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Article by DailyStocks_admin    (04-29-13 11:46 PM)

Description

Encore Capital Group, Inc. Director MESDAG WILLEM bought 350,000 shares on 04-22-2013 at $ 28

BUSINESS OVERVIEW

Nature of Our Business

We are a leader in debt management and recovery solutions for consumers and property owners across a broad range of financial assets. We purchase portfolios of defaulted consumer receivables at deep discounts to face value and use a variety of operational channels to maximize our collections from these portfolios. We manage our receivables 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, commercial retailers, auto finance companies, and telecommunication companies. We also purchase receivables subject to Chapter 7 and Chapter 13 bankruptcy proceedings. In addition, through our subsidiary, Propel Financial Services, LLC (“Propel”), we assist property owners who are delinquent on their property taxes by structuring affordable monthly payment plans. For financial information regarding our segments and operations in geographic areas, see “Item 8, Financial Statements and Supplementary Data.”

Four competitive, strategic advantages underpin our success and drive our future growth:

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The sophisticated and widespread use of analytics ( Analytic Strength );

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Broad investments in data and behavioral science ( Consumer Intelligence );

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Significant cost advantages based on our operations in India and Costa Rica, as well as our enterprise-wide, account-level cost database ( Cost Leadership ); and

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A demonstrated commitment to conduct business ethically and in ways that support our consumers’ financial recovery ( Principled Intent ).

Although we have enabled over two million consumers to retire a portion of their outstanding debt since 2007, one of the debt collection industry’s most formidable challenges is that many distressed consumers will never make a payment, much less retire their total debt obligation. In fact, we generate payments from fewer than one percent of our accounts every month. To address these challenges, we evaluate portfolios of receivables that are available for purchase using robust, account-level valuation methods, and we employ proprietary statistical and behavioral models across the full extent of our operations. We believe these business practices contribute to our ability to value portfolios accurately, avoid buying portfolios that are incompatible with our methods or goals, and align the accounts we purchase with our operational channels to maximize future collections. We also have one of the industry’s largest distressed consumer databases. We believe that our specialized knowledge, along with our investments in data and analytic tools, have enabled us to realize significant returns from the receivables we have acquired. We maintain strong relationships with many of the largest credit and telecommunication providers in the United States, and believe that we possess one of the industry’s best collection staff retention rates.

While seasonality does not have a material impact on our business, collections are generally strongest in our first calendar quarter, slower in the second and third calendar quarters, and slowest in the fourth calendar quarter. Relatively higher collections in the first quarter could result in a lower cost-to-collect ratio compared to the fourth quarter, as our fixed costs would be constant and applied against a larger collection base. The seasonal impact on our business may be influenced by our purchasing levels, the types of portfolios we purchase, and our operating strategies.

We conduct business through two operating segments: portfolio purchasing and recovery, and tax lien transfer. Financial information regarding these segments is set forth in Note 16 “Segments” to our consolidated financial statements.

We were incorporated in Delaware in 1999. Our headquarters is located at 3111 Camino Del Rio North, Suite 1300, San Diego, California 92108 and our telephone number is (877) 445-4581. Investors wishing to obtain more information about us may access the Investors section of our Internet site at http://www.encorecapital.com . The site provides access free of charge to relevant investor related information, such as Securities and Exchange Commission (“SEC”) filings, press releases, featured articles, an event calendar, and frequently asked questions. SEC filings are available on our Internet site as soon as reasonably practicable after being filed with, or furnished to, the SEC. The content of the Internet site is not incorporated by reference into this Annual Report on Form 10-K. Any materials that we filed with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

Our Competitive Advantages

Analytic Strength. We believe that success in our business depends on the ability to establish and maintain an information advantage. Leveraging an industry-leading distressed consumer database, our in-house team of statisticians, business analysts, and software programmers have developed, and continually enhance, proprietary behavioral and valuation models, custom software applications, and other business tools that guide our portfolio purchases. Moreover, our collection channels are informed by powerful statistical models specific to each collection activity, and each year we deploy significant capital to purchase credit bureau and customized consumer data that describe demographic, account level, and macroeconomic factors related to credit, savings, and payment behavior.

Consumer Intelligence. At the core of our analytic approach is a focus on understanding, measuring, and predicting distressed consumer behavior. In this effort, we apply tools and methods from statistics, psychology, economics, and management science across the full extent of our business. During portfolio valuation, we use an internally developed and proprietary family of statistical models that determines the likelihood and expected amount of payment for each consumer within a portfolio. Subsequently, the expectations for each account are aggregated to arrive at a portfolio-level liquidation solution and a valuation for the entire portfolio is determined. During collections, we apply our “willingness-capability” framework, which allows us to match our collection approach to an individual consumer’s payment behavior.

Cost Leadership. Cost efficiency is central to our collection and purchasing strategies. We experience considerable cost advantages, stemming from our operations in India and Costa Rica, our enterprise-wide, activity-level cost database, and the development and implementation of operational models that enhance profitability. We believe that we are the only company in our industry with a successful, late-stage collection platform in India. This cost-saving, first-mover advantage helps to reduce our call center variable cost-to-collect.

Principled Intent. We strive to treat consumers with respect, compassion, and integrity. From discounts and payment plans to hardship solutions, we work with our consumers as they attempt to return to financial health. We are committed to dialogue that is honorable and constructive, and hope to play an important and positive role in our consumers’ lives.

Our Strategy

We have implemented a business strategy that emphasizes the following elements:

Extend our knowledge about distressed consumers . We believe our investments in data, analytic tools, and expertise related to both general and distressed consumers provide us with a competitive advantage. In addition to rigorous data collection practices that take advantage of our unique relationship with distressed consumers, our consumer intelligence program focuses on segmentation, marketing communications, and original research

conducted in partnership with experts from both industry and academia. We believe this work will continue to bolster our operational success while fueling our efforts to understand the actions and motivations of our consumer base.

Realize the full strength of our international operations . We believe that our operations in India and Costa Rica will be critical for both our future collections strategy as well as our future growth. Our call centers have expanded over the past few years. Our attrition rate for experienced account managers in India is approximately 40% per year in an industry where 100% attrition is not uncommon. Moreover, we have expanded our talented work force in India beyond call center operations and are now developing software, managing portions of our IT infrastructure, handling complex analytics, supporting our bankruptcy servicing teams, and processing a large portion of our back-office needs. Our Costa Rica call center allows us to communicate more effectively with our Spanish speaking consumers. As portfolio prices fluctuate and the complexity of our industry continues to increase, we expect that our international operations will continue to provide a significant competitive advantage.

Safeguard and promote financial health and literacy . We believe that our interests, and those of the financial institutions from which we purchase portfolios, are closely aligned with the interests of government agencies seeking to protect consumer rights. Accordingly, we expect to continue investing in infrastructure and processes that support consumer advocacy and financial literacy, while promoting an appropriate balance between corporate and consumer responsibility.

Consider growth opportunities in adjacent businesses and new geographies . We may consider investments in or acquisitions of complementary companies in order to expand into new geographic markets or new types of defaulted consumer receivables, add capacity to our current business lines, or leverage our knowledge of the distressed consumer. We believe that our existing underwriting and collection processes can be extended to a variety of consumer receivables. These capabilities may allow us to develop and provide complementary products or services to specified distressed consumer segments.

Acquisition of Receivables

We provide sellers of delinquent receivables liquidity and immediate value through the purchase of charged-off consumer receivables. We believe that we are an appealing partner for these sellers given our financial strength, focus on principled intent, and track record of financial success.

Identify purchase opportunities. We maintain relationships with some of the largest credit originators and sellers of charged-off consumer receivables in the United States. We identify purchase opportunities and secure, where possible, exclusive negotiation rights. We believe that we are a valued partner for primary issuers and sellers from whom we purchase portfolios, and our ability to secure exclusive negotiation rights is typically a result of our strong relationships and our scale of purchasing. Receivable portfolios are sold either through a general auction, where the seller requests bids from market participants, or through an exclusive negotiation, where the seller and buyer negotiate the sale privately. The sale transaction can be either for a one-time spot purchase or for a “forward flow” contract. A “forward flow” contract is a commitment to purchase receivables over a duration that is typically three to twelve months with specifically defined volume, frequency, and pricing. Typically, these 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. We generally attempt to secure forward flow contracts for receivables because a consistent volume of receivables over a set duration can allow us more precision in forecasting and planning our operational needs.

Evaluate purchase opportunities using account level analytics. Once a portfolio of interest is identified, we obtain detailed information regarding the portfolio’s accounts, including certain information regarding the consumers themselves. We then purchase additional information for the consumers whose accounts we are contemplating purchasing, including credit, savings, or payment behavior. Our internal modeling team then

analyzes this information to determine the expected value of each potential new consumer. Our collection expectations are based on these demographic data, account characteristics, and economic variables, which we use to predict a consumer’s willingness and ability to repay his or her debt. The expected value of collections for each account is aggregated to calculate an overall value for the portfolio. Additional adjustments are made to account for qualitative factors that may impact the payment behavior of our consumers (such as prior collection activities, or the underwriting approaches of the seller), and servicing related adjustments to ensure our valuations are aligned with our operations.

