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 50 Table of Contents 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, 2022, our disclosure controls and procedures were effective, at the reasonable assurance level, as of such date. 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, 2022, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. As disclosed in “Part II Item 9A Controls and Procedures” in our Annual Report on Form 10-K for the year ended December 31, 2021, we identified a material weakness in internal control related to ineffective controls within our Midland Credit Management operating unit with respect to the determination of certain qualitative factors applied to our estimates of future recoveries. During the year ended December 31, 2022, management implemented our previously disclosed remediation plan that included documenting and maintaining 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. During the fourth quarter of 2022, we completed our testing of the operating effectiveness of the implemented controls and found them to be effective. As a result, we have concluded the material weakness has been remediated as of December 31, 2022. 51 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, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, 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, 2022 and 2021, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 22, 2023 expressed an unqualified opinion thereon. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ BDO USA, LLP San Diego, California February 22, 2023 52 Table of Contents Changes in Internal Control over Financial Reporting Except for the changes in connection with our implementation of the remediation plan discussed in Item 9A, there have been no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the quarter ended December 31, 2022 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. 53 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022. Item 11—Executive Compensation The information required by this item is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022. 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022. 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 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022. Item 14—Principal Accountant Fees and Services The information required by this item is incorporated by reference to our Proxy Statement for our 2023 Annual Meeting of Stockholders to be filed with the SEC within 120 days of the fiscal year ended December 31, 2022. 54 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 2 and 20 21 F- 3 Consolidated Statements of Income for the years ended December 31, 202 2 , 202 1 and 20 20 F- 4 Consolidated Statements of Comprehensive Income for the years ended December 31, 202 2 , 202 1 and 20 20 F- 5 Consolidated Statements of Equity for the years ended December 31, 202 2 , 202 1 and 20 20 F- 6 Consolidated Statements of Cash Flows for the years ended December 31, 202 2 , 202 1 and 20 20 F- 7 Notes to Consolidated Financial Statements F- 8 (b) Exhibits. Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 3.1.1 Restated Certificate of Incorporation S-1/A 333-77483 3.1 6/14/1999 3.1.2 Certificate of Amendment to the Certificate of Incorporation 8-K 000-26489 3.1 4/4/2002 3.1.3 Second Certificate of Amendment to the Certificate of Incorporation 10-Q 000-26489 3.1.3 8/7/2019 3.2 Amended and Restated Bylaws, as amended through December 13, 2022 8-K 000-26489 3.1 12/16/2022 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 4.2.2 Amendment No. 2 to the Fourth Amended and Restated Senior Secured Note Purchase Agreement, dated March 30, 2022, by and among Encore Capital Group, Inc. and the noteholders party thereto 8-K 000-26489 10.2 4/1/2022 4.2.3 Amendment No. 3 to Fourth Amended and Restated Senior Secured Note Purchase Agreement, dated November 14, 2022, by and among Encore Capital Group, Inc. and the purchasers named therein X 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 55 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 4.11.1 Supplemental Indenture (including the form of 4.50% Exchangeable Senior Notes due 2023), dated July 20, 2018, among Encore Capital Europe Finance Limited, Encore Capital Group, Inc. and MUFG Union Bank, N.A. 8-K 000-26489 4.2 7/20/2018 4.11.2 Second Supplemental Indenture, dated October 29, 2020, to the Indenture, dated as of July 20, 2018, by and among Encore Capital Europe Finance Limited, Encore Capital Group, Inc., as guarantor, and MUFG Union Bank, N.A., as trustee 10-Q 000-26489 4.6 11/2/2020 4.13 Indenture (including form of note), dated September 9, 2019, by and among Encore Capital Group, Inc., Midland Credit Management, Inc., as guarantor, and MUFG Union Bank, N.A., as trustee 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 4.15.1 First Supplemental Indenture, dated November 14, 2022, to the Indenture, dated September 24, 2020, by and 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 X 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 4.16.1 First Supplemental Indenture, dated November 14, 2022, to the Indenture, dated November 23, 2020, by and 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 X 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 56 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 4.17.1 First Supplemental Indenture, dated November 14, 2022, to the Indenture, dated December 21, 2020, by and 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 X 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 4.18.1 First Supplemental Indenture, dated November 14, 2022, to the Indenture, dated June 1, 2021, by and 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 X 10.1+ Form of Indemnification Agreement 8-K 000-26489 10.1 5/4/2006 10.4+ Encore Capital Group, Inc. 2013 Incentive Compensation Plan Def 14A 000-26489 Appendix A 4/26/2013 10.4.1+ First Amendment to Encore Capital Group, Inc. 2013 Incentive Compensation Plan, dated February 20, 2014 10-K 000-26489 10.84 2/25/2014 10.4.2+ Form of Non-Incentive Stock Option Agreement under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan 10-Q 000-26489 10.5 8/8/2013 10.4.8+ Form of Restricted Stock Unit Grant Notice and Agreement (Non-Employee Director) under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan 10-Q 000-26489 10.11 8/8/2013 10.4.14+ Form of Performance Stock Option Agreement under the Encore Capital Group, Inc. 2013 Incentive Compensation Plan 10-K 000-26489 10.108 2/23/2017 10.5+ Encore Capital Group, Inc. Executive Separation Plan 10-K 000-26489 10.5 2/23/2022 10.7+ Non-Employee Director Compensation Program Guidelines, effective June 10, 2022 10-Q 000-26489 10.1 8/3/2022 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 10.11+ 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 57 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 10.11.4+ Form of Stock Option Grant Notice and Award Agreement under the Encore Capital Group, Inc. 2017 Incentive Award Plan 8-K 000-26489 10.7 6/20/2017 10.11.5+ Form of Performance Share Unit Award Grant Notice and Award Agreement (EPS) under the Encore Capital Group, Inc. 2017 Incentive Award Plan (Executive Separation Plan Participant) 8-K 000-26489 10.1 3/15/2018 10.11.6+ Form of Performance Share Unit Award Grant Notice and Award Agreement (EPS) under the Encore Capital Group, Inc. 2017 Incentive Award Plan 8-K 000-26489 10.2 3/15/2018 10.11.7+ Form of Performance Share Unit Award Grant Notice and Award Agreement (TSR) under the Encore Capital Group, Inc. 2017 Incentive Award Plan (Executive Separation Plan Participant) 8-K 000-26489 10.3 3/15/2018 10.11.8+ Form of Performance Share Unit Award Grant Notice and Award Agreement (TSR) under the Encore Capital Group, Inc. 2017 Incentive Award Plan 8-K 000-26489 10.4 3/15/2018 10.11.9+ Form of Performance Share Unit Award Grant Notice and Award Agreement (ROAE) under the Encore Capital Group, Inc. 2017 Incentive Award Plan 10-K 000-26489 10.11.9 2/26/2020 10.11.10+ Form of Performance