ecpg-20210331

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________________________________________________________

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021 or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________to__________.

COMMISSION FILE NUMBER: 000-26489

ENCORE CAPITAL GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware			48-1090909
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)

350 Camino De La Reina, Suite 100

San Diego, California 92108

(Address of principal executive offices, including zip code)

(877) 445 - 4581

(Registrant’s telephone number, including area code)

(Not Applicable)

(Former name, former address and former fiscal year, if changed since last report)

_______________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, $0.01 Par Value Per Share

ECPG

The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the last 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class						Outstanding at April 28, 2021
Common Stock, $0.01 par value						31,009,845 shares

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ENCORE CAPITAL GROUP, INC.

INDEX TO FORM 10-Q


			Page
PART I – FINANCIAL INFORMATION			3
Item 1— Consolidated Financial Statements (Unaudited)			3
Consolidated Statements of Financial Condition			3
Consolidated Statements of Operations			4
Consolidated Statements of Comprehensive Income (Loss)			5
Consolidated Statements of Equity			6
Consolidated Statements of Cash Flows			7
Notes to Consolidated Financial Statements			8
Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies			8
Note 2: Earnings (Loss) Per Share			9
Note 3: Fair Value Measurements			10
Note 4: Derivatives and Hedging Instruments			12
Note 5: Investment in Receivable Portfolios, Net			14
Note 6 : Other Assets			16
Note 7 : Borrowings			17
Note 8 : Variable Interest Entities			20
Note 9 : Income Taxes			20
Note 1 0 : Commitments and Contingencies			21
Note 1 1 : Segment and Geographic Information			21
Note 1 2 : Goodwill and Identifiable Intangible Assets			22

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3 – Quantitative and Qualitative Disclosures About Market Risk			43
Item 4 – Controls and Procedures			43

PART II – OTHER INFORMATION			44
Item 1 – Legal Proceedings			44
Item 1A – Risk Factors			44
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds			44

Item 6 – Exhibits			45
SIGNATURES			46

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PART I – FINANCIAL INFORMATION

Item 1— Consolidated Financial Statements (Unaudited)

ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Financial Condition

(In Thousands, Except Par Value Amounts)

(Unaudited)


	March 31, 2021		December 31, 2020
Assets
Cash and cash equivalents	$	184,598	$	189,184
Investment in receivable portfolios, net	3,225,678		3,291,918
Property and equipment, net	124,586		127,297
Other assets	323,137		349,162
Goodwill	912,170		906,962
Total assets	$	4,770,169	$	4,864,523
Liabilities and Equity
Liabilities:
Accounts payable and accrued liabilities	$	189,529	$	215,920
Borrowings	3,151,928		3,281,634
Other liabilities	149,928		146,893
Total liabilities	3,491,385		3,644,447
Commitments and Contingencies (Note 10)
Equity:
Convertible preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding	—		—
Common stock, $0.01 par value, 75,000 shares authorized, 31,010 and 31,345 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively	310		313
Additional paid-in capital	167,655		230,440
Accumulated earnings	1,172,756		1,055,668
Accumulated other comprehensive loss	(64,541)		(68,813)
Total Encore Capital Group, Inc. stockholders’ equity	1,276,180		1,217,608
Noncontrolling interest	2,604		2,468
Total equity	1,278,784		1,220,076
Total liabilities and equity	$	4,770,169	$	4,864,523

The following table presents certain assets and liabilities of consolidated variable interest entities (“VIEs”) included in the consolidated statements of financial condition above. Most assets in the table below include those assets that can only be used to settle obligations of consolidated VIEs. The liabilities exclude amounts where creditors or beneficial interest holders have recourse to the general credit of the Company. See “Note 8: Variable Interest Entities” for additional information on the Company’s VIEs.


	March 31, 2021		December 31, 2020
Assets
Cash and cash equivalents	$	559	$	2,223
Investment in receivable portfolios, net	536,177		553,621
Other assets	4,687		5,127
Liabilities
Borrowings	482,377		478,131
Other Liabilities	11		37

See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

(Unaudited)


	Three Months Ended March 31,
	2021		2020
Revenues
Revenue from receivable portfolios	$	338,018	$	357,365
Changes in expected current and future recoveries	44,537		(98,661)
Servicing revenue	32,516		28,680
Other revenues	1,766		1,697
Total revenues	416,837		289,081
Operating expenses
Salaries and employee benefits	96,456		93,098
Cost of legal collections	67,142		66,279
General and administrative expenses	32,148		31,877
Other operating expenses	28,441		27,164
Collection agency commissions	12,824		13,176
Depreciation and amortization	11,512		10,285

Total operating expenses	248,523		241,879
Income from operations	168,314		47,202
Other (expense) income
Interest expense	(46,526)		(54,662)

Other (expense) income	(55)		1,439
Total other expense	(46,581)		(53,223)
Income (loss) before income taxes	121,733		(6,021)
Provision for income taxes	(26,968)		(4,558)
Net income (loss)	94,765		(10,579)
Net (income) loss attributable to noncontrolling interest	(135)		125
Net income (loss) attributable to Encore Capital Group, Inc. stockholders	$	94,630	$	(10,454)

Earnings (loss) per share attributable to Encore Capital Group, Inc.:
Basic	$	3.01	$	(0.33)
Diluted	$	2.97	$	(0.33)

Weighted average shares outstanding:
Basic	31,469		31,308
Diluted	31,832		31,308

See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited, In Thousands)


	Three Months Ended March 31,
	2021		2020
Net income (loss)	$	94,765	$	(10,579)
Other comprehensive income (loss), net of tax:
Change in unrealized gain (loss) on derivative instruments:
Unrealized gain (loss) on derivative instruments	1,761		(5,051)
Income tax effect	(378)		1,497
Unrealized gain (loss) on derivative instruments, net of tax	1,383		(3,554)
Change in foreign currency translation:
Unrealized gain (loss) on foreign currency translation	2,890		(61,038)


Other comprehensive income (loss), net of tax:	4,273		(64,592)
Comprehensive income (loss)	99,038		(75,171)
Comprehensive (income) loss attributable to noncontrolling interest:
Net (income) loss attributable to noncontrolling interest	(135)		125
Unrealized (gain) loss on foreign currency translation	(1)		3
Comprehensive (income) loss attributable to noncontrolling interest:	(136)		128
Comprehensive income (loss) attributable to Encore Capital Group, Inc. stockholders	$	98,902	$	(75,043)

See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Equity

(Unaudited, In Thousands)


	Three Months Ended March 31, 2021
	Common Stock			Additional Paid-In Capital		Accumulated Earnings		Accumulated Other Comprehensive (Loss) Income		Noncontrolling Interest		Total Equity
	Shares	Par
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	—	—		—		94,630		—		135		94,765
Other comprehensive income, net of tax	—	—		—		—		4,272		1		4,273

Exercise of stock options and issuance of share-based awards, net of shares withheld for employee taxes	183	2		(5,433)		—		—		—		(5,431)
Repurchase of common stock	(518)	(5)		(20,385)		—		—		—		(20,390)
Stock-based compensation	—	—		3,405		—		—		—		3,405
Balance as of March 31, 2021	31,010	$	310	$	167,655	$	1,172,756	$	(64,541)	$	2,604	$	1,278,784


	Three Months Ended March 31, 2020
	Common Stock			Additional Paid-In Capital		Accumulated Earnings		Accumulated Other Comprehensive Loss		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 loss	—	—		—		(10,454)		—		(125)		(10,579)
Other comprehensive loss, net of tax	—	—		—		—		(64,589)		(3)		(64,592)
Issuance of share-based awards, net of shares withheld for employee taxes	137	1		(4,714)		—		—		—		(4,713)
Stock-based compensation	—	—		4,527		—		—		—		4,527



Balance as of March 31, 2020	31,234	$	312	$	222,403	$	833,366	$	(153,355)	$	3,085	$	905,811

See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Consolidated Statements of Cash Flows

(Unaudited, In Thousands)


	Three Months Ended March 31,
	2021		2020
Operating activities:
Net income (loss)	$	94,765	$	(10,579)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,512		10,285

Other non-cash interest expense, net	4,749		5,909
Stock-based compensation expense	3,405		4,527
Deferred income taxes	(3,302)		(12,030)

Changes in expected current and future recoveries	(44,537)		98,661
Other, net	4,931		2,161
Changes in operating assets and liabilities
Other assets	(3,816)		3,377
Prepaid income tax and income taxes payable	28,627		14,970
Accounts payable, accrued liabilities and other liabilities	(27,215)		(46,476)
Net cash provided by operating activities	69,119		70,805
Investing activities:
Purchases of receivable portfolios, net of put-backs	(167,025)		(209,045)
Collections applied to investment in receivable portfolios, net	268,443		169,914

Other, net	(6,151)		(4,124)
Net cash provided by (used in) investing activities	95,267		(43,255)
Financing activities:

Proceeds from credit facilities	273,293		171,880
Repayment of credit facilities	(235,399)		(167,221)

Repayment of senior secured notes	(9,770)		(16,250)

Repayment of convertible senior notes	(161,000)		—
Repurchase of common stock	(20,390)		—
Other, net	(6,844)		(10,171)
Net cash used in financing activities	(160,110)		(21,762)
Net increase in cash and cash equivalents	4,276		5,788
Effect of exchange rate changes on cash and cash equivalents	(8,862)		(9,924)
Cash and cash equivalents, beginning of period	189,184		192,335
Cash and cash equivalents, end of period	$	184,598	$	188,199

Supplemental disclosure of cash information:
Cash paid for interest	$	37,258	$	60,495
Cash paid for taxes, net of refunds	813		766

See accompanying notes to consolidated financial statements

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ENCORE CAPITAL GROUP, INC.

Notes to Consolidated Financial Statements (Unaudited)

Note 1: Ownership, Description of Business, and Summary of Significant Accounting Policies

Encore Capital Group, Inc. (“Encore”), through its subsidiaries (collectively with Encore, the “Company”), is an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. The Company purchases portfolios of defaulted consumer receivables at deep discounts to face value and manages them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial obligations to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. The Company also provides debt servicing and other portfolio management services to credit originators for non-performing loans.

Through Midland Credit Management, Inc. and its domestic affiliates (collectively, “MCM”), the Company is a market leader in portfolio purchasing and recovery in the United States. Through Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates (collectively, “Cabot”), the Company is one of the largest credit management services providers in Europe and a market leader in the United Kingdom and Ireland. These are the Company’s primary operations.

The Company also has investments and operations in Latin America and Asia-Pacific, which the Company refers to as “LAAP.”

COVID-19

On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The COVID-19 outbreak and resulting containment measures implemented by governments around the world, as well as increased business uncertainty, have impacted the Company. The circumstances around the COVID-19 pandemic continue to rapidly evolve and will continue to impact the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to closely monitor the COVID-19 situation and update its assumptions accordingly.

Financial Statement Preparation and Presentation

The accompanying interim consolidated financial statements have been prepared by the Company, without audit, in accordance with the instructions to the Quarterly Report on Form 10-Q, and Rule 10-01 of Regulation S-X promulgated by the United States Securities and Exchange Commission (the “SEC”) and, therefore, do not include all information and footnotes necessary for a fair presentation of its consolidated financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”).

In the opinion of management, the unaudited financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts and the disclosure of contingent amounts in the Company’s financial statements and the accompanying notes. The inputs into the judgments and estimates consider the economic implications of the COVID-19 pandemic on the Company’s critical and significant accounting estimates. Actual results could materially differ from those estimates.

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 for which it is the primary beneficiary. The primary beneficiary has both (a) the power to direct the activities of the VIE that most significantly affect the entity’s economic performance, and (b) either the obligation to absorb losses or the right to receive benefits. Refer to “Note 8: Variable Interest Entities” for further details. All intercompany transactions and balances have been eliminated in consolidation.

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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, by recording a net cumulative-effect adjustment to equity of approximately $17.9 million.

The ASU simplifies the accounting for convertible instruments by removing certain models in Subtopic 470-20 and revises the guidance in Subtopic 815-40 to simplify the accounting for contracts in an entity’s own equity. The ASU also amends the guidance to improve the consistency of earnings per share calculations, which requires the if-converted method be used for convertible instruments.

Under ASU 2020-06, the Company’s convertible and exchangeable notes are no longer bifurcated to a debt component and an equity component, instead, they are carried as a single liability which reflects the principal amount of the convertible and exchangeable notes. The interest expense recognized on the convertible and exchangeable notes are 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 if-converted method in calculating dilutive effect of its convertible and exchangeable notes for earnings per share.

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 three months ended March 31, 2021, as compared to the recent accounting pronouncements described in our Annual Report, that have significance, or potential significance, to the Company’s consolidated financial statements.

Note 2: Earnings (Loss) 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 during the period. Dilutive potential common shares include outstanding stock options, non-vested share awards, and the dilutive effect of the convertible and exchangeable senior notes, if applicable.