Formal approval process. Once we have determined the value of the portfolio and have completed our qualitative diligence, we present the purchase opportunity to our investment committee, which either sets the maximum purchase price for the portfolio based on corporate Internal Rate of Return (“IRR”) objectives or declines to bid. Members of the investment committee include our CEO, CFO, other members of our senior management team, and experts, as needed.

We believe long-term success is best pursued by combining a diverse sourcing approach with an account-level scoring methodology and a disciplined evaluation process.

Collection Approach

We expand and build upon the insight developed during our purchase process when developing our account collection strategies for portfolios we have acquired. Our proprietary consumer-level collectability analysis is the primary determinant of whether an account is actively serviced post-purchase. Generally, we pursue collection activities on only a fraction of the accounts we purchase, through one or more of our collection channels. The channel identification process is analogous to a decision tree where we first differentiate those consumers who we believe are unable to pay from those who we believe are able to pay. Consumers who we believe are financially incapable of making any payments, or are facing extenuating circumstances or hardships that would prevent them from making payments, are excluded from our collection process. It is our practice to assess each consumer’s willingness to pay through analytics, phone calls and/or letters. Despite our efforts to reach consumers and work out a settlement option, only a small number of consumers who we contact choose to engage with us. Those who do are often offered discounts on their obligations or are presented with payment plans that are intended to suit their needs. However, the majority of consumers we contact ignore our calls and our letters and we must then make the decision about whether to pursue collections through legal action. During 2012, we called approximately 13.2 million unique consumers, of which 3.1 million, or 23%, made contact with us. Similarly, during the same time period, we mailed 11.3 million consumers, of which 3.0% engaged with us. Throughout our ownership period, we periodically refine our collection approach to determine the most effective collection strategy to pursue for each account. These strategies consist of:

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Inactive . We strive to use our financial resources judiciously and efficiently by not deploying resources on accounts where the prospects of collection are remote. For example, for accounts where we believe that the consumer is currently unemployed, overburdened by debt, incarcerated, or deceased, no collection method of any sort is assigned.

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Direct Mail . We develop innovative, low-cost mail campaigns offering consumers appropriate discounts to encourage settlement of their accounts.

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Call Centers . We maintain domestic collection call centers in San Diego, California, Phoenix, Arizona, and St. Cloud, Minnesota and international call centers in Gurgaon, India and San Jose, Costa Rica. Call centers generally consist of multiple collection departments. Account managers supervised by group managers are trained and divided into specialty teams. Account managers assess our consumers’ willingness and capacity to pay. They attempt to work with consumers to evaluate sources and means of repayment to achieve a full or negotiated lump sum settlement or develop payment programs customized to the individual’s ability to pay. In cases where a payment plan is developed, account managers encourage consumers to pay through automatic payment arrangements. During our new hire

training period, we educate account managers to understand and apply applicable laws and policies that are relevant in the account manager’s daily collection activities. Our ongoing training and monitoring efforts help ensure compliance with applicable laws and policies by account managers.

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Skip Tracing . If a consumer’s phone number proves inaccurate when an account manager calls an account, or if current contact information for a consumer is not available at the time of account purchase, then the account is automatically routed to our skip tracing process. We currently use a number of different skip tracing companies to provide phone numbers and addresses.

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Legal Action . We generally refer accounts for legal action where the consumer has not responded to our direct mail efforts or our calls and it appears the consumer is able, but unwilling, to pay his or her obligations. When we decide to pursue legal action, we place the account into our internal legal channel or refer them to our network of retained law firms. If placed to our internal legal channel, management in that channel will evaluate the accounts and make the final determination whether to pursue legal action. If referred to our network of retained law firms, we rely on our law firms’ expertise with respect to applicable debt collection laws to evaluate the accounts placed in that channel in order to make the decision about whether or not to pursue collection litigation. Prior to engaging an external collection firm, we evaluate the firm’s operations, financial condition, and experience, among other key criteria. The law firms we have hired may also attempt to communicate with the consumers in an attempt to collect their debts prior to initiating litigation. We pay the law firms a contingency fee based on amounts they collect on our behalf.

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Third Party Collection Agencies . We selectively employ a strategy that uses collection agencies. Collection agencies receive a contingency fee for each dollar collected. Generally, we use these agencies on accounts when we believe they can liquidate better or less expensively than we can or to supplement capacity in our internal call centers. We also use agencies to initially provide us a way to scale quickly when large purchases are made and as a challenge to our internal call center collection teams. Prior to engaging a collection agency, we evaluate, among other things, those aspects of the agency’s business that we believe are relevant to its performance and compliance with consumer credit laws and regulations.

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Sale . We do not resell accounts to third parties in the ordinary course of our business. If we have an occasional instance when we do resell accounts, we only do so when we can provide the purchaser with documentation evidencing the amount owed on the account and clear title of ownership.

Tax Lien Transfer

We originate and service property tax lien transfers in Texas through our Propel subsidiary. With the property owner’s consent and participation, we pay the property owner’s delinquent property taxes directly to the taxing authority, which then transfers its tax lien to us. We work with the property owner to create an affordable payment plan. Tax lien transfers provide the local taxing authorities with much needed tax revenue and property owners with an alternative method to paying their property tax bills in one lump sum. Tax lien transfers typically carry a lower interest rate and fee structure than what the local taxing authority would charge. We offer competitive rates and flexible payment terms, and have the ability to fund the transaction with the property owner quickly, thus saving the property owner from incurring additional fees and interest levied by the local tax authority. Based in San Antonio, Texas, Propel is the largest tax lien transfer company in the state of Texas.

Enterprise Risk Management and Legal Oversight

Our compliance and legal oversight functions are divided between our legal and enterprise risk management departments. Our legal department manages regulatory oversight, litigation, corporate transactions, and compliance with our internal ethics policy, while our enterprise risk management department manages risk assessment, regulatory compliance, and internal audit.

The legal department is responsible for interpreting and administering our Standards of Business Conduct (the “Standards”), which apply to all of our directors, officers, and employees and outlines our commitment to a culture of professionalism and ethical behavior. The Standards promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships, compliance with applicable laws, rules and regulations, and full and fair disclosure in reports that we file with, or submit to, the SEC and in other public communications made by us. As described in the Standards, we have also established a toll-free Accounting and Fraud Hotline to allow directors, officers, and employees to report any detected or suspected fraud, misappropriations, or other fiscal irregularities, any good faith concern about our accounting and/or auditing practices, or any other violations of the Standards.

The enterprise risk management department is responsible for the development and administration of internal policies, procedures and controls which apply to all of our business units. The team manages and tests our Sarbanes Oxley 404 compliance. The team also performs periodic risk assessments and audits to evaluate the level of compliance to both regulations and standards of internal control for both internal operations and vendors/outsourcers.

Beyond written policies, one of our core internal goals is the adherence to principled intent as it pertains to all consumer interactions. We believe that it is in our shareholders’ and our employees’ best interest to treat all consumers with the highest standards of integrity. Specifically, we have strict policies and a code of ethics, which guide all dealings with our consumers. To reinforce existing written policies, we have established a number of quality assurance procedures. Through our Quality Assurance program, our Fair Debt Collection Practices Act (“FDCPA”) training for new account managers, our FDCPA recertification program for continuing account managers, and our Consumer Support Services department, we take significant steps to ensure compliance with applicable laws and regulations and seek to promote consumer satisfaction. Our Quality Assurance team aims to enhance the skills of account managers and to drive compliance initiatives through active call monitoring, account manager coaching and mentoring, and the tracking and distribution of company-wide best practices. Finally, our Consumer Support Services department works directly with consumers to seek to resolve incoming consumer inquiries and to respond to consumer disputes as they may arise.

CEO BACKGROUND

General

Our Board currently consists of nine members, each with a term expiring at the 2013 annual meeting. The Nominating Committee of the Board has recommended, and the Board has nominated, the following incumbent directors for election at the 2013 annual meeting: Kenneth A. Vecchione, George Lund, Willem Mesdag, Francis E. Quinlan, Norman R. Sorensen, J. Christopher Teets, H Ronald Weissman and Warren Wilcox.

In the event that any nominee named below is unable or declines to serve as a director, the Board may change the number of seats on the Board or may designate an alternate nominee to fill the vacancy. If a substitute nominee is named, the proxy holders will vote the proxies held by them for the election of such person, unless contrary instructions are given. We are not aware of any nominee who will be unable or will decline to serve as a director. The term of office for each person elected as a director continues until the next annual meeting of stockholders or until his or her successor has been elected and qualified.

