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.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. Our first question today is from Mark Hughes with Truist Securities. Please proceed.

Yeah, thank you. Good afternoon. Good afternoon, Mark. You talked in the auto segment, 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? Just a little more detail on that auto would be great.

Sure. I guess as we don't really provide guidance around deployments or really guidance in general, What I can do is characterize that July in particular had us deploying capital across the spectrum in auto, both in terms of charge-offs, insolvencies, and performing. I think that's indicative of and it's why we've been talking about the auto market opportunity in particular is that we have seen a growing opportunity set in that space and I think we're uniquely positioned to be a beneficiary of the headwinds that are 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. So I'll start with insolvency. Insolvency, as a reminder, in general, has a very low cost to collect as most of the interaction takes place with the bankruptcy trustees. However, there are... with secured loans, there are occasions both in insolvency and outside of insolvency and distressed where the consumer still retains the vehicle. And as part of that, there could be a repossession process that takes place, which is a higher cost undertaking. And so I would think about deployments in insolvencies as largely Thank you. Thank you. The sort of cost to collect for installment line, as in our purchase of the cons portfolio, is a good template to think about what the cost to collect would be for performing auto.

Very good. Then, Christo, the fusion recovery 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 you're modeling and legal collections, you're having good success. Is that something that emerges over time or is that something we shouldn't anticipate in future quarters? Just how to approach that.

I think probably the best way to answer the question is that historically we have guided to kind of single digits of millions as a number that should be expected given the size of the portfolio, right? And I think for the quarter, this number was maybe slightly higher than in prior quarters, but it's still a number that we are comfortable with and a number that we We can expect to see in the future. And then I'll go back to our comments that we've made on this topic previously, which is the objective of our modeling of ERC is accuracy and not necessarily conservatism.

Thank you very much.

Thanks, Mark.

And our next question we'll hear from David Scarf with Citizen Capital Markets. Please proceed.

Good afternoon, Dave and Christo. Thanks for taking my questions. I wanted to follow up maybe on Mark's questions on auto. Dave, you've historically enjoyed some pretty formidable sort of competitive barriers, if you will, in your core kind of low-balance accounts. I know you referenced, you believe you're the only one who can kind of service the breadth or the mix of performing charged off and insolvency across auto, but can you talk a little bit more about just, I guess, the competitive landscape there, the breadth of how many sellers you work with, just trying to get a sense for whether Auto as an asset class is, from a competitive standpoint, kind of closer to the traditional credit card world or if it's closer to the barriers you enjoy in your core assets?

Good question, David, and I think it will be helpful to others to understand that distinction. I view auto as an area with more complexities, both in underwriting and engaging consumers. And even though you utilize similar collection channels, whether it be call center or legal, each of those are made more difficult because of the complexities involved in collecting on an auto account. You have, in some cases, the consumer has voluntarily surrendered the car or it's been repossessed, and the balance to be able to communicate clearly about the composition of the balance is an important criteria to have an effective communication with the consumer. And similarly, should the consumer still have the vehicle, then you're also undertaking a more complex undertaking as it relates to re-plevin action or repossession. And so operationally, it's more complex. In terms of consumer engagement, it's more complex. and that also applies to the legal channel where the documentation requirements are much more comprehensive and complex as there are state-based regulations which apply that are different from state to state and oftentimes you need to have evidence of those required communications in order to initiate litigation. So it's a higher touch, more complex process, and one that we excel at and have built systems and processes to be able to do so effectively. And I don't know that there are many other competitors in the space that are able to do that, and that's especially true as you consider The Array of Account Segments with Secured and Unsecured, Insolvency, Performing and Nonperforming. And again, that's why we have expertise and capability across that spectrum, and that makes us an ideal counterparty for an originator that has sale objectives.

No, that color is very helpful. And I guess just so we have a flavor for kind of the momentum in the business, I guess compared to a year ago, would you say that your auto volumes represent mostly deeper penetration of some existing originator relationships, or have you been adding new relationships over that time?

It's a mix of both. I think we have cultivated relationships with existing customers where we're doing more. And while at the same time, we've been able to cultivate new clients as well.

Got it. And just one last question for Christo. With the legal channel growing, obviously the returns will be similar, but with more upfront court costs, there's sort of a delayed kind of cash flow dynamic. As we think about second half modeling, I know you're not giving guidance, but is there any type of step function we should think about in terms of court costs, or is it going to continue along this typical trajectory?

So I'll make two comments. So the first one is the cash efficiency ratio.

That we put out obviously includes the court costs for the quarter.

