries to engage with customers through letters and/or phone calls. Where contact is made and consumers indicate a willingness to pay, a patient approach of forbearance is applied using regulatory protocols within the United Kingdom to assess affordability and ensure that plans are fair and balanced and therefore, sustainable. Where consumers cannot be located or refuse to engage in a constructive dialogue, Cabot will pass these accounts through a litigation scorecard and rule set in order to assess suitability for legal action. Through Cabot’s Marlin subsidiary, Cabot has a competitive advantage in the use of litigation-enhanced collections for non-paying accounts.

Grove: Grove, through its subsidiaries and affiliates, is a leading specialty investment firm focused on consumer non-performing loans, including insolvencies (in particular, IVAs) in the United Kingdom and bank and non-bank receivables in Spain. Grove purchases portfolio receivables using a proprietary pricing model. This model allows Grove to value portfolios with a high degree of accuracy and quantify portfolio performance in order to maximize future collections.

Latin America

Refinancia is a market leader in debt collection and management in Colombia and Peru. In addition to purchasing defaulted receivables, Refinancia offers portfolio management services to banks for non-performing loans. Refinancia also specializes in non-traditional niches in Colombia, including providing financial solutions to individuals who have previously defaulted on their credit obligations, payment plan guarantee and factoring services through merchants and loan guarantee services to financial institutions.

Beginning in December 2014 the Company began investing in non-performing secured residential mortgages in Latin America.

Tax Lien Business

Propel’s principal business is the acquisition and servicing of tax liens on residential and commercial real property. These liens take priority over most other liens, including mortgage liens. By funding unpaid property taxes, Propel provides state and local taxing authorities and governments with much needed tax revenue. To the extent permitted by local law, Propel works directly with property owners to structure affordable payment plans designed to allow them to keep their property while paying their property tax obligation over time. In such cases, Propel pays their tax lien obligation to the taxing authority, and the property owner pays Propel at a lower interest rate or over a longer period of time than the taxing authority would ordinarily permit. Propel also purchases tax liens directly from taxing authorities in various states. In many cases, these tax liens continue to be serviced by the taxing authority. When the taxing authority receives payment for the outstanding taxes, it pays Propel the outstanding balance of the lien plus interest, which is established by statute, negotiated at the time of the purchase, or determined by the bid Propel submitted to acquire the tax lien. Propel maintains a foreclosure rate of less than 0.5%.

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Financial Statement Preparation and Presentation

The accompanying interim condensed 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 position, results of operations and cash flows 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 position, results of operations, and cash flows. These condensed 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, 2014. 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. Actual results could materially differ from those estimates.

Basis of Consolidation

The condensed 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 VIEs, for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (b) either the obligation to absorb losses or the right to receive benefits. Refer to Note 11, “Variable Interest Entities,” for further details. All intercompany transactions and balances have been eliminated in consolidation.

On August 6, 2014, the Company acquired all of the outstanding equity interests of Atlantic Credit & Finance, Inc. (the “Atlantic Acquisition”), on February 7, 2014, Cabot completed the acquisition of Marlin (“the Marlin Acquisition”) and on June 1, 2015, Cabot completed the acquisition of dlc (the “dlc Acquisition”). The condensed consolidated financial statements include the results of operations of subsidiaries from mergers and acquisitions, since the date of the respective acquisitions.

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. Transaction gains and losses are included in other income or expense.

Reclassifications

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

Recent Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-02, “Amendments to the Consolidation Analysis.” This ASU affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU No. 2015-02 is effective for interim and annual reporting periods beginning after December 15, 2015. This standard is not expected to have a significant impact to the Company’s financial statements.

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In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU is effective beginning January 1, 2016, with early adoption permitted, and shall be applied retrospectively. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnotes disclosures.

In August 2015, the FASB issued ASU No. 2015-15, “Interest — Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements — Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting” (“ASU 2015-15”), which clarifies the treatment of debt issuance costs from line-of-credit arrangements after the adoption of ASU 2015-03. In particular, ASU 2015-15 clarifies that the SEC would not object to an entity deferring and presenting debt issuance costs related to a line-of-credit arrangement as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of such arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 is effective immediately for both public business entities and non-public entities. The Company believes the adoption of ASU 2015-15 will not have a material effect on its consolidated financial statements.

In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. ASU 2015-16 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for any interim and annual financial statements that have not yet been issued. ASU 2015-16 is applied prospectively to adjustments to provisional amounts that occur after the effective date, i.e., ASU 2015-16 applies to open measurement periods, regardless of the acquisition date. The Company early adopted this standard in the third quarter of 2015. The adoption of this guidance did not have a material impact on its consolidated financial statements and footnotes disclosures.

Note 2: Earnings (Loss) Per Share

Basic earnings or loss per share is calculated by dividing net earnings or loss attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock, and the dilutive effect of the convertible senior notes. In computing the diluted net loss per share, dilutive potential common shares are excluded from the diluted loss per share calculation because of their anti-dilutive effect.

On April 24, 2014, the Company’s Board of Directors approved a $50.0 million share repurchase program. In May 2014, the Company repurchased 400,000 shares of its common stock for approximately $16.8 million. In May 2015, the Company repurchased 839,295 shares of common stock for approximately $33.2 million, which represented the remaining amount allowed under the share repurchase program.

On August 12, 2015, the Company’s Board of Directors approved a new $50.0 million share repurchase program. Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by the Company’s management and Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion.

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



	Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014
Weighted average common shares outstanding—basic	25,450	25,879	25,800	25,811
Dilutive effect of stock-based awards	—	410	265	684
Dilutive effect of convertible senior notes	—	1,043	847	1,118
Dilutive effect of warrants	—	—	—	9
Weighted average common shares outstanding—diluted	25,450	27,332	26,912	27,622

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Due to a one-time charge resulting from a settlement with the Consumer Finance Protection Bureau (“CFPB”), discussed in detail in Note 13, “Commitments and Contingencies,” the Company incurred a net loss during the three months ended September 30, 2015, therefore the dilutive potential common shares are excluded from the diluted loss per share calculation during this period because of their anti-dilutive effect.

There were no anti-dilutive employee stock options outstanding during the nine months ended September 30, 2015 or the three and nine months ended September 30, 2014.

The Company has the following convertible senior notes outstanding: $115.0 million convertible senior notes due 2017 at a conversion price equivalent to approximately $31.56 per share of the Company’s common stock (the “2017 Convertible Notes”), $172.5 million convertible senior notes due 2020 at a conversion price equivalent to approximately $45.72 per share of the Company’s common stock (the “2020 Convertible Notes”), and $161.0 million convertible senior notes due 2021 at a conversion price equivalent to approximately $59.39 per share of the Company’s common stock (the “2021 Convertible Notes”).

In the event of conversion, the 2017 Convertible Notes are convertible into cash up to the aggregate principal amount and permit the excess conversion premium to be settled in cash or shares of the Company’s common stock. For the 2020 Convertible Notes and 2021 Convertible Notes, the Company has the option to pay cash, issue shares of common stock or any combination thereof for the aggregate amount due upon conversion. The Company’s intent is to settle the principal amount of the 2020 and 2021 Convertible Notes in cash upon conversion. As a result, upon conversion of all the convertible senior notes, only the amounts payable in excess of the principal amounts are considered in diluted earnings per share under the treasury stock method. Diluted earnings per share during the periods presented above included the effect of the common shares issuable upon conversion of certain of the convertible senior notes, because the average stock price exceeded the conversion price of these notes. However, as described in Note 10, “Debt—Encore Convertible Notes,” and further described below, the Company entered into certain hedge transactions that have the effect of increasing the effective conversion price of the 2017 Convertible Notes to $60.00, the 2020 Convertible Notes to $61.55, and the 2021 Convertible Notes to $83.14. On January 2, 2014, the 2017 Convertible Notes became convertible as certain conditions for conversion were met in the immediately preceding calendar quarter as defined in the applicable indenture. However, none of the 2017 Convertible Notes have been converted.

Note 3: Business Combinations

dlc Acquisition

On June 1, 2015, Cabot acquired dlc, a U.K.-based acquirer and collector of non-performing unsecured consumer debt for approximately £180.6 million (approximately $274.7 million). The dlc Acquisition was financed with borrowings under Cabot’s existing revolving credit facility and under Cabot’s new senior secured bridge facility. Refer to Note 10, “Debt” for further details of Cabot’s revolving credit facility and senior secured bridge facility.

The dlc Acquisition was accounted for using the acquisition method of accounting and, accordingly, the tangible and intangible assets acquired and liabilities assumed were recorded at their estimated fair values as of the date of the acquisition. Fair value measurements have been applied based on assumptions that market participants would use in the pricing of the respective assets and liabilities. As of the date of this Quarterly Report on Form 10-Q, the Company is still finalizing the allocation of the purchase price. The initial purchase price allocation presented below was based on the preliminary assessment of assets acquired and liabilities assumed, which is subject to change based on the final valuation study that is expected to be completed by the fourth quarter of 2015.