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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 are 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. Since all of the Company’s 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. The Company did not have any dilutive effect from its convertible and exchangeable notes during the three months ended March 31, 2021 or 2020.

In computing the diluted net loss per share for the three months ended March 31, 2020, dilutive potential common shares were excluded from the diluted loss per share calculation because of their anti-dilutive effect.

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 three months ended March 31, 2021, the Company repurchased 517,860 shares of our common stock for approximately $20.4 million, or $39.37 per share. The Company’s practice is to retire the shares repurchased.

A reconciliation of shares used in calculating earnings per basic and diluted shares follows (in thousands, except per share amounts):


	Three Months Ended March 31,
	2021		2020
Net income (loss) attributable to Encore Capital Group, Inc. stockholders	$	94,630	$	(10,454)

Total weighted-average basic shares outstanding	31,469		31,308
Dilutive effect of stock-based awards	363		—


Total weighted-average dilutive shares outstanding	31,832		31,308

Basic earnings (loss) per share	$	3.01	$	(0.33)
Diluted earnings (loss) per share	$	2.97	$	(0.33)

Anti-dilutive employee stock options outstanding were approximately 13,000 during the three months ended March 31, 2021 and 2020.

Note 3: 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.

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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 March 31, 2021
	Level 1		Level 2		Level 3		Total
Assets

Interest rate cap contracts	$	—	$	854	$	—	$	854
Liabilities
Interest rate swap agreements	—		(3,847)		—		(3,847)
Cross-currency swap agreements	—		(5,340)		—		(5,340)
Contingent consideration	—		—		(2,927)		(2,927)


	Fair Value Measurements as of December 31, 2020
	Level 1		Level 2		Level 3		Total
Assets
Cross-currency swap agreements	$	—	$	11,578	$	—	$	11,578
Interest rate cap contracts	—		659		—		659
Liabilities

Interest rate swap agreements	—		(5,232)		—		(5,232)
Contingent consideration	—		—		(2,957)		(2,957)

Derivative Contracts:

The Company uses derivative instruments to manage its exposure to fluctuations in interest rates and foreign currency exchange rates. Fair values of these derivative instruments are estimated using industry standard valuation models. These models project future cash flows and discount the future amounts to a present value using market-based observable inputs, including interest rate curves, foreign currency exchange rates, and forward and spot prices for currencies.

Contingent Consideration:

The Company carries certain contingent liabilities resulting from its mergers and acquisition activities. Certain sellers of the Company’s acquired entities could earn additional earn-out payments in cash based on the entities’ subsequent operating performance. The Company recorded the acquisition date fair values of these contingent liabilities, based on the likelihood of contingent earn-out payments, as part of the consideration transferred. The earn-out payments are subsequently remeasured to fair value at each reporting date based on actual and forecasted operating performance.

The following table provides a roll-forward of the fair value of contingent consideration for the three months ended March 31, 2021 and year ended December 31, 2020 (in thousands):


	Amount




Balance as of December 31, 2019	$	66
Issuance of contingent consideration in connection with acquisition	2,848
Payment of contingent consideration	(88)
Effect of foreign currency translation	131
Balance as of December 31, 2020	2,957


Payment of contingent consideration	(56)
Effect of foreign currency translation	26
Balance as of March 31, 2021	$	2,927

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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 using Level 3 measurements. The fair value estimate of these assets was approximately $40.1 million and $42.2 million as of March 31, 2021 and December 31, 2020, respectively.

Financial Instruments Not Required To Be Carried At Fair Value

The table below summarizes fair value estimates for the Company's financial instruments that are not required to be carried at fair value. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.

The carrying amounts in the following table are included in the consolidated statements of financial condition as of March 31, 2021 and December 31, 2020 (in thousands):


	March 31, 2021				December 31, 2020
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets
Investment in receivable portfolios, net	$	3,225,678	$	3,615,300	$	3,291,918	$	3,705,672
Financial Liabilities
Convertible notes and exchangeable notes(1)	422,500		481,126		564,136		622,081
Senior secured notes(2)	1,613,557		1,683,277		1,642,058		1,684,729

_______________________

(1)Prior to January 1, 2021, under the previous accounting standard, the convertible and exchangeable notes included a debt discount. The carrying amount as of December 31, 2020 represented the principal amount of the notes, net of the debt discount.

(2)Carrying amount represents historical cost, adjusted for any related debt discount or debt premium.

Investment in Receivable Portfolios:

The fair value of investment in receivable portfolios is measured using Level 3 inputs by discounting the estimated future cash flows generated by the Company’s proprietary forecasting models. The key inputs include the estimated future gross cash flow, average cost to collect, and discount rate. The determination of such inputs requires significant judgment, including assessing the assumed market participant’s cost structure, its determination of whether to include fixed costs in its valuation, its collection strategies, and determining the appropriate weighted average cost of capital. The Company evaluates the use of these key inputs on an ongoing basis and refines the data as it continues to obtain better information from market participants in the debt recovery and purchasing business.

Borrowings:

The Company’s convertible notes, exchangeable notes and senior secured notes are carried at historical cost, adjusted for the debt discount. The fair value estimate for the convertible and exchangeable notes incorporates quoted market prices using Level 2 inputs. The fair value of the senior secured notes is estimated using widely accepted valuation techniques, including discounted cash flow analyses using available market information on discount and borrowing rates with similar terms, maturities, and credit ratings. Accordingly, the Company used Level 2 inputs for these debt instrument fair value estimates.

The carrying value of the Company’s senior secured revolving credit facility agreement approximates fair value due to the short-term nature of the interest rate period. The Company’s borrowings also include private placement notes, a securitisation senior facility and finance lease liabilities for which the carrying value approximates respective fair value.

Note 4: Derivatives and Hedging Instruments

The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency.

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The following table summarizes the fair value of derivative instruments as included in the Company’s consolidated statements of financial condition (in thousands):

March 31, 2021

December 31, 2020

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments:

Interest rate cap contracts

Other assets

854

Other assets

659

Interest rate swap agreements

Other liabilities

(3,847)

Other liabilities

(5,232)

Cross-currency swap agreements

Other liabilities

(5,340)

Other assets

11,578

Derivatives Designated as Hedging Instruments

The Company has operations in foreign countries which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company may enter into derivative financial instruments, principally foreign currency forward contracts with financial counterparties. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis.

The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. Under the swap agreements, the Company receives floating interest rate payments and makes interest payments based on fixed interest rates. The Company designates its interest rate swap instruments as cash flow hedges. Previously, the Company held four interest rate swap agreements that hedged the risk of USD-LIBOR interest rate fluctuations for the Encore revolving credit facility and term loan facility. As part of the financing transactions completed in September 2020, the Company settled two of the interest rate swap agreements. As of March 31, 2021, there were two interest rate swap agreements outstanding with a total notional amount of $191.3 million. The Company expects to reclassify approximately $6.4 million of net derivative loss from OCI into earnings relating to interest rate swaps within the next 12 months.

In connection with the financing transactions discussed above, the Company entered into cross-currency swap agreements, which are used to manage foreign currency exchange risk by converting fixed-rate Euro-denominated borrowings including periodic interest payments and the payment of principal at maturity to fixed-rate USD debt and are accounted for as cash flow hedges. As of March 31, 2021, there were four cross-currency swap agreements outstanding with a total notional amount of €350.0 million (approximately $410.5 million based on an exchange rate of $1.00 to €0.85, the exchange rate as of March 31, 2021). The Company expects to reclassify approximately $4.6 million of net derivative loss from OCI into earnings relating to cross-currency swaps within the next 12 months.

Previously, the Company held two interest rate cap contracts (the “2018 Caps”) that hedged the risk of GBP-LIBOR interest rate fluctuations for the Cabot Securitisation Senior Facility interest payments. In February 2020, the Company settled the 2018 Caps and ceased the hedge relationship, which resulted in the reclassification of the associated other comprehensive loss balance to interest expense for approximately $2.5 million during the first quarter of 2020.

As of March 31, 2021, the Company held two interest rate cap contracts with a notional amount of approximately $951.5 million that are used to manage its risk related to interest rate fluctuations on the Company’s variable interest rate bearing debt. The interest rate cap hedging the fluctuations in three-month EURIBOR floating rate debt (“2019 Cap”) has a notional amount of €400.0 million (approximately $469.1 million based on an exchange rate of $1.00 to €0.85, the exchange rate as of March 31, 2021) and matures in 2024. The interest rate cap hedging the fluctuations in sterling overnight index average (“SONIA”) bearing debt (“2020 Cap”) has a notional amount of £350.0 million (approximately $482.4 million based on an exchange rate of $1.00 to £0.73, the exchange rate as of March 31, 2021) and matures in 2023. The Company expects the hedge relationships to be highly effective and designates the 2019 Cap and 2020 Cap as cash flow hedge instruments. The Company expects to reclassify approximately $0.6 million of net derivative loss from OCI into earnings relating to interest rate caps within the next 12 months.

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The following tables summarize 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 (Loss)	Gain (Loss) Reclassified from OCI into Income (Loss)
	Three Months Ended March 31,					Three Months Ended March 31,
	2021		2020			2021		2020
Foreign currency exchange contracts	$	—	$	(389)	Salaries and employee benefits	$	—	$	127
Foreign currency exchange contracts	—		(45)		General and administrative expenses	—		17
Interest rate swap agreements	(11)		(6,707)		Interest expense	(2,271)		(1,088)
Interest rate cap contracts	195		(1,396)		Interest expense	(107)		(2,542)
Cross-currency swap agreements	(18,329)		—		Interest expense / Other (expense) income	(17,528)		—

Derivatives Not Designated as Hedging Instruments

The Company enters into currency exchange forward contracts to reduce the effects of currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally mature within one to three months and are not designated as hedge instruments for accounting purposes. The Company continues to monitor the level of exposure of the foreign currency exchange risk and may enter into additional short-term forward contracts on an ongoing basis. The gains or losses on these derivative contracts are recognized in other income or expense based on the changes in fair value. As of March 31, 2021, the Company had no outstanding currency exchange forward contracts that were not designated as cash flow hedging instruments.

The following table summarizes the effects of derivatives in cash flow hedging relationships not designated as hedging instruments in the Company’s consolidated statements of operations (in thousands):


		Amount of Gain (Loss) Recognized in Income (Loss)
		Three Months Ended March 31,
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	2021		2020
Foreign currency exchange contracts	Other (expense) income	$	—	$	1,943

Note 5: Investment in Receivable Portfolios, Net

The Company’s purchased portfolios of loans are grossed-up to 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.

Receivable portfolio purchases are aggregated into pools based on similar risk characteristics. Examples of risk characteristics include financial asset type, collateral type, size, interest rate, date of origination, term, and geographic location. The Company’s static pools are typically grouped into credit card, purchased consumer bankruptcy, and mortgage portfolios. The Company further groups these static pools by geographic location. Once a pool is established, the portfolios will remain in the designated pool unless the underlying risk characteristics change. 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. Revenue primarily includes two components: (1) accretion of the discount on the negative allowance due to the passage of time, and (2) changes in expected

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cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries.

The Company measures expected future recoveries based on historical experience, current conditions, and reasonable and supportable forecasts. Factors that may change the expected future recoveries may include both internal as well as external factors. Internal factors include operational performance, such as capacity and the productivity of our collection staff. External factors that may have an impact on our collections include new laws or regulations, new interpretations of existing laws or regulations, and macroeconomic conditions.

The table below provides the detail on the establishment of negative allowance for expected recoveries of portfolios purchased during the periods presented (in thousands):


	Three Months Ended March 31,
	2021		2020
Purchase price	$	170,178	$	214,113
Allowance for credit losses	374,575		521,194
Amortized cost	544,753		735,307
Noncredit discount	784,112		967,715
Face value	1,328,865		1,703,022
Write-off of amortized cost	(544,753)		(735,307)
Write-off of noncredit discount	(784,112)		(967,715)
Negative allowance	170,178		214,113
Negative allowance for expected recoveries - current period purchases	$	170,178	$	214,113

The following table summarizes the changes in the balance of the investment in receivable portfolios during the periods presented (in thousands):


	Three Months Ended March 31,
	2021		2020
Balance, beginning of period	$	3,291,918	$	3,328,150
Purchases of receivable portfolios	170,178		214,113

Put-backs and Recalls	(3,153)		(5,068)
Disposals and transfers to assets held for sale	(1,665)		(1,531)
Cash collections	(606,461)		(527,279)
Revenue from receivable portfolios	338,018		357,365
Changes in expected current period recoveries	91,401		10,315
Changes in expected future period recoveries	(46,864)		(108,976)
Foreign currency adjustments	(7,694)		(101,071)
Balance, end of period	$	3,225,678	$	3,166,018

Changes in expected current period recoveries represent over and under-performance in the reporting period. Collections during the three months ended March 31, 2021 significantly outperformed the projected cash flows. The Company believes the collection over-performance was a result of its sustained improvements in portfolio collections driven by change in consumer behavior during the COVID-19 pandemic and our liquidation improvement initiatives. The over-performance was also driven by higher collections as compared to the reduced near-term expected recoveries as a result of adjustments made to the projected cash flow forecast during 2020 associated with the COVID-19 pandemic.