Share Unit Award Grant Notice and Award Agreement (ROIC) under the Encore Capital Group, Inc. 2017 Incentive Award Plan 10-K 000-26489 10.11.10 2/23/2023 10.19 Amended and Restated Senior Facilities Agreement, dated March 29, 2022, 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 04/01/2022 10.19.1 Amendment Letter, dated November 9, 2022, to the Amended and Restated Senior Facilities Agreement, dated March 29, 2022, 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 Agen t X 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 58 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 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 10.26.1+ Letter Agreement, dated November 1, 2022, between Encore Capital Group, Inc. and Craig Buick 10-Q 000-26489 10.1+ 11/2/2022 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 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 Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document X 101.SCH Inline XBRL Taxonomy Extension Schema Document X 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document X 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document X 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document X 59 Table of Contents Incorporated By Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document X 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) + Management contract or compensatory plan or arrangement. Item 16—Form 10-K Summary None. 60 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 22, 2023 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 22, 2023 Ashish Masih /s/ J ONATHAN C. C LARK Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) February 22, 2023 Jonathan C. Clark /s/ W ILLIAM C. G OINGS Director February 22, 2023 William C. Goings /s/ A SHWINI G UPTA Director February 22, 2023 Ashwini Gupta /s/ W ENDY G. H ANNAM Director February 22, 2023 Wendy G. Hannam /s/ J EFFREY A. H ILZINGER Director February 22, 2023 Jeffrey A. Hilzinger /s/ A NGELA A. K NIGHT Director February 22, 2023 Angela A. Knight /s/ M ICHAEL P. M ONACO Director February 22, 2023 Michael P. Monaco /s/ L AURA O LLE Director February 22, 2023 Laura Olle /s/ R ICHARD P. S TOVSKY Director February 22, 2023 Richard P. Stovsky 61 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, 2022 and 2021 F- 3 Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020 F- 4 Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020 F- 5 Consolidated Statements of Equity for the years ended December 31, 2022, 2021 and 2020 F- 6 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 F- 7 Notes to Consolidated Financial Statements F- 8 Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies F- 8 Note 2: Fair Value Measurements F- 13 Note 3: Derivatives and Hedging Instruments F- 15 Note 4: Investment in Receivable Portfolios, Net F- 17 Note 5: Composition of Certain Financial Statement Items F- 18 Note 6: Borrowings F- 19 Note 7: Variable Interest Entities F- 22 Note 8: Common Stock F- 22 Note 9: Accumulated Other Comprehensive Loss F- 23 Note 10: Stock-Based Compensation F- 23 Note 11: Income Taxes F- 26 Note 12: Leases F- 28 Note 13: Commitments and Contingencies F- 30 Note 14: Segment and Geographic Information F- 31 Note 15: Goodwill and Identifiable Intangible Assets F- 32 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, 2022 and 2021, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 22, 2023 expressed an unqualified opinion thereon. Change in Accounting Principle 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”). 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. 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, 2022 and the resulting changes in recoveries for the year ended December 31, 2022 were $93.1 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 F-1 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 consolidated 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 $821.2 million at December 31, 2022, which was allocated between two reporting units, MCM and Cabot, that carried goodwill. The Company performed its annual goodwill impairment assessment as of October 1, 2022 and determined that the fair value of each reporting unit was in excess of its carrying value. For the MCM and Cabot reporting units, management performed a quantitative analysis, which utilized a combination of the income and the market approaches. The Company also evaluated the aggregate fair value of its reporting units to its aggregate market capitalization at the testing date. We identified the goodwill impairment assessment of the MCM and Cabot reporting units as a critical audit matter because of the significant assumptions and judgments management made as part of the assessment to estimate the fair value of the reporting units. The income approach required significant management assumptions, such as assumptions used in the cash flow forecasts, the discount rate, and the terminal value. The market approach required significant management judgment in the selection of appropriate peer group companies and valuation multiples. Auditing these elements involved a high degree of auditor judgment due to the nature and extent of audit effort, including the extent of specialized skill or knowledge needed. The primary procedures we performed to address this critical audit matter included: • Evaluating management’s process for developing fair value estimates determined using the income and market approaches including testing the relevance and reliability of underlying data, and evaluating significant management assumptions to historical results and market participant data. • Testing the reconciliation of the estimated fair value of the Company’s reporting units to the indicated market capitalization of the Company, as a whole. • 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, selection of peer group companies, valuation multiples, and the terminal value, (iii) assessing the reasonableness of the discount rate by developing independent estimates and comparing estimates to those utilized by management, and (iv) evaluating the reasonableness of the market capitalization reconciliation. /s/ BDO USA, LLP We have served as the Company's auditor since 2001. San Diego, California February 22, 2023 F-2 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Financial Condition (In Thousands, Except Par Value Amounts) December 31, 2022 December 31, 2021 Assets Cash and cash equivalents $ 143,912 $ 189,645 Investment in receivable portfolios, net 3,088,261 3,065,553 Property and equipment, net 113,900 119,857 Other assets 341,073 335,275 Goodwill 821,214 897,795 Total assets $ 4,508,360 $ 4,608,125 Liabilities and Equity Liabilities: Accounts payable and accrued liabilities $ 198,217 $ 229,586 Borrowings 2,898,821 2,997,331 Other liabilities 231,695 195,947 Total liabilities 3,328,733 3,422,864 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, 23,323 shares and 24,541 shares issued and outstanding as of December 31, 2022 and December 31, 2021, respectively 233 245 Additional paid-in capital — — Accumulated earnings 1,278,210 1,238,564 Accumulated other comprehensive loss ( 98,816 ) ( 53,548 ) Total stockholders’ equity 1,179,627 1,185,261 Total liabilities and stockholders’ equity $ 4,508,360 $ 4,608,125 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, 2022 December 31, 2021 Assets Cash and cash equivalents $ 1,344 $ 1,927 Investment in receivable portfolios, net 431,350 498,507 Other assets 3,627 3,452 Liabilities Accounts payable and accrued liabilities 150 105 Borrowings 423,522 473,443 Other liabilities 105 10 See accompanying notes to consolidated financial statements F-3 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Income (In Thousands, Except Per Share Amounts) Year Ended December 31, 2022 2021 2020 Revenues Revenue from receivable portfolios $ 1,202,361 $ 1,287,730 $ 1,374,717 Changes in recoveries 93,145 199,136 7,246 Total debt purchasing revenue 1,295,506 1,486,866 1,381,963 Servicing revenue 94,922 120,778 115,118 Other