Encore Capital Group Inc (ECPG) Q3 2021 Earnings Call Transcript

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Encore Capital Group Inc (ECPG 1.34%)
Q3 2021 Earnings Call
Nov 3, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Encore Capital Group's Q3 2021 Earnings Conference Call. [Operator Instructions].

I would now like to turn the conference over to your host, Bruce Thomas, Vice President of Global Investor Relations.

Bruce Thomas -- Vice President, Investors Relation

Thank you, operator. Good afternoon, and welcome to Encore Capital Group's third quarter 2021 earnings call. Joining me on the call today are Ashish Masih, our President and Chief Executive Officer, Jonathan Clark, Executive Vice President and Chief Financial Officer, Ryan Bell, President of Midland Credit Management; and Craig Buick, CEO of Cabot Credit Management. Ashish and Jon will make prepared remarks today, and then we will be happy to take your questions. Unless otherwise noted, comparisons made on this conference call will be between the third quarter of 2021 and the third quarter of 2020.

In addition, today's discussion will include forward-looking statements subject to risks and uncertainties. Actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks and uncertainties. During this call, we'll use rounding and abbreviations for the sake of brevity. We will also be discussing non-GAAP financial measures with reconciliations to the most directly comparable GAAP financial measures are included in our earnings presentation, which was filed on Form Eight-K earlier today. As a reminder, this conference call will also be made available for replay on the Investors section of our website, where we will also post our prepared remarks following the conclusion of this call.

With that, let me turn the call over to Ashish Masih, our President and Chief Executive Officer.

Ashish Masih -- President And Chief Executive Officer

Thanks, Bruce, and good afternoon, everyone. Thank you for joining our earnings call. The third quarter for Encore was another period of strong performance as we continue to execute our strategy and deliver on our financial objectives, including our capital allocation priorities. To better understand our results, let's begin with some important highlights from the quarter. Our financial performance in Q3 was driven primarily by our strong collections in the period, particularly within our MCM business. On a global basis, our portfolio purchases were $168 million in Q3, nearly matching the $170 million purchase total from Q3 a year ago. Although issuers continue to sell, the market continues to be impacted by lower supply, as a result of fewer charge-offs.

As these conditions persist, we have remained disciplined in our purchasing approach. Importantly, we continue to purchase at attractive returns due to the improvements in the effectiveness of our collections operations, as well as our focus on cost efficiency over the past several years. These initiatives have allowed us to mitigate the impact of higher market pricing. After implementing our global funding structure in 2020, we began 2021 by articulating our financial priorities and balance sheet objectives, which included our capital allocation strategy. We subsequently initiated a $300 million multiyear share repurchase plan to return capital to shareholders. Since that time, we have been repurchasing Encore shares under our share repurchase authorization and in line with our capital allocation priorities. During the third quarter, we repurchased Encore shares totaling $41 million, bringing our total through the first three quarters of 2021 to $88 million. Throughout this year, our business has continued to perform extremely well, delivering strong returns and cash flows.

As a result, our balance sheet has continued to strengthen as we further reduced our leverage, which is now below our target range. This has prompted us to accelerate the return of capital to our shareholders through a $300 million tender offer. As a reminder, our financial priorities include objectives for our balance sheet, as well as a clear capital allocation framework, all underpinned by a long-term focus on delivering strong returns through the credit cycle. We have made tremendous progress in developing a strong and financially flexible balance sheet and a leverage of 1.8 times at the end of Q3 has improved more than half a turn since the beginning of the year and is now below our target range of 2 times to three times. A consistent capital allocation framework is critical to success in our business, and our priorities are clear. Our business is fueled by our ability to purchase portfolios at attractive returns, and we have demonstrated our discipline in this area by delivering the best returns in our industry.

Consistent with our capital allocation priorities, we began repurchasing Encore shares in the first quarter of 2021, and are now accelerating the return of capital by initiating a tender offer. We plan to launch a $300 million tender offer for Encore shares tomorrow, November 4, before the market opens, the tender will be conducted as a modified Dutch auction with offer pricing per Encore share, no less than $52 and no greater than $60. Pertinent in details will be provided in a press release and SEC filing at the time of the launch. To recap, Encore is delivering strong returns and cash flows, reflected in our best-in-class ROIC among our peers, which is a reminder that we deliver the best returns per dollar of invested capital in our industry.