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While the Company now has additional information with respect to the impact on collections of the COVID-19 pandemic, the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and spread of the pandemic and related actions taken by governments. When reassessing the future forecasts of expected lifetime recoveries during three months ended March 31, 2021, management considered historical and current collection performance, as well as the uncertainty in economic forecasts in the geographies in which we operate, and believes that while some of the collection over-performance resulted in increased total expected recoveries for certain pool groups, the majority of the over-performance was a shift forward in timing rather than an increase in total estimated remaining collections. Additionally, the macroeconomic driven consumer distress has improved; although it is still present and will likely impact the Company’s collections performance in the near future. As a result of a combination of the above, the Company has updated its forecast, resulting in a net reduction of total estimated remaining collections which in turn, when discounted to present value, resulted in a provision for credit loss adjustment of approximately $46.9 million during the three months ended March 31, 2021. During the three months ended March 31, 2020, the Company recorded approximately $109.0 million in provision for credit loss adjustment due to significant uncertainty of the COVID-19 pandemic at that time. The circumstances around this pandemic continue to rapidly evolve, and will continue to impact the Company’s business and its estimation of expected recoveries in future periods. The Company will continue to closely monitor the COVID-19 situation and update its assumptions accordingly.

Note 6: Other Assets

Other assets consist of the following (in thousands):


	March 31, 2021		December 31, 2020
Operating lease right-of-use assets	$	69,426	$	72,164
Identifiable intangible assets, net	42,991		45,012
Real estate owned	40,059		42,173
Deferred tax assets	33,834		33,202
Service fee receivables	30,718		26,539
Prepaid expenses	26,497		26,717
Equity method investments	17,302		10,155
Other financial receivables	12,036		12,238
Income tax deposits	8,272		35,853
Other	42,002		45,109
Total	$	323,137	$	349,162

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Note 7: Borrowings

The Company is in compliance in all material respects with all covenants under its financing arrangements as of March 31, 2021. The components of the Company’s consolidated borrowings were as follows (in thousands):


	March 31, 2021		December 31, 2020
Global senior secured revolving credit facility	$	520,505	$	481,007


Encore private placement notes	136,780		146,550
Senior secured notes	1,622,407		1,651,619
Convertible notes and exchangeable notes	422,500		583,500

Cabot securitisation senior facility	482,377		478,131
Other	24,921		24,398
Finance lease liabilities	9,953		8,288
	3,219,443		3,373,493
Less: debt discount and issuance costs, net of amortization	(67,515)		(91,859)
Total	$	3,151,928	$	3,281,634

Encore is the parent of the restricted group for the Global Senior Facility, the Senior Secured Notes and the Private Placement Notes, each of which is guaranteed by the same group of material Encore subsidiaries and secured by the same collateral, which represents substantially all of the assets of those subsidiaries.

Global Senior Secured Revolving Credit Facility

In September 2020, the Company entered into a multi-currency senior secured revolving credit facility agreement (as amended and restated, the “Global Senior Facility”). In previous periods, the Company referred to this facility as the Cabot Credit Facility. As of March 31, 2021, the Global Senior Facility provided for a total committed facility of $1,050.0 million that matures in September 2024 and included the following key provisions:

•Interest at LIBOR (or EURIBOR for any loan drawn in euro) plus 2.50% per annum, with a LIBOR (or EURIBOR) floor of 0.75%;

•A restrictive covenant that limits the LTV Ratio (defined in the Global Senior Facility) to 0.75 in the event that the Global Senior Facility is more than 20% utilized;

•A restrictive covenant that limits the SSRCF 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 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 March 31, 2021, the outstanding borrowings under the Global Senior Facility were $520.5 million. The weighted average interest rate of the Global Senior Facility was 3.25% for the three months ended March 31, 2021. The weighted average interest rate of the previous Cabot Credit Facility was 3.55% for the three months ended March 31, 2020. The weighted average interest rate of the previous Encore revolving credit facility was 4.58% for the three months ended March 31, 2020. Available capacity under the Global Senior Facility was approximately $529.5 million as of March 31, 2021.

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Private Placement Notes

In August 2017, Encore entered into $325.0 million in senior secured notes with a group of insurance companies (the “Private Placement Notes”). As of March 31, 2021, $136.8 million of the Private Placement Notes remained outstanding. The 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 Private Placement Notes are substantially similar to those for the Global Senior Facility.

Senior Secured Notes

The following table provides a summary of the Senior Secured Notes ($ in thousands):


	March 31, 2021		December 31, 2020		Maturity Date	Interest Payment Dates	Interest Rate
Cabot 2023 Notes	$	311,779	$	309,034	Oct 1, 2023	Apr 1, Oct 1	7.500	%

Encore 2025 Notes	410,466		426,752		Oct 15, 2025	Apr 15, Oct 15	4.875	%
Encore 2026 Notes	413,466		409,827		Feb 15, 2026	Feb 15, Aug 15	5.375	%
Encore 2028 Floating Rate Notes	486,696		506,006		Jan 15, 2028	Jan 15, Apr 15, Jul 15, Oct 15	EURIBOR +4.250%(1)
	$	1,622,407	$	1,651,619

_______________________

(1)Interest rate is based on a three-months 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 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 Private Placement Notes. Subject to the intercreditor agreement described above under “Global Senior Secured Revolving Credit Facility,” Super Senior Liabilities that are secured by assets that also secure the Senior Secured Notes will receive priority with respect to any proceeds received upon any enforcement action over any such assets.

Convertible Notes and Exchangeable Notes

The following table provides a summary of the principal balance, maturity date and interest rate for the Company’s convertible and exchangeable senior notes (the “Convertible Notes” or “Exchangeable Notes,” as applicable) ($ in thousands):


	March 31, 2021		December 31, 2020		Maturity Date	Interest Payment Dates	Interest Rate
2021 Convertible Notes(1)	$	—	$	161,000	Mar 15, 2021	Mar 15, Sep 15	2.875	%
2022 Convertible Notes	150,000		150,000		Mar 15, 2022	Mar 15, Sep 15	3.250	%
2023 Exchangeable Notes	172,500		172,500		Sep 1, 2023	Mar 1, Sep 1	4.500	%
2025 Convertible Notes	100,000		100,000		Oct 1, 2025	Apr 1, Oct 1	3.250	%
	$	422,500	$	583,500

_______________________

(1)The 2021 Convertible Notes matured on March 15, 2021 and the Company repaid the outstanding principal in cash.

The Exchangeable Notes were issued by Encore Capital Europe Finance Limited (“Encore Finance”), a 100% owned finance subsidiary of Encore, and are fully and unconditionally guaranteed by Encore. Unless otherwise indicated in connection with a particular offering of debt securities, Encore will fully and unconditionally guarantee any debt securities issued by Encore Finance. Amounts related to Encore Finance are included in the consolidated financial statements of Encore subsequent to April 30, 2018, the date of the incorporation of Encore Finance.

Prior to the close of business on the business day immediately preceding their respective free conversion or exchange date (listed below), holders may convert or exchange their Convertible Notes or Exchangeable Notes under certain circumstances set forth in the applicable indentures. On or after their respective free conversion or exchange dates until the close of business on the second scheduled trading day immediately preceding their respective maturity date, holders may convert or exchange their notes at any time. Certain key terms related to the convertible and exchangeable features as of March 31, 2021 are listed below:

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	2022 Convertible Notes			2023 Exchangeable Notes			2025 Convertible Notes
Initial conversion or exchange price	$	45.57		$	44.62		$	40.00
Closing stock price at date of issuance	$	35.05		$	36.45		$	32.00
Closing stock price date	Feb 27, 2017			Jul 20, 2018			Sep 4, 2019
Conversion or exchange rate (shares per $1,000 principal amount)	21.9467			22.4090			25.0000
Free conversion or exchange date	Sep 15, 2021			Mar 1, 2023			Jul 1, 2025
Stated interest rate	3.250		%	4.500		%	3.250		%

In the event of conversion or exchange, the notes are convertible or exchangeable into cash up to the aggregate principal amount of the notes and the excess conversion premium, if any, may be settled in cash or shares of the Company’s common stock at the Company’s election and subject to certain restrictions contained in each of the indentures governing the Convertible Notes and Exchangeable Notes.

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 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. 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.

Interest expense related to the Convertible Notes and Exchangeable Notes during the periods presented was as follows (in thousands):


	Three Months Ended March 31,
	2021		2020
Interest expense—stated coupon rate	$	4,923	$	5,799
Interest expense—amortization of debt discount	—		3,044
Interest expense—Convertible Notes and Exchangeable Notes	$	4,923	$	8,843

Hedge Transactions

In order to reduce the risk related to the potential dilution and/or the potential cash payments the Company may be required to make in the event that the market price of the Company’s common stock becomes greater than the exchange prices of the 2023 Exchangeable Notes, the Company maintains a hedge program that increases the effective exchange price for the 2023 Exchangeable Notes. The Company did not hedge the 2022 Convertible Notes or the 2025 Convertible Notes.

The details of the hedge program are listed below (in thousands, except conversion or exchange price):


	2023 Exchangeable Notes
Cost of the hedge transaction(s)	$	17,785
Initial exchange price	$	44.62
Effective exchange price	$	62.48

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Cabot Securitisation Senior Facility

Cabot Securitisation UK Ltd (“Cabot Securitisation”), an indirect subsidiary of Encore, has a senior facility for a committed amount of £350.0 million (as amended, the “Cabot Securitisation Senior Facility”). The Cabot Securitisation Senior Facility matures in March 2025. Funds drawn under the Cabot Securitisation Senior Facility bear interest at a rate per annum equal to SONIA plus a margin of 3.06% plus, for periods after March 15, 2023, a step-up margin ranging from zero to 1.00%.

As of March 31, 2021, the outstanding borrowings under the Cabot Securitisation Senior Facility were £350.0 million (approximately $482.4 million based on an exchange rate of $1.00 to £0.73, the exchange rate as of March 31, 2021). The obligations of Cabot Securitisation under the Cabot Securitisation Senior Facility are secured by first ranking security interests over all of Cabot Securitisation’s property, assets and rights (including receivables purchased from Cabot Financial UK from time to time), the book value of which was approximately £381.9 million (approximately $526.4 million based on an exchange rate of $1.00 to £0.73, the exchange rate as of March 31, 2021) as of March 31, 2021. The weighted average interest rate was 3.11% and 3.52% for the three months ended March 31, 2021 and 2020, respectively.

Cabot Securitisation is a securitized financing vehicle and is a VIE for consolidation purposes. Refer to “Note 8: Variable Interest Entities” for further details.

Note 8: Variable Interest Entities

A VIE is defined as a legal entity whose equity owners do not have sufficient equity at risk, or, as a group, the holders of the equity investment at risk lack any of the following three characteristics: decision-making rights, the obligation to absorb expected losses, or the right to receive expected residual returns of the entity. The primary beneficiary is identified as the variable interest holder that has both the power to direct the activities of the VIE that most significantly affect the entity’s economic performance and the obligation to absorb expected losses or the right to receive benefits from the entity that could potentially be significant to the VIE. The Company consolidates VIEs when it is the primary beneficiary.

As of March 31, 2021, the Company’s VIEs include certain securitized financing vehicles and other immaterial special purpose entities that were created to purchase receivable portfolios in certain geographies. The Company is the primary beneficiary of these VIEs. The Company has the power to direct the activities of the VIEs which includes but is not limited to the ability to exercise discretion in the servicing of the financial assets. The Company evaluates its relationships with its VIEs on an ongoing basis to ensure that it continues to be the primary beneficiary.

Most assets recognized as a result of consolidating these VIEs do not represent additional assets that could be used to satisfy claims against the Company’s general assets. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets; rather, they represent claims against the specific assets of the VIE.

Note 9: Income Taxes

The Company's effective tax rate for the three months ended March 31, 2021 was 22.2%. For the three months ended March 31, 2020, the Company recorded tax expense on a pre-tax loss resulting in a negative tax rate of 75.7%. The difference between the effective tax rate and the 21% federal statutory rate in 2020 was primarily due to a change in valuation allowance over consolidated pre-tax loss for the period, recognized in the period under the discrete method. The Company utilized the discrete method for recording income taxes during 2020 due to uncertainty in estimating annual pre-tax earnings, primarily due to the COVID-19 pandemic. The Company re-evaluated the methodology in calculating income taxes and returned to using the estimated annual effective tax rate method during the three months ended March 31, 2021.

Each interim period is considered an integral part of the annual period and tax expense or benefit is measured using an estimated annual effective income tax rate. The estimated annual effective tax rate for the full year is applied to the respective interim period, taking into account year-to-date amounts and projected amounts for the year. Since the Company operates in foreign countries with varying tax rates, the Company's quarterly effective tax rate is dependent on the level of income or loss from international operations in the reporting period.