revenues 7,919 6,855 4,319 Total revenues 1,398,347 1,614,499 1,501,400 Operating expenses Salaries and employee benefits 375,135 385,178 378,176 Cost of legal collections 217,944 254,280 239,071 General and administrative expenses 145,798 137,695 149,113 Other operating expenses 111,234 106,938 108,944 Collection agency commissions 35,568 47,057 49,754 Depreciation and amortization 50,494 50,079 42,780 Total operating expenses 936,173 981,227 967,838 Income from operations 462,174 633,272 533,562 Other expense Interest expense ( 153,308 ) ( 169,647 ) ( 209,356 ) Loss on extinguishment of debt — ( 9,300 ) ( 40,951 ) Other income (expense) 2,123 ( 17,784 ) ( 357 ) Total other expense ( 151,185 ) ( 196,731 ) ( 250,664 ) Income before income taxes 310,989 436,541 282,898 Provision for income taxes ( 116,425 ) ( 85,340 ) ( 70,374 ) Net income 194,564 351,201 212,524 Net income attributable to noncontrolling interest — ( 419 ) ( 676 ) Net income attributable to Encore Capital Group, Inc. stockholders $ 194,564 $ 350,782 $ 211,848 Earnings per share attributable to Encore Capital Group, Inc.: Basic $ 8.06 $ 11.64 $ 6.74 Diluted $ 7.46 $ 11.26 $ 6.68 Weighted average shares outstanding: Basic 24,142 30,129 31,427 Diluted 26,092 31,153 31,710 See accompanying notes to consolidated financial statements F-4 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Comprehensive Income (In Thousands) Year Ended December 31, 2022 2021 2020 Net income $ 194,564 $ 351,201 $ 212,524 Other comprehensive (loss) income, net of tax: Change in unrealized gain on derivative instruments: Unrealized gain on derivative instruments 36,385 12,835 234 Income tax effect ( 407 ) ( 2,165 ) ( 66 ) Unrealized gain on derivative instruments, net of tax 35,978 10,670 168 Change in foreign currency translation: Unrealized (loss) gain on foreign currency translation ( 78,232 ) ( 15,309 ) 17,160 Income tax effect ( 3,014 ) — — Removal of other comprehensive loss in connection with divestiture — 19,904 2,632 Unrealized (loss) gain on foreign currency translation, net of divestiture ( 81,246 ) 4,595 19,792 Other comprehensive (loss) income, net of tax ( 45,268 ) 15,265 19,960 Comprehensive income 149,296 366,466 232,484 Comprehensive income attributable to noncontrolling interest: Net income attributable to noncontrolling interest — ( 419 ) ( 676 ) Unrealized income on foreign currency translation — — ( 7 ) Comprehensive income attributable to noncontrolling interest — ( 419 ) ( 683 ) Comprehensive income attributable to Encore Capital Group, Inc. stockholders $ 149,296 $ 366,047 $ 231,801 See accompanying notes to consolidated financial statements F-5 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Equity (In Thousands) Common Stock Additional Paid-In Capital Accumulated Earnings Accumulated Other Comprehensive (Loss) Income Noncontrolling Interest Total Equity Shares Par Balance as of December 31, 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 and retirement 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 Net income — — — 194,564 — — 194,564 Other comprehensive loss, net of tax — — — — ( 45,268 ) — ( 45,268 ) Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes 279 3 ( 3,949 ) ( 7,434 ) — — ( 11,380 ) Repurchase and retirement of common stock ( 1,497 ) ( 15 ) ( 10,659 ) ( 76,332 ) — — ( 87,006 ) Stock-based compensation — — 15,402 — — — 15,402 Settlement of convertible senior notes — — — ( 71,152 ) — — ( 71,152 ) Other — — ( 794 ) — — — ( 794 ) Balance as of December 31, 2022 23,323 $ 233 $ — $ 1,278,210 $ ( 98,816 ) $ — $ 1,179,627 See accompanying notes to consolidated financial statements F-6 Table of Contents ENCORE CAPITAL GROUP, INC. Consolidated Statements of Cash Flows (In Thousands) Year Ended December 31, 2022 2021 2020 Operating activities: Net income $ 194,564 $ 351,201 $ 212,524 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 50,494 50,079 42,780 Expense related to financing — 9,300 51,117 Other non-cash interest expense, net 15,875 17,785 23,639 Stock-based compensation expense 15,402 18,330 16,560 Deferred income taxes 46,410 35,371 8,549 Changes in recoveries ( 93,145 ) ( 199,136 ) ( 7,246 ) Other, net 18,798 17,130 16,260 Changes in operating assets and liabilities Other assets ( 6,722 ) 38,941 ( 33,663 ) Accounts payable, accrued liabilities and other liabilities ( 30,995 ) ( 35,948 ) ( 17,656 ) Net cash provided by operating activities 210,681 303,053 312,864 Investing activities: Purchases of receivable portfolios, net of put-backs ( 790,569 ) ( 657,280 ) ( 644,048 ) Collections applied to investment in receivable portfolios, net 709,176 1,019,629 737,131 Purchases of assets held for sale ( 39,340 ) ( 17,090 ) ( 1,502 ) Purchases of property and equipment ( 37,224 ) ( 33,372 ) ( 34,600 ) Other, net 27,722 28,009 25,845 Net cash (used in) provided by investing activities ( 130,235 ) 339,896 82,826 Financing activities: Payment of loan and debt refinancing costs ( 1,659 ) ( 11,963 ) ( 82,455 ) Proceeds from credit facilities 779,513 821,931 1,820,634 Repayment of credit facilities ( 515,703 ) ( 896,418 ) ( 2,290,822 ) Proceeds from senior secured notes — 353,747 1,313,385 Repayment of senior secured notes ( 39,080 ) ( 359,175 ) ( 1,033,765 ) Repayment of convertible senior notes ( 221,153 ) ( 161,000 ) ( 89,355 ) Repurchase and retirement of common stock ( 87,006 ) ( 390,606 ) — Other, net ( 22,357 ) ( 12,208 ) ( 40,822 ) Net cash used in financing activities ( 107,445 ) ( 655,692 ) ( 403,200 ) Net decrease in cash and cash equivalents ( 26,999 ) ( 12,743 ) ( 7,510 ) Effect of exchange rate changes on cash and cash equivalents ( 18,734 ) 13,204 4,359 Cash and cash equivalents, beginning of period 189,645 189,184 192,335 Cash and cash equivalents, end of period $ 143,912 $ 189,645 $ 189,184 Supplemental disclosures of cash flow information: Cash paid for interest $ 131,391 $ 132,400 $ 169,553 Cash paid for income taxes, net of refunds 71,276 42,039 88,816 Supplemental schedule of non-cash investing and financing activities: Investment in receivable portfolios transferred to real estate owned $ 1,903 $ 768 $ 2,214 Property and equipment acquired through finance leases 3,273 2,664 3,276 See accompanying notes to consolidated financial statements F-7 Table of Contents ENCORE CAPITAL GROUP, INC. Notes to Consolidated Financial Statements Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial obligations to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. The Company also provides debt servicing and other portfolio management services to credit originators for non-performing loans 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 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.” 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 variable interest entities (“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. 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. 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. F-8 Table of Contents 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, 2022. 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 $ 17.8 million and $ 29.3 million as of December 31, 2022 and 2021, respectively. Investment in Receivable Portfolios 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 the accounting standard for Financial Instruments - Credit Losses (“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 F-9 Table of Contents 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. 