ENCORE CAPITAL GROUP INC 10-K

Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations This Annual Report on Form 10-K 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 this Annual Report on Form 10-K under “Part I, 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 We are an international specialty finance company providing debt recovery solutions and other related services for consumers 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 and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-performing loans. Encore Capital Group, Inc. (“Encore”) has three primary business units: MCM, which consists of Midland Credit Management, Inc. and its subsidiaries and domestic affiliates; Cabot, which consists of Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates, and LAAP, which is comprised of our investments and operations in Latin America and Asia-Pacific. MCM (United States) Through MCM, we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico. Cabot (Europe) Through Cabot, we are one of the largest credit management services providers in Europe and a market leader in the United Kingdom and Ireland. Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a range of debt servicing offerings such as early stage collections, business process outsourcing (“BPO”), and contingent collections, including through Wescot Credit Services Limited (“Wescot”), a leading U.K. contingency debt collection and BPO services company. LAAP (Latin America and Asia-Pacific) We have purchased non-performing loans in Colombia, Peru, Mexico and Brazil (which was sold in April 2020). Additionally, we have invested in Encore Asset Reconstruction Company (“EARC”) in India. To date, operating results from LAAP have not been significant to our total consolidated operating results. Our long-term growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business in the United States and United Kingdom and strengthening and developing our business in the rest of Europe. Recent Developments In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and 29 Table of Contents restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns (including court closures in certain jurisdictions). While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations for an indefinite period of time. Through a combination of work-from-home and social distancing, we remain fully operational in all the markets we serve. As a result of the COVID-19 pandemic and the resulting containment measures, we have observed, among other things: a decrease in supply of receivable portfolios in the U.S. driven mainly by a decrease in charge-off rates; a decrease in supply of receivable portfolios in Europe, which we believe is driven by both a decrease in charge-off rates and decreased sales as the banks focus on their customers’ needs; and impacts to the legal collections process, which negatively affected legal collections beginning in late March 2020 and could continue to affect legal collections and related costs depending on the duration and severity of the COVID-19 pandemic and the resulting containment measures. Government Regulation As discussed in more detail under “Part I - Item 1—Business - Government Regulation” contained in this Annual Report on Form 10-K, our operations in the United States 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 prohibitions on unfair, deceptive or abusive debt collection practices. Additionally, our operations in Europe are affected by foreign statutes, rules and regulations regarding debt collection and debt purchase activities. These statutes, rules, regulations, ordinances, 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. Portfolio Purchasing and Recovery MCM (United States) In the United States, the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt portfolios. A small percentage of our capital deployment in the United States comprises of receivable portfolios subject to Chapter 13 and Chapter 7 bankruptcy proceedings. We purchase receivables based on robust, account-level valuation methods and employ 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 strategies 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 financial service providers in the United States. Cabot (Europe) In Europe, our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan accounts. We also purchase: (1) portfolios that are in insolvency status, in particular, individual voluntary arrangements; and (2) non-performing secured mortgage portfolios and real estate assets previously securing mortgage portfolios. When we take possession of the underlying real estate assets or purchase real estate assets, we refer to those as real estate-owned assets, or REO assets. We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows us to value portfolios accurately and quantify portfolio performance in order to maximize future collections. As a result, we have been able to realize significant returns from the assets we have acquired. We maintain strong relationships with many of the largest financial services providers in the United Kingdom and continue to expand in the United Kingdom and the rest of Europe with our acquisitions of portfolios and other credit management services providers. 30 Table of Contents Purchases and Collections Portfolio Pricing, Supply and Demand MCM (United States) Issuers have continued to sell predominantly fresh portfolios. Fresh portfolios are portfolios that are generally sold within six months of the consumer’s account being charged-off by the financial institution. Pricing in the fourth quarter remained favorable. Issuers continued to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year. We are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply. We have observed a decrease in supply as a result of the COVID-19 pandemic, but expect supply to ultimately increase. 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. We believe this favors larger participants, such as us, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements. Cabot (Europe) The U.K. market for charged-off portfolios has generally provided a relatively consistent pipeline of opportunities over the past few years, despite an ongoing historic low level of charge-off rates, as creditors have embedded debt sales as an integral part of their business models and consumer indebtedness has continued to grow since the financial crisis. The Spanish debt market continues to be one of the largest in Europe with a significant amount of debt to be sold and serviced. In particular, we anticipate strong debt purchasing and servicing opportunities in the secured and small and medium enterprise asset classes given the backlog of non-performing debt that has accumulated in these sectors. Additionally, financial institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should further increase debt purchasing opportunities in Spain. Across all of our European markets, we are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply of portfolios to purchase. Due to the COVID-19 pandemic, banks have decreased portfolio sales in order to focus on customers’ needs. As a result, we expect a lower level of supply available for purchase in the near-term. Purchases by Geographic Location The following table summarizes the geographic locations of receivable portfolios we purchased during the periods presented (in thousands): Year Ended December 31, 2020 2019 2018 United States $ 542,973 $ 681,777 $ 637,881 Europe (1) 116,899 306,504 455,444 Other geographies — 11,577 38,573 Total purchases $ 659,872 $ 999,858 $ 1,131,898 __________________ (1) Amounts exclude receivable portfolios purchased and immediately sold to our co-investors under our co-investment framework. In the fourth quarter of 2019, we entered into co-investment framework agreements with certain third-party investors that enabled us to share the investment with co-investors while providing credit management solutions as the lead servicer for the portfolios. In the United States, capital deployment decreased during the year ended December 31, 2020, as compared to 2019. The majority of our deployments in the U.S. are in forward flow agreements, and the timing, contract duration, and volumes for each contract can fluctuate leading to variation when comparing to prior periods. The decrease in purchases in the U.S. resulted from a decrease in supply and our cautious approach to purchasing at the beginning of the COVID-19 pandemic when the potential impacts were relatively unknown. Capital deployment increased for the year ended December 31, 2019, as compared to 2018, primarily due to higher supply of fresh portfolios in 2019. In Europe, capital deployment decreased during the year ended December 31, 2020, as compared to 2019. The decrease was primarily the result of a relatively limited supply of portfolios during the year ended December 31, 2020 and a heightened return expectation as a result of greater uncertainty relating to the future impact of the COVID-19 pandemic. European capital deployment also decreased for the year ended December 31, 2019, as compared to 2018. The decrease was primarily the result 31 Table of Contents of a more selective purchasing process in conjunction with a plan to reduce European debt leverage over time and the strengthening of the U.S. dollar against the British Pound. The average purchase price as a percentage of face value was 11.3%, 8.6%, and 13.3% for the years ended December 31, 2020, 2019, and 2018, respectively. The average purchase price, as a percentage of face value, varies from period to period depending on, among other