Prepared remarks
Good afternoon, and welcome to Jefferson Capital's second quarter of 2026 conference call. With us today are David Burton, Founder and Chief Executive Officer; and Christo Realov, Chief Financial Officer. As a reminder, this conference call is being recorded. This call may contain forward-looking statements regarding the company's plans, initiatives and strategies and the anticipated financial performance of the company, including, but not limited to, sales and profitability, anticipated benefits of the debt purchasing market in Mexico, expectations for the market and macroeconomic factors and target performance metrics. Such statements are based upon management's current expectations, projections, estimates and assumptions. Words such as expect, believe, anticipate, think, outlook, hope and variations of such words and similar expressions identify such forward-looking statements. Forward-looking statements involve known and unknown risks and uncertainties that may cause future results to differ materially from those suggested by the forward-looking statements. Such risks and uncertainties are further disclosed in the company's most recent filings with the Securities and Exchange Commission. Shareholders, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements made herein and are cautioned not to place undue reliance on such forward-looking statements. The company does not undertake to update the forward-looking statements, except as required by law. Also during this conference call, the company will be presenting certain non-GAAP financial measures. Reconciliations of the company's historical non-GAAP financial measures to their most directly comparable GAAP financial measures appear in today's earnings press release. I will now turn the call over to David Burton.
Thank you, operator, and thanks, everyone, for joining our investor call. Let's dive into our second quarter financial performance highlights. We generated another quarter of excellent results for shareholders. The company delivered strong collections growth with collections up 18% year-over-year to $301 million, and we continue to perform well versus our underwriting expectations. The market backdrop remains attractive, and our deployments for the quarter were $152 million, up 21% versus the prior year period. Our estimated remaining collections grew 18% to $3.4 billion, driven by our continued deployment performance and attractive anticipated returns. We delivered a sector-leading cash efficiency ratio of 72.2%, driven in part by strong collections from the Bluestem and Conn's portfolio purchases. The company also generated strong cash flow for the quarter, which improved our leverage ratio to 1.71x, a level which positions us well for future growth and creates significant strategic optionality. Adjusted EPS for the quarter was $0.77. Next, I'd like to offer a brief market update and cover some of the macroeconomic indicators to provide better context for why we remain confident in the investment opportunity for our business. The fundamental backdrop remains unchanged. Near record consumer credit balances and elevated levels of charge-offs and delinquencies across all asset classes create a long runway for robust portfolio supply. The environment is also underpinned by a low level of unemployment, which supports the expected liquidation rates on our existing portfolio and gives us confidence in underwriting new purchases. I want to focus more closely on auto finance, an asset class which presents a substantial opportunity for our business. This is a large and growing segment of consumer credit, but also one which is highly fragmented and experiencing significant headwinds. Auto finance receivables have grown steadily to a new record of $1.69 trillion. Higher loan amounts for both new and used vehicles have been driven by higher vehicle prices, but also by the need for borrowers to roll over past negative equity balances with nearly one-third of used vehicle trade-ins carrying negative equity. As a result, loan payments, also driven by elevated interest rates, have grown significantly and have pressured household budgets. The average monthly new vehicle loan payment is currently $773, up 40% compared to pre-pandemic. And the average used vehicle monthly loan payment has reached $531, up 35% post-pandemic. In addition, 72-month or longer loans account for nearly one-third of all financed new vehicle sales. For smaller auto finance originators or dealership networks, deteriorating credit quality is frequently coupled with financing challenges where a portfolio sale could become the value-maximizing option for the business going forward. All of these trends set the stage for increasing portfolio supply for an asset class where significant complexity limits the number of interested buyers. We remain uniquely positioned to offer solutions across the spectrum of performing, charged-off and insolvency auto finance portfolios for both secured and unsecured accounts and to capitalize on this growing opportunity. Moving on, I'd like to review in more detail some key performance trends for the quarter. Our collections were $301 million, up 18% year-over-year, driven by strong deployments in 2024 and 2025. $41 million of collections for the quarter were attributable to the Bluestem portfolio purchase, and $24 million were attributable to the Conn's portfolio purchase. More broadly, our collection performance on the overall portfolio continues to reflect the accuracy of our underwriting models. A key trend in collection performance has been the increase in legal channel collections, which were up 54% year-over-year to $64 million. Jefferson