Encore Capital Discloses Another State Investigation as Profits Rise in Q3

Debt buyer Encore Capital Group, Inc. (Nasdaq: ECPG) late Wednesday announced financial results for the third quarter of 2011 marked by increases in net income, revenue, and cash collections. But the company also said that another state regulator had launched an investigation of its collection practices in the period.

San Diego-based Encore reported net income in Q3 2011 of $15.4 million, or $0.60 per share, up 25 percent from the same period a year ago. Adjusted EBITDA — earnings before interest, taxes, depreciation and amortization, stock-based compensation expense and portfolio amortization — was $107.2 million, up 20 percent from Q3 2010.

The company reported total revenue in the third quarter of $120.6 million, a 23 percent increase from a year ago. Gross collections were up 20 percent to $189.1 million. Encore reported a 32 percent increase in collections from its legal division – now the company’s largest collection channel – a 24 percent increase in collections from company-owned debt collection sites, and a 40 percent decline in collections from collection agency outsourcing.

Brandon Black, Encore’s president and CEO, said in a press release that the company was “preparing the foundation for a near-shore call center in Costa Rica in order to service our growing number of Spanish-speaking consumers.”

Encore said it invested $65.7 million to purchase $2 billion in face value debt portfolios in the third quarter of 2011, down 15.7 percent from debt buying activity a year ago. The company noted that it tripled the amount invested in telecom portfolios in the quarter, but that credit card accounts still made up 80 percent of third quarter purchases.

In its quarterly filing with the Securities and Exchange Commission, Encore disclosed that on September 12, the Department of Justice of the State of North Carolina issued an investigative demand to the company to produce documents and answer interrogatories concerning Encore’s debt collection practices in the state and related topics. Encore said it has and intends to continue to cooperate fully with North Carolina in response to its information request, subject to applicable law.

Encore also provided an update to an ongoing action in the state of Texas. On July 8, 2011, the Office of the Attorney General of Texas filed a petition in District Court accusing Encore of violating of the Texas Deceptive Trade Practices Act and the Texas Debt Collection Act, based on the company’s debt collection and related practices in the state. Encore disclosed Wednesday that it had “reached an agreement in principle to resolve the matter,” and is working towards finalizing a definitive settlement agreement. The proposed settlement anticipates that the company will pay a financial penalty and reimburse certain costs to the state of Texas and provide credits to certain consumers.

Encore has been embroiled in a legal battle over the affidavits it used to validate consumer debt in collection litigation, and that issue was central in the Texas action. A class action suit called Brent was brought by a consumer in 2008 that addresses the affidavit issue. A judge made a ruling in the case in 2009, prompting Encore to change many of its practices. But the case lingered into 2011 and other consumers filed “copycat” lawsuits. Encore decided to settle the case earlier this year, along with other related actions, on a nationwide basis. Under strong objections from many parties, the settlement was approved in August. Encore noted Wednesday that the approved settlement is currently under appeal.

Attorneys general of several states and the FTC disagreed with the terms of the settlement, principally because they feel it does not award the plaintiffs enough in damages. The AGs are also questioning whether the settlement will preclude separate action from their offices.

Encore submitted a detailed statement in late March outlining their position on the matter. The company notes that “the judge in the Brent case ruled there was ‘… no evidence that the amount of the debt, the fact that it is unpaid, or other vital account information, is false.’ Indeed, the court also stated Midland ‘… could easily prepare a form affidavit that achieved the same goals without being misleading by reflecting the truth, plain and simple… they could base it on the accuracy of the records kept and the accuracy of the data.’”