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-10 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-11 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 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 based on the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. Dilutive potential common shares include outstanding stock based awards, 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-12 Table of Contents A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands, except per share amounts) : Year Ended December 31, 2022 2021 2020 Net income attributable to Encore Capital Group, Inc. $ 194,564 $ 350,782 $ 211,848 Total weighted-average basic shares outstanding 24,142 30,129 31,427 Dilutive effect of stock-based awards 344 407 283 Dilutive effect of convertible and exchangeable senior notes 1,606 617 — Total weighted-average dilutive shares outstanding 26,092 31,153 31,710 Basic earnings per share $ 8.06 $ 11.64 $ 6.74 Diluted earnings per share $ 7.46 $ 11.26 $ 6.68 Anti-dilutive employee stock options outstanding were approximately zero , 3,000 and 51,000 during the years ended December 31, 2022, 2021, and 2020, 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, 2022 Level 1 Level 2 Level 3 Total Assets Interest rate cap contracts $ — $ 36,807 $ — $ 36,807 Liabilities Cross-currency swap agreements — ( 36,918 ) — ( 36,918 ) 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 ) 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 F-13 Table of Contents 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. All of the Company’s contingent consideration obligations were fully resolved as of December 31, 2022. The following table provides a roll-forward of the fair value of contingent consideration, for the years ended December 31, 2022, 2021 and 2020 (in thousands) : Amount 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 Change in fair value of contingent consideration 794 Payment of contingent consideration ( 5,273 ) Effect of foreign currency translation ( 739 ) Balance as of December 31, 2022 $ — 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 comparables. The fair value estimate of the assets held for sale was approximately $ 68.2 million and $ 44.6 million as of December 31, 2022 and December 31, 2021, respectively. Financial Instruments Not Required To Be Carried At Fair Value The table below summarizes fair value estimates for the Company’s financial instruments that are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company. F-14 Table of Contents The carrying amounts in the following table are included in the consolidated statements of financial condition as of December 31, 2022 and December 31, 2021 (in thousands) : December 31, 2022 December 31, 2021 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial Assets Investment in receivable portfolios, net $ 3,088,261 $ 3,242,506 $ 3,065,553 $ 3,416,926 Financial Liabilities Global senior secured revolving credit facility 661,738 661,738 406,635 406,635 Encore private placement notes 68,390 66,947 107,470 108,652 Senior secured notes (1) 1,480,258 1,334,686 1,606,327 1,652,246 Convertible senior notes due March 2022 (2) — — 150,000 195,009 Exchangeable senior notes due September 2023 172,500 205,227 172,500 257,782 Convertible senior notes due October 2025 100,000 130,556 100,000 165,887 Cabot securitisation senior facility 423,522 423,522 473,443 473,443 ________________________ (1) Carrying amount represents historical cost, adjusted for any related debt discount or debt premium. (2) The 2022 Convertible Senior Notes matured on March 15, 2022 and the Company repaid the notes in cash. 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. 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, 2022 December 31, 2021 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Interest rate cap contracts Other assets $ 36,807 Other assets $ 3,541 Cross-currency swap agreements Other liabilities ( 36,918 ) Other liabilities ( 16,902 ) F-15 Table of Contents Derivatives Designated as Hedging Instruments 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. As of December 31, 2022, there were no interest rate swap agreements outstanding. 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. As of December 31, 2022, the Company held two interest rate cap contracts with a notional amount of approximately $ 852.5 million. The interest rate cap hedging the fluctuations in three-month EURIBOR floating rate debt (“2019 Cap”) has a notional amount of € 400.0 million (approximately $ 428.9 million based on an exchange rate of $1.00 to € 0.93 , the exchange rate as of December 31, 2022) and matures in June 2024. The interest rate cap hedging the fluctuations in sterling overnight index average (“SONIA”) bearing debt (“2021 Cap”) has a notional amount of £ 350.0 million (approximately $ 423.5 million based on an exchange rate of $1.00 to £ 0.83 , the exchange rate as of December 31, 2022) and matures in September 2024. The Company expects the hedge relationships to be highly effective and designates the 2019 Cap and 2021 Cap as cash flow hedge instruments. The Company expects to reclassify approximately $ 20.3 million of net derivative gain from OCI into earnings relating to interest rate caps within the next 12 months. 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, 2022, there were four cross-currency swap agreements outstanding with a total notional amount of € 350.0 million (approximately $ 375.3 million based on an exchange rate of $1.00 to € 0.93 , the exchange rate as of December 31, 2022). The Company expects to reclassify approximately $ 4.4 million of net derivative loss from OCI into earnings relating to cross-currency swaps 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 (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, 2022 2021 2020 2022 2021 2020 Foreign currency exchange contracts $ — $ — $ ( 341 ) Salaries and employee benefits $ — $ — $ 49 Foreign currency exchange contracts — — ( 44 ) General and administrative expenses — — 11 Interest rate swap agreements — ( 69 ) ( 7,441 ) Interest expense — ( 8,743 ) ( 7,893 ) Interest rate cap contracts 33,354 1,824 ( 3,001 ) Interest expense ( 653 ) ( 568 ) ( 2,846 ) Cross-currency swap agreements ( 27,617 ) ( 33,464 ) 10,503 Interest expense ( 7,601 ) ( 4,984 ) ( 1,075 ) Other (expense) income ( 22,394 ) ( 28,548 ) 11,196 Derivatives Not Designated as Hedging Instruments The Company did not have any derivatives that were not designated as hedging instruments during the year ended December 31, 2022. 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, 2022 2021 2020 Foreign currency exchange contracts Other (expense) income $ — $ ( 20 ) $ 3,564 Interest rate swap agreements Other expense — ( 73 ) — F-16 Table of Contents Note 4: Investment in Receivable Portfolios, Net Investment in receivable portfolios, net consist of the following as of the dates presented ( in thousands ): Year Ended December 31, 2022 2021 Amortized cost $ — $ — Negative allowance for expected recoveries 3,088,261 3,065,553 Balance, end of period $ 3,088,261 $ 3,065,553 The following table summarizes the changes in the balance of investment in receivable portfolios, net during the periods presented ( in thousands ): Year Ended December 31, 2022 2021 2020 Balance, beginning of period $ 3,065,553 $ 3,291,918 $ 3,328,150 Negative allowance for expected recoveries - current period purchases (1) 800,507 664,529 659,872 Collections applied to investment in receivable portfolios, net (2) ( 709,176 ) ( 1,019,629 ) ( 737,131 ) Changes in recoveries (3) 93,145 199,136 7,246 Put-backs and Recalls ( 9,938 ) ( 7,249 ) ( 15,824 ) Deconsolidation of receivable portfolios — ( 9,352 ) ( 2,822 ) Disposals and transfers to real estate owned ( 8,335 ) ( 8,071 ) ( 9,459 ) Foreign currency translation adjustments ( 143,495 ) ( 45,729 ) 61,886 Balance, end of period $ 3,088,261 $ 3,065,553 $ 3,291,918 _______________________ (1) The table below provides the detail on the establishment of negative allowance for expected recoveries of portfolios purchased during the periods presented: Year Ended December 31, 2022 2021 2020 Purchase price $ 800,507 $ 664,529 $ 659,872 Allowance for credit losses 2,332,112 1,823,582 1,703,420 Amortized cost 3,132,619 2,488,111 2,363,292 Noncredit discount 3,216,500 3,284,369 3,464,670 Face value 6,349,119 5,772,480 5,827,962 Write-off of amortized cost ( 3,132,619 ) ( 2,488,111 ) ( 2,363,292 ) Write-off of noncredit discount ( 3,216,500 ) ( 3,284,369 ) ( 3,464,670 ) Negative allowance 800,507 664,529 659,872 Negative allowance for expected