Required Vote

If a quorum is present and voting, the eight nominees receiving the highest number of votes will be elected to the Board.

Director Nominees

Set forth below is certain biographical information about each of our nominees to the Board.




Name: Age: Position(s):
Kenneth A. Vecchione 58 President
George Lund 48 Director, Executive Chairman
Willem Mesdag 59 Director
Francis E. Quinlan 64 Director
Norman R. Sorensen 67 Director
J. Christopher Teets 40 Director
H Ronald Weissman 68 Director
Warren Wilcox 55 Director

KENNETH A. VECCHIONE . Mr. Vecchione has served as our President since April 2013. Prior to joining the Company, Mr. Vecchione served as the President and Chief Operating Officer of Western Alliance Bancorp. from April 2010 to April 2013. Mr. Vecchione served as the Chief Financial Officer of Apollo Global Management, L.P., a private equity firm, from November 2007 to March 2010. He also served as Vice Chairman and Chief Financial Officer of MBNA Corporation and as Chief Financial Officer at AT&T Universal Card, First Data Corp Merchant Group and Citicorp Credit Card Services. Mr. Vecchione has served as a director of Western Alliance Bancorp. since October 2007 and as director and Vice Chairman of its subsidiary, Bank of Nevada, since October 2010. Mr. Vecchione also serves as a director of International Securities Exchange and the chairman of its audit and finance committees, and is a director of the Federal Home Loan Bank of San Francisco. Mr. Vecchione is a graduate of SUNY at Albany. Mr. Vecchione’s qualifications to serve on the Board include his extensive experience in the financial services industry and service on other financial-industry boards, and his strong background in executive leadership and strategic planning.

GEORGE LUND . Mr. Lund has served as our Executive Chairman and an officer since July 2009, as the Chairman of our Board since August 2008 and as a director since September 2007. Mr. Lund is the Chairman and CEO of Torch Hill Investment Partners, a private equity firm focusing on defense, intelligence and civil and corporate security and is a director of One American Bank. Prior to joining Torch Hill he was the Chairman and Chief Executive Officer of BANKFIRST, a national issuer of consumer credit, serving in that capacity from 1986 to 2004. Mr. Lund holds a business administration degree from Southern Methodist University. Mr. Lund’s qualifications to serve on the Board include his extensive experience in executive leadership and strategic planning, strong regulatory and government affairs knowledge and deep connections in the financial services industry.

WILLEM MESDAG . Mr. Mesdag has served as a director since May 2007. He is the Managing Partner of Red Mountain Capital Partners LLC, an investment advisor, and is President of Red Mountain Capital Management, Inc., its Managing Member. Prior to founding Red Mountain, he was an investment banker at Goldman, Sachs & Co. and a securities lawyer at Ballard, Spahr, Andrews & Ingersoll. He joined Goldman, Sachs & Co. in 1981 and was made a General Partner in 1990. Mr. Mesdag holds a bachelor’s degree from Northwestern University and a Juris Doctor degree from Cornell Law School. He serves as a director of Davis Petroleum Acquisition Corp., a private company. He also serves as a director of 3i Group plc and Nature’s Sunshine Products, Inc., both of which are public companies and have significant international operations. Mr. Mesdag’s qualifications to serve on the Board include his career as an investment banker and securities lawyer, which give him extensive experience providing strategic and financial advisory services to complex organizations in the consumer credit and financial services industry.

FRANCIS E. QUINLAN . Brigadier General Francis E. Quinlan, United States Marine Corps Reserve (Ret.) has served as a director since September 2011. General Quinlan has practiced law for nearly thirty years, most recently at Newmeyer & Dillion LLP since May 2011. Before entering the practice of law he was an agent with the Federal Bureau of Investigation. As a reserve officer he performed active duty in command positions at the Squadron, Air Group, Air Wing, Marine Expeditionary Force and Joint Force levels of the United States Marine Corps. He has served for ten years as a board director and chairman of the audit committee of Irvine Company LLC; is founding audit committee chairman and member of the investment committee of the California State Compensation Insurance Fund; and is chairman of the audit committee of Santa Fe Trust, Inc. and its sister company, Independent Trust Company of America, LLC. Prior to joining the Board he served on the audit committee of Convoke Systems, Inc., an entity that provides software services to the debt buying industry. He is Emeritus General Counsel and former audit committee chairman of the Marine Corps University Foundation, Inc. Board of Trustees. Mr. Quinlan holds a Master of Laws in Taxation, has represented major financial institutions in matters ranging from governance and compliance to cyber security and has conducted and directed complex financial, tax, Foreign Corrupt Practices Act, internal fraud and national security investigations in his civilian and military careers. His additional qualifications to serve on the Board include financial forensic accounting training with the Federal Bureau of Investigation, completion of information operations, cyber security and inter-agency professional schools at the national level and corporate network security programs involving multi-national enterprises.

NORMAN R. SORENSEN . Mr. Sorensen has served as a director since December 2011. Mr. Sorensen is Chairman of the International Insurance Society. Previously, he was Chairman of the International Advisory Council of Principal Financial Group. He was Chairman of Principal International, serving from 2011 to 2012, and President and CEO of International Asset Management and Accumulation of the Principal Financial Group, serving from 2001 to 2011. He has served as Executive Vice President of both Principal Financial Group, Inc. and Principal Life Insurance Company since 2007, as well as held a number of other senior management positions since 1998. Mr. Sorensen served as a senior executive of American International Group, Inc. (insurance services) from 1989 to 1997. He is also Chairman of DE Master Blenders and a Senior Advisor to Deloitte, LLP. Mr. Sorensen’s qualifications to serve on the Board include his experience as an executive officer of an international financial services and asset management company, with responsibility over international operations and oversight over asset management and financial services functions and multiple divisional chief financial officers. He has also served as an executive officer of several publicly traded companies.

J. CHRISTOPHER TEETS . Mr. Teets has served as a director since May 2007. Mr. Teets has served as a Partner of Red Mountain Capital Partners LLC, an investment advisor, since February 2005. Mr. Teets also serves as a director of Air Transport Services Group, Inc. and Marlin Business Services Corp., both of which are public companies. Prior to joining Red Mountain Capital Partners LLC, Mr. Teets was an investment banker at Goldman Sachs & Co. Mr. Teets’ qualifications to serve on the Board include his broad experience in capital markets, providing strategic and financial advisory services and serving as a public company director.

H RONALD WEISSMAN . Mr. Weissman has served as a director since July 2009. Mr. Weissman has served as Chairman of the board of directors of the Federal Home Loan Bank’s Office of Finance since August 2009 and as Chairman of its Audit Committee from September 2009 through September 2012. From May 2002 through June 2009, he served as a Senior Partner with Ernst & Young LLP, where he was a member of the Financial Services Office and also served as the leader for the Office of the Chairman Accounts for the Americas International Financial Reporting Standards (IFRS) Network. Prior to joining Ernst & Young LLP in 2002, Mr. Weissman spent 32 years at Arthur Andersen LLP, where he served as an Andersen Worldwide SC partner from 1981 to 2002. He holds an MBA from the Columbia Graduate School of Business and a bachelor’s degree from Union College. Mr. Weissman is a Certified Public Accountant and holds an Advanced Professional Director Certification from the American College of Corporate Directors, a national public company director education and credentialing organization. Mr. Weissman’s qualifications to serve on the Board include his deep expertise in the complex accounting principles applicable to financial services companies.

WARREN S. WILCOX . Mr. Wilcox has served as a director since September 2007. He is currently the head of W2 Associates, LLC, which advises venture capital firms on investments related to financial services and information management. Prior to W2, Mr. Wilcox was Head of Advisory Services and Executive Vice President of Visa Inc., having served in that capacity since March 2008. Prior to Visa, Mr. Wilcox served as Vice Chairman, Marketing and Planning at WaMu Card Services, a division of Washington Mutual, Inc. He was previously Vice Chairman of Providian Financial Corporation (which WaMu acquired in 2005). Prior to joining Providian in 2002, Mr. Wilcox served as the Executive Vice President, Planning and Development at Fleet Credit Card Services from 1998 to 2001. Before Fleet, Mr. Wilcox spent 13 years at Household Credit Services, where he held a variety of senior management positions. Mr. Wilcox holds a Bachelor of Science degree from Illinois State University and a Master of Science degree in Management from Purdue University. Mr. Wilcox’s qualifications to serve on the Board include his three decades of executive experience in the consumer credit industry. He has served as a consumer marketing expert for a series of large financial institutions and has expertise in financial risk management and modeling.

Board Meetings

The Board met 15 times during 2012 and otherwise acted by unanimous written consent. Each director nominee who served on the Board in 2012 attended at least 75% of the total number of meetings held by the Board. Each director nominee who served on the Board in 2012 attended all committees on which such director served during the period he was a director in 2012, with the exception of Mr. Teets, who attended 4 of the 5 scheduled Audit Committee meetings.

