Q2 2020 Navient Corp Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the Navient second quarter 2020 earnings call. At this time, all participants are they listen only mode.

After the speakers presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone keypad.

Please be advised that today's conference is being recorded and if you require any further assistance. Please press star zero for the operator.

It is now my pleasure to turn the call over to your host Mr., Joe Fisher Mr for sure the floor is yours.

Thank you Sylvia good morning, and welcome to NAV in 2022nd quarter earnings call with me today, our Jack Remondi, our CEO and Ted Morris, our controller and acting CFO.

After their prepared remarks, we will open up the call for questions.

Before we begin keep in mind, our discussion will contain predictions expectations and forward looking statements actual results in the future maybe materially different from those discussed here.

This could be due to a variety of factors listeners should refer to the discussion of those factors on the company's form 10-K, and other filings with the FCC.

Or navios. These factors include among others, the risks and uncertainties associated with the severity magnitude and duration of the Kobin 19, pandemic and the related economic impact.

The work from home policies and travel restrictions that have been put in place did not negatively affect our ability to close or books and maintain our financial reporting system internal controls over financial reporting or disclosure controls and procedures.

During this conference call, we will refer to non-GAAP measures, we call our core earnings a description of core earnings a full reconciliation to GAAP measures and our GAAP results can be found in the second quarter 2020 supplemental earnings disclosure. This is posted on the investors page at Naveen Dotcom. Thank you and I will turn the call over.

To Jack.

Thanks, Joe and good morning, everyone. Thank you for joining us today and for your interest in Navios.

Before I start I would like to welcome Ted Morris to today's earnings call. Ted has been with Naveen since 2003, a where it's been an outstanding member of our finance team.

As Joe said in addition to his role as acting CFO. He's also our controller and he's our resident expert and two of my favorite accounting policies, our derivative accounting and Cecil.

Well, we were sorry to see Krish move on and I wish him well I have tremendous confidence and Ted and the rest of the finance team. So welcome Tim.

[laughter] the covert 19 crisis continues to present ongoing new challenges our customers and clients have seen disruptions in their lives work and financial health and while the continued interest continues to produce significant uncertainty as to what comes next we have responded.

We have provided we leave to millions of borrowers and need through Forbearances and other payment relief options. We have worked together with many state attorneys general and consumer protection agencies to provide a uniform set a private education loan relief nationwide.

And we are assisting states to meet the surge in demand for services, such as unemployment claims and contract pricing.

I'm extremely proud of how our team immediately and actively responding to the crisis in the need to those we serve.

In response to the uncertain environment, we took decisive action, we increased our reserves and ability and our ability to absorb credit losses reduced marketing campaigns for new loans and increased our liquidity on hand, and our retained capital.

In an effort to keep our teammates safe we continue to allow those who can about 90% of our team to work from home.

Our infrastructure and technology allowed this move to happen quickly and has allowed our team to work safely productively and efficiently with no disruption to service quality.

These steps our strategy the skills and dedication of our team and the strength and diversity and client focus of our business delivered outstanding results this quarter.

For the quarter adjusted core earnings per share rose, 23% over the year ago period to 91 cents.

The year ago quarter included 15 cents in gains from loan sales in debt repurchases. There were no similar gains this quarter.

Our results this quarter were driven by our proactive strategy strong credit performance, a very favorable interest rate environment.

Operational flexibility to meet new and significant demand for business processing services.

And a continued focus on improving our operating efficiency.

Later, Ted will provide more details on our financial results, but first let me add some color to the high on the highlights of the quarter.

Net interest income increased nearly $33 million over the year ago quarter, primarily due to the favorable rate environment and a $10 million increase from our re Fi loan portfolio.

Low short term interest rates increased floor income, particularly on the portion of the portfolio that reset each July onest.

With the rate reset earlier this month, the $30 million a floor income earned on annual reset loans will not repeat next quarter.

Credit performance was strong due in part to the relief provided by disaster Forbearance is granted in response to coated.

The balance of loans and repayments saw meaningful decreases in delinquencies with a 90 day delinquency rate falling 38% to 1% at June Thirtyth.

We are just beginning to see borrowers exit from disaster forbearance is granted earlier this year.

We have implemented an extensive data driven outreach program to inform and insist customers before they returned to repayment.

Since the peak levels of forbearance, and our private loan portfolio $1.7 billion has.

Successfully exited forbearance, where the borrower has not requested additional payment relief options that are available to them.

While credit performance has been strong today, we are prepared for this to change.

Our provision for loan losses and results in reserves are able to absorb a very significant level of losses.

For example at June Thirtyth, our loan loss reserve would cover new cumulative default of over 18% and our FFELP portfolio in over 12% and our legacy private loan portfolio.

Levels significantly above what we have experienced in recent years.

As I reported last quarter in response to the uncertain economic environment, we reduced marketing spend for Wi Fi loan products.

As a result, new originations in the quarter fell to $238 million from 1.9 billion in the first quarter.

With improved visibility in both credit and funding costs, we have restarted marketing effort efforts.

And expect to originate approximately $2 billion in high quality high value Rifai loans in the second half of 2020, consistent with our return hurdles.

We have also continued to prepare for the upcoming academic year with our in school lending product.

While overall demand is likely to fall from last year due to the lower enrollment levels and fewer students on campus. Early results are positive and we are confident that our product design and features will lead to an attractive and valuable business with targeted are always in the high teens.

In our bps segment, most clients experienced significant reductions in transaction volume due to the crisis for.

For example, there were fewer vehicles parking are using toll roads and patient visits fell at hospitals do coded concerns.

Our bps team was able to use our operational flexibility and processing expertise to win a number of incremental contracts to help our clients respond to new needs.

Including co bid contact tracing and unemployment processing services.

Importantly, we were able to demonstrate our ability to adapt and provide experienced people and technical capabilities on close to a real time basis.

Our rapid response led to nearly $20 million in new revenue in the quarter.

The feedback from these clients and their customers has been extremely satisfying.

One of our ongoing top priorities has been expense management in the current crisis has not reduced our efforts here.

While we have consistently operated at industry, leading efficiency, we are continuously improving in this area, while still delivering outstanding service.

As a result of these efforts total operating expenses this quarter fell 11% from the year ago quarter to $215 million.

And we continue to examine every expense item to eliminate waste reduce cost and improve efficiency.

While delivering excellent service to our customers and clients.

Finally, we returned $31 million to shareholders and dividends and main media full progress in improving our tangible capital ratio from the decline caused by last quarter's adoption of Cecil.

Our adjusted tangible equity ratio improved to 3.6% at June Thirtyth up from 3.2% at March 30 Onest.

Adding back the cumulative and temporary mark to market losses on derivatives.

That we employed to hedge floor income would increase this ratio to 6% at June Thirtyth.

Expected earnings easily support our dividend and will provide the ability to complete the balance of our planned capital return in 2020.

During our last earnings call our reported that our company was entering this crisis from a position of substantial financial and operational strength.

Our results this quarter of the product of these strengths.

Our business model and technology infrastructure allowed us to react quickly to the needs of our customers and clients.

Enabled our teammates to be safer as they work from home and delivered growth in net interest income strong credit performance and an ability to pivot our operations to areas of critical need.

Notably these results were accomplished with lower expenses.

Combined they delivered the core earnings of 91 cents and a 27% return on equity.

At this time, we're more confident of the outlook for the balance of the year and assuming interest rates and basis spreads remain at similar levels and that credit performance remains consistent with the early results we are seeing.

We expect to report full year earnings between 295 in $3 a share in 2020.

This forecast is extremely gratifying and confirms the value of our franchise, our strategic plan and our ability to build value for all of our stakeholders.

Finally, as the product of the hard work and dedication of an extraordinary team.

I appreciate your interest and I look forward to your questions App chaired Ted provides more details on the quarter. Thank you Ted.

Thank you Jack and thank you to everyone on today's call for your interest in Navios.

During my prepared remarks, I will review the second quarter results for 2020 and provide additional color on the impact of Coca 19 pandemic on our business I'll be referencing the earnings call presentation, which can be found on the company's website from the investor section.

Starting on slide five key highlights from the quarter include delivered GAAP EPS of 64 cents, an adjusted core EPS of 91 cents provided immediate payment relief to over 6 million borrowers impacted by co benign team.

Reduced operating expenses by 11% originated $238 million or private refinance loans improved on our strong liquidity position and increased our adjusted tangible equity ratio to 3.6% or 6% after excluding the cumulative negative mark to market losses related to derivative accounting.

Let's move to segment reporting beginning with the federal education loans on slide six.

On both our FFELP and private portfolio, we continue to grant disaster.