recoveries - current period purchases $ 800,507 $ 664,529 $ 659,872 (2) Collections applied to investment in receivable portfolios, net, is calculated as follows during the periods presented: Year Ended December 31, 2022 2021 2020 Cash Collections $ 1,911,537 $ 2,307,359 $ 2,111,848 Less - amounts classified to revenue from receivable portfolios ( 1,202,361 ) ( 1,287,730 ) ( 1,374,717 ) Collections applied to investment in receivable portfolios, net $ 709,176 $ 1,019,629 $ 737,131 F-17 Table of Contents (3) Changes in recoveries is calculated as follows during the periods presented, where recoveries include cash collections, put-backs and recalls, and other cash-based adjustments: Year Ended December 31, 2022 2021 2020 Recoveries above forecast $ 29,253 $ 326,006 $ 228,075 Changes in expected future recoveries 63,892 ( 126,870 ) ( 220,829 ) Changes in recoveries $ 93,145 $ 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, 2022 outperformed the projected cash flows by approximately $ 29.3 million. Changes in expected future recoveries are reassessed each quarter, the Company considers, among other factors, historical and current collection performance, changes in consumer behavior, and the macroeconomic environment when updating the forecasts of expected lifetime recoveries. The Company recorded a net positive change in expected future period recoveries of approximately $ 63.9 million during the year ended December 31, 2022. 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, 2022 December 31, 2021 Computer equipment and software $ 209,803 $ 209,844 Leasehold improvements 34,950 37,533 Furniture, fixtures and equipment 20,155 19,959 Construction in process 2,546 2,487 Telecommunications equipment and other 1,600 3,075 269,054 272,898 Less: accumulated depreciation and amortization ( 155,154 ) ( 153,041 ) $ 113,900 $ 119,857 Depreciation and amortization expense related to property and equipment was $ 40.1 million, $ 42.2 million, and $ 34.8 million during the years ended December 31, 2022, 2021, and 2020, respectively. Other Assets Other assets consist of the following as of the dates presented ( in thousands ): December 31, 2022 December 31, 2021 Operating lease right-of-use assets $ 70,074 $ 68,812 Real estate owned 68,242 44,640 Derivative instruments 36,807 3,541 Prepaid expenses 30,376 26,943 Identifiable intangible assets, net 22,112 36,320 Income tax deposits 18,259 19,315 Deferred tax assets 18,069 51,451 Service fee receivables 16,094 22,610 Other 61,040 61,643 Total $ 341,073 $ 335,275 F-18 Table of Contents Note 6: Borrowings The Company is in compliance in all material respects with all covenants under its financing arrangements as of December 31, 2022. The components of the Company’s consolidated borrowings were as follows (in thousands) : December 31, 2022 December 31, 2021 Global senior secured revolving credit facility $ 661,738 $ 406,635 Encore private placement notes 68,390 107,470 Senior secured notes 1,485,888 1,613,739 Convertible notes and exchangeable notes 272,500 422,500 Cabot securitisation senior facility 423,522 473,443 Other 23,512 24,889 Finance lease liabilities 5,675 7,005 2,941,225 3,055,681 Less: debt discount and issuance costs, net of amortization ( 42,404 ) ( 58,350 ) Total $ 2,898,821 $ 2,997,331 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”). On March 29, 2022, the Company amended and restated the Global Senior Facility to, among other things (1) upsize the facility by $ 90.0 million to $ 1.14 billion, (2) extend the termination date of the facility from September 2025 to September 2026, and (3) transition from LIBOR to Term SOFR for U.S. dollar borrowings. As of December 31, 2022, the Global Senior Facility provided for a total committed facility of $ 1.14 billion that matures in September 2026 and includes the following key provisions: • Interest at Term SOFR (or EURIBOR for any loan drawn in Euro or a rate based on SONIA for any loan drawn in British Pound), with a Term SOFR (or EURIBOR or SONIA) floor of 0.00 %, plus a margin of 2.50 %, plus in the case of Term SOFR borrowings, a credit adjustment spread of 0.10 %; • An unused commitment fee of 0.40 % per annum, payable quarterly in arrears; • A restrictive covenant that limits the LTV Ratio (defined in the Global Senior Facility) to 0.75 in the event that the Global Senior Facility is more than 20 % utilized; • A restrictive covenant that limits the SSRCF LTV Ratio (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 • 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, 2022, the outstanding borrowings under the Global Senior Facility were $ 661.7 million. The weighted average interest rate of the Global Senior Facility was 4.42 % and 3.07 % for the years ended December 31, 2022 and December 31, 2021, respectively. Available capacity under the Global Senior Facility, after taking into account applicable debt covenants, was approximately $ 478.3 million as of December 31, 2022. F-19 Table of Contents 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”). As of December 31, 2022, $ 68.4 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 Company’s senior secured notes (the “Senior Secured Notes”) ( $ in thousands ): December 31, 2022 December 31, 2021 Issue Currency Maturity Date Interest Payment Dates Interest Rate Encore 2025 Notes $ 375,325 $ 397,928 EUR Oct 15, 2025 Apr 15, Oct 15 4.875 % Encore 2026 Notes 363,019 405,808 GBP Feb 15, 2026 Feb 15, Aug 15 5.375 % Encore 2028 Notes 302,516 338,174 GBP Jun 1, 2028 Jun 1, Dec 1 4.250 % Encore 2028 Floating Rate Notes 445,028 471,829 EUR Jan 15, 2028 Jan 15, Apr 15, Jul 15, Oct 15 EURIBOR + 4.250 % (1) $ 1,485,888 $ 1,613,739 ______________________ (1) Interest rate is based on three-month EURIBOR (subject to a 0 % floor) plus 4.250 % per annum, resets quarterly. The Senior Secured Notes are secured by the same collateral as the Global Senior Facility and the Encore Private Placement Notes. The guarantees provided in respect of the Senior Secured Notes are pari passu with each such guarantee given in respect of the Global Senior Facility and Encore Private Placement Notes. Subject to the intercreditor agreement described above under 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 Company’s convertible and exchangeable senior notes (the “Convertible Notes” or “Exchangeable Notes,” as applicable) ( $ in thousands ): December 31, 2022 December 31, 2021 Maturity Date Interest Rate 2022 Convertible Notes $ — $ 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 % $ 272,500 $ 422,500 On March 15, 2022, the Company’s $ 150.0 million 2022 Convertible Notes matured. The 2022 Convertible Notes had a conversion price of $ 45.33 . 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. In March 2022, the Company settled the conversion of the 2022 Convertible Notes entirely in cash for $ 221.2 million, of which $ 71.2 million (the excess above the principal amount) represents the conversion spread and was recognized in the Company’s stockholder’s equity. No gain or loss was recognized as a result of the conversion of the 2022 Convertible Notes in the Company’s consolidated statements of income for the year ended December 31, 2022. 