Encore Capital Reports 33% Decline in Income for Q3

Encore Capital Group, Inc., a leading distressed consumer debt management company, today reported consolidated financial results for the third quarter ended September 30, 2006.

For the third quarter of 2006:

• Gross collections were $75.8 million, a decline of 10% from the $83.9 million in the same period of the prior year
• Revenues from the debt purchasing business were $57.2 million, a decline of 2% from the $58.2 million in the same period of the prior year. Revenues from the bankruptcy servicing business were $3.4 million compared to $1.0 million in the same period of the prior year
• Net income was $5.2 million, a decline of 33% from the $7.8 million in the same period of the prior year
• Earnings per fully diluted share were $0.22, a decline of 33% from the $0.33 in the same period of the prior year
• Adjusted EBITDA, defined as net income before interest, taxes, depreciation and amortization, stock-based compensation expense related to stock options, and portfolio amortization, was $35.6 million, a decline of 24% from the $46.8 million in the same period of the prior year

Encore Capital’s prior year comparisons reflect the significant increase in collections and Adjusted EBITDA the Company experienced in the third quarter of 2005, following the purchase of a portfolio of charged-off debt with a face value of approximately $2.8 billion from Jefferson Capital in June 2005.

Commenting on the third quarter results, J. Brandon Black, President and CEO of Encore Capital Group, Inc., said, “We continued to make excellent progress with our new portfolio liquidation strategies. For the first time in our history, the legal channel represented our largest collection channel during the quarter, which reflects the increased productivity generated by our new liquidation initiative. We continue to build on our new initiatives, which have a negative near-term impact on our expense levels. However, we are seeing the incremental portfolio liquidation that we envisioned from these strategies, and we expect to see a more positive bottom line impact as we scale these operations.

“During the third quarter, we invested $32 million to purchase $1.1 billion in face value of debt. While pricing for new portfolios remains elevated, the new liquidation strategies we are employing have opened up new purchasing opportunities for us on portfolios that would not have previously met our internal hurdle rates. We believe the strategies we are executing on will have positive long-term implications for both collections and purchasing, which should build on our strong foundation for future growth,” said Mr. Black.

Financial Highlights

Revenue recognized on receivable portfolios, as a percentage of portfolio collections, was 76% in the third quarter of 2006, compared with 69% in the third quarter of 2005. The increase in revenue recognition rate was primarily attributable to the strong collections experienced in the third quarter of 2005 following the large portfolio purchase from Jefferson Capital, which had the effect of lowering the revenue recognition rate in that quarter.

The Company generated $3.4 million in fee-based revenue during the third quarter of 2006, primarily through the Ascension Capital bankruptcy services business acquired in August 2005. The decline in Ascension Capital’s revenue from the prior quarter’s $6.2 million is attributable to the timing of revenue recognition on the large number of accounts that were placed with Ascension in the weeks leading up to bankruptcy reform in 2005.

Total operating expenses for the third quarter of 2006 were $45.0 million, compared with $37.6 million in the third quarter of 2005. Excluding stock option expense of $1.5 million, Ascension Capital operating expenses of $4.5 million, which is a fee-based business, and costs related to the consideration of strategic alternatives of $0.7 million, operating expenses were $38.3 million in the third quarter of 2006, compared with $36.3 million in the third quarter of 2005, while operating expense per dollar collected increased to 50% from 43%. This increase was primarily attributable to the lower level of sales in the quarter, which generally have a lower cost structure than other channels, and the ramp-up of certain operating initiatives where collections lag expenses.

Total interest expense was $6.7 million in the third quarter of 2006, compared to $8.5 million in the third quarter of 2005. The contingent interest component of interest expense was $3.8 million in the third quarter of 2006, compared with $5.0 million in the same period of the prior year. The Company continues to see a reduction in contingent interest expense as collections decline from older portfolios purchased under its previous credit facility.

The Company’s cash and cash equivalents balance and total debt both increased as of September 30, 2006 compared to June 30, 2006 as the Company built up its cash position and increased borrowings on its credit facility in anticipation of portfolio purchases that were completed in early October 2006, rather than in September 2006, as originally planned.

Outlook

Commenting on the outlook for Encore Capital Group, Mr. Black said, “In the fourth quarter, we expect similar trends as we experienced in the third quarter, including the seasonal slowdown in collections that typically occurs at the end of the year. We also expect to see continuing increases in bankruptcy placements at Ascension, as industry trends return to normal following bankruptcy reform last year.”