Jefferson Capital, Inc.

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 Crystal Relov, 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 that 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 forwarding 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 Bergen.

Thank you, Operator, and thanks, everyone, for joining our investor call. On January 9th, we completed our first follow-on offering post-IPO, which substantially improved our float and liquidity and reduced the JC 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 roadshow. 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 cons portfolio purchase. Adjusted EPS for the quarter was 69 cents. The previously announced Bluestem portfolio purchase closed on December 4th, 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 non-mortgage 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 pre-pandemic average from 2013 to 2019 of $1.1 trillion, 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 and 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 pre-pandemic full-year reference. We have successfully navigated credit cycle fluctuations, changing market dynamics, an 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 bank 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 CONS portfolio purchase represented $36 million of collections for the quarter, and the Bluestem portfolio, which closed on December 4th, 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 three 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 cons portfolio purchase. Returns remain attractive, and we remain confident in the deployment landscape. As of December 31st, 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 non-performing 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 31st were $3.4 billion, up 23% year-over-year overall. with ERC related to CONS 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 31st 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 31st, we had 225 million of deployments contracted via ForwardFlows 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 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 I mentioned, our cash efficiency ratio for the quarter was 71%. It was aided by the collections on the CONS portfolio, which carry lower cost to collect given the significant portion of paying accounts in the CONS portfolio, and to a lesser extent, the Bluestem portfolio, which benefited the month of December. Excluding the CONS and Bluestem portfolio collections and expenses, the cash official 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 forecasts. 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 put 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 pre-tax income was $51 million for the quarter, up 15% year-over-year, resulting in adjusted pre-tax ROE of 44.8%. We realized the material level of collections on portfolios purchased in 2023 and 2024, including the CONS portfolio purchase, which in turn drove adjusted cash EBITDA, $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 Kohn'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 4th. 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 pre-tax income, and adjusted cash EBITDA. Our cash efficiency ratio for 2025 was 74%. And excluding the constant bull stamp portfolio collections and expenses, the ratio would have been 69.7%. Our credit profile remains strong and positions as well for future opportunities. As of December 31st, our net debt to adjusted cash EBITDA improved to 1.9 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. On October 27th, we completed an amendment of our senior secured revolving trade facility, which achieved a number of capital structure objectives and substantially improved the terms. We increased the aggregate committed capital by $175 billion to $1 billion and added two new lenders to the bank group. We refreshed the tenor of the facility to five years with an effective two-and-a-half-year extension. We improved pricing by 50 basis points across the grid and eliminated the crate spread adjustment for an aggregate interest expense savings from the drone balance of the facility of 60 basis points. We also reduced the non-use fee rate for unutilized commitments by five basis points. The facility had $232 million drawn at December 31st. And we have earmarked $300 million of capacity to repay our 2026 bonds in May of 2026. Given the maturity was fully pre-funded 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% coupons. This 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 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 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 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 success for M&A, but we intend to remain disciplined and opportunistic. Now, we'll 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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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, please, while we poll for questions. Our first question comes from the line of David Sarf with Citizens Capital Markets. Please proceed with your question.

Yeah, good afternoon, and thanks for taking my question. You know, I guess it's probably obligatory to lead off, Dave, with maybe just – You know, some questions about your thoughts about maybe some of the macro uncertainties and whether it's employment headlines or the prospect of, you know, sustained elevated energy costs. Do any of these factors color sort of 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 two 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 sort of modest on-the-margin impact is likely to really just impact delinquencies and charge-offs. That kind of 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 one of three 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. 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 kind of expected liquidation rates.

Got it. That's helpful, Culler. And maybe just as a follow-on question, 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, you know, as you plan out the year, is there usually a percentage of total deployment that you'd like to have, you know, locked in in January 1st 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 kind of 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 sort of pricing in a way that wasn't meeting our return targets, we would not feel a need to sort of reach in order to have kind of this composition that we've historically had in the past. So 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 kind of see that our numbers don't move that much in terms of future committed forward flow volume. And with respect to sort of 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 sort of 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 UK 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 deployments, 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'm 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 You know, we do like to have committed future purchases at good returns.

