ENCORE CAPITAL GROUP INC 10-K

Item 9A—Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e) and 15d-15(e). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective at the reasonable assurance level in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period. Management’s Report on Internal Control over Financial Reporting The Company’s management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f) and 15d-15(f)) for Encore Capital Group, Inc. and its subsidiaries (the “Company”). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changing conditions, effectiveness of internal control over financial reporting may vary over time. The Company’s processes contain self-monitoring mechanisms and actions are taken to correct deficiencies as they are identified. Management has assessed the effectiveness of Encore’s internal control over financial reporting as of December 31, 2020, based on the criteria for effective internal control described in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2020. BDO USA, LLP, the independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report on Form 10-K, was engaged to attest to and report on the effectiveness of Encore’s internal control over financial reporting as of December 31, 2020, as stated in its report below. 56 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Encore Capital Group, Inc. San Diego, California Opinion on Internal Control over Financial Reporting We have audited Encore Capital Group, Inc.’s (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statements of financial condition of the Company as of December 31, 2020 and 2019 and the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and our report dated February 24, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, LLP San Diego, California February 24, 2021 57 Table of Contents Changes in Internal Control over Financial Reporting We implemented certain internal controls related to the adoption of Topic 326, “Financial Instruments – Credit Losses” to ensure we adequately interpreted the guidance and properly assessed the impact of the standard on our financial statements to facilitate its adoption effective January 1, 2020. There were no other changes in our system of internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the year ended December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. In the course of our ongoing preparations for management’s report on internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, we have identified areas in need of improvement and have taken remedial actions to strengthen the affected controls as appropriate. We make these and other changes, which do not have a material effect on our overall internal control over financial reporting, to enhance the effectiveness of our internal control over financial reporting. Item 9B—Other Information None. 58 Table of Contents PART III Item 10—Directors, Executive Officers and Corporate Governance The information required by this item is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020. Item 11—Executive Compensation The information required by this item is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020. Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020. Item 13—Certain Relationships and Related Transactions, and Director Independence The information required by this item is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020. Item 14—Principal Accountant Fees and Services The information required by this item is incorporated by reference to our Proxy Statement for our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2020. 59 Table of Contents PART IV Item 15—Exhibits and Financial Statement Schedules (a) Financial Statements. The following consolidated financial statements of Encore Capital Group, Inc. are filed as part of this annual report on Form 10-K: Page Report of Independent Registered Public Accounting Firm F- 1 Consolidated Statements of Financial Condition at December 31, 2020 and 2019 F- 3 Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 F- 4 Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 F- 5 Consolidated Statements of Equity for the years ended December 31, 2020, 2019 and 2018 F- 6 Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 F- 7 Notes to Consolidated Financial Statements F- 8 (b) Exhibits. Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 3.1.1 Restated Certificate of Incorporation S-1/A 333-77483 3.1 6/14/1999 3.1.2 Certificate of Amendment to the Certificate of Incorporation 8-K 000-26489 3.1 4/4/2002 3.1.3 Second Certificate of Amendment to the Certificate of Incorporation 10-Q 000-26489 3.1.3 8/7/2019 3.2 Bylaws, as amended through February 8, 2011 10-K 000-26489 3.3 2/14/2011 4.1 Form of Common Stock Certificate S-3 333-163876 4.7 12/21/2009 4.2 Fourth Amended and Restated Senior Secured Note Purchase Agreement (including the forms of the Notes), dated as of September 1, 2020, by and among Encore Capital Group, Inc. and the purchasers named therein 8-K 000-26489 10.2 9/1/2020 4.6 Indenture (including form of note), dated as of March 11, 2014, by and between Encore Capital Group, Inc., Midland Credit Management, Inc., as guarantor, and Union Bank, N.A., as trustee 8-K 000-26489 4.1 3/11/2014 4.6.1 Supplemental Indenture, dated November 6, 2018, to the Indenture, dated as of March 11, 2014, by and between Encore Capital Group, Inc., Midland Credit Management, Inc., as guarantor, and Union Bank, N.A., as trustee 10-Q 000-26489 4.6 11/7/2018 4.6.2 Second Supplemental Indenture, dated October 29, 2020, to the Indenture, dated as of March 11, 2014, by and among Encore Capital Group, Inc., Midland Credit Management, Inc., as guarantor, and MUFG Union Bank, N.A., as trustee 10-Q 000-26489 4.4 11/2/2020 60 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 4.9 Indenture (including form of note), dated October 6, 2016, between Cabot Financial (Luxembourg) S.A., Cabot Credit Management Limited, Cabot Financial Limited, the subsidiary guarantors party thereto, J.P. Morgan Europe Limited, as security agent, Citibank, N.A., London Branch as trustee, principal paying agent and transfer agent and Citigroup Global Markets Deutschland AG, as registrar 8-K 000-26489 4.1 10/7/2016 4.9.1 First Supplemental Indenture dated September 7, 2020 to Indenture dated October 6, 2016 8-K 000-26489 4.3 9/24/2020 4.9.2 Second Supplemental Indenture dated September 24, 2020 to Indenture dated October 6, 2016 8-K 000-26489 4.5 9/24/2020 4.10 Indenture (including form of note), dated March 3, 2017, by and among Encore Capital Group, Inc., Midland Credit Management, Inc., as guarantor, and MUFG Union Bank, N.A., as trustee 8-K 000-26489 4.1 3/3/2017 4.10.1 First Supplemental Indenture, dated October 29, 2020, to the Indenture, dated as of March 3, 2017, by and among Encore Capital Group, Inc., Midland Credit Management, Inc., as guarantor, and MUFG Union Bank, N.A., as trustee 10-Q 000-26489 4.5 11/2/2020 4.11 Indenture, dated July 20, 2018, between Encore Capital Europe Finance Limited and MUFG Union Bank, N.A. 8-K 000-26489 4.1 7/20/2018 4.11.1 Supplemental Indenture (including the form of 4.50% Exchangeable Senior Notes due 2023), dated July 20, 2018, among Encore Capital Europe Finance Limited, Encore Capital Group, Inc. and MUFG Union Bank, N.A. 8-K 000-26489 4.2 7/20/2018 4.11.2 Second Supplemental Indenture, dated October 29, 2020, to the Indenture, dated as of July 20, 2018, by and among Encore Capital Europe Finance Limited, Encore Capital Group, Inc., as guarantor, and MUFG Union Bank, N.A., as trustee 10-Q 000-26489 4.6 11/2/2020 4.13 Indenture (including form of note), dated September 9, 2019, by and among Encore Capital Group, Inc., Midland Credit Management, Inc., as guarantor, and MUFG Union Bank, N.A., as trustee. 8-K 000-26489 4.1 9/10/2019 4.13.1 First Supplemental Indenture, dated October 29, 2020, to the Indenture, dated as of September 9, 2019, by and among Encore Capital Group, Inc., Midland Credit Management, Inc., as guarantor, and MUFG Union Bank, N.A., as trustee 10-Q 000-26489 4.7 11/2/2020 4.14 Description of Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 10-K 000-26489 4.14 2/26/2020 4.15 Indenture dated September 24, 2020 between Encore Capital Group, Inc., the subsidiary guarantors party thereto, Citibank, N.A., London Branch as trustee and Truist Bank as security agent 8-K 000-26489 4.1 9/24/2020 61 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 4.16 Indenture dated November 23, 2020 between Encore Capital Group, Inc., the subsidiary guarantors party thereto, Citibank, N.A., London Branch as trustee and Truist Bank as security agent 8-K 000-26489 4.1 11/23/2020 4.17 Indenture dated December 21, 2020 between Encore Capital Group, Inc., the subsidiary guarantors party thereto, Citibank, N.A., London Branch as trustee and Truist Bank as security agent 8-K 000-26489 4.1 12/21/2020 10.1+ Form of Indemnification Agreement 8-K 000-26489 10.1 5/4/2006 10.3+ Encore Capital Group, Inc. 2005 Stock Incentive Plan, as amended and restated 8-K 000-26489 10.1 6/15/2009 10.3.2+ Form of Non-Incentive Stock Option Agreement under the Encore Capital Group, Inc. 2005 Stock Incentive Plan 10-Q 000-26489 10.3 11/1/2012 10.4+ Encore Capital Group, Inc. 2013 Incentive Compensation Plan Def 14A 000-26489 Appendix A 4/26/2013 10.4.1+ First Amendment to Encore Capital Group, Inc. 2013 Incentive Compensation Plan, dated February 20, 2014 10-K 000-26489 10.84 2/25/2014 10.4.2+ Form of Non-Incentive Stock Option Agreement under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan 10-Q 000-26489 10.5 8/8/2013 10.4.8+ Form of Restricted Stock Unit Grant Notice and Agreement (Non-Employee Director) under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan 10-Q 000-26489 10.11 8/8/2013 10.4.14+ Form of Performance Stock Option Agreement under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan 10-K 000-26489 10.108 2/23/2017 10.5+ Encore Capital Group, Inc. Executive Separation Plan 10-Q 000-26489 10.2 11/6/2014 10.6+ Employment offer letter dated October 9, 2014 by and between Encore Capital Group, Inc. and Jonathan Clark 8-K 000-26489 10.1 2/26/2015 10.7+ Non-Employee Director Compensation Program Guidelines, effective June 17, 2020 10-Q 000-26489 10.1 8/5/2020 10.8+ Non-Employee Director Deferred Stock Compensation Plan 10-Q 000-26489 10.2 8/4/2016 10.8.1+ First Amendment to Non-Employee Director Deferred Stock Compensation Plan, dated August 11, 2016 10-Q 000-26489 10.1 11/9/2016 10.9+ Letter, dated June 15, 2017, from Encore Capital Group, Inc. to Ashish Masih 8-K 000-26489 10.1 6/20/2017 10.11+ The Encore Capital Group, Inc. 2017 Incentive Award Plan 8-K 000-26489 10.3 6/20/2017 10.11.1+ Form of Restricted Stock Unit Grant Notice and Award Agreement under the Encore Capital Group, Inc. 2017 Incentive Award Plan 8-K 000-26489 10.4 6/20/2017 10.11.2+ Form of Restricted Stock Unit Grant Notice and Award Agreement under the Encore Capital Group, Inc. 2017 Incentive Award Plan (Executive Separation Plan Participant) 8-K 000-26489 10.5 6/20/2017 62 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 10.11.3+ Form of Restricted Stock Award Grant Notice and Award Agreement under the Encore Capital Group, Inc. 2017 Incentive Award Plan 8-K 000-26489 10.6 6/20/2017 10.11.4+ Form of Stock Option Grant Notice and Award Agreement under the Encore Capital Group, Inc. 2017 Incentive Award Plan 8-K 000-26489 10.7 6/20/2017 10.11.5+ Form of Performance Share Unit Award Grant Notice and Award Agreement (EPS) under the Encore Capital Group, Inc. 2017 Incentive Award Plan (Executive Separation Plan Participant) 8-K 000-26489 10.1 3/15/2018 10.11.6+ Form of Performance Share Unit Award Grant Notice and Award Agreement (EPS) under the Encore Capital Group, Inc. 2017 Incentive Award Plan 8-K 000-26489 10.2 3/15/2018 10.11.7+ Form of Performance Share Unit Award Grant Notice and Award Agreement (TSR) under the Encore Capital Group, Inc. 2017 Incentive Award Plan (Executive Separation Plan Participant) 8-K 000-26489 10.3 3/15/2018 10.11.8+ Form of Performance Share Unit Award Grant Notice and Award Agreement (TSR) under the Encore Capital Group, Inc. 2017 Incentive Award Plan 8-K 000-26489 10.4 3/15/2018 10.11.9+ Form of Performance Share Unit Award Grant Notice and Award Agreement (ROAE) under the Encore Capital Group, Inc. 2017 Incentive Award Plan 10-K 000-26489 10.11.9 2/26/2020 10.19 Amended and Restated Senior Facilities Agreement, dated September 1, 2020, by and among Encore Capital Group, Inc., the several guarantors, banks and other financial institutions and lenders from time to time party thereto and Truist Bank as Agent and Security Agent 8-K 000-26489 10.1 9/1/2020 10.21.1 Letter Agreement, dated March 5, 2014, between Citibank, N.A. and Encore Capital Group, Inc., regarding the Base Capped Call Transaction 8-K 000-26489 10.1 3/11/2014 10.21.2 Letter Agreement, dated March 5, 2014, between Credit Suisse International and Encore Capital Group, Inc., regarding the Base Capped Call Transaction 8-K 000-26489 10.2 3/11/2014 10.21.3 Letter Agreement, dated March 5, 2014, between Morgan Stanley & Co. LLC and Encore Capital Group, Inc., regarding the Base Capped Call Transaction 8-K 000-26489 10.3 3/11/2014 10.21.4 Letter Agreement, dated March 5, 2014, between Société Générale and Encore Capital Group, Inc., regarding the Base Capped Call Transaction 8-K 000-26489 10.4 3/11/2014 10.21.5 Letter Agreement, dated March 6, 2014, between Citibank, N.A. and Encore Capital Group, Inc., regarding the Additional Capped Call Transaction 8-K 000-26489 10.5 3/11/2014 63 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 10.21.6 Letter Agreement, dated March 6, 2014, between Credit Suisse International and Encore Capital Group, Inc., regarding the Additional Capped Call Transaction 8-K 000-26489 10.6 3/11/2014 10.21.7 Letter Agreement, dated March 6, 2014, between Morgan Stanley & Co. LLC and Encore Capital Group, Inc., regarding the Additional Capped Call Transaction 8-K 000-26489 10.7 3/11/2014 10.21.8 Letter Agreement, dated March 6, 2014, between Société Générale and Encore Capital Group, Inc., regarding the Additional Capped Call Transaction 8-K 000-26489 10.8 3/11/2014 10.22 Senior Facility Agreement, dated February 18, 2020, between Cabot Securitisation UK Limited, Cabot Financial (UK) Limited, HSBC Corporate Trustee Company (UK) Limited as Security Trustee, HSBC Bank PLC as Senior Agent and Goldman Sachs International Bank as Senior Lender 8-K 000-26489 10.1 2/24/2020 10.23.1 Letter Agreement, dated July 17, 2018, between Bank of Montreal and Encore Capital Group, Inc. regarding the Base Capped Call Transaction 8-K 000-26489 10.1 7/20/2018 10.23.2 Letter Agreement, dated July 17, 2018, between Credit Suisse International and Encore Capital Group, Inc. regarding the Base Capped Call Transaction 8-K 000-26489 10.2 7/20/2018 10.23.3 Letter Agreement, dated July 17, 2018, between Bank of America, N.A. and Encore Capital Group, Inc. regarding the Base Capped Call Transaction 8-K 000-26489 10.3 7/20/2018 10.23.4 Letter Agreement, dated July 19, 2018, between Bank of Montreal and Encore Capital Group, Inc. regarding the Additional Capped Call Transaction 8-K 000-26489 10.4 7/20/2018 10.23.5 Letter Agreement, dated July 19, 2018, between Credit Suisse International and Encore Capital Group, Inc. regarding the Additional Capped Call Transaction 8-K 000-26489 10.5 7/20/2018 10.23.6 Letter Agreement, dated July 19, 2018, between Bank of America, N.A. and Encore Capital Group, Inc. regarding the Additional Capped Call Transaction 8-K 000-26489 10.6 7/20/2018 10.26+ Executive Service Agreement, dated November 25, 2019, between Cabot UK Holdco Limited and Craig Buick 10-Q 000-26489 10.2+ 5/11/2020 21 List of Subsidiaries X 22 List of Issuers of Guaranteed Securities X 23 Consent of Independent Registered Public Accounting Firm, BDO USA, LLP, dated February 24, 2021 X 31.1 Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 X 64 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 31.2 Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 X 32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) X 101.INS XBRL Instance Document X 101.SCH XBRL Taxonomy Extension Schema Document X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB XBRL Taxonomy Extension Label Linkbase Document X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document X 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) X + Management contract or compensatory plan or arrangement. Item 16—Form 10-K Summary None. 65 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ENCORE CAPITAL GROUP, INC., a Delaware corporation By: /s/ A SHISH M ASIH Ashish Masih President and Chief Executive Officer Date: February 24, 2021 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Name and Signature Title Date /s/ A SHISH M ASIH President and Chief Executive Officer and Director (Principal Executive Officer) February 24, 2021 Ashish Masih /s/ J ONATHAN C. C LARK Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) February 24, 2021 Jonathan C. Clark /s/ A SHWINI G UPTA Director February 24, 2021 Ashwini Gupta /s/ W ENDY G. H ANNAM Director February 24, 2021 Wendy G. Hannam /s/ J EFFREY A. H ILZINGER Director February 24, 2021 Jeffrey A. Hilzinger /s/ A NGELA A. K NIGHT Director February 24, 2021 Angela A. Knight /s/ M ICHAEL P. M ONACO Director February 24, 2021 Michael P. Monaco /s/ L AURA O LLE Director February 24, 2021 Laura Olle /s/ R ICHARD J. S REDNICKI Director February 24, 2021 Richard J. Srednicki /s/ R ICHARD P. S TOVSKY Director February 24, 2021 Richard P. Stovsky 66 Table of Contents ENCORE CAPITAL GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm F- 1 Consolidated Statements of Financial Condition at December 31, 2020 and 2019 F- 3 Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 F- 4 Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, 2019 and 2018 F- 5 Consolidated Statements of Equity for the years ended December 31, 2020, 2019 and 2018 F- 6 Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 F- 7 Notes to Consolidated Financial Statements F- 8 Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies F- 8 Note 2: Fair Value Measurements F- 14 Note 3: Derivatives and Hedging Instruments F- 17 Note 4: Investment in Receivable Portfolios, Net F- 19 Note 5: Deferred Court Costs, Net F- 21 Note 6: Composition of Certain Financial Statement Items F- 22 Note 7 : Borrowings F- 23 Note 8 : Variable Interest Entities F- 28 Note 9 : Stock-Based Compensation F- 28 Note 1 0 : Income Taxes F- 30 Note 1 1 : Leases F- 33 Note 1 2 : Commitments and Contingencies F- 35 Note 13: Segment and Geographic Information F- 36 Note 1 4 : Goodwill and Identifiable Intangible Assets F- 37 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors Encore Capital Group, Inc. San Diego, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statements of financial condition of Encore Capital Group, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in I nternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 24, 2021 expressed an unqualified opinion thereon. Changes in Accounting Principles As discussed in Notes 1 and 4 to the consolidated financial statements, effective January 1, 2020, the Company adopted Accounting Standards Codification (“ASC”) Topic 326, Financial Instruments—Credit Losses . As discussed in Notes 1 to the consolidated financial statements, effective January 1, 2019, the Company adopted ASC Topic 842, Leases . Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Investment in Receivable Portfolios, Revenue from Receivable Portfolios and Changes in Expected Current and Future Recoveries As more fully described in Notes 1 and 4 to the consolidated financial statements, the Company’s investment in receivable portfolios balance was approximately $3.3 billion at December 31, 2020. Investment in receivable portfolios are comprised of loans with deteriorated credit quality since origination upon purchase. In accordance with the Company’s charge-off policy each loan is deemed to be uncollectible on an individual basis. Receivable portfolio purchases are grouped based on similar risk F-1 characteristics (“pool”) and a negative allowance is established based on future recoveries of the pool using a discounted cash flow approach. The discount rate is an effective interest rate (or “EIR”) based on the purchase price of the portfolio and the expected future cash flows at the time of purchase and does not change over the life of the pool unless the risk characteristics of the pool change. Revenue from receivable portfolios is recognized at an EIR through the accretion of the discount on the negative allowance, differences between actual versus expected recoveries and the present value of changes in expected future recoveries. The Company reviews each pool for current trends, actual versus expected performance and expected timing of cash flows (curve shape). The Company then re-forecasts the timing and amount of future recoveries. We identified the recording of investment in receivable portfolios, revenue from receivable portfolios and changes in expected current and future recoveries as a critical audit matter. Specifically, management is required to make significant judgments and assumptions to estimate future recoveries. Estimated future recoveries are based on historical experience, current conditions, and reasonable and supportable forecasts. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters. The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of controls over management’s assessment of the reasonableness of: (i) inputs and outputs from the Company’s proprietary statistical and behavioral models used to forecast collections, (ii) cash collection performance of pools, and (iii) a pool’s EIR. • Testing the completeness and accuracy of collection data used by management to calculate investment in receivable portfolios, revenue from receivable portfolios and changes in expected current and future recoveries. • Evaluating the Company’s process used to develop estimates of future recoveries by testing source data and evaluating the reasonableness of assumptions by comparing to historical results, including current period forecasts to actual performance, recent performance trends, curve shape and changes to the expected recoveries. Goodwill Impairment Assessment As more fully described in Notes 1 and 14 to the consolidated financial statements, the Company’s goodwill balance was approximately $0.9 billion at December 31, 2020, which was allocated between two reporting units, MCM and Cabot, that carried goodwill. The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. For the MCM reporting unit, management performed a qualitative assessment and determined it was not necessary to perform a quantitative test. For the Cabot reporting unit, management performed a quantitative analysis which utilized a combination of the income approach and the market approach. We identified the goodwill impairment assessment of the Cabot reporting unit as a critical audit matter because of the significant assumptions and judgments management makes as part of the assessment to estimate the fair value of the reporting unit. The income approach requires significant management assumptions such as assumptions used in the cash flow forecasts, the discount rate, and the terminal value exit multiple. The market approach requires significant management judgment in the selection of the appropriate peer group companies and the valuation multiples. Auditing these significant assumptions and judgments involved a high degree of auditor judgment and an increased extent of effort, including the extent of specialized skill or knowledge needed. The primary procedures we performed to address this critical audit matter included: • Testing the design and operating effectiveness of controls over goodwill impairment assessment, including controls over significant management assumptions and judgments used in the income and the market approaches. • Testing management’s process for developing fair value estimates including testing the completeness, accuracy, and relevance of underlying data and evaluating significant management assumptions by comparing to historical results and market participant data. • Utilizing personnel with specialized knowledge and skill in valuation to assist in: (i) assessing the appropriateness of the fair value methodology, (ii) evaluating the reasonableness of certain assumptions used including the discount rate and the terminal value exit multiple, and (iii) assessing the reasonableness of the discount rate by developing independent estimates and comparing estimates to those utilized by management. /s/ BDO USA, LLP We have served as the Company's auditor since 2001. San Diego, California February 24, 2021 F-2 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Financial Condition (In Thousands, Except Par Value Amounts) December 31, 2020 December 31, 2019 Assets Cash and cash equivalents $ 189,184 $ 192,335 Investment in receivable portfolios, net 3,291,918 3,283,984 Deferred court costs, net — 100,172 Property and equipment, net 127,297 120,051 Other assets 349,162 329,223 Goodwill 906,962 884,185 Total assets $ 4,864,523 $ 4,909,950 Liabilities and Equity Liabilities: Accounts payable and accrued liabilities $ 215,920 $ 223,911 Borrowings 3,281,634 3,513,197 Other liabilities 146,893 147,436 Total liabilities 3,644,447 3,884,544 Commitments and contingencies (Note 12) Equity: Convertible preferred stock, $ 0.01 par value, 5,000 shares authorized, no shares issued and outstanding — — Common stock, $ 0.01 par value, 75,000 shares authorized, 31,345 shares and 31,097 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively 313 311 Additional paid-in capital 230,440 222,590 Accumulated earnings 1,055,668 888,058 Accumulated other comprehensive loss ( 68,813 ) ( 88,766 ) Total Encore Capital Group, Inc. stockholders’ equity 1,217,608 1,022,193 Noncontrolling interest 2,468 3,213 Total equity 1,220,076 1,025,406 Total liabilities and equity $ 4,864,523 $ 4,909,950 The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”) included in the consolidated statements of financial condition above. Most assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs. The liabilities exclude amounts where creditors or beneficial interest holders have recourse to the general credit of the Company. See “Note 8: Variable Interest Entities” for additional information on the Company’s VIEs. December 31, 2020 December 31, 2019 Assets Cash and cash equivalents $ 2,223 $ 34 Investment in receivable portfolios, net 553,621 539,596 Other assets 5,127 4,759 Liabilities Borrowings 478,131 464,092 Other liabilities 37 — See accompanying notes to consolidated financial statements F-3 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Operations (In Thousands, Except Per Share Amounts) Year Ended December 31, 2020 2019 2018 Revenues Revenue from receivable portfolios $ 1,374,717 $ 1,269,288 $ 1,167,132 Changes in expected current and future recoveries 7,246 — — Servicing revenue 115,118 126,527 148,044 Other revenues 4,319 9,974 5,381 Total revenues 1,501,400 1,405,789 1,320,557 (Allowances) allowance reversals on receivable portfolios, net ( 8,108 ) 41,473 Total revenues, adjusted by net allowances 1,397,681 1,362,030 Operating expenses Salaries and employee benefits 378,176 376,365 369,064 Cost of legal collections 239,071 202,670 205,204 General and administrative expenses 149,113 148,256 158,352 Other operating expenses 108,944 108,433 134,934 Collection agency commissions 49,754 63,865 47,948 Depreciation and amortization 42,780 41,029 41,228 Goodwill impairment — 10,718 — Total operating expenses 967,838 951,336 956,730 Income from operations 533,562 446,345 405,300 Other expense Interest expense ( 209,356 ) ( 217,771 ) ( 237,355 ) Loss on extinguishment of debt ( 40,951 ) ( 8,989 ) ( 2,693 ) Other expense ( 357 ) ( 18,343 ) ( 8,764 ) Total other expense ( 250,664 ) ( 245,103 ) ( 248,812 ) Income before income taxes 282,898 201,242 156,488 Provision for income taxes ( 70,374 ) ( 32,333 ) ( 46,752 ) Net income 212,524 168,909 109,736 Net (income) loss attributable to noncontrolling interest ( 676 ) ( 1,040 ) 6,150 Net income attributable to Encore Capital Group, Inc. stockholders $ 211,848 $ 167,869 $ 115,886 Earnings per share attributable to Encore Capital Group, Inc.: Basic $ 6.74 $ 5.38 $ 4.09 Diluted $ 6.68 $ 5.33 $ 4.06 Weighted average shares outstanding: Basic 31,427 31,210 28,313 Diluted 31,710 31,474 28,572 See accompanying notes to consolidated financial statements F-4 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Comprehensive Income (In Thousands) Year Ended December 31, 2020 2019 2018 Net income $ 212,524 $ 168,909 $ 109,736 Other comprehensive income (loss), net of tax: Change in unrealized gain (loss) on derivative instruments: Unrealized gain (loss) on derivative instruments 234 ( 5,029 ) ( 7,658 ) Income tax effect ( 66 ) 761 1,743 Unrealized gain (loss) on derivative instruments, net of tax 168 ( 4,268 ) ( 5,915 ) Change in foreign currency translation: Unrealized gain (loss) on foreign currency translation 17,160 23,169 ( 36,927 ) Removal of other comprehensive loss in connection with divestiture 2,632 3,814 3,663 Unrealized gain (loss) on foreign currency translation, net of divestiture 19,792 26,983 ( 33,264 ) Other comprehensive income (loss), net of tax 19,960 22,715 ( 39,179 ) Comprehensive income 232,484 191,624 70,557 Comprehensive (income) loss attributable to noncontrolling interest: Net (income) loss attributable to noncontrolling interest ( 676 ) ( 1,040 ) 6,150 Unrealized (income) loss on foreign currency translation ( 7 ) ( 494 ) 5,548 Comprehensive (income) loss attributable to noncontrolling interest ( 683 ) ( 1,534 ) 11,698 Comprehensive income attributable to Encore Capital Group, Inc. stockholders $ 231,801 $ 190,090 $ 82,255 See accompanying notes to consolidated financial statements F-5 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Equity (In Thousands) Common Stock Additional Paid-In Capital Accumulated Earnings Accumulated Other Comprehensive (Loss) Income Noncontrolling Interest Total Equity Shares Par Balance as of December 31, 2017 25,801 $ 258 $ 42,646 $ 616,314 $ ( 77,356 ) $ ( 9,929 ) $ 571,933 Net income (loss) — — — 115,886 — ( 1,359 ) 114,527 Other comprehensive (loss) income, net of tax — — — — ( 37,294 ) 920 ( 36,374 ) Change in fair value of redeemable noncontrolling interest — — 19,430 ( 12,011 ) — — 7,419 Purchase of noncontrolling interest — — — — — 9,626 9,626 Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes 163 2 ( 2,510 ) — — — ( 2,508 ) Issuance of common stock 4,920 49 181,138 — — — 181,187 Stock-based compensation — — 12,980 — — — 12,980 Issuance of exchangeable notes — — 14,009 — — — 14,009 Exchangeable notes hedge transactions — — ( 17,785 ) — — — ( 17,785 ) Net equity adjustment on Cabot Transaction — — ( 43,097 ) — — — ( 43,097 ) Other — — 1,687 — 3,663 2,421 7,771 Balance as of December 31, 2018 30,884 309 208,498 720,189 ( 110,987 ) 1,679 819,688 Net income — — — 167,869 — 1,040 168,909 Other comprehensive income, net of tax — — — — 18,407 494 18,901 Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes 213 2 ( 4,874 ) — — — ( 4,872 ) Stock-based compensation — — 12,557 — — — 12,557 Issuance of exchangeable notes — — 4,733 — — — 4,733 Exchangeable notes hedge transactions — — 1,792 — — — 1,792 Other — — ( 116 ) — 3,814 — 3,698 Balance as of December 31, 2019 31,097 311 222,590 888,058 ( 88,766 ) 3,213 1,025,406 Cumulative adjustment — — — ( 44,238 ) — — ( 44,238 ) Net income — — — 211,848 — 676 212,524 Other comprehensive income, net of tax — — — — 17,321 7 17,328 Purchase of noncontrolling interest — — ( 2,394 ) — — ( 1,428 ) ( 3,822 ) Issuance of share-based awards, net of shares withheld for employee taxes 248 2 ( 6,316 ) — — — ( 6,314 ) Stock-based compensation — — 16,560 — — — 16,560 Other — — — — 2,632 — 2,632 Balance as of December 31, 2020 31,345 $ 313 $ 230,440 $ 1,055,668 $ ( 68,813 ) $ 2,468 $ 1,220,076 See accompanying notes to consolidated financial statements F-6 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Cash Flows (In Thousands) Year Ended December 31, 2020 2019 2018 Operating activities: Net income $ 212,524 $ 168,909 $ 109,736 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 42,780 41,029 41,228 Expense related to financing 51,117 3,523 11,710 Other non-cash interest expense, net 23,639 30,299 38,549 Stock-based compensation expense 16,560 12,557 12,980 Deferred income taxes 11,898 22,339 16,814 Goodwill impairment — 10,718 — Changes in expected current and future recoveries ( 7,246 ) — — Provision for (reversal of) allowances on receivable portfolios, net — 8,108 ( 41,473 ) Other, net 16,260 9,794 ( 7,016 ) Changes in operating assets and liabilities Deferred court costs — ( 3,646 ) ( 17,701 ) Other assets 8,980 29,025 ( 17,925 ) Prepaid income tax and income taxes payable ( 27,693 ) ( 25,678 ) 24,284 Accounts payable, accrued liabilities and other liabilities ( 35,955 ) ( 62,244 ) 15,605 Net cash provided by operating activities 312,864 244,733 186,791 Investing activities: Purchases of receivable portfolios, net of put-backs ( 644,048 ) ( 1,035,130 ) ( 1,131,095 ) Collections applied to investment in receivable portfolios, net 737,131 757,640 809,688 Purchases of property and equipment ( 34,600 ) ( 39,602 ) ( 67,475 ) Proceeds from sale of portfolios — 107,937 — Other, net 24,343 6,822 ( 8,634 ) Net cash provided by (used in) investing activities 82,826 ( 202,333 ) ( 397,516 ) Financing activities: Payment of loan and debt refinancing costs ( 82,455 ) ( 11,586 ) ( 23,286 ) Proceeds from credit facilities 1,820,634 603,634 942,186 Repayment of credit facilities ( 2,290,822 ) ( 586,429 ) ( 571,144 ) Proceeds from senior secured notes 1,313,385 454,573 — Repayment of senior secured notes ( 1,033,765 ) ( 470,768 ) ( 91,578 ) Proceeds from issuance of convertible and exchangeable senior notes — 100,000 172,500 Repayment of convertible senior notes ( 89,355 ) ( 84,600 ) — Payment for the purchase of PECs and noncontrolling interest — — ( 234,101 ) Other, net ( 40,822 ) ( 24,594 ) ( 28,200 ) Net cash (used in) provided by financing activities ( 403,200 ) ( 19,770 ) 166,377 Net (decrease) increase in cash and cash equivalents ( 7,510 ) 22,630 ( 44,348 ) Effect of exchange rate changes on cash and cash equivalents 4,359 12,287 ( 10,373 ) Cash and cash equivalents, beginning of period 192,335 157,418 212,139 Cash and cash equivalents, end of period $ 189,184 $ 192,335 $ 157,418 Supplemental disclosures of cash flow information: Cash paid for interest $ 169,553 $ 178,948 $ 198,797 Cash paid for income taxes, net of refunds 88,816 43,973 5,734 Supplemental schedule of non-cash investing and financing activities: Stock consideration for the Cabot Transaction $ — $ — $ 180,559 Investment in receivable portfolios transferred to real estate owned 2,214 5,058 4,701 Property and equipment acquired through finance leases 3,276 5,299 3,283 See accompanying