factors, the type and quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios. For example, the average purchase price as a percentage of face value is higher for fresh portfolios as compared to more seasoned portfolios because we generally expect higher collections from fresh paper. Further, paying portfolios tend to have a higher purchase price relative to face value than non-paying accounts due to the higher expectations for collections, as well as lower anticipated collection costs. As a result, in periods that we purchase a higher percentage of fresh paper or paying portfolios, we expect that our purchase price as a percentage of face value would be higher than would be in periods where a higher ratio of seasoned paper or non-paying portfolios were purchased. During the years ended December 31, 2020, 2019 and 2018, we also invested $1.5 million, $30.9 million, and $8.0 million in REO assets, respectively. Collections from Purchased Receivables by Channel and Geographic Location We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections from third-party collection agencies that we utilize when we believe they can liquidate better or less expensively than we can or to supplement capacity in our internal call centers. The collection agencies channel also includes collections on accounts purchased where we maintain the collection agency servicing until the accounts can be recalled and placed in our collection channels. The following table summarizes the total collections by collection channel and geographic area during the periods presented ( in thousands ): Year Ended December 31, 2020 2019 2018 United States: Call center and digital collections $ 941,682 $ 742,272 $ 658,272 Legal collections 573,510 563,038 548,374 Collection agencies 13,750 10,799 17,317 Subtotal 1,528,942 1,316,109 1,223,963 Europe: Call center and digital collections 245,762 257,317 291,540 Legal collections 165,249 198,903 161,556 Collection agencies 142,935 178,998 182,081 Subtotal 553,946 635,218 635,177 Other geographies (1) : Call center and digital collections — 25,620 86,407 Legal collections — 3,541 7,908 Collection agencies 28,960 46,440 14,165 Subtotal 28,960 75,601 108,480 Total collections from purchased receivables $ 2,111,848 $ 2,026,928 $ 1,967,620 __________________ (1) In December 2018, we completed the sale of all our interest in Refinancia S.A. (“Refinancia”), which remains the servicer for the non-performing loans we own in Colombia and Peru. As such, subsequent to December 2018, collections for these non-performing loans are classified as collection agency collections instead of call center and digital collections. In August 2019, we completed the sale of our wholly-owned subsidiary Baycorp. Gross collections from purchased receivables increased by $84.9 million, or 4.2%, to $2,111.8 million during the year ended December 31, 2020, from $2,026.9 million during the year ended December 31, 2019. The increase of collections in the United States was primarily due to the acquisition of portfolios with higher returns in recent periods, the increase in our collection capacity, and our continued effort in improving liquidation. Our consumer centric collection approach and our capacity buildup are driving a higher proportion of call center and digital collections compared to legal collections in the United 32 Table of Contents States. European collection decreased primarily due to the impacts of the COVID-19 pandemic. We anticipate a material portion of the reduced collections in 2020 will be recovered in future years. Gross collections from purchased receivables increased $59.3 million, or 3.0%, to $2,026.9 million during the year ended December 31, 2019, from $1,967.6 million during the year ended December 31, 2018. The increase of collections in the United States was primarily due to the acquisition of portfolios with higher returns in recent periods, the increase in our collection capacity and our continued effort in improving liquidation. European collection improvement was partially offset by the unfavorable impact of foreign currency translation, primarily from the strengthening of the U.S. dollar against the British Pound during the year ended December 31, 2019 as compared to 2018. Results of Operations Results of operations, in dollars and as a percentage of total revenues, adjusted by net allowances, were as follows for the periods presented (in thousands, except percentages) : Year Ended December 31, 2020 2019 2018 Revenues Revenue from receivable portfolios $ 1,374,717 91.5 % $ 1,269,288 90.8 % $ 1,167,132 85.7 % Changes in expected current and future recoveries 7,246 0.5 % — — % — — % Servicing revenue 115,118 7.7 % 126,527 9.1 % 148,044 10.9 % Other revenues 4,319 0.3 % 9,974 0.7 % 5,381 0.4 % Total revenues 1,501,400 100.0 % 1,405,789 100.6 % 1,320,557 97.0 % (Allowances) allowance reversals on receivable portfolios, net (8,108) (0.6) % 41,473 3.0 % Total revenues, adjusted by net allowances 1,397,681 100.0 % 1,362,030 100.0 % Operating expenses Salaries and employee benefits 378,176 25.2 % 376,365 26.9 % 369,064 27.1 % Cost of legal collections 239,071 15.9 % 202,670 14.5 % 205,204 15.1 % General and administrative expenses 149,113 9.9 % 148,256 10.6 % 158,352 11.6 % Other operating expenses 108,944 7.3 % 108,433 7.8 % 134,934 9.9 % Collection agency commissions 49,754 3.3 % 63,865 4.6 % 47,948 3.5 % Depreciation and amortization 42,780 2.8 % 41,029 2.9 % 41,228 3.0 % Goodwill impairment — — % 10,718 0.8 % — — % Total operating expenses 967,838 64.4 % 951,336 68.1 % 956,730 70.2 % Income from operations 533,562 35.6 % 446,345 31.9 % 405,300 29.8 % Other expense Interest expense (209,356) (14.0) % (217,771) (15.6) % (237,355) (17.4) % Loss on extinguishment of debt (40,951) (2.7) % (8,989) (0.6) % (2,693) (0.2) % Other expense (357) 0.0 % (18,343) (1.3) % (8,764) (0.7) % Total other expense (250,664) (16.7) % (245,103) (17.5) % (248,812) (18.3) % Income before income taxes 282,898 18.9 % 201,242 14.4 % 156,488 11.5 % Provision for income taxes (70,374) (4.7) % (32,333) (2.3) % (46,752) (3.4) % Net income 212,524 14.2 % 168,909 12.1 % 109,736 8.1 % Net (income) loss attributable to noncontrolling interest (676) (0.1) % (1,040) (0.1) % 6,150 0.4 % Net income attributable to Encore Capital Group, Inc. stockholders $ 211,848 14.1 % $ 167,869 12.0 % $ 115,886 8.5 % 33 Table of Contents Comparison of Results of Operations Our Annual Report on Form 10-K for the year ended December 31, 2019 includes discussion and analysis of our financial condition and results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018 in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Revenues Our revenues primarily include revenue recognized from engaging in debt purchasing and recovery activities. Effective January 1, 2020, we adopted the CECL accounting standard. Under CECL, we apply our charge-off policy and fully write-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables we acquire immediately after purchasing the portfolio. We then record a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which is presented as “Investment in receivable portfolios, net” in our consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) established based on the purchase price of the portfolio and the expected future cash flows at the time of purchase. Revenue generated by such activities primarily includes two components: (1) the accretion of the discount on the negative allowance due to the passage of time, which is included in “Revenue from receivable portfolios” and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries, and is presented in our consolidated statements of operations as “Changes in expected current and future recoveries.” Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to our adoption of CECL. We did not establish a negative allowance for these pools as we elected the Transition Resource Group for Credit Losses’ practical expedient to retain the integrity of these legacy pools. Similar to how we treated ZBA collections prior to the adoption of CECL, all subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in our consolidated statements of operations. Servicing revenue consists primarily of fee-based income earned on accounts collected on behalf of others, primarily credit originators. We earn fee-based income by providing debt servicing (such as early stage collections, BPO, contingent collections, trace services and litigation activities) to credit originators for non-performing loans. Other revenues primarily include revenues recognized from the sale of real estate assets that are acquired as a result of our investments in non-performing secured residential mortgage portfolios in Europe and LAAP. Other revenues also include gains recognized on transfers of financial assets. We have not adjusted prior period comparative information and will continue to disclose prior period financial information in accordance with the previous accounting guidance. The following table summarizes revenues during the periods presented ( in thousands, except percentages) : 34 Table of Contents Year Ended December 31, 2020 2019 $ Change % Change Revenue recognized from portfolio basis $ 1,318,306 $ 1,185,681 $ 132,625 11.2 % ZBA revenue 56,411 83,607 (27,196) (32.5) % Revenue from receivable portfolios 1,374,717 1,269,288 105,429 8.3 % Changes in expected current period recoveries 228,075 Changes in expected future period recoveries (220,829) Changes in expected current and future recoveries 7,246 Servicing revenue 115,118 126,527 (11,409) (9.0) % Other revenues 4,319 9,974 (5,655) (56.7) % Total revenues $ 1,501,400 $ 1,405,789 $ 95,611 6.8 % Allowance reversals on receivable portfolios, net (1) (8,108) Total revenues, adjusted by net allowances $ 1,397,681 __________________ (1) Amount includes $8.6 million of allowance reversals for zero-basis portfolios. Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international revenues, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international revenues. Our international revenues were favorably impacted by foreign currency translation, primarily from the weakening of the U.S. dollar, which decreased, based on average exchange rates, against the British Pound by approximately 0.5%, during the year ended December 31, 2020 as compared to the year ended December 31, 2019. The increase in revenue recognized from portfolio basis during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily due to higher expected total future cash flows resulting from a change in the expected economic life of static pool groups based on a lifetime expected recovery model upon the adoption of CECL which led to increased EIR, and increased expected total future cash flows resulting from a change in our accounting policy for court costs. Under our new accounting policy, all future expected cash flows, including the expected total recoveries in our legal channel, are included in the initial curve in the establishment of negative allowance, which in turn, increased the EIR. As discussed above, ZBA revenue represents collections from our legacy ZBA pools. We expect our ZBA revenue to continue to decline as we collect on these legacy pools. We do not expect to have new ZBA pools in the future. Under CECL, changes in expected current period recoveries represent over and under-performance in the reporting period. Collections during the year ended December 31, 2020 significantly outperformed the projected cash flows by approximately $228.1 million. We believe the collection over-performance was largely driven by the reduced near-term expected recoveries as a result of adjustments made to our projected cash flow forecast during the first quarter of 2020 associated with the COVID-19 pandemic. The over-performance was also a result of our sustained improvements in portfolio collections driven by liquidation improvement initiatives. While we now have additional information with respect to the impact on collections of the COVID-19 pandemic, the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and spread of the pandemic and related actions taken by governments. When reassessing the future forecasts of expected lifetime recoveries during the year ended December 31, 2020, management considered historical and current collection performance, uncertainty in economic forecasts in the geographies in which we operate, and believes that the operational disruption as a result of the COVID-19 pandemic has, for the near term, been resolved through a combination of social distancing in the workplace and working remotely. However, the macroeconomic driven consumer distress is still present and will likely continue to impact our collections performance in the near future. As a result, we have updated our forecast, resulting in a reduction of total estimated remaining collections which in turn, when discounted to present value, resulted in a provision for credit loss adjustment of approximately $220.8 million during the year ended December 31, 2020. The circumstances around this pandemic are evolving rapidly and will continue to impact our business and our estimation of expected recoveries in future periods. We will continue to closely monitor the COVID-19 situation and update our assumptions accordingly. 35 Table of Contents The following tables summarize collections from purchased receivables, revenue, end of period receivable balance and other related supplemental data, by year of purchase ( in thousands, except percentages ): Year Ended December 31, 2020 As of December 31, 2020 Collections Revenue from Receivable Portfolios Changes in Expected Current and Future Recoveries Investment in Receivable Portfolios Monthly EIR United States: ZBA $ 51,730 $ 51,865 $ — $ — — % 2011 25,497 22,389 2,173 1,741 88.6 % 2012 27,740 24,934 742 4,039 42.0 % 2013 64,367 59,837 126 10,718 40.5 % 2014 47,628 34,687 (4,364) 33,955 6.7 % 2015 64,133 31,837 1,397 52,960 3.9 % 2016 116,452 57,473 4,277 98,035 3.9 % 2017 193,328 105,124 23,054 138,455 5.2 % 2018 308,302 157,303 (2,980) 266,170 3.8 % 2019 416,315 262,751 (10,325) 469,130 3.8 % 2020 213,450 118,448 51,072 496,275 3.7 % Subtotal 1,528,942 926,648 65,172 1,571,478 4.4 % Europe: ZBA 184 183 — — — % 2013 93,203 86,148 (8,540) 230,333 3.2 % 2014 84,255 69,170 (2,488) 197,075 3.0 % 2015 55,102 42,970 1,150 151,976 2.4 % 2016 51,584 42,806 (6,275) 131,685 2.9 % 2017 87,549 59,801 (12,788) 261,915 1.9 % 2018 78,846 59,211 (36,973) 307,267 1.6 % 2019 80,502 54,377 (4,804) 245,191 1.8 % 2020 22,721 15,908 11,141 125,959 2.3 % Subtotal 553,946 430,574 (59,577) 1,651,401 2.3 % Other geographies: ZBA 4,362 4,363 — — — % 2014 (1) 3,837 1,703 359 47,909 102.5 % 2015 (1) 4,688 2,649 733 3,477 96.7 % 2016 2,633 1,827 (52) 1,523 7.2 % 2017 (1) 7,303 3,850 212 10,794 6.2 % 2018 5,892 2,963 399 5,122 3.7 % 2019 245 140 — 214 4.6 % 2020 — — — — — % Subtotal 28,960 17,495 1,651 69,039 7.9 % Total $ 2,111,848 $ 1,374,717 $ 7,246 $ 3,291,918 3.3 % _______________________ (1) Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue. 36 Table of Contents Year Ended December 31, 2019 As of December 31, 2019 Collections Revenue from Receivable Portfolios Net Reversal (Portfolio Allowance) Unamortized Balances Monthly EIR United States: ZBA $ 83,217 $ 74,614 $ 8,626 $ — — % 2011 21,684 21,158 304 2,546 85.5 % 2012 32,258 27,850 273 5,916 35.5 % 2013 84,133 73,248 (150) 14,697 33.4 % 2014 69,059 41,886 3,905 50,097 6.0 % 2015 85,042 37,207 6,099 82,187 3.1 % 2016 159,279 73,054 109 149,159 3.2 % 2017 255,048 132,946 191 198,714 4.5 % 2018 351,696 199,561 (4,955) 409,717 3.3 % 2019 174,693 121,614 — 626,911 3.3 % Subtotal 1,316,109 803,138 14,402 1,539,944 4.1 % Europe: ZBA 324 326 — — — % 2013 113,224 88,244 4,991 238,033 3.1 % 2014 105,337 73,230 (372) 206,895 2.9 % 2015 72,042 44,009 462 160,113 2.3 % 2016 63,113 43,309 (529) 140,663 2.7 % 2017 118,794 65,501 (7,190) 290,071 1.8 % 2018 118,266 70,553 (18,332) 347,399 1.5 % 2019 44,118 29,262 (470) 264,903 1.8 % Subtotal 635,218 414,434 (21,440) 1,648,077 2.2 % Other geographies: ZBA 8,647 8,667 — — — % 2014 4,663 6,548 — 60,479 103.0 % 2015 16,530 12,149 382 6,240 22.0 % 2016 12,172 6,402 (399) 4,680 5.3 % 2017 15,383 8,505 (98) 15,894 6.2 % 2018 15,008 8,082 (955) 8,330 3.8 % 2019 3,198 1,363 — 340 4.6 % Subtotal 75,601 51,716 (1,070) 95,963 7.0 % Total $ 2,026,928 $ 1,269,288 $ (8,108) $ 3,283,984 3.1 % The decrease in servicing revenues during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was primarily attributable to the sale of Baycorp in August 2019. Through Baycorp, we earned servicing revenues through August 2019. The decrease was also driven by the COVID-19 pandemic. The decrease during the year ended December 31, 2020 as compared to the year ended December 31, 2019 was partially offset by the favorable impact of foreign currency translation, which was primarily the result of the weakening of the U.S. dollar against the British Pound. 37 Table of Contents Operating Expenses The following table summarizes operating expenses during the periods presented ( in thousands, except percentages ): Year Ended December 31, 2020 2019 $ Change $ Change Salaries and employee benefits $ 378,176 $ 376,365 $ 1,811 0.5 % Cost of legal collections 239,071 202,670 36,401 18.0 % General and administrative expenses 149,113 148,256 857 0.6 % Other operating expenses 108,944 108,433 511 0.5 % Collection agency commissions 49,754 63,865 (14,111) (22.1) % Depreciation and amortization 42,780 41,029 1,751 4.3 % Goodwill impairment — 10,718 (10,718) (100.0) % Total operating expenses $ 967,838 $ 951,336 $ 16,502 1.7 % Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international operating expenses, and the weakening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international operating expenses. Our operating expenses were unfavorably impacted by foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound by approximately 0.5% for the year ended December 31, 2020 as compared to the year ended December 31, 2019. Operating expenses are explained in more detail as follows: Salaries and Employee Benefits The increase in salaries and employee benefits during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons: • Increase in stock-based compensation for the year ended December 31, 2020 due to adjustments to estimated vesting of certain performance-based awards; • Increased employee headcount, see “Supplemental Performance Data - Headcount by Function by Geographic Location” for details; • The unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound during the year ended December 31, 2020 compared to the year ended December 31, 2019; • Partially offset by reduced salaries and employee benefits due to the sale of Baycorp in August 2019. 