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 (CEO) and Chief Financial Officer (CFO), 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 CEO and CFO concluded that, as of December 31, 2021, our disclosure controls and procedures were not effective as of such date due to a material weakness in internal control over financial reporting, described below. Management’s Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities and Exchange Act of 1934 as a process designed by, or under the supervision of, our executive management and effected by our board of directors, to provide reasonable assurance regarding the reliability of financial reporting and the preparations of financial statements for external purposes in accordance with U.S. GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for 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. Under the supervision of and with the participation of our management, we assessed the effectiveness of our internal control over financial reporting as of December 31, 2021, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. During the year ended December 31, 2021, we determined that we did not design and maintain effective controls within our Midland Credit Management operating unit with respect to the determination of certain qualitative factors applied to our estimates of future recoveries. This was evidenced by our failure to sufficiently document and substantiate certain qualitative factors that were applied to the output of our quantitative forecasting model during the year ended December 31, 2021. Accordingly, management has determined that this is a control deficiency that constitutes a material weakness. As a result of the above, the Company’s independent registered public accounting firm, BDO USA, LLP (BDO) has issued an adverse audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. Following identification of the material weakness and prior to filing this Annual Report on Form 10-K, we completed substantive procedures for the year ended December 31, 2021. Based on these procedures, management believes that our consolidated financial statements included in this Form 10-K have been prepared in accordance with U.S. GAAP. Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K. BDO has issued an unqualified opinion on our financial statements, which is included in Item 8 of this Form 10-K. Remediation Plan for the Material Weakness To remediate the material weakness identified above, management will document and maintain evidence that demonstrates: (1) that the application of qualitative factors to our forecasts operates at a level of precision that would prevent or detect a material misstatement, (2) that a review of the application of the qualitative factors occurred and (3) that any findings related to the review are appropriately resolved. We believe that these actions will remediate the material weakness. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed no later than December 31, 2022. 54 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, 2021, 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 did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2021, 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, 2021 and 2020, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as “the consolidated financial statements”) and our report dated February 23, 2022 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. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. A material weakness regarding management’s failure to design and maintain controls over the qualitative adjustments to estimates of future recoveries, a component of revenues, has been identified and described in management’s assessment. This material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report dated February 23, 2022 on those consolidated financial statements. 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 consolidated 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 consolidated 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 23, 2022 55 Table of Contents Changes in Internal Control over Financial Reporting Except as described above, based on the evaluation of our management as required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, we believe that there were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Item 9B—Other Information None. Item 9C—Disclosure Regarding Foreign Jurisdictions that Prevent Inspection None. 56 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 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2021. Item 11—Executive Compensation The information required by this item is incorporated by reference to our Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2021. 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 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2021. 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 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2021. Item 14—Principal Accountant Fees and Services The information required by this item is incorporated by reference to our Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2021. 57 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, 202 1 and 20 20 F- 4 Consolidated Statements of Income for the years ended December 31, 202 1 , 2 020 and 201 9 F- 5 Consolidated Statements of Comprehensive Income for the years ended December 31, 202 1 , 20 20 and 201 9 F- 6 Consolidated Statements of Equity for the years ended December 31, 202 1 , 20 20 and 201 9 F- 7 Consolidated Statements of Cash Flows for the years ended December 31, 202 1 , 20 20 and 201 9 F- 8 Notes to Consolidated Financial Statements F- 9 (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 4.2.1 Amendment No. 1 to Fourth Amended and Restated Senior Secured Note Purchase Agreement, dated August 17, 2021, by and among Encore Capital Group, Inc. and the purchasers named therein 10-Q 000-26489 10.2 11/3/2021 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 for 2022 Convertible Notes 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 58 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 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 for 2025 Convertible Notes 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 for Encore 2025 Notes 8-K 000-26489 4.1 9/24/2020 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 for Encore 2026 Notes 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 for Encore 2028 Floating Rate Notes 8-K 000-26489 4.1 12/21/2020 4.18 Indenture dated June 1, 2021 between Encore Capital Group, Inc., the subsidiary guarantors party thereto, GLAS Trust Company LLC as trustee and Truist Bank as security agent for Encore 2028 Notes 8-K 000-26489 4.1 6/1/2021 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 59 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 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 X 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 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 60 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 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 10.11.10+ Form of Performance Share Unit Award Grant Notice and Award Agreement (ROIC) under the Encore Capital Group, Inc. 2017 Incentive Award Plan X 10.19 Amended and Restated Senior Facilities Agreement, dated August 5 , 202 1 , 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 8/11/2021 10.22 Senior Facility Agreement, dated November 12, 2021, 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 11/12/2021 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 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 61 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. 62 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 23, 2022 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 23, 2022 Ashish Masih /s/ J ONATHAN C. C LARK Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) February 23, 2022 Jonathan C. Clark /s/ P ETER R ECK Vice President, Chief Accounting Officer (Principal Accounting Officer) February 23, 2022 Peter Reck /s/ A SHWINI G UPTA Director February 23, 2022 Ashwini Gupta /s/ W ENDY G. H ANNAM Director February 23, 2022 Wendy G. Hannam /s/ J EFFREY A. H ILZINGER Director February 23, 2022 Jeffrey A. Hilzinger /s/ A NGELA A. K NIGHT Director February 23, 2022 Angela A. Knight /s/ M ICHAEL P. M ONACO Director February 23, 2022 Michael P. Monaco /s/ L AURA O LLE Director February 23, 2022 Laura Olle /s/ R ICHARD J. S REDNICKI Director February 23, 2022 Richard J. Srednicki /s/ R ICHARD P. S TOVSKY Director February 23, 2022 Richard P. Stovsky 63 Table of Contents ENCORE CAPITAL GROUP, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm ( BDO USA, LLP ; San Diego, California ; PCAOB ID # 243 ) F- 1 Consolidated Statements of Financial Condition at December 31, 2021 and 2020 F- 4 Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019 F- 5 Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019 F- 6 Consolidated Statements of Equity for the years ended December 31, 2021, 2020 and 2019 F- 7 Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 F- 8 Notes to Consolidated Financial Statements F- 9 Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies F- 9 Note 2: Fair Value Measurements F- 15 Note 3: Derivatives and Hedging Instruments F- 17 Note 4: Investment in Receivable Portfolios, Net F- 20 Note 5: Composition of Certain Financial Statement Items F- 22 Note 6: Borrowings F- 23 Note 7: Variable Interest Entities F- 28 Note 8: Common Stock F- 28 Note 9: Accumulated Other Comprehensive Loss F- 29 Note 10 : Stock-Based Compensation F- 29 Note 1 1 : Income Taxes F- 32 Note 1 2 : Leases F- 34 Note 1 3 : Commitments and Contingencies F- 36 Note 1 4 : Segment and Geographic Information F- 37 Note 1 5 : Goodwill and Identifiable Intangible Assets F- 38 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, 2021 and 2020, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 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, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 23, 2022 expressed an adverse opinion thereon. Changes in Accounting Principles As discussed in Note 1 to the consolidated financial statements, effective January 1, 2021, the Company adopted 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”). 