Related forbearance to those indeed.

As we provide payment relief to those impacted by Coca 19, forbearance rates on our FFELP loan portfolio increased to 26.6% at June Thirtyth, which was down from the peak of 28.5% and our delinquency rate decreased 22% to 8.2%.

Today, we are seeing forbearances that our 300 basis points lower than quarter end as borrowers began to transition back to paying status as well.

Well the portfolio continues to amortize the net interest margin improved 26 basis points for the second quarter, which led to the overall net interest income increasing 18% to $171 million in the quarter.

The increase from a year ago quarter was largely driven by the continued drop in interest rates that began in Q1 and accelerated into Q2.

This favorable interest rate environment resulted in a significant increase in unhedged floor income.

In the quarter unhedged floor income contributed 41 basis points to the segment's net interest margin a.

A little less than half of which was earned on 6 billion of loans with rates that reset annually on July onest of each year.

Given the current interest rate environment, we do not anticipate earning additional foreign income on the annual reset portion of our unhedged floor portfolio through the end of 2021.

The current outlook for interest rate should continue to positively impact net interest margin for our felt portfolio and as a result, we're raising our full year net interest margin expectations to be in the low to mid 90 basis point range. In addition, operating expenses declined 21% year over year.

Now, let's turn to slide seven and our consumer lending segment.

In the quarter, we saw a forbearance rate peak at 14.7% and declined 8.4% at quarter end.

Recently, we have seen forbearance continue to fall on additional 100 basis points as portfolio begins to transition to repayment statuses.

Our directory of the forbearance usage that Jack mentioned can be seen on the following page as borrowers that have successfully exited forbearance have not requested the additional payment relief options available.

Delinquency rate declined 60% to 2% and charge offs fell by 45% to 48 million.

As borrowers transition out of forbearance, we expect both charge offs in delinquencies to increase from these historic lows with the increase in charge offs not beginning until 2021.

In the quarter, our provision expense was $41 million, which resulted in the allowance as a percentage of loans and repayment of 8.2% up from 7.8% from the prior quarter.

Absent a significant deterioration in the economic environment from here, we feel confident that we are adequately reserved giving the well seasoned and high credit quality of our portfolio.

Net interest income increased 2 million year over year and was driven by the stability in our net interest margin combined with an increase in our private education refinanced loan balance offsetting the natural amortization of our legacy portfolio.

The net interest margin of 320 basis points was better than expectations due to the decrease volatility in rates for assets that earn based on the prime rate on our funded with line of work the dislocation on those rates that occurred in March and April has since returned to more normalized levels.

During the quarter, we originated $238 million of high quality education refinanced loans as we have indicated this decline was intentional as we decreased our marketing activities due to capital market uncertainty stemming from co benign team.

We also updated the pricing on new originations to reflect the increase in cost of funds on the ABS market. We're now seeing more stable and improving funding costs in the MBS market and as a result.

We plan to increase monthly originations and expect to originate 2 billion for the second half a year.

In addition, operating expenses remained flat year over year, while growing our portfolio, let's continue to slide nine to review our business processing segment.

In the second quarter, we saw a significantly lower transaction related placements in both government services and healthcare revenue cycle management compared to the year ago as a result of slower economic activity due to covert 19.

We have transitioned hundreds of our experience bps colleagues to support state clients, who are working to help with the increase in unemployed residents, who are accessing needed benefits and to provide contact tracing services. These new opportunities contributed to a 12% increase in total revenue from the first quarter.

Now, let's turn to slide 10, which highlights our financing activity during the second quarter, we issued $1.3 billion of term private education, Rifai ABS backed by high quality loans as markets began to recover.

Two days ago, we price an additional 780 million of term private education refinery be us strong investor demand resulted in spreads that overall were 50 50 basis points tighter than similar transactions in the second quarter.

In addition, we extended a felt warehouse facility to 2022 extended a private education facility to 2021.

And expanded total capacity in our private education refinanced loan facility.

At quarter end, we had additional capacity in our funding facilities of $2 billion for private education loans and $242 million for FFELP loans. In addition, we had 2.4 billion or primary liquidity of which 1.6 billion as cash.

As a result, we ended the quarter in a very strong liquidity position.

We ended the quarter with an adjusted tangible equity ratio of 3.6%.

The cumulative negative mark to Mark losses related to derivative accounting reduce shareholders' equity as of June thirtyth.

By $692 million and is primarily related to one sided mark to market losses on derivatives hedging floors.

Importantly, as we've discussed in the past these negative marks will reverse to zero as the hedge contracts mature over the next several years, excluding these temporary mark to Mark losses, our adjusted tangible equity ratio is 6%.

Let's turn to GAAP results on slide 11.

We recorded second quarter, GAAP net income of $125 million or 64 cents per share compared to net income of $153 million or 64 cents per share in the second quarter 2019.

Assuming interest rates and basis spreads remain at similar levels and that credit performance remains consistent with the early results. We're saying we feel confident that we can achieve both the guidance provided today for the remainder of the year, including the cash flow generated by our high quality and well seasoned education loan portfolio.

In summary, the strong results this quarter highlights the strength and resiliency of our workforce and commitment to quickly provide timely solutions for our customers and clients needs and these unprecedented times I will now open up the call for questions.

Ladies and gentlemen, if you will like to ask a question. Please press Star then the number one on your telephone keypad again to ask a question. Please press star one on your telephone keypad.

Your first question comes from the line vis it can take from Stephens.

Hey, Thanks, good morning, guys.

And a great result, this quarter first wanted to ask about.

Forbearance and how that.

We should think about that affecting.

The.

Interest income in the near term and and also some of the Investor questions I get is about a worry about funding mismatch between the lack of.

Cash flows on the prepared loans versus your Securitizations, maybe you could talk about that in more detail and have the cash flows work. Thank you.

Sure so.

So we offered immediately in response to the covert crisis, we allowed our borrowers to defer payments through what we call a disaster forbearance program when we applied that.

Those those options to both our fell behind our private loan portfolios.

As Ted shared we saw and as one of the slides in the Investor deck shows we saw a significant increase in demand and is now starting to recede as.

As.

Economic outlooks for many people are starting to become a little bit more clear.

We are just when someone exits of forbearance. They are required to make a payment at first payment. Due is 30 days later, so we're just starting to see those payment due gates come in and we're very.

Pleased by what we're seeing so far the an overwhelming majority somewhere around 80% armoire are actually successfully making their payment.

But it is still relatively early in the sample size a small how we'll see more of those borrowers scheduled to make have payment due date, starting in the second half of this month and into and into August from a net interest income perspective, a loan into forbearance for both our FFELP and private loan portfolio Doesnt change.

Range.

The interest accruals. So we continue to accrue interest on those loans and have.

No in fact on.

Interest income as reported.

From a cash flow perspective, certainly if a borrowers not making payments.

There is a reduction in cash flow, although our securitization trust on both the felt and the private side of the equation have more than sufficient cash flow to cover all payments.

Terms of interest accruals on the bonds servicing costs and they are still cash flowing.

Back to the company, meaning that there is there is more than enough excess cash coming into the trust. So that we continue to be able to sweep a component portion out of that and I. Thank the liquidity build that Ted mentioned as an example of that right. We were able to build liquidity. During this process. Despite the significant increases.

Forbearance.

Okay, great. Thank you.

And then just another follow up on the floor income so that was.

Nice jump this quarter.

So when I when we think about the rest of the year is it simply.

Keeping the 20 basis point benefit taking out the the other 20 basis point.

The benefit from the reset loans and then just continuing that for the rest of year just kind of wondering if.

How we should think about that and maybe any help on the sensitivities.

To benchmark rates. Thank you.

Sure, Yes, and I think you're right I mean overall related to the annual reset floor component that was $30 million of income for the quarter that goes away third quarter. So it's as simple as that as far as the fixed floors unhedged, they were earning about $30 million in the quarter as well.

So we would expect that to continue obviously, there's a natural decline of the balance, but thats not very significant when you go from third to fourth quarter.

Where rates are today as far as one month, LIBOR or being around 20 basis points that is expected to be relatively consistent not just this year, but for the next several years. Some if you look at the forward curve. So I think thats, a fair way to look at it as far as the floor component there as far as the $30 million comes out beginning in the third quarter.

Okay, great. Thank you very much.

Your next question comes from the line of Sanjay sure Ronnie from KBW.

Thanks. Good morning. Good result, 10, maybe just a follow up on that last comment you made just to be clear so great.

Rate environment doesn't change materially we should expect the FFELP NIM to sort of stay here in the mid Ninetys just want to be will be clear with that and then.