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 F-20 Table of Contents exchange prices of the Convertible Notes and the Exchangeable Notes, the Company may enter into hedge programs that increase the effective conversion or exchange price for the Convertible Notes and the Exchangeable Notes. As of December 31, 2022, the Company had one hedge program that increases the effective exchange price for the 2023 Exchangeable Notes. The hedge instrument has been determined to be indexed to the Company’s own stock and meets the criteria for equity classification. The Company recorded the cost of the hedge instrument as a reduction in additional paid-in capital, and does not recognize subsequent changes in fair value of this financial instrument in its consolidated financial statement. The Company did not hedge the 2022 Convertible Notes or the 2025 Convertible Notes. Certain key terms related to the convertible and exchangeable features as of December 31, 2022 are listed below ($ in thousands, except conversion or exchange price) : 2023 Exchangeable Notes 2025 Convertible Notes Initial conversion or exchange price $ 44.62 $ 40.00 Closing stock price at date of issuance $ 36.45 $ 32.00 Closing stock price date Jul 20, 2018 Sep 4, 2019 Initial conversion or exchange rate (shares per $1,000 principal amount) 22.4090 25.0000 Adjusted conversion or exchange rate (shares per $1,000 principal amount) 22.5264 25.1310 Adjusted conversion or exchange price (1) $ 44.39 $ 39.79 Adjusted effective conversion or exchange price (2) $ 62.13 $ 39.79 Excess of if-converted value compared to principal (3) $ 13,785 $ 20,478 Conversion or exchange date Mar 1, 2023 Jul 1, 2025 _______________________ (1) Pursuant to the indentures for the Company’s Convertible Notes and Exchangeable Notes, the conversion and exchange rates were adjusted upon the completion of the Company’s tender offer in December 2021. (2) The Company maintains a hedge program that increases the effective exchange price for the 2023 Exchangeable Notes to $ 62.13 . (3) Represents the premium the Company would have to pay assuming the Convertible Notes and Exchangeable Notes were converted or exchanged on December 31, 2022 using a hypothetical share price based on the closing stock price on December 31, 2022. The premium of the 2023 Exchangeable Notes would have been reduced to zero with the existing hedge program. 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 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 comparative information for the year ended December 31, 2020. Interest expense related to the Convertible Notes and Exchangeable Notes was as follows during the periods presented (in thousands) : Year ended December 31, 2022 2021 2020 Interest expense—stated coupon rate $ 12,001 $ 16,839 $ 21,857 Interest expense—amortization of debt discount — — 10,945 Interest expense—Convertible Notes and Exchangeable Notes $ 12,001 $ 16,839 $ 32,802 F-21 Table of Contents Cabot Securitisation Senior Facility Cabot Securitisation UK Ltd (“Cabot Securitisation”), an indirect subsidiary of Encore, has a senior facility for a committed amount of £ 350.0 million (as amended, the “Cabot Securitisation Senior Facility”). The Cabot Securitisation Senior Facility matures in September 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, 2022, the outstanding borrowings under the Cabot Securitisation Senior Facility were £ 350.0 million (approximately $ 423.5 million based on an exchange rate of $1.00 to £ 0.83 , the exchange rate as of December 31, 2022). 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 £ 349.7 million (approximately $ 423.1 million based on an exchange rate of $1.00 to £ 0.83 , the exchange rate as of December 31, 2022) as of December 31, 2022. The weighted average interest rate was 4.33 % and 3.11 % for the years ended December 31, 2022 and 2021, 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, 2022, the Company’s finance lease liabilities were approximately $ 5.7 million. Refer to “Note 12: Leases” for further details. Maturity Schedule The aggregate amounts of the Company’s borrowings, including finance lease liabilities, maturing in each of the next five years and thereafter are as follows (in thousands) : 2023 $ 224,828 2024 38,931 2025 480,801 2026 1,448,865 2027 256 Thereafter 747,544 Total $ 2,941,225 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 residual returns 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, 2022, the Company’s VIEs include certain securitized financing vehicles and other immaterial special purpose entities that were created to purchase receivable portfolios in certain geographies. The Company is the primary beneficiary of these VIEs. The Company has the power to direct the activities of the VIEs including the ability to exercise discretion in the servicing of the financial assets and has the right to receive residual returns that could potentially be significant to the VIEs. The Company’s exposure to loss is limited to the total of the carrying value of 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. F-22 Note 8: Common Stock 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 years ended December 31, 2022 and 2021, the Company repurchased 1,497,184 and 2,598,034 shares of its common stock for approximately $ 86.9 million and $ 121.2 million, respectively. The Company’s practice is to retire the shares repurchased. 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. 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, 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 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 ) Other comprehensive loss before reclassification 5,737 ( 78,232 ) ( 72,495 ) Reclassification 30,648 — 30,648 Tax effect ( 407 ) ( 3,014 ) ( 3,421 ) Balance at December 31, 2022 $ 36,494 $ ( 135,310 ) $ ( 98,816 ) 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 F-23 Table of Contents 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, 2022, 2021, and 2020 was $ 15.4 million, $ 18.3 million, and $ 16.6 million, respectively. The actual tax benefit from stock-based compensation arrangements totaled $ 4.2 million, $ 2.5 million, and $ 2.5 million for the years ended December 31, 2022, 2021, and 2020, respectively. The Company’s stock-based compensation arrangements are described below: 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, 2022, 2021, or 2020. As of December 31, 2022, 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, 2022, 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, 2021 4,166 $ 22.17 Exercised ( 4,166 ) $ 22.17 Outstanding as of December 31, 2022 — $ — — $ — Exercisable as of December 31, 2022 — $ — — $ — The total intrinsic value of options exercised during the years ended December 31, 2022, and 2021, was $ 0.2 million and $ 0.2 million, respectively. Cash received from option exercise under all share-based payment arrangements during the years ended December 31, 2022, and 2021, 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. F-24 Table of Contents A summary of the Company’s performance stock option activity as of December 31, 2022, 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, 2021 100,614 $ 30.95 Exercised ( 20,665 ) $ 30.95 Outstanding as of December 31, 2022 79,949 $ 30.95 1.19 $ 1,358 Vested as of December 31, 2022 79,949 $ 30.95 1.19 $ 1,358 Exercisable as of December 31, 2022 79,949 $ 30.95 1.19 $ 1,358 As of December 31, 2022, all related compensation expense has been fully recognized. No performance stock options were granted during the years ended December 31, 2022, 2021, and 2020. The total intrinsic value of performance options exercised during the year ended December 31, 2022 and 2021, was $ 0.6 million and $ 1.1 million, respectively. Cash received from performance option exercise during the years ended December 31, 2022 and 2021 was $ 0.6 million and $ 1.6 million, respectively. There were no performance stock options exercised during the year ended December 31, 2020. 