JCAP - NASDAQ

Good afternoon, and welcome to Jefferson Capital's Fourth Quarter and Full Year 2025 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, expected benefits of the Bluestem acquisition, expectations on the market and macroeconomic factors, and expected collections and growth in certain collections. 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. And now I'll turn the call over to David Burton.

Thank you, operator, and thanks, everyone, for joining our investor call. On January 9, we completed our first follow-on offering post IPO, which substantially improved our float and liquidity and reduced the J.C. Flowers ownership to 53%. I'd like to welcome our new investors to the call. We appreciate your support, and we look forward to delivering on the investment thesis we laid out in the road show. Let's dive into our fourth quarter financial performance highlights. We again generated strong results for shareholders. We delivered record collections at $245 million, up 41% versus the prior year period, and we continued to perform well on our underwriting expectations. We generated record deployments with $381 million invested, up 6% versus the fourth quarter of 2024, which had also been a record quarter. Our estimated remaining collections also reached a new record at $3.4 billion, up 23% year-over-year, driven by our continued deployment performance and attractive anticipated returns. Revenue for the quarter was a record $155 million, up 30% versus the prior year period. We delivered a sector-leading cash efficiency ratio of 71%, driven in part by strong collections from the Conn's portfolio purchase. Adjusted EPS for the quarter was $0.69. The previously announced Bluestem portfolio purchase closed on December 4, and we believe the transaction solidifies our leadership position as a strategic acquirer of a wide spectrum of dislocated consumer credit portfolios. We're pleased with the portfolio's performance to date and expect Bluestem to be a meaningful contributor to our financial results in 2026. 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. I'll start with delinquency trends, which remain elevated across all nonmortgage consumer asset classes and create favorable portfolio supply trends. An important component to better understand the state of the consumer is the current level of personal savings. During the pandemic, consumers accumulated abnormally high savings as a result of the unprecedented levels of government stimulus, which served as a financial cushion against life's unexpected events. By the end of 2022, the excess savings had been depleted. And in fact, the current level of personal savings at $831 billion is substantially lower than the long-term prepandemic average from 2013 to 2019 of $1.1 trillion, which is -- which becomes even more pronounced when adjusted for inflation. This suggests that consumers have a more limited ability to absorb unanticipated temporary financial hardships, which is an important driver for delinquency and charge-off volumes. Next, regarding the insolvency market, we've seen a well-pronounced increase in the number of insolvencies, both in the U.S. and in Canada from the pandemic trough in 2021, which in turn has fueled the resurgence in supply of insolvency portfolios. Insolvency valuation and servicing requires highly specialized expertise, a robust data set to develop accurate forecasts, and a technologically advanced servicing platform. And we remain one of the very few debt buyers in the U.S. and by far, the largest debt buyer in Canada that can take advantage of this market opportunity. Finally, this backdrop 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. Our portfolio performance is less sensitive to changes in unemployment compared to an originator. And despite the recent negative surprise on unemployment, current employment levels are still very favorable for our business. All of these trends point in one direction, elevated levels of consumer delinquencies and charge-offs, which we're seeing across all consumer asset classes and which we believe create a long runway for a robust portfolio supply over the coming quarters, coupled with strong collection performance on our existing book and on any future portfolio purchases. Next, I'll review our outstanding 2025 performance in the context of our long-term financial results, starting with 2019 as a prepandemic full-year reference. We have successfully navigated credit cycle fluctuations, changing market dynamics, and evolving regulatory framework, and a global pandemic, while continuously improving our financial performance through a combination of sustained growth and acute focus on returns. We delivered a 27% revenue compounded annual growth rate, a 37% net operating income compounded annual growth rate, and a 43% net income compounded annual growth rate from 2019 through 2025, showcasing our growth trajectory, efficiency improvements, and the profitability of the business. I believe there are very few debt buyers globally who can demonstrate this level of profitability and recurring growth through changing market and economic conditions. I'd also observe that Jefferson Capital is much better positioned today to take advantage of opportunities relative to earlier periods in our history. We have a much more scaled operation and are much more broadly diversified both geographically and across asset classes, which allow us to evaluate a substantially wider funnel of opportunities. We also have a more sophisticated collection capabilities today and a lower cost to collect, which in turn should further improve our net returns. And today, we have a much more robust funding structure with proven access to both the banks and the unsecured debt capital markets at an attractive borrowing cost. Simply put, Jefferson Capital is in a solid position to continue to deliver on its outstanding financial track record in the coming years and to build shareholder value. Moving on, I'd like to review in more detail some key performance trends for the quarter. Our collections, as I mentioned, were $245 million, up 41% year-over-year, driven by strong deployments in 2023 and 2024. The Conn's portfolio purchase represented $36 million of collections for the quarter and the Bluestem portfolio, which closed on December 4, represented $14 million. We've completed all necessary servicer transitions for Bluestem and the portfolio is performing according to expectations. 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. 