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The components of the preliminary purchase price allocation for the dlc Acquisition were as follows (in thousands):



Purchase price:
Cash paid at acquisition	$	268,391
Deferred consideration	6,306
Total purchase price	$	274,697

Allocation of purchase price:
Cash	$	30,518
Investment in receivable portfolios	215,988
Deferred court costs	760
Property and equipment	1,327
Other assets	2,384
Liabilities assumed	(44,335		)
Identifiable intangible assets	3,670
Goodwill	64,385
Total net assets acquired	$	274,697

The goodwill recognized is primarily attributable to synergies that are expected to be achieved by combining dlc and Cabot's existing contingent collections operations. The entire goodwill of $64.4 million related to the dlc Acquisition is not deductible for income tax purposes.

Total acquisition and integration costs related to the dlc Acquisition were approximately $0.1 million and $2.8 million for the three and nine months ended September 30, 2015, respectively, and have been expensed in the accompanying condensed consolidated statements of operations within general and administrative expenses. The amount of revenue and net income attributable to Encore included in the Company’s consolidated statement of operations for the three months ended September 30, 2015 related to dlc was $11.7 million and $2.3 million, respectively. The amount of revenue and net income attributable to Encore included in the Company’s consolidated statement of operations for the nine months ended September 30, 2015 related to dlc was $16.1 million and $3.8 million, respectively.

Other Acquisitions

In addition to the dlc Acquisition discussed above, the Company, through its subsidiaries, completed certain other acquisitions in 2015. These acquisitions were immaterial to the Company’s financial statements individually and in the aggregate.

Refer to Note 3, “Business Combinations” as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, for a complete description of the Company’s acquisition activities in 2014.

Note 4: Fair Value Measurements

The authoritative guidance for fair value measurements defines fair value 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 guidance utilizes 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 September 30, 2015
	Level 1		Level 2			Level 3			Total
Assets
Foreign currency exchange contracts	$	—	$	715		$	—		$	715
Liabilities
Foreign currency exchange contracts	—		(1,010		)	—			(1,010		)
Temporary Equity
Redeemable noncontrolling interests	—		—			(26,934		)	(26,934		)



	Fair Value Measurements as of December 31, 2014
	Level 1		Level 2			Level 3			Total
Assets
Foreign currency exchange contracts	$	—	$	768		$	—		$	768
Liabilities
Foreign currency exchange contracts	—		(1,037		)	—			(1,037		)
Temporary Equity
Redeemable noncontrolling interests	—		—			(28,885		)	(28,885		)

Foreign Currency Exchange Contracts:

The Company uses foreign currency exchange contracts to minimize its exposure to fluctuations in 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 foreign currency exchange rates, and forward and spot prices for currencies.

Redeemable Noncontrolling Interests:

Some minority shareholders in certain subsidiaries of the Company have the right, at certain times, to require the Company to acquire their ownership interest in those entities at fair value and, in some cases, to force a sale of the subsidiary if the Company chooses not to purchase their interests at fair value. The noncontrolling interests subject to these arrangements are included in temporary equity as redeemable noncontrolling interests, and are adjusted to their estimated redemption amounts each reporting period with a corresponding adjustment to additional paid-in capital. Future reductions in the carrying amounts are subject to a “floor” amount that is equal to the fair value of the redeemable noncontrolling interests at the time they were originally recorded. The recorded value of the redeemable noncontrolling interests cannot go below the floor level. These adjustments do not affect the calculation of earnings per share.

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The components of the change in the redeemable noncontrolling interests for the periods ended September 30, 2015 and December 31, 2014 are presented in the following table (in thousands):



	Amount
Balance at December 31, 2013	$	26,564
Initial redeemable noncontrolling interest related to business combinations	4,997
Net loss attributable to redeemable noncontrolling interests	(4,513		)
Adjustment of the redeemable noncontrolling interests to fair value	5,730
Effect of foreign currency translation attributable to redeemable noncontrolling interests	(3,893		)
Balance at December 31, 2014	28,885
Net loss attributable to redeemable noncontrolling interests	(316		)
Adjustment of the redeemable noncontrolling interests to fair value	1,323
Effect of foreign currency translation attributable to redeemable noncontrolling interests	(2,958		)
Balance at September 30, 2015	$	26,934

Financial Instruments Not Required To Be Carried At Fair Value

Investment in Receivable Portfolios:

The Company records its investment in receivable portfolios at cost, which represents a significant discount from the contractual receivable balances due. The Company computes the fair value of its investment in receivable portfolios 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. In accordance with authoritative guidance related to fair value measurements, the Company estimates the average cost to collect and discount rates based on its estimate of what a market participant might use in valuing these portfolios. 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.

In the Company’s current analysis, the estimated blended market participant cost to collect and discount rate is approximately 50.3% and 12.0%, respectively, for United States portfolios, and approximately 30.0% and 13.4%, respectively, for Europe portfolios. Using this method, the fair value of investment in receivable portfolios approximates the carrying value as of September 30, 2015 and December 31, 2014. A 100 basis point fluctuation in the cost to collect and discount rate used would result in an increase or decrease in the fair value of United States and Europe portfolios by approximately $41.2 million and $57.5 million, respectively, as of September 30, 2015. This fair value calculation does not represent, and should not be construed to represent, the underlying value of the Company or the amount which could be realized if its investment in receivable portfolios were sold. The carrying value of the investment in receivable portfolios was $2.3 billion and $2.1 billion as of September 30, 2015 and December 31, 2014, respectively.

Deferred Court Costs:

The Company capitalizes deferred court costs and provides a reserve for those costs that it believes will ultimately be uncollectible. The carrying value of net deferred court costs approximates fair value.

Receivables Secured By Property Tax Liens:

The fair value of receivables secured by property tax liens is estimated by discounting the future cash flows of the portfolio using a discount rate equivalent to the current rate at which similar portfolios would be originated. For tax liens purchased directly from taxing authorities, the fair value is estimated by discounting the expected future cash flows of the portfolio using a discount rate equivalent to the interest rate expected when acquiring these tax liens. The carrying value of receivables secured by property tax liens approximates fair value. Additionally, the carrying value of the related interest receivable also approximates fair value.

Debt:

Encore’s senior secured notes and borrowings under its revolving credit and term loan facilities are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximate fair value.

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Encore’s convertible senior notes are carried at historical cost, adjusted for the debt discount. The carrying value of the convertible senior notes was $448.5 million less debt discount of $44.3 million as of September 30, 2015, and $448.5 million less debt discount of $51.2 million as of December 31, 2014, respectively. The fair value estimate for these convertible senior notes, which incorporates quoted market prices, was approximately $451.9 million and $507.4 million as of September 30, 2015 and December 31, 2014, respectively.

Propel’s borrowings under its revolving credit facilities, term loan facility, and securitized notes are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximate fair value.

The carrying value of the Cabot and Marlin senior secured notes was $1.1 billion, including debt premium of $57.4 million and $1.1 billion, including debt premium of $67.3 million, as of September 30, 2015 and December 31, 2014, respectively. The fair value estimate for these senior notes, which incorporates quoted market prices, approximated the carrying value as of September 30, 2015 and December 31, 2014, respectively.

Cabot’s borrowings under its senior revolving credit facility and senior secured bridge loan facility, entered into in June 2015 in connection with the dlc Acquisition, are carried at historical amounts, adjusted for additional borrowings less principal repayments, which approximates fair value.

The Company’s preferred equity certificates are legal obligations to the noncontrolling shareholders of two of its subsidiaries, Janus Holdings and Cabot Holdings. They are carried at the face amount, plus any accrued interest. The Company determined, at the time of the acquisition of a controlling interest in Cabot (the “Cabot Acquisition”) and at September 30, 2015, that the carrying value of these preferred equity certificates approximates fair value.

Note 5: 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.

Foreign Currency Exchange Contracts

The Company has operations in foreign countries, which exposes the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate this risk, the Company enters into derivative financial instruments, principally Indian rupee forward contracts, which are designated as cash flow hedges, to mitigate fluctuations in the cash payments of future forecasted transactions. 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.

Gains and losses on cash flow hedges are recorded in other comprehensive income (“OCI”) until the hedged transaction is recorded in the consolidated financial statements. Once the underlying transaction is recorded in the consolidated financial statements, the Company reclassifies OCI on the derivative into earnings. If all or a portion of the forecasted transaction is cancelled, this would render all or a portion of the cash flow hedge ineffective and the Company would reclassify the ineffective portion of the hedge into earnings. The Company generally does not experience ineffectiveness of the hedge relationship and the accompanying consolidated financial statements do not include any such gains or losses.

As of September 30, 2015, the total notional amount of the forward contracts to buy Indian rupees in exchange for U.S. dollars was $43.8 million. All of these outstanding contracts qualified for hedge accounting treatment. The Company estimates that approximately $0.5 million of net derivative gain included in OCI will be reclassified into earnings within the next 12 months. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the nine months ended September 30, 2015 and 2014.

The Company does not enter into derivative instruments for trading or speculative purposes.