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, 2022, 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, 2021 693,939 $ 39.33 Awarded 302,283 $ 60.45 Vested ( 413,798 ) $ 38.12 Cancelled ( 39,489 ) $ 48.93 Non-vested as of December 31, 2022 542,935 $ 51.31 ________________________ (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 up to 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, 2022 and 2021, the maximum number of non-vested performance shares that could vest under the provisions of the agreements was 681,330 and 878,309 , respectively. Unrecognized compensation expense related to non-vested shares as of December 31, 2022 was $ 13.1 million. The weighted-average remaining expense period, based on the unamortized value of these outstanding non-vested shares, was approximately 1.4 years. The fair value of restricted stock units and restricted stock awards vested for the years ended December 31, 2022, 2021, and 2020 was $ 26.9 million, $ 16.9 million, and $ 14.5 million, respectively. The weighted average grant date fair value for stock awards granted during the years ended December 31, 2022, 2021, and 2020 was $ 60.45 , $ 42.09 , and $ 38.51 , respectively. F-25 Table of Contents Note 11: Income Taxes Income before provision for income taxes consisted of the following (in thousands) : Year Ended December 31, 2022 2021 2020 US $ 331,009 $ 390,607 $ 259,132 Foreign ( 20,020 ) 45,934 23,766 Total income before provision for income taxes $ 310,989 $ 436,541 $ 282,898 The provision for income tax consisted of the following (in thousands) : Year Ended December 31, 2022 2021 2020 Current expense (benefit): Federal $ 59,105 $ 33,582 $ 43,185 State 11,803 5,787 8,528 Foreign ( 893 ) 10,600 10,112 70,015 49,969 61,825 Deferred expense (benefit): Federal 8,142 49,512 15,851 State 6,290 5,904 2,192 Foreign 31,978 ( 20,045 ) ( 9,494 ) 46,410 35,371 8,549 Provision for income taxes $ 116,425 $ 85,340 $ 70,374 The reconciliation of federal statutory income tax rate to our effective tax rate was as follows: Year Ended December 31, 2022 2021 2020 Federal provision 21.0 % 21.0 % 21.0 % State provision 5.0 % 2.3 % 3.2 % Foreign rate differential (1) ( 0.3 ) % ( 1.0 ) % ( 0.5 ) % Change in tax rate (2) — % ( 1.3 ) % ( 0.9 ) % Change in valuation allowance (3) 13.2 % ( 2.3 ) % 0.9 % Non-deductible CFPB settlement fees — % — % 1.1 % Deductible loss in foreign jurisdiction (4) ( 2.7 ) % — % — % Other 1.2 % 0.8 % 0.1 % Effective rate 37.4 % 19.5 % 24.9 % ________________________ (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) Includes valuation allowance recorded on U.K. deferred tax assets (4) This represents a deductible loss recognized in a foreign subsidiary that maintains a full valuation allowance on its deferred tax assets. Accordingly, this deductible loss increased the valuation allowance and did not result in any tax benefit during the year ended December 31, 2022. 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, 2022, 2021 and 2020 was immaterial. The Company has not provided for applicable income or withholding taxes on the undistributed earnings from continuing operations for certain of its subsidiaries operating outside of the United States. Undistributed net income of these subsidiaries as of December 31, 2022, were approximately $ 138.5 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-26 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, 2022 December 31, 2021 Deferred tax assets: Net operating losses $ 70,543 $ 68,677 Operating lease liabilities 12,222 18,715 Accrued expenses 10,800 11,885 Difference in basis of receivable portfolio 23,751 33,335 Stock-based compensation 4,960 4,528 Right-of-use asset — 23 Difference in basis of depreciable and amortizable assets 2,057 5,326 Other 2,396 6,094 Total deferred tax assets 126,729 148,583 Valuation allowance ( 66,625 ) ( 35,920 ) Total deferred tax assets net of valuation allowance 60,104 112,663 Deferred tax liabilities: Accrued expenses ( 443 ) ( 750 ) Difference in basis of bond and loan costs ( 1,003 ) ( 1,725 ) Difference in basis of receivable portfolio ( 109,787 ) ( 105,743 ) Stock-based compensation ( 970 ) ( 672 ) Right-of-use asset ( 9,794 ) ( 15,367 ) Difference in basis of depreciable and amortizable assets ( 16,807 ) ( 26,210 ) Prepaid expenses ( 875 ) ( 907 ) Other ( 10,206 ) ( 23 ) Total deferred tax liabilities ( 149,885 ) ( 151,397 ) Net deferred tax liability (1) $ ( 89,781 ) $ ( 38,734 ) ________________________ (1) 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, 2022, certain of the Company’s foreign subsidiaries have net operating loss carry forwards of approximately $ 278.2 million, which will begin to expire in 2025. Certain of the Company’s domestic subsidiaries have state net operating losses with an indefinite carryover period. As of December 31, 2022, valuation allowances increased by $ 30.7 million, as compared to December 31, 2021. The increase in valuation allowance is primarily related to U.K. deferred tax assets. These deferred tax assets include revenue recognition differences between statutory reporting and US GAAP reporting. In evaluating all positive and negative evidence available to determine whether all or some portion of the deferred tax assets will be realized, significant judgement is required and the weight of all available evidence must be considered. A significant piece of objective negative evidence evaluated was the U.K. loss before income taxes for the three-year period ended December 31, 2022. Objective evidence limits the ability to consider subjective evidence, such as projections for future earnings growth. The Company will continue to evaluate the realizability of deferred tax assets each quarter based on all available positive and negative evidence, including current and cumulative earnings, forecasts of future profitability, statutory carryback and carryforward periods and tax planning strategies. In a period when positive evidence supports a conclusion that a valuation allowance is no longer needed, a tax benefit will be recorded. F-27 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, 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 Decrease related to prior year tax positions ( 1,296 ) Decrease related to settlements with taxing authorities ( 713 ) Decrease related to expiration of statute of limitations ( 115 ) Increase related to prior year tax positions 874 Increase related to current year tax positions 691 Balance as of December 31, 2022 $ 3,988 The Company had gross unrecognized tax benefits, inclusive of penalties and interest, of $ 4.9 million, $ 4.6 million and $ 6.9 million as of December 31, 2022, 2021, and 2020 respectively. As of December 31, 2022, 2021 and 2020, there was $ 2.5 million, $ 1.6 million and $ 3.3 million, respectively, of unrecognized tax benefit that if recognized, would result in a net tax benefit. During the year ended December 31, 2022, the decrease in the Company's gross unrecognized tax benefit was primarily due to the release of a prior year position related to a foreign entity. 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. 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 a benefit of $ 0.4 million, expense of $ 0.1 million and expense of $ 0.2 million in net interest and penalties during the years ended December 31, 2022, 2021 and 2020, respectively. Interest and penalties accrued as of December 31, 2022, 2021 and 2020 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 2018 for U.S state jurisdictions, and after 2017 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-28 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, 2022 2021 2020 Operating lease costs (1) $ 18,403 $ 17,272 $ 16,331 Finance lease costs Amortization of ROU assets 4,296 3,848 3,149 Interest on lease liabilities 312 419 420 Total lease costs $ 23,011 $ 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, 2022 December 31, 2021 Assets Operating lease ROU assets Other assets $ 70,074 $ 68,812 Finance lease ROU assets Property and equipment, net 18,337 15,064 Total lease ROU assets $ 88,411 $ 83,876 Liabilities Operating lease liabilities Other liabilities $ 83,598 $ 84,314 Finance lease liabilities Borrowings 5,675 7,005 Total lease liabilities $ 89,273 $ 91,319 Supplemental lease information is summarized below (in thousands) : Year Ended December 31, 2022 2021 2020 ROU assets obtained in exchange for new operating lease obligations $ 22,582 $ 13,426 $ 8,990 ROU assets obtained in exchange for new finance lease obligations 3,273 2,664 3,276 Cash paid for amounts included in the measurement of lease liabilities Operating leases - operating cash flows 19,227 20,048 17,396 Finance leases - operating cash flows 312 419 419 Finance leases - financing cash flows 4,622 3,950 3,114 Lease term and discount rate were as follows: December 31, 2022 December 31, 2021 December 31, 