ENCORE CAPITAL GROUP INC - Quarter Report: 2015 March (Form 10-Q)

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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 March 31, 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 April 28, 2015
Common Stock, $0.01 par value		26,026,649 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 Income	4

Condensed Consolidated Statements of Comprehensive Income	5

Condensed Consolidated Statements of Cash Flows	6

Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	58

Item 4 – Controls and Procedures	58

PART II – OTHER INFORMATION	59

Item 1 – Legal Proceedings	59

Item 1A – Risk Factors	59

Item 6 – Exhibits	59

SIGNATURES	60

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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)



	March 31, 2015			December 31, 2014
Assets
Cash and cash equivalents	$	136,209		$	124,163
Investment in receivable portfolios, net	2,038,407			2,143,560
Receivables secured by property tax liens, net	264,691			259,432
Property and equipment, net	64,601			66,969
Deferred court costs, net	64,475			60,412
Other assets	214,103			197,666
Goodwill	865,701			897,933
Total assets	$	3,648,187		$	3,750,135
Liabilities and equity
Liabilities:
Accounts payable and accrued liabilities	$	195,887		$	231,967
Debt	2,690,882			2,773,554
Other liabilities	87,458			79,675
Total liabilities	2,974,227			3,085,196
Commitments and contingencies
Redeemable noncontrolling interest	28,435			28,885
Redeemable equity component of convertible senior notes	8,355			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, 26,012 shares and 25,794 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively	260			258
Additional paid-in capital	128,135			125,310
Accumulated earnings	527,779			498,354
Accumulated other comprehensive loss	(23,058		)	(922		)
Total Encore Capital Group, Inc. stockholders’ equity	633,116			623,000
Noncontrolling interest	4,054			3,981
Total equity	637,170			626,981
Total liabilities, redeemable equity and equity	$	3,648,187		$	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.



	March 31, 2015		December 31, 2014
Assets
Cash and cash equivalents	$	63,171	$	44,996
Investment in receivable portfolios, net	935,063		993,462
Receivables secured by property tax liens, net	102,042		108,535
Property and equipment, net	15,366		15,957
Deferred court costs, net	21,359		17,317
Other assets	79,797		80,264
Goodwill	638,697		671,434
Liabilities
Accounts payable and accrued liabilities	$	103,855	$	137,201
Debt	1,492,689		1,556,956
Other liabilities	21,465		8,724

See accompanying notes to condensed consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Income

(In Thousands, Except Per Share Amounts)

(Unaudited)



	Three Months Ended March 31,
	2015			2014
Revenues
Revenue from receivable portfolios, net	$	264,110		$	237,568
Other revenues	14,410			11,349
Net interest income	7,143			4,824
Total revenues	285,663			253,741
Operating expenses
Salaries and employee benefits	67,748			58,137
Cost of legal collections	54,998			49,825
Other operating expenses	25,234			26,423
Collection agency commissions	10,685			8,276
General and administrative expenses	32,612			36,694
Depreciation and amortization	8,350			6,117
Total operating expenses	199,627			185,472
Income from operations	86,036			68,269
Other (income) expense
Interest expense	(42,303		)	(37,962		)
Other income	2,117			265
Total other expense	(40,186		)	(37,697		)
Income before income taxes	45,850			30,572
Provision for income taxes	(15,883		)	(11,742		)
Net income	29,967			18,830
Net (income) loss attributable to noncontrolling interest	(542		)	4,350
Net income attributable to Encore Capital Group, Inc. stockholders	$	29,425		$	23,180

Earnings per share attributable to Encore Capital Group, Inc.:

Basic	$	1.13		$	0.90
Diluted	$	1.08		$	0.82

Weighted average shares outstanding:
Basic	26,072			25,749
Diluted	27,315			28,196

See accompanying notes to condensed consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, In Thousands)



	Three Months Ended March 31,
	2015			2014
Net income	$	29,967		$	18,830
Other comprehensive (loss) gain, net of tax:
Unrealized gain on derivative instruments	513			1,523
Unrealized (loss) gain on foreign currency translation	(22,649		)	214
Other comprehensive (loss) gain, net of tax	(22,136		)	1,737
Comprehensive income	7,831			20,567
Comprehensive (gain) loss attributable to noncontrolling interest:
Net (income) loss	(542		)	4,350
Unrealized loss on foreign currency translation	1,582			148
Comprehensive loss attributable to noncontrolling interests	1,040			4,498
Comprehensive income attributable to Encore Capital Group, Inc. stockholders	$	8,871		$	25,065

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)



	Three Months Ended March 31,
	2015			2014
Operating activities:
Net income	$	29,967		$	18,830
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	8,350			6,117
Non-cash interest expense	8,141			5,254
Stock-based compensation expense	5,905			4,836
Deferred income taxes	(4,276		)	4,767
Excess tax benefit from stock-based payment arrangements	(637		)	(2,629		)
Reversal of allowances on receivable portfolios, net	(2,859		)	(3,230		)
Changes in operating assets and liabilities
Deferred court costs and other assets	(15,029		)	(471		)
Prepaid income tax and income taxes payable	6,166			3,123
Accounts payable, accrued liabilities and other liabilities	(16,338		)	(24,446		)
Net cash provided by operating activities	19,390			12,151
Investing activities:
Cash paid for acquisitions, net of cash acquired	—			(257,726		)
Purchases of receivable portfolios, net of put-backs	(143,239		)	(257,175		)
Collections applied to investment in receivable portfolios, net	164,217			161,927
Originations and purchases of receivables secured by tax liens	(53,516		)	(19,123		)
Collections applied to receivables secured by tax liens	41,598			22,085
Purchases of property and equipment	(4,271		)	(2,978		)
Other	(298		)	—
Net cash provided by (used in) investing activities	4,491			(352,990		)
Financing activities:
Payment of loan costs	(4,279		)	(14,222		)
Proceeds from credit facilities	134,285			457,266
Repayment of credit facilities	(124,395		)	(447,045		)
Proceeds from senior secured notes	—			288,645
Repayment of senior secured notes	(3,750		)	(3,750		)
Proceeds from issuance of convertible senior notes	—			161,000
Repayment of securitized notes	(6,625		)	—
Purchases of convertible hedge instruments	—			(33,576		)
Taxes paid related to net share settlement of equity awards	(4,554		)	(5,244		)
Excess tax benefit from stock-based payment arrangements	637			2,629
Other, net	(3,592		)	408
Net cash (used in) provided by financing activities	(12,273		)	406,111
Net increase in cash and cash equivalents	11,608			65,272
Effect of exchange rate changes on cash and cash equivalents	438			4,904
Cash and cash equivalents, beginning of period	124,163			126,213
Cash and cash equivalents, end of period	$	136,209		$	196,389
Supplemental disclosures of cash flow information:
Cash paid for interest	$	18,857		$	41,130
Cash paid for income taxes	14,651			6,103
Supplemental schedule of non-cash investing and financing activities:
Fixed assets acquired through capital lease	$	1,290		$	1,169

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, 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 United Kingdom-based subsidiary Cabot Credit Management Limited (“Cabot”), is a market leader in debt management in the United Kingdom, specializing in 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. Encore’s majority-owned subsidiary, Grove Holdings (“Grove”), through its subsidiaries and affiliates, is a 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 in Latin America, 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 Financial Services, LLC (“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.

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 credit and telecommunication providers, and possesses one of the industry’s best collection staff retention rates.

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 the Company’s preliminary analysis, it 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 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.

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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. In recent years, Cabot has concentrated on buying portfolios that are defined as semi-performing, in which over 50% of the accounts have received a payment in three of the last four months immediately prior to the portfolio purchase. 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 the management of non-performing loans 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 activities are the acquisition and servicing of residential and commercial tax liens on real property. These liens take priority over most other liens. By funding tax liens, 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. Propel maintains a foreclosure rate of less than one-half of one percent.

Propel’s receivables secured by property tax liens include Texas tax liens, Nevada tax liens, and tax lien certificates in various other states (collectively, “Tax Liens”). With Texas and Nevada Tax Liens, Texas or Nevada property owners choose to have the taxing authority transfer their tax lien to Propel. Propel pays their tax lien obligation to the taxing authority and the property owner pays Propel over time at a lower interest rate than they would be assessed by the taxing authority. Propel’s arrangements with Texas and Nevada property owners provide them with repayment plans that are both affordable and flexible when compared with other payment options. Propel also purchases Tax Liens in various other states directly from taxing authorities, securing rights to outstanding property tax payments, interest and penalties. In most cases, such Tax Liens continue to be serviced by the taxing authority. When the taxing authority is paid, it repays Propel the outstanding balance of the lien plus interest, which is established by statute or negotiated at the time of the purchase.

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Financial Statement Preparation and Presentation

The accompanying interim condensed consolidated financial statements have been prepared by Encore, 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. The condensed consolidated financial statements include the results of operations of subsidiaries from mergers and acquisitions, since the date of 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. 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.

The Company has reclassified a portion of the increase in other assets in the condensed consolidated statements of cash flows from operating activities to financing activities for all periods presented.

The impact of the reclassification was as follows:



	Three Months Ended March 31, 2014
Net cash flows used in operating activities - as previously reported	$	(2,591	)
Impact of reclassification	$	14,742
Net cash flows provided by operating activities - as reclassified	$	12,151

Net cash flows provided by financing activities - as previously reported	$	420,853
Impact of reclassification	$	(14,742	)
Net cash flows provided by financing activities - as reclassified	$	406,111

This reclassification had no impact on the net change in cash and cash equivalents or cash flows from investing activities for any period presented.

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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.

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.

Note 2: Earnings Per Share

Basic earnings per share is calculated by dividing net earnings attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated 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.

On April 24, 2014, the Company’s Board of Directors approved a $50.0 million share repurchase program. 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. In May 2014, the Company repurchased 400,000 shares of its common stock for approximately $16.8 million. The Company has not repurchased any additional shares of its common stock under this program through March 31, 2015.

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



	Three Months Ended March 31,
	2015	2014
Weighted average common shares outstanding—basic	26,072	25,749
Dilutive effect of stock-based awards	369	906
Dilutive effect of convertible senior notes	874	1,461
Dilutive effect of warrants	—	80
Weighted average common shares outstanding—diluted	27,315	28,196

No anti-dilutive employee stock options were outstanding during the three months ended March 31, 2015 or 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. For the three months ended March 31, 2015, diluted earnings per share included the effect of the common shares

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issuable upon conversion of the 2017 Convertible Notes, because the average stock price exceeded the conversion price of these notes. For the three months ended March 31, 2014, diluted earnings per share included the effect of the common shares issuable upon conversion of the 2017 Convertible Notes and the 2020 Convertible Notes because the average stock price exceeded the conversion price of these notes. However, as described in Note 10, “Debt—Encore Convertible Senior 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 and the 2020 Convertible Notes to $61.55. 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.

In conjunction with the issuance of the 2017 Convertible Notes, the Company entered into privately negotiated transactions with certain counterparties and sold warrants to purchase approximately 3.6 million shares of its common stock. The warrants had an exercise price of $44.19. On December 16, 2013, the Company entered into amendments with the same counterparties to exchange the original warrants with new warrants with an exercise price of $60.00. All other terms and settlement provisions remain unchanged. The warrant restrike transaction was completed on February 6, 2014. Diluted earnings per share included the effect of these warrants for the three months ended March 31, 2014. The effect of the warrants was anti-dilutive for the three months ended March 31, 2015.

Note 3: Business Combinations

On August 6, 2014, the Company acquired all of the outstanding equity interests of Atlantic Credit & Finance, Inc. (“Atlantic”) pursuant to a stock purchase agreement (the “Atlantic Acquisition”). The components of the purchase price allocation for the Atlantic Acquisition were as follows (in thousands):



Purchase price:
Cash paid at acquisition	$	196,104
Allocation of purchase price:
Cash	$	16,743
Investment in receivable portfolios	105,399
Deferred court costs	995
Property and equipment	1,331
Other assets	14,679
Liabilities assumed	(25,586		)
Identifiable intangible assets	2,595
Goodwill	79,948
Total net assets acquired	$	196,104

On February 7, 2014, the Company, through its Cabot subsidiary completed its acquisition of Marlin (“the Marlin Acquisition”). The condensed consolidated statements of income and comprehensive income for the three months ended March 31, 2014 includes the results of the operations of Marlin since the date of the acquisition.

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.