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



	September 30, 2015				December 31, 2014
	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Foreign currency exchange contracts	Other liabilities	$	(1,010	)	Other liabilities	$	(1,037	)
Foreign currency exchange contracts	Other assets	715			Other assets	768

The following table summarizes the effects of derivatives in cash flow hedging relationships on the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014 (in thousands):



	Gain or (Loss) Recognized in OCI- Effective Portion						Location of Gain or (Loss) Reclassified from OCI into Income - Effective Portion	Gain or (Loss) Reclassified from OCI into Income - Effective Portion						Location of Gain or (Loss) Recognized - Ineffective Portion and Amount Excluded from Effectiveness Testing	Amount of Gain or (Loss) Recognized - Ineffective Portion and Amount Excluded from Effectiveness Testing
	Three Months Ended September 30,							Three Months Ended September 30,							Three Months Ended September 30,
	2015			2014				2015			2014				2015		2014
Foreign currency exchange contracts	$	(670	)	$	(429	)	Salaries and employee benefits	$	(153	)	$	(243	)	Other (expense) income	$	—	$	—
Foreign currency exchange contracts	(126		)	(79		)	General and administrative expenses	(28		)	(46		)	Other (expense) income	—		—



	Gain or (Loss) Recognized in OCI- Effective Portion					Location of Gain or (Loss) Reclassified from OCI into Income - Effective Portion	Gain or (Loss) Reclassified from OCI into Income - Effective Portion						Location of Gain or (Loss) Recognized - Ineffective Portion and Amount Excluded from Effectiveness Testing	Amount of Gain or (Loss) Recognized - Ineffective Portion and Amount Excluded from Effectiveness Testing
	Nine Months Ended September 30,						Nine Months Ended September 30,							Nine Months Ended September 30,
	2015			2014			2015			2014				2015		2014
Foreign currency exchange contracts	$	(593	)	$	2,215	Salaries and employee benefits	$	(468	)	$	(818	)	Other (expense) income	$	—	$	—
Foreign currency exchange contracts	24			242		General and administrative expenses	(75		)	(143		)	Other (expense) income	—		—

Note 6: Investment in Receivable Portfolios, Net

In accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality, discrete receivable portfolio purchases during the same fiscal quarter are aggregated into pools based on common risk characteristics. Common risk characteristics include risk ratings (e.g. FICO or similar scores), 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 and telecom, purchased consumer bankruptcy, and mortgage portfolios. We further group these static pools by geographic region or location. Once a static pool is established, the portfolios are permanently assigned to the pool. The discount (i.e., the difference between the cost of each static pool and the related aggregate contractual receivable balance) is not

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recorded because the Company expects to collect a relatively small percentage of each static pool’s contractual receivable balance. As a result, receivable portfolios are recorded at cost at the time of acquisition. The purchase cost of the portfolios includes certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios.

In compliance with the authoritative guidance, the Company accounts for its investments in receivable portfolios using either the interest method or the cost recovery method. The interest method applies an internal rate of return (“IRR”) to the cost basis of the pool, which remains unchanged throughout the life of the pool, unless there is an increase in subsequent expected cash flows. Subsequent increases in expected cash flows are recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows do not change the IRR, but are recognized as an allowance to the cost basis of the pool, and are reflected in the consolidated statements of operations as a reduction in revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition.

The Company utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. During the quarter ended September 30, 2014, the Company revised the forecasting methodology it uses to value and calculate IRRs on its portfolios in the United States by extending the collection forecasts from 84 or 96 months to 120 months. This change was made as a result of the Company experiencing collections beyond 84 or 96 months and an increased confidence in its ability to forecast future cash collections to 120 months. Extending the collection forecast did not result in a material increase to any quarterly pool group’s IRR or revenue for the quarter. The Company has historically included collections to 120 months in its estimated remaining collection disclosures and when evaluating the economic returns of its portfolio purchases.

The Company accounts for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios, and for provision for loss or allowance. Revenue from receivable portfolios is accrued based on each pool’s IRR applied to each pool’s adjusted cost basis. The cost basis of each pool is increased by revenue earned and portfolio allowance reversals and decreased by gross collections and portfolio allowances.

If the amount and timing of future cash collections on a pool of receivables are not reasonably estimable, the Company accounts for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios have different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue is recognized until the purchase price of a Cost Recovery Portfolio has been fully recovered.

Accretable yield represents the amount of revenue the Company expects to generate over the remaining life of its existing investment in receivable portfolios based on estimated future cash flows. Total accretable yield is the difference between future estimated collections and the current carrying value of a portfolio. All estimated cash flows on portfolios where the cost basis has been fully recovered are classified as zero basis cash flows.

The following table summarizes the Company’s accretable yield and an estimate of zero basis future cash flows at the beginning and end of the period presented (in thousands):



	Accretable Yield			Estimate of Zero Basis Cash Flows			Total ⁽⁷⁾
December 31, 2014	$	2,993,321		$	66,392		$	3,059,713
Revenue recognized, net⁽¹⁾	(248,539		)	(15,571		)	(264,110		)
Net additions on existing portfolios⁽²⁾	120,729			39,607			160,336
Additions for current purchases, net⁽²⁾	85,692			—			85,692
Balance at March 31, 2015	2,951,203			90,428			3,041,631
Revenue recognized, net⁽¹⁾	(243,425		)	(26,876		)	(270,301		)
Net additions on existing portfolios⁽²⁾	91,294			74,586			165,880
Additions for current purchases, net^{(2), (3)}	395,032			—			395,032
Balance at June 30, 2015	3,194,104			138,138			3,332,242
Revenue recognized, net⁽¹⁾	(233,680		)	(31,843		)	(265,523		)
Net additions on existing portfolios^{(2), (4)}	(3,548		)	117,918			114,370
Additions for current purchases, net⁽²⁾	149,255			—			149,255
Balance at September 30, 2015	$	3,106,131		$	224,213		$	3,330,344

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	Accretable Yield			Estimate of Zero Basis Cash Flows			Total ⁽⁷⁾
Balance at December 31, 2013	$	2,391,471		$	8,465		$	2,399,936
Revenue recognized, net⁽¹⁾	(231,057		)	(6,511		)	(237,568		)
Net additions on existing portfolios⁽²⁾	92,325			8,555			100,880
Additions for current purchases, net^{(2), (5)}	591,205			—			591,205
Balance at March 31, 2014	2,843,944			10,509			2,854,453
Revenue recognized, net⁽¹⁾	(241,523		)	(6,708		)	(248,231		)
Net additions on existing portfolios⁽²⁾	80,582			6,135			86,717
Additions for current purchases, net⁽²⁾	218,047			—			218,047
Balance at June 30, 2014	2,901,050			9,936			2,910,986
Revenue recognized, net⁽¹⁾	(244,561		)	(7,224		)	(251,785		)
Net additions on existing portfolios⁽²⁾	161,622			54,184			215,806
Additions for current purchases, net^{(2), (6)}	179,604			—			179,604
Balance at September 30, 2014	$	2,997,715		$	56,896		$	3,054,611

________________________


(1)	Revenue recognized on Zero Basis Portfolios includes portfolio allowances and reversals.


(2)	Includes effect of foreign currency translation.


(3)	Includes $216.0 million of portfolios acquired in connection with the dlc Acquisition.


(4)	Includes impact of CFPB settlement of approximately $22.2 million.


(5)	Includes $208.5 million of portfolios acquired in connection with the Marlin Acquisition.


(6)	Includes $105.4 million of portfolios acquired in connection with the Atlantic Acquisition.


(7)	Estimated remaining collections and accretable yield include anticipated collections beyond the 120 month collection forecast for United States portfolios.

During the three months ended September 30, 2015, the Company purchased receivable portfolios with a face value of $2.1 billion for $187.2 million, or a purchase cost of 9.0% of face value. The estimated future collections at acquisition for all portfolios purchased during the quarter amounted to $336.4 million. During the three months ended September 30, 2014, the Company purchased receivable portfolios with a face value of $4.0 billion for $299.5 million, or a purchase cost of 7.5% of face value. Purchases of charged-off credit card portfolios during the three months ended September 30, 2014, include $105.4 million of portfolios acquired in connection with the Atlantic Acquisition. The estimated future collections at acquisition for all portfolios purchased during the quarter amounted to $606.3 million.

During the nine months ended September 30, 2015, the Company purchased receivable portfolios with a face value of $8.7 billion for $731.1 million, or a purchase cost of 8.4% of face value. Purchases of charged-off credit card portfolios during the nine months ended September 30, 2015, include $216.0 million of portfolios acquired in connection with the dlc Acquisition. The estimated future collections at acquisition for all portfolios purchased during the period amounted to $1.3 billion. During the nine months ended September 30, 2014, the Company purchased receivable portfolios with a face value of $11.3 billion for $992.8 million, or a purchase cost of 8.8% of face value. Purchases of charged-off credit card portfolios during the nine months ended September 30, 2014, include $208.5 million of portfolios acquired in connection with the Marlin Acquisition and $105.4 million of portfolios acquired in connection with the Atlantic Acquisition. The estimated future collections at acquisition for all portfolios purchased during the period amounted to $2.0 billion.