Despite a strong share performance this year, which is up 37% in 2021, we believe we are still undervalued relative to our peers. Our business has continued to generate significant cash and our leverage is now below our target range. Consequently, we are accelerating the return of capital through the tender offer, reflecting the Board's and management's confidence in our future. This offer is incremental to the existing share repurchase authorization, which, after including the share we repurchased had $212 million of remaining availability for future share buybacks, as of the end of Q3. When combined with shares, we have already repurchased, a fully subscribed tender, would reduce the number of outstanding Encore common shares by more than 22% since the beginning of the year. After the completion of the tender, assuming we purchase the entire $300 million amount, we expect to remain -- maintain a strong financial position to capitalize on future opportunities, with approximately $700 million in available liquidity, leverage still at or near the low end of our target range and full access to capital markets.

As is always the case in credit cycles, charge-offs will increase at some point and we are well-positioned to increase portfolio purchases when they do, applying a returns-focused approach, consistent with our strategy. We are delivering best-in-class financial performance, as a result of our consistent strategy and execution. We purchased portfolios of non-performing loans at attractive cash and cash returns, using funding with the lowest cost available to us. For each portfolio that we own, we strive to exceed our collections expectations, while both maintaining an efficient cost structure and ensuring the highest level of compliance and consumer focus. We achieve these objectives through a three-pillar strategy. This strategy enables us to consistently deliver outstanding financial performance, positions us well to capitalize on future opportunities and is instrumental in building long-term shareholder value.

The first pillar of our strategy, market focus leads us to concentrate our efforts in the markets where we can achieve the highest risk-adjusted returns. Consistent with this strategy, we sold our portfolios in Colombia and Peru during the third quarter. Our largest and most valuable market is the U.S. MCM delivered another quarter of strong performance in Q3, as collections grew 4% to $407 million. Legal collections grew compared to Q3 a year ago, as courts have reopened, which led to a higher proportion of collections coming through the legal channel, though we do not expect this to be a long-term shift in collection mix. MCM deployed $102 million to purchase portfolios during Q3, as the impact of the pandemic have dampened supply in the U.S. Nonetheless, we continue to deploy capital at attractive returns, reflecting our disciplined purchasing and superior collections effectiveness.

Finally, the CFPB's new industry rules will become effective later this year, and we are ready. We're pleased to see the completion of this multiyear process, which will resolve uncertainty and finally level the playing field for participants in our industry. In addition, the new rules will modernize communications with consumers, and allow us to engage using methods, consumers prefer. We are fully prepared to implement the new rules by the November 30 effective date. Turning to the business in the U.K. and Europe. Our collections performance continues its return to normal levels after several quarters of COVID-related volatility in 2020. Collections in the third quarter grew 10% compared to Q3 last year. Third quarter collections on the legal channel increased 12% compared to Q3 last year, which led to a higher cost-to-collect. Deployments in Q3 of $66 million were higher compared to the third quarter of last year, and Cabot's year-to-date portfolio purchases through the third quarter of 2021 totaled $197 million, which is more than Cabot's deployment for all of 2020. Portfolio pricing was higher in the third quarter across our European footprint, while delinquencies remained low, constraining our investments as we maintained our returned focused discipline and purchasing.

The second pillar of our strategy focuses on enhancing our competitive advantages. Our competitive platform enables us to consistently generate significant cash flow. Our cash generation for the 12 months ending in September increased 15%, reflecting a steady improvement in our business, the efficiency of our operations and the resilience of our portfolios. Our consistent growth in cash generation has contributed to our reduced borrowings and the deleveraging of our balance sheet. Our strong cash generation also provides us with additional flexibility when we consider our capital allocation priorities, including consistent share repurchases and the tender offer we are announcing today. Our competitive advantages also allow us to deliver differentiated returns. In addition to cash generation, another important measure of our business is ROIC, as it takes into account, both, the performance of our collections operations, as well as our ability to appropriately price risk when investing our capital.

We believe, it's important to demonstrate that our underlying business delivers strong, long-term returns and that we can maintain strong returns through the credit cycle. Our ROIC performance in the third quarter and our performance over time, are solid indicators of how we execute in comparison to our peers. In simple terms, we deliver the highest return per invested dollar in our industry. The third pillar of our strategy makes a strengthening of our balance sheet a constant priority. By the end of the third quarter, our balance sheet had further strengthened, as we reduced our debt-to-equity ratio to two times. In addition, we reduced our leverage ratio to 1.8 times, which is below our targeted range of two times to three times and is near the lowest in the industry.