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 March 31, 2015
	Level 1		Level 2			Level 3			Total
Assets
Foreign currency exchange contracts	$	—	$	1,064		$	—		$	1,064
Liabilities
Foreign currency exchange contracts	—		(474		)	—			(474		)
Temporary Equity
Redeemable noncontrolling interests	—		—			(28,435		)	(28,435		)



	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		)

Derivative Contracts:

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

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, while others have the right 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 March 31, 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 income attributable to redeemable noncontrolling interests	468
Adjustment of the redeemable noncontrolling interests to fair value	664
Effect of foreign currency translation attributable to redeemable noncontrolling interests	(1,582		)
Balance at March 31, 2015	$	28,435

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 30.1% and 12.7%, respectively, for Europe portfolios. Using this method, the fair value of investment in receivable portfolios approximates the carrying value as of March 31, 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 $38.2 million and $44.0 million, respectively, as of March 31, 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 $2.0 billion and $2.1 billion as of March 31, 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, net of debt discount of $48.9 million as of March 31, 2015, and $448.5 million, net of 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 $497.7 million and $507.4 million as of March 31, 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 $61.5 million and $1.1 billion, including a debt premium of $67.3 million, as of March 31, 2015 and December 31, 2014, respectively. The fair value estimate for these senior notes, incorporates quoted market prices, and approximated the carrying value as of March 31, 2015 and December 31, 2014, respectively.

The Company’s preferred equity certificates are legal obligations to the noncontrolling shareholders at its Janus Holdings and Cabot Holdings subsidiaries. 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 March 31, 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. Most of the Company’s derivative financial instruments qualify for hedge accounting treatment under the authoritative guidance for derivatives and hedging. The Company’s Cabot subsidiary has entered into several interest rate cap contracts to manage its risk related to interest rate fluctuations. As of March 31, 2015, Cabot had only one outstanding interest rate cap contract with a notional amount of £100.0 million. The Company does not apply hedge accounting on interest rate cap contracts. The impact of the interest rate cap contracts to the Company’s consolidated financial statements for the three months ended March 31, 2015 and 2014, was immaterial.

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 the 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 March 31, 2015, the total notional amount of the forward contracts to buy Indian rupees in exchange for United States dollars was $45.0 million. All of these outstanding contracts qualified for hedge accounting treatment. The Company estimates that approximately $0.2 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 three months ended March 31, 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):



	March 31, 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	$	(474	)	Other liabilities	$	(1,037	)
Foreign currency exchange contracts	Other assets	1,064			Other assets	768

The following table summarizes the effects of derivatives in cash flow hedging relationships on the Company’s condensed consolidated statements of income for the three months ended March 31, 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 March 31,					Three Months Ended March 31,							Three Months Ended March 31,
	2015		2014			2015			2014				2015		2014
Foreign currency exchange contracts	$	472	$	1,885	Salaries and employee benefits	$	(151	)	$	(356	)	Other (expense) income	$	—	$	—
Foreign currency exchange contracts	220		187		General and administrative expenses	(16		)	(57		)	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 a quarter are aggregated into pools based on common risk characteristics. 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 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 comprehensive income 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.

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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
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	120,729			39,607			160,336
Additions for current purchases	85,692			—			85,692
Balance at March 31, 2015	$	2,951,203		$	90,428		$	3,041,631



	Accretable Yield			Estimate of Zero Basis Cash Flows			Total
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	92,325			8,555			100,880
Additions for current purchases⁽²⁾	591,205			—			591,205
Balance at March 31, 2014	$	2,843,944		$	10,509		$	2,854,453

________________________


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


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

During the three months ended March 31, 2015, the Company purchased receivable portfolios with a face value of $1.0 billion for $125.2 million, or a purchase cost of 12.0% of face value. The estimated future collections at acquisition for all portfolios purchased during the period amounted to $197.5 million. During the three months ended March 31, 2014, the Company purchased receivable portfolios with a face value of $4.3 billion for $467.6 million, or a purchase cost of 10.9% of face value. Purchases of charged-off credit card portfolios during the three months ended March 31, 2014, include $208.5 million of portfolios acquired in conjunction with the Marlin Acquisition. The estimated future collections at acquisition for all portfolios purchased during the quarter amounted to $1.0 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 March 31, 2015 and 2014, Zero Basis Revenue was approximately $15.6 million and $6.5 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 March 31, 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	125,154			—			—			125,154
Gross collections⁽¹⁾	(407,556		)	(1,972		)	(15,543		)	(425,071		)
Put-backs and Recalls⁽²⁾	(2,517		)	(18		)	(28		)	(2,563		)
Foreign currency adjustments	(65,369		)	(1,414		)	—			(66,783		)
Revenue recognized	248,539			—			12,712			261,251
Portfolio allowance reversals, net	—			—			2,859			2,859
Balance, end of period	$	2,029,335		$	9,072		$	—		$	2,038,407
Revenue as a percentage of collections⁽³⁾	61.0		%	0.0		%	81.8		%	61.5		%

	Three Months Ended March 31, 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 ⁽⁴⁾	467,565			—			—			467,565
Gross collections⁽¹⁾	(389,503		)	(660		)	(6,511		)	(396,674		)
Put-backs and Recalls⁽²⁾	(3,235		)	(149		)	—			(3,384		)
Foreign currency adjustments	8,706			—			—			8,706
Revenue recognized	230,747			—			3,591			234,338
Portfolio allowance reversals, net	310			—			2,920			3,230
Balance, end of period	$	1,900,177		$	3,853		$	—		$	1,904,030
Revenue as a percentage of collections⁽³⁾	59.2		%	0.0		%	55.2		%	59.1		%

________________________


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


(4)	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 March 31,
	2015			2014
Balance at beginning of period	$	75,673		$	93,080
Reversal of prior allowances	(2,859		)	(3,230		)
Balance at end of period	$	72,814		$	89,850

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”).

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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):



	March 31, 2015			December 31, 2014
Court costs advanced	$	570,520		$	546,271
Court costs recovered	(215,662		)	(206,287		)
Court costs reserve	(290,383		)	(279,572		)
	$	64,475		$	60,412

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



	Court Cost Reserve
	Three Months Ended March 31,
	2015			2014
Balance at beginning of period	$	(279,572	)	$	(210,889	)
Provision for court costs	(19,179		)	(16,178		)
Net down of reserve after 60 months	7,925			—
Effect of foreign currency translation	443			—
Balance at end of period	$	(290,383	)	$	(227,067	)

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 one half of one percent 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. No receivables secured by property tax liens have been placed on a non-accrual basis. 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 this VIE do not represent assets that can be used to satisfy claims against the Company’s general assets.

At March 31, 2015, the Company had approximately $264.7 million in receivables secured by property tax liens, of which $102.0 million was carried at the VIE.

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Note 9: Other Assets

Other assets consist of the following (in thousands):



	March 31, 2015		December 31, 2014
Deferred tax assets	$	50,997	$	33,716
Debt issuance costs, net of amortization	39,794		38,504
Prepaid expenses	23,074		21,427
Identifiable intangible assets, net	18,770		21,564
Interest receivable	15,381		12,187
Service fee receivables	10,384		7,864
Other financial receivables	7,934		7,467
Recoverable legal fees	2,856		2,905
Receivable from seller	6,987		7,357
Security deposits	4,963		3,617
Funds held in escrow	—		16,889
Other	32,963		24,169
	$	214,103	$	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):



	March 31, 2015			December 31, 2014
Encore revolving credit facility	$	487,000		$	505,000
Encore term loan facility	144,063			146,023
Encore senior secured notes	40,000			43,750
Encore convertible notes	448,500			448,500
Less: Debt discount	(48,924		)	(51,202		)
Propel facilities	90,653			84,229
Propel securitized notes	97,622			104,247
Cabot senior secured notes	1,024,443			1,076,952
Add: Debt premium	61,482			67,259
Cabot senior revolving credit facility	105,123			86,368
Preferred equity certificates	204,019			208,312
Capital lease obligations	13,924			15,331
Other	22,977			38,785
	$	2,690,882		$	2,773,554

Encore Revolving Credit Facility and Term Loan Facility

On February 25, 2014, Encore amended its revolving credit facility and term loan facility (the “Credit Facility”) pursuant to a Second Amended and Restated Credit Agreement. On August 1, 2014, Encore further amended the Credit Facility pursuant to Amendment No. 1 to the Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”). The Restated Credit Agreement includes a revolving credit facility tranche of $692.6 million, a term loan facility tranche of $153.8 million, 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 Credit Facility is $1.1 billion. The Restated Credit Agreement has a five-year maturity, expiring in February 2019, except with respect to two

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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:

•

A revolving loan 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 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;


•	The allowance of additional unsecured or subordinated indebtedness not to exceed $750.0 million;


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


•	Repurchases of up to $50.0 million of Encore’s common stock after February 25, 2014, subject to compliance with certain covenants and available borrowing capacity;


•	A change of control definition, which excludes acquisitions of stock by Red Mountain Capital Partners LLC, JCF FPK LLP 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 in the aggregate for acquisitions after August 1, 2014;


•	A basket to allow for investments in unrestricted subsidiaries of $250.0 million;


•	A basket to allow for investments in certain subsidiaries of Propel of $200.0 million;


•	An annual foreign portfolio and loan investment basket of $150.0 million; and


•	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 March 31, 2015, the outstanding balance under the Restated Credit Agreement was $631.1 million. The weighted average interest rate was 2.98% and 2.89% for the three months ended March 31, 2015 and 2014, respectively.

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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 March 31, 2015, $40.0 million was outstanding under these obligations.

The Senior Secured Notes are guaranteed in full by certain of Encore’s subsidiaries. Similar to, and pari passu with, Encore’s credit facility, the Senior Secured Notes are also collateralized by all of the assets of the Company other than the assets of the unrestricted subsidiaries as defined in the Restated Credit Agreement. 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 March 31, 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.

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

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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):



	March 31, 2015			December 31, 2014
Liability component—principal amount	$	448,500		$	448,500
Unamortized debt discount	(48,924		)	(51,202		)
Liability component—net carrying amount	$	399,576		$	397,298
Equity component	$	55,955		$	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 March 31,
	2015		2014
Interest expense—stated coupon rate	$	3,292	$	2,456
Interest expense—amortization of debt discount	2,278		1,755
Total interest expense—convertible notes	$	5,570	$	4,211

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 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 costs for the amendments in 2013 and 2014 were approximately $2.7 million and $25.2 million, respectively.

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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 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 $157.0 million as of March 31, 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 $8.4 million of the equity component to temporary equity as of March 31, 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 months ended March 31, 2015.

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. The average share price of the Company’s common stock for the three months ended March 31, 2015 and 2014, exceeded the initial conversion price of the 2017 Convertible Notes. The dilutive effect from the 2017 Convertible Notes was approximately 0.9 million and 1.3 million shares for the three months ended March 31, 2015 and 2014, respectively. See Note 2, “Earnings Per Share” for additional information.

Propel Facilities

Propel Facility I

Propel has a $200.0 million syndicated loan facility (the “Propel Facility I”). The Propel Facility I is used to originate or purchase tax lien assets related to properties in Texas and Arizona.

The Propel Facility I expires in May 2015 and includes the following key provisions:

•

Interest at Propel’s option, at either: (1) LIBOR, plus a spread that ranges from 300 to 375 basis points, depending on Propel’s cash flow leverage ratio; or (2) Prime Rate, which is defined in the agreement as the rate of interest per annum equal to the sum of (a) the interest rate quoted in the “Money Rates” section of The Wall Street Journal from time to time and designated as the “Prime Rate” plus (b) the Prime Rate Margin, which is a spread that ranges from 0 to 75 basis points, depending on Propel’s cash flow leverage ratio;


•	A borrowing base of 90% of the face value of the tax lien collateralized payment arrangements;

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•	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 lender 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 March 31, 2015, the outstanding balance on the Propel Facility I was $48.8 million. The weighted average interest rate was 3.26% and 3.66% for the three months ended March 31, 2015 and 2014, respectively.

The Company is currently in the process of renegotiating this facility.

Propel Facility II

On May 15, 2013, the Company, through affiliates of Propel, entered into a $100.0 million revolving credit facility (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, 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. Additionally, 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 March 31, 2015, the outstanding balance on the Propel Facility II was $32.8 million. The weighted average interest rate was 3.48% and 3.04% the three months ended March 31, 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 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.

At March 31, 2015, the outstanding balance on the Propel Term Loan Facility was $9.1 million.

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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.

At March 31, 2015, the outstanding balance on the Propel Securitized Notes was $97.6 million and the balance of the collateral was $102.0 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 6.5% 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 the Senior Secured Bridge Facilities described below.

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 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.