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 have achieved a number of important process improvements, specifically in the United States, which have significantly compressed the timing from placement of the account to filing of the suit, which in turn has accelerated suit volumes. The inventory of suit-eligible accounts has increased given the significant growth in deployments over the past 3 years. So over time, we expect to see continued growth in legal collections. Our portfolio purchases for the quarter were $381 million, up 6% despite the fourth quarter of 2024, including the Conn's portfolio purchase. Returns remain attractive, and we remain confident in the deployment landscape. As of December 31, we had $274 million of deployments locked in through forward flows, which is an important building block of our deployment strategy for the coming quarters. I will note that our business is subject to pronounced seasonality. The fourth quarter is typically the largest quarter for deployments as credit originators aim to dispose of nonperforming portfolios ahead of year-end. Deployments then tend to decelerate in the first quarter as portfolio sales activity declines as originators want to take advantage of consumer liquidity related to tax refunds in the United States. Our estimated remaining collections as of December 31 were $3.4 billion, up 23% year-over-year with ERC related to Conn's and Bluestem comprising $140 million and $296 million of our U.S. distressed ERC, respectively. Our ERC is relatively short in duration due in part to the lower average account balances in our portfolio with 58% expected to be collected through 2027. We expect to collect $1.1 billion of our December 31 ERC balance during the next 12 months. Based on the average purchase price multiples recorded in 2025, we would need to deploy approximately $582 million globally over the same time frame to replace this runoff and maintain current ERC levels. I would note that as of December 31, we had $225 million of deployments 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 the 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 process and techniques that we believe create both a competitive advantage for the company as well as a significant barrier to entry. In contrast, 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, 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 I mentioned, our cash efficiency ratio for the quarter was 71%. It was aided by the collections on the Conn's portfolio, which carry lower cost to collect given the significant portion of paying accounts in the Conn's portfolio and to a lesser extent, the Bluestem portfolio, which benefited the month of December. Excluding the Conn's and Bluestem portfolio collections and expenses, the cash efficiency ratio would have been 68%, which remains 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 fourth quarter. Revenue was $155 million, up 30% year-over-year, driven by continued strong deployments and higher net yields. Changes in recoveries were $0 million for the quarter, reflecting the accuracy of our modeling and our execution against our underwritten forecast. Operating expenses were $84 million, up 30% year-over-year compared to an increase in collections of 41%. Court costs increased to $17.7 million, or 86% year-over-year, as a result of the trends in the increased legal channel volumes that David reviewed in his comments. This is an upfront expense to support future collections through the legal channel and the accelerated time to suit pulled forward these expenses. We expect core costs to remain at this level given the increased inventory of suit-eligible accounts resulting from the significant overall portfolio growth over the past several years. Adjusted pretax income was $51 million for the quarter, up 15% year-over-year, resulting in adjusted pretax ROE of 44.8%. We realized a material level of collections on portfolios purchased in 2023 and '24, including the Conn's portfolio purchase, which in turn drove adjusted cash EBITDA to $178 million for the quarter, up 34% year-over-year. Finally, for the fourth quarter, Jefferson Capital recognized portfolio revenue of $15.5 million, servicing revenue of $1.3 million, and net operating income of $10.7 million related to the Conn's portfolio purchase. Separately, we recognized portfolio revenue of $5.4 million and net operating income of $2.5 million related to the Bluestem portfolio purchase, which closed on December 4. Moving on to the full year results. We delivered strong performance in 2025, while setting several important operating milestones by recording the highest annual collections, deployments in ERC in the company's 23-year history. That performance in turn drove record revenue, net operating income, adjusted pretax income, and adjusted cash EBITDA. Our cash efficiency ratio for 2025 was 74%. And excluding the Conn's and Bluestem portfolio collections and expenses, the ratio would have been 69.7%. Our credit profile remains strong and positions us well for future opportunities. As of December 31, our net debt to adjusted cash EBITDA improved to 1.9x, 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. On October 27, we completed an amendment of our senior secured revolving credit facility, which achieved a number of capital structure objectives and substantially improved the terms. We increased the aggregate committed capital by $175 million to $1 billion and added 2 new lenders to the bank group. We refreshed the tenor of the facility to 5 years with an effective 2.5-year extension. We improved pricing by 50 basis points across the grid and eliminated the credit spread adjustment for an aggregate interest expense savings on the drawn balance of the facility of 60 basis points. We also reduced the nonuse fee rate for unutilized commitments by 5 basis points. The facility had $232 million drawn at December 31, and we have earmarked $300 million of capacity to repay our 2026 bonds in May of 2026. Given the maturity was fully prefunded with a $500 million unsecured issuance in 2025 and at this point we are not taking on any market risk, we plan to keep the bonds outstanding as long as possible to take advantage of the attractive 6% coupon. This strong liquidity profile is a critical component of our value proposition to sellers who value certainty of costs in periods when portfolio activity increases, but 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 per share, which represented a 4.7% annualized yield as of February 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 reduce the sponsor overhang. We will evaluate open market share repurchases at the appropriate time while also aiming to maintain liquidity in the stock. 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.