Maybe just talk about the consumer lending segment margin expected to decline some of the rest of year, maybe you could explains or what's driving that thanks.

Sure absolutely.

So to your point on page four where we give updated guidance.

We expect the FFELP NIM to be in the low to mid Ninetys for the year. When you see that NIM is at 105 for the second quarter. When you move to third quarter, you lose that $30 million worth of annual reset floor.

Partially offsetting that you do pick up some additional benefit related to if you remember in the first quarter when rates started moving on the FFELP side. It's a daily one month LIBOR rates that it's funded by a one month LIBOR that resets monthly. So the margin was compressed in the first quarter, we got a little bit of that back in the second quarter, we get the rest of that back in the third quarter.

Our so that's what's partially offsetting the decline in the floor income there. When you go from second quarter to third quarter. When you try to do the math there as far as year to date night before.

And and staying in the nine is there on the private side as far as what you're seeing there as far as the kind of sequential decline in the NIM for the four quarters again, the opposite occurred first quarter. This year on the private side, there was a benefit as far as the prime assets did not reset in the first quarter, but the LIBOR funding came to.

Down that was a pretty significant benefit in the first quarter you give some of that back in the second quarter and you give the rest of it back in the third quarter also contributing to the declined sequentially across the four quarters. Obviously, it's just the natural.

Growth in the refi portfolio, although that's a great risk adjusted return it has a lower NIM because losses are obviously a much lower.

So as that becomes a larger percentage of the portfolio that just naturally decreases the overall NIM.

And then some other items going on there in the second quarter. When we had moved loans move to forbearance. Some of those loans moved out of the modification program and some of those loans that were delinquent when into Forbearance center resulted in some release on our 90 that reserve I'm just like most financial institutions, we have a policy or reserving 90 day intra.

Just so as we moved the third and fourth quarter as loans come out a forbearance theres going to be some.

Build on the 90 day reserve and we'll also have some loans going back into the modification program.

So those are the elements that kind of bring your NIM down across all four quarters there.

Okay, Perfect and then Jack.

A couple of your competitor.

As I move away from the private loan market I'm, just curious how you think that physicians navios I assume it helps but maybe just walk us through.

How your positioning for that.

Yes, so one of the reasons, there's several reasons why we like our our abilities and prospects to enter the in school origination market.

Certainly the asset.

Returns that we think we can generate in this area are particularly attractive and the.

In the high teens.

We also believe that we've got very tremendous insight in terms of credit.

Modeling and predictions in terms of losses that can help us in that side of the equation and we know from our servicing operations and this has been true when we pick up private loan portfolios for servicing we're able to materially reduce the loss rates on that portfolio by working with customers define payment.

Plans they can afford.

But your point, we do see people, leaving this space I think this is that this can be a difficult product on a bank balance sheet because of the Cecil the combination of the Cecil capital tax and the equity that is required to capital that's required to be maintained on the portfolio and so I do.

I'll leave you will see fewer our.

Banks in this space and that creates opportunity for us.

Overall, but thats a upside potential from our original estimates.

Great. Thank you.

Your next question comes from the line of Mark Devries from Barclays.

Can you talk about the decision to exit the department of Ed servicing contract.

I am kind of a timing for those accounts to move off your platform and also in the past you've mentioned, it's about a breakeven contracts. So how should we think about the cost supporting that business, how much is variable versus fixed from how much of that.

Fixed can be taken out.

Sure. So we've been a private sales we have a long long history of servicing federal student loans, and we believe our insight our data driven strategies and and the processes that we've been able to bring to this make us not only a very efficient player, but a very effective.

Player in this space.

We've talked historically about are significantly lower.

Default rates on Federals serve federal student loans that we service being approximately 35% lower than everybody else.

And we were interested in providing continuing to provide services to the department in this important loan program, but they had to be not only.

Under terms and conditions that were reasonable, but they also had to be terms and conditions, where we could be successful. Unfortunately the offer letter we received from the department did not allow for that.

They transferred too much risk to the servicer.

And.

And at rates and terms that we believe our effectively below cost for everybody.

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So with the hard decision but.

Our disappointing I guess I should say on decision, but it was not a hard decision to determine that down.

The contract itself kicks in once the department begins to move loans off of the.

[music].

Servicing software platforms that exist today to whats called the New next generation S Award that.

Contract Award was just canceled by the department and is going to be re issues. So the timing of that is unclear.

They cannot move servicing operations call Center back office operations.

To another entity until.

Until that system issue is determined in the and the loans are actually transferred there.

Asset timing.

Guessing, but I mean, it seems unlikely that we would see those loans move in the next 18 to 24 months.

Okay.

Okay got it and then just on the expenses, how much of what you're exposed to our business or variable or so.

One of the big decisions we made.

Almost a year and a half ago now was to sell our platform.

Which was a effectively.

Set of fixed cost infrastructure for us and convert that to a variable rate structure. So the vast majority of our expenses associated with loan servicing our now variable. We certainly have some components of fixed costs in terms of facilities.

Some management overhead and things like that but with this is something we think we can.

Easily manage.

Add that as those accounts, if and when those accounts are transferred off of our platforms.

Okay. That's helpful and then Jack BMS, given your updated thoughts on just kind of appetite to repurchase your stock here.

So obviously our stock price.

But we'll see whether that would it looks like later today, but obviously our stock price has been trading well below what we were we what we think it's where it when we started this year back in January we were expecting earnings of approximately $3 a share.

And at a stock price and the low teens.

We today have a earnings forecasts of $3 per share despite the massive disruption.

That has been caused by by Covidien, there's been a number of puts and takes some and we talked about a lot of the benefits today of the of the rate environment in the $30 million of additional floor income, but there are also some significant.

Negatives here as some of the processing work we do for.

Entities like federal federal agencies state and local governments transportation entities et cetera reduced revenue fee revenue by more than that.

So we look at.

The overall when we look at that environment, we can get shows the resilience of resiliency of the company and would certainly expect to see.

At the $3 of earnings forecast that we have today to support a return to that stock price of the of the low to mid teens.

Okay. Thanks.

Your next question comes from the line of Rick Shane JP Morgan.

Hey, guys. Thanks for taking my questions. This morning, and also I appreciate the.

Effort to provide guidance we're.

It's a little bit.

More rare today and I think it's very helpful to investors.

I am curious, where we think about sort of the three.

Categories of loans loans that are currently that are current loans that are in forbearance loans that are delinquent.

How you think about the different reserve rates.

If you wouldn't mind, if you could relate that to how you expect the reserves to migrate as the loans come off forbearance in your experience and 80%.

Payment rate on the loans that are rolling off forbearance.

So you know under Cecil.

We are required to estimate that remaining life of loan the remaining losses that we would incur on the portfolio over the life of the loans. We do we have 40 years of data and experience here. This crisis, obviously a little different.

But we are able to use that experience to understand how borrowers who are experienced stress.

I expect to what we can expect to see in terms of recovery.

Our alternative repayment programs that we can apply to help them manage through that process.

Our models that we have employ preseason take into consideration unemployment rates growth in the economy, our contraction in the economy.

Economic output.

Through that process, where we're able to.

Forecast, what we expect to be life of loan losses.

Clearly we have made I think well thanks, not maybe not clearly we have made a conservative set of assumptions as to what we think losses will be for borrowers who are exiting coven related forbearances as well as the rest of the portfolio.

We're heartened by a few things our portfolio is highly seasoned so on the legacy side of the equation. So these are borrowers who have been in repayment for a number of years had been through other forms of financial stress. The most recent being the financial the financial crisis.

And so we can see what kinds of resiliency and expectations, we can get out of that.

But those customers are able to bear.

Continue to make payments.

We look at where our borrowers are.

Where we think our borrowers are employed and we don't see a huge amount of of borrowers in segments of the economy that had been more negatively impacted.

Maybe the exception being the medical field, where.

A lot of.

Offices like non kovac related medical practices, we to close, particularly dentist's office that are now starting to reopen but we expect those those customers to outperform very well and as I said it the way we look at this today as we look if we look backwards and look at where losses have been what types.

Of loss rates with we've seen in our private loan portfolio during periods of economic stress.

Apply some of those.

To the current period.

Were looking at we think we are in an excellent position to be able to absorb those losses and as I said, we're able to absorb significant losses in that area.

If you viewed the ending reserves at June Thirtyth.

It would cover 12% cumulative losses on the legacy portfolio Thats a.

I think thats, a pretty extraordinary rate and coverage ratio, particularly when you look at other consumer loan portfolios in the marketplace.

Hi, Jeff Thats really helpful and.