38 Table of Contents Cost of Legal Collections Cost of legal collections primarily includes contingent fees paid to our external network of attorneys and the cost of litigation. We pursue legal collections using a network of attorneys that specialize in collection matters and through our internal legal channel. Under the agreements with our contracted attorneys, we advance certain out-of-pocket court costs. Effective January 1, 2020, we no longer capitalize upfront court costs and recognize a portion of court costs as expense based on a loss-rate methodology, but rather, we expense all court costs as incurred. Cost of legal collections does not include internal legal channel employee costs, which are included in salaries and employee benefits in our consolidated statements of operations. The following table summarizes our cost of legal collections during the periods presented ( in thousands, except percentages ): Year Ended December 31, 2020 2019 $ Change % Change Court costs $ 148,596 $ 94,165 $ 54,431 57.8 % Legal collection fees 90,475 108,505 (18,030) (16.6) % Total cost of legal collections $ 239,071 $ 202,670 $ 36,401 18.0 % The increase in cost of legal collections during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons: • No longer capitalizing upfront court costs but rather expensing all court costs as incurred; • Partially offset by lower court cost spending due to court closures in certain jurisdictions as a result of the COVID-19 pandemic. General and Administrative Expenses The increase in general and administrative expenses during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons: • A charge of $15.0 million relating to our settlement with the CFPB; • Certain third-party costs of approximately $6.9 million incurred relating to various financing transactions completed in September 2020; • Partially offset by reduced travel and facilities expenses, and consulting fees and lower general and administrative expenses due to the sale of Baycorp in August 2019. Other Operating Expenses The increase in other operating expenses during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons: • Increased postage and printing expenses primarily at our domestic operations; • Partially offset by lower collection expenses primarily due to the sale of Baycorp in August 2019. Collection Agency Commissions Collection agency commissions are commissions paid to third-party collection agencies. Collections through the collections agencies channel are predominately in Europe and Latin America and vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally. Commission rates vary depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time, and commission rates for purchased bankruptcy portfolios are lower than the commission rates for charged-off credit card accounts. The decrease in collections agency commissions during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the decrease in agency collections in Europe and other geographies. Depreciation and Amortization The increase in depreciation and amortization expense during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons: 39 Table of Contents • Increased depreciation expense primarily incurred at our U.S. facilities; • Partially offset by the decrease due to the sale of Baycorp in August 2019. Goodwill Impairment In August 2019, we completed the sale of Baycorp. The transaction resulted in a goodwill impairment charge of $10.7 million and an additional loss on sale of $12.5 million during the year ended December 31, 2019. Interest Expense The following table summarizes our interest expense during the periods presented ( in thousands, except percentages ): Year Ended December 31, 2020 2019 $ Change % Change Stated interest on debt obligations $ 181,536 $ 193,003 $ (11,467) (5.9) % Amortization of loan fees and other loan costs 16,343 11,455 4,888 42.7 % Amortization of debt discount 11,477 13,313 (1,836) (13.8) % Total interest expense $ 209,356 $ 217,771 $ (8,415) (3.9) % In September 2020, we entered into various transactions, agreements and amendments related to our borrowings and completed the implementation of our new global funding structure. In November and December 2020, we completed two offerings of senior secured notes, partially redeemed our Cabot senior secured notes due in 2023 and fully redeemed our Cabot floating rate notes due 2024. These refinancing transactions successfully reduced the interest rates on our outstanding borrowings. The decrease in interest expense during the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the following reasons: • Lower average debt balances; • A decrease in LIBOR which resulted in decreased interest expense for the revolving credit facilities that reference LIBOR; • Decreased interest rates as a result of various refinancing transactions; • Partially offset by increased amortization of loan fees and other loan costs as a result of higher capitalized debt issuance costs. Loss on Extinguishment of Debt We presented certain refinancing charges such as make-whole provisions, call premiums, and write-offs of unamortized debt issuance costs and debt discount as interest expense in prior periods. During the three months ended December 31, 2020, we reclassed such costs as loss on extinguishment of debt as a single line item in our consolidated statements of operations. Loss on extinguishment of debt was $41.0 million and $9.0 million during the years ended December 31, 2020 and 2019, respectively. Refer to “Note 7: Borrowings” in the notes to our consolidated financial statements for details of our financing activities. Other Expense Other expense or income consists primarily of foreign currency exchange gains or losses, interest income and gains or losses recognized on certain transactions outside of our normal course of business. Other expense was $0.4 million during the year ended December 31, 2020, which included a loss of $4.8 million as a result of the divestiture of our investment in Brazil. This loss was partially offset by other income from fair value changes for currency exchange forward contracts that were not designated as hedge instruments for accounting purposes. Other expense was $18.3 million during the year ended December 31, 2019 and was primarily the result of a loss recognized on the sale of Baycorp of approximately $12.5 million. Provision for Income Taxes During the years ended December 31, 2020 and 2019, we recorded income tax provisions for income from continuing operations of $70.4 million and $32.3 million, respectively. 40 Table of Contents The effective tax rates for the respective periods are shown below: Year Ended December 31, 2020 2019 Federal provision 21.0 % 21.0 % State provision 3.2 % 0.2 % Foreign rate differential (1) (0.5) % (2.2) % Change in valuation allowance 0.9 % (0.5) % IRS settlement (2) — % (2.4) % Tax effect of CFPB settlement fees (3) 1.1 % — % Other (0.8) % — % Effective rate 24.9 % 16.1 % ________________________ (1) Relates primarily to the lower tax rates on the income or loss attributable to international operations. (2) In 2019, includes tax benefit resulting from tax accounting method change. (3) Non-deductible expense for tax purposes. Refer to “Note 12: Commitments and Contingencies” in the notes to our consolidated financial statements for details of the CFPB settlement. The effective tax rate for the year ended December 31, 2020 increased to 24.9% as compared to 16.1% for the year ended December 31, 2019. The lower tax rate in 2019 was primarily related to benefits resulting from tax accounting method change and exam resolutions with certain state taxing authorities. 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 tax rates and higher than anticipated in countries that have higher statutory tax rates. 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 Earnings Per Share. Management uses non-GAAP adjusted net income and 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 net income attributable to Encore excludes non-cash interest and issuance cost amortization relating to our convertible and exchangeable notes, acquisition, integration and restructuring related expenses, settlement fees and related administrative expenses, amortization of certain acquired intangible assets and other charges or gains that are not indicative of ongoing operations. The following table provides a reconciliation between net income and diluted earnings per share attributable to Encore calculated in accordance with GAAP, to adjusted net income and adjusted earnings per share attributable to Encore, respectively ( in thousands, except per share data ): 41 Table of Contents Year Ended December 31, 2020 2019 2018 $ Per Diluted Share $ Per Diluted Share $ Per Diluted Share GAAP net income attributable to Encore, as reported $ 211,848 $ 6.68 $ 167,869 $ 5.33 $ 115,886 $ 4.06 Adjustments: CFPB settlement fees (1) 15,009 0.47 — — — — Convertible and exchangeable notes non-cash interest and issuance cost amortization 14,444 0.46 15,501 0.50 13,896 0.50 Acquisition, integration and restructuring related expenses (2) 4,962 0.16 7,049 0.22 11,506 0.40 Amortization of certain acquired intangible assets (3) 7,010 0.22 7,017 0.22 8,337 0.29 Loss on sale of Baycorp (4) — — 12,489 0.40 — — Goodwill impairment (4) — — 10,718 0.34 — — Net gain on fair value adjustments to contingent considerations (5) — — (2,300) (0.07) (5,664) (0.20) Change in tax accounting method (6) — — (7,825) (0.25) — — Expenses related to withdrawn Cabot IPO (7) — — — — 2,984 0.10 Loss on derivatives in connection with the Cabot Transaction (8) — — — — 9,315 0.33 Adjustments attributable to noncontrolling interest (9) — — — — (5,022) (0.18) Income tax effect of the adjustments (10) (7,478) (0.24) (23,230) (0.74) (9,079) (0.32) Adjusted net income attributable to Encore $ 245,795 $ 7.75 $ 187,288 $ 5.95 $ 142,159 $ 4.98 ________________________ (1) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (2) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (3) We have acquired intangible assets, such as trade names and customer