A strong operating performance and focused capital deployment have driven higher levels of cash flow and have also contributed to a lower level of debt, which in turn has contributed to leverage reduction. Importantly, assuming we purchase the entire $300 million of Encore stock in the tender our pro forma leverage ratio for Q3 would still be at the low-end of our target range at approximately two times.

I'd now like to hand the call over to John, for a more detailed look at our financial results.

Jonathan Clark -- Executive Vice President And Chief Financial Officer

Thank you, Ashish. In the third quarter, strong collections drove higher revenue, net income and returns. The resulting strong cash generation combined with lower purchase volume led to a further reduction on our leverage ratio and lower ERC. For purposes of comparison, there were non-operating items that impacted GAAP net income and GAAP EPS in the third quarter this year, as well as last year. In Q3 2021, we incurred a $16 million loss after tax or $0.51 per share associated with the sale of our investment in Colombia and Peru, largely related to the change in foreign currency during our investment period.

I would like to highlight that a year ago, in Q3 2020, we recorded $19 million of expenses after tax or $0.59 per share related to establishing our new global funding structure. In addition, GAAP net income a year ago included $15 million or $0.47 per share of CFPB settlement fees. Collections were $567 million in the third quarter, up 5% compared to Q3 last year. MCM collections grew 4% in the third quarter to $407 million. Within that total, MCM's legal channel collections grew 22% compared to Q3 last year when the pandemic's impact on the legal channel was significant. Cabot's collections through our debt purchasing business in Europe in the third quarter were $155 million, up 10% compared to Q3 last year. Encore's year-to-date global collections for portfolios owned at the end of 2020 through the first three quarters of 2021 was 118% of ERC at the end of 2020. Revenues in the third quarter were $413 million compared to $404 million in Q3 last year. Our estimated remaining collections at the end of Q3 was $7.9 billion, down 7% compared to the end of Q3 last year, a time when our ERC was very near its peak level.

The decline is primarily a result of very strong collections performance during the past year, as well as lower portfolio purchasing during the same period. Our global funding structure provides many benefits to Encore, including lower funding costs and extended maturities. As such, in August, we amended and extended our global senior facility, reducing the LIBOR and EURIBOR floors to 0 and extending the maturity from 2024 to 2025. Available capacity under our global RCF was $864 million at the end of the third quarter, and we concluded Q3 with $130 million of non-client cash on the balance sheet. With our strong balance sheet, our financial flexibility and access to a variety of capital sources, we are well prepared to fund the tender offer, continued share buybacks and fund the opportunities that lie ahead.

With that, I'd like to turn it back over to Ashish.

Ashish Masih -- President And Chief Executive Officer

Thank you, Jon. As I stated earlier, we are delivering best-in-class performance, which is now also enabling our strategy to return capital to shareholders. I want to reiterate that we are able to do this from a position of strength that is driven by staying true to our strategy and through the exceptional talent at Encore. I'm thankful for their continued contributions during an unprecedented period to deliver time and again for our consumers. It's something that makes me very proud of our organization and excited about the opportunities in front of us.

With our mission, vision and values at the core of our business, we've been able to successfully navigate and embrace uncertainty, execute on our strategy and support our colleagues and consumers at a time when they need it most. Specifically, our values underscore the importance of caring for each other, finding a better way and embracing our differences. In our business, that empathetic approach is what inspires us to help consumers in need every day, and I can't think of better principles to live by, as we continue our success in the near and long term. Now we'd be happy to answer any questions that you may have.

Operator, please open up the lines for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Mark Hughes from Truist.

Mark Hughes -- Truist -- Analyst

Thank you. Good afternoon. So for the $300 million tender, the funding, say, roughly half of that will be incremental borrowing half will be cash on hand. Is that the right way to think about it?

Jonathan Clark -- Executive Vice President And Chief Financial Officer

Yes. I wouldn't focus on the exact mix, but we do have, as you pointed out, $130 million of cash on hand, and we're generating cash every day, and that was, of course, at the end of the quarter. So we probably generate even more cash incent. So roughly it's a reasonable approximation, I suppose.