notes to consolidated financial statements F-7 Table of Contents ENCORE CAPITAL GROUP, INC. Notes to Consolidated Financial Statements Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial obligations to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. The Company also provides debt servicing and other portfolio management services to credit originators for non-performing loans. Through Midland Credit Management, Inc. and its domestic affiliates (collectively, “MCM”), the Company is a market leader in portfolio purchasing and recovery in the United States. Through Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates (collectively, “Cabot”) the Company is one of the largest credit management services providers in Europe and a market leader in the United Kingdom and Ireland. These are the Company’s primary operations. The Company also has investments and operations in Latin America and Asia-Pacific, which the Company refers to as “LAAP.” In August 2019, the Company completed the sale of Baycorp, which represented the Company’s investments and operations in Australia and New Zealand. COVID-19 On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The COVID-19 outbreak and resulting containment measures implemented by governments around the world, as well as increased business uncertainty, have impacted the Company. The circumstances around the COVID-19 pandemic are rapidly evolving and will continue to impact the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to closely monitor the COVID-19 situation and update its assumptions accordingly. Basis of Consolidation The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and reflect the accounts and operations of the Company and those of its subsidiaries in which the Company has a controlling financial interest. The Company also consolidates VIEs for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and (b) either the obligation to absorb losses or the right to receive benefits. Refer to “Note 8: Variable Interest Entities” for further details. All intercompany transactions and balances have been eliminated in consolidation. Translation of Foreign Currencies The financial statements of certain of the Company’s foreign subsidiaries are measured using their local currency as the functional currency. Assets and liabilities of foreign operations are translated into U.S. dollars using period-end exchange rates, and revenues and expenses are translated into U.S. dollars using average exchange rates in effect during each period. The resulting translation adjustments are recorded as a component of other comprehensive income or loss. Equity accounts are translated at historical rates, except for the change in retained earnings during the year which is the result of the income statement translation process. Intercompany transaction gains or losses at each period end arising from subsequent measurement of balances for which settlement is not planned or anticipated in the foreseeable future are included as translation adjustments and recorded within other comprehensive income or loss. Translation gains or losses are the material components of accumulated other comprehensive income or loss and are reclassified to earnings upon the substantial sale or liquidation of investments in foreign operations. Reclassifications Certain immaterial reclassifications have been made to the prior years’ consolidated financial statements to conform to current year presentation. The Company 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, and have reclassed such costs as loss on extinguishment of debt as a single line item in the Company’s consolidated statements of operations rather than presenting them as part of interest expense. These reclassifications have no effect on net income, total assets, accumulated earnings or cash flow statements as previously reported. F-8 Table of Contents Change in Accounting Principle On January 1, 2020, the Company adopted the new accounting standard for Financial Instruments - Credit Losses (“CECL”). CECL introduces a new impairment approach for credit loss recognition based on current expected lifetime losses rather than incurred losses. CECL applies to all financial assets carried at amortized costs, including the Company’s investment in receivable portfolios, which are defined as purchased credit deteriorated (“PCD”) financial assets under CECL. The adoption of CECL represents a significant change from the previous U.S. GAAP guidance relating to purchased credit impaired assets and resulted in changes to the Company’s accounting for its investment in receivable portfolios and the related income from the receivable portfolios. As part of the adoption of CECL, the Company changed its accounting methodology for its court costs spent in its legal collection channel effective January 1, 2020. Previously, the Company capitalized its upfront court costs spent in its consolidated financial statements (“Deferred Court Costs”) and provided a reserve for those costs that it believed would ultimately be uncollectible. Effective January 1, 2020, the Company expenses all of its court costs as incurred. All expected cash flows, including all the expected collections from the legal channel, are included in the measurement of the negative allowance, or investment in receivable portfolios, at a discounted value. Upon transition, an adjustment was made to retained earnings to reflect the net change from an undiscounted to discounted value prior to writing-off uncollectible receivables and establishing a balance for discounted value of future recoveries of amounts expected to be collected. The Company has 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 the cumulative effects of adopting the CECL guidance on the Company’s consolidated statements of financial condition as of January 1, 2020 ( in thousands ): Balance as of December 31, 2019 Adjustment Opening Balance as of January 1, 2020 Assets Investment in receivable portfolios, net $ 3,283,984 $ 44,166 $ 3,328,150 Deferred court costs, net 100,172 ( 100,172 ) — Liabilities Other liabilities (for deferred tax liabilities) 147,436 ( 11,768 ) 135,668 Equity Accumulated earnings 888,058 ( 44,238 ) 843,820 In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The ASU provides optional expedients and exceptions for applying GAAP to transactions affected by reference rate (e.g., LIBOR) reform if certain criteria are met, for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Additionally, in January 2021, the FASB issued ASU 2021-01, which clarifies the scope of Topic 848 and allows entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates. These ASUs are effective as of March 12, 2020 through December 31, 2022 and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by the new standards. The ASUs are currently not expected to have a material impact on the Company’s consolidated financial statements. Effective January 1, 2019, the Company adopted Accounting Standard Codification 842 - Leases using the modified retrospective method. Refer to “Note 11: Leases” for details of the Company’s leases. Recent Accounting Pronouncements Recent Accounting Pronouncements Not Yet Effective In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt — Debt with Conversion and Other Options (“Subtopic 470-20”) and Derivatives and Hedging — Contracts in Entity’s Own Equity (“Subtopic 815-40”): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The ASU simplifies the accounting for convertible instruments by removing certain models in Subtopic 470-20 and revises the guidance in Subtopic 815-40 to simplify the accounting for contracts in an entity’s own equity. The ASU F-9 Table of Contents also amends the guidance to improve the consistency of earnings per share calculations, which requires the if-converted method be used for convertible instruments. ASU 2020-06 is effective for reporting periods beginning after December 15, 2021 with early adoption permitted for reporting periods beginning after December 15, 2020. The amendment is to be adopted through either a modified retrospective or fully retrospective method of transition. Under ASU 2020-06, the Company’s convertible and exchangeable notes will no longer be bifurcated to a debt component and an equity component, instead, they will be carried as a single liability. The interest expense recognized on the convertible and exchangeable notes will be based on coupon rates, rather than higher effective interest rates. As a result, the Company will recognize lower interest expense. The Company’s convertible and exchangeable notes require net share settlement. Additionally, the if-converted method will not substantially change the dilutive effect for convertible instruments that require net share settlement, only in-the-money shares will be included in the dilutive effect. The Company will early adopt ASU 2020-06 as of January 1, 2021 using a modified-retrospective approach, by recording a decrease to opening accumulated earnings of approximately $ 16.1 million, which represents the debt discount of all outstanding convertible and exchangeable notes as of December 31, 2020, adjusted for income tax effect. Implementation efforts have been substantially complete. With the exception of the updated standards discussed above, there have been no new accounting pronouncements not yet effective as of December 31, 2020 that have significance, or potential significance, to the Company’s consolidated financial statements. Use of Estimates The preparation of financial statements, in conformity with GAAP, 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. The inputs into the judgments and estimates consider the economic implications of the COVID-19 pandemic on the Company’s critical and significant accounting estimates. Actual results could materially differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the date of purchase. The Company maintains its cash and cash equivalents in multiple financial institutions and certain account balances exceed federally insurable limits. To date, the Company has experienced no loss or lack of access to cash in its bank accounts. The Company believes any risks are mitigated by maintaining cash with highly rated financial institutions. The carrying amounts reported in the consolidated statements of financial condition for cash and cash equivalents approximate their fair value. Included in cash and cash equivalents is cash collected on behalf of and due to third-party clients. A corresponding balance is included in accounts payable and accrued liabilities. The balance of cash held for clients was $ 20.3 million and $ 25.0 million as of December 31, 2020 and 2019, respectively. Investment in Receivable Portfolios Current Accounting Policy As a result of the adoption of CECL, the Company revised its accounting policy for investment in receivable portfolios effective January 1, 2020: The Company purchases portfolios of loans that have experienced significant deterioration of credit quality since origination from banks and other financial institutions. These financial assets are defined as purchased credit deteriorated (or “PCD”) assets under CECL. Under the PCD accounting model, the purchased assets are recognized at their face value with an offsetting allowance and noncredit discount allocated to the individual receivables as the unit of account is at the individual loan level. Since each loan is deeply delinquent and deemed uncollectible at the individual loan level, the Company applies its charge-off policy and fully writes-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables immediately after purchasing the portfolio. The Company then records 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 ultimately equals the amount paid for a portfolio purchase and presented as “Investment in receivable portfolios, net” in the Company’s consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) based on the purchase price of the portfolio and the expected future cash flows at the time of purchase. The amount of the negative allowance (i.e., investment in receivable portfolios) will not exceed the total amortized cost basis of the loans written-off. 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. F-10 Table of Contents The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups 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, which is not expected due to the delinquent nature of the individual loans. 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. The Company makes 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, the Company forecasts 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. The Company continues 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, 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.” The Company measures 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. The Company elected not to maintain its previously formed pool groups with amortized costs at transition. Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to the transition. The Company did not establish a negative allowance from ZBA pools as the Company elected the Transition Resource Group for Credit Losses’ practical expedient to retain the integrity of its legacy pools. All subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in the Company’s consolidated statements of operations. Accounting Policy Prior to January 1, 2020 Discrete receivable portfolio purchases during the same fiscal quarter were aggregated into pools based on common risk characteristics. Once a static pool was established, the portfolios were permanently assigned to the pool. Receivable portfolios were recorded at cost at the time of acquisition. The purchase cost of the portfolios included certain fees paid to third parties incurred in connection with the direct acquisition of the receivable portfolios. Revenues were calculated using either the interest method or the cost recovery method. The interest method applies an internal rate of return (“IRR”) to the cost basis of the pool, which remained unchanged throughout the life of the pool, unless there was an increase in subsequent expected cash flows. Subsequent increases in expected cash flows were recognized prospectively through an upward adjustment of the pool’s IRR over its remaining life. Subsequent decreases in expected cash flows did not change the IRR, but were recognized as an allowance to the cost basis of the pool, and were reflected in the consolidated statements of operations as an adjustment to revenue, with a corresponding valuation allowance, offsetting the investment in receivable portfolios in the consolidated statements of financial condition. With gross collections being discounted at monthly IRRs, when collections were lower in the near term, even if substantially higher collections were expected later in the collection curve, an allowance charge could result. The Company accounted for each static pool as a unit for the economic life of the pool (similar to one loan) for recognition of revenue from receivable portfolios, for collections applied to the cost basis of receivable portfolios and for provision for loss or allowance. Revenue from receivable portfolios was accrued based on each pool’s IRR applied to each pool’s adjusted cost basis. The cost basis of each pool was increased by revenue earned and portfolio allowance reversals and decreased by gross collections and portfolio allowances. Once the net book value of a static pool has been fully recovered, it became ZBA and all subsequent collections were recognized as ZBA revenue. If the amount and timing of future cash collections on a pool of receivables were not reasonably estimable, the Company accounted for such portfolios on the cost recovery method as Cost Recovery Portfolios. The accounts in these portfolios had different risk characteristics than those included in other portfolios acquired during the same quarter, or the necessary information was not available to estimate future cash flows and, accordingly, they were not aggregated with other portfolios. Under the cost recovery method of accounting, no revenue was recognized until the carrying value of a Cost Recovery Portfolio has been fully recovered. F-11 Table of Contents See “Note 4: Investment in Receivable Portfolios, Net” for further discussion of investment in receivable portfolios. Transfers of Financial Assets The Company accounts for transfers of financial assets as sales when it has surrendered control over the related assets. Whether control has been relinquished requires, among other things, an evaluation of relevant legal considerations and an assessment of the nature and extent of the Company’s ongoing involvement with the assets transferred. Gains and losses stemming from transfers reported as sales are included in “Other revenues” in the Company’s consolidated statements of operations. Assets obtained and liabilities incurred in connection with transfers reported as sales are initially recognized in the statements of financial condition at fair value. Transfers of financial assets that do not qualify for sale accounting are reported as collateralized borrowings. Accordingly, the related assets remain on the Company’s statements of financial condition and continue to be reported and accounted for as if the transfer had not occurred. Cash proceeds from these transfers are reported as liabilities, with attributable interest expense recognized over the life of the related transactions. To date, the Company has not had any transfers of financial assets that did not qualify