All collections realized after the net book value of a portfolio has been fully recovered (“Zero Basis Portfolios”) are recorded as revenue (“Zero Basis Revenue”). During the three months ended September 30, 2015 and 2014, Zero Basis Revenue was approximately $31.8 million and $7.2 million, respectively. During the nine months ended September 30, 2015 and 2014, Zero Basis Revenue was approximately $74.3 million and $20.4 million, respectively.

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The following tables summarize the changes in the balance of the investment in receivable portfolios during the following periods (in thousands, except percentages):



	Three Months Ended September 30, 2015
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	2,343,864		$	7,903		$	—		$	2,351,767
Purchases of receivable portfolios	187,180			—			—			187,180
Gross collections⁽¹⁾	(388,822		)	(1,126		)	(31,805		)	(421,753		)
Put-backs and Recalls⁽²⁾	(5,677		)	(1		)	(37		)	(5,715		)
Foreign currency adjustments	(52,505		)	(1,273		)	—			(53,778		)
Revenue recognized	240,039			—			28,745			268,784
Portfolio (allowance) reversals, net⁽³⁾	(6,358		)	—			3,097			(3,261		)
Balance, end of period	$	2,317,721		$	5,503		$	—		$	2,323,224
Revenue as a percentage of collections⁽⁴⁾	61.7		%	0.0		%	90.4		%	63.7		%

	Three Months Ended September 30, 2014
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	1,978,493		$	9,492		$	—		$	1,987,985
Purchases of receivable portfolios⁽⁵⁾	297,800			1,709			—			299,509
Transfer of portfolios	(11,519		)	11,519			—			—
Gross collections⁽¹⁾	(395,945		)	(4,056		)	(7,219		)	(407,220		)
Put-backs and Recalls⁽²⁾	(1,530		)	(9		)	(5		)	(1,544		)
Foreign currency adjustments	(55,869		)	(1,414		)	—			(57,283		)
Revenue recognized	241,502			—			4,480			245,982
Portfolio allowance reversals, net	3,059			—			2,744			5,803
Balance, end of period	$	2,055,991		$	17,241		$	—		$	2,073,232
Revenue as a percentage of collections⁽⁴⁾	61.0		%	0.0		%	62.1		%	60.4		%

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	Nine Months Ended September 30, 2015
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	2,131,084		$	12,476		$	—		$	2,143,560
Purchases of receivable portfolios⁽⁶⁾	731,114			—			—			731,114
Gross collections⁽¹⁾	(1,205,717		)	(4,351		)	(74,080		)	(1,284,148		)
Put-backs and Recalls⁽²⁾	(9,652		)	(20		)	(229		)	(9,901		)
Foreign currency adjustments	(54,753		)	(2,602		)	20			(57,335		)
Revenue recognized	731,196			—			64,780			795,976
Portfolio (allowance) reversals, net⁽³⁾	(5,551		)	—			9,509			3,958
Balance, end of period	$	2,317,721		$	5,503		$	—		$	2,323,224
Revenue as a percentage of collections⁽⁴⁾	60.6		%	0.0		%	87.4		%	62.0		%

	Nine Months Ended September 30, 2014
	Accrual Basis Portfolios			Cost Recovery Portfolios			Zero Basis Portfolios			Total
Balance, beginning of period	$	1,585,587		$	4,662		$	—		$	1,590,249
Purchases of receivable portfolios^{(5), (7)}	991,127			1,709			—			992,836
Transfer of portfolios	(18,682		)	18,682			—			—
Gross collections⁽¹⁾	(1,186,431		)	(6,305		)	(20,438		)	(1,213,174		)
Put-backs and Recalls⁽²⁾	(10,353		)	(412		)	(5		)	(10,770		)
Foreign currency adjustments	(22,398		)	(1,095		)	—			(23,493		)
Revenue recognized	713,656			—			11,473			725,129
Portfolio allowance reversals, net	3,485			—			8,970			12,455
Balance, end of period	$	2,055,991		$	17,241		$	—		$	2,073,232
Revenue as a percentage of collections⁽⁴⁾	60.2		%	0.0		%	56.1		%	59.8		%

________________________


(1)	Does not include amounts collected on behalf of others.


(2)	Put-backs represent accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”). Recalls represent accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).


(3)	Portfolio allowance reversal, net includes a portfolio allowance of $8.3 million related to the CFPB settlement as discussed in Note 13, “Commitments and Contingencies.”


(4)	Revenue as a percentage of collections excludes the effects of net portfolio allowances or net portfolio allowance reversals.


(5)	Includes $105.4 million acquired in connection with the Atlantic Acquisition in August 2014.


(6)	Includes $216.0 million acquired in connection with the dlc Acquisition in June 2015.


(7)	Includes $208.5 million acquired in connection with the Marlin Acquisition in February 2014.

The following table summarizes the change in the valuation allowance for investment in receivable portfolios during the periods presented (in thousands):



	Valuation Allowance
	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Balance at beginning of period	$	68,454		$	86,428		$	75,673		$	93,080
Provision for portfolio allowances	8,322			—			8,322			—
Reversal of prior allowances	(5,061		)	(5,803		)	(12,280		)	(12,455		)
Balance at end of period	$	71,715		$	80,625		$	71,715		$	80,625

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Note 7: Deferred Court Costs, Net

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 which are recoverable from the consumer (“Deferred Court Costs”).

The Company capitalizes Deferred Court Costs in its consolidated financial statements and provides a reserve for those costs that it believes will ultimately be uncollectible. The Company determines the reserve based on its analysis of court costs that have been advanced and those that have been recovered. The Company writes off any Deferred Court Cost not recovered within five years of placement. Collections received from debtors are first applied against related court costs with the balance applied to the debtors’ account balance.

Deferred Court Costs for the five-year deferral period consist of the following as of the dates presented (in thousands):



	September 30, 2015			December 31, 2014
Court costs advanced	$	615,002		$	546,271
Court costs recovered	(232,028		)	(206,287		)
Court costs reserve	(308,920		)	(279,572		)
	$	74,054		$	60,412

A roll forward of the Company’s court cost reserve is as follows (in thousands):



	Court Cost Reserve
	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Balance at beginning of period	$	(298,955	)	$	(243,832	)	$	(279,572	)	$	(210,889	)
Provision for court costs	(22,434		)	(18,127		)	(59,897		)	(51,038		)
Net down of reserve after 60 months	11,924			—			30,284			—
Effect of foreign currency translation	545			178			265			146
Balance at end of period	$	(308,920	)	$	(261,781	)	$	(308,920	)	$	(261,781	)

Note 8: Receivables Secured by Property Tax Liens, Net

Propel’s receivables are secured by property tax liens. Repayment of the property tax liens is generally dependent on the property owner but can also come through payments from other lien holders or, in less than 0.5% of cases, from foreclosure on the properties. Propel records receivables secured by property tax liens at their outstanding principal balances, adjusted for, if any, charge-offs, allowance for losses, deferred fees or costs, and unamortized premiums or discounts. Interest income is reported on the interest method and includes amortization of net deferred fees and costs over the term of the agreements. Propel accrues interest on all past due receivables secured by tax liens as the receivables are collateralized by tax liens that are in a priority position over most other liens on the properties. If there is doubt about the ultimate collection of the accrued interest on a specific account, it would be placed on non-accrual basis and, at that time, all accrued interest would be reversed. Receivables secured by property tax liens that have been placed on a non-accrual basis were $0.7 million and zero as of September 30, 2015 and December 31, 2014, respectively. The typical redemption period for receivables secured by property tax liens is less than 84 months.

On May 6, 2014, Propel, through its subsidiaries, completed the securitization of a pool of approximately $141.5 million in receivables secured by property tax liens on real property located in the State of Texas. In connection with the securitization, investors purchased approximately $134.0 million in aggregate principal amount of 1.44% notes collateralized by these property tax liens. The special purpose entity that is used for the securitization is consolidated by the Company as a VIE. The receivables recognized as a result of consolidating the VIE do not represent assets that can be used to satisfy claims against the Company’s general assets.

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At September 30, 2015, the Company had approximately $297.6 million in receivables secured by property tax liens, of which $88.2 million was carried at the VIE.