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



	Three Months Ended March 31,
	2015			2014
Interest expense—stated coupon rate	$	23,850		$	19,255
Interest income—accretion of debt premium	(2,547		)	(2,232		)
Total interest expense—Cabot Notes and Marlin Bonds	$	21,303		$	17,023

At March 31, 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;


•	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 March 31, 2015, the outstanding borrowings under the Cabot Credit Facility were approximately $105.1 million. The weighted average interest rate was 3.94% and 4.23% for the three months ended March 31, 2015 and 2014, respectively.

Senior Secured Bridge Facilities

The Marlin Acquisition was financed with borrowings under the existing Cabot Credit Facility and under new senior secured bridge facilities (the “Senior Secured Bridge Facilities”) that Cabot Financial Limited entered into on February 7, 2014 pursuant to a Senior Secured Bridge Facilities Agreement. The Senior Secured Bridge Facilities were paid off in full by using proceeds from borrowings under the £175.0 million (approximately $291.8 million) Cabot 2021 Notes.

The Senior Secured Bridge Facilities Agreement provided for (a) a senior secured bridge facility in an aggregate principal amount of up to £105.0 million (“Bridge Facility A”) and (b) a senior secured bridge facility in an aggregate principal amount of up to £151.5 million (“Bridge Facility B,” and together with Bridge Facility A, the “Bridge Facilities”). The purpose of Bridge Facility A was to provide funding for the financing, in full or in part, of the purchase price for the Marlin Acquisition and the payment of costs, fees and expenses in connection with the Marlin Acquisition, and was fully drawn on as of the closing of the Marlin Acquisition. The purpose of Bridge Facility B was to finance, in full or in part, the repurchase of any bonds tendered in any change of control offer required to be made to the holders of the Marlin Bonds and the premium payable thereon. Bridge Facility B was intended to be utilized only to the extent that any holders of the Marlin Bonds elected to tender

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their Marlin Bonds within a defined period. No Marlin Bonds were tendered during the defined period and Bridge Facility B expired without drawdown. The Senior Secured Bridge Facilities Agreement also provided for uncommitted incremental facilities in an amount of up to £80.0 million for the purposes of financing future debt portfolio acquisitions. The Senior Secured Bridge Facilities had an initial term of one year and an extended term of 6.5 years if they were not repaid during the first year of issuance.

Prior to their initial maturity date, the rate of interest payable under the Senior Secured Bridge Facilities was the aggregate, per annum, of (i) LIBOR, 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 Senior Secured Bridge Facilities remained outstanding), not to exceed total caps set forth in the Senior Secured Bridge Facilities Agreement.

Loan fees associated with the Senior Secured Bridge Facilities were approximately $2.0 million. These fees were originally recorded as debt issuance costs and were written off at the time of repayment and termination of the agreement. This $2.0 million was charged to interest expense in the Company’s condensed consolidated financial statements for the three months ended March 31, 2014.

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, respectively, 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 March 31, 2015, the outstanding balance of the PECs and their accrued interest was approximately $204.0 million.

Capital Lease Obligations

The Company has capital lease obligations primarily for computer equipment. As of March 31, 2015, the Company’s combined obligations for these equipment leases were approximately $13.9 million. These 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 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.

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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 March 31, 2015, and 2014, the Company recorded income tax provisions of $15.9 million and $11.7 million, respectively.

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



	Three Months Ended March 31,
	2015		2014
Federal provision	35.0	%	35.0	%
State provision	8.2	%	5.8	%
State benefit	(2.9	)%	(2.0	)%
Tax reserves⁽¹⁾	0.1	%	0.0	%
International benefit⁽²⁾	(6.0	)%	(3.4	)%
Permanent items⁽³⁾	0.2	%	2.3	%
Other⁽⁴⁾	0.0	%	0.7	%
Effective rate	34.6	%	38.4	%

________________________


(1)	Represents reserves taken for a certain tax position adopted by the Company.


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


(3)	Represents a provision for nondeductible items.


(4)	Includes the effect of discrete items.

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 months ended March 31, 2015 was immaterial.

The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $47.7 million and $44.4 million at March 31, 2015 and December 31, 2014, respectively. The total gross unrecognized tax benefits that, if recognized, would result in a net tax benefit of $16.0 million and $12.7 million as of March 31, 2015 and December 31, 2014, respectively. The increase in the gross unrecognized tax benefits was due to an unrecognized tax benefit of $3.3 million associated with certain business combinations. The uncertain tax benefit is included in “Other liabilities” in the Company’s condensed consolidated statements of financial condition.

During the three months ended March 31, 2015, the Company did not provide for United States income taxes or foreign withholding taxes on the quarterly undistributed earnings from operations of its subsidiaries operating outside of the United

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States. Undistributed net income of these subsidiaries during the three months ended March 31, 2015, was approximately $5.9 million.

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.

The Consumer Finance Protection Bureau (“CFPB”) is currently examining the collection practices of participants in the consumer debt buying industry. The Company is currently engaged in discussions with the staff of the CFPB regarding practices and controls relating to its engagement with consumers. In these discussions, the staff has taken certain positions with respect to the interpretation of existing legal requirements and the retroactive application of potential requirements from future rulemaking. The Company agrees with the staff on some items under discussion, and disagrees with the staff on others. As the Company seeks to resolve those areas of disagreement, it intends to vigorously defend its interpretation of the law and, consequently, may ultimately reach a negotiated settlement or become engaged in litigation. If the parties reach a negotiated agreement, it is reasonably possible that the Company could agree to pay penalties or restitution and could recognize pre-tax charges of in excess of $35 million and could agree to additional terms that may materially impact its future operations, collections or financial results. If the Company becomes involved in litigation, it is unable to estimate a possible range of loss, if any. These discussions and other supervisory or regulatory actions that may be taken by the CFPB in the future may have an adverse impact on the Company’s business, financial condition and operating results.

At March 31, 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 March 31, 2015, 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 March 31, 2015, the Company has entered into agreements to purchase receivable portfolios with a face value of approximately $1.7 billion for a purchase price of approximately $196.6 million. The Company has no purchase commitments extending past one year.

Note 14: Segment Information

The Company conducts business through several operating segments that meet the aggregation criteria under the 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

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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 March 31,
	2015			2014
Revenues:
Portfolio purchasing and recovery	$	277,783		$	248,589
Tax lien business	7,880			5,152
	$	285,663		$	253,741
Operating income:
Portfolio purchasing and recovery	$	96,929		$	77,568
Tax lien business	3,362			1,654
	100,291			79,222
Depreciation and amortization	(8,350		)	(6,117		)
Stock-based compensation	(5,905		)	(4,836		)
Other expense	(40,186		)	(37,697		)
Income before income taxes	$	45,850		$	30,572

Additionally, assets are allocated to operating segments for management review. As of March 31, 2015, total segment assets were $3.3 billion and $374.3 million for the portfolio purchasing and recovery segment and tax lien business segment, respectively.

The following presents information about geographic areas in which the Company operates (in thousands):



	Three Months Ended March 31,
	2015		2014
Revenues⁽¹⁾ :
Domestic	$	190,042	$	184,745
International	95,621		68,996
	$	285,663	$	253,741

________________________


(1)	Revenues are attributed to countries based on location of customer.

Note 15: Goodwill and Identifiable Intangible Assets

In accordance with authoritative guidance, goodwill is tested at the reporting unit level annually for impairment and in interim periods if certain events occur that indicate the fair value of a reporting unit may be below its carrying value. Goodwill was allocable to reporting units included in the Company’s reportable segments, as follows (in thousands):



	Portfolio Purchasing and Recovery			Tax Lien Business		Total
Balance, December 31, 2014	$	848,656		$	49,277	$	897,933
Goodwill adjustment ⁽¹⁾	2,410			—		2,410
Effect of foreign currency translation	(34,642		)	—		(34,642		)
Balance, March 31, 2015	$	816,424		$	49,277	$	865,701

______________________


(1)	During the first quarter of 2015, the Company completed the valuation study related to its acquisition of Atlantic in August 2014. Based on the valuation study, the Company has determined that there were additional tax related obligations assumed at the time of acquisition of approximately $2.4 million. As a result, the goodwill balance was increased by $2.4 million.

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



	As of March 31, 2015							As of December 31, 2014
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	4,979	$	(836	)	$	4,143	$	5,437	$	(743	)	$	4,694
Developed technologies	7,887		(2,560		)	5,327		8,353		(2,194		)	6,159
Trade name and other	9,677		(2,339		)	7,338		10,458		(1,709		)	8,749
Other intangibles—indefinite lived	1,962		—			1,962		1,962		—			1,962
Total intangible assets	$	24,505	$	(5,735	)	$	18,770	$	26,210	$	(4,646	)	$	21,564

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

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

Our Business and Operating Segments

We are an international specialty finance company providing debt recovery solutions for consumers and property owners across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies, commercial retailers, and telecommunication companies. Defaulted receivables may also include receivables subject to bankruptcy proceedings. Through certain subsidiaries, we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico. Our subsidiary, Janus Holdings Luxembourg S.a.r.l. (“Janus Holdings”), through its indirectly held United Kingdom-based subsidiary Cabot Credit Management Limited and its subsidiaries (“Cabot”), is a market leader in debt management in the United Kingdom, historically specializing in portfolios consisting of higher balance, semi-performing accounts (i.e., debt portfolios in which over 50% of the accounts have received a payment in three of the last four months immediately prior to the portfolio purchase). Cabot’s acquisition of Marlin Financial Group Limited (“Marlin”) in February 2014, provides Cabot with substantial litigation-enhanced collection capabilities for non-performing accounts. Our 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. Our majority-owned subsidiary, Refinancia S.A. (“Refinancia”), is a market leader in debt collection and management in Colombia and Peru. In addition, through our subsidiary, Propel Financial Services, LLC and its subsidiaries (collectively, “Propel”), we assist property owners who are delinquent on their property taxes by structuring affordable monthly payment plans and purchase delinquent tax liens directly from selected taxing authorities.

We conduct business through two reportable segments: portfolio purchasing and recovery, and tax lien business. The operating results from our tax lien business segment are immaterial to our total consolidated operating results. However, the total segment assets are significant as compared to our total consolidated assets. As a result, in accordance with authoritative guidance on segment reporting, our tax lien business segment is determined to be a reportable segment.

Our long-term growth strategy involves continuing to invest in our core portfolio purchasing and recovery and tax lien businesses, expanding into new geographies, and leveraging our core competencies to explore expansion into adjacent asset classes.

As discussed in more detail under “Part I - Item1 - Business” in our Annual Report on Form 10-K, our U.S. debt purchasing business and collection activities are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and

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prohibitions on unfair, deceptive or abusive debt collection practices. These rules, regulations, guidelines and procedures are modified from time to time by the relevant authorities charged with their administration which could affect the way we conduct our business. In particular, the Consumer Finance Protection Bureau (“CFPB”) may adopt new regulations that may affect our industry and our business. Additionally, the CFPB has supervisory, examination and enforcement authority over our business and is currently examining the collection practices of participants in the consumer debt buying industry. We are currently engaged in discussions with the staff of the CFPB regarding practices and controls relating to our engagement with consumers that could result in a negotiated settlement or litigation. As a result of these discussions or other supervisory or regulatory actions taken by the CFPB, it is reasonably possible that we could agree to pay penalties or restitution and could recognize pre-tax charges of in excess of $35 million and could agree to additional terms that may materially impact our future operations, collections or financial results.

Portfolio Purchasing and Recovery

United States

Our portfolio purchasing and recovery segment purchases receivables based on robust, account-level valuation methods and employs proprietary statistical and behavioral models across our U.S. operations. These methods and models allow us to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or goals and align the accounts we purchase with our business channels to maximize future collections. As a result, we have been able to realize significant returns from the receivables we acquire. We maintain strong relationships with many of the largest credit and telecommunication providers in the United States and we possess one of the industry’s best collection staff retention rates.

While seasonality does not have a material impact on our portfolio purchasing and recovery segment, collections are generally strongest in our first calendar quarter, slower in the second and third calendar quarters, and slowest in the fourth calendar quarter. Relatively higher collections in the first quarter could result in a lower cost-to-collect ratio compared to the other quarters, as our fixed costs are relatively constant and applied against a larger collection base. The seasonal impact on our business may also be influenced by our purchasing levels, the types of portfolios we purchase, and our operating strategies.

Collection seasonality with respect to our portfolio purchasing and recovery segment can also affect revenue as a percentage of collections, also referred to as our revenue recognition rate. Generally, revenue for each pool group declines steadily over time, whereas collections can fluctuate from quarter to quarter based on seasonality, as described above. In quarters with lower collections (e.g., the fourth calendar quarter), the revenue recognition rate can be higher than in quarters with higher collections (e.g., the first calendar quarter).