Our first question comes from the line of David Scharf with Citizens Capital Markets.

I guess probably obligatory to lead off, Dave, with maybe just some questions about your thoughts about maybe some of the macro uncertainties and whether it's employment headlines or the prospect of sustained elevated energy costs. Do any of these factors color how you're viewing the purchasing environment and maybe the types of bids you're putting in? Just trying to get a sense for whether it's just too early to really conclude that the macro in the U.S. has shifted much or whether you feel like we're starting to see some of the signs that maybe people saw in 2022 when inflation set in?

Thanks for the question, David. I guess let me answer that question in 2 different ways. The first way would be that the incremental pressure that energy costs would have and some modest deterioration in employment could have. That modest on-the-margin impact is likely to really just impact delinquencies and charge-offs. That minor movement is not apt to change liquidation rates on charge-off accounts. because a charge-off tends to be a consumer who has had 1 of 3 things happen: either they've lost their job, they've had a divorce, or they've had a health care issue that has either caused them to incur an uninsured medical bill or a health care situation that keeps them out of work temporarily. And so, I think the net of the current environment is probably a net positive for us on the supply side and not likely, and certainly, we see no indications of it impacting expected liquidation rates.

And maybe just as a follow-on, shifting to the deployment side and purchase volumes. The information on the visibility that the flow deals provide over the next 12 months is helpful. I'm curious, do you ever -- well, I guess, number one, are there any trends among your sellers broadly in terms of either a willingness to engage in more flow deals or less? And I guess related to that is, as you plan out the year, is there usually a percentage of total deployment that you'd like to have locked in, in January 1 by flow deals? Or is it just more opportunistic based on the terms that are out there?

So very insightful questions. I hope I'll be able to remember all of the questions, so I can answer them all. I'll start with, do we target a specific percentage of our deployments for forward flows? And the answer to that is we don't. Our history has been about half of our deployments have been in forward flows. But if forward flows were pricing in a way that wasn't meeting our return targets, we would not feel a need to reach in order to have this composition that we've historically had in the past. So we've been -- we continue and have been from really our inception to be very returns focused. As it happens, areas and sectors that we are a leader in have a consistent pattern of forward flows. And so that level has been relatively consistent. And you can see that our numbers don't move that much in terms of future committed forward flow volume. And with respect to your second question, which is, is there a market trend toward more forward flows or less. And I would say I need to answer the forward flow question by geography. The United States is the most prevalent market to offer forward flows. Most markets outside of the United States that we operate in have a much lesser emphasis on forward flows. And as a result, I would say Canada is probably the next highest percentage of forward flows that we have as a percentage of total deployments. And then the U.K. and then LatAm, which virtually has none. We actually, I think, had the first forward flow of any one or any seller in the Colombian market. But what I will -- I also want to point out is it's not just a geographic differential that exists. There's also differential across asset classes. Auto, as an example, which is an area where we are a leader, has historically been hesitant to embark on forward flows. There are some, but as a percentage of total deployment, it tends to be a much lower percentage. That is a sector that I think now, given some of the challenges that the auto sector has faced, we're hearing more discussions about forward flows, but I don't think that, that's manifested itself yet in any elevated level of forward flows for Jefferson Capital just yet. But I am hopeful that our long-term leadership in that market and that more sellers are discussing forward flows in that space that, that will lead to more forward flows because we do like to have committed future purchases at good returns.