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. 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) relate 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. F-1 Estimate of Expected Future Recoveries on Purchased Credit Deteriorated Assets As more fully described in Notes 1 and 4 to the consolidated financial statements, the Company’s investment in receivable portfolios, net balance was approximately $3.1 billion at December 31, 2021, and the resulting changes in recoveries for the year ended December 31, 2021 were $199.1 million. Investment in receivable portfolios, net is comprised of purchased loans that have experienced significant deterioration of credit quality since origination. In accordance with the Company’s charge-off policy each individual loan is deemed to be uncollectible. Receivable portfolio purchases are aggregated based on similar risk characteristics (“pool”), and a negative allowance is established based on expected future recoveries of the pool using a discounted cash flow approach. Subsequent changes (favorable and unfavorable) in expected future recoveries are recognized within changes in recoveries in the Statements of Income. The Company reviews each pool for current trends, actual versus expected performance, and expected timing of future recoveries (curve shape). The Company then re-forecasts the timing and amounts of expected future recoveries. We identified the estimate of expected future recoveries on purchased credit deteriorated assets as a critical audit matter. Specifically, management is required to make significant judgments and assumptions to estimate expected future recoveries. Estimated future recoveries are based on historical experience, current conditions, reasonable and supportable forecasts, and certain qualitative factors. 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 inputs and outputs from the Company’s proprietary statistical and behavioral models used to forecast expected future recoveries, and performance monitoring of expected future recoveries. • Testing the completeness and accuracy of collection data used by management to monitor each pool for current trends, actual versus expected performance, and the expected amount and timing of future recoveries (curve shape). • Evaluating management’s process used to develop estimates of expected future recoveries and certain qualitative factors 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, and curve shape. Goodwill Impairment Assessment As more fully described in Notes 1 and 15 to the consolidated financial statements, the Company’s goodwill balance was approximately $897.8 million at December 31, 2021, 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. The market approach requires significant management judgment in the selection of appropriate 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 market approaches. • Testing management’s process for developing fair value estimates including testing the completeness, accuracy, relevance and reliability of underlying data, and evaluating significant management assumptions within their cash flow forecasts 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, valuation multiples, and the terminal value, and (iii) assessing the reasonableness of the discount rate by developing independent estimates and comparing estimates to those utilized by management. F-2 /s/ BDO USA, LLP We have served as the Company's auditor since 2001. San Diego, California February 23, 2022 F-3 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Financial Condition (In Thousands, Except Par Value Amounts) December 31, 2021 December 31, 2020 Assets Cash and cash equivalents $ 189,645 $ 189,184 Investment in receivable portfolios, net 3,065,553 3,291,918 Property and equipment, net 119,857 127,297 Other assets 335,275 349,162 Goodwill 897,795 906,962 Total assets $ 4,608,125 $ 4,864,523 Liabilities and Equity Liabilities: Accounts payable and accrued liabilities $ 229,586 $ 215,920 Borrowings 2,997,331 3,281,634 Other liabilities 195,947 146,893 Total liabilities 3,422,864 3,644,447 Commitments and contingencies (Note 13) 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, 24,541 shares and 31,345 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively 245 313 Additional paid-in capital — 230,440 Accumulated earnings 1,238,564 1,055,668 Accumulated other comprehensive loss ( 53,548 ) ( 68,813 ) Total Encore Capital Group, Inc. stockholders’ equity 1,185,261 1,217,608 Noncontrolling interest — 2,468 Total equity 1,185,261 1,220,076 Total liabilities and equity $ 4,608,125 $ 4,864,523 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 7: Variable Interest Entities” for additional information on the Company’s VIEs. December 31, 2021 December 31, 2020 Assets Cash and cash equivalents $ 1,927 $ 2,223 Investment in receivable portfolios, net 498,507 553,621 Other assets 3,452 5,127 Liabilities Accounts payable and accrued liabilities 105 — Borrowings 473,443 478,131 Other liabilities 10 37 See accompanying notes to consolidated financial statements F-4 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Income (In Thousands, Except Per Share Amounts) Year Ended December 31, 2021 2020 2019 Revenues Revenue from receivable portfolios $ 1,287,730 $ 1,374,717 $ 1,269,288 Changes in recoveries 199,136 7,246 — Total debt purchasing revenue 1,486,866 1,381,963 1,269,288 Servicing revenue 120,778 115,118 126,527 Other revenues 6,855 4,319 9,974 Total revenues 1,614,499 1,501,400 1,405,789 Allowances on receivable portfolios, net ( 8,108 ) Total revenues, adjusted by net allowances 1,397,681 Operating expenses Salaries and employee benefits 385,178 378,176 376,365 Cost of legal collections 254,280 239,071 202,670 General and administrative expenses 137,695 149,113 148,256 Other operating expenses 106,938 108,944 108,433 Collection agency commissions 47,057 49,754 63,865 Depreciation and amortization 50,079 42,780 41,029 Goodwill impairment — — 10,718 Total operating expenses 981,227 967,838 951,336 Income from operations 633,272 533,562 446,345 Other expense Interest expense ( 169,647 ) ( 209,356 ) ( 217,771 ) Loss on extinguishment of debt ( 9,300 ) ( 40,951 ) ( 8,989 ) Other expense ( 17,784 ) ( 357 ) ( 18,343 ) Total other expense ( 196,731 ) ( 250,664 ) ( 245,103 ) Income before income taxes 436,541 282,898 201,242 Provision for income taxes ( 85,340 ) ( 70,374 ) ( 32,333 ) Net income 351,201 212,524 168,909 Net income attributable to noncontrolling interest ( 419 ) ( 676 ) ( 1,040 ) Net income attributable to Encore Capital Group, Inc. stockholders $ 350,782 $ 211,848 $ 167,869 Earnings per share attributable to Encore Capital Group, Inc.: Basic $ 11.64 $ 6.74 $ 5.38 Diluted $ 11.26 $ 6.68 $ 5.33 Weighted average shares outstanding: Basic 30,129 31,427 31,210 Diluted 31,153 31,710 31,474 See accompanying notes to consolidated financial statements F-5 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Comprehensive Income (In Thousands) Year Ended December 31, 2021 2020 2019 Net income $ 351,201 $ 212,524 $ 168,909 Other comprehensive income, net of tax: Change in unrealized gain (loss) on derivative instruments: Unrealized gain (loss) on derivative instruments 12,835 234 ( 5,029 ) Income tax effect ( 2,165 ) ( 66 ) 761 Unrealized gain (loss) on derivative instruments, net of tax 10,670 168 ( 4,268 ) Change in foreign currency translation: Unrealized (loss) gain on foreign currency translation ( 15,309 ) 17,160 23,169 Removal of other comprehensive loss in connection with divestiture 19,904 2,632 3,814 Unrealized gain on foreign currency translation, net of divestiture 4,595 19,792 26,983 Other comprehensive income, net of tax 15,265 19,960 22,715 Comprehensive income 366,466 232,484 191,624 Comprehensive income attributable to noncontrolling interest: Net income attributable to noncontrolling interest ( 419 ) ( 676 ) ( 1,040 ) Unrealized income on foreign currency translation — ( 7 ) ( 494 ) Comprehensive income attributable to noncontrolling interest ( 419 ) ( 683 ) ( 1,534 ) Comprehensive income attributable to Encore Capital Group, Inc. stockholders $ 366,047 $ 231,801 $ 190,090 See accompanying notes to consolidated financial statements F-6 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, 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 Removal of other comprehensive loss in connection with divestiture — — ( 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 Removal of other comprehensive loss in connection with divestiture — — — — 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 Cumulative adjustment — — ( 40,372 ) 22,458 — — ( 17,914 ) Net income — — — 350,782 — 419 351,201 Other comprehensive loss, net of tax — — — — ( 4,639 ) — ( 4,639 ) Purchase of noncontrolling interest — — ( 2,669 ) — — ( 2,887 ) ( 5,556 ) Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes 266 2 ( 5,537 ) — — — ( 5,535 ) Repurchase of common stock ( 7,070 ) ( 70 ) ( 200,192 ) ( 190,344 ) — — ( 390,606 ) Stock-based compensation — — 18,330 — — — 18,330 Removal of other comprehensive loss in connection with divestiture — — — — 19,904 — 19,904 Balance as of December 31, 2021 24,541 $ 245 $ — $ 1,238,564 $ ( 53,548 ) $ — $ 1,185,261 See accompanying notes to consolidated financial statements F-7 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Cash Flows (In Thousands) Year Ended December 31, 2021 2020 2019 Operating activities: Net income $ 351,201 $ 212,524 $ 168,909 