Note 9: Other Assets

Other assets consist of the following (in thousands):



	September 30, 2015		December 31, 2014
Prepaid income taxes	$	40,611	$	—
Debt issuance costs, net of amortization	36,415		38,504
Prepaid expenses	33,141		21,427
Interest receivable	20,525		12,187
Identifiable intangible assets, net	19,511		21,564
Deferred tax assets	14,604		33,716
Service fee receivables	10,688		7,864
Other financial receivables	9,382		7,467
Receivable from seller	6,987		7,357
Security deposits	4,334		3,617
Recoverable legal fees	2,794		2,905
Funds held in escrow	—		16,889
Other	30,705		24,169
	$	229,697	$	197,666

Note 10: Debt

The Company is in compliance with all covenants under its financing arrangements. The components of the Company’s consolidated debt and capital lease obligations were as follows (in thousands):



	September 30, 2015			December 31, 2014
Encore revolving credit facility	$	576,000		$	505,000
Encore term loan facility	140,141			146,023
Encore senior secured notes	32,500			43,750
Encore convertible notes	448,500			448,500
Less: Debt discount	(44,255		)	(51,202		)
Propel facilities	154,460			84,229
Propel securitized notes	71,923			104,247
Cabot senior secured notes	1,045,143			1,076,952
Add: Debt premium	57,387			67,259
Cabot senior revolving credit facility	242,751			86,368
Cabot senior secured bridge facility	136,323			—
Preferred equity certificates	220,304			208,312
Capital lease obligations	10,574			15,331
Other	24,693			38,785
	$	3,116,444		$	2,773,554

Encore Revolving Credit Facility and Term Loan Facility

On July 9, 2015, Encore amended its revolving credit facility and term loan facility pursuant to Amendment No. 2 to the Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”). The Restated Credit

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Agreement includes a revolving credit facility of $692.6 million (the “Revolving Credit Facility”), a term loan facility of $153.8 million (the “Term Loan Facility”, and together with the Revolving Credit Facility, the “Senior Secured Credit Facilities”), and an accordion feature that allows the Company to increase the Revolving Credit Facility by an additional $250.0 million. Including the accordion feature, the maximum amount that can be borrowed under the Restated Credit Agreement is $1.1 billion. The Restated Credit Agreement expires in February 2019, except with respect to two subtranches of the Term Loan Facility of $60.0 million and $6.3 million, maturing in February 2017 and November 2017, respectively.

Provisions of the Restated Credit Agreement include, but are not limited to:

•

The Revolving Credit Facility of $692.6 million, 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 Company’s cash flow leverage ratio; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points depending on the Company’s cash flow leverage ratio. “Alternate base rate,” as defined in the Restated Credit Agreement, means the highest of (i) the per annum rate which the administrative agent publicly announces from time to time as its prime lending rate, (ii) the federal funds effective rate from time to time, plus 0.5% per annum or (iii) reserved adjusted LIBOR determined on a daily basis for a one month interest period, plus 1.0% per annum;

•

An $87.5 million five-year term loan, 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 Company’s cash flow leverage ratio; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the Company’s cash flow leverage ratio. Principal amortizes $4.4 million in 2015, $6.6 million in 2016, $8.8 million in 2017, and $8.8 million in 2018 with the remaining principal due at the end of the term;

•

A $60.0 million term loan maturing on February 28, 2017, with interest at a floating rate equal to, at the Company’s option, either: (1) reserve adjusted LIBOR, plus a spread that ranges from 200 to 250 basis points, depending on the Company’s cash flow leverage ratio; or (2) alternate base rate, plus a spread that ranges from 100 to 150 basis points, depending on the Company’s cash flow leverage ratio. Principal amortizes $3.0 million in 2015, and $4.5 million in 2016 with the remaining principal due at the end of the term;

•

A $6.3 million term loan maturing on November 3, 2017, 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 Company’s cash flow leverage ratio; or (2) alternate base rate, plus a spread that ranges from 150 to 200 basis points, depending on the Company’s cash flow leverage ratio. Principal amortizes $0.5 million in 2015, $0.6 million in 2016 and $0.5 million in 2017 with the remaining principal due at the end of the term;

•

A borrowing base equal to (1) the lesser of (i) 30%—35% (depending on the Company’s trailing 12-month cost per dollar collected) of all eligible non-bankruptcy estimated remaining collections, currently 33%, plus 55% of eligible estimated remaining collections for consumer receivables subject to bankruptcy, and (ii) the product of the net book value of all receivable portfolios acquired on or after January 1, 2005 multiplied by 95%, minus (2) the sum of the aggregate principal amount outstanding of Encore’s Senior Secured Notes (as defined below) plus the aggregate principal amount outstanding under the term loans;


•	a maximum cash flow leverage ratio permitted of 2.50:1.00;


•	a maximum cash flow secured leverage ratio of 2.00:1.00;


•	The allowance of additional unsecured or subordinated indebtedness not to exceed $1.1 billion;


•	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 after July 9, 2015, subject to compliance with certain covenants and available borrowing capacity;


•	A change of control definition that excludes acquisitions of stock by Red Mountain Capital Partners LLC, JCF FPK I, LP and their respective affiliates of up to 50% of the outstanding shares of Encore’s voting stock;


•	Events of default which, upon occurrence, may permit the lenders to terminate the facility and declare all amounts outstanding to be immediately due and payable;


•	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 the Company 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; and

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

At September 30, 2015, the outstanding balance under the Restated Credit Agreement was $716.1 million. The weighted average interest rate was 3.25% and 2.95% for the three months ended September 30, 2015 and 2014, respectively, and 3.12% and 2.92% for the nine months ended September 30, 2015 and 2014, respectively.

Encore Senior Secured Notes

In 2010 and 2011 Encore entered into an aggregate of $75.0 million in senior secured notes with certain affiliates of Prudential Capital Group (the “Senior Secured Notes”). $25.0 million of the Senior Secured Notes bear an annual interest rate of 7.375%, mature in 2018 and require quarterly principal payments of $1.25 million. Prior to May 2013, these notes required quarterly payments of interest only. The remaining $50.0 million of Senior Secured Notes bear an annual interest rate of 7.75%, mature in 2017 and require quarterly principal payments of $2.5 million. Prior to December 2012 these notes required quarterly interest only payments. As of September 30, 2015, $12.5 million of the 7.375% Senior Secured Notes and $20.0 million of the 7.75% Senior Secured Notes, for an aggregate of $32.5 million, remained outstanding.

The Senior Secured Notes are guaranteed in full by certain of Encore’s subsidiaries. Similar to, and pari passu with, the Senior Secured Credit Facilities, the Senior Secured Notes are collateralized by the same collateral as our Revolving Credit Facility. The Senior Secured Notes may be accelerated and become automatically and immediately due and payable upon certain events of default, including certain events related to insolvency, bankruptcy, or liquidation. Additionally, the Senior Secured Notes may be accelerated at the election of the holder or holders of a majority in principal amount of the Senior Secured Notes upon certain events of default by Encore, including the breach of affirmative covenants regarding guarantors, collateral, most favored lender treatment, minimum revolving credit facility commitment or the breach of any negative covenant. If Encore prepays the Senior Secured Notes at any time for any reason, payment will be at the higher of par or the present value of the remaining scheduled payments of principal and interest on the portion being prepaid. The discount rate used to determine the present value is 50 basis points over the then current Treasury Rate corresponding to the remaining average life of the senior secured notes. The covenants are substantially similar to those in the Restated Credit Agreement. Prudential Capital Group and the administrative agent for the lenders of the Restated Credit Agreement have an intercreditor agreement related to their pro rata rights to the collateral, actionable default, powers and duties and remedies, among other topics. The terms of the Senior Secured Notes were amended in connection with the Restated Credit Agreement in order to properly align certain provisions between the two agreements.

Encore Convertible Notes

In November and December 2012, Encore sold $115.0 million aggregate principal amount of 3.0% 2017 Convertible Notes that mature on November 27, 2017 in private placement transactions. In June and July 2013, Encore sold $172.5 million aggregate principal amount of 3.0% 2020 Convertible Notes that mature on July 1, 2020 in private placement transactions. In March 2014, Encore sold $161.0 million aggregate principal amount of 2.875% 2021 Convertible Notes that mature on March 15, 2021 in private placement transactions. The interest on these unsecured convertible senior notes (collectively, the “Convertible Notes”), is payable semi-annually.

Prior to the close of business on the business day immediately preceding their respective conversion date (listed below), holders may convert their Convertible Notes under certain circumstances set forth in the applicable Convertible Notes indentures. On or after their respective conversion dates until the close of business on the scheduled trading day immediately preceding their respective maturity date, holders may convert their Convertible Notes at any time. Certain key terms related to the convertible features for each of the Convertible Notes as of September 30, 2015 are listed below.



	2017 Convertible Notes		2020 Convertible Notes		2021 Convertible Notes
Initial conversion price	$	31.56	$	45.72	$	59.39
Closing stock price at date of issuance	$	25.66	$	33.35	$	47.51
Closing stock price date	November 27, 2012		June 24, 2013		March 5, 2014
Conversion rate (shares per $1,000 principal amount)	31.6832		21.8718		16.8386
Conversion date⁽¹⁾	May 27, 2017		January 1, 2020		September 15, 2020

_______________________


(1)	2017 Convertible Notes became convertible on January 2, 2014, as certain early conversion events were satisfied. Refer to “Conversion and Earnings Per Share Impact” section below for further details.

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In the event of conversion, the 2017 Convertible Notes are convertible into cash up to the aggregate principal amount of the notes. The excess conversion premium may be settled in cash or shares of the Company’s common stock at the discretion of the Company. In the event of conversion, holders of the Company’s 2020 and 2021 Convertible 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 through combination settlement (i.e., convertible 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, for the remainder). As a result, and in accordance with authoritative guidance related to derivatives and hedging and earnings per share, only the conversion spread is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when, during any quarter, the average share price of the Company’s common stock exceeds the initial conversion prices listed in the above table.