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 three months ended March 31, 2021 and 2020, was immaterial.

The Company is subject to income taxes in the U.S. and foreign jurisdictions. Significant judgement is required in evaluating uncertain tax positions and determining our provision for income taxes. There has been no material change to the Company’s total gross unrecognized tax benefits from December 31, 2020.

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Note 10: Commitments and Contingencies

Litigation and Regulatory

The Company is involved in disputes, legal actions, regulatory investigations, inquiries, and other actions from time to time in the ordinary course of business. The Company, along with others in its industry, is routinely subject to legal actions based on the Fair Debt Collection Practices Act (“FDCPA”), comparable state statutes, the Telephone Consumer Protection Act (“TCPA”), state and federal unfair competition statutes, and common law causes of action. The violations of law investigated or alleged in these actions often include claims that the Company lacks specified licenses to conduct its business, attempts to collect debts on which the statute of limitations has run, has made inaccurate or unsupported assertions of fact in support of its collection actions and/or has acted improperly in connection with its efforts to contact consumers. Such litigation and regulatory actions could involve potential compensatory or punitive damage claims, fines, sanctions, injunctive relief, or changes in business practices. Many continue on for some length of time and involve substantial investigation, litigation, negotiation, and other expense and effort before a result is achieved, and during the process the Company often cannot determine the substance or timing of any eventual outcome.

As of March 31, 2021, there were no material developments in any of the legal proceedings disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

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 March 31, 2021, the Company has no material reserves for legal matters.

Purchase Commitments

In the normal course of business, the Company enters into forward flow purchase agreements. A forward flow purchase agreement is a commitment to purchase receivables over a duration that is typically three to twelve months, but can be longer, generally with a specifically defined volume range, frequency, and pricing. Typically, these forward flow contracts have provisions that allow for early termination or price re-negotiation should the underlying quality of the portfolio deteriorate over time or if any particular month’s delivery is materially different than the original portfolio used to price the forward flow contract. Certain of these forward flow purchase agreements may also have termination clauses, whereby the agreements can be canceled by either party upon providing a certain specified amount of notice.

As of March 31, 2021, the Company had entered into forward flow purchase agreements for the purchase of nonperforming loans with an estimated minimum aggregate purchase price of approximately $224.0 million. The Company expects actual purchases under these forward flow purchase agreements to be significantly greater than the estimated minimum aggregate purchase price.

Note 11: Segment and Geographic Information

The Company conducts business through several operating segments that have similar economic and other qualitative characteristics and have been aggregated in accordance with authoritative guidance into one reportable segment, portfolio purchasing and recovery. Since the Company operates in one reportable segment, all required segment information can be found in the consolidated financial statements.

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The Company has operations in the United States, Europe and other foreign countries. The following table presents the Company’s total revenues by geographic area in which the Company operates (in thousands):


	Three Months Ended March 31,
	2021		2020
Total revenues(1):
United States	$	287,787	$	208,218
International
Europe(2)	123,902		75,965
Other geographies	5,148		4,898
	129,050		80,863
Total	$	416,837	$	289,081

________________________

(1)Total revenues are attributed to countries based on consumer location.

(2)Based on the financial information that is used to produce the general-purpose financial statements, providing further geographic information is impracticable.

Note 12: 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 annual goodwill testing date for the reporting units that are included in the portfolio purchasing and recovery reportable segment is October 1st. There have been no events or circumstances during the three months ended March 31, 2021 that have required the Company to perform an interim assessment of goodwill carried at these reporting units. Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill and long-lived assets. Adverse changes in the Company’s actual or expected operating results, market capitalization, business climate, economic factors or other negative events that may be outside the control of management could result in a material non-cash impairment charge in the future.

The Company’s goodwill is attributable to reporting units included in its portfolio purchasing and recovery segment. The following table summarizes the activity in the Company’s goodwill balance (in thousands):


	Three Months Ended March 31,
	2021		2020
Balance, beginning of period	$	906,962	$	884,185

Effect of foreign currency translation	5,208		(44,884)
Balance, end of period	$	912,170	$	839,301

The Company’s acquired intangible assets are summarized as follows (in thousands):


	As of March 31, 2021						As of December 31, 2020
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer relationships	$	68,385	$	(26,174)	$	42,211	$	66,796	$	(22,714)	$	44,082
Developed technologies	2,643		(2,449)		194		5,048		(4,760)		288
Trade name and other	1,586		(1,000)		586		6,644		(6,002)		642
Total intangible assets	$	72,614	$	(29,623)	$	42,991	$	78,488	$	(33,476)	$	45,012

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains “forward-looking statements” relating to Encore Capital Group, Inc. (“Encore”) and its subsidiaries (which we may collectively refer to as the “Company,” “we,” “our” or “us”) within the meaning of the securities laws. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “plan,” “will,” “may,” and similar expressions often characterize forward-looking statements. These statements may include, but are not limited to, projections of collections, revenues, income or loss, estimates of capital expenditures, plans for future operations, products or services, financing needs or plans or the impacts of the COVID-19 pandemic, as well as assumptions relating to these matters. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we caution that these expectations or predictions may not prove to be correct or we may not achieve the financial results, savings, or other benefits anticipated in the forward-looking statements. These forward-looking statements are necessarily estimates reflecting the best judgment of our senior management and involve a number of risks and uncertainties, some of which may be beyond our control or cannot be predicted or quantified, that could cause actual results to differ materially from those suggested by the forward-looking statements. Many factors including, but not limited to, those set forth in our Annual Report on Form 10-K under “Part I, Item 1A—Risk Factors” and those set forth in “Part II, Item 1A, Risk Factors” of this Quarterly Report could cause our actual results, performance, achievements, or industry results to be very different from the results, performance, achievements or industry results expressed or implied by these forward-looking statements. Our business, financial condition, or results of operations could also be materially and adversely affected by other factors besides those listed. Forward-looking statements speak only as of the date the statements were made. We do not undertake any obligation to update or revise any forward-looking statements to reflect new information or future events, or for any other reason, even if experience or future events make it clear that any expected results expressed or implied by these forward-looking statements will not be realized. In addition, it is generally our policy not to make any specific projections as to future earnings, and we do not endorse projections regarding future performance that may be made by third parties.

Our Business

We are an international specialty finance company providing debt recovery solutions and other related services for consumers across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts to face value and manage them by working with individuals as they repay their obligations and work toward financial recovery. Defaulted receivables are consumers’ unpaid financial commitments to credit originators, including banks, credit unions, consumer finance companies and commercial retailers. Defaulted receivables may also include receivables subject to bankruptcy proceedings. We also provide debt servicing and other portfolio management services to credit originators for non-performing loans.

Encore Capital Group, Inc. (“Encore”) has three primary business units: MCM, which consists of Midland Credit Management, Inc. and its subsidiaries and domestic affiliates; Cabot, which consists of Cabot Credit Management Limited (“CCM”) and its subsidiaries and European affiliates, and LAAP, which is comprised of our investments and operations in Latin America and Asia-Pacific.

MCM (United States)

Through MCM we are a market leader in portfolio purchasing and recovery in the United States, including Puerto Rico.

Cabot (Europe)

Through Cabot we are one of the largest credit management services providers in Europe and a market leader in the United Kingdom and Ireland. Cabot, in addition to its primary business of portfolio purchasing and recovery, also provides a range of debt servicing offerings such as early stage collections, business process outsourcing (“BPO”), and contingent collections, including through Wescot Credit Services Limited (“Wescot”), a leading U.K. contingency debt collection and BPO services company.

LAAP (Latin America and Asia-Pacific)

We have purchased non-performing loans in Colombia, Peru, Mexico and Brazil (which was sold in April 2020). Additionally, we have invested in Encore Asset Reconstruction Company (“EARC”) in India.

To date, operating results from LAAP have not been significant to our total consolidated operating results. Our long-term growth strategy is focused on continuing to invest in our core portfolio purchasing and recovery business in the United States and United Kingdom and strengthening and developing our business in the rest of Europe.

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Recent Developments

In March 2020, the World Health Organization declared the outbreak of the novel coronavirus (“COVID-19”) a pandemic, which has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns (including court closures in certain jurisdictions). While we are unable to accurately predict the full impact that COVID-19 will have on our results from operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the duration and severity of the pandemic and containment measures, our compliance with these measures has impacted our day-to-day operations and could disrupt our business and operations for an indefinite period of time. Through a combination of work-from-home and social distancing, we remain fully operational in all the markets we serve. As a result of the COVID-19 pandemic and the resulting containment measures, we have observed, among other things: a decrease in supply in the U.S. driven mainly by a decrease in charge-off rates; a decrease in supply in Europe, which we believe is driven by both a decrease in charge-off rates and decreased sales as the banks focus on their customers’ needs; and impacts to the legal collections process, which negatively affected legal collections beginning in late March 2020 and could continue to affect legal collections and related costs depending on the duration and severity of the COVID-19 pandemic and the resulting containment measures.

Government Regulation

MCM (United States)

As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in our Annual Report on Form 10-K, our U.S. debt purchasing business and collection activities are subject to federal, state and municipal statutes, rules, regulations and ordinances that establish specific guidelines and procedures that debt purchasers and collectors must follow when collecting consumer accounts, including among others, specific guidelines and procedures for communicating with consumers and prohibitions on unfair, deceptive or abusive debt collection practices.

On October 30, 2020, the CFPB issued final rules in the form of a new Regulation F to implement the Fair Debt Collection Practices Act, which rules restate and clarify prohibitions on harassment and abuse, false or misleading representations, and unfair practices by debt collectors when collecting consumer debt. The rules included provisions related to, among other things, the use of newer technologies (text, voicemail and email) to communicate with consumers and limits relating to telephonic communications. On December 18, 2020, the CFPB also issued an additional debt collection final rule focused on consumer disclosures. This final rule amends Regulation F to provide additional requirements regarding validation information and disclosures provided at the outset of debt collection communications, prohibit suits and threats of suits regarding time-barred debt, and identify actions that must be taken before a debt collector may report information about a debt to consumer reporting agencies. The rules are scheduled to become effective on November 30, 2021; however the CFPB is proposing to extend the effective date to January 29, 2022. Based on our preliminary assessment of the rules, we believe that the new rules will not have a material incremental effect on our operations.

Cabot (Europe)

As discussed in more detail under “Part I - Item 1 - Business - Government Regulation” contained in our Annual Report on Form 10-K, our operations in Europe are affected by foreign statutes, rules and regulations regarding debt collection and debt purchase activities. These statutes, rules, regulations, ordinances, guidelines and procedures are modified from time to time by the relevant authorities charged with their administration, which could affect the way we conduct our business.

Portfolio Purchasing and Recovery

MCM (United States)

In the United States, the defaulted consumer receivable portfolios we purchase are primarily charged-off credit card debt portfolios. A small percentage of our capital deployment in the United States comprises of receivable portfolios subject to Chapter 13 and Chapter 7 bankruptcy proceedings.

We purchase receivables based on robust, account-level valuation methods and employ proprietary statistical and behavioral models across our U.S. operations. These methods and models allow us to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or strategies and align the accounts we purchase with our business channels to maximize future collections. As a result, we have been able to realize significant returns from the receivables we acquire. We maintain strong relationships with many of the largest financial service providers in the United States.

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Cabot (Europe)

In Europe, our purchased under-performing debt portfolios primarily consist of paying and non-paying consumer loan accounts. We also purchase: (1) portfolios that are in insolvency status, in particular, individual voluntary arrangements; and (2) non-performing secured mortgage portfolios and real estate assets previously securing mortgage portfolios. When we take possession of the underlying real estate assets or purchase real estate assets, we refer to those as real estate-owned assets, or REO assets.

We purchase paying and non-paying receivable portfolios using a proprietary pricing model that utilizes account-level statistical and behavioral data. This model allows us to value portfolios accurately and quantify portfolio performance in order to maximize future collections. As a result, we have been able to realize significant returns from the assets we have acquired. We maintain strong relationships with many of the largest financial services providers in the United Kingdom and continue to expand in the United Kingdom and the rest of Europe with our acquisitions of portfolios and other credit management services providers.

Purchases and Collections

Portfolio Pricing, Supply and Demand

MCM (United States)

Issuers have continued to sell predominantly fresh portfolios. Fresh portfolios are portfolios that are generally sold within six months of the consumer’s account being charged-off by the financial institution. Pricing in the first quarter remained in line with previous periods. Issuers continued to sell their volume in mostly forward flow arrangements that are often committed early in the calendar year. We are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply. We have observed a decrease in supply as a result of the COVID-19 pandemic, but expect supply to ultimately increase.

We believe that smaller competitors continue to face difficulties in the portfolio purchasing market because of the high cost to operate due to regulatory pressure and because issuers are being more selective with buyers in the marketplace. We believe this favors larger participants, such as us, because the larger market participants are better able to adapt to these pressures and commit to larger forward flow agreements.