In addition, seasonality could have an impact on the relative level of quarterly earnings. In quarters with stronger collections, total costs are higher as a result of the additional efforts required to generate those collections. Since revenue for each pool group declines steadily over time, in quarters with higher collections and higher costs (e.g., the first calendar quarter), all else being equal, earnings could be lower than in quarters with lower collections and lower costs (e.g., the fourth calendar quarter). Additionally, in quarters where a greater percentage of collections come from our legal and agency outsourcing channels, cost to collect will be higher than if there were more collections from our internal collection sites.

On August 6, 2014, we acquired all of the outstanding equity interests of Atlantic Credit & Finance, Inc. (“Atlantic”) pursuant to a stock purchase agreement (the “Atlantic Acquisition”). Atlantic acquires and liquidates fresh consumer finance receivables originated and charged off by U.S. financial institutions.

Europe

Cabot: Through Cabot, we purchase primarily semi-performing receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows Cabot to value portfolios accurately 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.

While seasonality does not have a material impact on Cabot’s operations, collections are generally strongest in the second and third calendar quarters and slower in the first and fourth quarters, largely driven by the impact of the December holiday season and the New Year holiday, and the related impact on its customers’ ability to repay their balances. This drives a higher level of plan defaults over this period, which are typically repaired across the first quarter of the following year. The August vacation season in the United Kingdom also has an unfavorable effect on the level of collections, but this is traditionally compensated for by higher collections in July and September.

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On February 7, 2014, Cabot acquired Marlin (the “Marlin Acquisition”), a leading acquirer of non-performing consumer debt in the United Kingdom. Marlin is differentiated by its proven competitive advantage in the use of litigation-enhanced collections for non-paying financial services receivables. Marlin’s litigation capabilities have benefited and will continue to benefit Cabot’s existing portfolio of non-performing accounts. Similarly, we have experienced synergies by applying Cabot’s collection models to Marlin’s portfolio since the acquisition.

Grove: On April 1, 2014, we completed the acquisition of a controlling equity ownership interest in 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

In December 2013, we acquired a majority ownership interest in Refinancia, a market leader in the management of non-performing loans 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 the geographic areas in which it operates, including providing financial solutions to individuals who have previously defaulted on their credit obligations, payment plan guarantee and factoring services to merchants, and loan guarantee services to financial institutions.

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

Tax Lien Business

Our tax lien business segment focuses on the property tax financing industry. Propel acquires and services residential and commercial tax liens on real property. These liens take priority over most other liens. 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 in various states directly from taxing authorities, securing rights to outstanding property tax payments, interest and penalties. In most cases, such tax liens continue to be serviced by the taxing authority. When the taxing authority is paid, it repays Propel the outstanding balance of the lien plus interest, which is established by statute or negotiated at the time of the purchase. In May 2014, Propel acquired a portfolio of tax liens and other assets in a transaction valued at approximately $43.0 million. The transaction strengthened Propel’s established servicing platform and expanded Propel’s operations to 22 states.

Revenue from our tax lien business segment comprised 3% and 2% of total consolidated revenues for the three months ended March 31, 2015 and 2014, respectively. Operating income from our tax lien business segment comprised 3% and 2% of our total consolidated operating income for the three months ended March 31, 2015 and 2014, respectively.

Purchases and Collections

Portfolio Pricing, Supply and Demand

United States Markets

Prices for portfolios offered for sale directly from credit issuers continued to remain elevated during the first quarter of 2015, especially for fresh portfolios. Fresh portfolios are portfolios that are generally transacted within six months of the consumer’s account being charged-off by the financial institution. We believe this elevated pricing is due to a reduction in the supply of charged-off accounts and continued demand in the marketplace. We believe that the reduction in supply is partially due to shifts in underwriting standards by financial institutions, which have resulted in lower volumes of charged-off accounts. We believe that this reduction in supply is also the result of certain financial institutions temporarily halting their sales of charged-off accounts. Although we have seen moderation in certain instances, we expect pricing will remain at elevated levels for some period of time.

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

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competitors limit their participation in or exit the market, it may provide additional opportunities for Encore to purchase portfolios from competitors or to acquire competitors directly.

European Markets

The United Kingdom market has grown significantly in recent years driven by a consolidation of sellers and a material backlog of portfolio coming to market from credit issuers who are selling an increasing proportion of their non-performing loans. We anticipate modest growth in supply in 2015. Prices for portfolios offered for sale directly from credit issuers remain at levels higher than historical averages. We expect that as a result of an increase in available funding to industry participants, and lower return requirements for certain debt purchasers, pricing will remain elevated. However, we also believe that as Cabot’s business increases in scale, and with anticipated improvements in liquidation and improved efficiencies in collections, Cabot’s margins will remain competitive. Additionally, the acquisition of Marlin resulted in a new liquidation channel for the Company through litigation, which is enabling Cabot to collect from consumers who have the ability to pay, but have so far been unwilling to do so. This further complements Cabot’s strength in collecting on semi-performing debt, where consumers have a greater willingness to pay.

Purchases by Type

The following table summarizes the types and geographic areas of charged-off consumer receivable portfolios we purchased for the periods presented (in thousands):



	Three Months Ended March 31,
	2015		2014
United States:
Credit card	$	98,987	$	104,829
Europe:
Credit card^(1),(2)	21,632		351,319
Latin America:
Credit card	4,535		11,417
	$	125,154	$	467,565

________________________


(1)	Purchases of consumer portfolio receivables in Europe for the three months ended March 31, 2015 include $1.6 million for IVAs.


(2)	Purchases of consumer portfolio receivables in Europe for the three months ended March 31, 2014 include $208.5 million acquired in connection with the Marlin Acquisition.

During the three months ended March 31, 2015, we invested $125.2 million to acquire portfolios of charged-off credit card portfolios, with face values aggregating $1.0 billion, for an average purchase price of 12.0% of face value. This is a $342.4 million decrease in the amount invested, compared with the $467.6 million invested during the three months ended March 31, 2014, to acquire portfolios of charged-off credit card with face values aggregating $4.3 billion, for an average purchase price of 10.9% of face value. Purchases of charged-off credit card portfolios during the three months ended March 31, 2014 include $208.5 million of portfolios acquired in the Marlin Acquisition.

The average purchase price, as a percentage of face value, varies from period to period depending on, among other things, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios. The increases in purchase price as a percentage of face value for the three months ended March 31, 2015 compared to prior periods were primarily related to our acquisition of a higher percentage of fresh portfolios, and a general increase in the price of portfolios offered for sale directly from credit issuers.

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Collections by Channel

We currently utilize various business channels for the collection of our receivables. The following table summarizes the total collections by collection channel and geographic areas (in thousands):



	Three Months Ended March 31,
	2015		2014
United States:
Legal collections	$	158,959	$	151,029
Collection sites	135,929		136,525
Collection agencies⁽¹⁾	18,101		21,901
Subtotal	312,989		309,455
Europe:
Collection sites	46,398		45,861
Collection agencies	40,124		27,922
Legal collections	18,103		7,598
Subtotal	104,625		81,381
Latin America:
Collection sites	7,457		5,838
Total collections	$	425,071	$	396,674

________________________


(1)	Collections through our collection agency channel in the United States include accounts subject to bankruptcy filings collected by others. Additionally, collection agency collections often include accounts purchased from a competitor where we maintain the collection agency servicing until the accounts can be recalled and placed in our collection channels.

Gross collections increased $28.4 million, or 7.2%, to $425.1 million during the three months ended March 31, 2015, from $396.7 million during the three months ended March 31, 2014. The increase in gross collections during the three months ended March 31, 2015 as compared to the gross collections during the three months ended March 31, 2014, were primarily due to collections on portfolios acquired through our increased merger and acquisition activities.

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Results of Operations

Results of operations, in dollars and as a percentage of total revenue, were as follows (in thousands, except percentages):



	Three Months Ended March 31,
	2015					2014
Revenues
Revenue from receivable portfolios, net	$	264,110		92.5	%	$	237,568		93.6	%
Other revenues	14,410			5.0	%	11,349			4.5	%
Net interest income	7,143			2.5	%	4,824			1.9	%
Total revenues	285,663			100.0	%	253,741			100.0	%
Operating expenses
Salaries and employee benefits	67,748			23.7	%	58,137			22.9	%
Cost of legal collections	54,998			19.3	%	49,825			19.6	%
Other operating expenses	25,234			8.8	%	26,423			10.4	%
Collection agency commissions	10,685			3.7	%	8,276			3.3	%
General and administrative expenses	32,612			11.4	%	36,694			14.5	%
Depreciation and amortization	8,350			2.9	%	6,117			2.4	%
Total operating expenses	199,627			69.9	%	185,472			73.1	%
Income from operations	86,036			30.1	%	68,269			26.9	%
Other expense
Interest expense	(42,303		)	(14.8	)%	(37,962		)	(15.0	)%
Other income	2,117			0.7	%	265			0.1	%
Total other expense	(40,186		)	(14.1	)%	(37,697		)	(14.9	)%
Income before income taxes	45,850			16.1	%	30,572			12.0	%
Provision for income taxes	(15,883		)	(5.6	)%	(11,742		)	(4.6	)%
Net income	29,967			10.5	%	18,830			7.4	%
Net (income) loss attributable to noncontrolling interest	(542		)	(0.2	)%	4,350			1.7	%
Net income attributable to Encore shareholders	$	29,425		10.3	%	$	23,180		9.1	%

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Results of Operations—Cabot

The following table summarizes the operating results contributed by Cabot during the periods presented (in thousands):



	Three Months Ended March 31, 2015									Three Months Ended March 31, 2014
	Janus Holdings			Encore Europe ⁽¹⁾			Consolidated			Janus Holdings			Encore Europe⁽¹⁾		Consolidated
Total revenues	$	79,777		$	—		$	79,777		$	62,520		$	—	$	62,520
Total operating expenses	(40,782		)	—			(40,782		)	(39,576		)	—		(39,576		)
Income from operations	38,995			—			38,995			22,944			—		22,944
Interest expense-non-PEC	(23,297		)	—			(23,297		)	(21,776		)	—		(21,776		)
PEC interest (expense) income	(11,732		)	5,749			(5,983		)	(11,042		)	5,367		(5,675		)
Other income	758			—			758			75			—		75
Income (loss) before income taxes	4,724			5,749			10,473			(9,799		)	5,367		(4,432		)
(Provision) benefit for income taxes	(2,121		)	—			(2,121		)	2,146			—		2,146
Net income (loss)	2,603			5,749			8,352			(7,653		)	5,367		(2,286		)
Net (income) loss attributable to noncontrolling interests	(365		)	(1,117		)	(1,482		)	1,099			3,271		4,370
Net income (loss) attributable to Encore	$	2,238		$	4,632		$	6,870		$	(6,554	)	$	8,638	$	2,084

________________________


(1)	Includes only the results of operations related to Janus Holdings and therefore does not represent the complete financial performance of Encore Europe.

The net loss recognized at Janus Holdings during the three months ended March 31, 2014 was primarily due to Cabot incurring $9.8 million in non-recurring acquisition and integration related charges primarily related to Cabot’s acquisition of Marlin. Additionally, for the three months ended March 31, 2015 and 2014, Janus Holdings recognized all interest expense related to the outstanding preferred equity certificates (“PECs”) owed to Encore and other minority shareholders, while the interest income from PECs owed to Encore was recognized at Janus Holdings’ parent company, Encore Europe Holdings, S.a.r.l. (“Encore Europe”), which is a wholly-owned subsidiary of Encore.