MANAGEMENT DISCUSSION FROM LATEST 10K

Our Business and Operating Segments

We are a leading provider of debt management and recovery solutions for consumers and property owners across a broad range of assets. We purchase portfolios of defaulted consumer receivables and manage them by partnering with individuals as they repay their obligations and work toward financial recovery. In addition, through our subsidiary Propel Financial Services, LLC (“Propel”), we assist Texas property owners who are delinquent on their property taxes by paying these taxes on behalf of the property owners in exchange for payment agreements collateralized by tax liens on the property.

We conduct business through two operating segments: portfolio purchasing and recovery and tax lien transfer. The operating results from our tax lien transfer segment are immaterial to our total consolidated operating results. However, the total segment assets are significant as compared to our total consolidated assets. As a result, in accordance with authoritative guidance on segment reporting, our tax lien transfer segment is determined to be a reportable segment.

Portfolio purchasing and recovery

Our portfolio purchasing and recovery segment purchases receivables based on robust, account-level valuation methods and employs proprietary statistical and behavioral models across the full extent of our operations. These investments allow us to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or goals and align the accounts we purchase with our operational 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 credit and telecommunication providers in the United States and possess one of the industry’s best collection staff retention rates.

While seasonality does not have a material impact on our portfolio purchasing and recovery segment, collections are generally strongest in our first calendar quarter, slower in the second and third calendar quarters, and slowest in the fourth calendar quarter. Relatively higher collections in the first quarter could result in a lower cost-to-collect ratio compared to the other quarters, as our fixed costs would be constant and applied against a larger collection base. The seasonal impact on our business may be influenced by our purchasing levels, the types of portfolios we purchase, and our operating strategies.

Collection seasonality with respect to our portfolio purchasing and recovery segment can also impact our revenue recognition rate. Generally, revenue for each pool group declines steadily over time, whereas collections can fluctuate from quarter to quarter based on seasonality, as described above. In quarters with lower collections ( e.g., the fourth calendar quarter), revenue as a percentage of collections can be higher than in quarters with higher collections ( e.g., the first calendar quarter).

In addition, seasonality could have an impact on the relative level of quarterly earnings. In quarters with stronger collections, total costs are higher as a result of the additional efforts required to generate those collections. Since revenue for each pool group declines steadily over time, in quarters with stronger collections and higher costs ( e.g., the first calendar quarter), all else being equal, earnings could be lower than in quarters with slower collections and lower costs ( e.g., the fourth calendar quarter). Additionally, in quarters where a greater percentage of collections come from our legal and agency outsourcing channels, cost to collect will be higher than if there were more collections from our internal collection sites.

Tax lien transfer

Our tax lien transfer segment focuses on the property tax financing industry. Our principal activity is originating and servicing property tax lien transfers in the state of Texas. With the property owner’s consent, we pay the property owner’s delinquent property taxes directly to the taxing authority, which then transfers its tax lien to us. We then enter into a payment agreement with the property owner, creating an affordable payment plan. Revenue from our tax lien transfer segment for the period May 8, 2012 (date of acquisition) through December 31, 2012, comprised 2% of total consolidated revenues for the year ended December 31, 2012. Operating income from our tax lien transfer segment for the period May 8, 2012 (date of acquisition) through December 31, 2012, comprised 3% of our total consolidated operating income for the year ended December 31, 2012.

Discontinued Operations

On May 16, 2012, we completed the sale of substantially all of the assets and certain of the liabilities of our bankruptcy servicing subsidiary, Ascension Capital Group, Inc. (“Ascension”). Accordingly, Ascension’s results of operations are reflected as discontinued operations in our consolidated statements of comprehensive income.

Purchases and Collections

Purchases by Type

During the year ended December 31, 2012, we invested $562.3 million in portfolios, primarily of charged-off credit card, telecommunications, and bankruptcy portfolios, with face values aggregating $18.5 billion, for an average purchase price of 3.0% of face value. This is a $175.4 million increase, or 45.3%, in the amount invested, compared with the $386.9 million invested during the year ended December 31, 2011, to acquire portfolios with a face value aggregating $11.7 billion, for an average purchase price of 3.3% of face value. During the year ended December 31, 2010, we invested $362.0 million for portfolios with face values aggregating $10.9 billion, for an average purchase price of 3.3% of face value.

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

We have recently seen a meaningful increase in the prices for portfolios directly from credit issuers, especially for fresh portfolios. These are portfolios that are generally transacted within 6 months of the consumer’s account being charged-off by the financial institution. We believe this pricing increase is due to a reduction in supply of charged-off accounts and constant demand in the marketplace. Given shifts in underwriting standards by financial institutions resulting in the lower volumes of charged-off accounts, we expect that the pricing will remain at these elevated levels for a period of time. We believe that pricing will decline when buyers who have paid prices that are too high are unable to realize a profit. The current supply environment did not have a material impact on our portfolio purchases for 2012, as we fulfilled much of our planned 2012 portfolio acquisition in the first half of the year, when pricing was more favorable. However, our ability to purchase portfolios in 2013 at favorable prices may be adversely impacted. Should pricing trends continue in this manner, we expect to adjust our purchasing strategies away from fresh portfolios, and towards portfolios in alternative asset classes or aged portfolios, where pricing is not as elevated and where we believe that our operational model allows us to maintain acceptable profit margins.

Collections by Channel

During 2012, 2011 and 2010, we utilized numerous business channels for the collection of charged-off credit card receivables and other charged-off receivables.

Gross collections increased $186.9 million, or 24.6%, to $948.1 million during the year ended December 31, 2012, from $761.2 million during the year ended December 31, 2011, primarily due to increased portfolio purchases in the current and prior years.

Gross collections increased $156.6 million, or 25.9%, to $761.2 million during the year ended December 31, 2011, from $604.6 million during the year ended December 31, 2010, primarily due to increased portfolio purchases in the current and prior years.

Results of Operations

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 presentation of 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, derivative instruments, and amortization methods, 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.

Comparison of Results of Operations

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Revenues

Our revenues consist primarily of portfolio revenue. Portfolio revenue consists of accretion revenue and zero basis revenue. Accretion revenue represents revenue derived from pools (quarterly groupings of purchased receivable portfolios) with a cost basis that has not been fully amortized. Revenue from pools with a remaining unamortized cost basis is accrued based on each pool’s effective interest rate applied to each pool’s remaining unamortized cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances. The effective interest rate is the Internal Rate of Return (“IRR”) derived from the timing and amounts of actual cash received and anticipated future cash flow projections for each pool. All collections realized after the net book value of a portfolio has been fully recovered, or Zero Basis Portfolios, are recorded as revenue, or Zero Basis Revenue. We account for our investment in receivable portfolios utilizing the interest method in accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality. Interest income, net of related interest expense, represents net interest income on property tax payment agreements receivable.

Total revenues were $555.9 million for the year ended December 31, 2012, an increase of $107.2 million, or 23.9%, compared to total revenues of $448.7 million for the year ended December 31, 2011. Portfolio revenue was $545.4 million for the year ended December 31, 2012, an increase of $96.7 million, or 21.6%, compared to portfolio revenue of $448.7 million for the year ended December 31, 2011. The increase in portfolio revenue for the year ended December 31, 2012 was primarily the result of additional accretion revenue associated with a higher portfolio balance and a net portfolio allowance reversal during the year ended December 31, 2012. During the year ended December 31, 2012, we recorded a net portfolio allowance reversal of $4.2 million, compared to a net portfolio allowance provision of $10.8 million in the prior year.

Net interest income from our tax lien transfer segment was $10.5 million for the period from acquisition (May 8, 2012) through December 31, 2012.

Operating Expenses

Total operating expenses were $401.7 million for the year ended December 31, 2012, an increase of $73.1 million, or 22.3%, compared to total operating expenses of $328.6 million for the year ended December 31, 2011.

Operating expenses are explained in more detail as follows:

Salaries and employee benefits

Total salaries and employee benefits increased $23.3 million, or 29.9%, to $101.1 million during the year ended December 31, 2012, from $77.8 million during the year ended December 31, 2011. The increase was primarily the result of increased headcount to support our growth in our portfolio purchasing and recovery business and the acquisition of Propel Financial Services, LLC, BNC Retax, LLC, RioProp Ventures, LLC, and certain related affiliates (collectively, the “Propel Entities”). Salaries and employee benefits related to our internal legal channel were approximately $7.0 million and $2.6 million for the years ended December 31, 2012 and 2011, respectively.

Stock-based compensation increased $1.1 million, or 14.1%, to $8.8 million during the year ended December 31, 2012, from $7.7 million during the year ended December 31, 2011. This increase was primarily attributable to the higher fair value of equity awards granted in recent periods due to an increase in our stock price and an increase in the number of shares granted.