Capital utilizes the legal channel as a means of last resort in instances where we believe the account holder has the ability but not the willingness to engage or pay. We've achieved a number of important process improvements, specifically in the U.S., which have significantly compressed the timing from placement of the account to filing the lawsuit, which, in turn, has accelerated suit volumes. The inventory of suit-eligible accounts has increased given the significant growth in deployments over the past three years. So over time, we expect to see continued growth in legal collections. A separate component of the increase is driven by modeling improvements, which have allowed us to identify new portfolio segments from prior purchases where we have uncovered opportunities to profitably increase collections through use of the legal channel. The increased consumer litigation activity will result in incremental court costs, but the resulting collections will profitably support this upfront expense. Our portfolio purchases for the quarter were $152 million, up 21% year-over-year. Returns remain attractive, and we remain confident in the deployment landscape. I am pleased to report that as a result of our strong execution on our asset class-based growth strategy and the favorable market backdrop I described, we were able to generate record deployments in the month of July of $185 million, a significant portion of which was invested in performing and nonperforming auto finance portfolios. This is an important milestone as we have now added auto as a third asset class segment to our performing portfolio purchase capabilities following credit cards with Bluestem and installment loans with Conn's. To further this strong purchasing momentum, we generated robust growth in forward flow commitments. As of June 30, we had $480.7 million of deployments locked in through forward flows, which is a new record for the company and an important building block of our deployment strategy for the coming quarters. Finally, I'm pleased to announce that after significant evaluation, Jefferson Capital has entered the debt purchasing market in Mexico. As in our past efforts to enter a new geography, we deploy relatively low amounts of capital initially as we build our servicing capabilities and validate our forecast model. But we believe this is a large market, which offers attractive U.S. dollar risk-adjusted returns and adds another growth pillar for our Latin American strategy. In addition, our foray is supported by a number of significant competitive advantages, including global relationships with key sellers, more sophisticated modeling and servicer management capabilities and a substantially lower cost of capital compared to local competitors. We are excited to report more on our progress in the coming quarters as we gain more experience in this market. Moving on. Our estimated remaining collections as of June 30 were $3.4 billion, up 18% year-over-year with ERC related to the Bluestem and Conn's portfolios comprising $218 million and $83 million of U.S. distressed. Our ERC is relatively short in duration due in part to the lower average account balances in our portfolio with 46% of our ERC to be collected through 2027. We expect to collect $1.1 billion of our June 30 ERC balance during the next 12 months. Based on the average purchase price multiples recorded in the second quarter, we would need to deploy approximately $565 million globally over the same time frame to replace this runoff and maintain current ERC levels. I would note that as of June 30, we had $312 million of deployments already contracted via forward flows for the next 12 months. Lastly, I'd like to review in more detail another core pillar of our business model and a critical building block of our differentiated return profile, our best-in-class operating efficiency. We seek to own high value-added aspects of the purchasing and collection process, including portfolio and consumer payment performance data, extensive analytical and modeling capabilities, certain proprietary technological capabilities and the collection processes and techniques that we believe create both a competitive advantage for the company as well as a significant barrier to entry. Conversely, we seek to outsource the aspects of the collection value chain that we view as commoditized or operationally intensive and do not produce a competitive advantage, such as running large domestic call centers. We utilize champion-challenger performance measures to allocate portfolio segments to the best servicers and our internal collection platform competes for market share against external collection service providers. Finally, our mostly variable cost structure provides flexibility to scale deployments depending on market conditions. The benefits of our relentless pursuit of operating efficiency are evident in our efficiency metrics relative to the rest of the sector. As mentioned earlier, our cash efficiency ratio for the quarter was 72.2%. It was aided by collections on the Bluestem and Conn's portfolios, which carry lower cost to collect given the significant portion of paying accounts. Excluding the Bluestem and Conn's portfolio collections and expenses, the cash efficiency ratio would have been 67.8%, which is also materially higher than other public companies in the sector. Our leading operating efficiency is a powerful competitive advantage, and coupled with the strong returns on our differentiated investment strategy, supports consistent, attractive shareholder returns. With that, I would now like to hand the call over to Christo for a more detailed look at our financial results.