Authoritative guidance related to debt with conversion and other options requires that issuers of convertible debt instruments that, upon conversion, may be settled fully or partially in cash, must separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. Additionally, debt issuance costs are required to be allocated in proportion to the allocation of the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively.

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 are listed below (in thousands, except percentages):



	2017 Convertible Notes			2020 Convertible Notes			2021 Convertible Notes
Debt component	$	100,298		$	140,271		$	143,604
Equity component	$	14,702		$	32,229		$	17,396
Equity issuance cost	$	788		$	1,113		$	575
Stated interest rate	3.000		%	3.000		%	2.875		%
Effective interest rate	6.000		%	6.350		%	4.700		%

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



	September 30, 2015			December 31, 2014
Liability component—principal amount	$	448,500		$	448,500
Unamortized debt discount	(44,255		)	(51,202		)
Liability component—net carrying amount	$	404,245		$	397,298
Equity component	$	57,428		$	55,236

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Interest expense—stated coupon rate	$	3,315	$	3,316	$	9,915	$	9,080
Interest expense—amortization of debt discount	2,359		2,228		6,947		6,164
Total interest expense—convertible notes	$	5,674	$	5,544	$	16,862	$	15,244

Convertible Notes Hedge Transactions

In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company is required to make in the event that the market price of the Company’s common stock becomes greater than the conversion price of the Convertible Notes, the Company maintains a hedge program that increases the effective conversion price for each of the Convertible Notes. All of the hedge instruments related to the Convertible Notes have been determined to be indexed to the Company’s own stock and meet the criteria for equity classification. In accordance with authoritative guidance, the Company

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recorded the cost of the hedge instruments as a reduction in additional paid-in capital, and will not recognize subsequent changes in fair value of these financial instruments in its consolidated financial statements.

The initial hedge instruments the Company entered into in connection with its issuance of the 2017 Convertible Notes had an effective conversion price of $44.19. On December 16, 2013, the Company entered into amendments to the hedge instruments to further increase the effective conversion price from $44.19 to $60.00. All other terms and settlement provisions of the hedge instruments remained unchanged. The transaction was completed in February 2014. The Company paid approximately $27.9 million in total consideration for amending the hedge instruments. The Company recorded the payment as a reduction of equity in the consolidated statements of financial condition.

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



	2017 Convertible Notes		2020 Convertible Notes		2021 Convertible Notes
Cost of the hedge transaction(s)	$	50,595	$	18,113	$	19,545
Initial conversion price	$	31.56	$	45.72	$	59.39
Effective conversion price	$	60.00	$	61.55	$	83.14

Conversion and Earnings Per Share Impact

During the quarter ending December 31, 2013, the closing price of the Company’s common stock exceeded 130% of the conversion price of the 2017 Convertible Notes for more than 20 trading days during a 30 consecutive trading day period, thereby satisfying one of the early conversion events. As a result, the 2017 Convertible Notes became convertible on demand effective January 2, 2014, and the holders were notified that they could elect to submit their 2017 Convertible Notes for conversion. The carrying value of the 2017 Convertible Notes continues to be reported as debt as the Company intends to draw on the Revolving Credit Facility or use cash on hand to settle the principal amount of any such conversions in cash. No gain or loss was recognized when the debt became convertible. The estimated fair value of the 2017 Convertible Notes was approximately $144.5 million as of September 30, 2015. In addition, upon becoming convertible, a portion of the equity component that was recorded at the time of the issuance of the 2017 Convertible Notes was considered redeemable and that portion of the equity was reclassified to temporary equity in the Company’s condensed consolidated statements of financial condition. Such amount was determined based on the cash consideration to be paid upon conversion and the carrying amount of the debt. Upon conversion, the holders of the 2017 Convertible Notes will be paid in cash for the principal amount and issued shares or a combination of cash and shares for the remaining value of the 2017 Convertible Notes. As a result, the Company reclassified $6.9 million of the equity component to temporary equity as of September 30, 2015. If a conversion event takes place, this temporary equity balance will be recalculated based on the difference between the 2017 Convertible Notes principal and the debt carrying value. If the 2017 Convertible Notes are settled, an amount equal to the fair value of the liability component, immediately prior to the settlement, will be deducted from the fair value of the total settlement consideration transferred and allocated to the liability component. Any difference between the amount allocated to the liability and the net carrying amount of the 2017 Convertible Notes (including any unamortized debt issue costs and discount) will be recognized in earnings as a gain or loss on debt extinguishment. Any remaining consideration is allocated to the reacquisition of the equity component and will be recognized as a reduction in stockholders’ equity.

None of the 2017 Convertible Notes were converted during the three and nine months ended September 30, 2015 and 2014.

In accordance with authoritative guidance related to derivatives and hedging and earnings per share calculation, only the conversion spread of the Convertible Notes is included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion spread has a dilutive effect when the average share price of the Company’s common stock during any quarter exceeds the respective conversion price of each of the Convertible Notes. See Note 2, “Earnings (Loss) Per Share” for additional information.

Propel Facilities

Propel Facility I

On May 8, 2015, Propel amended its syndicated loan facility (as amended, the “Propel Facility I”). The Propel Facility I is an $80.0 million facility, with a $20.0 million uncommitted accordion feature, used to originate or purchase tax lien assets.

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The Propel Facility I expires in May 2018 and includes the following key provisions:

•

Interest at Propel’s option, at either: (1) LIBOR, plus a spread that ranges from 270 to 320 basis points, depending on Propel’s cash flow leverage ratio; or (2) the greater of (a) the rate publicly announced from time to time by Texas Capital Bank, National Association, as its prime rate, (b) the sum of the federal funds rate for such day plus 50 basis points, or (c) one month LIBOR plus 100 basis points;


•	A borrowing base of 90% of the face value of the tax lien assets;


•	Interest payable monthly; principal and interest due at maturity;


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


•	Events of default which, upon occurrence, may permit the lenders to terminate the Propel Facility I and declare all amounts outstanding to be immediately due and payable.

The Propel Facility I is primarily collateralized by the tax liens in Texas and requires Propel to maintain various financial covenants, including a minimum interest coverage ratio and a maximum cash flow leverage ratio.

At September 30, 2015, the outstanding balance on the Propel Facility I was $63.0 million. The weighted average interest rate was 2.71% and 3.15% for the three months ended September 30, 2015 and 2014, respectively, and 3.02% and 3.34% for the nine months ended September 30, 2015 and 2014, respectively.

Propel Facility II

On May 15, 2013, the Company, through affiliates of Propel, entered into a $100.0 million revolving credit facility (as amended, the “Propel Facility II”). The Propel Facility II is used to purchase tax liens from taxing authorities in various states and expires on May 10, 2019. On April 3, 2015 and October 26, 2015, the Propel Facility II was amended to, among other things, modify the interest rate and permit additional tax lien assets to be included in the borrowing base. The Propel Facility II includes the following key provisions:


•	Propel can draw up to $150.0 million through May 15, 2017;

•

The committed amount can be drawn on a revolving basis until May 15, 2017 (unless terminated earlier in accordance with the terms of the facility). During the following two years, until the May 10, 2019 expiration date, no additional draws are permitted, and all proceeds from the tax liens are used to repay any amounts outstanding under the facility. So long as no events or default have occurred, Propel may extend the expiration date for additional one year periods.


•	Prior to the expiration of the facility, interest at a per annum floating rate equal to LIBOR plus 2.25%;

•

Following the expiration of the facility, or upon the occurrence of an event of default, interest at 400 basis points plus the greater of (i) a per annum floating rate equal to LIBOR plus 2.25%, or (ii) Prime Rate, which is defined in the agreement as the rate most recently announced by the lender at its branch in San Francisco, California, from time to time as its prime commercial rate for United States dollar-denominated loans made in the United States;


•	Proceeds from the tax liens are applied to pay interest, principal and other obligations incurred in connection with the Propel Facility II on a monthly basis as defined in the agreement;


•	Special purpose entity covenants designed to protect the bankruptcy-remoteness of the borrowers and additional restrictions and covenants, which limit, among other things, the payment of certain dividends, the occurrence of additional indebtedness and liens and use of the collections proceeds from the certain tax liens; and


•	Events of default which, upon occurrence, may permit the lender to terminate the Propel Facility II and declare all amounts outstanding to be immediately due and payable.

The Propel Facility II is collateralized by the tax liens acquired under the Propel Facility II. At September 30, 2015, the outstanding balance on the Propel Facility II was $91.5 million. The weighted average interest rate was 2.40% and 3.94% for the three months ended September 30, 2015 and 2014, respectively, and 2.43% and 3.80% the nine months ended September 30, 2015 and 2014, respectively.

Propel Term Loan Facility

On May 2, 2014, the Company, through affiliates of Propel, entered into a $31.9 million term loan facility (the “Propel Term Loan Facility”). The Propel Term Loan Facility was entered into to fund the acquisition of a portfolio of tax liens and

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other assets in a transaction valued at approximately $43.0 million. The Propel Term Loan Facility has a fixed 5.5% interest rate and matures in October 2016.

In July 2015, Propel paid off the outstanding balance on the term loan. As a result, at September 30, 2015, there was no amount outstanding on the Propel Term Loan Facility.