Cost of legal collections—Portfolio purchasing and recovery

The cost of legal collections increased $11.6 million, or 7.4%, to $168.7 million during the year ended December 31, 2012, compared to $157.1 million during the year ended December 31, 2011. These costs represent contingent fees paid to our nationwide network of attorneys and costs of litigation. The increase in the cost of legal collections was primarily the result of an increase of $7.3 million in contingent fees paid to our network of attorneys related to an increase of $70.9 million, or 18.8%, in gross collections through our legal channel, offset by a decrease in the average commission rate we pay our network of attorneys. The increase was also attributable to an increase of $3.8 million in upfront litigation costs expensed during the period. Gross legal collections amounted to $448.4 million during the year ended December 31, 2012, up from $377.5 million during the year ended December 31, 2011. During the year ended December 31, 2012, the cost of legal collections decreased as a percent of gross collections through this channel to 37.6%, from 41.6% during the year ended December 31, 2011, as a result of the decrease in commission rates mentioned above and an increase in our court cost recovery rate due to our improved ability to more accurately and consistently identify those consumers with the financial means to repay their obligations.

Other operating expenses

Other operating expenses increased $13.2 million, or 37.1%, to $48.9 million during the year ended December 31, 2012, from $35.7 million during the year ended December 31, 2011. The increase was primarily the result of an increase of $4.1 million in direct mail campaign expenses, other operating expenses incurred by Propel of $1.4 million, an increase of $1.4 million in telephone expenses, an increase of $1.3 million in media related expenses, an increase of $1.0 million in advertising expenses, and a net increase in various other operating expenses of $4.0 million, all to support our growth.

Collection agency commissions—Portfolio purchasing and recovery

During the year ended December 31, 2012, we incurred $15.3 million in commissions to third party collection agencies, or 26.6% of the related gross collections of $57.6 million, compared to $14.2 million in commissions, or 29.7% of the related gross collections of $47.7 million during the year ended December 31, 2011. During the quarter ended June 30, 2012, we acquired a large portfolio from a competitor where most of the customer’s accounts had been placed with third party collection agencies. We have slowly transitioned these accounts from collection agencies to our internal operating sites. Until such transition is complete, there may be an increase in agency collections and related commissions. During the third and fourth quarter of 2012, we experienced an increase in such collections and commissions. During the same period, the commission rate decreased as compared to the prior year as a result of the lower commission rates paid to the agencies where these accounts had been placed.

General and administrative expenses

General and administrative expenses increased $22.0 million, or 55.4%, to $61.8 million during the year ended December 31, 2012, from $39.8 million during the year ended December 31, 2011. The increase was primarily the result of an increase of $8.9 million in litigation and corporate legal expenses associated with governmental investigations or inquiries and litigation, general and administrative expenses incurred by Propel of $1.3 million, an increase of $1.1 million in building rent, an increase of $1.1 million in consulting fees, an increase of $0.7 million in system maintenance costs, and a net increase in other general and administrative expenses of $8.9 million, primarily to support our growth.

Depreciation and amortization

Depreciation and amortization expense increased $1.7 million, or 43.1%, to $5.8 million during the year ended December 31, 2012, from $4.1 million during the year ended December 31, 2011. The increase was primarily due to increased depreciation expenses resulting from our acquisition of fixed assets in the current and prior years.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Our Business and Operating Segments

We are a leading provider of debt management and recovery solutions for consumers and property owners across a broad range of assets. We purchase portfolios of defaulted consumer receivables and manage them by partnering with individuals as they repay their obligations and work toward financial recovery. In addition, through our subsidiary Propel Financial Services, LLC (“Propel”), we assist Texas property owners who are delinquent on their property taxes by paying these taxes on behalf of the property owners in exchange for payment agreements collateralized by tax liens on the property.

We conduct business through two operating segments: portfolio purchasing and recovery and tax lien transfer. The operating results from our tax lien transfer segment are immaterial to our total consolidated operating results. However, the total segment assets are significant as compared to our total consolidated assets. As a result, in accordance with authoritative guidance on segment reporting, our tax lien transfer segment is determined to be a reportable segment.

Portfolio purchasing and recovery

Our portfolio purchasing and recovery segment purchases receivables based on robust, account-level valuation methods and employs a suite of proprietary statistical and behavioral models across the full extent of our operations. These investments allow us to value portfolios accurately (and limit the risk of overpaying), avoid buying portfolios that are incompatible with our methods or goals and precisely align the accounts we purchase with our operational 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 credit and telecommunication providers in the United States, and possess one of the industry’s best collection staff retention rates.

While seasonality does not have a material impact on our portfolio purchasing and recovery segment, collections are generally strongest in our first calendar quarter, slower in the second and third calendar quarters, and slowest in the fourth calendar quarter. Relatively higher collections in the first quarter could result in a lower cost-to-collect ratio compared to the other quarters, as our fixed costs would be constant and applied against a larger collection base. The seasonal impact on our business may be influenced by our purchasing levels, the types of portfolios we purchase, and our operating strategies.

Collection seasonality with respect to our portfolio purchasing and recovery segment can also impact our revenue recognition rate. Generally, revenue for each pool group declines steadily over time, whereas collections can fluctuate from quarter to quarter based on seasonality, as described above. In quarters with lower collections ( e.g., the fourth calendar quarter), revenue as a percentage of collections can be higher than in quarters with higher collections ( e.g., the first calendar quarter).

In addition, seasonality could have an impact on the relative level of quarterly earnings. In quarters with stronger collections, total costs are higher, as a result of the additional efforts required to generate those collections. Since revenue for each pool group declines steadily over time, in quarters with stronger collections and higher costs ( e.g., the first calendar quarter), all else being equal, earnings could be lower than in quarters with slower collections and lower costs ( e.g., the fourth calendar quarter). Additionally, in quarters where a greater percentage of collections come from our legal and agency outsourcing channels, cost to collect will be higher than if there were more collections from our internal collection sites.

Tax lien transfer

Our tax lien transfer segment focuses on the property tax financing industry. Our principal activity is originating and servicing property tax lien transfers in the state of Texas. With the property owner’s consent, we pay the property owner’s delinquent property taxes directly to the taxing authority, which then transfers its tax lien to us. We then enter into a payment agreement with the property owner creating an affordable payment plan. Revenue from our tax lien transfer segment for the period May 8, 2012 (date of acquisition) through September 30, 2012, comprised 3% and 2% of total consolidated revenues for the three and nine months ended September 30, 2012, respectively. Operating income from our tax lien transfer segment for the period May 8, 2012 (date of acquisition) through September 30, 2012, comprised 5% and 2% of our total consolidated operating income for the three and nine months ended September 30, 2012, respectively.

Discontinued Operations

On May 16, 2012, we completed the sale of substantially all of the assets and certain of the liabilities of our bankruptcy servicing subsidiary Ascension Capital Group, Inc. (“Ascension”). Accordingly, Ascension’s results of operations are reflected as discontinued operations in our condensed consolidated statements of comprehensive income.

Portfolio Purchasing and Recovery Market Overview

While there has been improvement in macroeconomic indicators during the last three months, a broad economic recovery has yet to fully materialize for the U.S. consumer. Slow job growth, uncertainty over state and federal taxes, and limited credit availability continue to challenge U.S. consumers, as demonstrated by weak consumer spending and volatile but rising consumer confidence levels.

Despite this macroeconomic uncertainty through the third quarter of 2012, most of our internal collection metrics were consistent with, or better than, what we observed during the same periods in 2010 and 2011. To illustrate, payer rates, adjusted for changes in the mix of settlements-in-full versus payment plans, remained consistent. As compared to prior years, more of our consumers continue to opt to settle their debt obligations through payment plans as opposed to one-time settlements. Settlements made through payment plans impact our recoveries in two ways. First, the delay in cash flows from payments received over extended time periods may result in a provision for portfolio allowance. When a long-term payment stream (as compared to a one-time payment of the same amount) is discounted using a pool group’s internal rate of return, or IRR, the net present value is lower. In other words, despite the absolute value of total cash received being identical in both scenarios, accounting for the timing of cash flows in a payment plan yields a lower net present value, which, in turn, can result in a provision for portfolio allowance. Despite this, as a result of our cautious approach to setting initial pool groups’ internal rates of return, we have experienced no provisions for portfolio allowances for the 2009 – 2012 pool groups. Second, payment plans inherently contain the possibility of consumers failing to complete all scheduled payments, which we term a “broken payer.”