Got it. Interesting opportunity. You know, I guess maybe just one more to wrap up. I guess it would be for Christo. You know, given the pace at which the cons portfolio sort of 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 – the ratio at 70 or above, even as those two low-cost collection portfolios run down?

Yeah, I mean, look, I think we certainly have a substitution effect, right, 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 cost portfolio declined. And now we're going to essentially re-up and the blue stem would have virtually the same impact, and it's similar in size. And we expect that to effectively take its 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 Kohns and Bluestem. And that would be kind of in the high 60s, right, as an underlying trend, excluding the impact of performing portfolios.

Got it.

Great. Thank you very much.

Yeah, thank you, David.

Thank you. Our next question comes from the line of Mark Hughes with Truist. Please proceed with your question.

Yeah, thanks. Good afternoon. Good afternoon, Mark. 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 specifically as it relates to volume of charged-off accounts or insolvencies?

Yeah, just kind of the opportunity set that you're seeing.

Yeah. I would say, you know, there's a couple things at play. First, you know, there's this seasonality aspect where the fourth quarter is the biggest quarter that originators tend to sell. And then because of tax season in the first quarter, it tends to be a trough. And so you have both of those things sort of going on. Those impacts are probably bigger than any impact on underlying charge-off trends. And so these are difficult quarters to kind of 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 sort of making something more conclusive. I think one thing I could say is, you know, we are the era of supply of, you know, sort 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? Kind of when you look across your book and what you're buying, your returns have obviously been very attractive. Are we sort of looking at being able to maintain that or a little bit better, maybe a little more competitive? How do you see that?

Yeah. 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 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 kind of the similar 14, 15 percent? And then what should we use for 2026?

Yeah, 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 percent is appropriate. to estimate the tax provision. So, quote, 24.5% would be what I would use for 26 for a full year.

And how about for 4Q, the adjusted EPS number, is that based on a kind of, 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, it's It 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%.

Okay. 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? 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 401 offering. At present time, our focus is on deploying capital at the 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 kind of better liquidity and better float for our investors.

Appreciate that. Thank you.

Thank you. Our next question comes from the line of John Heck with Jefferies. Please proceed with your question.

Afternoon. Thanks for taking my questions, and congratulations on wrapping up a pretty busy year. The first question is just thinking about deployments. You guys are diversified from a product and geographic perspective. Maybe can you give us kind of the characteristics of the deployments, into which markets and which products, and was there any kind of shifts in that deployment that are worth calling out over the past couple quarters?

Sure. I think 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 US and in Canada. And, you know, our deployments correspond, you know, quite closely with how the filings have increased across the country. And then I would say other trends in deployments, you know, obviously our ability to undertake the, you know, attractive deployments in Bluestem and CONS. 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, you know, 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 of the geographies we've 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.

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

So I'm going to separate my comments into kind of these runoff portfolios that, you know, in the form of like a, Hans and Bluestem, which we have a unique capability set to kind of value, navigate, integrate, and execute on. It's, you know, during 25, we saw more of those opportunities than we'd ever seen. But that resulted in two very large purchases. And sometimes a process like that takes a long time. to kind of 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.

Okay, great. Thank you very much.

Yeah, thanks, John.

Thank you. Our next question comes from the line of Bose George with KBW. Please proceed with your question.

Good afternoon. 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. Okay.

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

Yeah, 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.

Okay, great. Thanks a lot. Yeah, of course. Thank you.