relationships, as a result of our acquisition of debt solution service providers. These intangible assets are valued at the time of the acquisition and amortized over their estimated lives. We believe that amortization of acquisition-related intangible assets, especially the amortization of an acquired company’s trade names and customer relationships, is the result of pre-acquisition activities. In addition, the amortization of these acquired intangibles is a non-cash static expense that is not affected by operations during any reporting period. As a result, the amortization of certain acquired intangible assets is excluded from our adjusted income attributable to Encore and adjusted income per share. (4) The sale of Baycorp resulted in a goodwill impairment charge of $10.7 million and a loss on sale of $12.5 million during the year ended December 31, 2019. We believe the goodwill impairment charge and the loss on sale are not indicative of ongoing operations, therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (5) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to the Contingent Consideration section of “Note 2: Fair Value Measurements” in the notes to our consolidated financial statements for further details. (6) Amount represents the benefit from the tax accounting method change related to revenue reporting. We adjust for certain discrete tax items that are not indicative of our ongoing operations. (7) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (8) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the purchase of all of the outstanding equity of CCM not owned by Encore (the “Cabot Transaction”). We adjust for this amount because we believe the loss is not indicative of ongoing operations; therefore, adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (9) Certain of the above pre-tax adjustments include expenses recognized by our partially-owned subsidiaries. This adjustment represents the portion of the non-GAAP adjustments that are attributable to noncontrolling interest. (10) Amount represents the total income tax effect of the adjustments, which is generally calculated based on the applicable marginal tax rate of the jurisdiction in which the portion of the adjustment occurred. Additionally, we adjust for certain discrete tax items that are not indicative of our ongoing operations. We recognized approximately $17.5 million, or $0.55 per diluted share, in tax benefit as a result of the sale of Baycorp, which is included in this income tax adjustment during the year ended December 31, 2019. 42 Table of Contents Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before discontinued operations, interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related expenses, settlement fees and related administrative expenses and other charges or gains that are not indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented is as follows ( in thousands ): Year Ended December 31, 2020 2019 2018 GAAP net income, as reported $ 212,524 $ 168,909 $ 109,736 Adjustments: Interest expense 209,356 217,771 237,355 Loss on extinguishment of debt 40,951 8,989 2,693 Interest income (2,397) (3,693) (3,345) Provision for income taxes 70,374 32,333 46,752 Depreciation and amortization 42,780 41,029 41,228 CFPB settlement fees (1) 15,009 — — Stock-based compensation expense 16,560 12,557 12,980 Acquisition, integration and restructuring related expenses (2) 4,962 7,049 7,523 Loss on sale of Baycorp (3) — 12,489 — Goodwill impairment (3) — 10,718 — Net gain on fair value adjustments to contingent considerations (4) — (2,300) (5,664) Loss on derivative in connection with the Cabot Transaction (5) — — 9,315 Expenses related to withdrawn Cabot IPO (6) — — 2,984 Adjusted EBITDA $ 610,119 $ 505,851 $ 461,557 Collections applied to principal balance (7) $ 740,350 $ 765,748 $ 759,014 ________________________ (1) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (2) Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (3) The sale of Baycorp resulted in a goodwill impairment charge of $10.7 million and a loss on sale of $12.5 million during the year ended December 31, 2019. We believe the goodwill impairment charge and the loss on sale are not indicative of ongoing operations, therefore adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (4) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to the Contingent Consideration section of “Note 2: Fair Value Measurements” in the notes to our consolidated financial statements for further details. (5) Amount represents the loss recognized on the forward contract we entered into in anticipation of the completion of the Cabot Transaction. We adjust for this amount because we believe the loss is not indicative of ongoing operations; therefore, adjusting for this loss enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (6) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (7) For periods prior to January 1, 2020, amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) allowance charges or allowance reversals on receivable portfolios. For periods subsequent to January 1, 2020 amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) changes in expected recoveries. For consistency with the Company debt covenant reporting, for periods subsequent to June 30, 2020, the collections applied to principal balance also includes proceeds applied to basis from sales of REO assets and related activities; prior period amounts have not been adjusted to reflect this change as such amounts were immaterial. 43 Table of Contents Adjusted Operating Expenses. Management utilizes adjusted operating expenses in order to facilitate a comparison of approximate 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, acquisition, integration and restructuring related operating expenses, settlement fees and related administrative expenses and other charges or gains that are not indicative of ongoing operations. Adjusted operating expenses related to our portfolio purchasing and recovery business for the periods presented are as follows ( in thousands ): Year Ended December 31, 2020 2019 2018 GAAP total operating expenses, as reported $ 967,838 $ 951,336 $ 956,730 Adjustments: Operating expenses related to non-portfolio purchasing and recovery business (1) (182,930) (173,190) (193,715) CFPB settlement fees (2) (15,009) — — Stock-based compensation expense (16,560) (12,557) (12,980) Acquisition, integration and restructuring related operating expenses (3) (154) (7,049) (7,523) Goodwill impairment (4) — (10,718) — Net gain on fair value adjustments to contingent considerations (5) — 2,300 5,664 Expenses related to withdrawn Cabot IPO (6) — — (2,984) Adjusted operating expenses related to portfolio purchasing and recovery business $ 753,185 $ 750,122 $ 745,192 ________________________ (1) Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily engage in fee-based business, as well as corporate overhead not related to our portfolio purchasing and recovery business. (2) Amount represents a charge resulting from the Stipulated Judgment with the CFPB. We have adjusted for this amount because we believe it is not indicative of ongoing operations; therefore, adjusting for it enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (3) Amount represents acquisition, integration and restructuring related operating expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (4) The sale of Baycorp resulted in a goodwill impairment charge of $10.7 million that is included in operating expenses during the year ended December 31, 2019. We believe the goodwill impairment charge is not indicative of ongoing operations, therefore, adjusting for the expense enhances comparability to prior periods, anticipated future periods, and our competitors’ results. (5) Amount represents the net gain recognized as a result of fair value adjustments to contingent considerations that were established for our acquisitions of debt solution service providers in Europe. We have adjusted for this amount because we do not believe this is indicative of ongoing operations. Refer to the Contingent Consideration section of “Note 2: Fair Value Measurements” in the notes to our consolidated financial statements for further details. (6) Amount represents expenses related to the proposed and later withdrawn initial public offering by Cabot. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results. 44 Table of Contents Cost per Dollar Collected We utilize cost per dollar collected (or “cost-to-collect”) in order to facilitate a comparison of approximate costs to cash collections from purchased receivables for our portfolio purchasing and recovery business. Cost-to-collect is calculated by dividing adjusted operating expenses by collections from purchased receivables. The calculation of adjusted operating expenses is illustrated in detail above. The following table summarizes our overall cost per dollar collected by geographic location during the periods presented: Year Ended December 31, 2020 2019 United States 37.4 % 40.3 % Europe 29.9 % 28.2 % Other geographies 55.9 % 54.3 % Overall cost per dollar collected 35.7 % 37.0 % As discussed in the “Change in Accounting Principle” section in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies” of the notes to the consolidated financial statements, effective January 1, 2020, we expense all court costs as incurred and no longer capitalize such costs as Deferred Court Costs based on a loss-rate methodology. This change in accounting principle increased the cost-to-collect metric as compared to prior periods because the court costs expense recognized in prior periods only represented costs we did not expect to recover. The change in accounting principle has no impact on the amount of court cost payments incurred. Despite the increase in expense due to the change in accounting principle discussed above, cost-to-collect decreased 130 basis points to 35.7% for the year ended December 31, 2020 from 37.0% during the prior year. The decrease in overall cost-to-collect was driven by improved cost-to-collect in the United States, which was due to a combination of (1) continued improvement in operational efficiencies in the collection process, (2) a large reduction in legal channel spending due to court closures in certain jurisdictions as a result of the COVID-19 pandemic, the legal channel spending has gradually increased in the third and fourth quarters as compared to the previous quarters but is still lower than historical levels and (3) collection mix shifting towards non-legal collection, which has a lower cost-to-collect. Collections from other geographies continue to decline as we continue to focus on the U.S. and European markets. Cost-to-collect in LAAP is expected to stay at an elevated level and will continue to fluctuate over time. Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on seasonality, product mix, acquisitions, foreign exchange rates, the cost of new operating initiatives, and the changing regulatory and legislative environment. Supplemental Performance Data The tables included in this supplemental performance data section include detail for purchases, collections and ERC by year of purchase. Our collection expectations are based on account characteristics and economic variables. Additional adjustments are made to account for qualitative factors that may affect the payment behavior of our consumers and servicing related adjustments to ensure our collection expectations are aligned with our operations. We continue to refine our process of forecasting collections both domestically and internationally with a focus on operational enhancements. Our collection expectations vary between types of portfolio and geographic location. For example, in the U.K., due to the higher concentration of payment plans, as compared to the U.S. and other locations in Europe, we expect to receive streams of collections over longer periods of time. As a result, past performance of pools in certain geographic locations or of certain types of portfolio are not necessarily a suitable indicator of future results in other locations or for other types of portfolio. The supplemental performance data presented in this section is impacted by foreign currency translation, which represents the effect of translating financial results where the functional currency of our foreign subsidiary is different than our U.S. dollar reporting currency. For example, the strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable reporting impact on our international purchases, collections, and ERC, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international purchases, collections, and ERC. We utilize proprietary forecasting models to continuously evaluate the economic life of each pool. 45 Table of Contents Cumulative Collections from Purchased Receivables to Purchase Price Multiple The following table summarizes our receivable purchases and related gross collections by year of purchase (in thousands, except multiples) : Year of Purchase Purchase Price (1) Cumulative Collections through December 31, 2020 <2011 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total (2) Multiple (3) United States: <2011 $ 1,760,989 $ 3,222,155 $ 637,415 $ 458,336 $ 328,076 $ 236,557 $ 180,622 $ 129,676 $ 99,169 $ 80,397 $ 65,855 $ 51,481 $ 5,489,739 3.1 2011 383,794 — 123,596 301,949 226,521 155,180 112,906 77,257 56,287 41,148 33,445 25,620 1,153,909 3.0 2012 548,808 — — 187,721 350,134 259,252 176,914 113,067 74,507 48,832 37,327 27,797 1,275,551 2.3 2013 551,895 — — — 230,051 397,646 298,068 203,386 147,503 107,399 84,665 64,436 1,533,154 2.8 2014 517,685 — — — — 144,178 307,814 216,357 142,147 94,929 69,059 47,628 1,022,112 2.0 2015 499,257 — — — — — 105,610 231,102 186,391 125,673 85,042 64,133 797,951 1.6 2016 553,335 — — — — — — 110,875 283,035 234,690 159,279 116,452 904,331 1.6 2017 528,384 — — — — — — — 111,902 315,853 255,048 193,328 876,131 1.7 2018 630,775 — — — — — — — — 175,042 351,696 308,302 835,040 1.3 2019 677,357 — — — — — — — — — 174,693 416,315 591,008 0.9 2020 540,264 — — — — — — — — — — 213,450 213,450 0.4 Subtotal 7,192,543 3,222,155 761,011 948,006 1,134,782 1,192,813 1,181,934 1,081,720 1,100,941 1,223,963 1,316,109 1,528,942 14,692,376 2.0 Europe: 2013 619,079 — — — 134,259 249,307 212,129 165,610 146,993 132,663 113,228 93,203 1,247,392 2.0 2014 623,129 — — — — 135,549 198,127 156,665 137,806 129,033 105,337 84,255 946,772 1.5 2015 419,941 — — — — — 65,870 127,084 103,823 88,065 72,277 55,261 512,380 1.2 2016 258,218 — — — — — — 44,641 97,587 83,107 63,198 51,609 340,142 1.3 2017 461,571 — — — — — — — 68,111 152,926 118,794 87,549 427,380 0.9 2018 433,302 — — — — — — — — 49,383 118,266 78,846 246,495 0.6 2019 273,354 — — — — — — — — — 44,118 80,502 124,620 0.5 2020 116,899 — — — — — — — — — — 22,721 22,721 0.2 Subtotal 3,205,493 — — — 134,259 384,856 476,126 494,000 554,320 635,177 635,218 553,946 3,867,902 1.2 Other geographies: 2012 6,721 — — — 3,848 2,561 1,208 542 551 422 390 294 9,816 1.5 2013 29,568 — — — 6,617 17,615 10,334 4,606 3,339 2,468 1,573 1,042 47,594 1.6 2014 86,989 — — — — 9,652 16,062 18,403 9,813 7,991 6,472 4,300 72,693 0.8 2015 83,198 — — — — — 15,061 57,064 43,499 32,622 17,499 4,688 170,433 2.0 2016 64,450 — — — — — — 29,269 39,710 28,992 16,078 5,196 119,245 1.9 2017 49,670 — — — — — — — 15,471 23,075 15,383 7,303 61,232 1.2 2018 26,371 — — — — — — — — 12,910 15,008 5,892 33,810 1.3 2019 2,668 — — — — — — — — — 3,198 245 3,443 1.3 2020 — — — — — — — — — — — — — — Subtotal 349,635 — — — 10,465 29,828 42,665 109,884 112,383 108,480 75,601 28,960 518,266 1.5 Total $ 10,747,671 $ 3,222,155 $ 761,011 $ 948,006 $ 1,279,506 $ 1,607,497 $ 1,700,725 $ 1,685,604 $ 1,767,644 $ 1,967,620 $ 2,026,928 $ 2,111,848 $ 19,078,544 1.8 ________________________ (1) Adjusted for Put-Backs and Recalls. Put-Backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement. (2) Cumulative collections from inception through December 31, 2020, excluding collections on behalf of others. (3) Cumulative Collections Multiple (“Multiple”) through December 31, 2020 refers to collections as a multiple of purchase price. 46 Table of Contents Total Estimated Collections from Purchased Receivables to Purchase Price Multiple The following table summarizes our purchases, resulting historical gross collections, and estimated remaining gross collections for purchased receivables, by year of purchase (in thousands, except multiples) : Purchase Price (1) Historical Collections (2) Estimated Remaining Collections Total Estimated Gross Collections Total Estimated Gross Collections to Purchase Price United States: <2011 $ 1,760,989 $ 5,489,739 $ 115,101 $ 5,604,840 3.2 2011 383,794 1,153,909 54,675 1,208,584 3.1 2012 548,808 1,275,551 61,317 1,336,868 2.4 2013 (3) 551,895 1,533,154 172,934 1,706,088 3.1 2014 (3) 517,685 1,022,112 110,916 1,133,028 2.2 2015 499,257 797,951 120,743 918,694 1.8 2016 553,335 904,331 223,731 1,128,062 2.0 2017 528,384 876,131 366,098 1,242,229 2.4 2018 630,775 835,040 562,107 1,397,147 2.2 2019 677,357 591,008 995,808 1,586,816 2.3 2020 540,264 213,450 1,110,044 1,323,494 2.4 Subtotal 7,192,543 14,692,376 3,893,474 18,585,850 2.6 Europe: 2013 (3) 619,079 1,247,392 914,652 2,162,044 3.5 2014 (3) 623,129 946,772 678,545 1,625,317 2.6 2015 (3) 419,941 512,380 437,102 949,482 2.3 2016 258,218 340,142 337,273 677,415 2.6 2017 461,571 427,380 583,441 1,010,821 2.2 2018 433,302 246,495 637,914 884,409 2.0 2019 273,354 124,620 530,179 654,799 2.4 2020 116,899 22,721 312,508 335,229 2.9 Subtotal 3,205,493 3,867,902 4,431,614 8,299,516 2.6 Other geographies: 2012 6,721 9,816 162 9,978 1.5 2013 29,568 47,594 1,106 48,700 1.6 2014 86,989 72,693 54,635 127,328 1.5 2015 83,198 170,433 17,864 188,297 2.3 2016 64,450 119,245 5,899 125,144 1.9 2017 49,670 61,232 30,289 91,521 1.8 2018 26,371 33,810 9,920 43,730 1.7 2019 2,668 3,443 421 3,864 1.4 2020 — — — — — Subtotal 349,635 518,266 120,296 638,562 1.8 Total $ 10,747,671 $ 19,078,544 $ 8,445,384 $ 27,523,928 2.6 ________________________ (1) Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments. Put-Backs and Recalls represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement. (2) Cumulative collections from inception through December 31, 2020, excluding collections on behalf of others. (3) Includes portfolios acquired in connection with certain business combinations. 