Thank you, David. Taking a closer look at the financial details for the second quarter, revenue was $178 million, up 16% year-over-year, driven by continued strong deployments and higher net yields. Changes in recoveries were $9 million for the quarter, reflecting the accuracy of our modeling and strong execution against our underwritten forecast. Operating expenses were $95 million, up 46% year-over-year, with the increase due to two key components: an increase in court costs as a result of increased legal channel volumes and noncash stock-based compensation expense resulting from the IPO. Adjusting for stock-based compensation and adjusting the prior year quarter for IPO-related items, expense growth would have been 35%. Expenses remain well controlled relative to the growth in collections with our cash efficiency ratio at 72.2% for the quarter. Adjusted pretax income was $59 million for the quarter, resulting in an adjusted pretax ROE of 51.6%. We realized a material level of collections on portfolios purchased in 2024 and 2025, including the Bluestem and Conn's portfolio purchases, which in turn drove our adjusted cash EBITDA to $226 million for the quarter, up 12% year-over-year. Finally, for the second quarter, Jefferson Capital recognized portfolio revenue of $11 million and net operating income of $7.1 million related to the Bluestem portfolio purchase. Separately, we recognized portfolio revenue of $11.1 million, servicing revenue of $0.6 million and net operating income of $8.1 million related to the Conn's portfolio purchase. Our credit profile remains strong and positions us well for future opportunities. As of June 30, our net debt to adjusted cash EBITDA improved to 1.71x, a level which is significantly lower than our publicly traded peers. Over the long term, our target leverage ratio is in the range of 2x to 2.5x on a sustained basis. Our balance sheet is solid with ample liquidity to support growth, create strategic optionality and pay our quarterly dividend. Our senior secured revolving credit facility with aggregate committed capital of $1.15 billion had $226 million drawn at June 30. Today, we drew on the RCF and transferred $300 million to the bond trustee for the repayment of our senior unsecured notes due August 2026. The notes will be discharged on August 17. Our strong liquidity profile is a critical component of our value proposition to sellers who value certainty of close in periods when portfolio activity increases, but the funding markets could be constrained or unavailable. With regard to our capital allocation priorities, our primary focus remains on deploying capital to purchase portfolios at attractive risk-adjusted returns. Our Board has declared a regular quarterly dividend of $0.24 a share, which represents a 4.8% annualized yield as of July month end. The dividend offers an attractive component of shareholder return, which is not available from other public companies in the sector, and it also reinforces long-term discipline around investment returns. In conjunction with the follow-on equity offering in January, we also repurchased 3 million shares or approximately 5% of the total legally issued shares for $59 million. This was a tactical share repurchase where the company used its capital to support the offering and to further reduce the sponsor overhang. We will evaluate open market share repurchases if the share price exhibits significant volatility. Finally, we have a long history of successful M&A, but we intend to remain disciplined and opportunistic. Now we will be happy to answer any questions that you may have. Operator, please open up the lines.
Questions and answers
The operator will now provide instructions on how to ask a question. Our first question today is from Mark Hughes with Truist Securities.
You talked about the auto segment, it sounds like you're seeing a lot of success in the month of July. How broad is that? How should we think about the opportunity as the rest of the year progresses? A little more detail on auto would be great.
Sure. We don't provide guidance around deployments or guidance in general, but what I can do is characterize that July had us deploying capital across the spectrum in auto, both in terms of charge-offs, insolvencies and performing. That's indicative and it's why we've been talking about the auto market opportunity in particular: we have seen a growing opportunity set in that space. We are uniquely positioned to be a beneficiary of the headwinds facing that sector.
Very good. Could you refresh us on any differences in terms of the collections profile or costs associated with the auto channel?
Sure. I'll start with insolvency. Insolvency, in general, has a very low cost to collect as most of the interaction takes place with the bankruptcy trustees. However, with secured loans, there are occasions both in insolvency and outside of insolvency and distressed where the consumer still retains the vehicle. In those cases there could be a repossession process, which is a higher-cost undertaking. Think of deployments in insolvencies as similar in aggregate to other insolvency cost to collect. On the deficiency or charge-off distressed side of the business, that is more in line with other distressed portfolios but has some unique components that are higher cost to collect than insolvency. Finally, on the performing side, the cost to collect for installment loans, such as our purchase of the Conn's portfolio, is a good template for what the cost to collect would be for performing auto.