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

Hi, guys, and congrats on the year and the beginning of a new one. Most of my questions have actually been oriented on the tax season, right? To your point, I mean, you know, we're at the beginning of the year. It is tax season in the U.S. If we look at it, there's already been 50 million returns filed and processed, even though it's pretty early in season. There's about a third of the total, so it that you expect for years. So it's a pretty decent sample and the average refunds up almost 9%. So are you seeing anything in, in the data to, to your point, the macro doesn't seem to be hurting you and, and the, the, the tax season may be of benefit. So are you seeing anything unusual at all? Any, any increase in utilization of payment plans or increase in, in spot payments? Obviously it's, That's key one. 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, you know, things are sort of in line with expectations. I wouldn't suggest anything... materially kind of higher or lower. And so, you know, we continue to expect to achieve kind of the underwritten forecast that we have in place for the quarter, which obviously includes some seasonality in the expectation. So, and as you also note that, you know, we have very modest changes in expected recoveries and changes in collection performance relative to expectations during a quarter, which I think actually netted to zero 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.

Understood. Thank you for that.

One more, if I can. On the efficiency ratio, I mean, obviously there's There's a number of factors with the bit of seasonality and obviously cotton's blue stem rolling off as we go through – not rolling off, but having a blue stem having a declining benefit as we get towards the second half of the year. But to your point, if we back that out sort of and you do give us the underlying excluding that – Are there any new initiatives? I mean, you're always working on that efficiency, right, to improve the IRR, you know, with the Champion Challenger model, the Mumbai Center, et cetera. Are there any new initiatives initiatives in in the works that can improve um the the underlying number if we look through kind of the the uh the the cons bluestem kind of impact as we as we go through the course of this year and maybe a little longer term it's kind of hard to move that number in a 12-month window uh sure so um you you point out that you know we have historically uh

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, you know, kind of cost to collect improvement is one that I think is a trend that ought to continue pending, you know, assuming we have continued success against those initiatives as we have in past years.

Thank you. Of course.

Thank you. Our next question comes from the line of Randy Benner with Texas Capital. Please proceed with your question.

Hey, thanks. Good evening. 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 kind of think of the the court system is being slow still, and maybe I'm not thinking it the right way, but can you explain a little bit more how those process improvements have helped in that area?

Sure. 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 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, you 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 a 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 at the beginning of last year and kind of concluded sort of in the third quarter, at which time we saw the ramp up in 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.

All right, thanks for that clarification, but I guess the follow-up is, does it lead, I mean, all of 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?

Yeah, so there's really two aspects of it that are improvements. The first is you just have this compressed timeframe, 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 sort of provided right up front, that then would cause a fair amount of, you know, delay, if you will, or added time. So there's a secondary compression that also has occurred from the process that we implemented.

All right. Understood. Thank you for the answers.

Yeah. Thanks for the question.

Thanks, Randy.

Thank you. Our next question comes from the line of Gaoshi Sri with Singular Research. Please proceed with your question.

Good evening, gentlemen. Can you guys hear me?

Yes.

Thanks for taking my questions. Building on that collection strength you've shown all year, can you talk about the quality of those collections, specifically whether you are seeing any change in the mix between one-time 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 years. I would say there was a different payment pattern that occurred during the government stimulus, which did involve more settlement and higher one-time payments, but that has reverted to the mean sort of by the end of 2022. Got you.

And with the legal channel, you've you lean harder into the legal channel with courts costs almost doubling. And I think you've alluded to that in the 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 a 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 costs is recognized up front, 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 uncover inventory that now has become sort of incrementally profitable. Again, we are sort of in line with the underwritten expectations. And because we just deployed more in 23 and 24 and 25, in particular in U.S. distress 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, you know, those that are eligible for legal and are eligible profit generating after considering court costs, you know, those just naturally flow to the legal channel at that time.

Hello.

Hopefully that was helpful.

Yeah, thank you. 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 price reasons or the return thresholds are not attractive?

No. Okay. No. Thank you. That's all the questions I have. Okay. Thanks for the question.

Thank you. And we have reached the end of the question and answer session. Therefore, I will now turn the call over 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.

And this concludes today's conference, and you may disconnect your lines at this time. We thank you for your participation. Have a great day.