The rate at which consumers are honoring their obligations and completing their payment plans has continued to increase over the last nine months. We believe this is the result of two factors: our commitment to partner effectively with consumers during their recovery process and the strength of our analytic platform, which allows us to make accurate and timely decisions about how best to maximize our portfolio returns. Nevertheless, payment plans may still produce broken payers that fail to fulfill all scheduled payments. When this happens, we are often successful in getting the consumer back on plan, but this is not always the case, and in those instances where we are unable to do so, we may experience a shortfall in recoveries as compared to our initial forecasts. Please refer to “Management’s Discussion and Analysis – Revenue” below for a more detailed explanation of the provision for portfolio allowances.

We have recently seen a meaningful increase in the prices for portfolios directly from credit issuers, especially for fresh portfolios. These are portfolios that are generally transacted within 6 months of the consumer’s account being charged-off by the financial institution. We believe this pricing increase is due to a reduction in supply of charged-off accounts and constant demand in the marketplace. Given shifts in underwriting standards by financial institutions resulting in the lower volumes of charged-off accounts, we expect that the pricing will remain at these elevated levels for a period of time. We believe that this will reverse itself when buyers of these portfolios are unable to realize a profit after paying elevated prices. We do not expect the current supply environment to have a material impact on our portfolio purchases for 2012, as we fulfilled much of our planned 2012 portfolio acquisition in the first half of the year, when pricing was more favorable. However, our ability to purchase additional portfolios in 2013 at favorable prices may be adversely impacted unless this trend is reversed in the near term. Should pricing trends continue in this manner, we expect to adjust our purchasing strategies away from fresh portfolios, and towards portfolios in alternative asset classes or with higher aging, where our operational model allows us to continue to be profitable.

Purchases and Collections

Purchases by Type

During the three months ended September 30, 2012, we invested $47.3 million in receivable portfolios, primarily for charged-off credit card portfolios with face values aggregating $1.1 billion, for an average purchase price of 4.5% of the face value of the purchased receivables. This is an $18.4 million decrease, or 28.0%, in the amount invested, compared to the $65.7 million invested during the three months ended September 30, 2011, to acquire receivable portfolios, primarily consisting of charged-off credit card portfolios, with a face value aggregating $2.0 billion for an average purchase price of 3.2% of the face value of the purchased receivables.

During the nine months ended September 30, 2012, we invested $408.8 million in receivable portfolios, primarily for charged-off credit card portfolios with face values aggregating $10.0 billion, for an average purchase price of 4.1% of the face value of the purchased receivables. This is a $158.7 million increase, or 63.5%, in the amount invested, compared to the $250.1 million invested during the nine months ended September 30, 2011, to acquire receivable portfolios, primarily consisting of charged-off credit card portfolios, with a face value aggregating $7.9 billion for an average purchase price of 3.2% of the face value of the purchased receivables. Included in our portfolio purchases for the nine months ended September 30, 2012, is a single, one-time purchase of more than $100.0 million.

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

Collections by Channel

Gross collections increased $56.9 million, or 30.1%, to $246.0 million during the three months ended September 30, 2012, from $189.1 million during the three months ended September 30, 2011. Gross collections increased $142.4 million, or 24.8%, to $717.6 million during the nine months ended September 30, 2012, from $575.2 million during the nine months ended September 30, 2011.

Results of Operations

Comparison of Results of Operations

Revenues

Our revenues consist primarily of portfolio revenue and interest income net of related interest expense from property tax payment agreements receivable.

Portfolio revenue consists of accretion revenue and zero basis revenue. Accretion revenue represents revenue derived from pools (quarterly groupings of purchased receivable portfolios) with a cost basis that has not been fully amortized. Revenue from pools with a remaining unamortized cost basis is accrued based on each pool’s effective interest rate applied to each pool’s remaining unamortized cost basis. The cost basis of each pool is increased by revenue earned and decreased by gross collections and portfolio allowances. The effective interest rate is the IRR derived from the timing and amounts of actual cash received and anticipated future cash flow projections for each pool. All collections realized after the net book value of a portfolio has been fully recovered, or Zero Basis Portfolios, are recorded as revenue, or Zero Basis Revenue. We account for our investment in receivable portfolios utilizing the interest method in accordance with the authoritative guidance for loans and debt securities acquired with deteriorated credit quality. Interest income, net of related interest expense represents net interest income on property tax payment agreements receivable.

Total revenues were $144.8 million during the three months ended September 30, 2012, an increase of $29.0 million, or 25.0%, compared to total revenues of $115.8 million during the three months ended September 30, 2011. Total revenues were $412.3 million during the nine months ended September 30, 2012, an increase of $80.0 million, or 24.1%, compared to total revenues of $332.3 million during the nine months ended September 30, 2011.

Revenue from our portfolio purchasing and recovery segment was $140.7 million during the three months ended September 30, 2012, an increase of $24.9 million, or 21.4%, compared to revenue of $115.8 million during the three months ended September 30, 2011. Portfolio revenue was $405.8 million during the nine months ended September 30, 2012, an increase of $73.5 million, or 22.1%, compared to portfolio revenue of $332.3 million during the nine months ended September 30, 2011. The increase in portfolio revenue during the three and nine months ended September 30, 2012 was primarily the result of additional accretion revenue associated with a higher portfolio balance during the three and nine months ended September 30, 2012 compared to the same periods of the prior year. During the three months ended September 30, 2012, we recorded a net portfolio allowance reversal of $0.7 million, compared to a net portfolio allowance provision of $1.6 million during the three months ended September 30, 2011. During the nine months ended September 30, 2012, we recorded a net portfolio allowance reversal of $1.5 million, compared to a net portfolio allowance provision of $8.1 million during the nine months ended September 30, 2011.

Net interest income from our tax lien transfer segment was $4.1 million and $6.4 million for the three months ended September 30, 2012 and the period from acquisition (May 8, 2012) through September 30, 2012, respectively.

Operating Expenses

Total operating expenses were $103.6 million during the three months ended September 30, 2012, an increase of $18.4 million, or 21.6%, compared to total operating expenses of $85.2 million during the three months ended September 30, 2011.

Total operating expenses were $297.8 million during the nine months ended September 30, 2012, an increase of $52.9 million, or 21.6%, compared to total operating expenses of $244.9 million during the nine months ended September 30, 2011.

Operating expenses are explained in more detail as follows:

Salaries and employee benefits

Salaries and employee benefits increased $5.3 million, or 26.4%, to $25.4 million during the three months ended September 30, 2012, from $20.1 million during the three months ended September 30, 2011. The increase was primarily the result of increases in headcount and related compensation expense to support the growth in our portfolio purchasing and recovery business and the acquisition of Propel Financial Services, LLC, BNC Retax, LLC, RioProp Ventures, LLC, and certain related affiliates (collectively, the “Propel Entities”). The increase was offset by a decrease in stock-based compensation expense of $0.5 million primarily due to the impact of the acceleration of certain equity awards during the three months ended September 30, 2011. Salaries and employee benefits related to our internal legal channel were approximately $1.8 million and $0.7 million for the three months ended September 30, 2012 and 2011, respectively.

Salaries and employee benefits, increased $15.4 million, or 26.9%, to $72.9 million during the nine months ended September 30, 2012, from $57.5 million during the nine months ended September 30, 2011. The increase was primarily the result of increases in headcount and related compensation expense to support our growth, and an increase of $0.7 million in stock-based compensation expense primarily due to higher fair value of equity awards granted in recent periods. Salaries and employee benefits related to our internal legal channel were approximately $4.7 million and $1.5 million for the nine months ended September 30, 2012 and 2011, respectively.

Cost of legal collections – Portfolio purchasing and recovery

The cost of legal collections increased $3.3 million, or 8.4%, to $43.5 million during the three months ended September 30, 2012, compared to $40.2 million during the three months ended September 30, 2011. These costs represent contingent fees paid to our nationwide network of attorneys and costs of litigation. The increase in the cost of legal collections was partially the result of a net increase of $1.4 million in contingent fees paid to our network of attorneys related to an increase of $16.4 million, or 17.3%, in gross collections, offset by a reduction in commission rates. Gross legal collections amounted to $111.3 million during the three months ended September 30, 2012, up from $94.9 million collected during the three months ended September 30, 2011. The increase was also attributable to an increase of $1.7 million in upfront litigation costs expensed during the period. The cost of legal collections decreased as a percent of gross collections through this channel to 39.1% during the three months ended September 30, 2012, from 42.3% during the three months ended September 30, 2011, primarily due to an improvement in our court cost recovery rate and a decrease in the commission rate we pay our contracted attorneys.

The cost of legal collections increased $5.8 million, or 5.0%, to $123.2 million during the nine months ended September 30, 2012, compared to $117.4 million during the nine months ended September 30, 2011. The increase in the cost of legal collections was primarily the result of an increase of $6.0 million in contingent fees paid to our network of attorneys related to an increase of $54.3 million, or 19.3%, in gross collections, offset by a reduction in commission rates. Gross legal collections amounted to $335.8 million during the nine months ended September 30, 2012, up from $281.5 million collected during the nine months ended September 30, 2011. The cost of legal collections decreased as a percent of gross collections through this channel to 36.7% during the nine months ended September 30, 2012, from 41.7% during the nine months ended September 30, 2011, primarily due to an improvement in our court cost recovery rate and a decrease in the commission rate we pay our contracted attorneys.