Very good. And then, Christo, the change in recoveries is a nice positive number again, maybe starting to look like a trend. How should we think about that line item? Is that something where it sounds like your modeling and legal collections are having good success? Is that something that emerges over time? Or is it something we shouldn't anticipate in future quarters? How should we approach that?
I think the best way to answer is that historically we have guided to kind of single-digit millions as a number that should be expected given the size of the portfolio. For the quarter, this number was slightly higher than in prior quarters, but it's still a number that we are comfortable with and a number that we can expect to see in the future. I'll reiterate our previous comments: the objective of our modeling of ERC is accuracy and not necessarily conservatism.
Our next question is from David Scharf with Citizens Capital Markets.
I wanted to follow up again on auto. You've historically enjoyed formidable competitive barriers in your core low balance accounts. You referenced that you believe you're the only one who can service the breadth or mix of performing, charge-off and insolvency across auto. Can you talk more about the competitive landscape there, the breadth of how many sellers you work with? Is auto from a competitive standpoint closer to the traditional credit card world or closer to the barriers you enjoy in your core assets?
Good question. It's helpful to understand the distinction. I view auto as an area with more complexities in underwriting and engaging consumers. Although you utilize similar collection channels, each is made more difficult because of the complexities involved in collecting on an auto account. Sometimes the consumer has voluntarily surrendered the car or it has been repossessed, and being able to communicate clearly about the composition of the balance is important for effective engagement. If the consumer still has the vehicle, repossession is a more complex undertaking. Operationally and in consumer engagement, it's more complex. That also applies to the legal channel where documentation requirements are more comprehensive and state-based regulations vary. Often you need evidence of required communications to initiate litigation. It's a higher-touch, more complex process and one that we have built systems and processes to handle effectively. I don't think there are many other competitors in the space that can cover the array of account segments—secured and unsecured, insolvency, performing and nonperforming—across that spectrum. That makes us an ideal counterparty for an originator with sale objectives.
That color is very helpful. Compared to a year ago, would you say your auto volumes mostly represent deeper penetration of existing originator relationships, or have you been adding new relationships over that time?
It's a mix of both. We've cultivated relationships with existing customers where we're doing more, and we've also cultivated new clients.
Just one last question for Christo. With the legal channel growing, obviously there are more upfront court costs, creating a delayed cash flow dynamic as that channel grows. As we think about second-half modeling, is there any step function we should consider in terms of court costs, or will it continue along a typical trajectory?
Two comments. First, the cash efficiency ratio we reported includes the court costs for the quarter. We provide the as-reported basis at 72.2% and excluding Conn's and Bluestem at 67.8%, and we've said we expect excluding Conn's and Bluestem to be in the high 60s. Those comments are relevant and a good way to think about this. As it relates to the actual court cost amounts, I would think of this quarter as a good guide to what to expect for the balance of the year.
Next, we'll hear from Randy Binner with Texas Capital.
I have a couple questions. On the July deployment number, did I hear that correctly—did you say $185 million, David?
We did. We normally wouldn't disclose a monthly deployment number, but as you note, it's more in July than for the entire second quarter and we thought that was valuable information to share with shareholders.
That is a large number. Was the nature of that a big lumpy thing or a distribution across deployments? I wouldn't model $185 million every month, so was there anything episodic or unusually large?
We wouldn't encourage modeling that monthly. It was a wide distribution more like a normal distribution across asset classes, with a larger distribution in July for auto.
Understood. The collection activity continues to be good and ahead of expectations. Do you discuss collection performance by vintage? Given more recent charge-offs while people generally have jobs, are collections better on more recent vintages versus older vintages? How should we think about that?
I wouldn't frame it exactly that way. Underwriting should account for consumers' capability of repayment and the volatility around liquidation rates tied to unemployment, which tend to be relatively narrow except in a recession when unemployment increases rapidly. In non-recessionary times, liquidation rates don't change substantially with ordinary macroeconomic fluctuations.
Next, we'll move to John Hecht with Jefferies LLC.
Congrats on another good quarter. First, can you talk about the pipeline? Performing portfolio acquisitions as well as buying into other channels has been important. Maybe talk about characteristics of the pipeline and pricing.
The level of activity is elevated across all the kinds of investments we make. When you look at deployments across geographies, you'll see attractive levels of growth. That's evidence of an attractive supply backdrop and increased effectiveness in building our pipeline.