Cabot (Europe)

The U.K. market for charged-off portfolios has generally provided a relatively consistent pipeline of opportunities over the past few years, despite an ongoing historic low level of charge-off rates, as creditors have embedded debt sales as an integral part of their business models and consumer indebtedness has continued to grow since the financial crisis.

The Spanish debt market continues to be one of the largest in Europe with significant debt sales activity, and an expectation of a significant amount of debt to be sold and serviced in the future. Additionally, financial institutions continue to experience both market and regulatory pressure to dispose of non-performing loans, which should continue to provide debt purchasing opportunities in Spain.

Across all of our European markets, we are closely monitoring the impacts of the COVID-19 pandemic on pricing and supply of portfolios to purchase. Due to the COVID-19 pandemic, banks decreased portfolio sales during 2020 in order to focus on customers’ needs. While we have seen a resumption of sales activity across many of our European markets in 2021, underlying default rates are generally low by historic levels, and sales levels are expected to fluctuate from quarter to quarter as banks seek to re-establish a more stable debt sales strategy.

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Purchases by Geographic Location

The following table summarizes the geographic locations of receivable portfolios purchased during the periods presented (in thousands):


	Three Months Ended March 31,
	2021		2020
MCM (United States)	$	92,352	$	185,252
Cabot (Europe)	77,826		28,861

Total purchases of receivable portfolios	$	170,178	$	214,113

During the three months ended March 31, 2021, we invested $170.2 million to acquire receivable portfolios, with face values aggregating $1.3 billion, for an average purchase price of 12.8% of face value. The amount invested in receivable portfolios decreased $43.9 million, or 20.5%, compared with the $214.1 million invested during the three months ended March 31, 2020, to acquire receivable portfolios with face values aggregating $1.7 billion, for an average purchase price of 12.6% of face value.

In the United States, purchases of receivable portfolios decreased during the three months ended March 31, 2021 as compared to the corresponding period in the prior year. The majority of our purchases in the U.S. are in forward flow agreements, and the timing, contract duration, and volumes for each contract can fluctuate leading to variation when comparing to prior periods. The decrease in purchases in the U.S. is a result of a decrease in supply which we believe is temporary.

In Europe, purchases of receivable portfolios increased during the three months ended March 31, 2021 as compared to the corresponding periods in the prior year. The increase was primarily the result of a relatively limited supply of portfolios and a continuation of our selective purchasing process in conjunction with a plan to reduce European debt leverage during the three months ended March 31, 2020. The increase was also attributable to the favorable impact from foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pounds.

The average purchase price, as a percentage of face value, varies from period to period depending on, among other factors, the quality of the accounts purchased and the length of time from charge-off to the time we purchase the portfolios.

During the three months ended March 31, 2021 and 2020, we also invested $2.4 million and $1.2 million in REO assets, respectively.

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Collections from Purchased Receivables by Channel and Geographic Location

We utilize three channels for the collection of our purchased receivables: call center and digital collections; legal collections; and collection agencies. The call center and digital collections channel consists of collections that result from our call centers, direct mail program and online collections. The legal collections channel consists of collections that result from our internal legal channel or from our network of retained law firms. The collection agencies channel consists of collections from third-party collection agencies that we utilize when we believe they can liquidate better or less expensively than we can or to supplement capacity in our internal call centers. The collection agencies channel also includes collections on accounts purchased where we maintain the collection agency servicing until the accounts can be placed in our internal collection channels. The following table summarizes the total collections by collection channel and geographic area during the periods presented (in thousands):


	Three Months Ended March 31,
	2021		2020
MCM (United States):
Call center and digital collections	$	267,984	$	214,238
Legal collections	164,332		158,026
Collection agencies	3,257		2,465
Subtotal	435,573		374,729
Cabot (Europe):
Call center and digital collections	70,551		63,789
Legal collections	49,065		42,900
Collection agencies	42,985		37,414
Subtotal	162,601		144,103
Other geographies:


Collection agencies	8,287		8,447
Subtotal	8,287		8,447
Total collections from purchased receivables	$	606,461	$	527,279

Gross collections from purchased receivables increased by $79.2 million, or 15.0%, to $606.5 million during the three months ended March 31, 2021, from $527.3 million during the three months ended March 31, 2020.

Gross collections from receivable portfolios in the United States increased significantly. The increase was primarily driven by change in consumer behavior during the COVID-19 pandemic and our continued effort in improving liquidation. We are increasingly being called upon by our consumers to assist them with their financial recovery through inbound calls and online digital interaction. The large volume of consumer contact resulted in significant increase in collections and improved our operating efficiency.

The increase in collections from purchased receivables in Europe was primarily due to the acquisition of portfolios with higher returns in recent periods and the favorable impact from foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pounds.

The COVID-19 pandemic and the resulting containment measures, including impacts to the legal collections process, negatively affected legal collections beginning in late March 2020 and could continue to affect legal collections and related costs depending on the duration and severity of the COVID-19 pandemic and the resulting containment measures. We are closely monitoring the impacts of the COVID-19 pandemic on collections and cost-to-collect.

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Results of Operations

Results of operations, in dollars and as a percentage of total revenues, adjusted by net allowances, were as follows (in thousands, except percentages):


	Three Months Ended March 31,
	2021				2020
Revenues
Revenue from receivable portfolios	$	338,018	81.1	%	$	357,365	123.6	%
Changes in expected current and future recoveries	44,537		10.7	%	(98,661)		(34.1)	%
Servicing revenue	32,516		7.8	%	28,680		9.9	%
Other revenues	1,766		0.4	%	1,697		0.6	%
Total revenues	416,837		100.0	%	289,081		100.0	%


Operating expenses
Salaries and employee benefits	96,456		23.1	%	93,098		32.2	%
Cost of legal collections	67,142		16.1	%	66,279		22.9	%
General and administrative expenses	32,148		7.7	%	31,877		11.0	%
Other operating expenses	28,441		6.8	%	27,164		9.4	%
Collection agency commissions	12,824		3.1	%	13,176		4.6	%
Depreciation and amortization	11,512		2.8	%	10,285		3.6	%

Total operating expenses	248,523		59.6	%	241,879		83.7	%
Income from operations	168,314		40.4	%	47,202		16.3	%
Other (expense) income
Interest expense	(46,526)		(11.2)	%	(54,662)		(18.9)	%

Other (expense) income	(55)		0.0	%	1,439		0.5	%
Total other expense	(46,581)		(11.2)	%	(53,223)		(18.4)	%
Income (loss) before income taxes	121,733		29.2	%	(6,021)		(2.1)	%
Provision for income taxes	(26,968)		(6.5)	%	(4,558)		(1.6)	%
Net income (loss)	94,765		22.7	%	(10,579)		(3.7)	%
Net (income) loss attributable to noncontrolling interest	(135)		(0.1)	%	125		0.1	%
Net income (loss) attributable to Encore Capital Group, Inc. stockholders	$	94,630	22.6	%	$	(10,454)	(3.6)	%

Comparison of Results of Operations

Revenues

Our revenues primarily include revenue recognized from engaging in debt purchasing and recovery activities. Effective January 1, 2020, we adopted the CECL accounting standard. Under CECL, we apply our charge-off policy and fully write-off the amortized costs (i.e., face value net of noncredit discount) of the individual receivables we acquire immediately after purchasing the portfolio. We then record a negative allowance that represents the present value of all expected future recoveries for pools of receivables that share similar risk characteristics using a discounted cash flow approach, which is presented as “Investment in receivable portfolios, net” in our consolidated statements of financial condition. The discount rate is an effective interest rate (or “purchase EIR”) established based on the purchase price of the portfolio and the expected future cash flows at the time of purchase. Revenue generated by such activities primarily includes two components: (1) the accretion of the discount on the negative allowance due to the passage of time, which is included in “Revenue from receivable portfolios” and (2) changes in expected cash flows, which includes (a) the current period variances between actual cash collected and expected cash recoveries and (b) the present value change of expected future recoveries, and is presented in our consolidated statements of operations as “Changes in expected current and future recoveries.”

Certain pools already fully recovered their cost basis and became zero basis portfolios (“ZBA”) prior to our adoption of CECL. We did not establish a negative allowance for these pools as we elected the Transition Resource Group for Credit Losses’ practical expedient to retain the integrity of these legacy pools. Similar to how we treated ZBA collections prior to the

adoption of CECL, all subsequent collections to the ZBA pools are recognized as ZBA revenue, which is included in revenue from receivable portfolios in our consolidated statements of operations.

Servicing revenue consists primarily of fee-based income earned on accounts collected on behalf of others, primarily credit originators. We earn fee-based income by providing debt servicing (such as early stage collections, BPO, contingent collections, trace services and litigation activities) to credit originators for non-performing loans.

Other revenues primarily include revenues recognized from the sale of real estate assets that are acquired as a result of our investments in non-performing secured residential mortgage portfolios in Europe and LAAP. Other revenues may include gains recognized on transfers of financial assets.

The following table summarizes revenues for the periods presented (in thousands, except percentages):


	Three Months Ended March 31,
	2021		2020		$ Change		% Change
Revenue recognized from portfolio basis	$	324,254	$	340,815	$	(16,561)	(4.9)	%
ZBA revenue	13,764		16,550		(2,786)		(16.8)	%
Revenue from receivable portfolios	338,018		357,365		(19,347)		(5.4)	%

Changes in expected current period recoveries	91,401		10,315		81,086		786.1	%
Changes in expected future period recoveries	(46,864)		(108,976)		62,112		(57.0)	%
Changes in expected current and future recoveries	44,537		(98,661)		143,198		(145.1)	%

Servicing revenue	32,516		28,680		3,836		13.4	%
Other revenues	1,766		1,697		69		4.1	%
Total revenues	$	416,837	$	289,081	$	127,756	44.2	%

Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international revenues, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international revenues. Our revenues were favorably impacted by foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound by 7.2% during the three months ended March 31, 2021 compared to the three months ended March 31, 2020.

The decrease in revenue recognized from portfolio basis during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 was primarily due to lower portfolio basis driven by higher collections and lower volume of purchases in recent quarters.

As discussed above, ZBA revenue represents collections from our legacy ZBA pools. We expect our ZBA revenue to continue to decline as we collect on these legacy pools.

Under CECL, changes in expected current period recoveries represent over and under-performance in the reporting period. Collections during the three months ended March 31, 2021 significantly outperformed the projected cash flows. We believe the collection over-performance was a result of our sustained improvements in portfolio collections driven by change in consumer behavior during the COVID-19 pandemic and our liquidation improvement initiatives. The over-performance was also driven by higher collections as compared to the reduced near-term expected recoveries as a result of adjustments made to our projected cash flow forecast during 2020 associated with the COVID-19 pandemic.

While we now have additional information with respect to the impact on collections of the COVID-19 pandemic, the future outlook remains uncertain, and will continue to evolve depending on future developments, including the duration and spread of the pandemic and related actions taken by governments. When reassessing the future forecasts of expected lifetime recoveries during the three months ended March 31, 2021, management considered historical and current collection performance, as well as the uncertainty in economic forecasts in the geographies in which we operate, and believes that while some of the collection over-performance resulted in increased total expected recoveries for certain pool groups, the majority of the over-performance was a shift forward in timing rather than an increase in total estimated remaining collections. Additionally, the macroeconomic driven consumer distress has improved; although it is still present and will likely impact our collections performance in the near future. As a result of a combination of the above, we have updated our forecast, resulting in

a net reduction of total estimated remaining collections which in turn, when discounted to present value, resulted in a provision for credit loss adjustment of approximately $46.9 million during the three months ended March 31, 2021. The circumstances around this pandemic are evolving rapidly and will continue to impact our business and our estimation of expected recoveries in future periods. We will continue to closely monitor the COVID-19 situation and update our assumptions accordingly. During the three months ended March 31, 2020, we recorded approximately $109.0 million in provision for credit loss adjustment due to significant uncertainty of the COVID-19 pandemic at that time.