Other operating expenses

Other operating expenses increased $4.9 million, or 49.7%, to $14.8 million during the three months ended September 30, 2012, from $9.9 million during the three months ended September 30, 2011. The increase was primarily the result of an increase of $2.6 million in direct mail campaign expenses, an increase of $0.5 million in telephone expenses, an increase of $0.5 million in media-related expenses, and a net increase in various other operating expenses of $1.3 million, primarily to support our growth.

Other operating expenses increased $11.9 million, or 44.2%, to $38.8 million during the nine months ended September 30, 2012, from $26.9 million during the nine months ended September 30, 2011. The increase was primarily the result of an increase of $5.3 million in direct mail campaign expenses, an increase of $1.5 million in media-related expenses, an increase of $0.9 million in telephone expenses, an increase of $0.7 million in recruiting expenses, an increase of $0.7 million in advertising expenses related to the Propel Entities, and a net increase in various other operating expenses of $2.8 million, primarily to support our growth.

CONF CALL

Adam Sragovicz - Director of Finance and Treasury

Thank you, Latoya. Good afternoon, and welcome to Encore Capital Group's fourth quarter and full year 2012 earnings call.

With me on the call today are Brandon Black, our President and Chief Executive Officer; and Paul Grinberg, our Executive Vice President and Chief Financial Officer. Brandon and Paul will make prepared remarks, and then we will be happy to take your questions.

Before we begin, we have a few housekeeping items. Unless otherwise noted, all comparisons made on this conference call will be between the full year of 2012 and the full year of 2011.

Throughout the call, we will use forward-looking statements including predictions, expectations, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment, these statements are also subject to risks and uncertainties that may cause actual results to differ materially from statements being made today.

As a result, we caution you against placing undue reliance on these forward-looking statements, which speak only as of the date they are made. We will also use rounding and abbreviations in our conference call for the sake of brevity. For more detailed numbers and explanations, please refer to our Form 10-K that was filed today with the SEC.

We will also be referencing both GAAP and non-GAAP financial results. We believe certain non-GAAP financial measures provide useful information about our business. However, the presentation of this additional information should not be considered an alternative to, or more meaningful than, our results prepared in accordance with GAAP.

Management utilizes adjusted EBITDA, which is similar to a financial measure contained in covenants used in our credit agreement in the evaluation of our operations and believes this measure is a useful indicator of our ability to generate cash collections in excess of operating expenses through the liquidation of our receivable portfolios.

We included information concerning adjusted operating expenses, excluding stock-based compensation expense, in order to facilitate a comparison of approximate cash costs to cash collections for the debt purchasing business in the periods presented. Once again, please be sure to see our Forms 10-K, 10-Q and other SEC filings, including a press release issued as an exhibit to our current report on Form 8-K filed today, which includes a reconciliation of non-GAAP financial measures for a more complete discussion of these factors and other risks.

As a reminder, this conference call will also be made available for replay on the Investors section of our website, and we also plan to post the prepared remarks following the conclusion of this call.

With that, let me turn the call over to Brandon Black, our President and Chief Executive Officer.
J. Brandon Black - Chief Executive Officer, President and Director

Thank you, Adam, and good afternoon, everyone. I appreciate you joining us for a discussion of Encore's fourth quarter and full year 2012 results. I'm pleased to report that 2012 was an exceptional year for Encore. We delivered strong financial results while making investments that we believe will strengthen our core business, provide long-term strategic advantages and position our company to succeed in an increasingly complex regulatory environment. Our strategies and deliberate and disciplined approach to portfolio underwriting and management again drove record earnings, record collections and record operating cash flow for both the fourth quarter and the full year.

Of course, none of this would be possible without our more than 2,800 employees. I appreciate their daily commitment to our company and their willingness to help our consumers resolve their past financial obligations.

To put our performance in a context, I'd like to take a step back and look at our progress over the past 3 years. In 2009, we recorded collections of $490 million. This year, we collected $950 million, nearly double the amount from just 3 years ago. We delivered these strong results, thanks to the deep insights we've developed into consumer behavior over the past decade. We are seeing similar results in our cost-to-collect. In 2009, our cost-to-collect was 47.6%. In 2012, our cost-to-collect was 40.4%, a decrease of 720 basis points. This meaningful reduction in cost-to-collect translates into a savings of almost $70 million or $1.60 in earnings for 2012 alone. These savings have been achieved through various operational strategies, including stopping collection efforts on accounts where we believe the consumer has unlimited ability to pay. The lower cost-to-collect has allowed us to develop our internal legal initiative, expand our operating site in Costa Rica and make the investments required to manage the changing regulatory and legislative environment.

All of this adds up to earnings per fully diluted share from continuing operations of $3.04 in 2012. That's an increase of 125% over our 2009 earnings of $1.37. Clearly, our team has been executing the right strategies for the current environment and have built our success year after year.

In addition to our outstanding front-line employees, I believe our performance also speaks to the strength and depth of our management team. We have hired leaders from world-class organizations and they have brought in best-in-class practices to all areas of Encore.

Our full year purchases of $562 million were a 45% increase over 2011 and above the $500 million target that we discussed at our Investor Day. Concluded in the year's acquisition volumes were 2 large purchases from competitors, including 1 this quarter. Each of these purchases was a result of industry participants winding down their businesses, confirming our thesis of industry consolidation.

For the quarter, we completed a total of 41 individual transactions from 11 unique sellers for a total of $154 million. We took advantage of a number of privately negotiated deals in both our core asset classes as well as the bankruptcy space, where we completed a large acquisition of a performing portfolio. Across the industry, pricing continued to be elevated and we saw that in the fourth quarter. That said, Encore is in the enviable position of having built the company by acquiring portfolios across the delinquency and product spectrum. With this depth of experience, we understand what prices are profitable and where to draw the line. In contrast, many of our competitors have a limited range of purchasing targets or lack the analytical sophistication to underwrite profitable portfolios. We will remain selective during this cyclical period of high, and in some cases, irrational pricing.

Predicting the speed and scope of the industry consolidation is, of course, impossible. However, we are prepared, both operationally and financially, to take advantage of strategic opportunities to increase shareholder value as they emerge. Given the unpredictability of consolidation, our purchasing volumes may fluctuate from quarter-to-quarter. Our long-term goal to deploy enough capital across all asset classes, including tax lien transfers, to generate 15% to 20% earnings growth.

As a testament to the advances in operations and analytics that we highlighted earlier, we are pleased to report some additional details on the large transaction that we completed in the second quarter. We have already collected 40% of the purchase price within the first 7 months of ownership, which is in line with our expectations. Our performance validates our conservative approach to valuation and our ability to manage extremely complex transactions.

One of the other noteworthy accomplishments of 2012 was the acquisition of Propel. I'm pleased to report that the integration of the business is now complete. As part of the integration, we began deploying our legislative strategy and have enhanced the tax lien transfer origination process. Our focus now shifts to leveraging our combined strengths to drive the business forward and meaningfully increase originations in the early part of this year when the annual delinquent tax rolls are released. We believe that this is a real opportunity to help families and business owners, who need a flexible and affordable option to meet their property tax obligations.

As proud as we are with our financial accomplishments, we are equally proud of the work we've done, to strengthen the industry and cultivate an innovative and engaging corporate culture. In keeping with our commitment in treating consumers fairly, as detailed in our Consumer Bill of Rights, Encore's Senior Vice President of Business Development, Amy Anuk, was instrumental in leading a cross-industry effort to create a certification program for members of the Debt Buyers Association. This certification will help ensure that industry participants operate with the highest ethical standards. Similarly, Ashish Masih, our Senior Vice President of Legal Collections, has taken a position on the board of the Debt Buyers Association, giving Encore yet another avenue for driving high standards in ethical behavior across the industry.

Another important undertaking is Encore's consumer intelligence center of excellence, the Consumer Credit Research Institute, or CCRI. It is continuing to address important questions related to financial distress, credit behavior and consumer psychology. As many households continue to struggle, efforts to provide relief through policy and educational channels are hampered by a lack of information about subprime consumer behavior. The CCRI was designed to help address this, and we recently completed a first-of-its-kind study that compares prime and subprime consumers. This work was done in collaboration with scientists from UCLA.

Our study found that subprime consumers, relative to prime consumers, are more likely to struggle with numeric and financial literacy concepts, misjudge their relative credit worthiness and place greater emphasis on short-term planning. These cognitive and behavioral differences are important and provide a unique means to which we can enhance our consumer interaction model and promote financial recovery. Additional information about this study and other work being conducted at the CCRI can be found at www.encoreccri.org.