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 50,079 42,780 41,029 Expense related to financing 9,300 51,117 3,523 Other non-cash interest expense, net 17,785 23,639 30,299 Stock-based compensation expense 18,330 16,560 12,557 Deferred income taxes 35,371 8,549 20,706 Goodwill impairment — — 10,718 Changes in recoveries ( 199,136 ) ( 7,246 ) — Provision for allowances on receivable portfolios, net — — 8,108 Other, net 17,130 16,260 9,794 Changes in operating assets and liabilities Deferred court costs — — ( 3,646 ) Other assets 3,927 8,980 29,025 Prepaid income tax and income taxes payable 7,758 ( 24,344 ) ( 24,045 ) Accounts payable, accrued liabilities and other liabilities ( 8,692 ) ( 35,955 ) ( 62,244 ) Net cash provided by operating activities 303,053 312,864 244,733 Investing activities: Purchases of receivable portfolios, net of put-backs ( 657,280 ) ( 644,048 ) ( 1,035,130 ) Collections applied to investment in receivable portfolios, net 1,019,629 737,131 757,640 Purchases of property and equipment ( 33,372 ) ( 34,600 ) ( 39,602 ) Proceeds from sale of portfolios — — 107,937 Other, net 10,919 24,343 6,822 Net cash provided by (used in) investing activities 339,896 82,826 ( 202,333 ) Financing activities: Payment of loan and debt refinancing costs ( 11,963 ) ( 82,455 ) ( 11,586 ) Proceeds from credit facilities 821,931 1,820,634 603,634 Repayment of credit facilities ( 896,418 ) ( 2,290,822 ) ( 586,429 ) Proceeds from senior secured notes 353,747 1,313,385 454,573 Repayment of senior secured notes ( 359,175 ) ( 1,033,765 ) ( 470,768 ) Proceeds from issuance of convertible senior notes — — 100,000 Repayment of convertible senior notes ( 161,000 ) ( 89,355 ) ( 84,600 ) Repurchase of common stock ( 390,606 ) — — Other, net ( 12,208 ) ( 40,822 ) ( 24,594 ) Net cash used in by financing activities ( 655,692 ) ( 403,200 ) ( 19,770 ) Net (decrease) increase in cash and cash equivalents ( 12,743 ) ( 7,510 ) 22,630 Effect of exchange rate changes on cash and cash equivalents 13,204 4,359 12,287 Cash and cash equivalents, beginning of period 189,184 192,335 157,418 Cash and cash equivalents, end of period $ 189,645 $ 189,184 $ 192,335 Supplemental disclosures of cash flow information: Cash paid for interest $ 132,400 $ 169,553 $ 178,948 Cash paid for income taxes, net of refunds 42,039 88,816 43,973 Supplemental schedule of non-cash investing and financing activities: Investment in receivable portfolios transferred to real estate owned $ 768 $ 2,214 $ 5,058 Property and equipment acquired through finance leases 2,664 3,276 5,299 See accompanying notes to consolidated financial statements F-8 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 in Europe. 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. 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.” 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 continue to rapidly evolve 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 7: 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. Immaterial Error Corrections During 2021, the Company identified immaterial disclosure errors relating to presentation of its deferred tax assets and deferred tax liabilities in the Income Taxes footnote of Form 10-K for the year ended December 31, 2020. The disclosure error was primarily related to incorrect netting of deferred tax assets and deferred tax liabilities in various tax jurisdictions. Nonetheless, the consolidated net deferred taxes positions for the periods presented were reported correctly. The Company revised the previously reported deferred tax assets and deferred tax liabilities in this Form 10-K for the year ended December 31, 2021. The disclosure error had no effect on the Company’s consolidated financial statements. F-9 Table of Contents Recently Adopted Accounting Guidance On January 1, 2021, the Company adopted 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 Company adopted ASU 2020-06 using the modified-retrospective approach, by recording a net cumulative-effect adjustment to equity of approximately $ 17.9 million. 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 also amends the guidance to improve the consistency of earnings per share calculations, which requires the if-converted method be used for convertible instruments. Under ASU 2020-06, the Company’s convertible and exchangeable notes are no longer bifurcated to a debt component and an equity component, instead, they are carried as a single liability which reflects the principal amount of the convertible and exchangeable notes. The interest expense recognized on the convertible and exchangeable notes is based on coupon rates, rather than higher effective interest rates. As a result, the Company recognizes lower interest expense after the adoption. Additionally, effective January 1, 2021, the Company uses the if-converted method in calculating the dilutive effect of its convertible and exchangeable notes for earnings per share. The adoption of ASU 2020-06 had a positive impact to the Company’s diluted earnings per share of $ 0.19 for the year ended December 31, 2021. 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 new guidance on the Company’s consolidated statements of financial condition at January 1, 2021 ( in thousands ): Balance as of December 31, 2020 Adjustment Opening Balance as of January 1, 2021 Liabilities Convertible notes and exchangeable notes $ 583,500 $ — $ 583,500 Debt discount ( 19,364 ) 19,364 — Other liabilities (for deferred tax liabilities) 146,893 ( 1,450 ) 145,443 Equity Additional paid-in capital 230,440 ( 40,372 ) 190,068 Accumulated earnings 1,055,668 22,458 1,078,126 With the exception of the updated standard discussed above, there have been no recent accounting pronouncements or changes in accounting pronouncements during the year ended December 31, 2021. 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. On an ongoing basis, the Company evaluates significant estimates, including changes in estimated future recoveries on its investment in receivable portfolios, fair value of goodwill, and income taxes, among others. The Company bases its estimates on assumptions, both historical and forward looking, that are believed to be reasonable. 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 $ 29.3 million and $ 20.3 million as of December 31, 2021 and 2020, respectively. F-10 Table of Contents Investment in Receivable Portfolios Current Accounting Policy On January 1, 2020, the Company adopted the new accounting standard for Financial Instruments - Credit Losses (“CECL”). The adoption resulted in a reduction to the Company’s accumulated earnings of $ 44.2 million. 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. 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. Debt purchasing revenue includes two components: (1) Revenue from receivable portfolios, which is the accretion of the discount on the negative allowance due to the passage of time (generally the portfolio balance multiplied by the EIR) and also includes all revenue from zero basis portfolio (“ZBA”) collections, and (2) Changes in recoveries, which includes (a) Recoveries above or below forecast, which is the difference between (i) actual cash collected/recovered during the current period and (ii) expected cash recoveries for the current period, which generally represents over or under performance for the period; and (b) Changes in expected future recoveries, which is the present value change of expected future recoveries, where such change generally results from (i) collections “pulled forward from” or “pushed out to” future periods (i.e. amounts either collected early or expected to be collected later) and (ii) magnitude and timing changes to estimates of expected future collections (which can be increases or decreases). The Company measures expected future recoveries based on historical experience, current conditions, reasonable and supportable forecasts, and other quantitative and qualitative factors. 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 the Company’s collection staff. External factors that may have an impact on the Company’s collections include new laws or regulations, new interpretations of existing laws or regulations, and macroeconomic conditions. 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 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 income. F-11 Table of Contents 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 income 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. 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 income. 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 15: Goodwill and Identifiable Intangible Assets” for further discussion of the Company’s goodwill and other intangible assets. F-12 Table of Contents 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. Leases 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 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 Company elected not to apply the recognition requirements to short-term leases and not to separate non-lease components from lease components for operating leases. Income Taxes The provision for income taxes is estimated using the asset and liability method of accounting for income taxes, under which deferred tax assets and liabilities are recognized based on temporary differences between the financial statement and income tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which the differences are expected to be realized or settled. At each reporting date, the Company considers new evidence, both positive and negative, that could affect future realization of deferred tax assets including historical earnings, taxable income in prior carryback years if permitted under tax law, projections of future income, timing of reversing temporary differences and the implementation of feasible and prudent tax planning strategies. In the event that it is more likely than not that all or part of the deferred tax assets are determined not to be realizable in the future, the Company would establish or increase a valuation allowance in the period such determination is made, with a corresponding charge to earnings. In the event the Company realizes deferred tax assets that were previously determined to be unrealizable, the Company would release or decrease the respective valuation allowance, with a corresponding positive adjustment to earnings. The calculation of tax liabilities involves significant judgement in estimating the impact and timing of resolution of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with the Company’s expectations could have a material impact on the Company’s results of operation and financial position. The Company records liabilities related to uncertain tax positions when it believes that it is more likely than not that those positions may not be fully sustained upon review by tax authorities, despite its belief that those tax return positions are supportable. The Company includes interest and penalties related to income taxes within its provision for income taxes. See “Note 11: Income Taxes” for further discussion. 