Propel Securitized Notes

On May 6, 2014, Propel, through its affiliates, completed the securitization of a pool of approximately $141.5 million in payment agreements and contracts relating to unpaid real property taxes, assessments, and other charges secured by liens on real property located in the State of Texas (the “Securitized Texas Tax Liens”). In connection with the securitization, investors purchased, in a private placement, approximately $134.0 million in aggregate principal amount of 1.44% notes collateralized by the Securitized Texas Tax Liens (the “Propel Securitized Notes”), due May 15, 2029. The payment agreements and contracts will continue to be serviced by Propel.

The Propel Securitized Notes are payable solely from the collateral and represent non-recourse obligations of the consolidated securitization entity PFS Tax Lien Trust 2014-1, a Delaware statutory trust and an affiliate of Propel. Interest accrues monthly at the rate of 1.44% per annum. Principal and interest on the Propel Securitized Notes are payable on the 15^th day of each calendar month. Propel used the net proceeds to pay down borrowings under the Propel Facility I, pay certain expenses incurred in connection with the issuance of the Propel Securitized Notes and fund certain reserves.

The Propel Securitized Notes are guaranteed on a limited basis by Encore.

At September 30, 2015, the outstanding balance on the Propel Securitized Notes was $71.9 million and the balance of the collateral was $88.2 million.

Cabot Senior Secured Notes

On September 20, 2012, Cabot Financial (Luxembourg) S.A. (“Cabot Financial”), an indirect subsidiary of Janus Holdings, issued £265.0 million (approximately $438.4 million) in aggregate principal amount of 10.375% Senior Secured Notes due 2019 (the “Cabot 2019 Notes”). Interest on the Cabot 2019 Notes is payable semi-annually, in arrears, on April 1 and October 1 of each year.

On August 2, 2013, Cabot Financial issued £100 million (approximately $151.7 million) in aggregate principal amount of 8.375% Senior Secured Notes due 2020 (the “Cabot 2020 Notes”). Interest on the Cabot 2020 Notes is payable semi-annually, in arrears, on February 1 and August 1 of each year.

Of the proceeds from the issuance of the Cabot 2020 Notes, approximately £75.0 million (approximately $113.8 million) was used to repay all amounts outstanding under the senior credit facilities of Cabot Financial (UK) Limited (“Cabot Financial UK”), an indirect subsidiary of Janus Holdings, and £25.0 million (approximately $37.9 million) was used to partially repay a portion of the J Bridge preferred equity certificates (the “J Bridge PECs”) to an affiliate of J.C. Flowers & Co. LLC (“J.C. Flowers”), discussed in further detail below.

On March 27, 2014, Cabot Financial issued £175.0 million (approximately $291.8 million) in aggregate principal amount of 6.500% Senior Secured Notes due 2021 (the “Cabot 2021 Notes” and, together with the Cabot 2019 Notes and the Cabot 2020 Notes, the “Cabot Notes”). Interest on the Cabot 2021 Notes is payable semi-annually, in arrears, on April 1 and October 1 of each year, beginning on October 1, 2014. The total debt issuance cost associated with the Cabot 2021 Notes was approximately $7.5 million.

Approximately £105.0 million (approximately $174.8 million) of the proceeds from the issuance of the Cabot 2021 Notes was used to repay all amounts outstanding under senior secured bridge facilities that Cabot Financial UK entered into in connection with the Marlin Acquisition.

The Cabot Notes are fully and unconditionally guaranteed on a senior secured basis by certain indirect subsidiaries of the Company. The Cabot Notes are secured by a first ranking security interest in all the outstanding shares of Cabot Financial and certain guarantors and substantially all the assets of Cabot Financial and certain guarantors. The guarantees provided in respect of the Cabot Notes are pari passu with each such guarantee given in respect of the Marlin Bonds and the Cabot Credit Facility described below.

On July 25, 2013, Marlin Intermediate Holdings plc, a subsidiary of Marlin, issued £150.0 million (approximately $246.5 million) in aggregate principal amount of 10.5% Senior Secured Notes due 2020 (the “Marlin Bonds”). Interest on the Marlin Bonds is payable semi-annually, in arrears, on February 1 and August 1 of each year. Cabot assumed the Marlin Bonds as a

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result of the Marlin Acquisition. The carrying value of the Marlin Bonds was adjusted to approximately $284.2 million to reflect the fair value of the Marlin Bonds at the time of acquisition.

The Marlin Bonds are fully and unconditionally guaranteed on a senior secured basis by certain indirect subsidiaries of the Company. The guarantees provided in respect of the Marlin Bonds are pari passu with each such guarantee given in respect of the Cabot Notes and the Cabot Credit Facility.

Interest expense related to the Cabot Notes and Marlin Bonds was as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Interest expense—stated coupon rate	$	24,394		$	26,239		$	72,395		$	72,099
Interest income—accretion of debt premium	(2,771		)	(2,760		)	(7,978		)	(7,565		)
Total interest expense—Cabot Notes and Marlin Bonds	$	21,623		$	23,479		$	64,417		$	64,534

At September 30, 2015, the outstanding balance on the Cabot Notes and Marlin Bonds was $1.0 billion.

Cabot Senior Revolving Credit Facility

On September 20, 2012, Cabot Financial UK entered into an agreement for a senior committed revolving credit facility of £50.0 million (approximately $82.7 million) (the “Cabot Credit Agreement”). This agreement was amended and restated on June 28, 2013 to increase the size of the revolving credit facility to £85.0 million (approximately $140.6 million) and again on February 5, 2015 to increase the size of the revolving credit facility to £195.0 million (approximately $298.1 million) (the “Cabot Credit Facility”). The Cabot Credit Facility also includes an uncommitted accordion provision which will allow the facility to be increased by an additional £55.0 million, subject to obtaining the requisite commitments and compliance with the terms of Cabot Financial UK’s other indebtedness, among other conditions precedent. Loan fees associated with the amendment to the Cabot Credit Facility were approximately £2.7 million (approximately $4.1 million) and capitalized as debt issuance costs.

The Cabot Credit Facility has a five-year term expiring in September 2017, and includes the following key provisions:


•	Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 3.5%;


•	A restrictive covenant that limits the loan to value ratio to 0.75;


•	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 0.25;


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


•	Events of default which, upon occurrence, may permit the lenders to terminate the Cabot Credit Facility and declare all amounts outstanding to be immediately due and payable.

The Cabot Credit Facility is unconditionally guaranteed by certain indirect subsidiaries of the Company. The Cabot Credit Facility is secured by first ranking security interests in all the outstanding shares of Cabot Financial UK and certain guarantors and substantially all the assets of Cabot Financial UK and certain guarantors. Pursuant to the terms of intercreditor agreements entered into with respect to the relative positions of the Cabot Notes, the Marlin Bonds and the Cabot Credit Facility, any liabilities in respect of obligations under the Cabot Credit Facility that are secured by assets that also secure the Cabot Notes and the Marlin Bonds will receive priority with respect to any proceeds received upon any enforcement action over any such assets.

At September 30, 2015, the outstanding borrowings under the Cabot Credit Facility were approximately $242.8 million. The weighted average interest rate was 3.89% and 4.55% for the three months ended September 30, 2015 and 2014, respectively, and 3.87% and 4.36% for the nine months ended September 30, 2015 and 2014, respectively.

Cabot 2015 Senior Secured Bridge Facility

The dlc Acquisition was financed with borrowings under the existing Cabot Credit Facility and under a new senior secured bridge facility entered into by Cabot on June 1, 2015 (the “2015 Senior Secured Bridge Facility”).

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The 2015 Senior Secured Bridge Facility provides an aggregate principal amount of up to £90.0 million. The purpose of the 2015 Senior Secured Bridge Facility was to provide funding for the financing, in full or in part, of the purchase price of the dlc Acquisition and the payment of costs, fees and expenses in connection with the dlc Acquisition, and was fully drawn as of the closing of the dlc Acquisition. The 2015 Senior Secured Bridge Facility has an initial term of one year and can be extended for an additional year if it is not repaid during the first year of issuance.

Prior to the initial maturity date, the rate of interest payable under the 2015 Senior Secured Bridge Facility was the aggregate, per annum, of (i) LIBOR (set to a minimum of 1%), plus (ii) an initial spread of 6.00% per annum (such spread stepping up by 50 basis points for each three-month period that the 2015 Senior Secured Bridge Facility remains outstanding), not to exceed total caps set forth in the senior secured bridge facility agreement.

Loan fees associated with the 2015 Senior Secured Bridge Facility were approximately $1.4 million for the nine months ended September 30, 2015. These fees were recognized as interest expense in the Company’s condensed consolidated financial statements.

At September 30, 2015, the outstanding balance on the 2015 Senior Secured Bridge Facility was $136.3 million.