Mark Hughes -- Truist -- Analyst

Yes. I was thinking of you -- I think you had $864 million in availability. And then you talked in the release about there being $700 million after the offer. Am I thinking about -- that's the -- you're talking about the numbers there, correct?

Jonathan Clark -- Executive Vice President And Chief Financial Officer

Yes. The way I think about it, Mark, is there's $864 million left in availability and then there's $130 million in cash. So you add those together, you're up to $994 million. If you assume the tenders fully executed, that's less $300 million, so that gets you to $694 million. So I'd call that $700 million.

Mark Hughes -- Truist -- Analyst

Then the incremental borrowing cost, the interest rate on that credit facility for the $160 million roughly. What's the cost on that?

Jonathan Clark -- Executive Vice President And Chief Financial Officer

Well, the interest rate today is a little over 4.4%. So it's unchanged from, I think, roughly the same that we've had in the past.

Mark Hughes -- Truist -- Analyst

And then the European markets, you talked about the increased price. You're being disciplined there. How about the supply or the size of the portfolios coming to market? Are those also constrained? Or is this more of a competitive issue rather than a supply issue?

Ashish Masih -- President And Chief Executive Officer

So this is Ashish, Mark. Let me take it, and then I'll let Craig chime in as well who is on the phone. So in Europe, all the banks are selling who sell. Although, the sales are more lumpy compared to U.S., I mean, there are some forward flows, but at times, banks accumulate and the behavior is a bit different in Europe versus U.K. in Europe, there's some of the legacy supply that comes to market.

But in general, given delinquencies and charge-offs are low, the volumes are lower. So that's creating a higher competition and somewhat increased higher pressure on pricing. Now that said, if you read their reports and bank reports and other reports, purchasing spend is starting to rise again and credit card balances at at least the U.K. bank, the reports I have seen are starting to turn the corner and rise again. So at some point in the future, banks expect charge-offs to rise. But right now, they're at a kind of fairly low level.

Any other color, Craig, you'd like to add?

Craig Buick -- Chief Executive Officer of Cabot Credit Management Group

Yes. And I think you hit the key points there. Ashish and Mark to add, I think about it is if we have, as Ashish mentioned, had a relatively low supply for a period of time. We've got a number of well funded sort of peers in the sector. With that relatively low supply, we are seeing upward pressure on pricing at this point. As Ashish mentioned, supply is down, consumer lending in the U.K. given our focus on unsecured consumer lending. In the U.K., we've seen credit card balances dropped they're down about 15% from the pre-COVID, but they're starting to pick back up again now. Lending is starting to increase.

So that's a positive sign for the sector. The key, I think is probably delinquencies remain quite low. Delinquencies have been pretty much consistent pre-crisis through the crisis to today. And then the question is longer term, where will they go? I don't think they'll go down. The question is, when will they go up? And if so, by how much? But in the meantime, we are seeing that higher pricing coming through, and we remain disciplined in terms of that capital deployment to protect that sort of return on invested capital that Ashish alluded to.

Mark Hughes -- Truist -- Analyst

And then the -- thank you for that. The sale of the business in Colombia and Peru. I take it we could add back the loss associated with that. It didn't look like you adjusted it out for your earnings number. So the $0.51 add back would get you over $3 in earnings if we chose to do that, that's the right way to think about that.

Ashish Masih -- President And Chief Executive Officer

That's correct. We did not adjust. We only report one earnings number, the GAAP earnings EPS now, Mark. So that would be correct. Jon also highlighted to we just fully transparent that two adjustments from a year ago quarter as well. And there were two significant adjustments in that quarter as well. So.

Mark Hughes -- Truist -- Analyst

Could that transaction help the collections number?

Ashish Masih -- President And Chief Executive Officer

No. And once we sell the portfolios, whatever collections that were coming from that portfolio would not be there going forward. Not material. The sales does not help collections, no.

Mark Hughes -- Truist -- Analyst

And then just the U.S. competition, you mentioned how you're doing well with your collections effectiveness and your cost efficiency, and that's helping you to -- it's mitigating the impact of the higher market pricing. What's the dynamic within the U.S.? How would you describe it in terms of competition?