And we provide that both on a kind of as reported basis, which is the 72.2% number, and on an excluding cons and boosts basis, which is the 68% number. And we've also said that we expect that excluding cons and boosts them to be kind of in the high 60s. Those comments are relevant and that probably is 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 kind of guide to what to expect for the balance of the year.

Very helpful. Thanks so much.

And next we'll hear from Randy Benner with Texas Capital. Please go ahead.

Hi, good evening. Thanks. I have a couple. On the July deployment number, did I hear that correctly? Did you say 185 million, David?

We did. And 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.

Yeah, you know, and the other three analysts, you know, there was some good Q&A about auto, which is helpful, you know, to learn about and kind of understand because it's clearly the direction you're moving. But I guess the one, because 185 is a big number, What was it? Was it more of a nature of that? I kind of missed that. Was that like a big, lumpy thing, or that was just a deployment kind of across, you know, presumably it was large and auto, but was there like anything episodic or lumpy there, or is that just trying to figure out how to sequence? You know, I wouldn't put 185 in the model every month, let me put it that way. So maybe just trying to understand if there was anything unusually large about it.

Yeah, we certainly wouldn't encourage you to do that. But what we would say is it's a wide distribution of more of like a normal kind of distribution across asset classes. Yes, there was a larger distribution in the month of July for auto.

Got it. Okay. And then... I have a question just about, so the collection activity just continues to be good and ahead of our expectation. Do you talk about collection performance by vintage? Meaning, is it, you know, kind of given the dynamic where there's a larger collection You know, balance the charge off at the same time that people have jobs. Are collections better on kind of more recent vintages and not as good on older vintages? How should we think about that?

Yeah, I don't know that that's necessarily the way I would think about it. As your underwriting should take into account, you know, the Thank you very much. increase rapidly to levels that exceed 6-7%. I would say the level of variance in times of non-recession, the liquidation rates don't have substantial changes given macroeconomic fluctuations.

Okay, understood. Thank you.

Thanks for the responses. Of course.

And next we'll move to John Hecht with Jefferies LLC.

Good afternoon, guys. Congrats on another good quarter. Thanks for broken my question. First one is, David, can you talk about the pipeline? I mean, obviously, you guys have a lot of good organic growth, but... both performing portfolio acquisitions as well as finding other channels has been an important part of your story. Maybe talk about the characteristics of the pipeline and pricing and so forth.

Yeah, I think what I would say is that the level of activity is certainly, you know, Thank you very much. Effectiveness in Building Our Pipeline.

Okay, and then, Christo, maybe, can you, I mean, I guess you have to think about blue stem and cons in this, but then also just general, like, T2 to T3 seasonality. Just maybe remind us and refresh us how those factors impact the coming quarters relative to T2s.

I mean, look, I think the seasonality impact is probably a much bigger driver of performance and specifically collections in the first quarter. Going kind of into the rest of the year, that obviously kind of, it's kind of a, I think the seasonality impact weakens. We certainly see on deployments, You know, a trend of acceleration of activity as we're getting into the second half of the year. And typically, right, the fourth quarter is the largest quarter in terms of deployments, as we have discussed before. So I don't think that there's anything out of the ordinary that we're seeing. And the activity that we saw in the month of July is probably indicative more of This broader opportunity that we discussed in the prepared rebox around auto finance and around the broader consumer credit asset class rather than any seasonal impacts.

And I'll just add to that, John, a reminder of the record-level forward flow commitments Okay, and then final question for me is that

I mean, all geographies seem to be doing very well, but LATAM kind of stuck out this quarter in terms of growth and momentum. Maybe anything to point out there that was one time, or maybe just talk about the overall conditions there and opportunities you're seeing?

Yeah, thank you. Thanks for noticing that. We're really proud of the platform that we're continuing to build in Latin America and continuing to Thank you very much. has initiated as that market has historically been characterized really just by spot sales. And so that helps us develop sustained growth as we build these longer-term relationships with originators in the region. And, of course, we did mention to you that we did an inaugural deployment in Mexico in July, and as all of our initial forays when we're making an organic investment into a new geography, we take a very measured and patient approach to ensure that we validate our underwriting model and that we build a robust servicing capacity before deploying lots of capital in that market.

Wonderful. Thanks very much, guys.

Thank you, John.

And our next question, we'll hear from Robert Dodd with Raymond James.