The following tables summarize collections from purchased receivables, revenue from receivable portfolios, end of period receivable balance and other related supplemental data, by year of purchase (in thousands, except percentages):


	Three Months Ended March 31, 2021						As of March 31, 2021
	Collections		Revenue from Receivable Portfolios		Changes in Expected Current and Future Recoveries		Investment in Receivable Portfolios		Monthly EIR
United States:
ZBA	$	12,501	$	12,501	$	—	$	—	—	%
2011	6,187		4,673		1,484		1,712		88.6	%
2012	6,306		5,011		993		3,735		42.0	%
2013	13,600		12,974		1,351		10,460		40.5	%
2014	9,475		6,671		(726)		30,417		6.7	%
2015	12,994		6,038		2,617		48,589		3.9	%
2016	26,378		11,181		7,020		89,806		4.0	%
2017	43,518		21,140		9,601		125,608		5.3	%
2018	68,358		29,587		10,694		238,022		3.8	%
2019	114,690		51,761		9,482		415,502		3.8	%
2020	113,142		54,252		21,108		457,785		3.7	%
2021	8,424		3,829		4,061		91,748		4.3	%
Subtotal	435,573		219,618		67,685		1,513,384		4.4	%
Europe:
ZBA	34		34		—		—		—	%
2013	24,748		22,383		(13,588)		216,432		3.2	%
2014	22,477		17,590		(7,411)		185,531		3.1	%
2015	14,996		10,891		(5,407)		143,115		2.4	%
2016	13,996		10,679		(939)		125,215		2.8	%
2017	23,146		14,584		(2,160)		249,313		1.8	%
2018	21,712		14,296		(3,007)		294,406		1.6	%
2019	23,979		13,443		1,438		234,835		1.8	%
2020	15,121		8,703		5,801		124,989		2.3	%
2021	2,392		2,013		864		76,456		1.9	%
Subtotal	162,601		114,616		(24,409)		1,650,292		2.2	%
Other geographies:
ZBA	1,229		1,229		—		—		—	%
2014(1)	1,252		396		141		44,413		98.2	%
2015(1)	1,192		542		368		3,076		96.7	%
2016	635		305		144		1,261		6.7	%
2017(1)	2,269		750		306		9,128		6.2	%
2018	1,640		535		292		3,958		3.7	%
2019	70		27		10		166		4.6	%


Subtotal	8,287		3,784		1,261		62,002		7.9	%
Total	$	606,461	$	338,018	$	44,537	$	3,225,678	3.4	%

________________________

(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.


	Three Months Ended March 31, 2020						As of March 31, 2020
	Collections		Revenue from Receivable Portfolios		Changes in Expected Current and Future Recoveries		Investment in Receivable Portfolios		Monthly EIR
United States:
ZBA	$	15,274	$	15,274	$	—	$	—	—	%
2011	7,249		6,865		(215)		2,021		88.6	%
2012	8,495		7,664		(480)		4,795		42.0	%
2013	17,687		18,136		(3,984)		11,564		40.5	%
2014	14,591		10,089		(2,026)		44,820		6.7	%
2015	18,302		9,309		(1,079)		73,901		3.8	%
2016	33,377		16,785		(2,412)		133,941		3.8	%
2017	55,435		30,850		(1,103)		178,176		5.2	%
2018	89,418		46,938		(15,629)		362,553		3.8	%
2019	102,534		72,048		(2,104)		601,892		3.8	%
2020	12,367		8,175		(5,010)		176,543		3.6	%
Subtotal	374,729		242,133		(34,042)		1,590,206		4.4	%
Europe:
ZBA	58		58		—		—		—	%
2013	25,259		22,262		(6,306)		215,495		3.2	%
2014	23,271		17,887		(4,972)		186,139		3.0	%
2015	15,173		11,189		(2,096)		143,275		2.4	%
2016	13,102		11,259		(11,028)		122,994		2.8	%
2017	23,494		15,696		(9,692)		260,314		1.9	%
2018	22,658		15,662		(22,493)		305,824		1.6	%
2019	20,106		14,292		(7,633)		240,124		1.8	%
2020	982		1,400		249		28,086		2.6	%
Subtotal	144,103		109,705		(63,971)		1,502,251		2.3	%
Other geographies:
ZBA	1,218		1,218		—		—		—	%
2014 (1)	1,174		545		(19)		47,819		100.2	%
2015	1,557		941		76		4,544		17.1	%
2016	971		686		(249)		3,391		5.1	%
2017	1,875		1,140		(323)		11,586		6.1	%
2018	1,580		955		(120)		5,986		3.7	%
2019	72		42		(13)		235		4.6	%

Subtotal	8,447		5,527		(648)		73,561		67.7	%
Total	$	527,279	$	357,365	$	(98,661)	$	3,166,018	3.4	%

________________________

(1)Portfolio balance includes non-accrual pool groups. The EIR presented is only for pool groups that accrete portfolio revenue.

The increase in servicing revenues during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 was primarily attributable to the favorable impact of foreign currency translation, which was primarily the result of the weakening of the U.S. dollar against the British Pound.

Other revenues increased during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, primarily driven by the favorable impact of foreign currency translation, which was primarily the result of the weakening of the U.S. dollar against the British Pound.

Operating Expenses

The following table summarizes operating expenses for the periods presented (in thousands, except percentages):


	Three Months Ended March 31,
	2021		2020		$ Change		% Change
Salaries and employee benefits	$	96,456	$	93,098	$	3,358	3.6	%
Cost of legal collections	67,142		66,279		863		1.3	%
General and administrative expenses	32,148		31,877		271		0.9	%
Other operating expenses	28,441		27,164		1,277		4.7	%
Collection agency commissions	12,824		13,176		(352)		(2.7)	%
Depreciation and amortization	11,512		10,285		1,227		11.9	%
Total operating expenses	$	248,523	$	241,879	$	6,644	2.7	%

Our operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The strengthening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international operating expenses, and the weakening of the U.S. dollar relative to other foreign currencies has an unfavorable impact on our international operating expenses. Our operating expenses were unfavorably impacted by foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound by approximately 7.2% for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

Operating expenses are explained in more detail as follows:

Salaries and Employee Benefits

The increase in salaries and employee benefits was primarily due to the following reasons:

•Increase in overall headcount;

•The unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound during the three months ended March 31, 2021 compared to the three months ended March 31, 2020;

•Partially offset by reduced stock-based compensation expense as compared to the same period in the prior year, due to acceleration of certain equity grants and true-up adjustment for certain performance awards recognized in the prior year.

Cost of Legal Collections

Cost of legal collections primarily includes contingent fees paid to our external network of attorneys and the cost of litigation. We pursue legal collections using a network of attorneys that specialize in collection matters and through our internal legal channel. Under the agreements with our contracted attorneys, we advance certain out-of-pocket court costs. Cost of legal collections does not include internal legal channel employee costs, which are included in salaries and employee benefits in our consolidated statements of operations.

The following table summarizes our cost of legal collections during the periods presented (in thousands, except percentages):


	Three Months Ended March 31,
	2021		2020		$ Change		% Change
Court costs	$	41,682	$	41,355	$	327	0.8	%
Legal collection fees	25,460		24,924		536		2.2	%
Total cost of legal collections	$	67,142	$	66,279	$	863	1.3	%

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Cost of legal collections slightly increased driven by increased legal channel collections. Beginning in late March of 2020, our legal collection channel spending reduced substantially due to court closures in certain jurisdictions as a result of the COVID-19 pandemic, the legal collection channel spending has gradually increased and are now back to historical levels.

General and Administrative Expenses

The increase in general and administrative expense was primarily due to the following reasons:

•Increased information technology related expense as we continue to invest in network security under the current work-from-home environment due to the COVID-19 pandemic;

•Partially offset by reduced travel and facilities expenses.

Other Operating Expenses

The increase in other operating expenses was primarily due to the following reasons:

•Increased postage and printing expenses primarily at our domestic operations driven by increased interactions with consumers via mail;

•The unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound.

Collection Agency Commissions

Collection agency commissions are commissions paid to third-party collection agencies. Collections through the collections agencies channel are predominately in Europe and Latin America and vary from period to period depending on, among other things, the number of accounts placed with an agency versus accounts collected internally. Commission rates vary depending on, among other things, the amount of time that has passed since the charge-off of the accounts placed with an agency, the asset class, and the geographic location of the receivables. Generally, freshly charged-off accounts have a lower commission rate than accounts that have been charged off for a longer period of time, and commission rates for purchased bankruptcy portfolios are lower than the commission rates for charged-off credit card accounts.

Depreciation and Amortization

The increase in depreciation and amortization expense was primarily due to the following reasons:

•Increased depreciation expense primarily incurred at our U.S. facilities;

Interest Expense

The following tables summarize our interest expense (in thousands, except percentages):


	Three Months Ended March 31,
	2021		2020		$ Change		% Change
Stated interest on debt obligations	$	41,776	$	48,755	$	(6,979)	(14.3)	%
Amortization of debt issuance costs	4,397		2,778		1,619		58.3	%
Amortization of debt discount	353		3,129		(2,776)		(88.7)	%
Total interest expense	$	46,526	$	54,662	$	(8,136)	(14.9)	%

In September 2020, we entered into various transactions, agreements and amendments related to our borrowings and completed the implementation of our new global funding structure. In November and December 2020, we completed two offerings of senior secured notes, partially redeemed our Cabot senior secured notes due in 2023 and fully redeemed our Cabot floating rate notes due 2024. These refinancing transactions successfully reduced the interest rates on our outstanding borrowings.

The decrease in interest expense during the three months ended March 31, 2021 compared to the three months ended March 31, 2020 was primarily due to the following reasons:

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•Lower average debt balances;

•Decreased interest rates as a result of various refinancing transactions;

•Effective January 1, 2021, we adopted a new accounting standard for our convertible and exchangeable notes and now recognize interest expense at the stated coupon rate of interest, rather than the higher effective interest rate;

•Partially offset by the unfavorable impact of foreign currency translation, primarily by the weakening of the U.S. dollar against the British Pound and increased amortization of loan fees and other loan costs as a result of higher capitalized debt issuance costs.

Other (Expense) Income

Other income or expense consists primarily of foreign currency exchange gains or losses, interest income, and gains or losses recognized on certain transactions outside of our normal course of business. Other expense was $0.1 million and other income was $1.4 million during the three months ended three months ended March 31, 2021 and 2020, respectively.

Other income recognized during the three months ended March 31, 2020 primarily included the fair value changes for currency exchange forward contracts which were not designated as hedge instruments for accounting purposes.

Provision for Income Taxes

Provision for income taxes and effective tax rate are as follows for the periods presented ($ in thousands):


	Three Months Ended March 31,
	2021			2020
Provision for income taxes	$	26,968		$	4,558
Effective tax rate	22.2		%	(75.7)		%

For the three months ended March 31, 2020, the difference between our effective tax rate and the 21% federal statutory rate was primarily due to a change in valuation allowance over consolidated pre-tax loss for the period, recognized in the period under the discrete method. We utilized the discrete method for recording income taxes during 2020 due to uncertainty in estimating annual pre-tax earnings primarily due to the COVID-19 pandemic. We re-evaluated the methodology in calculating income taxes and return to using the estimated annual effective tax rate method during the three months ended March 31, 2021.

Non-GAAP Disclosure

In addition to the financial information prepared in conformity with Generally Accepted Accounting Principles (“GAAP”), we provide historical non-GAAP financial information. Management believes that the presentation of such non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.

Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, and derivative instruments, which provide a more complete understanding of our financial performance, competitive position, and prospects for the future. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of these measures for comparative purposes.

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Adjusted EBITDA. Management utilizes adjusted EBITDA (defined as net income before interest income and expense, taxes, depreciation and amortization, stock-based compensation expenses, acquisition, integration and restructuring related expenses, and other charges or gains that are not indicative of ongoing operations), in the evaluation of our operating performance. Adjusted EBITDA for the periods presented is as follows (in thousands):


	Three Months Ended March 31,
	2021		2020
GAAP net income, as reported	$	94,765	$	(10,579)
Adjustments:
Interest expense	46,526		54,662
Interest income	(474)		(1,000)
Provision for income taxes	26,968		4,558
Depreciation and amortization	11,512		10,285

Stock-based compensation expense	3,405		4,527
Acquisition, integration and restructuring related expenses(1)	—		187


Adjusted EBITDA	$	182,702	$	62,640
Collections applied to principal balance(2)	$	229,510	$	268,575

________________________

(1)Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

(2)Amount represents (a) gross collections from receivable portfolios less the sum of (b) revenue from receivable portfolios and (c) changes in expected recoveries. For consistency with the Company debt covenant reporting, for periods subsequent to June 30, 2020, the collections applied to principal balance also includes proceeds applied to basis from sales of REO assets and related activities; prior period amounts have not been adjusted to reflect this change as such amounts were immaterial.

Adjusted Operating Expenses. Management utilizes adjusted operating expenses in order to facilitate a comparison of approximate costs to cash collections for our portfolio purchasing and recovery business. Adjusted operating expenses for our portfolio purchasing and recovery business are calculated by starting with GAAP total operating expenses and backing out operating expenses related to non-portfolio purchasing and recovery business, acquisition, integration and restructuring related operating expenses, stock-based compensation expense, settlement fees and related administrative expenses and other charges or gains that are not indicative of ongoing operations. Adjusted operating expenses related to our portfolio purchasing and recovery business for the periods presented are as follows (in thousands):


	Three Months Ended March 31,
	2021		2020
GAAP total operating expenses, as reported	$	248,523	$	241,879
Adjustments:
Operating expenses related to non-portfolio purchasing and recovery business(1)	(42,653)		(41,489)

Stock-based compensation expense	(3,405)		(4,527)
Acquisition, integration and restructuring related expenses(2)	—		(187)


Adjusted operating expenses related to portfolio purchasing and recovery business	$	202,465	$	195,676

________________________

(1)Operating expenses related to non-portfolio purchasing and recovery business include operating expenses from other operating segments that primarily engage in fee-based business, as well as corporate overhead not related to our portfolio purchasing and recovery business.