It's interesting because I think in some late you described more of a top down modeling exercise than a bottoms up modeling exercise for seasonal and we're assuming that.

That it's probably a combination of both with a quarter of the portfolio on forbearance.

Can help us understand a little bit better from a bottoms up perspective, how you look at those loans in terms of the reserve rates that would be really helpful.

So we are building the model is built by loan statuses. So it is it is it is a bottoms up build.

But the the percentage of portfolio Thats, a self statistic.

Private side of the equation, our forbearance rates.

Our more at the seven 8% range.

And what we're looking at in those periods in particularly what we saw up for example in some of our customers who are and the dentistry.

World.

Borrowers look for payment relief, while their practices were shot but as their practices reopened those customers are able to re establishing themselves and continue to make payments on their loans.

So we feel like we're in if you look at the performance of the portfolio you look at the the how delinquency rates fell you look at the portion of the dollar balance of loans that are up to date, meaning.

Zero days past due not even not even one day delinquent those numbers are very strong and continue to improve each day.

And I guess I would say just a follow up on Jack said, we use Moody's analytics for our modeling here, which is obviously a well known model that's used by many other financial institutions.

And like other companies, we do a waiting of a baseline worst case best case are waiting right now puts the allowance between baseline and worst case and just like Jack said it is a bottoms up approach. So loan status is one of the attributes that's highly correlated to economic attributes such as unemployment.

And GDP so for those loans that are in forbearance theres, a specific expectation based on unemployment and GDP, how they would perform based on the performance. The previous 40 years of experience we have.

Got it okay. That's very helpful guys. Thank you both.

Your next question comes from the line of Lee Cooperman from Omega family.

Good morning, congratulations on a good quarter.

Let me issue I don't really much care about 31 years earnings I care about earning power.

When you guys look at your business what do you view is your recurring normalized earnings.

So we think.

As I said only.

There are lot of puts and takes this quarter and I think we entered we we spend our prepared remarks talking about some of the highlights in terms of floor income, helping credit performance, helping the overall numbers, but we look at our fee other fee income and the cobot related disease.

As processing service contracts that we won.

This this quarter.

But we also had revenue reductions as as I mentioned.

Transactional activity that we process for parking tolls hospitals.

We had a number of federal agencies, we do work for that asked us to pause on our contingency our asset recovery businesses, Jack I understand over that I get the basis of the question is because of all those puts and takes when you look at everything.

You had much more knowledge, we have what do you seek a normal recurring earnings are you know when in 2016 year on $1.83 that it down 90 down 95 to 44 to 95 and throughout this year should maybe a little bit inflated. This year, what do you think it normally.

Heading to a different series of questions, but what do you think your normalized earnings or you think your salad to 40 to 50 earn a typical you were less than that.

No I think this is I mean, I think our earnings this year so the.

Reflect that kind of more than what our earnings power is for sure because of the puts and take it.

Sure.

$3.

Well, but you have to take you have to subject you have to take into consideration Lee that the vast majority our earnings come from our legacy portfolio, which is amortizing about 10% year. She have that you have to bake that into the processes.

Well I'm, assuming myself to your salary as you go to 250 type arena.

I'm heading to a different direction.

What does your status of you buy backs. The question was ASP you didn't really answered what is the and utilized the authorization and what is your intentions regarding it.

So early at the beginning of this year, we estimated that we would acquire about $400 million or allocate about $400 million to share repurchases, we have about $65 million remaining under that that plan.

We paused in the second quarter, we didn't know share repurchases in the second quarter as we wanted to see how the economic environment would shake out as our customers exit the disaster forbearance is and we are able to confirm the performance that we expect to see in that portfolio.

We as I said in my comments, we would expect to complete our planned.

Capital distributions are returned to shareholders through the balance of this year. So sometime in the second half when we discuss my vote, which was not going to surprise you.

You said you didn't know where your stock was trading it's a 28.

Bids 30 offered last I checked that's a 7.7% yield at 830.

If you couldn't be the recurring we earned over 20% in your book you worth more than book value. Your book value I think is $10. A 90 cents. So we're very mispriced and I would say you should quite a way of being and I understand it met the virus the uncertainty, but you should find a way would be more aggressive five years ago. When I question you answered.

Dock repurchase you were buying a new low twentys because you thought it was really the rental value was 30 or better.

Clearly that was the wrong view, but you know to not be in the market. Currently when your stock is cheaper than it's ever been where you can retirees sevenseventy yield which is very accretive to the remaining distribution and buy back at a discount to book when business is worth more than book based upon your returns and book I think is making a series mistake.

So I would just put my vote into that.

What I would reactivate in a more aggressive fashion, even if you sold off some assets it.

And they have fully worked to buy somebody is showing that half of what is worth its a worthwhile trade.

That's the only got to say, but congratulations on the quarter.

Thank you.

Your next question comes from the line of Mark Hammond from Bank of America High yield.

Thank you Hi, Jack 10 gel.

So on slide 14, the cash flow for the next five years and compared that slide and then the actual unique cash flow Thats companies produced and then that same slide from the for Q 19 earnings deck.

I see basically virtually no change in cash flow expectations from that is that right and then if it is how you rationalize.

[noise] that virtually no change with.

The increased use of forbearance.

So forbearances a is a temporary.

Delay in cash flows not not a permanent delay in cash flows and there are many puts and takes so we have higher margins higher net interest margins that were incurring more floor income.

That will.

Crew into the portfolio minuses would be pushing some some cash flows back out overtime.

But this is these these numbers are recalculated each quarter.

And we estimated based on the portfolio characteristics and our expectations.

During.

For the next in this case five years.

Yeah.

A payment flows so they are they do reflect our best estimates of what we would expect to happen here.

Including all of those factors forbearance floor income.

Cost of funds et cetera.

Got it Jack Yes, that's.

Great if theres no change.

For credit investors on the unsecured credit rating.

Moody's and Fitch or low double b with negative outlooks would you be able to give me a sense for the importance of double b rating from Moodys, and Fitch and where that ranks on capital allocation or just priorities overall for naveen.

So I mean, we obviously have a view that we are stronger balance sheet than our ratings imply and I think our our performance and managing our unsecured debt balances and the consistency through really some challenging environments over the last 10 years to be able.

To continue to pay those down.

I think really reflected.

The strength of the balance sheet that we have in the predictability of the cash flows your comment earlier about it's great to see that despite co bid, we're not seeing a any material changes and expected cash flows that's because our portfolio has a very predictable.

Performance level and cash flow expectations, because of the mix of between federal and private and the seasoning that exists there.

So yes, we we run our we run our balance sheet, we run our business to make sure that we're able to create value for all stakeholders and that means that we have the ability to both the issue in the unsecured marketplace and be able to confidently service that unsecured debt in.

All types of economic environment, Thank our performance.

No it reflects that.

Got it and last one from me Hi regarding your allowance for losses in the consumer loan segment.

Okay can you give a sense for what chart the charge off rate for the next year for 2021.

Is that is built into that.

Diesel assumption.

The ended the second quarter.

So Cecil Ses and under the Cecil process, we do make estimates on both annual and LIFO, our periodic as well as life of loan loss expectations, but but there is much more volatility on the.

Where where that loss might occur and at this point in time, we have not we're not prepared to provide guidance for 2021 in terms of what loss expectation out expectations are although we would say at 12%.

The ability to absorb 12% cumulative losses on our legacy portfolio is.

It's extremely high end.

Probably unmatched in the consumer lending space.

Okay, great. Thanks, Jack 10, Joe.

Okay great.

At this time I would like to remind everyone. If you will like to ask a question. Please press star one on your telephone keypad.

Your next question comes from a line of John Hecht from Jefferies.

Morning, guys. Congratulations on a good quarter. Thanks for all the details here.

Most of my questions have been asked and answered that I'm curious so in the business in the Bts segment you guys.

Yeah, you quickly adapted you're doing some you're getting some revenue from Princeton services, you I understand we might think that you that could be a temporary thing given the circumstances, but yes, I guess, what I'm interested in is what.

Yeah.

What capabilities do you have that enable you to quickly ramped that up and how might those.

Resources and capabilities the used over the long term.

Yeah, So I think thats a great question.

Obviously coded created new needs for many of our clients. The first item that really showed up was I need to help them process unemployment insurance claims.

We were able to step in and help.

Very very quickly there and some in some instances, we were up and running with call centers and and assistance within three or four days of being requested to do so.

And what our capabilities are really is the ability to take inbound take inbound calls make outbound calls use our our systems and analytics to be able to kind of predict volume flows triage accounts and segment them in two ways that they can be resolved.

Quickly through the process.