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 F-13 Table of Contents 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 income. See “Note 10: 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 in the United States 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. 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. The Company adopted ASU 2020-06 on January 1, 2021, using a modified retrospective approach. Effective January 1, 2021, the dilutive effect of the Company’s convertible and exchangeable notes is calculated using the if-converted method. Prior to the adoption, the dilutive effect of the convertible and exchangeable notes was calculated using the treasury stock method. In September 2021, in accordance with the indenture for the convertible senior notes due in March 2022, the Company irrevocably elected cash settlement for these notes. As a result, the convertible senior notes due in March 2022 were only dilutive prior to September 15, 2021. All of the Company’s other convertible and exchangeable notes require net share settlement, using the if-converted method results in a similar dilutive effect as using the treasury stock method under the previous accounting standard, due to the fact that only in-the-money shares are included in the dilutive effect. F-14 Table of Contents 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, 2021 2020 2019 Net income attributable to Encore Capital Group, Inc. $ 350,782 $ 211,848 $ 167,869 Total weighted-average basic shares outstanding 30,129 31,427 31,210 Dilutive effect of stock-based awards 407 283 264 Dilutive effect of convertible and exchangeable senior notes 617 — — Total weighted-average dilutive shares outstanding 31,153 31,710 31,474 Basic earnings per share $ 11.64 $ 6.74 $ 5.38 Diluted earnings per share $ 11.26 $ 6.68 $ 5.33 Anti-dilutive employee stock options outstanding were approximately 3,000 , 51,000 and 64,000 during the years ended December 31, 2021, 2020, and 2019, 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, 2021 Level 1 Level 2 Level 3 Total Assets Interest rate cap contracts $ — $ 3,541 $ — $ 3,541 Liabilities Cross-currency swap agreements — ( 16,902 ) — ( 16,902 ) Contingent consideration — — ( 5,218 ) ( 5,218 ) F-15 Table of Contents 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 ) 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. Changes in fair value of contingent consideration are included in other operating expenses in the Company’s consolidated statements of income. The following table provides a roll-forward of the fair value of contingent consideration, which is included in the accounts payable and accrued liabilities in the Company’s consolidated statements of financial position, for the years ended December 31, 2021, 2020 and 2019 (in thousands) : Amount 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 in connection with purchase of noncontrolling interest 2,848 Payment of contingent consideration ( 88 ) Effect of foreign currency translation 131 Balance as of December 31, 2020 2,957 Issuance of contingent consideration in connection with purchase of noncontrolling interest 2,913 Change in fair value of contingent consideration ( 388 ) Payment of contingent consideration ( 180 ) Effect of foreign currency translation ( 84 ) Balance as of December 31, 2021 $ 5,218 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 based on appraised values using market comparable. The fair value estimate of the assets held for sale was approximately $ 44.6 million and $ 42.2 million as of December 31, 2021 and December 31, 2020, respectively. F-16 Table of Contents 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, 2021 and December 31, 2020 (in thousands) : December 31, 2021 December 31, 2020 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial Assets Investment in receivable portfolios $ 3,065,553 $ 3,416,926 $ 3,291,918 $ 3,705,672 Financial Liabilities Convertible senior notes due March 2021 (1) — — 160,406 161,349 Convertible senior notes due March 2022 (1) 150,000 195,009 146,644 160,905 Exchangeable senior notes due September 2023 (1) 172,500 257,782 164,339 190,737 Convertible senior notes due October 2025 (1) 100,000 165,887 92,747 109,090 Senior secured notes (2) 1,606,327 1,652,246 1,642,058 1,684,729 Encore private placement notes 107,470 108,652 146,550 141,860 ________________________ (1) Prior to January 1, 2021, under the previous accounting standard, the convertible and exchangeable notes included a debt discount. The carrying amount as of December 31, 2020 represented the principal amount of the notes, net of the debt discount. (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. Borrowings: The Company’s convertible notes, exchangeable notes, senior secured notes and private placement 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 and private placement 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 and securitisation senior facility approximates fair value due to the use of current market rates that are repriced frequently. F-17 Table of Contents 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, 2021 December 31, 2020 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Derivatives designated as hedging instruments: Interest rate cap contracts Other assets $ 3,541 Other assets $ 659 Interest rate swap agreements — — Other liabilities ( 5,232 ) Cross-currency swap agreements Other liabilities ( 16,902 ) Other assets 11,578 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. 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, 2021, 2020, or 2019. 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 but continued to amortize the remaining unrealized loss in OCI into earnings. On September 30, 2021, the Company ceased hedge accounting for its interest rate swap instruments due to the forecasted transactions were no longer probable driven by the continued pay down of its USD-LIBOR denominated borrowings. As a result, the Company reclassified all the remaining unrealized loss in OCI of approximately $ 1.9 million into earnings. The two remaining interest swap agreements matured in December 2021 and were not designated as hedging instruments during the fourth quarter of 2021. The Company uses cross-currency swap agreements 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. The cross-currency swap agreements are accounted for as cash flow hedges. As of December 31, 2021, there were four cross-currency swap agreements outstanding with a total notional amount of € 350.0 million (approximately $ 397.9 million based on an exchange rate of $1.00 to € 0.88 , the exchange rate as of December 31, 2021). The Company expects to reclassify approximately $ 5.2 million of net derivative loss from OCI into earnings relating to cross-currency swaps within the next 12 months. The Company also uses interest rate cap contracts to manage its risk related to the interest rate fluctuations in its variable interest rate bearing debt. The Company has an interest rate cap (the “2019 Cap”) with a notional amount of € 400.0 million (approximately $ 454.8 million based on an exchange rate of $1.00 to € 0.88 , the exchange rate as of December 31, 2021). The 2019 Cap hedges the fluctuations in three-month EURIBOR floating rate debt and matures in 2024. The Company also had an interest rate cap that was used to hedge the fluctuations in debt bearing variable interest based on sterling overnight index average (“SONIA”) (the “2020 Cap”). The 2020 Cap had a notional amount of £ 350.0 million (approximately $ 473.4 million based on an exchange rate of $1.00 to £ 0.74 , the exchange rate as of December 31, 2021) with a maturity date in March 2023. In November 2021, the Company sold the 2020 Cap for approximately $ 0.9 million and paid approximately $ 2.1 million to purchase another interest rate cap (the “2021 Cap”) that matures in September 2024 with the same notional amount. The Company expects the hedge relationships to be highly effective and designates the 2019 Cap and 2021 Cap as cash flow hedge instruments. The remaining OCI associated with the terminated 2020 Cap will continue to be amortized through March 2023. The Company expects to F-18 Table of Contents reclassify approximately $ 0.9 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, 2021 2020 2019 2021 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 ( 69 ) ( 7,441 ) ( 6,347 ) Interest expense ( 8,743 ) ( 7,893 ) ( 2,560 ) Interest rate cap contracts 1,824 ( 3,001 ) ( 1,752 ) Interest expense ( 568 ) ( 2,846 ) 146 Cross-currency swap agreements ( 33,464 ) 10,503 — Interest expense / Other expense ( 33,532 ) 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. As of December 31, 2021, the Company had no outstanding currency exchange forward contracts that were not designated as cash flow hedging instruments. 