47 Table of Contents Estimated Remaining Gross Collections from Purchased Receivables by Year of Purchase The following table summarizes our estimated remaining gross collections for purchased receivables by year of purchase (in thousands) : Estimated Remaining Gross Collections by Year of Purchase (1) 2021 2022 2023 2024 2025 2026 2027 2028 2029 >2029 Total (2) United States: <2011 $ 35,925 $ 26,180 $ 18,179 $ 12,553 $ 8,564 $ 5,800 $ 3,848 $ 2,384 $ 1,258 $ 410 $ 115,101 2011 16,599 11,808 8,183 5,723 4,033 2,847 2,016 1,429 1,017 1,020 54,675 2012 18,501 13,009 9,137 6,414 4,515 3,183 2,250 1,596 1,136 1,576 61,317 2013 (3) 49,612 36,577 25,902 18,368 13,032 9,246 6,562 4,659 3,309 5,667 172,934 2014 (3) 33,329 23,568 16,301 11,291 7,979 5,648 4,001 2,838 2,015 3,946 110,916 2015 37,280 26,255 18,062 12,277 8,197 5,660 3,990 2,819 1,996 4,207 120,743 2016 73,054 46,967 31,826 22,079 15,355 10,517 7,353 5,174 3,648 7,758 223,731 2017 120,287 81,528 51,712 34,557 23,705 16,527 11,581 8,167 5,759 12,275 366,098 2018 191,409 131,151 84,377 53,132 34,927 23,047 15,214 9,950 6,620 12,280 562,107 2019 349,045 213,131 134,793 91,889 62,683 43,723 31,172 22,231 15,498 31,643 995,808 2020 298,297 300,371 175,189 106,095 71,412 48,451 34,062 24,310 17,327 34,530 1,110,044 Subtotal 1,223,338 910,545 573,661 374,378 254,402 174,649 122,049 85,557 59,583 115,312 3,893,474 Europe: 2013 (3) 100,145 97,594 91,655 85,731 78,218 69,395 62,179 56,149 50,925 222,661 914,652 2014 (3) 85,220 77,011 72,046 65,329 58,565 49,705 44,325 38,965 34,983 152,396 678,545 2015 (3) 55,714 50,404 46,506 41,560 37,585 33,159 28,535 24,972 22,833 95,834 437,102 2016 58,524 54,097 40,481 34,949 29,138 24,020 19,938 16,963 14,403 44,760 337,273 2017 87,521 82,023 70,536 60,050 50,134 42,541 36,495 30,357 26,206 97,578 583,441 2018 87,004 84,426 76,090 66,778 58,662 48,514 41,395 35,900 29,928 109,217 637,914 2019 83,648 77,209 65,517 55,199 45,684 37,710 31,496 26,896 22,616 84,204 530,179 2020 43,738 46,970 42,865 34,312 27,479 24,542 19,572 16,263 13,420 43,347 312,508 Subtotal 601,514 569,734 505,696 443,908 385,465 329,586 283,935 246,465 215,314 849,997 4,431,614 Other geographies: 2012 113 49 — — — — — — — — 162 2013 555 357 194 — — — — — — — 1,106 2014 10,548 8,488 7,630 6,531 4,934 2,899 1,649 1,502 1,502 8,952 54,635 2015 3,500 2,991 2,763 1,942 1,284 949 831 719 601 2,284 17,864 2016 3,189 1,615 573 258 169 95 — — — — 5,899 2017 7,820 5,502 4,061 2,302 2,042 1,530 878 773 773 4,608 30,289 2018 3,766 2,350 1,676 963 518 338 222 87 — — 9,920 2019 179 106 72 54 10 — — — — — 421 2020 — — — — — — — — — — — Subtotal 29,670 21,458 16,969 12,050 8,957 5,811 3,580 3,081 2,876 15,844 120,296 Portfolio ERC 1,854,522 1,501,737 1,096,326 830,336 648,824 510,046 409,564 335,103 277,773 981,153 8,445,384 REO ERC (4) 27,115 26,403 17,203 7,791 1,866 64 6 78 74 — 80,600 Total $ 1,881,637 $ 1,528,140 $ 1,113,529 $ 838,127 $ 650,690 $ 510,110 $ 409,570 $ 335,181 $ 277,847 $ 981,153 $ 8,525,984 ________________________ (1) ERC for Zero Basis Portfolios can extend beyond our collection forecasts. As of December 31, 2020, ERC for Zero Basis Portfolios includes approximately $115.1 million for purchased consumer and bankruptcy receivables in the United States. ERC for Zero Basis Portfolios in Europe and other geographies was immaterial. ERC also includes approximately $84.0 million from cost recovery portfolios, primarily in other geographies. (2) Represents the expected remaining gross cash collections on purchased portfolios over a 180-month period. As of December 31, 2020, ERC for purchased receivables for 84-month and 120-month periods were: 48 Table of Contents 84-Month ERC 120-Month ERC United States $ 3,633,022 $ 3,819,461 Europe 3,119,838 3,769,186 Other geographies 98,495 107,248 Portfolio ERC $ 6,851,355 $ 7,695,895 REO ERC $ 80,448 $ 80,600 Total ERC $ 6,931,803 $ 7,776,495 (3) Includes portfolios acquired in connection with certain business combinations. (4) Real estate-owned assets ERC includes approximately $78.7 million and $1.9 million of estimated future cash flows for Europe and Other Geographies, respectively. Estimated Future Collections Applied to Principal As of December 31, 2020, we had $3.3 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows (in thousands): Years Ending December 31, United States Europe Other Geographies Total Amortization 2021 $ 474,872 $ 168,875 $ 18,437 $ 662,184 2022 397,791 188,289 14,561 600,641 2023 237,719 173,000 9,525 420,244 2024 146,742 155,394 6,886 309,022 2025 97,357 136,759 5,392 239,508 2026 65,289 115,726 3,198 184,213 2027 45,463 99,366 1,822 146,651 2028 32,109 86,979 1,577 120,665 2029 22,570 78,265 1,502 102,337 2030 15,961 70,738 1,502 88,201 2031 11,467 67,531 1,502 80,500 2032 8,479 67,055 1,502 77,036 2033 6,725 70,895 1,502 79,122 2034 5,685 77,893 131 83,709 2035 3,249 88,833 — 92,082 2036 — 5,803 — 5,803 Total $ 1,571,478 $ 1,651,401 $ 69,039 $ 3,291,918 49 Table of Contents Headcount by Function by Geographic Location The following table summarizes our headcount by function and by geographic location: Headcount as of December 31, 2020 2019 2018 United States: General & Administrative 1,167 1,106 1,060 Account Manager 389 418 504 Subtotal 1,556 1,524 1,564 Europe: General & Administrative 997 998 1,036 Account Manager 2,483 2,085 2,037 Subtotal 3,480 3,083 3,073 Other Geographies (1) : General & Administrative 1,227 1,173 1,345 Account Manager 1,462 1,475 1,884 Subtotal 2,689 2,648 3,229 Total 7,725 7,255 7,866 ________________________ (1) Headcount for other geographies includes employees in India and Costa Rica that service accounts originated in the United States. Headcount as of December 31, 2018 includes 191 general and administrative and 361 account manager Baycorp employees. Purchases by Quarter The following table summarizes the receivable portfolios we purchased by quarter, and the respective purchase prices ( in thousands ): Quarter # of Accounts Face Value Purchase Price Q1 2018 973 $ 1,799,804 $ 276,762 Q2 2018 1,031 2,870,456 359,580 Q3 2018 706 1,559,241 248,691 Q4 2018 766 2,272,113 246,865 Q1 2019 854 1,732,977 262,335 Q2 2019 778 2,307,711 242,697 Q3 2019 1,255 5,313,092 259,910 Q4 2019 803 2,241,628 234,916 Q1 2020 943 1,703,022 214,113 Q2 2020 754 1,305,875 147,939 Q3 2020 735 1,782,733 170,131 Q4 2020 558 1,036,332 127,689 50 Table of Contents Liquidity and Capital Resources Liquidity The following table summarizes our cash flow activity during the periods presented (in thousands) : Year Ended December 31, 2020 2019 2018 Net cash provided by operating activities $ 312,864 $ 244,733 $ 186,791 Net cash provided by (used in) investing activities 82,826 (202,333) (397,516) Net cash (used in) provided by financing activities (403,200) (19,770) 166,377 Operating Cash Flows Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities. Net cash provided by operating activities was $312.9 million, $244.7 million, and $186.8 million during the years ended December 31, 2020, 2019, and 2018, respectively. Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in expected recoveries, allowance charges, stock-based compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations. Investing Cash Flows Net cash provided by investing activities was $82.8 million during year ended December 31, 2010, net cash used in investing activities was $202.3 million and $397.5 million during the years ended December 31, 2019 and 2018, respectively. Cash provided by or used in investing activities is primarily affected by receivable portfolio purchases offset by collection proceeds applied to the principal of our receivable portfolios. Receivable portfolio purchases were $644.0 million, $1,035.1 million, and $1,131.1 million during the years ended December 31, 2020, 2019, and 2018, respectively. Collection proceeds applied to the principal of our receivable portfolios were $737.1 million, $757.6 million, and $809.7 million during the years ended December 31, 2020, 2019, and 2018, respectively. Financing Cash Flows Net cash used in financing activities was $403.2 million and $19.8 million during the years ended December 2020 and 2019, respectively, net cash provided by financing activities was $166.4 million during the year ended December 31, 2018. Financing cash flows are generally affected by borrowings under our credit facilities and proceeds from various debt offerings, offset by repayments of amounts outstanding under our credit facilities and repayments of various notes. Borrowings under our credit facilities were $1,820.6 million, $603.6 million and $942.2 million during the years ended December 31, 2020, 2019, and 2018, respectively. Repayments of amounts outstanding under our credit facilities were $2,290.8 million, $586.4 million and $571.1 million during the years ended December 31, 2020, 2019, and 2018, respectively. Proceeds from the issuance of senior secured notes were $1,313.4 million and $454.6 million during the years ended December 31, 2020 and 2019, respectively. Repayments of senior secured notes were $1,033.8 million, $470.8 million and $91.6 million during the years ended December 31, 2020, 2019, and 2018, respectively. Capital Resources Historically, we have met our cash requirements by utilizing our cash flows from operations, cash collections from our investment in receivable portfolios, bank borrowings, debt offerings, and equity offerings. Depending on the capital markets, we consider additional financings to fund our operations and acquisitions. From time to time, we may repurchase outstanding debt or equity and/or restructure or refinance debt obligations. Our primary cash requirements have included the purchase of receivable portfolios, entity acquisitions, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes. Currently, all of our portfolio purchases are funded with cash from operations, cash collections from our investment in receivable portfolios, and our bank borrowings. We are in material compliance with all covenants under our financing arrangements. See “Note 7: Borrowings” in the notes to our consolidated financial statements for a further discussion of our debt. 51 Table of Contents In August 2018, we established an at-the-market equity offering program (the “ATM Program”) pursuant to which we may issue and sell shares of Encore’s common stock having an aggregate offering price of $50.0 million. During the year ended December 31, 2020, we did not issue any shares under our ATM Program. We have issued a total of 13,600 shares under our ATM Program, generating proceeds of approximately $0.54 million. We have no obligation to sell any of such shares under our ATM Program. Actual sales will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of our common stock, our determination of the appropriate sources of funding for the Company, and potential uses of funding available to us. We intend to use the net proceeds from the offering of such shares, if any, for general corporate purposes, which could include repayments of our credit facilities from time to time. Our cash and cash equivalents as of December 31, 2020 consisted of $39.4 million held by U.S.