I think what we are hopeful here is that as we've demonstrated the skills demonstrated the operational skills demonstrated the value of our analytics and and capabilities.

That we will win some longer term arrangements with some of these some of these clients. Obviously, we would hope that unemployment insurance processing demand would come down dramatically, we would hope that cobot contact racing.

With no longer be required.

With that we can apply those same skills to other other lines of businesses remember at the same time that these businesses. We're ramping up we had others that were declining rapidly in the bps space you know our work for our hospitals. For example is a function of revenue that patient visits and transactions when cobot struck.

Demand for these types of services that were not covert related decline dramatically. Many hospitals soft 30, 40, even 50% declines in their revenue as a result of that.

We don't do parking processing, we're not doing toll processing for people who aren't driving.

And then some of our federal contracts.

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Also asked us to pause basically not do any work that is now just starting to be turned back on and so we're expecting that those revenues from the the original businesses plus the continued revenue from these cobot related businesses will produce higher fee income in the in.

The third quarter.

Okay, that's very helpful.

Color appreciate that second question is.

Do you I mean do you guys have I guess details or I guess insight with respect to you the kind of fall.

Fall status of people going back to college and does that even matter for refinancing volume.

I guess is does the development of Kogut effect kind of your outlook for the ability to produce loan volume.

Yes, so two different.

Types of businesses in the refi cited the equation, we are working with borrowers who have already graduated have demonstrated track record in and their career multiple years of repayment outperformance that we're able to evaluate and then because of that strong credit performance.

Hi levels of free cash flow on their portfolio and sticking asked our consistency of their employment history, we're able to offer them lower rates and so we that business.

We don't expect to be driven impacted by what's going on in terms of school openings or not and certainly the low rate environment makes that business more attractive for some for some customers right now.

On the in school side of the equation. There's no question that we would expect overall demand for.

[music].

Financing to be impacted by enrollment levels, we expect enrollment levels to be down for this upcoming academic year in for students who are in school, but not on campus obviously.

Living expenses room, and board expenses are will grow we will be reduced as well.

But we're just starting in this space and so we're capturing a relatively small segment of what we expect to be freshman.

Our first time borrowers in the in the private student loan arena, and we have very modest expectations and based on application flows that we're seeing at this point in time in July.

We are confident that we will hit or exceed our modest expectations for this year.

Okay. Thank you and then final question for me is yes, I think we're getting deeper into an election cycle.

Or anything.

From either side noted on a policy perspective that we should be monitoring at this point or is it too early to.

Have any kind of perspective on that.

I think I think the biggest challenge in the in this in those student loan space has been.

Policies that are more one size fits all and what we see in our portfolios and see from our experiences that.

While some borrowers.

Have too much debt and do struggle others got the value of their investment in there in higher education and are easily able to manage that you can just look at the FFELP portfolio that we have and see the balance of customers, who are able to continue to make payments without interruption during cove at all.

What we saw in the private side, so solutions that treat all trick or treat all customers. The same is probably.

Probably not the best solution, particularly when one considers the costs. So I think theres a lot of high level concepts that are thrown out in terms of proposals here and in relief options.

And then the stick or just the sticker price associated with those tend to be extremely large and harder and harder to kind of.

Skewed on.

We'll see what we'll see what happens, but I think right now is this a lot of talk.

A lot of a lot of ideas flowing back and forth and.

Oftentimes, we see things that are significantly different in implementation.

Down the road when we when the realities of costs come into the equation.

Yes, Okay I appreciate the.

The perspective, thanks very much.

Your next question comes from the line of Moshe Orenbuch from Credit Suisse.

Great. Thanks.

Couple of things I guess first just on expenses. Some expenses were really good this quarter anything in there that.

I would have driven that one time direction, either higher or lower.

That we should be aware.

Well certainly in some areas, where we were not doing.

Work on like asset recovery sides of the equation.

We would definitely have seen a decrease in that space, but if you look at where are our operating so operating expenses overall.

We were down really across the board, we saw lower expenses and our technology team in servicing mbps asset recovery and even in our corporate overhead functions. The only area that was really flat was consumer lending as we continued to kind of build out our origination capabilities.

For for in school volume.

And this is really a function Moshe just you know there's definitely some revenue revenue related items that costs expenses to decline footwear.

We're examining all of our expenses as I said, we're looking we continuously look for opportunities to improve our operating efficiencies through.

Technology automation AI anything that can help us drive.

More better efficiency ratios, but at the same time maintain the service levels on.

We that we seek to deliver here.

So this is just as a inc. This quarter's results I think are a good example of a combination of activities, but operating efficiency as a contributor here.

And obviously you get some revenue rebound, but how much should we expect from things like the recovery business in the refi business kind of stepping back up in the second half like what how much you know all other things equal with that.

So like Rifai suspending marketing spend doesn't really hurt our hit our operating expense line on because most of those dollars end up getting capitalize as under accounting rules to the to the originated loan.

And so they that expense gets spread effectively through net interest income over time.

But on the bps side of the equation. There's no question, if we're not doing.

One of our businesses for example, as we manage asset recovery for.

Federal guarantee agencies, and we do that work both internally and we farm it out to different entities under accounting rules. If we if we do that the expenses associated with those third parties are recognized on our books right and then the revenue is grossed up to match it that obviously didnt happen this quarter as an example.

Paul.

But.

But overall you would definitely see.

We continue to expect at our operating expense numbers will be at kind of similar levels for the balance of this year.

Okay, just kind of thanks, Thanks, Jack just to kind of talk a little bit about the refi business capital implications and you've been.

Rebuilding the capital ratio post the C. so in the derivatives charging you've got at least one of the rating agencies.

Who who pretty much has a pretty harsh capital treatment of pure.

Rifai loans treats them kind of the same as the is the amortizing legacy private loans and.

I mean, I guess I'm struck by the fact that the 2 billion that you expect to originate in the second half I mean, if you kind of multiply that by your capital required capital ratio at least according to S&P.

I mean, that's 10% of your market I.

I guess and so you know how should we kind of think about that because it just feels like there's.

They're.

Kind of echoing what.

We had said earlier, given where the stock is trading it just feels like there should be little more.

You know kind of looking for for money in a bunch of other places I guess.

So we we I mean I hear your point here and when we look at our capital allocation model, we look at a variety of different different opportunities. We think it we can originate loans based on the capital that we are allocating to businesses and generate.

Mid teen our lease that that's a that can be thats, an attractive long term business versus.

Yes.

Not not being in that space, we can manage that business and the capital implications through a variety of ways. We did it last year you saw in a year ago quarter, we we monetize the value of that rifai portfolio by selling some of those loans and booking again.

That may not be the best it may not be the best opportunity to do something like that in today's marketplace, but yes, we believe that that would be an attractive.

Place for us to look.

As as credit outlook becomes more stable.

So I think theres, a combination of things that one can do but ultimately.

I think companies are valued more highly with they have ongoing franchise capability, where they can continuously create and deliver long term value.

Thats really what we're looking to do on balance that against the amortizing business that is generating sick or releasing generating and releasing significant amount of capital that we can.

Returned to shareholders.

And thats done through both our dividend and our share repurchase programs.

Alright, thank you.

Your final question comes from the line of Aaron's Cyganovich from Citi.

Thanks, you in the earlier answer about production levels. I think you said that in school would be a modest amount did you did you comment on what your expectations for reflect production would be in the second huh.

Yes, we said $2 billion, Okay got it.

And then I guess kind of at last point about <unk>.

What level of of equity you need to have a pro forma adjusted tangible at 6% is that.

At the level that you feel comfortable to to complete share repurchases or do you want to see that rise higher.

To to.

Mobile.

Sending out more capital.

No no I think we've said that 6% is based on the mix of the portfolio today is.

Is the right number for us.

Okay all right. Thank you.

Yes.

Ladies and gentlemen at this time I will now I'll turn the call back to Mr., Joe Fisher for any closing remarks.

Thank you Sylvia like to thank everyone for joining us on todays call. Please contact me or my colleague Nathan Rutledge. If you have any other follow up question. This concludes today's call.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation and I've said you. Please disconnect at this time.

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Ladies and gentlemen, thank you for standing by and welcome to be Navio second quarter 2020 earnings call. At this time, all participants are they listen only mode.

After the speakers presentation, there will be a question and answer session.

Yes. Good question during the session you wanted to press Star one on your telephone keypad.

Please be advised that today's conference is being recorded and if you're required any further assistance. Please press star zero for the operator.

It is now my pleasure to turn the call over to your host Mr., Joe Fisher Mr for sure the floor is yours.