2020 Weighted-average remaining lease term ( in years ) Operating leases 5.9 6.2 7.1 Finance leases 2.1 2.0 2.5 Weighted-average discount rate Operating leases 5.2 % 5.2 % 5.0 % Finance leases 3.9 % 4.6 % 4.6 % F-29 Table of Contents Maturities of lease liabilities under non-cancelable leases as of December 31, 2022 are summarized as follows (in thousands) : Finance Leases Operating Leases Total 2023 $ 3,229 $ 17,691 $ 20,920 2024 1,945 17,688 19,633 2025 715 14,751 15,466 2026 15 13,789 13,804 2027 — 11,150 11,150 Thereafter — 23,529 23,529 Total undiscounted lease payments 5,904 98,598 104,502 Less: imputed interest ( 229 ) ( 15,000 ) ( 15,229 ) Total lease liabilities $ 5,675 $ 83,598 $ 89,273 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 asserting various claims, including those based on the Fair Debt Collection Practices Act (“FDCPA”), the Fair Credit Reporting Act (“FCRA”), the Telephone Consumer Protection Act (“TCPA”), comparable state statutes, 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. Additionally, we are subject to ancillary state Attorney General investigations related to similar debt collection practices. We have entered into settlement agreements with the Attorneys General of various U.S. states 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, 2022, the Company has no material reserves for legal matters. Purchase Commitments In the normal course of business, the Company enters into forward flow purchase agreements. A forward flow purchase agreement is a commitment to purchase receivables over a duration that is typically three to twelve months, but can be longer, generally with a specifically defined volume range, frequency, and pricing. Typically, these forward flow contracts have provisions that allow for early termination or price re-negotiation should the underlying quality of the portfolio deteriorate over time or if any particular month’s delivery is materially different than the original portfolio used to price the forward flow contract. Certain of these forward flow purchase agreements may also have termination clauses, whereby the agreements can be canceled by either party upon providing a certain specified amount of notice. F-30 Table of Contents As of December 31, 2022, the Company had entered into forward flow purchase agreements for the purchase of nonperforming loans with an estimated minimum aggregate purchase price of approximately $ 444.0 million. The Company expects 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, $ 2.8 million, and $ 2.9 million for the years ended December 31, 2022, 2021, and 2020, respectively, in salaries and employee benefits in its consolidated statements of income. 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, 2022, 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, 2022 2021 2020 Total revenues: United States $ 995,470 $ 1,115,572 $ 992,916 Europe United Kingdom 272,962 344,214 390,955 Other European countries (1) 129,737 142,316 99,430 Total Europe 402,699 486,530 490,385 Other geographies (1) 178 12,397 18,099 Total $ 1,398,347 $ 1,614,499 $ 1,501,400 ________________________ (1) None of these countries comprise greater than 10% of the Company's consolidated revenues. F-31 Table of Contents December 31, 2022 December 31, 2021 Long-lived assets (1) : United States $ 82,695 $ 104,169 International United Kingdom 58,034 62,205 India 25,337 4,571 Other foreign countries (2) 17,908 17,724 101,279 84,500 Total $ 183,974 $ 188,669 ________________________ (1) Long-lived assets consist of property and equipment, net and right of use assets. (2) None of these countries comprise greater than 10% of the Company's consolidated long-lived assets. Note 15: Goodwill and Identifiable Intangible Assets The Company’s 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. When reviewing goodwill for impairment, the Company first performs a qualitative test to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. In performing its qualitative test, the Company considers various qualitative factors including, but not limited to economic environment, business climate, market capitalization, operating performance and competition. If after performing the qualitative test, the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company must perform a quantitative goodwill impairment test. Instead of performing a qualitative test, the Company may also just proceed directly to performing a quantitative test. A quantitative impairment test is performed by estimating the fair value of the reporting unit and comparing it to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the Company would record an impairment charge equal to the excess of the carrying value of the reporting unit over its fair value. The Company applies various valuation techniques to estimate the fair value of each reporting unit when performing a quantitative impairment test, including the income approach and the market approach. Under the income approach, the Company uses a discounted cash flow method, or DCF, to estimate the fair value of a reporting unit. In applying the DCF method, an identified level of future cash flow is estimated. The cash flow projections are based on five-year financial forecasts developed by management that include purchasing volume, collections forecasts, capital spending trends, and cost assumptions to support anticipated growth, which are updated annually and reviewed by management. 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. Because DCF analyses are based on management’s long-term financial projections and require significant estimates and judgments, the market approach is conducted in addition to the income approach in estimating the fair value of a reporting unit. Under the market approach, the Company uses both a Guideline Public Company Method and Guideline Merged & Acquired Company method to estimate the fair value of equity and the business enterprise value of a reporting unit. The Guideline Public Company approach uses financial metrics from similar public traded companies to estimate fair value. The Guideline Merged and Acquired Company method calculates fair value by analyzing the actual prices paid for recent mergers and acquisitions in the industry. 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. As of October 1, 2022, the Company had two reporting units, MCM and Cabot, that carried goodwill. Instead of performing qualitative tests, the Company chose to proceed directly to performing quantitative tests for both reporting units at October 1, 2022, and determined that no goodwill impairment existed at these two reporting units. No indicators of impairment noted between the assessment date and December 31, 2022. Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill and intangible assets. Adverse changes in the Company’s actual or expected operating results, market capitalization, F-32 Table of Contents 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 (in thousands): Year Ended December 31, 2022 2021 2020 Balance as of beginning of period: $ 897,795 $ 906,962 $ 884,185 Effect of foreign currency translation ( 76,581 ) ( 9,167 ) 22,777 Balance as of end of period: $ 821,214 $ 897,795 $ 906,962 The Company’s acquired intangible assets are summarized as follows (in thousands) : As of December 31, 2022 As of December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships $ 45,498 $ ( 23,507 ) $ 21,991 $ 66,969 $ ( 31,154 ) $ 35,815 Developed technologies — — — 2,549 ( 2,530 ) 19 Trade name and other 909 ( 788 ) 121 1,597 ( 1,111 ) 486 Total intangible assets $ 46,407 $ ( 24,295 ) $ 22,112 $ 71,115 $ ( 34,795 ) $ 36,320 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 $ 10.4 million, $ 7.9 million, and $ 8.0 million during the years ended December 31, 2022, 2021, and 2020, respectively. Estimated future amortization expense related to finite-lived intangible assets as of December 31, 2022 is as follows ( in thousands ): 2023 $ 4,622 2024 4,598 2025 4,550 2026 4,550 2027 3,792 Total $ 22,112 F-33