-based entities and $149.8 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 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. Included in cash and cash equivalents is cash that was collected on behalf of, and remains payable to, third-party clients. The balance of cash held for clients was $20.3 million and $25.0 million as of December 31, 2020 and 2019, respectively. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from our consumers, and other risks detailed in our Risk Factors. However, 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, cash collections from our investment in receivable portfolios, 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. Future Contractual Cash Obligations The following table summarizes our future contractual cash obligations as of December 31, 2020 ( in thousands ): Payment Due By Period Contractual Obligations Total Less Than 1 Year 1 – 3 Years 3 – 5 Years More Than 5 Years Principal payments on debt $ 3,365,205 $ 208,132 $ 720,392 $ 1,520,452 $ 916,229 Estimated interest payments (1) 649,961 141,033 274,117 174,693 60,118 Finance leases 8,792 3,674 4,877 241 — Operating leases 113,485 19,440 30,183 26,086 37,776 Purchase commitments on receivable portfolios 157,448 150,713 6,735 — — Total contractual cash obligations (2) $ 4,294,891 $ 522,992 $ 1,036,304 $ 1,721,472 $ 1,014,123 ________________________ (1) Estimated interest payments are calculated based on outstanding principal amounts, applicable fixed interest rates or currently effective interest rates as of December 31, 2020 for variable rate debt, timing of scheduled payments and the term of the debt obligations. (2) We had approximately $6.9 million of liabilities and accrued interests related to uncertain tax positions as of December 31, 2020. We are unable to reasonably estimate the timing of the cash settlement with the tax authorities due to uncertainties related to these tax matters and, as a result, these obligations are not included in the table. See “Note 10: Income Taxes” to our consolidated financial statements for additional information on our uncertain tax positions. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K. Critical Accounting Policies and Estimates We prepare our financial statements, in conformity with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies” of the notes to the consolidated financial statements describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. 52 Table of Contents We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. Actual results may differ from these estimates and such differences may be material. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below. We have reviewed our critical accounting policies and estimates with the audit committee of our board of directors. Investment in Receivable Portfolios and Related Revenue . Effective January 1, 2020, our investment in receivable portfolios is accounted for under CECL. Receivable portfolio purchases are aggregated into pools based on similar risk characteristics. Examples of risk characteristics include financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. Our static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. We further group these static pools by geographic location. Once a pool is established, the portfolios will remain in the designated pool unless the underlying risk characteristics change. The purchase EIR of a pool will not change over the life of the pool even if expected future cash flows change. Revenue is recognized for each static pool over the economic life of the pool. We make significant assumptions in determining the economic life of a pool, including the reasonable and supportable economic forecast period based on asset type and geography, which considers the availability of forward-looking scenarios and their respective time horizons. In general, we forecast recoveries over one or two years prior to reverting to historical averages at an estimate-level over the remaining life using various methodologies depending on the asset type and geography. The speed at which forecasts revert varies based on the spread between the forecast period and historical data. In addition, estimated recoveries include a qualitative component, which generally reflects management’s assessment of macroeconomic environment and business initiatives. We continue to evaluate the reasonable economic life of a pool and reversion method annually. Revenue primarily includes two components: (1) accretion of the discount on the negative allowance due to the passage of time, and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries. We measure expected future recoveries based on historical experience, current conditions, and reasonable and supportable forecasts. Factors that may change the expected future recoveries may include both internal as well as external factors. Internal factors include operational performance, such as capacity and the productivity of our collection staff. External factors that may have an impact on our collections include macroeconomic conditions, new laws or regulations, and new interpretations of existing laws or regulations. See “Note 4: Investment in Receivable Portfolios, Net” for further discussion of investment in receivable portfolios. Valuation of Goodwill and Other Intangible Assets. Business combinations typically result in the recording of goodwill and other intangible assets. The excess of the purchase price over the fair value assigned to the tangible and identifiable intangible assets, liabilities assumed, and noncontrolling interest in the acquiree is recorded as goodwill. Goodwill is tested annually for impairment and in interim periods if events or changes in circumstances indicate that the assets may be impaired. Our judgments regarding the existence of impairment indicators and future cash flows related to goodwill may be based on economic environment, business climate, market capitalization, operating performance, competition, and other factors. Significant judgments are required to estimate the fair value of reporting units including estimating future cash flows, determining appropriate discount rates, growth rates, comparable guideline companies and other assumptions. Future business conditions and/or activities could differ materially from the projections made by management, which in turn, could result in the need for impairment charges. We will perform additional impairment testing if events occur or circumstances change indicating that the carrying amounts may be impaired. The determination of the recorded value of intangible assets acquired in a business combination requires management to make estimates and assumptions that affect our consolidated financial statements. Valuation techniques consistent with the market approach, income approach and/or cost approach are used to measure fair value. An estimate of fair value can be affected by many assumptions that require significant judgment. Income Taxes. We use the asset and liability method of accounting for income taxes. When we prepare the consolidated financial statements, we estimate our income taxes based on the various jurisdictions where we conduct business. This requires us to estimate our current tax exposure and to assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. Deferred income taxes are recognized based on the differences between the financial statement and income tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We then assess the likelihood that our deferred tax assets will be realized. In completing this evaluation, we consider all available positive and negative evidence. Such evidence includes historical earnings, taxable income in prior carryback year(s) if permitted under the tax law, projections of future pretax book income, the time period over which our temporary differences will reverse, and the implementation of feasible and prudent tax planning strategies. Deferred tax assets are reduced 53 Table of Contents by a valuation allowance if, based on the weight of this evidence, it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized in future periods. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding tax expense in our statement of operations. When we reduce our valuation allowance in an accounting period, we record a corresponding tax benefit in our statement of operations. We include interest and penalties related to income taxes within our provision for income taxes. See “Note 10: Income Taxes” to our consolidated financial statements for further discussion of income taxes. Recent Accounting Pronouncements Information regarding recent accounting pronouncements and the impact of those pronouncements, if any, on our consolidated financial statements is provided in this Annual Report in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies” to our consolidated financial statements. 54 Table of Contents