In December, we also announced an exclusive partnership with payoff.com, which uses goal-setting, rewards and other incentives to help consumers change their behaviors. This relationship will add to our understanding of financially-stressed consumers and enable us to better align and help with their recovery. Taken together, we believe that our efforts to drive higher standards throughout the industry and develop new insights into financially-stressed consumers position us well to engage and make a difference in the industry, regulatory and policy conversations.

We are also excited to be recognized once again, along with companies such as Google and American Express, as one of India's 50 Best Places to Work by the Great Place to Work Institute. We are also named as one of Fortune's 100 Fastest-Growing Companies for the second year in a row, as well as one of San Diego's Healthiest Companies. Propel received the distinction of being one of the Top Workplaces by the San Antonio Express-News. We appreciate greatly that the importance we place on human capital strategy has been recognized by the marketplace, and more importantly, by our employees. Encore's annual retention rate for our call center employees across the globe is greater than 70%, which allows us to deliver a higher level of service to our consumers and ensure that our Consumer Bill of Rights remains at the forefront of every customer interaction.

Finally, as you may be aware, the Federal Trade Commission recently issued a comprehensive study of our industry. We are pleased that the report highlighted the positive role that our industry plays in helping ensure that consumers have access to affordable credit.

With that, I will turn it over to Paul, who will discuss our financial results in detail.
Paul J. Grinberg - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Thank you, Brandon. As Brandon discussed, we had a very strong fourth quarter and year in 2012. Collections in the fourth quarter reached a record high for our fourth quarter and continued investments in our operating platform give us confidence in our ability to expand upon the operating leverage created over the past few years.

We generated earnings from continuing operations of $0.79 per fully diluted share during the quarter, an increase of 17% over the fourth quarter of 2011. For 2012, we generated earnings from continuing operations of $3.04 per fully diluted share, an increase of 29% over 2011. Adjusted EBITDA, which represents the cash we generate that is available for future purchases, capital expenditures, debt service and taxes, was $135 million in the fourth quarter, an increase of 28% compared to the fourth quarter of 2011. Our overall cost-to-collect for the year decreased 180 basis points to 40.4%, down significantly from 42.2% in 2011. We achieved these results in 2012 even as we made investments to expand our internal legal channel and ramp up our operations center in Costa Rica.

While cost-to-collect is an important metric, there are other related drivers of our success. One example is generating the greatest net return per dollar invested. We accomplished that by generating more gross dollars collected per investment dollar at what we believe to be the lowest cost per dollar collected in the industry. Over time, we expect our cost-to-collect to continually improve, but also expect it to fluctuate from quarter-to-quarter based on seasonality, the cost of investments in new operating initiatives and the ongoing management of the changing regulatory and legislative environment.

Due primarily to the large purchasing volume and the strong performance of portfolios purchased over the last couple of years, our estimated remaining collections, or ERC, at December 31 increased by about $390 million over 2011 to approximately $2 billion. As we've discussed previously, we believe that our ERC, which reflects the estimated remaining value of our existing portfolios, is conservatively stated because of our cautious approach to setting initial curves and our practice of only increasing future expectations after a sustained period of overperformance.

Fourth quarter collections were very strong at $230 million, up 24% from the fourth quarter of 2011. Our call centers contributed 45% of total collections, or $104 million, compared to $80 million. Direct cost per dollar collected in our call centers fell slightly to 7.2% in the fourth quarter from 7.3%.

Legal channel collections grew to $113 million in the fourth quarter of 2012, compared to $96 million and accounted for 49% of total collections. Cost-to-collect in the legal channel was 40.4%, down from 41.4%.

I'd like to reiterate that our long-stated preference to work with our consumers to negotiate a mutually accessible payment plan tailored to their personal financial situation. These plans almost always involve substantial discounts from what is owed. We not only believe that this is the right thing to do for our consumers, but the right thing to do for our business. When we do litigate, we pledge to be fair and reasonable throughout the process. Unfortunately, despite sincere efforts to reach consumers in a variety of ways, too many refuse engagement with us to resolve their financial obligations. Accordingly and as a last resort, we are often left only with the option of using legal means to recover debts that are owed.

Finally, 6% of collections came from third-party collection agencies. In general, we expect collections from this channel to continue to decline as we shift more of our work to our internal call centers at a lower overall cost-to-collect. As a result of the large portfolio purchase we completed in the second quarter, we saw a temporary increase in third-party collections as many of those assets were already placed with third-party agencies at the time of acquisition. Because of our lower cost-to-collect and because we are able to ensure a consistently positive consumer experience, we will continue to shift much of this work to our internal call centers.

Consistent with our stated practice and in keeping with our Consumer Bill of Rights, we had no portfolio sales in the quarter.

Moving on, revenue from receivable portfolios was $140 million, an increase of 20% over the $116 million in the fourth quarter of 2011. As a percentage of collections and excluding the effects of allowances, our revenue recognition rate was 59.4%, compared to 64.1% in the fourth quarter of 2011. Our revenue recognition rate is attributable to our cautious approach when setting initial IRRs and our policy of increasing them gradually after periods of overperformance. For example, as a result of sustained overperformance, we have slowly increased the multiples on the 2009, '10 and '11 vintages to 2.9, 2.8 and 2.4x, respectively, up from their initial levels of 2.4, 2.2 and 2x, respectively. For the quarter, we had $2.7 million in net allowance reversals compared to $2.7 million of allowance charges in the fourth quarter of 2011. Looking at the breakdown by year, we had $914,000 of allowance reversals in the 2005 vintage, $252,000 in the 2007 vintage, $2 million in the 2008 vintage and $759,000 in ZBA allowance reversals. These were partially offset by allowances of $1.3 million in the 2006 vintage.

We had no allowance charges for the 2009, '10, '11 or '12 vintages, as has been the case since we acquired these portfolios.

As many of you know, we account for the business on a quarterly pool basis rather than overall. When pools underperform, we take allowance charges, which are reflected as an immediate reduction in revenue. We measure underperformance against the current yield that is assigned to a pool, not its original expectation. This pool-by-pool accounting treatment leads inevitably to noncash allowance charges in certain periods, even when we are overperforming a pool's initial expectations. In contrast, when pools overperform, that overperformance is not reflected immediately. Once we have evidence of sustained overperformance in the pool, we will increase that pool's yield.

Unlike allowance charges, which are realized immediately, this increased yield will be reflected as increased revenue during the current and the future quarters. Consistent with this practice and as a result of continued overperformance, primarily in the 2009, '10 and '11 vintages, we increased yields in those pool groups this quarter.

Shifting now to expenses. Our total operating expenses for the fourth quarter, excluding Propel, were $102 million, up from $84 million in the fourth quarter of 2011. Included in operating expenses for the fourth quarter of 2012 were stock-based compensation charges of approximately $2.1 million compared to $1.7 million in the fourth quarter of 2011.

One of our key financing milestones at Encore in 2012 was the issuance of $115 million in the convertible debt for a 5-year term with a 3% coupon. This additional capital will allow us to take advantage of accelerating industry consolidation and keep our competitive cost of capital edge. However, it is important to mention that while the accounting for our business is complicated, the accounting for convertible bonds can be even more complicated. We have a 3% coupon on our convertible debt, which reflects the cash costs of this debt. However, in our financial statements, we will show an interest rate of 6% or the amount that is estimated to be our cost of straight debt. The noncash difference is not insignificant, about $3.5 million or $0.09 per share per year. This difference is a noncash charge and so, going forward, to give a more accurate picture of the cash position of our business, we will add the presentation of cash EPS to back out these noncash charges. Earlier today, we posted a presentation to the Investors section of our website to more fully explain some of the accounting nuances of our convertible bonds.

Including the convertible debt, we ended the quarter with $706 million in total debt. Our leverage ratio was 1.25x in the fourth quarter, down from a high of 1.46x in the second quarter. At the end of the fourth quarter, we had approximately $190 million of available borrowing capacity.

Before we open up the line for your questions, Brandon has a few final remarks.
J. Brandon Black - Chief Executive Officer, President and Director

Looking back at 2012, it's clear that our team has a lot to be proud of. We posted strong financial and operational results, made key investments designed to drive performance in the coming years and funded initiatives that should help our consumers get back on the path towards financial freedom. Our strength in analytics and disciplined approach to deploying capital continue to be competitive advantages for the company, advantages that are increasingly important during a time of industry consolidation and elevated pricing.

Finally, our strong capital foundation and creative, responsible approach to problem solving positions us well for 2013 and beyond. We would like to close by once again thanking Encore's employees worldwide for their continued commitment to our success. I'm gratified by the work that we do to help consumers resolve their outstanding debts flexibly and affordably. With that, we'll open up the call to questions.

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