(2)Amount represents acquisition, integration and restructuring related expenses. We adjust for this amount because we believe these expenses are not indicative of ongoing operations; therefore, adjusting for these expenses enhances comparability to prior periods, anticipated future periods, and our competitors’ results.

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Cost per Dollar Collected

We utilize adjusted operating expenses in order to facilitate a comparison of approximate costs to cash collections from purchased receivables for our portfolio purchasing and recovery business. The following table summarizes our cost per dollar collected (defined as adjusted operating expenses as a percentage of collections from purchased receivables) by geographic location during the periods presented:


	Three Months Ended March 31,
	2021		2020
United States	34.5	%	39.5	%
Europe	29.4	%	29.9	%
Other geographies	52.1	%	52.6	%
Overall cost per dollar collected	33.4	%	37.1	%

Cost-to-collect decreased during the periods presented, due to a combination of (1) continued improvement in operational efficiencies in the collection process and (2) collection mix shifting towards non-legal collection, which has a lower cost-to-collect. Collections from other geographies continue to decline as we continue to focus on the U.S. and European markets. Cost-to-collect in LAAP is expected to stay at an elevated level and will continue to fluctuate over time.

Over time, we expect our cost-to-collect to remain competitive, but also to fluctuate from quarter to quarter based on seasonality, product mix, acquisitions, foreign exchange rates, the cost of new operating initiatives, and the changing regulatory and legislative environment.

Supplemental Performance Data

The tables included in this supplemental performance data section include detail for purchases, collections and ERC by year of purchase.

Our collection expectations are based on account characteristics and economic variables. Additional adjustments are made to account for qualitative factors that may affect the payment behavior of our consumers and servicing related adjustments to ensure our collection expectations are aligned with our operations. We continue to refine our process of forecasting collections both domestically and internationally with a focus on operational enhancements. Our collection expectations vary between types of portfolio and geographic location. For example, in the U.K., due to the higher concentration of payment plans, as compared to the U.S. and other locations in Europe, we expect to receive streams of collections over longer periods of time. As a result, past performance of pools in certain geographic locations or of certain types of portfolio are not necessarily a suitable indicator of future results in other locations or for other types of portfolio.

The supplemental performance data presented in this section is impacted by foreign currency translation, which represents the effect of translating financial results where the functional currency of our foreign subsidiary is different than our U.S. dollar reporting currency. For example, the strengthening of the U.S. dollar relative to other foreign currencies has an unfavorable reporting impact on our international purchases, collections, and ERC, and the weakening of the U.S. dollar relative to other foreign currencies has a favorable impact on our international purchases, collections, and ERC.

We utilize proprietary forecasting models to continuously evaluate the economic life of each pool.

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Cumulative Collections from Purchased Receivables to Purchase Price Multiple

The following table summarizes our receivable purchases and related gross collections by year of purchase (in thousands, except multiples):


Year of Purchase	Purchase Price(1)		Cumulative Collections through March 31, 2021
			<2012		2012		2013		2014		2015		2016		2017		2018		2019		2020		2021		Total(2)		Multiple(3)
United States:
<2012	$	2,143,800	$	3,983,166	$	760,285	$	554,597	$	391,737	$	293,528	$	206,933	$	155,456	$	121,545	$	99,300	$	77,101	$	17,651	$	6,661,299	3.1
2012	548,808		—		187,721		350,134		259,252		176,914		113,067		74,507		48,832		37,327		27,797		6,344		1,281,895		2.3
2013	551,894		—		—		230,051		397,646		298,068		203,386		147,503		107,399		84,665		64,436		14,599		1,547,753		2.8
2014	517,677		—		—		—		144,178		307,814		216,357		142,147		94,929		69,059		47,628		9,475		1,031,587		2.0
2015	499,226		—		—		—		—		105,610		231,102		186,391		125,673		85,042		64,133		12,994		810,945		1.6
2016	553,284		—		—		—		—		—		110,875		283,035		234,690		159,279		116,452		26,378		930,709		1.7
2017	528,314		—		—		—		—		—		—		111,902		315,853		255,048		193,328		43,518		919,649		1.7
2018	630,704		—		—		—		—		—		—		—		175,042		351,696		308,302		68,358		903,398		1.4
2019	677,176		—		—		—		—		—		—		—		—		174,693		416,315		114,690		705,698		1.0
2020	539,553		—		—		—		—		—		—		—		—		—		213,450		113,142		326,592		0.6
2021	92,282		—		—		—		—		—		—		—		—		—		—		8,424		8,424		0.1
Subtotal	7,282,718		3,983,166		948,006		1,134,782		1,192,813		1,181,934		1,081,720		1,100,941		1,223,963		1,316,109		1,528,942		435,573		15,127,949		2.1
Europe:
2013	619,079		—		—		134,259		249,307		212,129		165,610		146,993		132,663		113,228		93,203		24,748		1,272,140		2.1
2014	623,129		—		—		—		135,549		198,127		156,665		137,806		129,033		105,337		84,255		22,477		969,249		1.6
2015	419,941		—		—		—		—		65,870		127,084		103,823		88,065		72,277		55,261		15,016		527,396		1.3
2016	258,218		—		—		—		—		—		44,641		97,587		83,107		63,198		51,609		14,010		354,152		1.4
2017	461,571		—		—		—		—		—		—		68,111		152,926		118,794		87,549		23,146		450,526		1.0
2018	433,302		—		—		—		—		—		—		—		49,383		118,266		78,846		21,712		268,207		0.6
2019	273,354		—		—		—		—		—		—		—		—		44,118		80,502		23,979		148,599		0.5
2020	116,899		—		—		—		—		—		—		—		—		—		22,721		15,121		37,842		0.3
2021	77,826		—		—		—		—		—		—		—		—		—		—		2,392		2,392		—
Subtotal	3,283,319		—		—		134,259		384,856		476,126		494,000		554,320		635,177		635,218		553,946		162,601		4,030,503		1.2
Other geographies:
2012	6,721		—		—		3,848		2,561		1,208		542		551		422		390		294		95		9,911		1.5
2013	29,568		—		—		6,617		17,615		10,334		4,606		3,339		2,468		1,573		1,042		297		47,891		1.6
2014	86,989		—		—		—		9,652		16,062		18,403		9,813		7,991		6,472		4,300		1,391		74,084		0.9
2015	83,198		—		—		—		—		15,061		57,064		43,499		32,622		17,499		4,688		1,192		171,625		2.1
2016	64,450		—		—		—		—		—		29,269		39,710		28,992		16,078		5,196		1,333		120,578		1.9
2017	49,670		—		—		—		—		—		—		15,471		23,075		15,383		7,303		2,269		63,501		1.3
2018	26,371		—		—		—		—		—		—		—		12,910		15,008		5,892		1,640		35,450		1.3
2019	2,668		—		—		—		—		—		—		—		—		3,198		245		70		3,513		1.3


Subtotal	349,635		—		—		10,465		29,828		42,665		109,884		112,383		108,480		75,601		28,960		8,287		526,553		1.5
Total	$	10,915,672	$	3,983,166	$	948,006	$	1,279,506	$	1,607,497	$	1,700,725	$	1,685,604	$	1,767,644	$	1,967,620	$	2,026,928	$	2,111,848	$	606,461	$	19,685,005	1.8

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(1)Adjusted for Put-Backs and Recalls. Put-Backs (“Put-Backs”) and recalls (“Recalls”) represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.

(2)Cumulative collections from inception through March 31, 2021, excluding collections on behalf of others.

(3)Cumulative Collections Multiple (“Multiple”) through March 31, 2021 refers to collections as a multiple of purchase price.

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Total Estimated Collections from Purchased Receivables to Purchase Price Multiple

The following table summarizes our purchases, resulting historical gross collections, and estimated remaining gross collections from purchased receivables, by year of purchase (in thousands, except multiples):


	Purchase Price(1)		Historical Collections(2)		Estimated Remaining Collections		Total Estimated Gross Collections		Total Estimated Gross Collections to Purchase Price
United States:
<2011	$	1,760,006	$	5,501,203	$	105,360	$	5,606,563	3.2
2011	383,794		1,160,096		51,789		1,211,885		3.2
2012	548,808		1,281,895		56,219		1,338,114		2.4
2013(3)	551,894		1,547,753		159,200		1,706,953		3.1
2014(3)	517,677		1,031,587		98,327		1,129,914		2.2
2015	499,226		810,945		109,999		920,944		1.8
2016	553,284		930,709		204,119		1,134,828		2.1
2017	528,314		919,649		332,635		1,252,284		2.4
2018	630,704		903,398		502,810		1,406,208		2.2
2019	677,176		705,698		891,534		1,597,232		2.4
2020	539,553		326,592		1,002,765		1,329,357		2.5
2021	92,282		8,424		223,227		231,651		2.5
Subtotal	7,282,718		15,127,949		3,737,984		18,865,933		2.6
Europe:
2013(3)	619,079		1,272,140		865,462		2,137,602		3.5
2014(3)	623,129		969,249		642,939		1,612,188		2.6
2015(3)	419,941		527,396		413,504		940,900		2.2
2016	258,218		354,152		319,524		673,676		2.6
2017	461,571		450,526		558,605		1,009,131		2.2
2018	433,302		268,207		610,538		878,745		2.0
2019	273,354		148,599		502,757		651,356		2.4
2020	116,899		37,842		302,226		340,068		2.9
2021	77,826		2,392		175,991		178,383		2.3
Subtotal	3,283,319		4,030,503		4,391,546		8,422,049		2.6
Other geographies:
2012	6,721		9,911		63		9,974		1.5
2013	29,568		47,891		774		48,665		1.6
2014	86,989		74,084		50,516		124,600		1.4
2015	83,198		171,625		13,321		184,946		2.2
2016	64,450		120,578		4,289		124,867		1.9
2017	49,670		63,501		26,781		90,282		1.8
2018	26,371		35,450		7,664		43,114		1.6
2019	2,668		3,513		323		3,836		1.4


Subtotal	349,635		526,553		103,731		630,284		1.8
Total	$	10,915,672	$	19,685,005	$	8,233,261	$	27,918,266	2.6

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(1)Purchase price refers to the cash paid to a seller to acquire a portfolio less Put-backs, Recalls, and other adjustments. Put-Backs and Recalls represent ineligible accounts that are returned by us or recalled by the seller pursuant to specific guidelines as set forth in the respective purchase agreement.

(2)Cumulative collections from inception through March 31, 2021, excluding collections on behalf of others.

(3)Includes portfolios acquired in connection with certain business combinations.

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Estimated Remaining Gross Collections by Year of Purchase

The following table summarizes our estimated remaining gross collections from purchased receivable portfolios and estimated future cash flows from real estate-owned assets by year of purchase (in thousands):


	Estimated Remaining Gross Collections by Year of Purchase(1)
	2021(3)		2022		2023		2024		2025		2026		2027		2028		2029		>2029		Total(2)
United States:
<2011	$	26,212	$	26,102	$	18,170	$	12,578	$	8,578	$	5,814	$	3,861	$	2,385	$	1,260	$	400	$	105,360
2011	12,457		12,168		8,473		5,928		4,171		2,944		2,080		1,474		1,047		1,047		51,789
2012	13,437		12,995		9,133		6,406		4,510		3,181		2,249		1,596		1,136		1,576		56,219
2013(4)	37,028		36,243		25,680		18,191		12,903		9,156		6,498		4,614		3,277		5,610		159,200
2014(4)	23,588		22,761		15,677		10,805		7,630		5,402		3,829		2,717		1,931		3,987		98,327
2015	27,168		26,079		18,006		12,193		8,121		5,575		3,933		2,781		1,971		4,172		109,999
2016	53,665		47,533		31,980		21,983		15,104		10,293		7,195		5,067		3,576		7,723		204,119
2017	88,721		78,385		49,933		35,497		24,340		16,930		11,827		8,352		5,889		12,761		332,635
2018	137,797		125,833		81,381		54,057		35,510		23,418		15,449		10,112		6,730		12,523		502,810
2019	246,003		209,162		134,096		93,610		63,905		44,357		31,261		21,994		15,234		31,912		891,534
2020	222,665		280,072		163,837		106,095		71,412		48,451		34,062		24,314		17,327		34,530		1,002,765
2021	45,237		60,671		41,106		24,362		16,147		11,131		7,554		5,313		3,761		7,945		223,227
Subtotal	933,978		938,004		597,472		401,705		272,331		186,652		129,798		90,719		63,139		124,186		3,737,984
Europe:
2013(4)	70,401		91,831		88,191		82,241		75,011		68,559		61,460		55,275		49,680		222,813		865,462
2014(4)	60,729		74,390		69,269		63,117		56,840		48,712		43,025		38,018		34,305		154,534		642,939
2015(4)	39,471		48,472		44,854		40,580		36,778		32,232		27,720		24,603		22,134		96,660		413,504
2016	44,969		51,726		39,178		32,325		28,688		24,039		19,958		16,698		14,291		47,652		319,524
2017	62,593		79,825		69,366		58,865		50,329		42,446		36,620		30,472		26,128		101,961		558,605
2018	62,749		82,001		74,626		65,036		57,067		49,158		41,453		35,629		30,312		112,507		610,538
2019	62,358		75,770		64,237		55,012		45,847		37,406		30,879		26,291		21,933		83,024		502,757
2020	34,809		46,700		42,482		34,029		27,257		23,904		19,361		16,099		13,306		44,279		302,226
2021	17,842		24,467		21,842		18,550		15,895		13,844		12,226		10,718		8,884		31,723		175,991
Subtotal	455,921		575,182		514,045		449,755		393,712		340,300		292,702		253,803		220,973		895,153		4,391,546
Other geographies:
2012	46		17		—		—		—		—		—		—		—		—		63
2013	338		282		154		—		—		—		—		—		—		—		774
2014	7,463		8,166		7,350		6,342		4,803		2,822		1,606		1,462		1,462		9,040		50,516
2015	2,149		2,202		2,197		1,627		1,136		761		637		534		449		1,629		13,321
2016	1,972		1,325		500		243		158		91		—		—		—		—		4,289
2017	5,195		5,085		3,773		2,241		1,987		1,489		854		752		752		4,653		26,781
2018	2,353		1,959		1,368		898		483		315		207		81		—		—		7,664
2019	113		90		60		50		10		—		—		—		—		—		323


