Encore Capital Reports 25 percent Increase in Earnings in 2008

Debt buyer and collector Encore Capital Group (Nasdaq: ECPG) said Wednesday that net income for 2008 was up over 2007 on a slight increase in revenue. Net income and revenue fell sharply in the fourth quarter, however.

San Diego-based Encore reported net income of $18.8 million for the year ended Dec. 31, 2008, a 25 percent increase from the $15 million it earned in 2007. Total revenue was up 1 percent for the year to $255.9 million. Gross collections for the year were $398.6 million, a 12 percent increase over the $355.2 million reported in 2007.

But the fourth quarter proved to be a difficult one for Encore as it reported a sharp decrease in net income to $200,000, down from the $4.8 million in net income it reported in the fourth quarter of 2007. Total revenue declined 11.5 percent in the quarter to $51.9 million even as gross collections increased 10 percent to $94.4 million. Revenue was negatively impacted by a $25.4 million impairment charge in the fourth quarter.

For the full year, Encore recorded a net impairment provision of $41.4 million, compared to a net impairment provision of $11.2 million in 2007. The company said in a Securities and Exchange Commission (SEC) filing Wednesday that $1.4 million of the impairment charge was attributable to its healthcare receivables portfolio and was recorded in connection with the company’s exit from healthcare purchasing and collecting activities, which it announced in 2007 (“Encore Capital to Cut Jobs, Exit Healthcare Sector,” Sept. 18, 2007).

During the year, Encore invested $230.3 million to acquire portfolios with face values aggregating $6.6 billion, a 10.2 percent in the amount invested in portfolio purchases when compared to 2007. Debt buying activity was down 14.5 percent in the fourth quarter.

Data provided in the company’s annual 10-K filing with the SEC reveal that it has shifted toward credit card account purchasing in recent years. In 2006, only 46.2 percent of the face value debt Encore purchased was in credit card accounts. In 2008, the share of credit card account value had risen to 87.5 percent.

Encore also indicated that it has shifted its primary collection channel from captive collection sites to legal collections over the past three years.

In 2006, the company brought in its largest proportion of gross cash collections – 38.3 percent – from collection sites. Legal collections trailed closely at 35.2 percent. But for 2008, the legal channel had risen to represent nearly half of gross collections, while collection sites remained fairly flat.

The legal collection channel gained at the expense of collection agency outsourcing and portfolio sales. In 2006, collection agencies and portfolio sales accounted for 14.7 percent and 10 percent of gross collections, respectively. In 2008, collection agencies brought in just 8.7 percent with portfolio sales accounting for 3.1 percent.