for sale accounting. Servicing Revenue Certain of the Company’s subsidiaries earn servicing revenue by providing portfolio management services to credit originators for non-performing loans. The Company recognizes servicing revenue when it satisfies the performance obligation over time by providing debt solution and credit management services. The Company typically invoices for its services monthly with payment terms of 30 days. Goodwill and Other Intangible Assets Goodwill represents the excess of purchase price over the value assigned to tangible and identifiable intangible assets, liabilities assumed, and noncontrolling interest of businesses acquired. Acquired intangible assets other than goodwill are amortized over their useful lives unless the lives are determined to be indefinite. Goodwill is tested at the reporting unit level annually for impairment and in interim periods if certain events occur indicating the fair value of a reporting unit may be below its carrying value. See “Note 14: Goodwill and Identifiable Intangible Assets” for further discussion of the Company’s goodwill and other intangible assets. Property and Equipment Property and equipment are recorded at cost, less accumulated depreciation and amortization. The provision for depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets as follows: Fixed Asset Category Estimated Useful Life Leasehold improvements Lesser of lease term, including periods covered by renewal options, or useful life Furniture, fixtures and equipment 5 to 10 years Computer hardware and software 3 to 5 years Maintenance and repairs are charged to expense in the year incurred. Expenditures for major renewals that extend the useful lives of fixed assets are capitalized and depreciated over the useful lives of such assets. The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company measures recoverability by comparing the carrying amount to the future undiscounted cash flows that the asset is expected to generate. If the asset is not recoverable, its carrying amount would be adjusted down to its fair value. Deferred Court Costs The Company pursues legal collections using a network of attorneys that specialize in collection matters and through its internal legal channel. The Company generally pursues collections through legal means only when it believes a consumer has sufficient assets to repay their indebtedness but has, to date, been unwilling to pay. In order to pursue legal collections, the Company is required to pay certain upfront costs to the applicable courts that are recoverable from the consumer. Effective January 1, 2020, the Company expenses all of its court costs as incurred and no longer capitalizes such costs as Deferred Court Costs. All expected cash flows, including all the expected collections from the legal channel, are included in the measurement of the negative allowance, or investment in receivable portfolios, at a discounted value. F-12 Table of Contents Prior to January 1, 2020, the Company capitalized Deferred Court Costs in its consolidated financial statements and provided a reserve for those costs that it estimated to be uncollectible. The Company determined the reserve based on an estimated court cost recovery rate established based on its analysis of historical court costs recovery data. The Company estimated deferral periods for Deferred Court Costs based on jurisdiction and nature of litigation and wrote off any Deferred Court Costs not recovered within the respective deferral period. Collections received from debtors were first applied against related court costs with the balance applied to the debtors’ account balance. See “Note 5: Deferred Court Costs, Net” for further details. Income Taxes The Company uses the asset and liability method of accounting for income taxes. When the Company prepares its consolidated financial statements, it estimates income taxes based on the various jurisdictions and countries where it conducts business. This requires the Company to estimate 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. The Company then assesses the likelihood that deferred tax assets will be realized. Valuation allowances are established, when it is more likely than not the deferred tax assets will not be realized. When the Company establishes a valuation allowance or increases this allowance in an accounting period, it records a corresponding tax expense in the consolidated statements of operations. The Company includes interest and penalties related to income taxes within its provision for income taxes. See “Note 10: Income Taxes” for further discussion. Management must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, and any valuation allowance to be recorded against deferred tax assets. Stock-Based Compensation The Company determines stock-based compensation expense for all share-based payment awards based on the measurement date fair value. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock option grants. The Company has certain share awards that include market conditions that affect vesting, the fair value of these shares is estimated using a lattice model. Compensation cost is not adjusted if the market condition is not met, as long as the requisite service is provided. For share awards that require service and performance conditions, the Company recognizes compensation cost only for those awards expected to meet the service and performance vesting conditions over the requisite service period of the award. Forfeiture rates are estimated based on the Company’s historical experience. Stock-based compensation expenses are included in “Salaries and Employee Benefits” in the Company’s consolidated statements of operations. See “Note 9: Stock-Based Compensation” for further discussion. Derivative Instruments and Hedging Activities The Company recognizes all derivative financial instruments in its consolidated financial statements at fair value. Changes in the fair value of derivative instruments are recorded in earnings unless hedge accounting criteria are met. The Company designates certain derivative instruments as cash flow hedges. The changes in fair value of derivatives designated as cash flow hedges is recorded each period, net of tax, in accumulated other comprehensive income or loss until the related hedged transaction occurs. If in the event the hedged cash flow does not occur, or it becomes probable that it will not occur, the Company would reclassify the amount of any gain or loss on the related cash flow hedge to income or expense at that time. If the hedged cash flows are still reasonably possible to occur, the hedged cash flows will continue to be recorded in accumulated other comprehensive income or loss until the hedged cash flows are no longer probable of occurring. The Company classifies the cash flows from a derivative instrument that is accounted for as a cash flow hedge (and that does not contain an other-than-insignificant financing element at inception) in the same category as the cash flows from the items being hedged. See “Note 3: Derivatives and Hedging Instruments” for further discussion. Concentration of Supply Risk A significant percentage of the Company’s portfolio purchases for any given fiscal quarter or year may be concentrated with a few large sellers, some of which may also involve forward flow arrangements. A significant decrease in the volume of portfolio available from any of the Company’s principal sellers would force the Company to seek alternative sources of charged-off receivables. The Company may be unable to find alternative sources from which to purchase charged-off receivables, and even if it could successfully replace these purchases, the search could take time and the receivables could be of lower quality, cost more, or both, any of which could adversely affect the Company’s business, financial condition and operating results. F-13 Table of Contents Earnings Per Share Basic earnings per share is calculated by dividing net earnings attributable to Encore by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is calculated on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. Dilutive potential common shares include outstanding stock options, restricted stock, and the dilutive effect of the convertible and exchangeable senior notes, if applicable. A reconciliation of shares used in calculating earnings per basic and diluted shares follows for the periods presented (in thousands, except per share amounts) : Year Ended December 31, 2020 2019 2018 Net income attributable to Encore Capital Group, Inc. $ 211,848 $ 167,869 $ 115,886 Total weighted-average basic shares outstanding 31,427 31,210 28,313 Dilutive effect of stock-based awards 283 264 259 Total weighted-average dilutive shares outstanding 31,710 31,474 28,572 Basic earnings per share $ 6.74 $ 5.38 $ 4.09 Diluted earnings per share $ 6.68 $ 5.33 $ 4.06 Anti-dilutive employee stock options outstanding were approximately 51,000 , 64,000 and 66,000 during the years ended December 31, 2020, 2019, and 2018, respectively. Note 2: Fair Value Measurements Fair value is defined as the price that would be received upon sale of an asset or the price paid to transfer a liability, in an orderly transaction between market participants at the measurement date ( i.e., the “exit price”). The Company uses a fair value hierarchy that prioritizes the inputs used in valuation techniques to measure fair value into three broad levels. The following is a brief description of each level: • Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. • Level 3: Unobservable inputs, including inputs that reflect the reporting entity’s own assumptions. Financial Instruments Required To Be Carried At Fair Value Financial assets and liabilities measured at fair value on a recurring basis are summarized below ( in thousands ): Fair Value Measurements as of December 31, 2020 Level 1 Level 2 Level 3 Total Assets Cross-currency swap agreements $ — $ 11,578 $ — $ 11,578 Interest rate cap contracts — 659 — 659 Liabilities Interest rate swap agreements — ( 5,232 ) — ( 5,232 ) Contingent consideration — — ( 2,957 ) ( 2,957 ) F-14 Table of Contents Fair Value Measurements as of December 31, 2019 Level 1 Level 2 Level 3 Total Assets Foreign currency exchange contracts $ — $ 1,473 $ — $ 1,473 Interest rate cap contracts — 2,460 — 2,460 Liabilities Interest rate swap agreements — ( 9,116 ) — ( 9,116 ) Contingent consideration — — ( 66 ) ( 66 ) Derivative Contracts: The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies. Contingent Consideration: The Company carries certain contingent liabilities resulting from its mergers and acquisition activities. Certain sellers of the Company’s acquired entities could earn additional earn-out payments in cash based on the entities’ subsequent operating performance. The Company recorded the acquisition date fair values of these contingent liabilities, based on the likelihood of contingent earn-out payments, as part of the consideration transferred. The earn-out payments are subsequently remeasured to fair value at each reporting date, based on actual and forecasted operating performance. The following table provides a roll-forward of the fair value of contingent consideration for the years ended December 31, 2020, 2019 and 2018 (in thousands) : Amount Balance as of December 31, 2017 $ 10,612 Issuance of contingent consideration 1,728 Change in fair value of contingent consideration ( 5,664 ) Payment of contingent consideration ( 271 ) Effect of foreign currency translation ( 207 ) Balance as of December 31, 2018 6,198 Change in fair value of contingent consideration ( 2,300 ) Payment of contingent consideration ( 3,686 ) Effect of foreign currency translation ( 146 ) Balance as of December 31, 2019 66 Issuance of contingent consideration 2,848 Payment of contingent consideration ( 88 ) Effect of foreign currency translation 131 Balance as of December 31, 2020 $ 2,957 Redeemable Noncontrolling Interest: Some minority shareholders in certain subsidiaries of the Company had the right, at certain times, to require the Company to acquire their ownership interest in those entities at fair value and, in some cases, to force a sale of the subsidiary if the Company chose not to purchase their interests at fair value. In connection with various business transactions, the Company redeemed or deconsolidated all of its redeemable noncontrolling interest during the year ended December 31, 2018 and no longer carried any redeemable noncontrolling interest as of December 31, 2018. F-15 Table of Contents The components of the change in the redeemable noncontrolling interest for the years ended December 31, 2018 are presented in the following table (in thousands) : Amount Balance as of December 31, 2017 $ 151,978 Redemption of redeemable noncontrolling interest ( 138,835 ) Deconsolidation upon sale of redeemable noncontrolling interest 5,535 Net loss attributable to redeemable noncontrolling interest ( 4,791 ) Adjustment of the redeemable noncontrolling interest to fair value ( 7,419 ) Effect of foreign currency translation attributable to redeemable noncontrolling interest ( 6,468 ) Balance as of December 31, 2018 $ — Non-Recurring Fair Value Measurement: Certain assets are measured at fair value on a nonrecurring basis. These assets include real estate-owned assets classified as held for sale at the lower of their carrying value or fair value less cost to sell. The fair value of the assets held for sale and estimated selling expenses were determined at the time of initial recognition and in each reporting period using Level 3 measurements. The fair value estimate of the assets held for sale was approximately $ 42.2 million and $ 46.7 million as of December 31, 2020 and December 31, 2019, respectively. Financial Instruments Not Required To Be Carried At Fair Value The table below summarizes fair value estimates for the Company’s financial instruments that are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company. The carrying amounts in the following table are recorded in the consolidated statements of financial condition as of December 31, 2020 and December 31, 2019 (in thousands) : December 31, 2020 December 31, 2019 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial Assets Investment in receivable portfolios $ 3,291,918 $ 3,705,672 $ 3,283,984 $ 3,464,050 Deferred court costs — — 100,172 100,172 Financial Liabilities Convertible notes and exchangeable notes (1) 564,136 622,081 642,547 693,708 Senior secured notes (2) 1,642,058 1,684,729 1,127,435 1,170,945 ________________________ (1) Carrying amount represents the portion of the convertible and exchangeable notes classified as debt, while estimated fair value pertains to the face amount of the notes. (2) Carrying amount represents historical cost, adjusted for any related debt discount or debt premium. Investment in Receivable Portfolios: The fair value of investment in receivable portfolios is measured using Level 3 inputs by discounting the estimated future cash flows generated by the Company’s proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business. Deferred Court Costs: Effective January 1, 2020, the Company no longer carries Deferred Court Costs as a result of its change in accounting policy. The fair value estimate for Deferred Court Costs as of December 31, 2019 involved Level 3 inputs as there was little observable market data available and management was required to use significant judgment in its estimates. F-16 Table of Contents Borrowings: The Company’s convertible notes, exchangeable notes and senior secured notes are carried at historical cost, adjusted for the applicable debt discount. The fair value estimate for the convertible and exchangeable notes incorporates quoted market prices using Level 2 inputs. The fair value of the senior secured notes is estimated using widely accepted valuation techniques, including discounted cash flow analyses using available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. Accordingly, the Company used Level 2 inputs for these debt instrument fair value estimates. The carrying value of the Company’s senior secured revolving credit facility agreement approximates fair value due to the short-term nature of the interest rate period. The Company’s borrowings also include private placement notes, securitisation senior facility and finance lease liabilities for which the carrying value approximates respective fair value. Note 3: Derivatives and Hedging Instruments The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency. Certain of the Company’s derivative financial instruments qualify for hedge accounting treatment. The following table summarizes the fair value of derivative instruments as recorded in the Company’s consolidated statements of financial condition (in thousands): December 31, 2020 December 31, 2019 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments: Interest rate cap contracts Other assets $ 659 Other assets $ 2,460 Foreign currency exchange contracts Other assets — Other assets 443 Interest rate swap agreements Other liabilities ( 5,232 ) Other liabilities ( 9,116 ) Cross-currency swap agreements Other assets 11,578 Other assets — Derivatives not designated as hedging instruments: Foreign currency exchange contracts Other assets — Other assets 1,030 Derivatives Designated as Hedging Instruments The Company has operations in foreign countries, which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company enters into derivative financial instruments, principally foreign currency forward contracts with financial counterparties. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis. The Company held certain foreign currency forward contracts designated as cash flow hedging instruments that matured in June 2020. As of December 31, 2020, the Company had no outstanding forward contracts that were designated as cash flow hedging instruments. No gains or losses were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the years ended December 31, 2020, 2019, or 2018. The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. Under the swap agreements, the Company receives floating interest rate payments and makes interest payments based on fixed interest rates. The Company designates its interest rate swap instruments as cash flow hedges. Previously, the Company held four interest rate swap agreements that hedged the risk of USD-LIBOR interest rate fluctuations for the Encore revolving credit facility and term loan facility. As part of the financing transactions completed in September 2020, the Company settled two of the interest rate swap agreements. As of December 31, 2020, there were two interest rate swap agreements outstanding with a total notional amount of $ 196.4 million. The Company expects to reclassify approximately $ 8.7 million of net derivative loss from OCI into earnings relating to interest rate swaps within the next 12 months. In connection with the financing transactions discussed above, the Company entered into cross-currency swap agreements, which are used to manage foreign currency exchange risk by converting fixed-rate Euro-denominated borrowings including periodic interest payments and the payment of principal at maturity to fixed-rate USD debt and are accounted for as cash flow hedges. As of December 31, 2020, there were four cross-currency swap agreements outstanding with a total notional amount of € 350.0 million (approximately $ 426.8 million based on an exchange rate of $1.00 to €0.82, the exchange rate as of F-17 Table of Contents December 31, 2020). The Company expects to reclassify approximately $ 3.8 million of net derivative loss from OCI into earnings relating to cross-currency swaps within the next 12 months. Previously, the Company held two interest rate cap contracts (the “2018 Caps”) that hedged the risk of GBP-LIBOR interest rate fluctuations for the Cabot Securitisation Senior Facility interest payments. In February 2020, the Company settled the 2018 Caps and ceased the hedge relationship, which resulted in the reclassification of the associated other comprehensive loss balance to interest expense for approximately $ 2.5 million during the first quarter of 2020. As of December 31, 2020, the Company held two interest rate cap contracts with a notional amount of approximately $ 965.8 million that are used to manage its risk related to interest rate fluctuations on the Company’s variable interest rate bearing debt. The interest rate cap hedging the fluctuations in three-month EURIBOR floating rate debt (“2019 Cap”) has a notional amount of € 400.0 million (approximately $ 487.7 million based on an exchange rate of $1.00 to €0.82, the exchange rate as of December 31, 2020) and matures in 2024. The interest rate cap hedging the fluctuations in sterling overnight index average (“SONIA”) bearing debt (“2020 Cap”) has a notional amount of £ 350.0 million (approximately $ 478.1 million based on an exchange rate of $1.00 to £0.73, the exchange rate as of December 31, 2020) and matures in 2023. The 2019 Cap is structured as a series of European call options (“Caplets”) such that if exercised, the Company will receive a payment equal to 3-months EURIBOR on a notional amount equal to the hedged notional amount net of a fixed strike price. The 2020 Cap is also structured as a series of Caplets such that if exercised, the Company will receive a payment equal to SONIA on a notional amount equal to the hedged notional amount net of a fixed strike price. Each interest rate reset date, the Company will elect to exercise the Caplet or let it expire. The potential cash flows from each Caplet are expected to offset any variability in the cash flows of the interest payments to the extent EURIBOR or SONIA exceeds the strike price of the Caplets. The Company expects the hedge relationships to be highly effective and designates the 2019 Cap and 2020 Cap as cash flow hedge instruments. The Company expects to reclassify approximately $ 0.5 million of net derivative loss from OCI into earnings relating to interest rate caps within the next 12 months. The following table summarizes the effects of derivatives in cash flow hedging relationships designated as hedging instruments in the Company’s consolidated financial statements during the periods presented (in thousands): Derivatives Designated as Hedging Instruments Gain (Loss) Recognized in OCI Location of Gain (Loss) Reclassified from OCI into Income Gain (Loss) Reclassified from OCI into Income Year Ended December 31, Year Ended December 31, 2020 2019 2020 2019 Foreign currency exchange contracts $ ( 341 ) $ 1,100 Salaries and employee benefits $ 49 $ 383 Foreign currency exchange contracts ( 44 ) ( 56 ) General and administrative expenses 11 ( 19 ) Interest rate swap agreements ( 7,441 ) ( 6,347 ) Interest expense ( 7,893 ) ( 2,560 ) Interest rate cap contracts ( 3,001 ) ( 1,752 ) Interest expense ( 2,846 ) 146 Cross-currency swap agreements 10,503 — Interest expense / Other expense 10,121 — Derivatives Not Designated as Hedging Instruments The Company enters into currency exchange forward contracts to reduce the effects of currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally mature within one to three months and are not designated as hedge instruments for accounting purposes. The Company continues to monitor the level of exposure of the foreign currency exchange risk and may enter into additional short-term forward contracts on an ongoing basis. The gains or losses on these derivative contracts are recognized in other income or expense based on the changes in fair value. As of December 31, 2020, the Company had no outstanding currency exchange forward contracts that were not designated as cash flow hedging instruments. In May 2018, in anticipation of the completion of the purchase of all of the outstanding equity of CCM not owned by Encore (the “Cabot Transaction”), Encore entered into a foreign exchange forward contract with a notional amount of £ 176.0 million, which was approximately the amount of cash consideration for the Cabot Transaction. The forward contract settled in August 2018 at a total loss of $ 9.3 million. This loss was substantially offset by a decrease in the final purchase price in U.S. dollars for the Cabot Transaction. F-18 Table of Contents The following table summarizes the effects of derivatives not designated as hedging instruments on the Company’s consolidated statements of operations during the periods presented (in thousands) : Derivatives Not Designated as Hedging Instruments Location of Gain (Loss) Recognized in Income on Derivative Amount of Gain (Loss) Recognized in Income Year ended December 31, 2020 2019 2018 Foreign currency exchange contracts Other expense $ 3,564 $ ( 2,959 ) $ ( 9,221 ) Interest rate cap contracts Interest expense — — ( 1,568 ) Note 4: Investment in Receivable Portfolios, Net As discussed in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies,” effective January 1, 2020, the Company accounts for its investment in receivable portfolios as PCD assets under CECL and changed its accounting policy for reimbursable court costs. As a result, the Company wrote-off the previous Deferred Court Costs balance that represented an undiscounted value of recoverable historic spend as a result of a loss-rate methodology, and established a discounted value of expected future recoveries of these reimbursable court costs, which is included in the beginning balance of the investment in receivable portfolios. The table below illustrates the Company’s transition approach for its investment in receivable portfolios as of January 1, 2020 ( in thousands ): Amount Investment in receivable portfolios prior to transition $ 3,283,984 Initial transitioned deferred court costs 44,166 3,328,150 Allowance for credit losses 79,028,043 Amortized cost 82,356,193 Noncredit discount 132,533,142 Face value 214,889,335 Write-off of amortized cost ( 82,356,193 ) Write-off of noncredit discount ( 132,533,142 ) Negative allowance 3,328,150 Initial negative allowance from transition $ 3,328,150 The table below provides the detail on the establishment of negative allowance for expected recoveries of portfolios purchased during the periods presented ( in thousands ): Year Ended December 31, 2020 Purchase price $ 659,872 Allowance for credit losses 1,703,420 Amortized cost 2,363,292 Noncredit discount 3,464,670 Face value 5,827,962 Write-off of amortized cost ( 2,363,292 ) Write-off of noncredit discount ( 3,464,670 ) Negative allowance 659,872 Negative allowance for expected recoveries - current period purchases $ 659,872 F-19 Table of Contents The following tables summarize the changes in the balance of the investment in receivable portfolios during the periods presented ( in thousands ): Year Ended December 31, 2020 2019 2018 Balance, beginning of period $ 3,328,150 $ 3,137,893 $ 2,890,613 Purchases of receivable portfolios 659,872 1,046,696 1,131,898 Deconsolidation of receivable portfolios (1) ( 2,822 ) ( 51,935 ) — Put-backs and Recalls ( 15,824 ) ( 11,591 ) ( 14,429 ) Disposals and transfers to real estate owned ( 9,459 ) ( 11,495 ) ( 12,456 ) Sale of receivable portfolios (2) — ( 98,636 ) — Cash collections ( 2,111,848 ) ( 2,026,928 ) ( 1,967,620 ) Revenue from receivable portfolios 1,374,717 1,269,288 1,167,132 Changes in expected current period recoveries 228,075 — — Changes in expected future period recoveries ( 220,829 ) — — Portfolio (allowance) reversals, net — ( 8,108 ) 41,473 Foreign currency adjustments 61,886 38,800 ( 98,718 ) Balance, end of period $ 3,291,918 $ 3,283,984 $ 3,137,893 ________________________ (1) Deconsolidation of receivable portfolios as a result of the Company’s divestiture of its investment in Brazil for the year ended December 31, 2020 and as a result of the sale of Baycorp for the year ended December 31, 2019. (2) Represents the sale of certain portfolios in the Company’s European operations under its co-investment framework. 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. The Company believes the collection over-performance was largely driven by the reduced near-term expected recoveries as a result of adjustments made to the projected cash flow forecast during the first quarter of 2020 associated with the COVID-19 pandemic. The over-performance was also a result of sustained improvements in portfolio collections driven by liquidation improvement initiatives. While the Company now has 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 the Company’s collections performance in the near future. As a result, the Company has updated its 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 the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to closely monitor the COVID-19 situation and update its assumptions accordingly. F-20 Table of Contents Accretable yield represented the amount of revenue on purchased receivable portfolios the Company expected to recognize over the remaining life of its existing portfolios. The following table summarizes the change in accretable yield under the previous accounting guidance during the period presented ( in thousands ): Balance as of December 31, 2018 $ 4,026,206 Revenue from receivable portfolios ( 1,269,288 ) Allowance on receivable portfolios, net 8,108 Additions on existing portfolios, net 524,964 Additions for current purchases, net 1,081,774 Effect of foreign currency translation 77,307 Balance as of December 31, 2019 $ 4,449,071 The following table summarizes the change in the valuation allowance for investment in receivable portfolios as accounted for under the previous accounting guidance during the period presented ( in thousands ): Valuation Allowance Balance as of December 31, 2017 $ 102,576 Provision for portfolio allowances 14,421 Reversal of prior allowances ( 55,894 ) Effect of foreign currency translation ( 472 ) Balance as of December 31, 2018 60,631 Provision for portfolio allowances 36,806 Reversal of prior allowances ( 28,698 ) Sale of Baycorp ( 1,036 ) Effect of foreign currency translation 1,776 Balance as of December 31, 2019 $ 69,479 Note 5: Deferred Court Costs, Net As discussed in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies,” effective January 1, 2020 and as part of the adoption of CECL, the Company changed its method of accounting for court costs spent in its legal collection channel. The Company now expenses all of its court costs as incurred and includes all expected recoveries, including the recoveries from the legal channel, in the measurement of the investment in receivable portfolios at a discounted value. As a result, the Company no longer carries deferred court costs. Net deferred court costs under the previous accounting method consisted of the following as of the date presented ( in thousands ): December 31, 2019 Court costs advanced $ 891,207 Court costs recovered ( 369,043 ) Court costs reserve ( 421,992 ) Deferred court costs, net $ 100,172 F-21 A roll-forward of the Company’s court cost reserve as accounted for under the previous accounting method is as follows for the periods presented ( in thousands ): Year Ended December 31, 2019 2018 Balance as of beginning of period $ ( 396,460 ) $ ( 364,015 ) Provision for court costs ( 82,987 ) ( 90,026 ) Charge-offs 60,618 53,383 Effect of foreign currency translation ( 3,163 ) 4,198 Balance as of end of period $ ( 421,992 ) $ ( 396,460 ) Note 6: Composition of Certain Financial Statement Items Property and Equipment, Net Property and equipment consist of the following as of the dates presented ( in thousands ): December 31, 2020 December 31, 2019 Computer equipment and software $ 194,678 $ 167,045 Leasehold improvements 43,621 39,542 Furniture, fixtures and equipment 10,514 10,428 Telecommunications equipment and other 3,450 3,156 Construction in process 4,739 2,089 257,002 222,260 Less: accumulated depreciation and amortization ( 129,705 ) ( 102,209 ) $ 127,297 $ 120,051 Depreciation and amortization expense related to property and equipment was $ 34.8 million, $ 33.3 million, and $ 29.5 million during the years ended December 31, 2020, 2019, and 2018, respectively. Other Assets Other assets consist of the following as of the dates presented ( in thousands ): December 31, 2020 December 31, 2019 Operating lease right-of-use assets $ 72,164 $ 75,254 Identifiable intangible assets, net 45,012 51,371 Real estate owned 42,173 46,717 Income tax deposit 35,853 5,822 Deferred tax assets 33,202 24,134 Prepaid expenses 26,717 22,272 Service fee receivables 26,539 27,705 Other financial receivables 12,238 17,308 Other 55,264 58,640 Total $ 349,162 $ 329,223 F-22 Table of Contents Note 7: Borrowings The Company is in compliance in all material respects with all covenants under its financing arrangements as of December 31, 2020. The components of the Company’s consolidated borrowings were as follows as of the dates presented (in thousands) : December 31, 2020 December 31, 2019 Global senior secured revolving credit facility $ 481,007 $ — Encore revolving credit facility — 492,000 Encore term loan facility — 171,677 Encore private placement notes 146,550 308,750 Senior secured notes 1,651,619 1,129,039 Convertible notes and exchangeable notes 583,500 672,855 Cabot senior revolving credit facility — 285,749 Cabot securitisation senior facility 478,131 464,092 Other 24,398 54,151 Finance lease liabilities 8,288 8,121 3,373,493 3,586,434 Less: debt discount and issuance costs, net of amortization ( 91,859 ) ( 73,237 ) Total $ 3,281,634 $ 3,513,197 In September 2020 the Company entered into various transactions, agreements and amendments related to its borrowings including (collectively, the “Financing Transactions”): • an amended multi-currency revolving credit facility that formerly supported only Cabot that now supports the operations of all operating units; • an issuance of € 350.0 million (approximately $ 410.8 million) in 4.875 % senior secured notes due 2025; and • an amendment to the terms of the existing Senior Secured Notes (defined below). Following the Financing Transactions, Encore is the parent of the restricted group for the Global Senior Facility, the Senior Secured Notes and the Private Placement Notes, each of which is now guaranteed by the same group of material Encore subsidiaries and secured by the same collateral, which represents substantially all of the assets of those subsidiaries. In connection with the Financing Transactions, Encore repaid and terminated the Encore Senior Secured Credit Facilities (defined below) and prepaid a portion of its Encore Private Placement Notes (defined below). The total fees paid to the lenders and third-party costs incurred relating to the Financing Transactions were approximately $ 49.7 million, a portion of which were capitalized as debt issuance costs. Additionally, certain of the unamortized debt issuance costs prior to the Financing Transaction were written-off. The Company recorded a pre-tax expense of approximately $ 24.6 million (approximately $ 18.9 million net of tax) relating to the Financing Transactions, $ 15.0 million of which was included in loss on extinguishment of debt, $ 2.7 million was included in interest