Christo, maybe refresh us on Bluestem and Conn's and general Q2 to Q3 seasonality. How do those factors impact the coming quarters relative to Q3?
Seasonality is a bigger driver of performance and specifically collections in the first quarter. Going into the rest of the year, seasonality impact weakens. We see deployment acceleration in the second half, and typically the fourth quarter is the largest in terms of deployments. There's nothing out of the ordinary. The activity in July is indicative of the broader opportunity we discussed around auto finance and the broader consumer credit asset class rather than seasonal impacts.
I'll add a reminder of the record-level forward flow commitments at $480 million, which is a substantial increase—up about 80% year-over-year—and is one component of the future deployment pipeline.
All geographies seem to be doing well, but Latin America stood out this quarter. Anything to point out that was one-time, or talk about conditions there and opportunities you're seeing?
We're proud of the platform we've built in Latin America. We've continued to lead in Colombia and Peru and expanded our pipeline. We've been successful establishing some of the first forward flows in the region, which was historically spot sales. That helps develop sustained growth as we build longer-term relationships with originators. We also executed an inaugural deployment in Mexico in July. As with other new geographies, we take a measured approach to validate our underwriting model and build servicing capability before deploying significant capital.
Next question is from Robert Dodd with Raymond James.
On the timing of collections in auto: with non-auto, legal channel court costs can front-run collections. In auto, when you incur higher-cost elements like repossession, those costs are likely incurred near the time of collection, such as wholesaling the vehicle. So does the timing of those costs align with collections, meaning auto costs are less distortive to cash efficiency ratios compared to legal channel timing mismatches?
That makes sense. We purchase across three core areas: charge-off, insolvency and performing in auto. Performing has a low cost to collect and expenses are not out of sequence there. Secured insolvencies are largely paid through bankruptcy processes, so timing is aligned. The deficiency and distressed segment can show a disconnect between expenses and recoveries; repossession and court costs are examples of that. Because deficiency balances tend to be a lower priority obligation, a higher percentage of recoveries in that segment will require the legal channel, creating potential timing offsets between costs and collections. In the quarter, we deployed across all three segments. We won't disclose exact allocations, but Christo guided on cash efficiency: without performing portfolios, high 60s is what we would expect, and despite larger deployments in auto, we are not anticipating a meaningful change in that metric.
One additional comment: the return profile of the incremental deployment in July is not substantially different than our historical return targets and what we're seeing across the rest of the portfolio.
You mentioned forward flows locked in for the next year at $312 million, and you bought $185 million in July—presumably a small part from forward flows. That's about $497 million. You also noted you need to deploy $565 million over the next year to maintain ERC. Given that starting position, are there any headwinds that would prevent meaningful ERC growth over the next year?
The clear answer is no.
Next, we will hear from Bose George with KBW.
On auto, it seems like it's hitting an inflection point. How much of the change is driven by increased supply versus a shift among lenders recognizing outcomes could be better through selling receivables?
There are several drivers in the auto market, some permanent and some episodic. Permanent drivers include a relatively low percentage of autos being sold into the market, and we seek to cultivate relationships with originators to encourage initial portfolio sales. That's a large organic opportunity unrelated to recent headwinds. Episodic drivers include higher balances in auto, a more stressed consumer, and depleted pandemic-era savings, which have increased delinquency and defaults for some originators. Those originators may look to sell portfolios more than before or potentially exit origination. It's a fragmented industry with a mix of factors; it's hard to precisely quantify what share of our deployments comes from episodic trends versus more structural shifts.
That's helpful. On forward flow numbers, is there a sweet spot for purchase forward flow commitments as a percentage of total acquisitions?
Historically that percentage has run in the 50% range, plus or minus 10%. We're not optimizing around a specific percentage. Our goal is to deploy capital at attractive risk-adjusted returns and secure as many forward flows that reflect those returns. Forward flows provide certainty and a base to grow, but there's no fixed target; they are a byproduct of strong relationships with originators.
That concludes today's question-and-answer session. I will now turn the floor back to David Burton for closing remarks.
Thanks, operator. Looking forward, we're excited about the growth prospects for our business for the remainder of this year and beyond. We've built an outstanding platform over the past 23 years, and we're in a great position to capitalize on opportunities as the market continues to evolve. Thank you all very much for joining us on today's call, and we look forward to providing another update on our third quarter earnings call.
Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.