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 discussed in “Derivatives Designed as Hedging Instruments,” on September 30, 2021, the Company ceased hedge accounting for its interest rate swap instruments due to the continued pay down of its USD-LIBOR denominated borrowings. The interest rate swap agreements had a liability balance of $ 1.2 million as of September 30, 2021 and matured in December 2021. The following table summarizes the effects of derivatives not designated as hedging instruments on the Company’s consolidated statements of income 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, 2021 2020 2019 Foreign currency exchange contracts Other expense $ ( 20 ) $ 3,564 $ ( 2,959 ) Interest rate swap agreements Other expense ( 73 ) — — F-19 Table of Contents 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. Refer to the “Investment in Receivable Portfolios” section in Note 1 for current accounting policy and accounting policy prior to January 1, 2020 for the Company’s purchased 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 subsequent to the adoption of CECL ( in thousands ): Year Ended December 31, 2021 2020 Purchase price $ 664,529 $ 659,872 Allowance for credit losses 1,823,582 1,703,420 Amortized cost 2,488,111 2,363,292 Noncredit discount 3,284,369 3,464,670 Face value 5,772,480 5,827,962 Write-off of amortized cost ( 2,488,111 ) ( 2,363,292 ) Write-off of noncredit discount ( 3,284,369 ) ( 3,464,670 ) Negative allowance 664,529 659,872 Negative allowance for expected recoveries - current period purchases $ 664,529 $ 659,872 F-20 Table of Contents The following tables summarize the changes in the balance of the investment in receivable portfolios during the periods subsequent to the adoption of CECL ( in thousands ): Year Ended December 31, 2021 2020 Balance, beginning of period $ 3,291,918 $ 3,328,150 Purchases of receivable portfolios 664,529 659,872 Collections applied to investment in receivable portfolios, net (1) ( 1,019,629 ) ( 737,131 ) Changes in recoveries (2) 199,136 7,246 Put-backs and Recalls ( 7,249 ) ( 15,824 ) Deconsolidation of receivable portfolios ( 9,352 ) ( 2,822 ) Disposals and transfers to real estate owned ( 8,071 ) ( 9,459 ) Foreign currency adjustments ( 45,729 ) 61,886 Balance, end of period $ 3,065,553 $ 3,291,918 ________________________ (1) Collections applied to investment in receivable portfolios, net, is calculated as follows during the periods subsequent to the adoption of CECL: Year Ended December 31, 2021 2020 Cash collections $ 2,307,359 $ 2,111,848 Less - amounts classified to revenue from receivable portfolios ( 1,287,730 ) ( 1,374,717 ) Collections applied to investment in receivable portfolios, net $ 1,019,629 $ 737,131 (2) Changes in recoveries is calculated as follows during the periods subsequent to the adoption of CECL, where recoveries include cash collections, put-backs and recalls, and other cash-based adjustments: Year Ended December 31, 2021 2020 Recoveries above forecast $ 326,006 $ 228,075 Changes in expected future recoveries ( 126,870 ) ( 220,829 ) Changes in recoveries $ 199,136 $ 7,246 Recoveries above or below forecast represent over and under-performance in the reporting period, respectively. Collections during the year ended December 31, 2021 significantly outperformed the projected cash flows by approximately $ 326.0 million. The Company believes the collection over-performance was a result of improvements in collections operations and changed consumer behavior during the COVID-19 pandemic. 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, 2021, management considered historical and current collection performance, uncertainty in economic forecasts in the geographies in which we operate, and believes that for certain static pools collections over-performance resulted in increased total expected recoveries. Although management believes that the relevant macroeconomic conditions have improved and therefore no longer materially impact the Company’s collections performance, uncertainty still remains in the geographies in which the Company operates. 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 negative change in expected future period recoveries of approximately $ 126.9 million during the year ended December 31, 2021. 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-21 Table of Contents The following tables summarize the changes in the balance of the investment in receivable portfolios during the year ended December 31, 2019, prior to the adoption of CECL ( in thousands ): Year Ended December 31, 2019 Balance, beginning of period $ 3,137,893 Purchases of receivable portfolios 1,046,696 Collections applied to investment in receivable portfolios, net ( 757,640 ) Put-backs and Recalls ( 11,591 ) Deconsolidation of receivable portfolios ( 51,935 ) Disposals and transfers to real estate owned ( 11,495 ) Sale of receivable portfolios (1) ( 98,636 ) Portfolio allowance, net ( 8,108 ) Foreign currency adjustments 38,800 Balance, end of period $ 3,283,984 ________________________ (1) Represents the sale of certain portfolios in the Company’s European operations under its co-investment framework. The Company recognized a gain of approximately $ 9.3 million in connection with the transaction. The gain was included in Other Revenues in the Company’s consolidated statements of income during the year ended December 31, 2019. Note 5: 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, 2021 December 31, 2020 Computer equipment and software $ 209,844 $ 194,678 Leasehold improvements 37,533 43,621 Furniture, fixtures and equipment 19,959 10,514 Telecommunications equipment and other 3,075 3,450 Construction in process 2,487 4,739 272,898 257,002 Less: accumulated depreciation and amortization ( 153,041 ) ( 129,705 ) $ 119,857 $ 127,297 Depreciation and amortization expense related to property and equipment was $ 42.2 million, $ 34.8 million, and $ 33.3 million during the years ended December 31, 2021, 2020, and 2019, respectively. F-22 Table of Contents Other Assets Other assets consist of the following as of the dates presented ( in thousands ): December 31, 2021 December 31, 2020 Operating lease right-of-use assets $ 68,812 $ 72,164 Deferred tax assets 51,451 33,202 Real estate owned 44,640 42,173 Identifiable intangible assets, net 36,320 45,012 Prepaid expenses 26,943 26,717 Service fee receivables 22,610 26,539 Income tax deposits 19,315 35,853 Other 65,184 67,502 Total $ 335,275 $ 349,162 Note 6: Borrowings The Company is in compliance in all material respects with all covenants under its financing arrangements as of December 31, 2021. The components of the Company’s consolidated borrowings were as follows as of the dates presented (in thousands) : December 31, 2021 December 31, 2020 Global senior secured revolving credit facility $ 406,635 $ 481,007 Encore private placement notes 107,470 146,550 Senior secured notes 1,613,739 1,651,619 Convertible notes and exchangeable notes 422,500 583,500 Cabot securitisation senior facility 473,443 478,131 Other 24,889 24,398 Finance lease liabilities 7,005 8,288 3,055,681 3,373,493 Less: debt discount and issuance costs, net of amortization ( 58,350 ) ( 91,859 ) Total $ 2,997,331 $ 3,281,634 Encore is the parent of the restricted group for the Global Senior Facility, the Senior Secured Notes and the Encore Private Placement Notes, each of which is 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. Global Senior Secured Revolving Credit Facility In September 2020, the Company 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, 2021, the Global Senior Facility provided for a total committed facility of $ 1,050.0 million that matures in September 2025 and included the following key provisions: • Interest at LIBOR (or EURIBOR for any loan drawn in euro or a rate based on SONIA for any loan drawn in British Pound) plus 2.50 % per annum, with a LIBOR (or EURIBOR or SONIA) floor of 0.00 %; • An unused commitment fee of 0.40 % per annum, payable quarterly in arrears; • A restrictive covenant that limits the LTV Ratio (as 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 (as defined in the Global Senior Facility) to 0.275 ; • 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 F-23 Table of Contents • 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, 2021, the outstanding borrowings under the Global Senior Facility were $ 406.6 million. The weighted average interest rate of the Global Senior Facility was 3.07 % and 3.25 % for the years ended December 31, 2021 and December 31, 2020, respectively. The weighted average interest rate of the previous Cabot Credit Facility was 3.30 % for the year ended December 31, 2020. The weighted average interest rate of the previous Encore Revolving Credit Facility was 3.90 % for the year ended December 31, 2020. Available capacity under the Global Senior Facility was $ 643.4 million as of December 31, 2021. 