expense, and $ 6.9 million was included in general and administrative expense in the Company’s consolidated statements of operations during the year ended December 31, 2020. Global Senior Secured Revolving Credit Facility The Company has entered into a multi-currency senior secured revolving credit facility agreement (as amended and restated, the “Global Senior Facility”). In previous periods, the Company referred to this facility as the Cabot Credit Facility. As of December 31, 2020, the Global Senior Facility provided for a total committed facility of $ 1,050.0 million that matures in September 2024 and included the following key provisions: • Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 2.50 % per annum, with a LIBOR (or EURIBOR) floor of 0.75 %; • A restrictive covenant that limits the LTV Ratio (defined in the Global Senior Facility) to 0.75 in the event that the Global Senior Facility is more than 20 % utilized; • A restrictive covenant that limits the SSRCF Ratio (defined in the Global Senior Facility) to 0.275 ; F-23 Table of Contents • A restrictive covenant that requires the Company to maintain a Fixed Charge Coverage Ratio (as defined in the Global Senior Facility) of at least 2.0 ; • Additional restrictions and covenants which limit, among other things, the payment of dividends and the incurrence of additional indebtedness and liens; and • Standard events of default which, upon occurrence, may permit the lenders to terminate the Global Senior Facility and declare all amounts outstanding to be immediately due and payable. The Global Senior Facility is secured by substantially all of the assets of the Company and the guarantors. Pursuant to the terms of an intercreditor agreement entered into with respect to the relative positions of (1) the Global Senior Facility, any super priority hedging liabilities and the Encore Private Placement Notes (collectively, “Super Senior Liabilities”) and (2) the Senior Secured Notes, Super Senior Liabilities that are secured by assets that also secure the Senior Secured Notes will receive priority with respect to any proceeds received upon any enforcement action over any such assets. As of December 31, 2020, the outstanding borrowings under the Global Senior Facility were $ 481.0 million. Since the completion of the Financing Transactions, the weighted average interest rate of the Global Senior Facility was 3.25 %. The weighted average interest rate of the previous Cabot Credit Facility was 3.30 % and 3.52 % for the years ended December 31, 2020 and December 31, 2019, respectively. The weighted average interest rate of the previous Encore Revolving Credit Facility was 3.90 % and 5.27 % for the years ended December 31, 2020 and December 31, 2019, respectively. Available capacity under the Global Senior Facility was $ 569.0 million as of December 31, 2020. Encore Revolving Credit Facility and Term Loan Facility The Company had a revolving credit facility (the “Revolving Credit Facility”) and term loan facility (the “Term Loan Facility,” and together with the Revolving Credit Facility, the “Encore Senior Secured Credit Facilities”) pursuant to a Third Amended and Restated Credit Agreement dated December 20, 2016 (as amended, the “Restated Credit Agreement”) that was previously used to support the Company’s domestic operations. In connection with the Financing Transactions on September 24, 2020, the Company repaid the Encore Senior Secured Credit Facilities and terminated the Restated Credit Agreement. Encore Private Placement Notes In August 2017, Encore entered into $ 325.0 million in senior secured notes with a group of insurance companies (the “Encore Private Placement Notes”). In September 2020, as part of the Financing Transactions, the Company prepaid approximately $ 103.7 million of the Encore Private Placement Notes and made a $ 10.4 million make-whole payment to the holders of notes that were prepaid. The make-whole payment was included in loss on extinguishment of debt in the Company’s consolidated statements of operations during the year ended December 31, 2020. As of December 31, 2020, $ 146.6 million of the Encore Private Placement Notes remained outstanding. The Encore Private Placement Notes bear an annual interest rate of 5.625 %, mature in August 2024 and require quarterly principal payments of $ 9.8 million. The covenants and material terms for the Encore Private Placement Notes are substantially similar to those for the Global Senior Facility. Senior Secured Notes The following table provides a summary of the Senior Secured Notes ( $ in thousands ): December 31, 2020 December 31, 2019 Maturity Date Interest Rate Cabot 2023 Notes $ 309,034 $ 680,118 Oct 1, 2023 7.500 % Cabot 2024 Floating Rate Notes — 448,921 Jun 1, 2024 EURIBOR + 6.375 % Encore 2025 Notes 426,752 — Oct 15, 2025 4.875 % Encore 2026 Notes 409,827 — Feb 15, 2026 5.375 % Encore 2028 Floating Rate Notes 506,006 — Jan 15, 2028 EURIBOR + 4.250 % $ 1,651,619 $ 1,129,039 In September 2020, as part of the Financing Transactions, Encore issued € 350.0 million (approximately $ 426.8 million based on an exchange rate of $1.00 to €0.82, the exchange rate as of December 31, 2020) in aggregate principal amount of 4.875 % Senior Secured Notes due 2025 at an issue price of 98.889 % (the “Encore 2025 Notes”). Interest on the Encore 2025 Notes is payable semi-annually, in arrears, on April 15 and October 15 of each year, commencing on April 15, 2021. In November 2020, Encore issued £ 300.0 million (approximately $ 409.8 million based on an exchange rate of $1.00 to £0.73, the exchange rate as of December 31, 2020) in aggregate principal amount of 5.375 % Senior Secured Notes due 2026 at an issue price of 100.000 % (the “Encore 2026 Notes”). Interest on the Encore 2026 Notes is payable semi-annually, in arrears, on February 15 and August 15 of each year, commencing on February 15, 2021. The Company used the proceeds from this F-24 Table of Contents offering to redeem £ 286.7 million (approximately $ 391.7 million based on an exchange rate of $1.00 to £0.73, the exchange rate as of December 31, 2020) of the outstanding £ 512.9 million (approximately $ 700.7 million based on an exchange rate of $1.00 to £0.73, the exchange rate as of December 31, 2020) aggregate principal amount of 7.500 % Senior Secured Notes due 2023 (the “Cabot 2023 Notes”) at a redemption price of 101.875 %, and pay certain transaction fees and expenses incurred in connection with this offering. The Company recognized a loss on extinguishment of debt of approximately $ 12.8 million (approximately $ 10.3 million net of tax) associated with this transaction during the year ended December 31, 2020. As of December 31, 2020, £ 226.2 million (approximately $ 309.0 million based on an exchange rate of $1.00 to £0.73, the exchange rate as of December 31, 2020) of the Cabot 2023 Notes were outstanding, interest is payable semi-annually, in arrears, on April 1 and October 1 of each year. In December 2020, Encore issued € 415.0 million (approximately $ 506.0 million based on an exchange rate of $1.00 to €0.82, the exchange rate as of December 31, 2020) in aggregate principal amount of senior secured floating rate notes due 2028 at an issue price of 99.000 % (the “Encore 2028 Floating Rate Notes” and together with the Cabot 2023 Notes, Encore 2025 Notes and Encore 2026 Notes, the “Senior Secured Notes”). The Encore 2028 Floating Rate Notes bear interest at a rate equal to the sum of (i) three-month EURIBOR (subject to a 0 % floor) plus (ii) 4.250 % per annum, reset quarterly. Interest is payable quarterly in arrears on January 15, April 15, July 15 and October 15 of each year, commencing on April 15, 2021. The Company used the proceeds from this offering to redeem the outstanding € 400.0 million (approximately $ 487.7 million based on an exchange rate of $1.00 to €0.82, the exchange rate as of December 31, 2020) aggregate principal amount Senior Secured Floating Rate Notes due 2024 (the “Cabot 2024 Floating Rate Notes”) in full and pay certain transaction fees and expenses incurred in connection with this offering. The Company recognized a loss on extinguishment of debt of approximately $ 13.1 million (approximately $ 10.6 million net of tax) associated with this transaction during the year ended December 31, 2020. The Cabot 2024 Floating Rate Notes bore interest at a rate equal to the sum of (i) three-month EURIBOR (subject to a 0 % floor) plus (ii) 6.375 %, reset quarterly. The Senior Secured Notes are secured by the same collateral as the Global Senior Facility and the Encore Private Placement Notes. The guarantees provided in respect of the Senior Secured Notes are pari passu with each such guarantee given in respect of the Global Senior Facility and Encore Private Placement Notes. Subject to the intercreditor agreement described above under “Global Senior Secured Revolving Credit Facility,” Super Senior Liabilities that are secured by assets that also secure the Senior Secured Notes will receive priority with respect to any proceeds received upon any enforcement action over any such assets. Convertible Notes and Exchangeable Notes The following table provides a summary of the principal balance, maturity date and interest rate for the outstanding convertible and exchangeable senior notes (the “Convertible Notes” or “Exchangeable Notes,” as applicable) ( $ in thousands ): December 31, 2020 December 31, 2019 Maturity Date Interest Rate 2020 Convertible Notes (1) $ — $ 89,355 Jul 1, 2020 3.000 % 2021 Convertible Notes 161,000 161,000 Mar 15, 2021 2.875 % 2022 Convertible Notes 150,000 150,000 Mar 15, 2022 3.250 % 2023 Exchangeable Notes 172,500 172,500 Sep 1, 2023 4.500 % 2025 Convertible Notes 100,000 100,000 Oct 1, 2025 3.250 % $ 583,500 $ 672,855 _______________________ (1) The 2020 Convertible Notes matured on July 1, 2020 and the Company repaid the outstanding principal in cash. The Exchangeable Notes were issued by Encore Capital Europe Finance Limited (“Encore Finance”), a 100% owned finance subsidiary of Encore, and are fully and unconditionally guaranteed by Encore. Unless otherwise indicated in connection with a particular offering of debt securities, Encore will fully and unconditionally guarantee any debt securities issued by Encore Finance. Amounts related to Encore Finance are included in the consolidated financial statements of Encore subsequent to April 30, 2018, the date of incorporation of Encore Finance. Prior to the close of business on the business day immediately preceding their respective free conversion or exchange date (listed below), holders may convert or exchange their Convertible Notes or Exchangeable Notes under certain circumstances set forth in the applicable indentures. On or after their respective free conversion or exchange dates until the close of business on the second scheduled trading day immediately preceding their respective maturity date, holders may convert or exchange their notes at any time. Certain key terms related to the convertible and exchangeable features as of December 31, 2020 are listed below: F-25 Table of Contents 2021 Convertible Notes 2022 Convertible Notes 2023 Exchangeable Notes 2025 Convertible Notes Initial conversion or exchange price $ 59.39 $ 45.57 $ 44.62 $ 40.00 Closing stock price at date of issuance $ 47.51 $ 35.05 $ 36.45 $ 32.00 Closing stock price date Mar 5, 2014 Feb 27, 2017 Jul 20, 2018 Sep 4, 2019 Conversion or exchange rate (shares per $1,000 principal amount) 16.8386 21.9467 22.4090 25.0000 Conversion or exchange date Sep 15, 2020 Sep 15, 2021 Mar 1, 2023 Jul 1, 2025 Prior to October 29, 2020, in the event of conversion or exchange, holders of the Company’s Convertible Notes or Exchangeable Notes would receive cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. The Company’s intent was to settle conversions and exchanges through combination settlement with a minimum specified dollar amount of $1,000 per $1,000 principal amount of notes (i.e., convertible or exchangeable into cash up to the aggregate principal amount, and shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election and subject to certain restrictions contained in each of the indentures governing the Convertible Notes and Exchangeable Notes, for the remainder). As a result, only the conversion or exchange spread was included in the diluted earnings per share calculation, if dilutive. Under such method, the settlement of the conversion or exchange spread had a dilutive effect when, during any quarter, the average share price of the Company’s common stock exceeds the initial conversion or exchange prices listed in the above table. On October 29, 2020, the Company entered into supplemental indentures for the Convertible Notes and Exchangeable Notes so that in the event of conversion or exchange, the notes are convertible or exchangeable into cash up to the aggregate principal amount of the notes and the excess conversion premium, if any, may be settled in cash or shares of the Company’s common stock at the Company’s election and subject to certain restrictions contained in each of the indentures governing the Convertible Notes and Exchangeable Notes. Only the conversion or exchange spread is included in the diluted earnings per share calculation, if dilutive. There was no dilutive effect relating to our convertible or exchangeable notes during the years ended December 31, 2020, 2019, or 2018. The debt and equity components, the issuance costs related to the equity component, the stated interest rate, and the effective interest rate for each of the Convertible Notes and Exchangeable Notes at the time of the original offering are listed below (in thousands, except percentages) : 2021 Convertible Notes 2022 Convertible Notes 2023 Exchangeable Notes 2025 Convertible Notes Debt component $ 143,645 $ 137,266 $ 157,971 $ 91,024 Equity component $ 17,355 $ 12,734 $ 14,009 $ 8,976 Equity issuance cost $ 581 $ 398 $ — $ 224 Stated interest rate 2.875 % 3.250 % 4.500 % 3.250 % Effective interest rate 4.700 % 5.200 % 6.500 % 5.000 % The balances of the liability and equity components of all the Convertible Notes and Exchangeable Notes outstanding were as follows (in thousands) : December 31, 2020 December 31, 2019 Liability component—principal amount $ 583,500 $ 672,855 Unamortized debt discount ( 19,364 ) ( 30,308 ) Liability component—net carrying amount $ 564,136 $ 642,547 Equity component $ 53,074 $ 83,127 The debt discount is being amortized into interest expense over the remaining life of the Convertible Notes and Exchangeable Notes using the effective interest rates. Interest expense related to the Convertible Notes and Exchangeable Notes was as follows during the periods presented (in thousands) : F-26 Table of Contents Year ended December 31, 2020 2019 2018 Interest expense—stated coupon rate $ 21,857 $ 23,845 $ 17,518 Interest expense—amortization of debt discount 10,945 12,780 10,888 Interest expense—Convertible Notes and Exchangeable Notes $ 32,802 $ 36,625 $ 28,406 Hedge Transactions In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company may be required to make in the event that the market price of the Company’s common stock becomes greater than the conversion or exchange prices of the Convertible Notes and the Exchangeable Notes, the Company maintains a hedge program that increases the effective conversion or exchange price for the 2021 Convertible Notes and the Exchangeable Notes. All of the hedge instruments related to the Convertible Notes and the Exchangeable Notes have been determined to be indexed to the Company’s own stock and meet the criteria for equity classification. The Company recorded the cost of the hedge instruments as a reduction in additional paid-in capital, and does not recognize subsequent changes in fair value of these financial instruments in its consolidated financial statements. The Company did not hedge the 2022 Convertible Notes or the 2025 Convertible Notes. The details of the hedge program are listed below (in thousands, except conversion or exchange price) : 2021 Convertible Notes 2023 Exchangeable Notes Cost of the hedge transaction(s) $ 19,545 $ 17,785 Initial conversion or exchange price $ 59.39 $ 44.62 Effective conversion or exchange price $ 83.14 $ 62.48 Cabot Securitisation Senior Facility Cabot Securitisation UK Ltd (“Cabot Securitisation”), an indirect subsidiary of Encore, has a senior facility for a committed amount of £ 350.0 million (as amended, the “Cabot Securitisation Senior Facility”). The Cabot Securitisation Senior Facility matures in March 2025. Funds drawn under the Cabot Securitisation Senior Facility bear interest at a rate per annum equal to SONIA plus a margin of 3.06 % plus, for periods after March 15, 2023, a step-up margin ranging from zero to 1.00 %. As of December 31, 2020, the outstanding borrowings under the Cabot Securitisation Senior Facility were £ 350.0 million (approximately $ 478.1 million based on an exchange rate of $1.00 to £0.73, the exchange rate as of December 31, 2020). The obligations of Cabot Securitisation under the Cabot Securitisation Senior Facility are secured by first ranking security interests over all of Cabot Securitisation’s property, assets and rights (including receivables purchased from Cabot Financial UK from time to time), the book value of which was approximately £ 397.7 million (approximately $ 543.3 million based on an exchange rate of $1.00 to £0.73, the exchange rate as of December 31, 2020) as of December 31, 2020. The weighted average interest rate was 3.23 % and 3.74 % for the years ended December 31, 