No, interesting opportunity. I guess maybe just one more to wrap up. I guess this would be for Christo. Given the pace at which the Conn's portfolio runs off throughout this year as well as the half-life on the Bluestem collections, should we see -- I know you're not providing guidance, but when we think about the efficiency ratio, should we see a reversion towards that 68% level by the end of the year? Or are there other efficiencies and process improvements that would keep the ratio at 70% or above even as those 2 low-cost collection portfolios...?

Yes. look, I think we certainly have a substitution effect that you see. You can see that the headline cash efficiency ratio trended down over the course of 2025 as the collections coming out of the Conn's portfolio declined. And now we're going to essentially reup and the Bluestem would have virtually the same impact, and it's similar in size. And we expect that to effectively take, of course, over the course of 2026, as we have discussed before. We also provide the underlying cash efficiency ratio, excluding any collections and expenses from both Conn's and Bluestem, and that would be in the high 60s as a underlying trend, excluding the impact of performing portfolios.

Our next question comes from the line of Mark Hughes with Truist.

David, your commentary about supply is very interesting. Any way to characterize how much of an increase you've seen? Is it single digits, double digits? I wonder if you could maybe give us a little more detail there.

And that's specifically as it relates to volume of charged-off accounts or insolvencies.

Yes, just the opportunity set that you're seeing.

Yes. I would say there's a couple of things at play. First, there's this seasonality aspect where the fourth quarter is the biggest quarter that originators tend to sell. And then because the tax season in the first quarter tends to be a trough. And so you have both of those things going on. Those impacts are probably bigger than any impact on underlying charge-off trends. And so these are difficult quarters to gauge a steady state. And so I wish I had a little bit more clairvoyance for you. But I think the second quarter probably would be a better quarter to begin making something more conclusive. I think one thing I could say is we are -- the era of supply of elevated levels of supply began some time ago and broadly, it's continuing.

Very good. How about the returns? Have the return profiles been reasonably stable when you look across your book and what you're buying? And your returns have obviously been very attractive. Is that -- are we looking at being able to maintain that or a little bit better, maybe a little more competitive? How do you see that?

Yes. So I would say that our returns have been pretty stable. And I think pricing is pretty stable in the market and fairly predictable. And that our win rates, which is another gauge of the level of competition, have been steady.

Then, Christo, the tax rate this quarter for the adjusted number, was it the similar 14%, 15%? And then what should we use for 2026?

Yes. I would say for 2026, we now have a full clean year. And as such, I think something that's in the 24% to 25% is appropriate to estimate the tax provision. So call it 24.5% would be what I would use for '26 for full year.

And how about for 4Q, the adjusted EPS number, is that based on a -- I think just doing the math on the release, it was 14.5% tax rate?

Yes. Although if that's the effective tax rate, that is true, I would not -- that effectively takes into account the full year tax provision that's required, except that we are only getting taxed as a taxpayer for half of the year since the IPO. So that is not indicative of anything going forward. Going forward, it should be relatively straightforward. There isn't anything special from a tax perspective other than the fact that we're not paying cash taxes. But for the purpose of estimating the tax provision going forward, 24.5%.

Then I'm sorry, I missed this when you were talking about the potential share buybacks in the future. What's the current authorization? What's your posture on that? Are you -- do you tend to be active...?

No, the posture is that the $3 million that we repurchased was very much a tactical repurchase in conjunction with the follow-on offering. At present time, our focus is on deploying capital at attractive risk-adjusted returns in portfolio purchases. We will evaluate open market share repurchases in the future. But at present time, we, of course, are also focused on developing better liquidity and better float for our investors.

Our next question comes from the line of John Hecht with Jefferies.

Congratulations on wrapping up a pretty busy year. First question is just thinking about deployments. You guys are diversified from a product and geographic perspective. Maybe can you give us the characteristics of the deployments where -- in which markets and which products? And was there any shifts in that deployment that are worth calling out over the past couple of quarters?