Thank you feel real good morning, welcome to NAV in 2022nd quarter earnings call with me today, our Jackman, our CEO and 10, Morris, our controller and acting CFO.

After their prepared remarks, well open up the call for questions.

Before we begin keep in mind, our discussion will contain predictions expectations and forward looking statements actual results in the future maybe materially different from those discussed here.

This could be due to a variety of factors what do you should refer to the discussion of those factors on the company's form 10-K, and other filings with the FCC.

Flavio. These factors include among others, the risks and uncertainties associated with the severity magnitude and duration of the Kobin 19 endemic and the related economic impact.

The work from home policies and travel restrictions that have been put in place did not negatively affect our ability to close or books and maintain our financial reporting system internal controls over financial reporting work disclosure controls and procedures.

During this conference call, we will refer to non-GAAP measures, we call our core earnings.

Scripts in the core earnings a full reconciliation to GAAP measures and our GAAP results can be found in the second quarter 2020 supplemental earnings disclosure. This is posted on the investors page at Navient dotcom.

Thank you and I'll turn the call over to Jack.

Thanks, Joe Good morning, everyone. Thank you for joining us today for your interest the Navient.

Before I start I would like to welcome Ted Morris to today's earnings call. Ted has been what Naveen since 2003, a where it's been an outstanding member of our finance team.

As Joe said in addition to his role as acting CFO. He is also our controller and he's our resident expert in two of my favorite accounting policies I derivative accounting and see so.

Well, we were sorry to see Chris move on and I wish him well I had tremendous confidence and Ted and the rest of the finance team. So welcome Ken.

[noise] the Kobe 19 crisis continues to present ongoing new challenges our customers and clients have seen disruptions in their lives work and financial health.

And while the continued it continues to produce significant uncertainty as to what comes next we have responded.

We have provided relief to millions of borrowers and need to Forbearances and other payment relief options. We have worked together with many state attorneys general and consumer protection agencies to provide a uniform set a private education loan relief nationwide.

And we are assisting states to meet the surge in demand for services, such as unemployment claims and contract pricing.

I'm extremely proud of how our team immediately and actively responding to the crisis in the needs of those we serve.

In response to the uncertain environment, we took decisive action, we increased our reserves and a bill and our ability to absorb credit losses reduced marketing campaigns for new loans and increased our liquidity on hand, and our retained capital.

In an effort to keep our teammates safe we continue to allow those who can about 90% of our team to work from home.

Our infrastructure and technology allowed this moved to happen quickly and has allowed our team to work safely productively and efficiently with no disruption to service quality.

[laughter] these steps our strategy the skills and dedication of our team and the strength and diversity and client focus of our business delivered outstanding results this quarter.

For the quarter adjusted core earnings per share rose, 23% over the year ago period to 91 cents.

The year ago quarter included 15 times in gains from loan sales in debt repurchases. There were no similar gains this quarter.

Our results this quarter were driven by our proactive strategy strong credit performance, a very favorable interest rate environment.

Operational flexibility to meet new and significant demand for business processing services.

And a continued focus on improving our operating efficiency.

Later, Ted will provide more details on our financial results, but first let me add some color to the high.

On the highlights of the quarter.

Net interest income increased nearly $33 million over the year ago quarter, primarily due to the favorable rate environment and a 10 million dollar increase from our Wi Fi loan portfolio.

Low short term interest rates increased floor income, particularly on the portion of the portfolio that reset each July 1st.

With the rate, we said earlier this month the $30 million a floor income earned on annual reset loans will not repeat next quarter.

Credit performance was strong due in part to the release provided by disaster Forbearance is granted in response to coated.

The balance of loans and repayments on meaningful decreases in delinquencies, what the 90 day delinquency rate falling 38% to 1% at June Thirtyth.

We're just beginning to see borrowers exit from disaster Forbearance has granted earlier this year.

We have implemented an extensive data driven outreach program to inform and insist customers before they returned to repayment.

Since the peak levels up forbearance, and our private loan portfolio $1.7 billion has.

Successfully exited forbearance, where the borrower had not requested additional payment relief options that are available to them.

While credit performance has been strong today, we're prepared for this to change.

Our provision for loan losses and results in reserves are able to absorb a very significant level of losses.

For example at June Thirtyth, our loan loss reserve would cover new cumulative default of over 18% in our FFELP portfolio in over 12% and our legacy private loan portfolio.

Levels significantly above what we have experienced in recent years.

As I reported last quarter in response to the uncertain economic environment, we reduced marketing spend for Wi Fi loan products.

As a result, new originations in the quarter fell to $238 million from 1.9 billion in the first quarter.

With improved visibility in both credit and funding costs, we have restarted marketing effort efforts.

And expect to originate approximately $2 billion and high quality high value Rifai loans in the second half of 2020, consistent with our return hurdles.

We have also continued to prepare for the upcoming academic year with our in school lending product.

While overall demand is likely to fall from last year due to the lower enrollment levels and fewer students on campus. Early results are positive and we are confident that our product design features will lead to an attractive and valuable business with targeted are always in the high teens.

In our bps segment, most clients experienced significant reductions in transaction volume due to the crisis.

For example, there were fewer vehicles parking are using toll roads and patient visits fell at hospitals due to covert concerns.

Our bps team was able to use our operational flexibility and processing expertise to win a number of incremental contracts to help our clients respond to new needs.

Alluding Kobe contact tracing in unemployment processing services.

Importantly, we were able to demonstrate our ability to adapt and provide experienced people and technical capabilities on close to a real time basis.

Our rapid response led to nearly $20 million, a new revenue in the quarter.

The feedback from these clients and their customers has been extremely satisfying.

One of our ongoing top priorities has been expense management in the current crisis has not reduced our efforts here.

While we have consistently operated at industry, leading efficiency, we're continuously improving in this area, while still delivering outstanding service.

As a result of these efforts total operating expenses this quarter fell 11% from the year ago quarter to $215 million.

And we continue to examine every expense item to eliminate waste reduce cost and improve efficiency.

While delivering excellent service to our customers on clients.

Finally, we returned $31 million to shareholders and dividends and made meaningful progress in improving our tangible capital ratio from the decline caused by last quarter's adoption of Cecil.

Our adjusted tangible equity ratio improved to 3.6% at June Thirtyth up from 3.2% at March 31st.

Adding back the cumulative and temporary mark to market losses on derivatives.

That we employed to hedge floor income would increase stressed ratio to 6% at June thirtyth.

Expected earnings easily support our dividend and will provide the ability to complete the balance of our planned capital return in 2020.

During our last earnings call I reported that our company was entering this crisis from a position of substantial financial and operational strength.

Our results this quarter or the product of these strengths.

Our business model and technology infrastructure allowed us to react quickly to the needs of our customers and clients.

Enabled our teammates to be safer as they work from home.

And delivered growth in net interest income strong credit performance and an ability to pivot our operations to areas of critical need.

Notably these results were accomplished with lower expenses.

Combined they delivered the core earnings of 91 cents and a 27% return on equity.

At this time, we're more confident of the outlook for the balance of the year and assuming interest rates and basis spreads remain at similar levels and that credit performance remains consistent with the early results we are seeing.

We expect to report full year earnings between 295 in $3 a share in 2020.

This forecast is extremely gratifying and confirms the value of our franchise, our strategic plan and our ability to build value for all of our stakeholders.

Finally at the product of the hard work and dedication of an extraordinary team.

I appreciate your interest and I look forward to your questions Abcheck Ted provides more details on the quarter. Thank you.

Thank you Jack and thank you to everyone on today's call for your interest and Navios. During my prepared remarks, I will review the second quarter results for 2020 and provide additional color on the impact of Cobot 19 pandemic on our business.

Ill be referencing the earnings call presentation, which can be found on the company's website from the Investor section.

Starting on slide five key highlights from the quarter include delivered GAAP EPS of 64 cents and adjusted core EPS of 91 cents.

Provided a media payment relief to over 6 million borrowers impacted by October 19.

Reduced operating expenses by 11%.

Originated $238 million or private refinance loans improved on our strong liquidity position and increased our adjusted tangible equity ratio to 3.6% or 6% after excluding the cumulative negative mark to market losses related to derivative accounting.

Let's move to segment reporting beginning with the federal education loans on slide six.

On both our FFELP and private portfolio, we continue to grant disaster.

Related forbearance to there's a need.

As we provide payment relief to those impacted by cobot 19, forbearance rates on our FFELP loan portfolio increased to 26.6% at June Thirtyth, which was down from the peak of 28.5% and our delinquency rate decreased 22% to 8.2%.