Non-GAAP Disclosure

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

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

Adjusted Income Per Share. Management uses non-GAAP adjusted income attributable to Encore and adjusted income per share (which we also refer to from time to time as adjusted earnings per share), to assess operating performance, in order to highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. Adjusted income attributable to Encore excludes non-cash interest and issuance cost amortization relating to our convertible notes, one-time charges and acquisition and integration related expenses, all net of tax. The following table provides a reconciliation between income and diluted income per share attributable to Encore calculated in accordance with GAAP to adjusted income and adjusted income per share attributable to Encore, respectively. GAAP diluted earnings per share for the three months ended March 31, 2015 and 2014, includes the effect of approximately 0.9 million and 1.5 million, respectively, common shares that are issuable upon conversion of certain convertible senior notes because the average stock price during the respective periods exceeded the conversion price of these notes. However, as described in Note 10, “Debt—Encore Convertible Senior Notes,” in the notes to our condensed consolidated financial statements, we have certain hedging transactions in place that have the effect of increasing the effective conversion price of these notes. Accordingly, while these common shares are included in our diluted earnings per share, the hedge transactions will offset the impact of this dilution

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and no shares will be issued unless our stock price exceeds the effective conversion price, thereby creating a discrepancy between the accounting effect of those notes under GAAP and their economic impact. We have presented the following metrics both including and excluding the dilutive effect of these convertible senior notes to better illustrate the economic impact of those notes and the related hedging transactions to shareholders, with the GAAP item under the “Per Diluted Share-Accounting” and “Per Diluted Share-Economic” columns, respectively (in thousands, except per share data):



	Three Months Ended March 31,
	2015						2014
	$		Per Diluted Share— Accounting		Per Diluted Share— Economic		$		Per Diluted Share— Accounting		Per Diluted Share— Economic
GAAP net income attributable to Encore, as reported	$	29,425	$	1.08	$	1.11	$	23,180	$	0.82	$	0.87
Adjustments:
Convertible notes non-cash interest and issuance cost amortization, net of tax	1,666		0.06		0.07		1,291		0.05		0.05
Acquisition, integration and restructuring related expenses, net of tax	1,352		0.05		0.05		4,358		0.15		0.16
Adjusted income attributable to Encore	$	32,443	$	1.19	$	1.23	$	28,829	$	1.02	$	1.08

Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before interest, taxes, depreciation and amortization, stock-based compensation expenses, portfolio amortization, one-time charges, and acquisition and integration related expenses), which is materially similar to a financial measure contained in covenants used in the Encore revolving credit and term loan facility, in the evaluation of our operations and believes that this measure is a useful indicator of our ability to generate cash collections in excess of operating expenses through the liquidation of our receivable portfolios. Adjusted EBITDA for the periods presented is as follows (in thousands):



	Three Months Ended March 31,
	2015		2014
GAAP net income, as reported	$	29,967	$	18,830
Adjustments:
Interest expense	42,303		37,962
Provision for income taxes	15,883		11,742
Depreciation and amortization	8,350		6,117
Amount applied to principal on receivable portfolios	160,961		159,106
Stock-based compensation expense	5,905		4,836
Acquisition, integration and restructuring related expenses	2,772		11,081
Adjusted EBITDA	$	266,141	$	249,674

Adjusted Operating Expenses. Management utilizes adjusted operating expenses in order to facilitate a comparison of approximate cash costs to cash collections for our portfolio purchasing and recovery business. Adjusted operating expenses for our portfolio purchasing and recovery business are calculated by starting with GAAP total operating expenses and backing out stock-based compensation expense, operating expenses related to non-portfolio purchasing and recovery business, one-time charges, and acquisition and integration related operating expenses. Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from our tax lien business and other non-reportable operating segments, as well as corporate overhead not related to our portfolio purchasing and recovery business. Adjusted operating expenses related to our portfolio purchasing and recovery business for the periods presented are as follows (in thousands):

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	Three Months Ended March 31,
	2015			2014
GAAP total operating expenses, as reported	$	199,627		$	185,472
Adjustments:
Stock-based compensation expense	(5,905		)	(4,836		)
Operating expenses related to non-portfolio purchasing and recovery business	(26,349		)	(19,832		)
Acquisition, integration and restructuring related expenses	(2,772		)	(11,081		)
Adjusted operating expenses	$	164,601		$	149,723

Comparison of Results of Operations

Revenues

Our revenues consist primarily of portfolio revenue, contingent fee income, and net interest income from our tax lien business.

Portfolio revenue consists of accretion revenue and zero basis revenue. Accretion revenue represents revenue derived from pools (quarterly groupings of purchased receivable portfolios) with a cost basis that has not been fully amortized. Revenue from pools with a remaining unamortized cost basis is accrued based on each pool’s effective interest rate applied to each pool’s remaining unamortized cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances. The effective interest rate is the Internal Rate of Return (“IRR”) derived from the timing and amounts of actual cash received and anticipated future cash flow projections for each pool. All collections realized after the net book value of a portfolio has been fully recovered, or Zero Basis Portfolios (“ZBA”), are recorded as revenue, or Zero Basis Revenue. We account for our investment in receivable portfolios utilizing the interest method in accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality. We incur allowance charges when actual cash flows from our receivable portfolios underperform compared to our expectations. Factors that may contribute to underperformance and to the recording of valuation allowances may include both internal as well as external factors. External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing laws or regulations, and the overall condition of the economy. Internal factors that may have an impact on our collections include operational activities such as the productivity of our collection staff. We record allowance reversals on pool groups which have historic allowance reserves when actual cash flows from these receivable portfolios outperform our expectations. Allowance reversals are included in portfolio revenue.

Interest income, net of related interest expense represents net interest income on receivables secured by property tax liens.

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The following tables summarize collections, revenue, end of period receivable balance and other related supplemental data, by year of purchase from our portfolio purchasing and recovery segment (in thousands, except percentages):



	Three Months Ended March 31, 2015										As of March 31, 2015
	Collections⁽¹⁾		Gross Revenue⁽²⁾		Revenue Recognition Rate⁽³⁾		Net Portfolio Allowance Reversal		Revenue % of Total Revenue		Unamortized Balances		Monthly IRR
United States⁽⁴⁾:
ZBA ⁽⁵⁾	$	15,543	$	12,712	81.8	%	$	2,859	4.9	%	$	—	—
2007	985		333		33.8	%	—		0.1	%	1,952		4.6	%
2008	3,518		2,460		69.9	%	—		0.9	%	7,338		10.4	%
2009	7,535		5,626		74.7	%	—		2.2	%	5,970		25.1	%
2010	21,435		13,056		60.9	%	—		5.0	%	12,746		21.9	%
2011	32,760		24,973		76.2	%	—		9.6	%	48,126		15.4	%
2012	53,558		32,812		61.3	%	—		12.6	%	130,423		7.5	%
2013	90,155		47,843		53.1	%	—		18.3	%	251,780		5.7	%
2014	89,720		44,066		49.1	%	—		16.9	%	489,141		2.8	%
2015	5,237		1,304		24.9	%	—		0.4	%	99,892		2.0	%
Subtotal	320,446		185,185		57.8	%	2,859		70.9	%	1,047,368		5.0	%
Europe:
2013	55,063		43,707		79.4	%	—		16.7	%	468,814		3.0	%
2014	49,399		32,065		64.9	%	—		12.3	%	500,812		2.0	%
2015	163		294		180.4	%	—		0.1	%	21,413		1.5	%
Subtotal	104,625		76,066		72.7	%	—		29.1	%	991,039		2.5	%
Total	$	425,071	$	261,251	61.5	%	$	2,859	100.0	%	$	2,038,407	3.8	%

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	Three Months Ended March 31, 2014										As of March 31, 2014
	Collections⁽¹⁾		Gross Revenue⁽²⁾		Revenue Recognition Rate⁽³⁾		Net Portfolio Allowance Reversal		Revenue % of Total Revenue		Unamortized Balances		Monthly IRR
United States ⁽⁴⁾:
ZBA ⁽⁵⁾	$	6,511	$	3,591	55.2	%	$	2,920	1.5	%	$	—	—
2006	1,287		338		26.3	%	—		0.1	%	1,516		5.3	%
2007	2,338		1,227		52.5	%	—		0.5	%	4,544		7.7	%
2008	8,373		5,062		60.5	%	310		2.2	%	14,613		9.9	%
2009	16,500		12,740		77.2	%	—		5.4	%	17,241		21.1	%
2010	31,963		22,138		69.3	%	—		9.4	%	40,348		15.5	%
2011	45,649		29,245		64.1	%	—		12.5	%	86,579		9.9	%
2012	78,858		37,357		47.4	%	—		15.9	%	235,250		4.6	%
2013	119,772		64,437		53.8	%	—		27.5	%	435,471		4.5	%
2014	4,042		1,973		48.8	%	—		0.8	%	114,321		2.6	%
Subtotal	315,293		178,108		56.5	%	3,230		76.0	%	949,883		5.6	%
Europe:
2013	63,594		43,373		68.2	%	—		18.5	%	604,962		2.4	%
2014	17,787		12,857		72.3	%	—		5.5	%	349,185		2.2	%
Subtotal	81,381		56,230		69.1	%	—		24.0	%	954,147		2.3	%
Total	$	396,674	$	234,338	59.1	%	$	3,230	100.0	%	$	1,904,030	4.0	%

________________________


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


(2)	Gross revenue excludes the effects of net portfolio allowance or net portfolio allowance reversals.


(3)	Revenue recognition rate excludes the effects of net portfolio allowance or net portfolio allowance reversals.


(4)	United States data includes results from Latin America.

(5)

ZBA revenue typically has a 100% revenue recognition rate. However, collections on ZBA pool groups where a valuation allowance remains must first be recorded as an allowance reversal until the allowance for that pool group is zero. Once the entire valuation allowance is reversed, the revenue recognition rate will become 100%. ZBA gross revenue includes an immaterial amount of accounts that are returned to the seller in accordance with the respective purchase agreement (“Put-Backs”) and accounts that are recalled by the seller in accordance with the respective purchase agreement (“Recalls”).

Total revenues were $285.7 million during the three months ended March 31, 2015, an increase of $31.9 million, or 12.6%, compared to total revenues of $253.7 million during the three months ended March 31, 2014.

Accretion revenue from our portfolio purchasing and recovery segment was $264.1 million during the three months ended March 31, 2015, an increase of $26.5 million, or 11.2%, compared to revenue of $237.6 million during the three months ended March 31, 2014. The increase in portfolio purchasing and recovery revenue during the three months ended March 31, 2015 compared to 2014 was due to additional accretion revenue associated with a higher portfolio balance, primarily associated with portfolios acquired through our increased level of merger and acquisition related activities, and increases in yields on certain pool groups due to over-performance, offset by lower yields on recently formed pool groups.

During the three months ended March 31, 2015, we recorded a portfolio allowance reversal of $2.9 million, compared to a net portfolio allowance reversal of $3.2 million during the three months ended March 31, 2014. The recording of allowance reversals during the three months ended March 31, 2015 and 2014 was primarily due to operational improvements which allowed us to assist our customers to repay their obligations and increased collections on our ZBA portfolios. Additionally, our refined valuation methodologies have limited the amount of valuation charges necessary during recent periods.

Other revenues were $14.4 million and $11.3 million for the three months ended March 31, 2015 and 2014, respectively. Other revenues are primarily comprised of contingent fee income at our Cabot, Refinancia and Grove subsidiaries earned on accounts collected on behalf of others, primarily credit originators. The increase in other revenues during the three months ended March 31, 2015 was primarily due to the acquisition of Grove in April 2014. Contingent fees from Grove are only included in the prior year periods since the acquisition date.

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Net interest income from our tax lien business segment was $7.1 million and $4.8 million for the three months ended March 31, 2015 and 2014, respectively. The increase in revenue for the three month period was due to an increase in the balance of receivables secured by property tax liens primarily as a result of Propel’s recent acquisition of a portfolio of tax liens for approximately $43.0 million in May 2014.

Operating Expenses

Total operating expenses were $199.6 million during the three months ended March 31, 2015, an increase of $14.2 million, or 7.6%, compared to total operating expenses of $185.5 million during the three months ended March 31, 2014.

Operating expenses are explained in more detail as follows:

Salaries and Employee Benefits

Salaries and employee benefits increased $9.6 million, or 16.5%, to $67.7 million during the three months ended March 31, 2015, from $58.1 million during the three months ended March 31, 2014. The increase was primarily the result of increases in headcount as a result of our recent mergers and acquisitions of $6.0 million, severance expenses of $1.7 million including reducing our call center staffing in Warren, MI and San Diego, CA and increases in headcount and related compensation expense to support our growth.

Stock-based compensation increased $1.1 million, or 22.1% to $5.9 million during the three months ended March 31, 2015, from $4.8 million during the three months ended March 31, 2014. This increase was primarily attributable to the higher fair value of equity awards granted in recent periods.

Salaries and employee benefits broken down between the reportable segments were as follows (in thousands):



	Three Months Ended March 31,
	2015		2014
Salaries and employee benefits:
Portfolio purchasing and recovery	$	65,552	$	56,398
Tax lien business	2,196		1,739
	$	67,748	$	58,137

Cost of Legal Collections—Portfolio Purchasing and Recovery

The cost of legal collections increased $5.2 million, or 10.4%, to $55.0 million during the three months ended March 31, 2015, compared to $49.8 million during the three months ended March 31, 2014. These costs represent contingent fees paid to our network of attorneys, internal legal costs and the cost of litigation. Gross legal collections were $177.1 million during the three months ended March 31, 2015, up from $158.6 million collected during the three months ended March 31, 2014. The cost of legal collections decreased as a percentage of gross collections through this channel to 31.1% during the three months ended March 31, 2015, from 31.4% during the same period in the prior year. This decrease was primarily due to decreased cost as a percentage of legal collections in the United States as a result of a slight decrease in the commission rate we pay our attorneys. The decrease was partially offset by increased cost of legal collections in Europe. During the three months ended March 31, 2015, Cabot and Marlin collected $18.1 million through Marlin’s legal channel and incurred costs of $5.3 million, or 29.3%, of collections including upfront court costs, as compared to collections of $7.6 million and costs of $1.5 million, or cost as a percentage of legal collection of 19.2% during the three months ending March 31, 2014. As Cabot and Marlin continue to increase the number of consumer accounts directed through Marlin’s legal platform, the cost as a percent of collections in Europe will increase, as experienced in the most recent quarter, due to the increase in upfront court costs.