Subtotal	19,629		19,126		15,402		11,401		8,577		5,478		3,304		2,829		2,663		15,322		103,731
Portfolio ERC	1,409,528		1,532,312		1,126,919		862,861		674,620		532,430		425,804		347,351		286,775		1,034,661		8,233,261
REO ERC(5)	20,586		26,884		17,796		7,970		1,988		68		11		76		283		—		75,662
Total ERC	$	1,430,114	$	1,559,196	$	1,144,715	$	870,831	$	676,608	$	532,498	$	425,815	$	347,427	$	287,058	$	1,034,661	$	8,308,923

________________________

(1)As of March 31, 2021, ERC for Zero Basis Portfolios include approximately $105.4 million for purchased consumer and bankruptcy receivables in the United States. ERC for Zero Basis Portfolios in Europe and other geographies was immaterial. ERC also includes approximately $76.1 million from cost recovery portfolios, primarily in other geographies.

(2)Represents the expected remaining gross cash collections over a 180-month period. As of March 31, 2021, ERC for 84-month and 120-month periods were:

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	84-Month ERC		120-Month ERC
United States	$	3,485,857	$	3,666,276
Europe	3,088,406		3,733,609
Other geographies	83,645		91,634
Portfolio ERC	6,657,908		7,491,519
REO ERC	75,304		75,662
Total ERC	$	6,733,212	$	7,567,181

(3)Amount for 2021 consists of nine months data from April 1, 2021 to December 31, 2021.

(4)Includes portfolios acquired in connection with certain business combinations.

(5)Real estate-owned assets ERC includes approximately $74.0 million and $1.7 million of estimated future cash flows for Europe and Other Geographies, respectively.

Estimated Future Collections Applied to Principal

As of March 31, 2021, we had $3.2 billion in investment in receivable portfolios. The estimated future collections applied to the investment in receivable portfolios net balance is as follows (in thousands):


Years Ending December 31,	United States		Europe		Other Geographies		Total
2021(1)	$	370,692	$	138,034	$	12,997	$	521,723
2022	402,587		187,848		13,286		603,721
2023	242,472		175,413		10,088		427,973
2024	158,932		155,195		6,675		320,802
2025	105,328		138,573		5,233		249,134
2026	70,715		120,586		3,104		194,405
2027	48,851		103,157		1,767		153,775
2028	34,319		90,071		1,532		125,922
2029	24,064		80,059		1,462		105,585
2030	17,016		72,111		1,462		90,589
2031	12,198		68,219		1,462		81,879
2032	8,977		67,798		1,462		78,237
2033	7,035		70,246		1,462		78,743
2034	5,828		74,719		10		80,557
2035	3,660		84,216		—		87,876
2036	710		24,047		—		24,757
Total	$	1,513,384	$	1,650,292	$	62,002	$	3,225,678

________________________

(1)Amount for 2021 consists of nine months data from April 1, 2021 to December 31, 2021.

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Purchases by Quarter

The following table summarizes the receivable portfolios we purchased by quarter, and the respective purchase prices and fair value (in thousands):


Quarter	# of Accounts	Face Value		Purchase Price
Q1 2019	854	$	1,732,977	$	262,335
Q2 2019	778	2,307,711		242,697
Q3 2019	1,255	5,313,092		259,910
Q4 2019	803	2,241,628		234,916
Q1 2020	943	1,703,022		214,113
Q2 2020	754	1,305,875		147,939
Q3 2020	735	1,782,733		170,131
Q4 2020	558	1,036,332		127,689
Q1 2021	749	1,328,865		170,178

Liquidity and Capital Resources

Liquidity

The following table summarizes our cash flow activities for the periods presented (in thousands):


	Three Months Ended March 31,
	2021		2020
	(Unaudited)
Net cash provided by operating activities	$	69,119	$	70,805
Net cash provided by (used in) investing activities	95,267		(43,255)
Net cash used in financing activities	(160,110)		(21,762)

Operating Cash Flows

Cash flows from operating activities represent the cash receipts and disbursements related to all of our activities other than investing and financing activities.

Net cash provided by operating activities was $69.1 million and $70.8 million during the three months ended March 31, 2021 and 2020, respectively. Operating cash flows are derived by adjusting net income for non-cash operating items such as depreciation and amortization, changes in expected recoveries, stock-based compensation charges, and changes in operating assets and liabilities which reflect timing differences between the receipt and payment of cash associated with transactions and when they are recognized in results of operations.

Investing Cash Flows

Cash flow relating to investing activities is primarily affected by receivable portfolio purchases offset by collection proceeds applied to the principal of our receivable portfolios.

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Net cash provided by investing activities was $95.3 million for the three months ended March 31, 2021. Net cash used in investing activities was $43.3 million during the three months ended March 31, 2020. Cash provided by or used in investing activities is primarily affected by receivable portfolio purchases offset by collection proceeds applied to the principal of our receivable portfolios. Receivable portfolio purchases, net of put-backs, were $167.0 million and $209.0 million during the three months ended March 31, 2021 and 2020, respectively. Collection proceeds applied to the principal of our receivable portfolios, net, were $268.4 million and $169.9 million during the three months ended March 31, 2021 and 2020, respectively.

Financing Cash Flows

Net cash used in financing activities was $160.1 million and $21.8 million during the three months ended March 31, 2021 and 2020, respectively. Financing cash flows are generally affected by borrowings under our credit facilities and proceeds from various debt offerings, offset by repayments of amounts outstanding under our credit facilities and repayments of various notes. Borrowings under our credit facilities were $273.3 million and $171.9 million during the three months ended March 31, 2021 and 2020, respectively. Repayments of amounts outstanding under our credit facilities were $235.4 million and $167.2 million during the three months ended March 31, 2021 and 2020, respectively. We paid $161.0 million of convertible senior notes that matured on March 15, 2021 using cash on hand.

Capital Resources

Historically, we have met our cash requirements by utilizing our cash flows from operations, cash collections from our investment in receivable portfolios, bank borrowings, debt offerings, and equity offerings. Depending on the capital markets, we consider additional financings to fund our operations and acquisitions. From time to time, we may repurchase outstanding debt or equity and/or restructure or refinance debt obligations. Our primary cash requirements have included the purchase of receivable portfolios, entity acquisitions, operating expenses, the payment of interest and principal on borrowings, and the payment of income taxes.

Currently, all of our portfolio purchases are funded with cash from operations, cash collections from our investment in receivable portfolios, and our bank borrowings.

We are in material compliance with all covenants under our financing arrangements. See “Note 7: Borrowings” in the notes to our consolidated financial statements for a further discussion of our debt.

On August 12, 2015, our Board of Directors approved a $50.0 million share repurchase program. On May 5, 2021, we 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 our management and Board of Directors, and in accordance with market conditions, other corporate considerations, and applicable regulatory requirements. The program does not obligate us to acquire any particular amount of common stock, and it may be modified or suspended at any time at our discretion. During the three months ended March 31, 2021, we repurchased 517,860 shares of our common stock for approximately $20.4 million, or $39.37 per share. Our practice is to retire the shares repurchased.

In May 2021, we terminated our at-the-market equity offering program (the “ATM Program”) pursuant to which we could issue and sell shares of Encore’s common stock having an aggregate offering price of $50.0 million.

Our cash and cash equivalents as of March 31, 2021 consisted of $34.6 million held by U.S.-based entities and $150.0 million held by foreign entities. Most of our cash and cash equivalents held by foreign entities is indefinitely reinvested and may be subject to material tax effects if repatriated. However, we believe that our U.S. sources of cash and liquidity are sufficient to meet our business needs in the United States and do not expect that we will need to repatriate the funds.

Included in cash and cash equivalents is cash that was collected on behalf of, and remains payable to, third-party clients. The balance of cash held for clients was $23.0 million as of March 31, 2021.

Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including timing of cash collections from our consumers, and other risks detailed in our Risk Factors. However, we believe that we have sufficient liquidity to fund our operations for at least the next twelve months, given our expectation of continued positive cash flows from operations, cash collections from our investment in receivable portfolios, our cash and cash equivalents, our access to capital markets, and availability under our credit facilities. Our future cash needs will depend on our acquisitions of portfolios and businesses.

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Rates. As of March 31, 2021, there had not been a material change in any of the foreign currency risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Interest Rates. As of March 31, 2021, there had not been a material change in the interest rate risk information disclosed in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Item 4 – Controls and Procedures

Attached as exhibits to this Form 10-Q are the certifications required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended. This section includes information concerning the controls and controls evaluation referred to in the certifications.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”) and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and accordingly, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on their most recent evaluation, as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act are effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

Except as noted below there were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We have not experienced any material impact to our internal controls over financial reporting due to the COVID-19 pandemic even though many of our employees are working remotely. We are continually monitoring and assessing the impact of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.

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PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

Information with respect to this item may be found in “Note 10: Commitments and Contingencies,” to the consolidated financial statements.

Item 1A – Risk Factors

There is no material change in the information reported under “Part I-Item 1A-Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Repurchases of Equity Securities

The following table presents information with respect to purchases of common stock of the Company during the three months ended March 31, 2021, by the Company or an “affiliated purchaser” of the Company, as defined in Rule 10b-18(a)(3) under the Exchange Act:


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)(2)	Maximum Number of Shares (or Approximate Dollar Value) That May Yet Be Purchased Under the Publicly Announced Plans or Programs(1)
January 1, 2021 to January 31, 2021	—	$	—	—	$	50,000,000
February 1, 2021 to February 28, 2021	11,142	$	32.41	11,142	$	49,638,834
March 1, 2021 to March 31, 2021	506,718	$	39.53	506,718	$	29,610,273
Total	517,860	$	39.37	517,860	$	29,610,273

________________________

(1)On August 12, 2015, we publicly announced that our Board of Directors had authorized a stock repurchase program for the Company to purchase $50.0 million of our Company’s common stock. On May 5, 2021, we publicly announced that our Board of Directors had authorized a $250.0 million increase to the stock repurchase program, which increased the size of the program from $50.0 million to $300.0 million.

(2)This column discloses the number of shares purchased pursuant to the program during the indicated time periods.

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Item 6 – Exhibits


Number						Description
3.1.1						Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 2 to the Company’s Registration Statement on Form S-1/A filed on June 14, 1999, File No. 333-77483)

3.1.2						Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 4, 2002, File No. 000-26489)

3.1.3						Second Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.1.3 to the Company’s Quarterly Report on Form 10-Q filed on August 7, 2019)

3.3						Bylaws, as amended through February 8, 2011 (incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed on February 14, 2011)

31.1						Certification of the Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2						Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

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)

101.INS						XBRL Instance Document - The instance document does not appear in the interactive data file because XBRL tags are embedded within the inline XBRL document. (filed herewith)

101.SCH						XBRL Taxonomy Extension Schema Document (filed herewith)

101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)

101.DEF						XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)

101.LAB						XBRL Taxonomy Extension Label Linkbase Document (filed herewith)

101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101

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SIGNATURES

Pursuant to the requirements 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.

			By:						/s/ Jonathan C. Clark
									Jonathan C. Clark
									Executive Vice President,
									Chief Financial Officer and Treasurer

									/s/ Peter Reck
									Peter Reck
									Vice President,
									Chief Accounting Officer

Date: May 5, 2021