I think the one of the most prominent and promising shifts has been an increase in deployments in insolvencies, which is an area that, obviously, we have very limited competition because there's only a couple of companies that have the ability to value or service those accounts in the U.S. and in Canada. And our deployments correspond quite closely with how the filings have increased across the country. And then I would say other trends in deployments, obviously, our ability to undertake these attractive deployments in Bluestem and Conn's, I think, represent a unique capability and a good and a very attractive risk-adjusted return profile. And so I think that obviously is a change in our composition versus '23 and prior. So I think the trends have been relatively similar to quarters in the past. And we're -- they all reinforce the markets that we're in, our asset class specialization as being attractive, and the geographic diversification and the geographies we picked have, again, reinforced our investment thesis for those markets. So we're obtaining attractive returns across really all of the spaces that we're in, both asset class and geographies.

And then a follow-up is, obviously, acquisitions, you have good organic growth and then you've had successful acquired growth over time as well. How do we -- how would you describe the pipeline now?

So I'm going to separate my comments into these runoff portfolios that in the form of like Conn's and Bluestem, which we have a unique capability set to value, navigate, integrate, and execute on. During '25, we saw more of those opportunities than we've ever seen. but that resulted in 2 very large purchases. And sometimes a process like that takes a long time to conclude. And so we're eager to evaluate opportunities in that space, and we're active. But there's, of course, no certainty on any one of those. Our hope would be that while we've done this successfully in the installment loan space and in credit card that we could, over time, expand our capabilities to include some of the other asset classes that we're in.

Our next question comes from the line of Bose George with KBW.

Actually, in terms of areas of potential growth, have you seen pricing become more interesting in areas like prime credit cards? Or is that still not quite there yet?

I would say prime credit card continues to be an area that our win rate has been pretty consistent. So I don't know that we're seeing much change in pricing of those assets. And we obviously would welcome pricing to reflect better returns in those asset classes, but we're not really seeing much in the way of change, even though there has been a modest increase in supply.

And then just there's obviously been a lot of concern about AI-driven white-collar job loss. It seems very early to think about what that means, but is that something that you guys have thought about in terms of the way it potentially impacts supply performance? Or is it just early for that?

Yes. I think it would be early for that. And of course, it depends on who you read as to what the impact is going to be. I've read the full gamut of how all the -- formation of all these AI companies is leading to more demand for staff. But at the same time, there's efficiencies that are happening by the deployment of AI in various parts of other companies. So hard to know. I certainly don't consider myself an expert. What I do know is that we look at employment trends pretty closely. And we have a long way to go before an elevated level of unemployment would begin causing concern for us with respect to our ability to achieve our underwritten collection forecasts.

Our next question comes from the line of Robert Dodd with Raymond James.

Congrats on the year and the beginning of the new one. Most of my questions have actually been already answered. On the tax season, to your point, we're at the beginning of the year, it is tax season in the U.S. If we look at it, there's always been 50 million returns filed and processed even though it's pretty early in season. That's about 1/3 of the total. So it's that you expect for. So it's a pretty decent sample and the average refund is up almost 9%. So are you seeing anything in the data to your point, the macro doesn't seem to be hurting you and the tax season may be of benefit. So are you seeing anything unusual at all? Any increase in utilization of payment plans or increase in spot payments? Obviously, it's -- that's Q1. You probably don't want to talk about it, but I'm going to ask anyway.

I certainly don't blame you for the question. And your insights and instincts, I think, are very rational. I would say -- I think the comment that I can share is that things are in line with expectations. I wouldn't suggest anything materially higher or lower. And so we continue to expect to achieve the underwritten forecast that we have in place for the quarter, which obviously includes some seasonality in the expectation. And as you also note that we have very modest changes in expected recoveries and changes in collection performance relative to expectations during a quarter or so, which I think actually netted to 0 this quarter. So I know that's very different. And that might also be why some questions -- there are questions around this area. But that has typically not been an area where we generate incremental earnings.

One more, if I could. On the -- to Christo, the efficiency ratio. Obviously, there's a number of factors with a bit of seasonality and obviously, Conn's, Bluestem rolling off as we go through -- not rolling off, but Bluestem having a declining benefit as we get towards the second half of the year. But to your point, if we back that out and you give us the -- you do give us the underlying excluding that, are there any new initiatives? You're always working on that efficiency to improve the IRR with the Champion-Challenger model, the Mumbai center, et cetera. Are there any new initiatives in the works that can improve the underlying number if we look through the Conn's, Bluestem impact as we go through the course of this year and maybe a little longer term as it's hard to move that number in a 12-month window?