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 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 income during the year ended December 31, 2020. As of December 31, 2021, $ 107.5 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, 2021 December 31, 2020 Maturity Date Interest Payment Dates Interest Rate Cabot 2023 Notes $ — $ 309,034 Oct 1, 2023 Apr 1, Oct 1 7.500 % Encore 2025 Notes 397,928 426,752 Oct 15, 2025 Apr 15, Oct 15 4.875 % Encore 2026 Notes 405,808 409,827 Feb 15, 2026 Feb 15, Aug 15 5.375 % Encore 2028 Notes 338,174 — Jun 1, 2028 Jun 1, Dec 1 4.250 % Encore 2028 Floating Rate Notes 471,829 506,006 Jan 15, 2028 Jan 15, Apr 15, Jul 15, Oct 15 EURIBOR + 4.250 % (1) $ 1,613,739 $ 1,651,619 ______________________ (1) Interest rate is based on three-month EURIBOR (subject to a 0 % floor) plus 4.250 % per annum, resets quarterly. In September 2020 Encore issued € 350.0 million (approximately $ 397.9 million based on an exchange rate of $1.00 to € 0.88 , the exchange rate as of December 31, 2021) 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 $ 405.8 million based on an exchange rate of $1.00 to £ 0.74 , the exchange rate as of December 31, 2021) 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 offering to redeem £ 286.7 million (approximately $ 387.8 million based on an exchange rate of $1.00 to £ 0.74 , the exchange rate as of December 31, 2021) of the outstanding £ 512.9 million (approximately $ 693.8 million based on an exchange rate of $1.00 to £ 0.74 , the exchange rate as of December 31, 2021) 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 associated with this transaction during the year ended December 31, 2020. F-24 Table of Contents In December 2020, Encore issued € 415.0 million (approximately $ 471.8 million based on an exchange rate of $1.00 to € 0.88 , the exchange rate as of December 31, 2021) 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”). 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 $ 454.8 million based on an exchange rate of $1.00 to € 0.88 , the exchange rate as of December 31, 2021) 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 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. In June 2021, Encore issued £ 250.00 million (approximately $ 338.2 million based on an exchange rate of $1.00 to £ 0.74 , the exchange rate as of December 31, 2021) aggregate principal amount of senior secured notes due 2028 (the “Encore 2028 Notes” and together with the Cabot 2023 Notes, Encore 2025 Notes, Encore 2026 Notes and the Encore 2028 Floating Rate Notes, the “Senior Secured Notes”). The Encore 2028 Notes accrue interest at a rate of 4.250 % per annum, payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2021. Encore used the proceeds from the offering to redeem in full the then outstanding £ 226.2 million (approximately $ 306.0 million based on an exchange rate of $1.00 to £ 0.74 , the exchange rate as of December 31, 2021) aggregate principal amount of 7.500 % Cabot 2023 Notes at a redemption price of 101.875 %, and to pay certain transaction fees and expenses incurred in connection with the offering. The Company recognized a loss on extinguishment of debt of approximately $ 9.3 million associated with this transaction during the year ended December 31, 2021. 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 the section “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, 2021 December 31, 2020 Maturity Date Interest Rate 2021 Convertible Notes (1) $ — $ 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 % $ 422,500 $ 583,500 _______________________ (1) The 2021 Convertible Notes matured on March 15, 2021 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. 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 Convertible Notes and the Exchangeable Notes. The hedge instruments 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. As of December 31, 2021, the Company had one hedge program that increases the effective exchange price for the 2023 Exchangeable Notes. The Company did not hedge the 2022 Convertible Notes or the 2025 Convertible Notes. F-25 Table of Contents Pursuant to certain terms in the indentures of the Company’s Convertible Notes and Exchangeable Notes, the conversion or exchange rates have been adjusted upon the completion of the Company’s modified “Dutch Auction” tender offer effective in December 2021. Refer to details of the tender offer in Note 8: Common Stock.” Certain key terms related to the convertible and exchangeable features as of December 31, 2021 are listed below ($ in thousands, except conversion or exchange price) : 2022 Convertible Notes 2023 Exchangeable Notes 2025 Convertible Notes Initial conversion or exchange price $ 45.57 $ 44.62 $ 40.00 Closing stock price at date of issuance $ 35.05 $ 36.45 $ 32.00 Closing stock price date Feb 27, 2017 Jul 20, 2018 Sep 4, 2019 Initial conversion or exchange rate (shares per $1,000 principal amount) 21.9467 22.4090 25.0000 Adjusted conversion or exchange rate (shares per $1,000 principal amount) 22.0617 22.5264 25.1310 Adjusted conversion or exchange price $ 45.33 $ 44.39 $ 39.79 Adjusted effective conversion or exchange price (1) $ 45.33 $ 62.13 $ 39.79 Excess of if-converted value compared to principal (2) $ 55,538 $ 68,847 $ 56,089 Conversion or exchange date (3) Sep 15, 2021 Mar 1, 2023 Jul 1, 2025 _______________________ (1) As discussed above, the Company maintains a hedge program that increases the effective exchange price for the 2023 Exchangeable Notes to $ 62.13 . (2) Represents the premium the Company would have to pay assuming the Convertible Notes and Exchangeable Notes were converted or exchanged on December 31, 2021. The premium of the 2023 Exchangeable Notes would have been reduced to zero with the existing hedge program. (3) During the quarter ending December 31, 2021, the closing price of the Company’s common stock exceeded 130 % of the exchange price of the 2023 Exchangeable Notes and the conversion price of the 2025 Convertible Notes for more than 20 trading days during a 30 consecutive trading day period, thereby satisfying one of the early exchange or conversion events. As a result, the 2023 Exchangeable Notes and the 2025 Convertible Notes became exchangeable or convertible on demand on January 1, 2022. Prior to the close of business on the business day immediately preceding their respective free conversion or exchange date (listed above), 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. In September 2021, in accordance with the indenture for the 2022 Convertible Notes, the Company irrevocably elected “combination settlement” with a specified dollar amount equal to $1,750 per $1,000 principal amount of the 2022 Convertible Notes for all conversions of the 2022 Convertible Notes that occur on or after September 15, 2021, the free conversion date, which effectively will result in an all cash settlement for the 2022 Convertible Notes so long as the stock price is less than $ 79.32 at the time of conversion. None of the 2022 Convertible Notes have been converted. In the event of conversion or exchange, the 2025 Convertible Notes and the 2023 Exchangeable 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. As discussed in “Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies,” the Company adopted ASU 2020-06 on January 1, 2021 using a modified-retrospective approach. The Company’s convertible and exchangeable notes are no longer bifurcated into a debt component and an equity component, instead, they are carried as a single liability, which reflects the principal amount of the convertible and exchangeable notes. The interest expense recognized on the convertible and exchangeable notes is based on coupon rates, rather than higher effective interest rates. 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. Prior to the adoption of ASU 2020-06. The Convertible Notes and Exchangeable Notes were bifurcated into a debt component and an equity component. The debt discount was amortized into interest expense using effective interest rates. 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 F-26 Table of Contents 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 prior to the adoption of ASU 2020-06 were as follows (in thousands) : December 31, 2020 Liability component—principal amount $ 583,500 Unamortized debt discount ( 19,364 ) Liability component—net carrying amount $ 564,136 Equity component $ 53,074 Interest expense related to the Convertible Notes and Exchangeable Notes was as follows during the periods presented (in thousands) : Year ended December 31, 2021 2020 2019 Interest expense—stated coupon rate $ 16,839 $ 21,857 $ 23,845 Interest expense—amortization of debt discount — 10,945 12,780 Interest expense—Convertible Notes and Exchangeable Notes $ 16,839 $ 32,802 $ 36,625 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”). On November 12, 2021, the Cabot Securitisation Senior Facility was amended to extend the maturity date from March 15, 2025 to September 18, 2026. Funds drawn under the Cabot Securitisation Senior Facility bear interest at a rate per annum equal to SONIA plus a margin of 3.00 % plus, for periods after September 18, 2024, a step-up margin ranging from zero to 1.00 %. As of December 31, 2021, the outstanding borrowings under the Cabot Securitisation Senior Facility were £ 350.0 million (approximately $ 473.4 million based on an exchange rate of $1.00 to £ 0.74 , the exchange rate as of December 31, 2021). 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 £ 361.0 million (approximately $ 488.3 million based on an exchange rate of $1.00 to £ 0.74 , the exchange rate as of December 31, 2021) as of December 31, 2021. The weighted average interest rate was 3.11 % and 3.23 % for the years ended December 31, 2021 and 2020, respectively. Cabot Securitisation is a securitized financing vehicle and is a VIE for consolidation purposes. Refer to “Note 7: Variable Interest Entities” for further details. Finance Lease Liabilities The Company has finance lease liabilities primarily for computer equipment. As of December 31, 2021, the Company’s finance lease liabilities were approximately $ 7.0 million. Refer to “Note 12: 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) : 2022 $ 203,825 2023 220,667 2024 33,622 2025 907,663 2026 879,901 Thereafter 810,003 Total $ 3,055,681 Note 7: 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, 2021, the Company’s VIEs include certain securitized financing vehicle 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 exercise discretion in the servicing of the financial assets and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIEs. 