Ashish Masih -- President And Chief Executive Officer

Yes. In U.S., as I've said before, all banks who have been sellers traditionally are selling into the market. It's just the delinquencies and charge-offs are at a low point right now. And I would say, in some cases, you find flat pricing. And occasionally, in some cases, you find somewhat higher pricing that we're able to mitigate. But as we are hearing the earnings reports and what we hear directly from the banks as well, spending is rising, purchase volumes are up and kind of credit card balances is starting to pick up. So they all expect charge-offs to rise sometime in 2022. But at this point, we're at a fairly low point. And perhaps, if I had to give an opinion at the lowest point in terms of charge-off volumes.

Ryan, any other color on the market?

Ryan Bell -- President, Midland Credit Management, Inc.

No, I think you covered it well, Ashish. Yes, I would to directly address the question, I think competition is stable. We're not seeing a bunch of new or any entrants into the market. But to your point, Ashish you're correct, supply is still depressed. It's down, but we do expect it to increase next year, and we're hearing very similar comments from the bank publicly and then our conversations with them.

Mark Hughes -- Truist -- Analyst

And then finally, the -- you used the number down 22% in terms of the share count. Was that contemplating the shares that you've already repurchased and did the tender offer that was fully subscribed, is that the 22% number?

Ashish Masih -- President And Chief Executive Officer

Yes. So to put the 22% in context, Mark, we have purchased about two million shares in the first three quarters of this year. And if at $60 a share, the full tender offer subscribe, that would be another five million shares. So that's about seven million shares. And if you compare that or factor that into the shares outstanding at the end of last year, which is about $31.3 million or something around that, that gets you to 22%. Now if you buy it at a lower price and more share, that number would be slightly higher.

Mark Hughes -- Truist -- Analyst

Understood. And then to the extent that you execute on the remaining $212 million on the authorization. What would be -- can you give us the sense of your commitment on that? I think you said it's still outstanding. Would you be in the market later in the fourth quarter? Or are you'll wait and see?

Ashish Masih -- President And Chief Executive Officer

So the way I would characterize kind of the two programs. One program was when the Board authorized earlier in the year to $300 million. We have bought $88 million out of that. So $212 million will be remaining in that program. The tender offer is incremental and complementary to that. Now, even though they are separate, we view purchasing from both repurchases from both, as part of a comprehensive return of capital strategy. So you need to think of it together. And post tender our repurchases will depend again, as we have said many times on our performance, our balance sheet strength and our liquidity. So that's how we would do, but for that, we would have the $212 million available as of end of Q3.

Mark Hughes -- Truist -- Analyst

Understood. Thank you.

Operator

Your next question comes from the line of Bob Napoli of William Blair & Company.

Spencer -- William Blair & Company -- Analyst

Hi. This is Spencer on for Bob. As I'm looking at the difference between cash collections and income on receivables, it seems like the payment applied to principal is more around historical levels this quarter. Can you provide any color on the drivers of that looking forward? Should we expect that to remain in the historical range? Or should that remain volatile?

Bruce Thomas -- Vice President, Investors Relation

Yes, Spencer, it's always hard to predict. It all depends on -- there can be general trends, but it all depends on what portfolios are being collected. They each have an additional effective interest rate, as you know. And then for every dollar you collect, if you happen to be in one which drive from pools that have a higher effective interest rate than you're going to get a different ratio than you draw from one that gets lower. We care about collecting cash and investing at high returns, and there will be movement and volatility in this over time. But as long as you're investing at strong IRRs and you continue to collect strongly the rest takes care of itself.

Spencer -- William Blair & Company -- Analyst

And would you mind providing an update on how you're using digital tools? How digital has trended, as a percent of collections? And any update to how you're investing in those capabilities?

Ashish Masih -- President And Chief Executive Officer

Yes, Spencer, this is Ashish. So we have typically not provided 1% coming just from digital. What we do disclose is what comes from call center and digital combined, it's kind of an omnichannel approach because a consumer will start online, go to the mobile and then speak to an account manager or just any combination. So that omnichannel is most important. That said, we continue to invest a lot and focus a lot in innovation and the digital space. Whether it's through the web, which is often on the phone or other ways to do it. Now the other thing is as the CFPB rules come into effect at the end of this month, one of the positives there is the rules make it easier to communicate with consumers using modern technologies such as text and kind of email becomes easier and so forth.