Today, we are seeing forbearances that are 300 basis points lower than quarter end as bars began to transition back to paying status as well.

Well the portfolio continues to amortize the net interest margin improved 26 basis points for the second quarter, which led to the overall net interest income increasing 18% to 171 million on a quarter.

The increase from a year ago quarter was largely driven by the continued drop in interest rates that began in Q1, an accelerated in the Q2.

This favorable interest rate environment resulted in a significant increase in unhedged floor income.

In the quarter unhedged floor income contributed 41 basis points to the segment's net interest margin a.

A little less than half of which was earned on 6 billion of loans with rates that reset annually on July onest of each year.

Given the current interest rate environment, we do not anticipate earning additional floor income on the annual reset portion of our unhedged floor portfolio through the end of 2021.

The current outlook for interest rate should continue to positively impact net interest margin for felt portfolio and as a result, we're raising our full year net interest margin expectations to be on the low to mid 90 basis point range. In addition, operating expenses declined 21% year over year.

Now, let's turn to slide seven and our consumer lending segments.

In the quarter, we saw a forbearance rate peak at 14.7% and declined 8.4% at quarter end.

Recently, we have seen forbearance continue to fall on additional 100 basis points as this portfolio begins to transition to repayment statuses.

Predictor of the forbearance usage that Jack mentioned can be seen on the following page as borrowers that have successfully exited forbearance have not requested the additional payment relief options available.

Delinquency rate declined 60% to 2% can charge offs fell by 45% to 48 million.

As borrowers transition out of forbearance, we expect both charge offs in delinquencies to increase from these historic lows, but the increase in charge offs not beginning until 2021.

In the quarter, our provision expense was 41 million, which resulted in the allowance as a percentage of loans are repayment of 8.2% up from 7.8% in the prior quarter.

Absent a significant deterioration in the economic environment from here, we feel confident that were adequately reserved giving the well seasoned and high credit quality of our portfolio.

Net interest income increased 2 million year over year and was driven by the stability and our net interest margin combined with an increase in our private education refinance loan balance offsetting the natural amortization of our legacy portfolio.

The net interest margin of 320 basis points was better than expectations due to the decrease volatility in rates for assets that earn based on the prime rate and our funded with LIBOR. The dislocation on those rates that occurred in March and April has since returned to more normalized levels.

During the quarter, we originated $238 million of high quality education refinanced loans as we have indicated this decline was intentional as we decreased our marketing activities due to capital market uncertainty stemming from cover 19.

We also updated the pricing on new originations to reflect the increase in cost of funds on the ABS market. We're now seeing more stable and improving funding cost on the MBS market.

As a result.

We plan to increase monthly originations and expect to originate 2 billion for the second half a year.

In addition, operating expenses remained flat year over year, while growing our portfolio.

It's continue to slide nine to review our business processing segment.

And the second quarter, we saw significantly lower transaction related placements and both government services and healthcare revenue cycle management compared to the year ago as a result of slower economic activity due to covert team.

We have transition hundreds of our experience bps colleagues to support state clients, who are working to help with the increase in unemployed residents, who are accessing needed benefits and to provide contact tracing services. These new opportunities contributed to a 12% increase in total revenue from the first quarter.

Now, let's turn to slide 10, which highlights our financing activity during the second quarter, we issued $1.3 billion of term private education, Rifai ABS backed by high quality loans as markets began to recover.

Two days ago, we price an additional 780 million of term private education refi us strong investor demand resulted in the spreads that overall were 50 50 basis points tighter than similar transactions in the second quarter.

In addition, we extended the felt warehouse facility to 20 to 22 extended a private education facility to 2021.

And expanded total capacity in our private education refinanced loan facility.

At quarter end, we had additional capacity in our funding facilities of $2 billion for private education loans, and 242 million for FFELP loans.

In addition, we had 2.4 billion or primary liquidity of which 1.6 billion as cash.

As a result, we ended the quarter in a very strong liquidity position.

We ended the quarter with another adjusted tangible equity ratio of 3.6% the cumulative negative mark to mark losses related to derivative accounting reduce shareholders' equity as of June thirtyth.

By $692 million and is primarily related to one sided mark to market losses on derivatives hedging floors.

Fortunately as we've discussed in the past these negative marks will reverse to zero as the hedge contracts mature over the next several years, excluding these temporary mark to Mark losses, our adjusted tangible equity ratio is 6%.

Let's turn to GAAP results on slide 11.

We recorded second quarter, GAAP net income of $125 million or 64 cents per share compared to net income of $153 million or 64 cents per share in the second quarter 2019.

Assuming interest rates and basis spreads remain at similar levels and that credit performance remains consistent with the early results were saying we feel confident that we can achieve both the guidance provided today for the remainder of the year, including the cash flow generated by our high quality and well seasoned education loan portfolio.

In summary, the strong results this quarter highlight the strength and resiliency of our workforce and commitment to quickly provide timely solutions for our customers and clients needs within these unprecedented times I will now open up the call for questions.

Ladies and gentlemen, if you will like to ask a question. Please press Star then the number one on your telephone keypad again to ask a question. Please press star one on your telephone keypad.

Your first question comes from the line Vincent can take from Stephens.

Hey, Thanks, good morning, guys.

Great results this quarter.

Just wanted to ask about.

Forbearance and how that.

How we should think about that affecting.

The.

Interest income in the near term and and also some of the Investor questions I get is about a worry about funding mismatch between the lack of.

Cash flows on the premiered loans versus your Securitizations, maybe you could talk about that in more detail on how the cash flows work. Thank you.

Sure so.

So we offer immediately in response to the covert crisis, we allowed our borrowers to defer payments through what we call a disaster forbearance program when we applied that.

Those those options to both our fell behind our private loan portfolios.

As Ted shared we saw and as one of the slides in the Investor deck shows we saw a significant increase in demand and is now starting to receive guys.

As.

Economic outlooks for many people are starting to become a little bit more clear.

We are just when someone exit so forbearance they are required to make a payment at first payment. Due is 30 days later, so we're just starting to see those payment due gates come in and we're very.

Please by what we're seeing so far the overwhelming majority somewhere around 80% armoire are actually successfully making their payment.

But it is still relatively early in the sample size a small how we'll see more of those borrowers schedule to make have payment due gates starting in the second half of this month and into and into August from a net interest income perspective, a loan in a forbearance for both our FFELP and private loan portfolio Doesnt change.

Range.

The interest accruals. So we continue to accrue interest on those loans and have.

No in fact on.

Interest income as reported.

From a cash flow perspective, certainly if a borrowers not making payments.

There is that reduction in cash flow, although our securitization trust on both the FFELP and private side of the equation have more than sufficient cash flow to cover all payments.

In terms of interest accruals on the bonds servicing costs and they are still cash flowing.

Back to the company, meaning that there is there's more than enough excess cash coming into the trust. So that we continue to be able to sweep a component portion out of that and I. Thank the liquidity build that Ted mentioned as an example of that right. We were able to build liquidity. During this process. Despite the significant increases.

Forbearance.

Okay, great. Thank you.

And then just another follow up on the floor income so that was.

Nice jump this quarter.

So when I when we think about the rest of the year is it simply.

Keeping the 20 basis point benefit taking out the the other 20 basis point.

The benefit from the reset loans and then just continuing that for the rest of year just kind of wondering.

We should think about that and maybe any help on the sensitivities to.

To benchmark rates. Thank you.

Sure, Yeah, and I think you're right I mean overall related to the annual reset floor component that was $30 million of income for the quarter that goes away third quarter. So it's as simple as that as far as the fixed floors on hedges they were earning about $30 million in the quarter as well.

So we would expect that to continue obviously there is a natural decline of the balance, but thats not very significant when you go from third to fourth quarter.

Where rates are today as far as one month, LIBOR or being around 20 basis points, that's expected to be relatively consistent not just this year, but for the next several years on if you look at the forward curve. So.

Thats, a fair way to look at it as far as the floor component there as far as the $30 million comes out beginning in the third quarter.

Okay, great. Thank you very much.

Your next question comes from the line of Sanjay Sakhrani from KBW.

Thanks. Good morning. Good result, 10, maybe just a follow up on that last comment you made just to be clear so great.

Rate environment doesn't change materially we should expect the FFELP NIM to sort of stay here in the mid Ninetys just want to be will be clear with that and then.

Maybe just talk about the consumer lending segment margin expected to decline some other EMEA, maybe you could plans or what's driving that thanks.

Sure absolutely.

So to your point on page four where we give updated guidance.

We expect the FFELP NIM to be in the low to mid Ninetys for the year. When you see that NIM is at one of five for the second quarter. When you move to third quarter, you lose that $30 million worth of annual reset floor.