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 8: Common Stock Share Repurchase Plan On August 12, 2015, the Company’s Board of Directors approved a $ 50.0 million share repurchase program. On May 5, 2021, the Company announced that the Board of Directors had approved an increase in the size of the repurchase program from $ 50.0 million to $ 300.0 million (an increase of $ 250.0 million). Repurchases under this program are expected to be made with cash on hand and may be made from time to time, subject to market conditions and other factors, in the open market, through private transactions, block transactions, or other methods as determined by the Company’s management and Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate the Company to acquire any particular amount of common stock, and it may be modified or suspended at any time at the Company’s discretion. During the year ended December 31, 2021, the Company repurchased 2,598,034 shares of its common stock for approximately $ 121.2 million. The Company’s practice is to retire the shares repurchased. Tender Offer On November 4, 2021, the Company commenced a modified “Dutch Auction” tender offer to purchase up to $ 300.0 million of shares of its common stock with a price range between $ 52.00 and $ 60.00 per share. On December 9, 2021, the Company announced the final results of the tender offer. Through the tender offer, the Company purchased 4,471,995 shares of common stock at a price of $ 60.00 per share, for a total cost of $ 268.3 million, excluding fees and expenses. The shares purchased through the tender offer were immediately retired. The Company records the excess of repurchase price over the par amount to additional paid-in capital, then to retained earnings once additional paid-in capital is reduced to zero. Direct costs relating to the stock repurchases are treated as stock issuance costs and are included in stockholders’ equity. F-28 Note 9: Accumulated Other Comprehensive Loss A summary of the Company’s changes in accumulated other comprehensive loss by component is presented below (in thousands): Derivatives Currency Translation Adjustments Accumulated Other Comprehensive Loss Balance at December 31, 2018 $ ( 6,054 ) $ ( 104,933 ) $ ( 110,987 ) Other comprehensive loss before reclassification ( 7,055 ) 22,675 15,620 Reclassification (1) 2,026 — 2,026 Removal of OCI in connection with divestiture — 3,814 3,814 Tax effect 761 — 761 Balance at December 31, 2019 ( 10,322 ) ( 78,444 ) ( 88,766 ) Other comprehensive loss before reclassification ( 324 ) 17,153 16,829 Reclassification 558 — 558 Removal of OCI in connection with divestiture — 2,632 2,632 Tax effect ( 66 ) — ( 66 ) Balance at December 31, 2020 ( 10,154 ) ( 58,659 ) ( 68,813 ) Other comprehensive loss before reclassification ( 31,709 ) ( 15,309 ) ( 47,018 ) Reclassification (1) 44,544 — 44,544 Removal of OCI in connection with divestiture — 19,904 19,904 Tax effect ( 2,165 ) — ( 2,165 ) Balance at December 31, 2021 $ 516 $ ( 54,064 ) $ ( 53,548 ) ________________________ (1) Includes immaterial adjustment to true-up certain derivative related activities recorded in prior periods. Note 10: 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, 2021, 2020, and 2019 was $ 18.3 million, $ 16.6 million, and $ 12.6 million, respectively. The actual tax benefit from stock-based compensation arrangements totaled $ 2.5 million, $ 2.5 million, and $ 1.2 million for the years ended December 31, 2021, 2020, and 2019, respectively. The Company’s stock-based compensation arrangements are described below: F-29 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, 2021, 2020, or 2019. As of December 31, 2021, 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, 2021, 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, 2020 9,166 $ 22.17 Exercised ( 5,000 ) $ 22.17 Outstanding as of December 31, 2021 4,166 $ 22.17 0.26 $ 166 Exercisable as of December 31, 2021 4,166 $ 22.17 0.26 $ 166 The total intrinsic value of options exercised during the years ended December 31, 2021 and 2019 was $ 0.2 million and $ 0.9 million, respectively. Cash received from option exercise under all share-based payment arrangements during the years ended December 31, 2021 and 2019, was negligible. There were no stock 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, 2021, 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, 2020 164,013 $ 31.73 Exercised ( 50,083 ) $ 30.95 Expired ( 13,316 ) $ 40.50 Outstanding as of December 31, 2021 100,614 $ 30.95 2.19 $ 3,135 Vested as of December 31, 2021 100,614 $ 30.95 2.19 $ 3,135 Exercisable as of December 31, 2021 100,614 $ 30.95 2.19 $ 3,135 As of December 31, 2021, all related compensation expense has been fully recognized. No performance stock options were granted during the years ended December 31, 2021, 2020, and 2019. The total intrinsic value of performance options exercised during the year ended December 31, 2021 and 2019 was $ 1.1 million and $ 0.1 million, respectively. Cash received from performance option exercise during the years ended December 31, 2021 and 2019 was $ 1.6 million and $ 0.3 million, respectively. There were no performance stock options exercised during the year ended December 31, 2020. F-30 Table of Contents 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, 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, 2021, 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, 2020 942,518 $ 37.28 Awarded 418,961 $ 42.09 Vested ( 442,894 ) $ 38.04 Cancelled ( 224,646 ) $ 38.44 Non-vested as of December 31, 2021 693,939 $ 39.33 ________________________ (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, 2021 and 2020, the maximum number of non-vested performance shares that could vest under the provisions of the agreements was 878,309 and 1,255,445 , respectively. Unrecognized compensation expense related to non-vested shares as of December 31, 2021 was $ 12.8 million. The weighted-average remaining expense period, based on the unamortized value of these outstanding non-vested shares, was approximately 1.3 years. The fair value of restricted stock units and restricted stock awards vested for the years ended December 31, 2021, 2020, and 2019 was $ 16.9 million, $ 14.5 million, and $ 8.9 million, respectively. The weighted average grant date fair value for stock awards granted during the years ended December 31, 2021, 2020, and 2019 was $ 42.09 , $ 38.51 , and $ 32.42 , respectively. F-31 Table of Contents Note 11: Income Taxes Income before provision for income taxes consisted of the following (in thousands) : Year Ended December 31, 2021 2020 2019 US $ 390,607 $ 259,132 $ 144,495 Foreign 45,934 23,766 56,747 Total income before provision for income taxes $ 436,541 $ 282,898 $ 201,242 The provision for income tax on earnings from continuing operations consisted of the following (in thousands) : Year Ended December 31, 2021 2020 2019 Current expense (benefit): Federal $ 33,582 $ 43,185 $ ( 2,917 ) State 5,787 8,528 ( 6,464 ) Foreign 10,600 10,112 21,008 49,969 61,825 11,627 Deferred expense (benefit): Federal 49,512 15,851 27,640 State 5,904 2,192 5,535 Foreign ( 20,045 ) ( 9,494 ) ( 12,469 ) 35,371 8,549 20,706 Provision for income taxes $ 85,340 $ 70,374 $ 32,333 The reconciliation of federal statutory income tax rate to our effective tax rate was as follows: Year Ended December 31, 2021 2020 2019 Federal provision 21.0 % 21.0 % 21.0 % State provision 2.3 % 3.2 % 0.2 % Foreign rate differential (1) ( 1.0 ) % ( 0.5 ) % ( 2.2 ) % Change in tax rate (2) ( 1.3 ) % ( 0.9 ) % 0.2 % Change in valuation allowance (3) ( 2.3 ) % 0.9 % ( 0.5 ) % IRS settlement (4) — % — % ( 2.4 ) % Tax effect of CFPB settlement fees (5) — % 1.1 % — % Other 0.8 % 0.1 % ( 0.2 ) % Effective rate 19.5 % 24.9 % 16.1 % ________________________ (1) Relates primarily to lower tax rates on income or loss attributable to international operations. (2) In 2021 and 2020, includes impact of U.K. tax rate increases. (3) In 2021, valuation allowance net decrease resulted from releasing valuation allowances in certain foreign subsidiaries. (4) In 2019, relates to tax benefit resulting from tax accounting method change. (5) Non-deductible expense for tax purposes. 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 years ended December 31, 2021, 2020 and 2019 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, 2021, were approximately $ 143.0 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 F-32 Table of Contents 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 and therefore no U.S. taxes have been provided. 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, 2021 December 31, 2020 (1) Deferred tax assets: Net operating losses $ 68,677 $ 69,718 Operating lease liabilities 18,715 18,717 Accrued expenses 11,885 10,165 Difference in basis of bond and loan costs — 16 Difference in basis of receivable portfolio 33,335 17,115 Stock-based compensation 4,528 2,787 Right-of-use asset 23 58 Difference in basis of depreciable and amortizable assets 5,326 4,242 Other 6,094 5,782 Total deferred tax assets 148,583 128,600 Valuation allowance ( 35,920 ) ( 45,636 ) Total deferred tax assets net of valuation allowance 112,663 82,964 Deferred tax liabilities: Accrued expenses ( 750 ) ( 9 ) Difference in basis of bond and loan costs ( 1,725 ) ( 11,818 ) Difference in basis of receivable portfolio ( 105,743 ) ( 41,383 ) Stock-based compensation ( 672 ) — Right-of-use asset ( 15,367 ) ( 14,717 ) Difference in basis of depreciable and amortizable assets ( 26,210 ) ( 18,105 ) Prepaid expenses ( 907 ) ( 793 ) Other ( 23 ) ( 1,869 ) Total deferred tax liabilities ( 151,397 ) ( 88,694 ) Net deferred tax liability (2) $ ( 38,734 ) $ ( 5,730 ) ________________________ (1) Certain adjustments have been made to the numbers reported in the Form 10-K for the year ended December 31, 2020, to reflect the revision of immaterial presentation errors in the prior period primarily due to incorrect netting of deferred tax assets and deferred tax liabilities in certain taxing jurisdictions. The net deferred tax liability was correctly reported in the prior year. (2) The Company operates in multiple jurisdictions. In accordance with authoritative guidance relating to income taxes, deferred taxes 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, 2021, certain of the Company’s foreign subsidiaries have net operating loss carry forwards of approximately $ 274.3 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 2021 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 it is more likely than not that some or all of the deferred tax assets will not be realized. As of December 31, 2021, valuation allowance decreased by $9.7 million, as compared to December 31, 2020. The decrease in valuation allowance is primarily due to expected utilization of net operating losses in certain foreign jurisdictions that were previously limited due to forecasted income. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets in these jurisdictions. F-33 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, 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 Decrease related to prior year tax positions ( 2,034 ) Decrease related to expiration of statute of limitations ( 712 ) Increase related to prior year tax positions 261 Increase related to current year tax positions 251 Balance as of December 31, 2021 $ 4,547 The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $ 4.6 million, $ 6.9 million and $ 8.2 million as of December 31, 2021, 2020, and 2019 respectively. As of December 31, 2021, 2020 and 2019, there was $ 1.6 million, $ 3.3 million and $ 5.0 million, respectively, of unrecognized tax benefit that if recognized, would result in a net tax benefit. During the year ended December 31, 2021, the decrease in the Company’s gross unrecognized tax benefit was primarily related to the release of a prior year position related to a foreign entity. 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. 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 income tax as a component of the provision for income taxes. The Company recognized expense of $ 0.1 million, expense of $ 0.2 million and benefit of $ 2.7 million in net interest and penalties during the years ended December 31, 2021, 2020 and 2019, respectively. Interest and penalties accrued as of December 31, 2021, 2020 and 2019 were immaterial. The Company files federal, state and non-U.S. income tax returns in jurisdictions with varying statutes of limitations. The Company is subject to 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. In general, the Company is subject to examination for tax years after 2017 for the U.S. federal jurisdiction, after 2012 for U.S state jurisdictions, and after 2014 in major foreign jurisdictions. The Company's management regularly assesses the likelihood of adverse outcomes resulting from examinations, if any, 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. F-34 Table of Contents Note 12: Leases The majority of the Company’s leases are for corporate offices, various facilities, and information technology equipment. The components of lease expense were as follows during the periods presented (in thousands) : Year Ended December 31, 2021 2020 Operating lease costs (1) $ 17,272 $ 16,331 Finance lease costs Amortization of ROU assets 3,848 3,149 Interest on lease liabilities 419 420 Total lease costs $ 21,539 $ 19,900 ________________________ (1) Operating lease expenses are included in general and administrative expenses in the Company’s consolidated statements of income. 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, 2021 December 31, 2020 Assets Operating lease ROU assets Other assets $ 68,812 $ 72,164 Finance lease ROU assets Property and equipment, net 15,064 12,410 Total lease ROU assets $ 83,876 $ 84,574 Liabilities Operating lease liabilities Other liabilities $ 84,314 $ 90,659 Finance lease liabilities Borrowings 7,005 8,288 Total lease liabilities $ 91,319 $ 98,947 Supplemental lease information is summarized below (in thousands) : Year Ended December 31, 2021 2020 ROU assets obtained in exchange for new operating lease obligations $ 13,426 $ 8,990 ROU assets obtained in exchange for new finance lease obligations 2,664 3,276 Cash paid for amounts included in the measurement of lease liabilities Operating leases - operating cash flows 20,048 17,396 Finance leases - operating cash flows 419 419 Finance leases - financing cash flows 3,950 3,114 Lease term and discount rate were as follows: December 31, 2021 December 31, 2020 Weighted-average remaining lease term ( in years ) Operating leases 6.2 7.1 Finance leases 2.0 2.5 Weighted-average discount rate Operating leases 5.2 % 5.0 % Finance leases 4.6 % 4.6 % F-35 Table of Contents Maturities of lease liabilities under non-cancelable leases as of December 31, 2021 are summarized as follows (in thousands) : Finance Leases Operating Leases Total 2022 $ 4,182 $ 17,878 $ 22,060 2023 2,198 15,459 17,657 2024 973 15,751 16,724 2025 — 13,015 13,015 2026 — 12,127 12,127 Thereafter — 28,507 28,507 Total undiscounted lease payments 7,353 102,737 110,090 Less: imputed interest ( 348 ) ( 18,423 ) ( 18,771 ) Total lease liabilities $ 7,005 $ 84,314 $ 91,319 Note 13: Commitments and Contingencies Litigation and Regulatory The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act (“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to collect debts on which the statute of limitations has run, has made inaccurate or unsupported assertions of fact in support of its collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or changes in business practices. Many continue on for some length of time and involve substantial investigation, litigation, negotiation, and other expense and effort before a result is achieved, and during the process the Company often cannot determine the substance or timing of any eventual outcome. 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. In October 2020, the Company entered into a stipulated judgment (“Stipulated Judgment”) with the CFPB to resolve a subsequent lawsuit related to the 2015 Consent Order. As a result of the Stipulated Judgment the Company recorded a charge of $ 15.0 million, which is included in the general and administration expenses in its consolidated statements of income for the year ended December 31, 2020. 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, 2021, the Company has no material reserves for legal matters. F-36 Table of Contents 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, 2021, the Company had entered into forward flow purchase agreements for the purchase of nonperforming loans with an estimated minimum aggregate purchase price of approximately $ 259.2 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 $ 2.8 million, $ 2.9 million, and $ 2.8 million for the years ended December 31, 2021, 2020, and 2019, 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, 2021, has no liabilities recorded for these agreements. Note 14: Segment and Geographic Information The Company conducts business through several operating segments. The Company’s Chief Operating Decision Maker 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. The following tables present information about geographic areas in which the Company operates (in thousands) : Year Ended December 31, 2021 2020 2019 Total revenues (1) : United States $ 1,115,572 $ 992,916 $ 817,693 International Europe (2) 486,530 490,385 520,433 Other geographies 12,397 18,099 59,555 498,927 508,484 579,988 Total $ 1,614,499 $ 1,501,400 $ 1,397,681 ________________________ (1) Total revenues during 2019 is 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. F-37 Table of Contents December 31, 2021 December 31, 2020 Long-lived assets (1) : United States $ 70,413 $ 83,523 International United Kingdom 43,604 37,225 Other foreign countries 5,840 6,549 49,444 43,774 Total $ 119,857 $ 127,297 ________________________ (1) Long-lived assets consist of property and equipment, net and finance leases. Note 15: 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, 2021, 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, 2021, 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 and the earnings before interest, tax, depreciation and amortization (“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, 2021, no goodwill impairment existed at these two reporting units. On August 15, 2019, the Company completed the sale of Baycorp, which represented the Company’s investments and operations in Australia and New Zealand. 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 income during the year ended December 31, 2019. F-38 Table of Contents 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, 2021 2020 2019 Balance as of beginning of period: $ 906,962 $ 884,185 $ 868,126 Goodwill impairment — — ( 10,718 ) Effect of foreign currency translation ( 9,167 ) 22,777 26,777 Balance as of end of period: $ 897,795 $ 906,962 $ 884,185 The Company’s acquired intangible assets are summarized as follows (in thousands) : As of December 31, 2021 As of December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships $ 66,969 $ ( 31,154 ) $ 35,815 $ 66,796 $ ( 22,714 ) $ 44,082 Developed technologies 2,549 ( 2,530 ) 19 5,048 ( 4,760 ) 288 Trade name and other 1,597 ( 1,111 ) 486 6,644 ( 6,002 ) 642 Total intangible assets $ 71,115 $ ( 34,795 ) $ 36,320 $ 78,488 $ ( 33,476 ) $ 45,012 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 The amortization expense for intangible assets subject to amortization was $ 7.9 million, $ 8.0 million, and $ 7.7 million during the years ended December 31, 2021, 2020, and 2019, respectively. Estimated future amortization expense related to finite-lived intangible assets as of December 31, 2021 is as follows ( in thousands ): 2022 $ 7,374 2023 6,965 2024 6,887 2025 6,533 2026 5,182 Thereafter 3,379 Total $ 36,320 F-39