So over time, I do expect we will continue to invest a lot and push on that in a much stronger way to drive collections through those channels. And as consumers prefer that way, frankly, every other financial sector, consumers are used to operating digitally, and we are no different. So that rule change is going to be -- provide a good impetus to really helping consumers in the right way. And in that sense, players with larger scale, like Encore will be able to invest much more than some of the smaller players in our sector, as well as collection agencies who work for banks, and they'll have to invest, and it just makes it easier for us and enhances our competitive advantage, as we keep moving forward.

Spencer -- William Blair & Company -- Analyst

Thank you for saving questions.

Operator

Your next question is from the line of David Scharf of JMP Securities.

David Scharf -- JMP Securities -- Analyst

Thank you. I'm fine, all the questions have been answered. Thank you.

Operator

Your next question comes from the line of Mike Grondahlof Northland Capital Markets.

Mike Grondahl -- Northland Capital Markets -- Analyst

Hey guys, thanks. Ashish, maybe just the first question. Is it too early to call a bottom in purchase volume? Are you getting close to that?

Ashish Masih -- President And Chief Executive Officer

So thanks for your question, Mike. I believe it is the bottom. If you -- again, this is -- will depend on how consumer behavior goes, if it's been anything but predictable and their economic cycle or the credit cycle has been very unusual, as you know, consumers got some help, but also their expenses were lower and they paid off the debt, both pre and post charge-off. Now I think the situation is normalizing pretty quickly, and banks are reporting higher spend volume, but most banks are reporting, if not all, that we looked at just in the last two weeks, credit card balances are starting to rise.

And in U.K. as well for the sector, credit card balancing are rising. So even if charge-off rates remain the same, the dollar volume of charge-offs will go up. And then, as you know, as banks lend, they lend deeper into the credit spectrum and the credit losses and charge-off rate also increases over time. So it may be a slow ramp up, but I do feel -- it does feel like we are at the bottom in terms of the charge-off volumes and supply volume.

Mike Grondahl -- Northland Capital Markets -- Analyst

Got it. And secondly, I'm looking -- I'm glad you're doing the tender. I'm looking for a little insight into how you came to the conclusion to do the tender. Was it more driven that your leverage got to a point -- 1.8 times or the strong performance this year? Or was the buyback just really slow going and you wanted to to accelerate it? I guess a little bit of color how you decided on the tender to layer that in.

Ashish Masih -- President And Chief Executive Officer

Absolutely, a great question, and you touched on a lot of points. So let me just take a step back or a broader perspective, and I give you our thinking on this. So the first thing is, this all starts with a very basic, which is the foundation of our strategy of returning capital, which is our performance. A strong performance being in the right markets. We're delivering the highest returns in the industry and a strong balance sheet. So that's number one. Number two, if you go back to earlier part of the year, at the beginning of the year, we outlined our balance sheet priorities, we also outlined a capital allocation priorities very clearly.

And at that time, our leverage was at 2.4 times, which is in the middle of the range, and we initiated repurchases. After that, the Board authorized a $300 million multiyear program and we bought $88 million out of that. Now as the year progressed, and the third point I would make is we've continued to perform strongly, cash flow strong and a balance sheet continued to strengthen our leverage now at the end of Q3 is 1.8 times, which is below our range. And the other point I would highlight is, we are undervalued, we believe we are undervalued relative to our peers. And especially if you consider the highest -- the return that's highest in the industry that's a factor as well. So we are accelerating return of capital. And through this $300 million tender the important thing to note is this is incremental. We still have $212 million remaining in the original program. So that's kind of the context.

And finally, I would say, as you think of us going forward, kind of we are a fundamentally different company now, much stronger than when you compare us to three years ago. And we will maintain a strong financial position. So even after if this $300 million is fully subscribed, let's say, assume that. We will have access to $700 million in liquidity, as Jon mentioned earlier, our leverage will be at the low end of our range, and we'll have access to capital markets. And as it happens with credit cycles, charge-offs are expected to increase, and we're going to be very well positioned to still capitalize on that and increase our portfolio purchases. So that's kind of our thinking on the business, our balance sheet and just a whole capital return strategy. So I hope that's helpful to your question.

Mike Grondahl -- Northland Capital Markets -- Analyst

Yes. Good to hear and thanks for the insight.

Operator

[Operator Instructions] Your next question comes from the line of Robert Dodd from Raymond James.