So you point out that we have historically had a strong emphasis on each year having a myriad, literally dozens of initiatives aimed at improving our efficiency and effectiveness. And this year is no different. We have our laundry list of things we're going to tackle this year. But we don't really like discussing what those are. But I think the historical trend of cost to collect improvement is one that I think is a trend that ought to continue pending our -- assuming we have continued success against those initiatives as we have in past years.

Our next question comes from the line of Randy Binner with Texas Capital.

I'm mostly covered at this point. But the one thing that stuck out to me that I thought was interesting is you mentioned these process improvements that are leading to, I think, more effective suit activity in the collection process. And I think of the court system as being slow still, and maybe I'm not thinking of it the right way. But can you explain a little bit more like how those process improvements have helped in that area?

First of all, again, you're actually right. The court systems are not moving any faster. Well, I shouldn't say that because, of course, there are lots of jurisdictions and some might be. But in the aggregate, I would -- I don't have any expectation for the court process themselves to work faster. What is -- where we have made the most inroads in our efficiency is all the things we have to do before filing the suit. And as you may or may not know, various courts and asset classes and states have different requirements with respect to what has to be available and included with the suit at the time of filing. And that list of things has gotten longer over time as those requirements and expectations have become more defined. And so, a process which, call it, 10 years ago had much less stringent requirements with respect to what needed to be included at the time of filing suit has massively become more involved. that complexity added time to the process. And we spent a fair amount of time engineering efficiencies in that area, which began more than -- at the beginning of last year and concluded in the third quarter, at which time we saw that the ramp-up and the acceleration in our suit volume. So you're right, it's not the courts, it's everything we do before to prepare an account for suit.

But I guess the follow-up is, does it lead -- all that is great, the automation of the process. Does it lead to a better result? Or is it just more is getting through the process faster, so we're seeing it faster?

Yes. So there's really 2 aspects of it that are improvements. The first is you just have this compressed time frame, which obviously also has an NPV impact. If you start the suit sooner, you're going to get to the collections from that suit sooner. The other aspect is to the extent that after starting the process, there was components of the process, which then required incremental materials that were not provided right upfront, that then would cause a fair amount of delay, if you will, or added time. So there's a secondary compression that also has occurred from the process that we implemented.

Our next question comes from the line of Gowshi Sri with Singular Research.

Can you guys hear me?

Yes.

Building on that collection strength you've shown all year, can you talk about the quality of those collections, specifically whether you're seeing any change in the mix between onetime settlements, payment plans, and now with the legal recoveries that you talked about, would that make the cash flow profile more durable as we move through 2026?

Let me see if I can answer that in a way that gets at, I think, what you're looking at. The distribution of payment types and payment size has been pretty consistent over the last couple of years. I would say there was a different payment pattern that occurred during the government stimulus, which did involve more settlements and higher onetime payments, but that has reverted to the mean by the end of 2022.

And with the legal channel, you've leaned harder into the legal channel with court costs almost doubling, and I think you've alluded to that in a question. As we look at 2026, how should we think about the returns for the legal channel? Is there still room to scale that profitably? Are you reaching more of a near steady state?

So I would say that the volume of legal accounts corresponds to our underwritten expectations. And as we deployed more capital and bought more portfolios and more volume, that inherently creates more volume to the legal channel. But because the expense of court cost is recognized upfront, it's just a little bit more pronounced when that volume enters the legal channel. But I would not characterize our effort in legal and the volume growth in legal as necessarily inconsistent with our underwritten expectations. It's not like we're having some type of material uncovered inventory that now has become incrementally profitable. Again, we are in line with the underwritten expectations. And because we just deployed more in '23 and '24 and '25, in particular, in U.S. distressed and really in the U.K. and to a lesser extent, in Canada, that just is -- as those accounts work through the voluntary collection process and we complete that, those that are eligible for legal and are profit generating after considering court costs, those just naturally flow to the legal channel at that time. Hopefully, that is helpful.

One last question. Given the supply backdrop that you've outlined, are there any parts of the market where you have consciously decided to walk away from either for pricing reasons or the return thresholds are not attractive?

No.

And we have reached the end of the question-and-answer session. Therefore, I will now turn the call back over to CEO, David Burton, for closing remarks.

Thank you. 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 last 23 years, and we're in a great position to capitalize on opportunities as the market continues to evolve. Thank you all for joining us today, and we look forward to providing another update on our first quarter earnings call.