2020 and 2019, respectively. Cabot Securitisation and Cabot Securitisation II are securitized financing vehicles and are VIEs for consolidation purposes. Refer to “Note 8: Variable Interest Entities” for further details. Finance Lease Liabilities The Company has finance lease liabilities primarily for computer equipment. As of December 31, 2020, the Company’s finance lease liabilities were approximately $ 8.3 million. Refer to “Note 11: Leases” for further details. F-27 Table of Contents Maturity Schedule The aggregate amounts of the Company’s borrowings, maturing in each of the next five years and thereafter are as follows (in thousands) : 2021 $ 211,499 2022 198,573 2023 526,502 2024 511,963 2025 1,008,727 Thereafter 916,229 Total $ 3,373,493 Note 8: Variable Interest Entities A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb expected losses, or the right to receive expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company consolidates VIEs when it is the primary beneficiary. As of December 31, 2020, the Company’s VIEs include certain securitized financing vehicles and other immaterial special purpose entities that were created to purchase receivable portfolios in certain geographies. The Company is the primary beneficiary of these VIEs. The Company has the power to direct the activities of the VIEs which includes but is not limited to the ability to exercise discretion in the servicing of the financial assets. The Company evaluates its relationships with its VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary. Most assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the VIE. Note 9: Stock-Based Compensation In April 2017, Encore’s Board of Directors (the “Board”) approved the Encore Capital Group, Inc. 2017 Incentive Award Plan (the “2017 Plan”), which was then approved by the Company’s stockholders on June 15, 2017. The 2017 Plan superseded the Company’s 2013 Incentive Compensation Plan (as amended, the “2013 Plan”), which had previously superseded the Company’s 2005 Stock Incentive Plan (“2005 Plan”). Board members, employees, and consultants of Encore and its subsidiaries and affiliates are eligible to receive awards under the 2017 Plan. Subject to certain adjustments, the Company may grant awards for an aggregate of 5,713,571 shares of the Company’s common stock under the 2017 Plan. The aggregate number of shares available for issuance under the 2017 Plan will be reduced by 2.12 shares for each share delivered in settlement of any full value award and by one share for each share delivered in settlement of any stock option or stock appreciation right. If an award under the 2017 Plan or the 2013 Plan expires, lapses or is terminated, exchanged for cash, surrendered, repurchased, canceled without having been fully exercised or forfeited, the unused shares covered by such award will again become or again be available for award grants under the 2017 Plan. Shares available under the 2017 Plan will be increased by 2.12 shares for each share subject to a full value award and by one share for each share subject to a stock option or a stock appreciation right, in each case, that become or again be available for issuance pursuant to the foregoing share counting provisions. The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, dividend equivalent rights, stock appreciation rights, cash awards, performance-based awards and any other types of awards not inconsistent with the 2017 Plan. Total stock-based compensation expense during the years ended December 31, 2020, 2019, and 2018 was $ 16.6 million, $ 12.6 million, and $ 13.0 million, respectively. The actual tax benefit from stock-based compensation arrangements totaled $ 2.5 million, $ 1.2 million, and $ 1.3 million for the years ended December 31, 2020, 2019, and 2018, respectively. The Company’s stock-based compensation arrangements are described below: F-28 Table of Contents Stock Options Under the 2005 Plan, option awards were generally granted with an exercise price equal to the market price of the Company’s stock at the date of issuance. They generally vest over three to five years of continuous service, and have ten-year contractual terms. Other than the Performance Options discussed below, no options have been awarded under the 2013 Plan or 2017 Plan. There were no options granted during the years ended December 31, 2020, 2019, or 2018. As of December 31, 2020, all outstanding stock options have been fully vested and all related compensation expense has been fully recognized. A summary of the Company’s stock option activity as of December 31, 2020, and changes during the year then ended, are presented below: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2019 9,166 $ 22.17 Outstanding as of December 31, 2020 9,166 $ 22.17 1.26 $ 154 Exercisable as of December 31, 2020 9,166 $ 22.17 1.26 $ 154 The total intrinsic value of options exercised during the years ended December 31, 2019 and 2018 was $ 1.0 million and $ 0.4 million, respectively. Cash received from option exercise under all share-based payment arrangements during the years ended December 31, 2019 and 2018, was $ 0.3 million and $ 0.7 million, respectively. There were no options exercised during the year ended December 31, 2020. Performance Stock Options Under the 2017 Plan and the 2013 Plan, the Company granted performance stock options, with an exercise price equal to the closing price of the Company’s stock at the date of issuance, that vest in equal annual installments over a three year service period but only if, within four years from the date of grant, the 20 trading day average of the closing price of the Company’s stock (subject to dividend-related adjustments) exceeds a target equal to a 25 % increase from the closing price on the date of grant. These performance options have a seven-year contractual life. A summary of the Company’s performance stock option activity as of December 31, 2020, and changes during the year then ended, are presented below: Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (in thousands) Outstanding as of December 31, 2019 164,013 $ 31.73 Outstanding as of December 31, 2020 164,013 $ 31.73 3.21 $ 1,206 Vested as of December 31, 2020 150,697 $ 30.95 3.19 $ 1,206 Exercisable as of December 31, 2020 150,697 $ 30.95 3.19 $ 1,206 As of December 31, 2020, all related compensation expense has been fully recognized. No performance stock options were granted during the years ended December 31, 2020, 2019, and 2018. Non-Vested Shares The Company’s 2017 Plan (and previously, the 2013 Plan and 2005 Plan), permits restricted stock units, restricted stock awards, performance stock units, and performance stock awards (collectively “stock awards”). The fair value of non-vested shares with a service condition and/or a performance condition that affect vesting is equal to the closing sale price of the Company’s common stock on the grant date. Compensation expense is recognized only for the awards that ultimately vest. The Company has certain share awards that include market conditions that affect vesting. These shares vest based on the Company’s three-year relative total stockholder return compared to the other companies in the S&P SmallCap 600 Financial Sector Index as of the date of grant. The fair value of these shares is estimated using a lattice model. For the majority of non-vested shares, F-29 Table of Contents shares are issued on the vesting dates net of the number of shares needed to satisfy minimal statutory tax withholding requirements. The tax obligations are then paid by the Company on behalf of the employees. A summary of the Company’s stock award activities as of December 31, 2020, and changes during the year then ended, is presented below: Non-Vested Shares (1) Weighted Average Grant Date Fair Value Non-vested as of December 31, 2019 922,530 $ 33.11 Awarded 443,101 $ 38.51 Vested ( 389,484 ) $ 35.45 Cancelled ( 33,629 ) $ 39.68 Non-vested as of December 31, 2020 942,518 $ 35.29 ________________________ (1) Certain of the Company’s stock awards have a vesting matrix under which the stock awards can vest at a maximum level that is 200 % of the shares that would vest for achieving the performance goals at target. The number of shares presented is based on achieving the performance goals at target levels as defined in the stock award agreements. As of December 31, 2020 and 2019, the maximum number of non-vested performance shares that could vest under the provisions of the agreements was 1,255,445 and 1,171,334 , respectively. Unrecognized compensation expense related to non-vested shares as of December 31, 2020 was $ 15.4 million. The weighted-average remaining expense period, based on the unamortized value of these outstanding non-vested shares, was approximately 1.2 years. The fair value of restricted stock units and restricted stock awards vested for the years ended December 31, 2020, 2019, and 2018 was $ 14.5 million, $ 8.9 million, and $ 8.8 million, respectively. The weighted average grant date fair value for stock awards granted during the years ended December 31, 2020, 2019, and 2018 was $ 38.51 , $ 32.42 , and $ 38.52 , respectively. Note 10: Income Taxes Income before provision for income taxes consisted of the following (in thousands) : Year Ended December 31, 2020 2019 2018 US $ 259,132 $ 144,495 $ 61,972 Foreign 23,766 56,747 94,516 Total income before provision for income taxes $ 282,898 $ 201,242 $ 156,488 The provision for income tax on earnings from continuing operations consisted of the following (in thousands) : Year Ended December 31, 2020 2019 2018 Current expense (benefit): Federal $ 43,185 $ ( 2,917 ) $ 23,254 State 8,528 ( 6,464 ) 2,983 Foreign 10,112 21,008 29,532 61,825 11,627 55,769 Deferred expense (benefit): Federal 15,851 27,640 ( 10,447 ) State 2,192 5,535 ( 2,169 ) Foreign ( 9,494 ) ( 12,469 ) 3,599 8,549 20,706 ( 9,017 ) Provision for income taxes $ 70,374 $ 32,333 $ 46,752 F-30 Table of Contents The reconciliation of federal statutory income tax rate to our effective tax rate was as follows: Year Ended December 31, 2020 2019 2018 Federal provision 21.0 % 21.0 % 21.0 % State provision 3.2 % 0.2 % 0.1 % Foreign rate differential (1) ( 0.5 ) % ( 2.2 ) % ( 11.7 ) % Change in valuation allowance (2) 0.9 % ( 0.5 ) % 17.7 % IRS settlement (3) — % ( 2.4 ) % — % Tax effect of CFPB settlement fees (4) 1.1 % — % — % Other ( 0.8 ) % — % 2.8 % Effective rate 24.9 % 16.1 % 29.9 % ________________________ (1) Relates primarily to lower tax rates on income or loss attributable to international operations. (2) In 2018, valuation allowance net increase recorded as a result of certain foreign subsidiaries' cumulative operating losses for tax purposes. (3) In 2019, relates to tax benefit resulting from tax accounting method change. (4) Non-deductible expense for tax purposes. Refer to “Note 12: Commitments and Contingencies” for details of the CFPB settlement. The Company’s subsidiary in Costa Rica is operating under a 100 % tax holiday through December 31, 2026. The impact of the tax holiday in Costa Rica for the year ended December 31, 2020 was immaterial. The Company has not provided for applicable income or withholding taxes on the undistributed earnings from continuing operations for certain of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries as of December 31, 2020, were approximately $ 71.3 million. Such undistributed earnings are considered permanently reinvested. The Company does not provide deferred taxes on translation adjustments of unremitted earnings under the indefinite reinvestment exemption. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practical due to the complexities of a hypothetical calculation. Subsidiaries operating outside of the United States for which the Company does not consider under the indefinite reinvestment exemption have no material undistributed earnings or outside basis differences. F-31 Table of Contents Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the carrying amounts for income tax purposes. Significant components of the Company's deferred tax assets and liabilities were as follows (in thousands) : December 31, 2020 December 31, 2019 Deferred tax assets: Net operating losses $ 43,307 $ 36,236 Operating lease liabilities 12,583 18,023 Accrued expenses 12,862 10,050 Difference in basis of bond and loan costs 1,267 4,194 Stock-based compensation 2,787 2,882 Other 5,596 1,822 Total deferred tax assets 78,402 73,207 Valuation allowance ( 38,463 ) ( 36,422 ) Total deferred tax assets net of valuation allowance 39,939 36,785 Deferred tax liabilities: Deferred court cost — ( 23,682 ) Difference in basis of receivable portfolio ( 20,806 ) ( 57 ) Right-of-use asset ( 8,525 ) ( 14,422 ) Difference in basis of depreciable and amortizable assets ( 13,863 ) ( 3,680 ) Prepaid expenses ( 793 ) ( 628 ) Other ( 1,682 ) ( 4,559 ) Total deferred tax liabilities ( 45,669 ) ( 47,028 ) Net deferred tax liability (1) $ ( 5,730 ) $ ( 10,243 ) ________________________ (1) The Company operates in multiple jurisdictions. Deferred tax assets and liabilities are netted for each tax-paying component of the Company within a particular tax jurisdiction and presented as a single amount in the statement of financial condition. As of December 31, 2020, certain of the Company’s foreign subsidiaries have net operating loss carry forwards of approximately $ 155.3 million, which will begin to expire in 2024. Certain of the Company’s domestic subsidiaries have state net operating losses which the Company expects to fully utilize upon filing the 2020 income tax returns. Valuation allowances are recorded against deferred tax assets, including certain net operating losses recorded as deferred tax assets, if the Company believes that it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2020, valuation allowances increased to $ 38.5 million, as compared to $ 36.4 million as of December 31, 2019. The increase was primarily related to current period losses at certain foreign entities with cumulative operating losses during the period ended December 31, 2020. F-32 Table of Contents A reconciliation of the beginning and ending amounts of unrecognized tax benefit is as follows (in thousands) : Amount Balance as of December 31, 2017 $ 20,020 Increases related to prior year tax positions 256 Increases related to current year tax positions 1,958 Decrease related to expiration of statute of limitations ( 3,221 ) Decreases related to settlements with taxing authorities ( 461 ) Balance as of December 31, 2018 18,552 Decreases related to prior year tax positions ( 10,673 ) Increases related to current year tax positions 4,442 Decrease related to expiration of statute of limitations ( 2,493 ) Decreases related to settlements with taxing authorities ( 1,920 ) Balance as of December 31, 2019 7,908 Decrease related to prior year tax positions ( 608 ) Increases related to prior year tax positions 6 Increases related to current year tax positions 574 Decrease related to expiration of statute of limitations ( 827 ) Decreases related to settlements with taxing authorities ( 272 ) Balance as of December 31, 2020 $ 6,781 The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $ 6.9 million, $ 8.2 million and $ 19.9 million as of December 31, 2020, 2019, and 2018 respectively. As of December 31, 2020, 2019 and 2018, there was $ 6.5 million, $ 7.6 million and $ 13.0 million, respectively, of unrecognized tax benefit that if recognized, would result in a net tax benefit. During the year ended December 31, 2020, the decrease in the Company’s gross unrecognized tax benefit was primarily related to the expiration of state statute of limitations. During the year ended December 31, 2019, the decrease in the Company's gross unrecognized tax benefit was primarily related to decreases in prior year tax positions from exam resolutions. During the year ended December 31, 2018, the decrease in the Company’s gross unrecognized tax benefit was primarily related to expiration of state statute of limitations. The Company believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, it is reasonably possible that certain changes may occur within the next 12 months, which could significantly increase or decrease the balance of the Company’s gross unrecognized tax benefits. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of tax expense. The Company recognized expense of $ 0.2 million, benefit of $ 2.7 million and expense of $ 0.6 million in interest and penalties during the years ended December 31, 2020, 2019 and 2018, respectively. Interest and penalties accrued as of December 31, 2020 and 2019 were $ 0.2 million and $ 0.3 million, respectively. The Company files federal, state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. The Company is no longer subject to federal tax examinations for years prior to 2018. For U.S. state tax returns, the Company is generally not subject to tax examinations prior to 2013. The Company is subject to the examination of its income tax returns by various taxing authorities, and the timing of the resolution of income tax examinations cannot be predicted with certainty. The Company’s management regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of the Company’s provision for income taxes. If any issues addressed in the Company’s tax examinations are resolved in a manner not consistent with management's expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Note 11: Leases The majority of the Company’s leases are for corporate offices, various facilities, and information technology equipment. The Company elected not to apply the recognition requirements to short-term leases and not to separate non-lease components from lease components. The Company recognizes operating lease right-of-use (“ROU”) assets and operating lease liabilities in the consolidated statements of financial condition. ROU assets represent the Company’s right to use an underlying asset during the lease term F-33 Table of Contents and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at commencement date based on the net present value of fixed lease payments over the lease term. The Company’s lease term includes options to extend or terminate the lease when it is reasonably certain that it will exercise that option. ROU assets also include any advance lease payments made and are net of any lease incentives. As most of the Company’s operating leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The incremental borrowing rate is the rate of interest that the Company would expect to pay to borrow over a similar term, and on a collateralized basis, an amount equal to the lease payments in a similar economic environment. The components of lease expense were as follows during the periods presented (in thousands) : Year Ended December 31, 2020 2019 Operating lease costs (1) $ 16,331 $ 19,450 Finance lease costs Amortization of ROU assets 3,149 1,825 Interest on lease liabilities 420 563 Total lease costs $ 19,900 $ 21,838 ________________________ (1) Operating lease expenses are included in general and administrative expenses in the Company’s consolidated statements of operations. Costs include short-term and variable lease components which were not material for the periods presented. The following table provides supplemental consolidated statement of financial condition information related to leases as of the dates presented (in thousands) : Classification December 31, 2020 December 31, 2019 Assets Operating lease ROU assets Other assets $ 72,164 $ 75,254 Finance lease ROU assets Property and equipment, net 12,410 9,133 Total lease ROU assets $ 84,574 $ 84,387 Liabilities Operating lease liabilities Other liabilities $ 90,659 $ 93,847 Finance lease liabilities Borrowings 8,288 8,121 Total lease liabilities $ 98,947 $ 101,968 Supplemental lease information is summarized below (in thousands, except rate and lease term) : Year Ended December 31, 2020 2019 ROU assets obtained in exchange for new operating lease obligations (1) $ 8,990 $ 123,477 ROU assets obtained in exchange for new finance lease obligations 3,276 5,299 Cash paid for amounts included in the measurement of lease liabilities Operating leases - operating cash flows 17,396 14,874 Finance leases - operating cash flows 419 295 Finance leases - financing cash flows 3,114 1,898 ________________________ (1) During the year ended December 31, 2019, the amount includes $ 89.1 million for operating leases existing as of January 1, 2019. F-34 Table of Contents December 31, 2020 December 31, 2019 Weighted-average remaining lease term ( in years ) Operating leases 7.1 8.1 Finance leases 2.5 3.1 Weighted-average discount rate Operating leases (1) 5.0 % 5.3 % Finance leases 4.6 % 4.7 % ________________________ (1) Upon adoption of the new lease standard, discount rates used for existing operating leases were established at January 1, 2019. Maturities of lease liabilities under non-cancelable leases as of December 31, 2020 are summarized as follows (in thousands) : Finance Leases Operating Leases Total 2021 $ 3,674 $ 19,440 $ 23,114 2022 3,410 15,872 19,282 2023 1,467 14,311 15,778 2024 241 14,474 14,715 2025 — 11,612 11,612 Thereafter — 37,776 37,776 Total undiscounted lease payments 8,792 113,485 122,277 Less: imputed interest ( 504 ) ( 22,826 ) ( 23,330 ) Total lease liabilities $ 8,288 $ 90,659 $ 98,947 Note 12: Commitments and Contingencies Litigation and Regulatory The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act (“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to collect debts on which the statute of limitations has run, has made inaccurate or unsupported assertions of fact in support of its collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or changes in business practices. Many continue on for some length of time and involve substantial investigation, litigation, negotiation, and other expense and effort before a result is achieved, and during the process the Company often cannot determine the substance or timing of any eventual outcome. In September 2015, the Company entered into a consent order (the “2015 Consent Order”) with the Consumer Financial Protection Bureau (the “CFPB”) in which the Company settled allegations arising from its practices between 2011 and 2015. On September 8, 2020, a suit captioned Bureau of Consumer Financial Protection v. Encore Capital Group, Inc. et al. was filed in the United States District Court for the Southern District of California. In the suit, the CFPB alleged that the Company did not perfectly adhere to certain operational provisions of the 2015 Consent Order, leading to alleged violations of federal consumer financial law. On October 15, 2020, the parties entered into a stipulated judgment (“Stipulated Judgment”) to resolve the lawsuit. The Stipulated Judgment includes obligations on the Company to, among other things: (1) continue to follow a narrow subset of the operational requirements contained in the 2015 Consent Order, all of which have long been part of the Company’s routine practices; (2) pay a $ 15.0 million civil monetary penalty; and (3) provide redress of approximately $ 9,000 to 14 affected consumers, which is in addition to approximately $ 70,000 of redress that the Company had previously voluntarily provided. Under the Stipulated Judgment, the Company neither admits nor denies the allegations in the CFPB’s suit. In connection with the Stipulated Judgment the CFPB has formally terminated the 2015 Consent Order. As a result of the Stipulated Judgment the Company recorded an after-tax charge of $ 15.0 million, which is included in the general and administration expenses in its consolidated statements of operations for the year ended December 31, 2020 . F-35 Table of Contents Additionally, we are subject to ancillary state Attorney General investigations related to similar debt collection practices. In 2018, we entered into settlement agreements with the Attorneys General of 42 U.S. states and the District of Columbia in connection with our debt collection and litigation practices. The Company has discussed with additional state attorneys general potential resolution of these investigations, which could include penalties, restitution, and/or the adoption of new operational requirements. If the Company is unable to resolve its differences with the state attorneys general, it is possible that they may file claims against the Company. In certain legal proceedings, the Company may have recourse to insurance or third-party contractual indemnities to cover all or portions of its litigation expenses, judgments, or settlements. The Company records loss contingencies in its financial statements only for matters in which losses are probable and can be reasonably estimated. Where a range of loss can be reasonably estimated with no best estimate in the range, the Company records the minimum estimated liability. The Company continuously assesses the potential liability related to its pending litigation and regulatory matters and revises its estimates when additional information becomes available. The Company’s legal costs are recorded to expense as incurred. As of December 31, 2020, the Company has no material reserves for legal matters. Purchase Commitments In the normal course of business, the Company enters into forward flow purchase agreements. A forward flow purchase agreement is a commitment to purchase receivables over a duration that is typically three to twelve months, but can be longer, generally with a specifically defined volume range, frequency, and pricing. Typically, these forward flow contracts have provisions that allow for early termination or price re-negotiation should the underlying quality of the portfolio deteriorate over time or if any particular month’s delivery is materially different than the original portfolio used to price the forward flow contract. Certain of these forward flow purchase agreements may also have termination clauses, whereby the agreements can be canceled by either party upon providing a certain specified amount of notice. As of December 31, 2020, the Company had entered into forward flow purchase agreements for the purchase of nonperforming loans with an estimated minimum aggregate purchase price of approximately $ 157.4 million. We expect actual purchases under these forward flow purchase agreements to be significantly greater than the estimated minimum aggregate purchase price. Employee Savings and Retirement Plan The Company has a 401(k) Savings Plan that qualifies as deferred salary arrangements under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, matching contributions are based upon the amount of the employees’ contributions subject to certain limitations. The Company recognized expense of approximately $ 2.9 million, $ 2.8 million, and $ 2.5 million for the years ended December 31, 2020, 2019, and 2018, respectively. Guarantees Encore’s Certificate of Incorporation and indemnification agreements between the Company and its officers and directors provide that the Company will indemnify and hold harmless its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The Company has also agreed to indemnify certain third parties under certain circumstances pursuant to the terms of certain underwriting agreements, registration rights agreements, credit facilities, portfolio purchase and sale agreements, and other agreements entered into by the Company in the ordinary course of business. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of these indemnification agreements is minimal and, as of December 31, 2020, has no liabilities recorded for these agreements. Note 13: Segment and Geographic Information The Company conducts business through several operating segments. The Company’s management relies on internal management reporting processes that provide segment revenue, segment operating income, and segment asset information in order to make financial decisions and allocate resources. The Company determined its operating segments meet the aggregation criteria, and therefore, it has one reportable segment, portfolio purchasing and recovery, based on similarities among the operating units including economic characteristics, the nature of the services, the nature of the production process, customer types for their services, the methods used to provide their services and the nature of the regulatory environment. F-36 Table of Contents The following tables present information about geographic areas in which the Company operates (in thousands) : Year Ended December 31, 2020 2019 2018 Total revenues (1) : United States $ 992,916 $ 817,693 $ 709,493 International Europe (2) 490,385 520,433 556,265 Other geographies 18,099 59,555 96,272 Total $ 1,501,400 $ 1,397,681 $ 1,362,030 ________________________ (1) Total revenues for periods in 2019 and 2018 are adjusted by net allowances. Total revenues are attributed to countries based on consumer location. (2) Based on the financial information that is used to produce the general-purpose financial statements, providing further geographic information is impracticable. December 31, 2020 December 31, 2019 Long-lived assets (1) : United States $ 83,523 $ 84,118 International United Kingdom 37,225 28,602 Other foreign countries 6,549 7,331 43,774 35,933 Total $ 127,297 $ 120,051 ________________________ (1) Long-lived assets consist of property and equipment, net and finance leases. Note 14: Goodwill and Identifiable Intangible Assets The Company’s goodwill is attributable to reporting units included in its portfolio purchasing and recovery segment. Goodwill is tested for impairment at the reporting unit level annually and in interim periods if certain events occur that indicate that the fair value of a reporting unit may be below its carrying value. Determining the number of reporting units and the fair value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and assumptions. The Company performs its annual goodwill impairment assessment as of October 1. As of October 1, 2020, the Company had two reporting units, MCM and Cabot, that carried goodwill. The Company first assesses qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. The qualitative factors include economic environment, business climate, market capitalization, operating performance, competition, and other factors. The Company may proceed directly to the quantitative test without performing the qualitative test. For the goodwill impairment tests performed as of October 1, 2020, the Company updated its consideration of the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each of the reporting units. The Company performed qualitative analysis for the MCM reporting unit and proceeded directly to the quantitative test for its Cabot reporting unit. If goodwill is quantitatively assessed for impairment and a reporting unit’s carrying value exceeds its fair value, the difference is recorded as an impairment. The Company applies various valuation techniques to measure the fair value of each reporting unit, including the income approach and the market approach. For goodwill impairment analyses, the Company uses the income approach in determining fair value, specifically the discounted cash flow method, or DCF. In applying the DCF method, an identified level of future cash flow is estimated. Annual estimated cash flows and a terminal value are then discounted to their present value at an appropriate discount rate to obtain an indication of fair value. The discount rate utilized reflects estimates of required rates of return for investments that are seen as similar to an investment in the reporting unit. DCF analyses are based on management’s long-term financial projections and require significant judgments. Therefore, for the Company’s reporting units where the Company has access to reliable market participant data, the market approach is conducted in addition to the income approach in determining the fair value. The Company uses a guideline company method under the market approach to estimate the fair value of equity and the market value of invested capital (“MVIC”). The guideline company approach relies on estimated remaining collections data or the earnings before interest, tax, depreciation and amortization F-37 Table of Contents (“EBITDA”) for each of the selected guideline companies, which enables a direct comparison between the reporting unit and the selected peer group. The Company believes that the current methodology used in determining the fair value at its reporting units represent its best estimates. In addition, the Company compares the aggregate fair value of the reporting units to its overall market capitalization. Based on the annual goodwill impairment tests performed at October 1, 2020, no goodwill impairment existed at these two reporting units. On August 15, 2019, the Company completed the sale of Baycorp. The Company concluded that the fair value of Baycorp immediately prior to the sale was less than its recorded book value and, as a result, the entire goodwill balance carried at the Baycorp reporting unit of $ 10.7 million was impaired. The goodwill impairment is included in operating expenses in the Company’s consolidated statements of operations during the year ended December 31, 2019. Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill and long-lived assets. Further adverse changes in the Company’s actual or expected operating results, market capitalization, business climate, economic factors or other negative events that may be outside the control of management could result in a material non-cash impairment charge in the future. The Company’s goodwill is attributable to reporting units included in its portfolio purchasing and recovery segment. The following table summarizes the activity in the Company’s goodwill balance during the periods presented (in thousands): Year Ended December 31, 2020 2019 Balance as of beginning of period: $ 884,185 $ 868,126 Goodwill impairment — ( 10,718 ) Effect of foreign currency translation 22,777 26,777 Balance as of end of period: $ 906,962 $ 884,185 The Company’s acquired intangible assets are summarized as follows (in thousands) : As of December 31, 2020 As of December 31, 2019 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships $ 66,796 $ ( 22,714 ) $ 44,082 $ 67,897 $ ( 18,191 ) $ 49,706 Developed technologies 5,048 ( 4,760 ) 288 4,734 ( 4,124 ) 610 Trade name and other 6,644 ( 6,002 ) 642 6,299 ( 5,244 ) 1,055 Total intangible assets $ 78,488 $ ( 33,476 ) $ 45,012 $ 78,930 $ ( 27,559 ) $ 51,371 The weighted-average useful lives of intangible assets at the time of acquisition were as follows (in years) : Weighted-Average Useful Lives Customer relationships 10 Developed technologies 5 Trade name and other 7 F-38 Table of Contents The amortization expense for intangible assets subject to amortization was $ 8.0 million, $ 7.7 million, and $ 11.7 million during the years ended December 31, 2020, 2019, and 2018, respectively. Estimated future amortization expense related to finite-lived intangible assets as of December 31, 2020 is as follows ( in thousands ): 2021 $ 6,746 2022 6,720 2023 6,361 2024 6,274 2025 6,226 Thereafter 12,685 Total $ 45,012 F-39