Preferred Equity Certificates

On July 1, 2013, the Company, through its wholly owned subsidiary Encore Europe Holdings, S.a.r.l. (“Encore Europe”), completed the Cabot Acquisition by acquiring 50.1% of the equity interest in Janus Holdings. Encore Europe purchased from J.C. Flowers: (i) E Bridge preferred equity certificates issued by Janus Holdings, with a face value of £10,218,574 (approximately $15.5 million) (and any accrued interest thereof) (the “E Bridge PECs”), (ii) E preferred equity certificates issued by Janus Holdings with a face value of £96,729,661 (approximately $147.1 million) (and any accrued interest thereof) (the “E PECs”), (iii) 3,498,563 E shares of Janus Holdings (the “E Shares”), and (iv) 100 A shares of Cabot Holdings S.a.r.l. (“Cabot Holdings”), the direct subsidiary of Janus Holdings, for an aggregate purchase price of approximately £115.1 million (approximately $175.0 million). The E Bridge PECs, E PECs, and E Shares represent 50.1% of all of the issued and outstanding equity and debt securities of Janus Holdings. The remaining 49.9% of Janus Holdings’ equity and debt securities are owned by J.C. Flowers and include: (a) J Bridge PECs with a face value of £10,177,781 (approximately $15.5 million), (b) J preferred equity certificates with a face value of £96,343,515 (approximately $146.5 million) (the “J PECs”), (c) 3,484,597 J shares of Janus Holdings (the “J Shares”), and (d) 100 A shares of Cabot Holdings.

All of the PECs accrue interest at 12% per annum. Since PECs are legal form debt, the J Bridge PECs, J PECs and any accrued interests thereof are classified as liabilities and are included in debt in the Company’s accompanying condensed consolidated statements of financial condition. In addition, certain other minority owners hold PECs at the Cabot Holdings level (the “Management PECs”). These PECs are also included in debt in the Company’s accompanying condensed consolidated statements of financial condition. The E Bridge PECs and E PECs held by the Company, and their related interest eliminate in consolidation and therefore are not included in debt in the Company’s condensed consolidated statements of financial condition. The J Bridge PECs, J PECs, and the Management PECs do not require the payment of cash interest expense as they have characteristics similar to equity with a preferred return. The ultimate payment of the accumulated interest would be satisfied only in connection with the disposition of the noncontrolling interests of J.C. Flowers and management.

On June 20, 2014, Encore Europe converted all of its E Bridge PECs into E Shares and E PECs, and J.C. Flowers converted all of its J Bridge PECs into J Shares and J PECs in proportion to the number of E Shares and E PECs, or J Shares and J PECs, as applicable, outstanding on the closing date of the Cabot Acquisition.

As of September 30, 2015, the outstanding balance of the PECs, including accrued interest, was approximately $220.3 million.

Capital Lease Obligations

The Company has capital lease obligations primarily for computer equipment. As of September 30, 2015, the Company’s combined obligations for capital leases were approximately $10.6 million. These capital lease obligations require monthly, quarterly or annual payments through 2020 and have implicit interest rates that range from zero to approximately 11.0%.

Note 11: 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 losses, or the right to receive the 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

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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’s VIEs include its subsidiary Janus Holdings and its special purpose entity used for the Propel securitization.

Janus Holdings is the immediate parent company of Cabot. The Company has determined that Janus Holdings is a VIE and the Company is the primary beneficiary of the VIE. The key activities that affect Cabot’s economic performance include, but are not limited to, operational budgets and purchasing decisions. Through its control of the board of directors of Janus Holdings, the Company controls the key operating activities at Cabot.

Propel used a special purpose entity to issue asset-backed securities to investors. The Company has determined that it is a VIE and Propel is the primary beneficiary of the VIE. Propel has the power to direct the activities of the VIE because it has the ability to exercise discretion in the servicing of the financial assets and to add assets to revolving structures.

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 consolidated VIEs.

The Company evaluates its relationships with the VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary.

Note 12: Income Taxes

During the three months ended September 30, 2015 and 2014, the Company recorded an income tax benefit of $4.9 million and a tax provision of $10.2 million, respectively. During the nine months ended September 30, 2015, and 2014, the Company recorded income tax provisions of $27.0 million and $35.9 million, respectively.

The Company incurred a net loss and therefore recorded an income tax benefit during the three months ended September 30, 2015. The net loss was due to a one-time charge resulting from a settlement with the CFPB. The $10.0 million civil monetary penalty component of the CFPB settlement is not deductible for income tax purposes. Refer to Note 13, “Commitments and Contingencies,” for further discussion of the CFPB settlement.

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Federal (benefit) provision	(35.0	)%	35.0	%	35.0	%	35.0	%
State (benefit) provision	(4.4	)%	3.8	%	4.4	%	3.8	%
International benefit⁽¹⁾	(23.4	)%	(8.7	)%	(8.8	)%	(5.0	)%
Permanent items⁽²⁾	1.7	%	5.7	%	1.0	%	4.1	%
Tax effect of CFPB / regulatory charges	27.6	%	0.0	%	5.4	%	0.0	%
Other⁽³⁾	(0.8	)%	(10.6	)%	0.1	%	(4.0	)%
Effective rate	(34.3	)%	25.2	%	37.1	%	33.9	%

________________________


(1)	Relates primarily to lower tax rates on income attributable to international operations.


(2)	Represents a provision for nondeductible items.


(3)	Includes the effect of discrete items and reserves taken for a certain tax position adopted by the Company.

The Company’s subsidiary in Costa Rica is operating under a 100% tax holiday through December 31, 2018 and a 50% tax holiday for the subsequent four years. The impact of the tax holiday in Costa Rica for the three and nine months ended September 30, 2015 was immaterial.

The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $48.0 million and $44.4 million at September 30, 2015 and December 31, 2014, respectively, that, if recognized, would result in a net tax benefit of $16.0 million and $12.7 million as of September 30, 2015 and December 31, 2014, respectively. The increase in gross unrecognized

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tax benefits was due to an unrecognized tax benefit of $3.6 million associated with certain business combinations, which is included in “Other liabilities” in the Company’s condensed consolidated statements of financial condition.

During the three and nine months ended September 30, 2015, the Company did not provide for U.S. income taxes or foreign withholding taxes on the quarterly undistributed earnings from operations of its subsidiaries operating outside of the United States. Undistributed pre-tax income of these subsidiaries during the three and nine months ended September 30, 2015, was approximately $9.8 million and $18.3 million, respectively.

Note 13: 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.

On September 9, 2015, the Company entered into a consent order (the “Consent Order”) with the CFPB in which it settled allegations arising from its practices between 2011 and 2015. The Consent Order includes obligations on the Company to, among other things: (1) follow certain specified operational requirements, substantially all of which are already part of the Company’s current operations; (2) submit to the CFPB for review a comprehensive plan designed to ensure that its debt collection practices comply with all applicable federal consumer financial laws and the terms of the Consent Order; (3) pay redress to certain specified groups of consumers; and (4) pay a civil monetary penalty. The Company will continue to cooperate and engage with the CFPB and work to ensure compliance with the Consent Order. In addition, the Company is subject to ancillary state attorney general investigations related to similar debt collection practices.

The Company incurred a one-time, after-tax charge of approximately $43 million in the third quarter of 2015. The Company believes this charge will cover all related impacts of the Consent Order, including civil monetary penalties, restitution, any such ancillary state regulatory matters, legal expenses and portfolio allowance charges on several pool groups due to the impact on the Company’s current estimated remaining collections related to its existing receivable portfolios. The Company anticipates that after this one-time charge, any future earnings impact will be immaterial.

Except as described above and in the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, at September 30, 2015, there have been no material developments in any of the legal proceedings disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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. In accordance with authoritative guidance, 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. As of September 30, 2015, other than reserves for the CFPB and ancillary state regulatory matters discussed above, the Company has no material reserves for legal matters. Additionally, based on the current status of litigation and regulatory matters, either the estimate of exposure is immaterial to the Company’s financial statements or an estimate cannot yet be determined. The Company’s legal costs are recorded to expense as incurred.

Purchase Commitments

In the normal course of business, the Company enters into forward flow purchase agreements and other purchase commitment agreements. As of September 30, 2015, the Company has entered into agreements to purchase receivable portfolios with a face value of approximately $1.0 billion for a purchase price of approximately $148.6 million. Most purchase commitments do not extend past one year.

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Note 14: Segment Information

The Company conducts business through several operating segments that meet the aggregation criteria under authoritative guidance related to segment reporting. The Company has determined that it has two reportable segments: portfolio purchasing and recovery and tax lien business. The Company’s management relies on internal management reporting processes that provide segment revenue, segment operating income, and segment asset information in order to make financial decisions and allocate resources. The operating results from the Company’s tax lien business segment are immaterial to the Company’s total consolidated operating results. However, total assets from the tax lien business segment are significant as compared to the Company’s total consolidated assets. As a result, in accordance with authoritative guidance on segment reporting, the Company’s tax lien business segment is determined to be a reportable segment.

Segment operating income includes income from operations before depreciation, amortization of intangible assets, and stock-based compensation expense. The following table provides a reconciliation of revenue and segment operating income by reportable segment to consolidated results and was derived from the segments’ internal financial information as used for corporate management purposes (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenues:
Portfolio purchasing and recovery	$	278,914	$	264,800	$	839,358	$	775,476
Tax lien business	8,882		8,482		24,457