Hi, guys. On the timing of collections on auto, obviously, we look at non-auto, right, where there's legal channel, obviously, the court costs front-run. collections to a degree. So we kind of understand what's going on there. On the auto channel, when you do have those higher cost elements, like if it's a repo, for example, which is not all of it, obviously, but I would imagine those high costs are incurred kind of essentially in the same or very closely related time period to when the collection is occurs as well, i.e., maybe wholesaling the vehicle at an auction. And so does the auto, it does have high collection elements, but are those closely aligned, i.e., they're not as distortive time-wise to cash efficiency ratios as, say, sometimes the regular cost component is, if that makes sense.

It does make sense. My answer is not intentionally confusing, but I just want to flag that we purchase across kind of the three core businesses, if you will, of charge-off, insolvency, and now performing and auto. And performing has a low cost to collect. And as you, at least in the context of how closely do the expenses correlate to collections. And I think they're not in any way out of sequence in the performing side of the business, nor are they really an insolvency, at least for secured insolvencies, as those are paid out at 100%. in the bankruptcy process, plus interest in some cases. But it's in the deficiency collections in distressed where you may have a disconnect between some expenses and recoveries. Repossession is one example of that, and court costs is another. And because Deficiency balances tend to be a low priority obligation for the consumer. A higher percentage of recoveries in the deficiency balance and distressed segment will require the legal channel. And so you'll see a greater disconnect between costs and recoveries or collections. Again, because in the quarter we deployed capital across all three of those, the answer is a little complicated, and we're not going to disclose exactly how much was in each. But I think your bigger question is, do you expect some kind of a step function change in the timing of your expenses and your collections, and how would that And I think, you know, Christo sort of guided on that, and it's consistent with what we've really indicated in the past, you know, both with and without the performing side. Without performing, you know, high 60s is what we would expect, and despite the larger deployments in auto, we are not anticipating really any change in that. because we have more exposure to auto.

Maybe, Robert, one additional comment. The return profile of the incremental deployments in July is not substantially different than our historical return targets and what we're seeing on the rest of the portfolio, right?

Got it. Got it. Thank you. The follow-up to that kind of title, I mean, you said in the prepared remarks a I can't remember if it was you or David, Christo. You've got forward flows locked in over the next year at 312. You bought 185 in July. Maybe a tiny part of that was from the forward flows, but I don't imagine very much. That's 497. And you also said that you need to deploy over the next year 565 to maintain ERC. I mean, that looks like you're almost there. in July, with contracts on forward flows. Are there any headwinds you can see where you would not generate substantial, maybe you don't want to use the word substantial, but meaningful ERC growth over the course of the next year given the position you're starting in in July and the amount that you need to deploy over the next 12 months?

The clear answer is no.

Fair enough. Yes. Thank you.

Of course.

And next I'll move to Bo's George with KBW.

Hey, guys. Good afternoon. Just going back to the auto discussion, it seems like it's hitting kind of an inflection point, that asset class. Now, how much of the change is being driven by just the increased supply that you noted versus a shift among lenders, maybe recognizing that the outcomes could be better through selling the receivables?

So, hmm. Thank you for having me. Our quest is to cultivate relations with more originators and encourage them to undertake their first sale, which is a profit-maximizing option for them. There's a large organic opportunity that really has nothing to do with the level of charge-offs or any headwinds that are sort of an episodic component right now. and then turning to the episodic aspect, there happens to be higher balances in auto, a more stressed consumer that also happens to have depleted the savings that were built up during the pandemic after receiving government stimulus. And the level of delinquency and defaults for some originators has become an important headwind that is driving them to look at asset sales either at levels that are higher than they were before or, in some cases, more holistically and potentially exiting the origination business altogether. And so it's a very fragmented industry, and so there's lots going on. It's hard for me to characterize how much of our deployments were derived from either the episodic trends or the broader trend of more auto originators choosing to optimize their profitability by beginning to sell their charge-offs to us or to the sector.

Okay, great. That's helpful. Thanks. And then just on the forward flow numbers, can you just remind us, is there kind of a sweet spot for purchase forward flow commitments as a percentage of your total acquisitions?

Historically, that percentage has ran in the 50% range, plus or minus 10%. And so we're not really trying to optimize around a specific percentage of our deployments. Our goal is to deploy capital at attractive risk-adjusted returns, and we seek to have as many forward flows in place that reflect that. Those levels of attractive risk-adjusted returns, they certainly help in terms of having certainty and allow us to have a base to be able to jump off of as we attempt to grow in the aggregate. Forward Flows is not a specific target. hopefully is a byproduct of a good relationship with originators where we can add value and we turn that value into something that's more long-term in a forward flow agreement.

Okay, great. Thanks for the call.

And that will conclude today's question and answer session. I would now like to 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 in 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.