Other Operating Expenses

Other operating expenses decreased $1.2 million, or 4.5%, to $25.2 million during the three months ended March 31, 2015, from $26.4 million during the three months ended March 31, 2014. This decrease was primarily the result of reductions in certain other operating expenses due to our continued focus on discretionary costs offset by additional other operating expenses at our newly acquired subsidiaries.

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Other operating expenses broken down between the reportable segments were as follows (in thousands):



	Three Months Ended March 31,
	2015		2014
Other operating expenses:
Portfolio purchasing and recovery	$	24,326	$	25,296
Tax lien business	908		1,127
	$	25,234	$	26,423

Collection Agency Commissions—Portfolio Purchasing and Recovery

During the three months ended March 31, 2015, we incurred $10.7 million in commissions to third-party collection agencies, or 18.4% of the related gross collections of $58.2 million. During the period, the commission rate as a percentage of related gross collections was 15.8% and 19.5% for our collection outsourcing channels in the United States and Europe, respectively. During the three months ended March 31, 2014, we incurred $8.3 million in commissions, or 16.6%, of the related gross collections of $49.8 million. During the 2014 period, the commission rate as a percentage of related gross collections was 16.9% and 16.4% for our collection outsourcing channels in the United States and Europe, respectively. The increase in Europe to 19.5% for the three months ended March 31, 2015 compared to 16.4% for the three months ended March 31, 2014 was primarily related to an increase in collections at Grove where the commission rate is approximately 30.0%.

Collections through this channel vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally. Additionally, commissions, as a percentage of collections in this channel, vary from period to period depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time.

General and Administrative Expenses

General and administrative expenses decreased $4.1 million, or 11.1%, to $32.6 million during the three months ended March 31, 2015, from $36.7 million during the three months ended March 31, 2014. The decrease was primarily the result of lower one-time acquisition and integration related costs offset by an increase in costs associated with regulatory and legislative costs and general increases in expenses to support our growth. One-time acquisition and integration related costs included in general and administrative expenses were $1.6 million and $11.1 million for the three months ended March 31, 2015 and 2014, respectively.

General and administrative expenses broken down between the reportable segments were as follows (in thousands):



	Three Months Ended March 31,
	2015		2014
General and administrative expenses:
Portfolio purchasing and recovery	$	31,197	$	36,062
Tax lien business	1,415		632
	$	32,612	$	36,694

Depreciation and Amortization

Depreciation and amortization expense increased $2.2 million, or 36.5%, to $8.4 million during the three months ended March 31, 2015, from $6.1 million during the three months ended March 31, 2014. The increase during the three months ended March 31, 2015 was primarily related to increased depreciation expense resulting from the acquisition of fixed assets in the current and prior years and additional depreciation and amortization expenses resulting from fixed assets and intangible assets acquired through our recent acquisitions.

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Cost per Dollar Collected—Portfolio Purchasing and Recovery

The following tables summarize our cost per dollar collected (in thousands, except percentages):



	Three Months Ended March 31,
	2015								2014
	Collections		Cost		Cost Per Channel Dollar Collected		Cost Per Total Dollar Collected		Collections		Cost		Cost Per Channel Dollar Collected		Cost Per Total Dollar Collected
United States:
Collection sites⁽¹⁾	$	135,929	$	10,475	7.7	%	3.3	%	$	136,525	$	8,410	6.2	%	2.7	%
Legal outsourcing	129,552		45,695		35.3	%	14.6	%	119,733		43,216		36.1	%	14.0	%
Internal legal⁽²⁾	29,407		11,299		38.4	%	3.6	%	31,296		12,189		38.9	%	3.9	%
Collection agencies	18,101		2,856		15.8	%	0.9	%	21,901		3,706		16.9	%	1.2	%
Other indirect costs⁽³⁾	—		57,534		—		18.4	%	—		56,837		—		18.4	%
Subtotal	312,989		127,859				40.9	%	309,455		124,358				40.2	%
Europe:
Collection sites⁽¹⁾	46,398		4,002		8.6	%	3.8	%	45,861		2,723		5.9	%	3.4	%
Legal outsourcing	18,103		5,304		29.3	%	5.1	%	7,598		1,457		19.2	%	1.8	%
Collection agencies	40,124		7,830		19.5	%	7.5	%	27,922		4,570		16.4	%	5.6	%
Other indirect costs⁽³⁾	—		17,599		—		16.8	%	—		14,739		—		18.1	%
Subtotal	104,625		34,735				33.2	%	81,381		23,489				28.9	%
Latin America:
Collection sites⁽¹⁾	7,457		806		10.8	%	10.8	%	5,838		864		14.8	%	14.8	%
Other indirect costs⁽³⁾	—		1,360		—		18.2	%	—		1,011		—		17.3	%
Subtotal	7,457		2,166				29.0	%	5,838		1,875				32.1	%
Total⁽⁴⁾	$	425,071	$	164,760			38.8	%	$	396,674	$	149,722			37.7	%

________________________


(1)	Cost in collection sites represents only account managers and their supervisors’ salaries, variable compensation, and employee benefits. Collection sites in the United States include collection site expenses for our India and Costa Rica call centers.


(2)	Cost in internal legal channel represents court costs expensed, internal legal channel employee salaries and benefits, and other related direct operating expenses.


(3)	Other indirect costs represent non-collection site salaries and employee benefits, general and administrative expenses, other operating expenses and depreciation and amortization.

(4)

Total cost represents all operating expenses, excluding stock-based compensation expense, operating expenses related to non-portfolio purchasing and recovery business, one-time charges, and acquisition and integration related operating expenses. We include this information in order to facilitate a comparison of approximate cash costs to cash collections for the debt purchasing business in the periods presented. Refer to the “Non-GAAP Disclosure” section for further details.

During the three months ended March 31, 2015, overall cost per dollar collected increased by 110 basis points to 38.8% of gross collections from 37.7% of gross collections during the three months ended March 31, 2014. This increase was primarily due to increased cost to collect in the United States and Europe, offset by a lower cost to collect from Latin America. Over time, we expect our cost to collect to remain competitive, but also expect that it will fluctuate from quarter to quarter based on seasonality, acquisitions, the cost of investments in new operating initiatives, and the ongoing management of the changing regulatory and legislative environment.

The increase in total cost to collect in the United States was due to several factors, including:

•

The cost from collection sites, which includes account manager salaries, variable compensation, and employee benefits, as a percentage of total collections in the United States, increased to 3.3% during the three months ended March 31, 2015 from 2.7% during the three months ended March 31, 2014 and, as a percentage of our site collections, increased to 7.7% during the three months ended March 31, 2015, from 6.2% during the three months ended March 31, 2014. The increase in cost as a percentage of site collections, through our collection sites in the United States, was primarily related to our Atlantic subsidiary, acquired in August 2014 which maintains a higher cost structure.

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•

The cost of legal collections through the legal outsourcing channel, as a percentage of total collections in the United States, increased to 14.6% during the three months ended March 31, 2015, from 14.0% during the three months ended March 31, 2014. However, cost as a percentage of channel collections, decreased to 35.3% during the three months ended March 31, 3015, from 36.1% during the same period in the prior year. The increase in the cost of legal collections as a percentage of total collections was primarily due to an increase in this channel’s collections as a percentage of total collections. The decrease in cost as a percentage of channel collections was primarily due to a reduction in the commission rates we pay to our network of attorneys in the United States.

The increase in cost per dollar collected in the United States was partially offset due to the following factors:

•

The cost of legal collections through our internal legal channel, as a percentage of total collections in the United States, decreased to 3.6% during the three months ended March 31, 2015, from 3.9% during the three months ended March 31, 2014 and, as a percentage of channel collections, decreased to 38.4% during the three months ended March 31, 2015, from 38.9% during the three months ended March 31, 2014. The decrease in cost as a percentage of total collections was primarily due to decreased internal legal collections as a percentage of total collections. The decrease in cost as a percentage of channel collections was primarily due to improved productivity in our internal legal platform.

•

Collection agency commissions, as a percentage of total collections in the United States, decreased to 0.9% during the three months ended March 31, 2015, from 1.2% during the same period in the prior year. Our collection agency commission rate decreased to 15.8% during the three months ended March 31, 2015, from 16.9% during the same period in the prior year. The decrease in collection agency commissions as a percentage of total collections was primarily related to a decrease in this channel’s collections as a percentage of total collections. Commissions, as a percentage of collections in this channel, vary from period to period depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time.

The increase in total cost to collect in Europe was due to several factors, including:

•

The cost from collection sites, which includes account manager salaries, variable compensation, and employee benefits, as a percentage of total collections increased to 3.8% during the three months ended March 31, 2015 from 3.4% during the three months ended March 31, 2014 and, as a percentage of our site collections, increased to 8.6% during the three months ended March 31, 2015, from 5.9% during the three months ended March 31, 2014. The increase in cost as a percentage of site collections, through our collection sites in Europe, was primarily related to an account manager staff increase at Cabot. Cost from collection sites will decrease as these account managers gain experience in future periods.

•

The cost of legal collections through the legal outsourcing channel, as a percentage of total collections in Europe, increased to 5.1% during the three months ended March 31, 2015, from 1.8% during the three months ended March 31, 2014. Cost as a percentage of channel collections, increased to 29.3% during the three months ended March 31, 2015, from 19.2% during the same period in the prior year. The increase in the cost of legal collections as a percentage of total collections was primarily due to Cabot placing accounts through Marlin’s legal channel and expensing the related non recoverable portion of upfront legal costs.

•

Collection agency commissions, as a percentage of total collections in Europe, increased to 7.5% during the three months ended March 31, 2015, from 5.6% during the same period in the prior year. Our collection agency commission rate increased to 19.5% during the three months ended March 31, 2015, from 16.4% during the same period in the prior year. The increase in collection agency commissions as a percentage of total collections was primarily related to an increase in collections at Grove where the commission rate is approximately 30.0%.

The increase in cost per dollar collected in Europe was partially offset due to the following:


•	Other indirect costs decreased to 16.8% during the three months ended March 31, 2015 from 18.1% during the three months ended March 31, 2014. This decrease was primarily due to collections growing a rate faster than the growth in other indirect costs as we experience efficiencies in our European subsidiaries.

Interest Expense—Portfolio Purchasing and Recovery

Interest expense increased $4.3 million to $42.3 million during the three months ended March 31, 2015, from $38.0 million during the three months ended March 31, 2014.

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



	Three Months Ended March 31,
	2015			2014			$ Change			% Change
Stated interest on debt obligations	$	34,519		$	29,332		$	5,187		17.7	%
Interest expense on preferred equity certificates	5,982			5,675			307			5.4	%
Amortization of loan fees and other loan costs	2,071			3,432			(1,361		)	(39.7	)%
Amortization of debt discount	2,278			1,755			523			29.8	%
Accretion of debt premium	(2,547		)	(2,232		)	(315		)	14.1	%
Total interest expense	$	42,303		$	37,962		$	4,341		11.4	%

The payment of the accumulated interest on the preferred equity certificates issued in connection with the Cabot Acquisition will only be satisfied in connection with the disposition of the noncontrolling interests of J.C. Flowers & Co. LLC and management.

The increase in interest expense was primarily attributable to increased debt levels in the United States and in Europe related to additional borrowings to finance recent acquisitions and portfolio purchases.

Other income

Other income increased $1.9 million to $2.1 million during the three months ended March 31, 2015, from $0.3 million during the three months ended March 31, 2014. During the three months ended March 31, 2015, we recognized a foreign currency exchange gain of $1.7 million.

Provision for Income Taxes

During the three months ended March 31, 2015 and 2014, we recorded income tax provisions of $15.9 million and $11.7 million, respectively.

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



	Three Months Ended March 31,
	2015		2014
Federal provision	35.0	%	35.0	%
State provision	8.2	%	5.8	%
State benefit	(2.9	)%	(2.0	)%
Tax reserves⁽¹⁾	0.1	%	0.0	%
International benefit⁽²⁾	(6.0	)%	(3.4	)%
Permanent items⁽³⁾	0.2	%	2.3	%
Other⁽⁴⁾	0.0	%	0.7	%
Effective rate	34.6	%	38.4	%

________________________


(1)	Represents reserves taken for a certain tax position adopted by the Company.


