Jefferson Capital, Inc.

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 expectation, 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. Thank you for joining us. 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 Cons portfolio purchases. The company also generated strong cash flow for the quarter, which improved our leverage ratio to 1.71 times, a level which positions us well for future growth and creates significant strategic optionalities. adjusted EPS for the quarter with 77 cents. 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 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, Mark Zellmann, Penelope Campbell Person, Sue Unterberger, David Burton, Matthew Pfohl 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, All of these trends set up the stage for increasing portfolio supply for an asset class 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 Cons 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 non-performing 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 CONS. To further this strong purchasing momentum, we generated robust growth in forward flow commitments. As of June 30th, 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 30th were $3.4 billion, up 18% year-over-year, with ERC related to the Bluestem and Kahn'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 timeframe to replace this runoff and maintain current ERC levels. I would note that as of June 30th, 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. 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 Cons portfolios, which carry lower cost to collect, Thank you for joining us. 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 forecasts. Operating expenses were $95 million, up 46% year-over-year, with an increase due to two key components, an increase in court costs as a result of increased legal channel volumes and non-cash stock-based compensation expense resulting from the IPO. Adjusting for stock-based comp 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 pre-tax income was $59 million for the quarter, resulting in an adjusted pre-tax ROE of 51.6%. We realized the material level of collections on portfolios purchased in 2024 and 2025, including the Bluestem and Kohn'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 Cons portfolio purchase. Our credit profile remains strong and positions as well for future opportunities. As of June 30th, our net debt to adjusted cash EBITDA improved 1.71 times, a level which is significantly lower than our publicly traded peers. Over the long term, our target leverage ratio is in the range of 2 to 2.5 times 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 trade facility, with aggregate committed capital of $1.15 billion, had $226 million drawn at June 30. Today, we've drawn 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 closing 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 fall 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.