Robert Dodd -- Raymond James -- Analyst

Hi guys and congrats on the quarter. Most of them have been answered, but I got a couple. On the U.S. first. I mean, as you said, I mean, we're seeing rising balances, etc. I mean, we're going to see charge-offs rise eventually. At the same time, we're also seeing now in September, I think consumer savings dropped to pre-COVID levels. So are you seeing anything that's maybe not bank data, maybe in your data or in your collections is the amount of excess cash from consumers declining a little bit, which would make sense with the savings number? And is that -- can we -- is there anything to read into there about potential incremental stretched consumers, which would be another good indicator for supply at some point?

Ashish Masih -- President And Chief Executive Officer

So in U.S., I think we are still seeing solid collections. We are collecting well. And again, our channels change and so forth, depending on the kind of the cycle we're in. But we're seeing strong collections. I think you're making the right points on savings rates. And all the other things we have noticed, as we looked at the last most recent delinquency report from some of the largest banks I think many of them reported the 30-plus the early stage delinquency, either leveling off in a few cases actually rising. So that, to me, is also a good leading indicator, potentially if that continues for another quarter of supply that's bottomed out and will increase in the coming quarters in the next year.

Robert Dodd -- Raymond James -- Analyst

And then one more, if I can, on Europe. I mean, we talked about European supply is a bit more lumpy, and it's typically a little softer in the third quarter anyway because you guys on by cash. Are you seeing any more emerging that kind of pent-up supply with a lot of those banks not having historically sold and just let it sit on the balance sheet. Any indications that any of that's going to come to market in separate from whether the supply -- this is more outside the U.K., obviously, separate from maybe just the building of balances. Is more of that expected to come over the next, say, 12 months versus what we've seen historically?

Ashish Masih -- President And Chief Executive Officer

In U.K. at times, you've seen some banks accumulate their portfolios and then sell. Europe, there's still some of the older portfolios that have continued to come to market. Craig, any color on the Europe side from this kind of the pent-up supply that Robert's talking about?

Craig Buick -- Chief Executive Officer of Cabot Credit Management Group

Yes. Robert, you're right. In U.K., it's a different kettle of fish because they tend in the U.K., and most banks sort of do tend to claim this thing through relatively quickly, just the nature of the financial ecosystem in the U.K. is it tends to cycle through relatively quick. You don't have that pent-up piece that you talked about. In Europe, I think we are starting to see the signs that some of those European banks are starting to address some of their historic NPL levels. We've seen this for a little bit. I'd say probably the supply in Europe is coming through a little stronger than the U.K. but curious that's still got some of that backlog to work on.

The concept of the calendar provisioning that's coming in that is forcing the banks to look into this and some further pressure from the regulators is seeing them start to address a little bit more of that supply. So that pent-up NPL backlog is probably supplemented some of the supply during this sort of low delinquency period. So we are starting to see that shift in some of the markets we're in. We are starting to see the banks address that a little more proactively than what they probably did, call it, three or four years ago.

Robert Dodd -- Raymond James -- Analyst

I appreciate that. Thank you.

Operator

[Operator Instructions] I am showing no further questions at this time. I would now like to turn the conference back to Mr. Masih.

Ashish Masih -- President And Chief Executive Officer

Thank you. As we close the call today, I'd just like to reiterate a couple of key points. Our strategy of focusing on the right markets, executing well to deliver strong returns on our portfolio purchases and maintaining a strong balance sheet are key drivers of our success. This strong track record of success enabled us to begin returning capital to shareholders earlier in the year, and is now helping us accelerate it via the $300 million tender offer. Looking ahead, we intend to maintain a strong financial position that will enable us to increase portfolio purchases when supply starts rising again, as it does in every credit cycle. This will drive Encore's continued success. Thanks for taking the time to join us, and we look forward to providing a fourth quarter and full year 2021 results in February.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Bruce Thomas -- Vice President, Investors Relation

Ashish Masih -- President And Chief Executive Officer

Jonathan Clark -- Executive Vice President And Chief Financial Officer

Craig Buick -- Chief Executive Officer of Cabot Credit Management Group

Ryan Bell -- President, Midland Credit Management, Inc.

Mark Hughes -- Truist -- Analyst

Spencer -- William Blair & Company -- Analyst

David Scharf -- JMP Securities -- Analyst

Mike Grondahl -- Northland Capital Markets -- Analyst

Robert Dodd -- Raymond James -- Analyst

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