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


(3)	Represents a provision for nondeductible items.


(4)	Includes the effect of discrete items.

The effective tax rate for the three months ended March 31, 2015 as compared to 2014, decreased as a result of proportionately more earnings realized in countries that have lower statutory tax rates than the United States’ federal rate. Our effective tax rate could fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates.

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Our 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 months ended March 31, 2015 and 2014 was immaterial.

Supplemental Performance Data—Portfolio purchasing and recovery

The Company utilizes its proprietary forecasting models to continuously evaluate the economic life of each pool. The collection forecast of each pool is estimated to be 120 months which is included in its estimated remaining collections and is used for calculating its IRRs.

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Cumulative Collections to Purchase Price Multiple

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



Year of Purchase	Purchase Price⁽¹⁾		Cumulative Collections though March 31, 2015
Year of Purchase	Purchase Price⁽¹⁾		<2005		2005		2006		2007		2008		2009		2010		2011		2012		2013		2014		2015		Total⁽²⁾		CCM⁽³⁾
Purchased consumer receivables:
United States⁽⁴⁾:
<1999	$	41,117	$	137,929	$	2,042	$	1,513	$	989	$	501	$	406	$	296	$	207	$	128	$	100	$	96	$	15	$	144,222	3.5
1999	48,712		84,758		5,157		3,513		1,954		1,149		885		590		487		345		256		245		35		99,374		2.0
2000	6,153		23,873		1,323		1,007		566		324		239		181		115		103		96		55		27		27,909		4.5
2001	38,185		137,004		20,622		14,521		5,644		2,984		2,005		1,411		1,139		991		731		600		165		187,817		4.9
2002	61,490		180,831		45,699		33,694		14,902		7,922		4,778		3,575		2,795		1,983		1,715		1,318		277		299,489		4.9
2003	88,496		145,996		69,932		55,131		26,653		13,897		8,032		5,871		4,577		3,582		2,882		2,353		543		339,449		3.8
2004	101,316		39,400		79,845		54,832		34,625		19,116		11,363		8,062		5,860		4,329		3,442		2,767		588		264,229		2.6
2005	192,585		—		66,491		129,809		109,078		67,346		42,387		27,210		18,651		12,669		9,552		7,626		1,666		492,485		2.6
2006	141,026		—		—		42,354		92,265		70,743		44,553		26,201		18,306		12,825		9,468		6,952		1,354		325,021		2.3
2007	204,064		—		—		—		68,048		145,272		111,117		70,572		44,035		29,619		20,812		14,431		2,890		506,796		2.5
2008	227,758		—		—		—		—		69,049		165,164		127,799		87,850		59,507		41,773		29,776		6,063		586,981		2.6
2009	253,218		—		—		—		—		—		96,529		206,773		164,605		111,569		80,443		58,345		11,794		730,058		2.9
2010	345,670		—		—		—		—		—		—		125,465		284,541		215,088		150,558		106,079		22,076		903,807		2.6
2011	382,351		—		—		—		—		—		—		—		122,224		300,536		225,451		154,847		32,760		835,818		2.2
2012	473,530		—		—		—		—		—		—		—		—		186,472		322,962		235,606		47,971		793,011		1.7
2013	543,235		—		—		—		—		—		—		—		—		—		223,862		390,582		84,542		698,986		1.3
2014	610,882		—		—		—		—		—		—		—		—		—		—		153,830		89,720		243,550		0.4
2015	103,450		—		—		—		—		—		—		—		—		—		—		—		5,237		5,237		0.1
Subtotal	3,863,238		749,791		291,111		336,374		354,724		398,303		487,458		604,006		755,392		939,746		1,094,103		1,165,508		307,723		7,484,239		1.9
Europe:
2013	619,079		—		—		—		—		—		—		—		—		—		134,259		249,307		55,063		438,629		0.7
2014	630,353		—		—		—		—		—		—		—		—		—		—		135,549		49,399		184,948		0.3
2015	21,632		—		—		—		—		—		—		—		—		—		—		—		163		163		—
Subtotal	1,271,064		—		—		—		—		—		—		—		—		—		134,259		384,856		104,625		623,740		0.5
Purchased bankruptcy receivables:
2010	11,971		—		—		—		—		—		—		388		4,247		5,598		6,248		5,914		1,321		23,716		2.0
2011	1,642		—		—		—		—		—		—		—		1,372		1,413		1,070		333		58		4,246		2.6
2012	83,159		—		—		—		—		—		—		—		—		1,249		31,020		26,207		5,587		64,063		0.8
2013	39,833		—		—		—		—		—		—		—		—		—		12,806		24,679		5,757		43,242		1.1
Subtotal	136,605		—		—		—		—		—		—		388		5,619		8,260		51,144		57,133		12,723		135,267		1.0
Total	$	5,270,907	$	749,791	$	291,111	$	336,374	$	354,724	$	398,303	$	487,458	$	604,394	$	761,011	$	948,006	$	1,279,506	$	1,607,497	$	425,071	$	8,243,246	1.6

________________________


(1)	Adjusted for Put-Backs and Recalls.


(2)	Cumulative collections from inception through March 31, 2015, excluding collections on behalf of others.


(3)	Cumulative Collections Multiple (“CCM”) through March 31, 2015 refers to collections as a multiple of purchase price.


(4)	United States data includes results from Latin America.

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Total Estimated Collections to Purchase Price Multiple

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



	Purchase Price⁽¹⁾		Historical Collections⁽²⁾		Estimated Remaining Collections ⁽³⁾		Total Estimated Gross Collections		Total Estimated Gross Collections to Purchase Price
Purchased consumer receivables:
United States ⁽⁴⁾:
<2006	$	578,054	$	1,854,974	$	991	$	1,855,965	3.2
2006	141,026		325,021		4,623		329,644		2.3
2007	204,064		506,796		13,485		520,281		2.5
2008	227,758		586,981		32,421		619,402		2.7
2009	253,218		730,058		66,898		796,956		3.1
2010	345,670		903,807		110,081		1,013,888		2.9
2011	382,351		835,818		221,977		1,057,795		2.8
2012	473,530		793,011		327,015		1,120,026		2.4
2013	543,235		698,986		661,137		1,360,123		2.5
2014	610,882		243,550		1,002,931		1,246,481		2.0
2015	103,450		5,237		173,058		178,295		1.7
Subtotal	3,863,238		7,484,239		2,614,617		10,098,856		2.6
Europe:
2013	619,079		438,629		1,309,789		1,748,418		2.8
2014	630,353		184,948		1,058,429		1,243,377		2.0
2015	21,632		163		34,765		34,928		1.6
Subtotal	1,271,064		623,740		2,402,983		3,026,723		2.4
Purchased bankruptcy receivables:
2010	11,971		23,716		3,313		27,029		2.3
2011	1,642		4,246		184		4,430		2.7
2012	83,159		64,063		35,361		99,424		1.2
2013	39,833		43,242		23,580		66,822		1.7
Subtotal	136,605		135,267		62,438		197,705		1.4
Total	$	5,270,907	$	8,243,246	$	5,080,038	$	13,323,284	2.5

________________________


(1)	Adjusted for Put-Backs and Recalls.


(2)	Cumulative collections from inception through March 31, 2015, excluding collections on behalf of others.


(3)	Estimated remaining collections (“ERC”) for charged off consumer receivables includes $104.7 million related to accounts that converted to bankruptcy after purchase.


(4)	United States data includes results from Latin America.

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Estimated Remaining Gross Collections by Year of Purchase

The following table summarizes our estimated remaining gross collections by year of purchase (in thousands):



	Estimated Remaining Gross Collections by Year of Purchase^{(1), (2)}
	2015		2016		2017		2018		2019		2020		2021		2022		2023		>2023		Total
Purchased consumer receivables:
United States⁽³⁾:
<2006	$	988	$	3	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	991
2006	3,230		1,392		1		—		—		—		—		—		—		—		4,623
2007	6,610		4,954		1,920		1		—		—		—		—		—		—		13,485
2008	14,819		10,018		5,543		2,041		—		—		—		—		—		—		32,421
2009	23,238		21,054		12,370		7,559		2,677		—		—		—		—		—		66,898
2010	37,903		31,744		19,146		10,899		7,056		3,333		—		—		—		—		110,081
2011	74,127		63,595		38,348		22,824		12,373		7,852		2,858		—		—		—		221,977
2012	110,590		90,140		55,516		32,945		18,665		10,293		6,863		2,003		—		—		327,015
2013	165,578		164,620		117,229		79,317		53,029		35,529		23,360		16,648		5,827		—		661,137
2014	191,396		237,551		176,020		159,598		112,733		56,685		28,556		19,392		14,317		6,683		1,002,931
2015	24,803		48,651		35,529		23,161		15,564		10,178		6,099		3,994		2,921		2,158		173,058
Subtotal	653,282		673,722		461,622		338,345		222,097		123,870		67,736		42,037		23,065		8,841		2,614,617
Europe:
2013	130,497		209,354		198,640		174,919		154,239		137,361		121,958		109,107		73,714		—		1,309,789
2014	122,514		172,516		156,413		132,523		113,947		101,045		90,129		79,125		70,712		19,505		1,058,429
2015	6,538		7,313		5,120		3,747		2,926		2,378		2,017		1,700		1,472		1,554		34,765
Subtotal	259,549		389,183		360,173		311,189		271,112		240,784		214,104		189,932		145,898		21,059		2,402,983
Purchased bankruptcy receivables:
2010	2,520		793		—		—		—		—		—		—		—		—		3,313
2011	106		76		2		—		—		—		—		—		—		—		184
2012	14,143		12,713		6,527		1,978		—		—		—		—		—		—		35,361
2013	12,746		8,346		2,387		101		—		—		—		—		—		—		23,580
Subtotal	29,515		21,928		8,916		2,079		—		—		—		—		—		—		62,438
Total	$	942,346	$	1,084,833	$	830,711	$	651,613	$	493,209	$	364,654	$	281,840	$	231,969	$	168,963	$	29,900	$	5,080,038

________________________


(1)	ERC for Zero Basis Portfolios can extend beyond our collection forecasts.


(2)	ERC for charged off consumer receivables includes $104.7 million related to accounts that converted to bankruptcy after purchase.


(3)	United States data includes results from Latin America.

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Unamortized Balances of Portfolios

The following table summarizes the remaining unamortized balances of our purchased receivable portfolios by year of purchase (in thousands, except percentages):



	Unamortized Balance as of March 31, 2015		Purchase Price⁽¹⁾		Unamortized Balance as a Percentage of Purchase Price		Unamortized Balance as a Percentage of Total
Purchased consumer receivables:
United States ⁽²⁾:
2007	$	1,952	$	204,064	1.0	%	0.2	%
2008	7,338		227,758		3.2	%	0.7	%
2009	5,970		253,218		2.4	%	0.6	%
2010	12,746		345,670		3.7	%	1.3	%
2011	48,126		382,351		12.6	%	4.8	%
2012	99,259		473,530		21.0	%	9.9	%
2013	238,781		543,235		44.0	%	23.8	%
2014	489,141		610,882		80.1	%	48.8	%
2015	99,892		103,450		96.6	%	10.0	%
Subtotal	1,003,205		3,144,158		31.9	%	100.0	%
Europe:
2013	468,814		619,079		75.7	%	47.3	%
2014	500,812		630,353		79.4	%	50.5	%
2015	21,413		21,632		99.0	%	2.2	%
Subtotal	991,039		1,271,064		78.0	%	100.0	%
Purchased bankruptcy receivables:
2012	31,164		83,159		37.5	%	70.6	%
2013	12,999		39,833		32.6	%	29.4	%
Subtotal	44,163		122,992		35.9	%	100.0	%
Total	$	2,038,407	$	4,538,214	44.9	%	100.0	%

________________________


(1)	Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-Backs, Recalls, and other adjustments.


(2)	United States data includes results from Latin America.

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Estimated Future Amortization of Portfolios

As of March 31, 2015, we had $2.0 billion in investment in receivable portfolios. This balance will be amortized based upon current projections of cash collections in excess of revenue applied to the principal balance. The estimated amortization of the investment in receivable portfolios balance is as follows (in thousands):



Years Ending December 31,	Charged-off Consumer Receivables United States⁽¹⁾		Charged-off Consumer Receivables Europe		Purchased Bankruptcy Receivables		Total Amortization
2015⁽²⁾	$	177,271	$	42,030	$	18,322	$	237,623
2016	237,379		117,593		16,137		371,109
2017	174,924		126,400		7,691		309,015
2018	154,392		112,871		2,013		269,276
2019	113,261		104,663		—		217,924
2020	62,432		113,621		—		176,053
2021	33,996		105,510		—		139,506
2022	27,424		125,793		—		153,217
2023	15,898		124,770		—		140,668
2024	5,997		17,525		—		23,522
2025	231		263		—		494
Total	$	1,003,205	$	991,039	$	44,163	$	2,038,407

________________________


(1)	United States data includes results from Latin America.


(2)	2015 amount consists of nine months data from April 1, 2015 to December 31, 2015.

Headcount by Function by Geographic Location

The following table summarizes our headcount by function by geographic location:



	Headcount as of March 31,
	2015		2014
	Domestic	International	Domestic	International
General & Administrative	980	1,601	988	1,529
Internal Legal Account Manager	40	89	69	60
Account Manager	301	2,392	265	2,415
	1,321	4,082	1,322	4,004

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Gross Collections by Account Manager

The following table summarizes our collection performance by account manager (in thousands, except headcount):



	Three Months Ended March 31,
	2015		2014
United States⁽¹⁾:
Gross collections—collection sites	$	135,929	$	136,525
Average active Account Manager	1,481		1,646
Collections per average active Account Manager	$	91.8	$	82.9
Europe⁽²⁾:
Gross collections—collection sites	$	46,398	$	45,861
Average active Account Manager	617		438
Collections per average active Account Manager	$	75.2	$	104.7
Overall:
Collections per average active Account Manager	$	86.9	$	87.5

________________________


(1)	United States represents account manager statistics for United States portfolios and includes applicable collection statistics from our India and Costa Rica call centers.


(2)	Europe represents account manager statistics for Europe portfolios and includes applicable collection statistics for our India call centers.

Gross Collections per Hour Paid

The following table summarizes our gross collections per hour paid to account managers (in thousands, except gross collections per hour paid):



	Three Months Ended March 31,
	2015		2014
United States⁽¹⁾:
Gross collections—collection sites	$	135,929	$	136,525
Total hours paid	697		741
Collections per hour paid	$	195.0	$	184.2
Europe⁽²⁾:
Gross collections—collection sites	$	46,398	$	45,861
Total hours paid	153		133
Collections per hour paid	$	303.3	$	344.8
Overall:
Collections per hour paid	$	214.5	$	208.7

________________________


(1)	United States represents account manager statistics for United States portfolios and includes applicable collection statistics from our India and Costa Rica call centers.


(2)	Europe represents account manager statistics for Europe portfolios and includes applicable collection statistics for our India call centers.

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Collection Sites Direct Cost per Dollar Collected

The following table summarizes our gross collections in collection sites and the related direct cost (in thousands, except percentages):



	Three Months Ended March 31,
	2015			2014
United States⁽¹⁾:
Gross collections—collection sites	$	135,929		$	136,525
Direct cost⁽²⁾	$	10,475		$	8,410
Cost per dollar collected	7.7		%	6.2		%
Europe⁽³⁾:
Gross collections—collection sites	$	46,398		$	45,861
Direct cost⁽²⁾	$	4,002		$	2,723
Cost per dollar collected	8.6		%	5.9		%
Overall:
Cost per dollar collected	7.9		%	6.1		%

________________________


(1)	United States statistics include applicable gross collections and direct costs from India and Costa Rica call centers.


(2)	Represent account managers and their supervisors’ salaries, variable compensation, and employee benefits.


(3)	Europe statistics include applicable gross collections and direct costs from our India call centers.

Salaries and Employee Benefits by Function

The following table summarizes our salaries and employee benefits by function (excluding stock-based compensation) (in thousands):



	Three Months Ended March 31,
	2015		2014
Portfolio purchasing and recovery activities
Collection site salaries and employee benefits⁽¹⁾	$	15,283	$	11,997
Non-collection site salaries and employee benefits⁽²⁾	43,202		39,565
Subtotal	58,485		51,562
Non portfolio purchasing and recovery	3,358		1,739
	$	61,843	$	53,301

________________________


(1)	Represent account managers and their supervisors’ salaries, variable compensation, and employee benefits.


(2)	Includes internal legal channel salaries and employee benefits of $5.2 million and $5.7 million for the three months ended March 31, 2015 and 2014, respectively.

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Purchases by Quarter

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



Quarter	# of Accounts	Face Value		Purchase Price
Q1 2013	1,678	$	1,615,214	$	58,771
Q2 2013⁽¹⁾	23,887	68,906,743		423,113
Q3 2013⁽²⁾	4,232	13,437,807		617,852
Q4 2013	614	1,032,472		105,043
Q1 2014⁽³⁾	1,104	4,288,159		467,565
Q2 2014	1,210	3,075,343		225,762
Q3 2014⁽⁴⁾	2,203	3,970,145		299,509
Q4 2014	859	2,422,128		258,524
Q1 2015	734	1,041,011		125,154

________________________


(1)	Includes $383.4 million of portfolios acquired with a face value of approximately $68.2 billion in connection with the merger with Asset Acceptance Capital Corp.


(2)	Includes $559.0 million of portfolios acquired with a face value of approximately $12.8 billion in connection with the Cabot Acquisition.


(3)	Includes $208.5 million of portfolios acquired with a face value of approximately $2.4 billion in connection with the Marlin Acquisition.


(4)	Includes $105.4 million of portfolios acquired with a face value of approximately $1.7 billion in connection with the Atlantic Acquisition.

Liquidity and Capital Resources

Historically, we have met our cash requirements by utilizing our cash flows from operations, bank borrowings, convertible debt offerings, and equity offerings. Our primary cash requirements have included the purchase of receivable portfolios, the acquisition of U.S. and international entities, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes.

The following table summarizes our cash flows by category for the periods presented (in thousands):



	Three Months Ended March 31,
	2015			2014
Net cash provided by operating activities	$	19,390		$	12,151
Net cash provided by (used in) investing activities	4,491			(352,990		)
Net cash (used in) provided by financing activities	(12,273		)	406,111

On February 25, 2014, we amended our revolving credit facility and term loan facility (the “Credit Facility”) pursuant to a Second Amended and Restated Credit Agreement. On August 1, 2014, we further amended the Credit Facility pursuant to Amendment No. 1 to the Second Amended and Restated Credit Agreement (as amended, the “Restated Credit Agreement”). Under the Restated Credit Agreement, we have a revolving credit facility tranche of $692.6 million, a term loan facility tranche of $153.8 million, and an accordion feature that allows us 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 has a five-year maturity, expiring in February 2019, except with respect to two subtranches of the term loan facility of $60.0 million and $6.3 million, expiring in February 2017 and November 2017, respectively. As of March 31, 2015, we had $631.1 million outstanding and $205.6 million of availability under the Credit Facility, excluding the $250.0 million accordion.

On March 5, 2014, we sold $140.0 million in aggregate principal amount of 2.875% convertible senior notes due March 15, 2021 in a private placement transaction. On March 6, 2014, the initial purchasers exercised, in full, their option to purchase an additional $21.0 million of the convertible senior notes, which resulted in an aggregate principal amount of $161.0 million of the convertible senior notes outstanding (collectively, the “2021 Convertible Notes”). The 2021 Convertible Notes are general unsecured obligations of Encore. The net proceeds from the sale of the 2021 Convertible Notes were approximately $155.7 million, after deducting the initial purchasers’ discounts and commissions and the estimated offering expenses paid by the Company. The Company used approximately $19.5 million of the net proceeds from this offering to pay the cost of the

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capped call transactions entered into in connection with the 2021 Convertible Notes and used the remainder of the net proceeds from this offering for general corporate purposes, including working capital.

Through Cabot Financial (UK) Limited (“Cabot Financial UK”), an indirect subsidiary, we have a revolving credit facility of £195.0 million (the “Cabot Credit Facility”). As of March 31, 2015, there was £70.8 million (approximately $105.1 million) outstanding and we had £124.2 million (approximately $184.4 million) available for borrowing. The Cabot Credit Facility includes an uncommitted accordion facility 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. Refer to Note 10, “Cabot Senior Revolving Credit Facility” in the notes to our condensed consolidated financial statements for detailed information related to the Cabot Credit Facility. On February 7, 2014, in connection to the Marlin Acquisition, Cabot Financial UK borrowed £75.0 million (approximately $122.3 million) under this facility and used the proceeds to pay for a portion of the purchase price. The Marlin Acquisition was financed with the £75.0 million (approximately $122.3 million) Cabot Credit Facility draw discussed above, and with borrowings under two senior secured bridge facilities (the “Senior Secured Bridge Facilities”) entered into on February 7, 2014. On March 21, 2014, Cabot Financial issued £175.0 million (approximately $288.6 million) in aggregate principal amount of 6.5% Senior Secured Notes due 2021 (the “Cabot 2021 Notes”). The Senior Secured Bridge Facilities were paid in full using proceeds from borrowings under the Cabot 2021 Notes.

Currently, all of our portfolio purchases are funded with cash from operations and borrowings under our Restated Credit Agreement and our Cabot Credit Facility.

We are in compliance with all covenants under our financing arrangements. See Note 10, “Debt” to our condensed consolidated financial statements for a further discussion of our debt.

Our cash and cash equivalents at March 31, 2015 consisted of $51.3 million held by United States-based entities and $84.9 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated. However, we believe that our United States sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds.

We believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities. Our future cash needs will depend on our acquisitions of portfolios and businesses.

Operating Cash Flows

Net cash provided by operating activities was $19.4 million and $12.2 million during the three months ended March 31, 2015 and 2014, respectively.

Cash provided by operating activities during the three months ended March 31, 2015 was primarily related to net income of $30.0 million, various non-cash add backs in operating activities, and changes in operating assets and liabilities. Cash provided by operating activities during the three months ended March 31, 2014 was primarily related to net income of $18.8 million, various non-cash add backs in operating activities, and changes in operating assets and liabilities.

Investing Cash Flows

Net cash provided by investing activities was $4.5 million during the three months ended March 31, 2015. Net cash used in investing activities was $353.0 million during the three months ended March 31, 2014.

The cash flows used in investing activities during the three months ended March 31, 2015 were primarily related to receivable portfolio purchases of $143.2 million, offset by collection proceeds applied to the principal of our receivable portfolios in the amount of $164.2 million. The cash flows used in investing activities during the three months ended March 31, 2014 were primarily related to cash paid for the Marlin Acquisition, net of cash acquired, of $257.7 million, receivable portfolio purchases (excluding the portfolios acquired from the Marlin Acquisition of $208.5 million) of $257.2 million, offset by gross collection proceeds applied to the principal of our receivable portfolios in the amount of $161.9 million.

Capital expenditures for fixed assets acquired with internal cash flows were $4.3 million and $3.0 million for three months ended March 31, 2015 and 2014, respectively.

Financing Cash Flows

Net cash used in financing activities was $12.3 million during the three months ended March 31, 2015. Net cash provided by financing activities was $406.1 million three months ended March 31, 2014.

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The cash used in financing activities during the three months ended March 31, 2015 primarily reflects $134.3 million in borrowings under our credit facilities, offset by $124.4 million in repayments of amounts outstanding under our credit facilities. The cash provided by financing activities during the three months ended March 31, 2014 primarily reflects $457.3 million in borrowings under our credit facilities, $288.6 million of proceeds from the Cabot 2021 Notes, and $161.0 million of proceeds from the issuance of the 2021 Convertible Notes, offset by $447.0 million in repayments of amounts outstanding under our credit facilities and $33.6 million in purchases of convertible hedge instruments, including the payment for our warrant restrike transaction associated with our 2017 Convertible Notes.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Rates. At March 31, 2015, there had not been a material change in any of the foreign currency risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Interest Rates. At March 31, 2015, there had not been a material change in the interest rate risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Information with respect to this item may be found in Note 13, “Commitments and Contingencies,” to the condensed consolidated financial statements.

Item 1A – Risk Factors

There is no material change in the information reported under “Part I—Item 1A—Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Item 6 – Exhibits



10.1		Amendment Agreement, dated February 5, 2015, for Cabot Financial (UK) Limited, as Parent, with J.P. Morgan Europe Limited, as Agent, relating to a Senior Facilities Agreement originally dated September 20, 2012 (filed herewith)

31.1		Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2		Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101		The following financial information from the Encore Capital Group, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2015 formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Financial Condition; (ii) Condensed Consolidated Statements of Income; (iii) Condensed Consolidated Statements of Comprehensive Income; (iv) Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements

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SIGNATURES

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



	ENCORE CAPITAL GROUP, INC.

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

Date: May 7, 2015