Finally, offsetting that you do pick up some additional benefit related to if you remember in the first quarter when rates started moving on the FFELP side. It's a daily one month LIBOR rates that it's funded by one month LIBOR that resets monthly. So the margin was compressed in the first quarter, we got a little bit of that back in the second quarter, we get the rest of that back in the third quarter.

So that's what's partially offsetting the decline in the floor income there. When you go from second quarter to third quarter. When you try to do the math there as far as year to date night before.

And and staying in the nine years, there on the private side as far as what you're saying there as far as the kind of sequential decline in the NIM for the four quarters again, the opposite occurred first quarter. This year on the private side, there was a benefit as far as the prime assets did not reset of the first quarter, but the LIBOR funding came down.

Around that was a pretty significant benefit in the first quarter you give some of that back in the second quarter and you give the rest of it back in the third quarter also contributing to the decline sequentially across the four quarters. Obviously, it's just the natural.

Growth in the refi portfolio, although that's a great risk adjusted return it has a lower NIM because losses are obviously much lower.

So as that becomes a larger percentage with a portfolio that just naturally decreases the overall NIM.

And then some other items going on there and the second quarter. When we had moved loans move to forbearance. Some of those loans moved out of the modification program and some of those loans that were delinquent when into forbearance that resulted in some release on our 90 that reserve just like most financial institutions, we have a policy or reserving 90 day intra.

Just so as we moved the third and fourth quarter as loans come out of forbearance theres going to be some.

Bill on the 90 day reserve and we'll also have some loans going back into the modification program.

So those are the elements that kind of bring your NIM down across all four quarters there.

Okay, perfect and then attack.

Couple of your competitor.

Moving away from the private loan market I'm, just curious how you think that positions navios I assume it helps but maybe just walk us through.

How your positioning for that.

Yes, so one of the reasons there are several reasons why we like our our abilities and prospects to enter the in school origination market.

Certainly the asset.

Returns that we think we can generate in this area are particularly attractive and the.

In the high teens.

We also believe that we've got very tremendous insight in terms of credit.

Modeling and predictions in terms of losses that can help us in that side of the equation and we know from our servicing operations and this has been true when we pick up private loan portfolios for servicing we're able to materially reduce.

The loss rates on that portfolio by working with customers define payment plans they can afford.

But your point, we do see people, leaving this space I think this is this can be a difficult product on a bank balance sheet because of the c. So the combination of the Cecil capital tax and the equity that is required to capital that's required to be maintained on the portfolio and so I do.

I believe you will see fewer our.

Banks in this space and that creates opportunity for us.

Overall, but that's that's upside potential from our original estimates.

Great. Thank you.

Your next question comes from the line of Mark Devries from Barclays.

Can you talk about the decision to exit the department of Ed servicing contract.

And kind of a timing for those accounts to move off your platform and also in the past you've mentioned, it's about a breakeven contracts. So how should we think about other cost supporting that business, how much is variable versus fixed and how much of that.

Fixed can be taken out.

Sure so within a private sales we have a long long history of servicing federal student loans, and we believe our insight our data driven strategies and and the processes that we've been able to bring to that make us not only a very efficient player, but a very effective.

Player in this space.

We've talked historically about are significantly lower.

Default rates on Federals server federal student loans that we serve as being approximately 35% lower than everybody else.

And we were interested in providing continuing to provide services to the department in this important loan program, but they had to be not only.

Under terms and conditions that were reasonable, but they also had to be terms and conditions, where we could be successful. Unfortunately the offer letter we received from the department did not allow for that.

They transferred too much risk to the servicer.

And.

And at rates and terms that we believe our effectively below cost for everybody.

So with the hard decision but.

Our disappointing I guess I should say.

Decision, but it was not a hard decision to determine that down.

The contract itself.

Kicks in once the department begins to move loans off of the.

Servicing software platforms that exist today to whats called the new next generation.

EPS Award that contract award was just canceled by the department and is going to be re issues. So the timing of that is unclear. They cannot move servicing operations call Center back office operations.

To another entity until.

Until that system issue is determined in the and the loans are actually transferred there.

Thats a timing.

Guessing, but I mean, it seems unlikely that we would see those loans move in the next 18 to 24 months.

Okay.

Okay got it and then just on the expenses how much of that are expected to our business or variable or so.

Yes, one of the big decisions we made.

Almost.

And a half ago now was to sell our platform.

Which was a effectively.

Set of fixed cost infrastructure for us.

Convert that to a variable rate structure. So the vast majority of our expenses associated with loan servicing are now variable.

Certainly have some components of fixed costs in terms of facilities.

Some management overhead and things like that but with this is something we think we can.

Easily manage.

At that as those accounts, if and when those accounts are transferred off of our platforms.

Okay. That's helpful and then Jack BMS, given your updated thoughts on just kind of appetite to to repurchase or stock here.

So obviously our stock price.

Well, we'll see whether that would it looks like later today, but obviously our stock price has been trading well below what we what we think it's where it when we started this year back in January we were expecting earnings of approximately $3 a share.

And had a stock price and the low teens.

We today have a earnings forecasts of $3 per share despite the massive disruption.

That has been caused by by Covidien, there's been a number of puts and takes some and we talked about a lot of the benefits today and the of the rate environment in the $30 million of additional floor income, but there are also some significant.

Negatives here as some of the processing work we do for.

Entities like federal federal agencies state and local governments transportation entities.

Cetera reduced revenue fee revenue by more than that.

So we look at.

The overall when we look at that environment, we can get shows the resilience of resiliency of the company and which certainly expect to see.

At the $3 of earnings forecast that we have today to support a return to that stock price of the low to mid teens.

Okay. Thanks.

Your next question comes from the line of Rick Shane JP Morgan.

Hey, guys. Thanks for taking my questions. This morning, and also I appreciate the.

Effort to provide guidance we're.

It's a little bit.

More rare today and I think it's very helpful to investors.

I am curious, where we think about sort of the three.

Categories of loans loans that are currently that are current loans that are in forbearance loans that are delinquent.

How you think about the different reserve rates.

If you wouldn't mind, if you could relate that to how you expect the reserves to migrate as the loans come off forbearance in your experience and 80%.

Payment rate on the loans that are rolling off forbearance.

So I wonder Cecil.

We are required to estimate that remaining.

Life of loan the remaining losses that we would incur on the portfolio over the life of the loans. We do we have 40 years of data and experience here. This crisis, obviously, a little bit different.

But we're able to use that experience to understand how borrowers who are experienced stress.

I expect to what we can expect to see in terms of recovery.

Our alternative repayment programs that we can't apply to help them manage through that process.

Our models that we have employ preseason take into consideration unemployment rates growth in the economy, our contraction in the economy.

Economic output.

Through that process, where we're able to.

Forecast, what we expect to be life of loan losses.

Clearly, we have made I think well.

Maybe not clearly we have made a conservative set of assumptions as to what we think losses will be for borrowers who are exiting kobe related forbearances, while the rest of the portfolio.

We're heartened by a few things our portfolio is highly seasoned so on the legacy side of the equation. So these are borrowers who have been in repayment for a number of years have been through other forms of financial stress. The most recent being the financial the financial crisis.

And so we can see what kinds of resiliency and expectations, we can get out of that.

But those customers are able to bear.

We continue to make payments.

We look at where our borrowers are.

Where we think our borrowers are employed and we don't see huge amount of.

Borrowers in segments of the economy that have been more negatively impacted.

Maybe the exception being in the medical field, where.

A lot of.

Offices like non kovac related medical practices, where either close, particularly dentist's office that are now starting to reopen but we expect those those customers to outperform very well and as I said it the way we look at this today as we look if we look backwards and look at where losses have been what types of.

The loss rates with we've seen in our private loan portfolio during periods of economic stress.

Apply some of those.

To the current period.

Were looking at we think we are an excellent position to be able to absorb those losses and as I said were able to absorb significant losses in that area.

If you viewed the ending reserves at June Thirtyth.

It would cover 12% cumulative losses on the legacy portfolio Thats a.

I think thats, a pretty extraordinary rate and coverage ratio, particularly when you look at other consumer loan portfolios in the marketplace.

Jeff Thats really helpful and.

It's interesting because I think in some ways you described more of a top down modeling exercise than a bottoms up modeling exercise receivable and we're assuming that.

That it's probably a combination of both.

A quarter of the portfolio on forbearance, if you can help us understand a little bit.

Better from a bottoms up perspective, how you look at those loans in terms of the reserve rates that would be really helpful.

So we are building the model is built by loan status. So it is it is is a bottoms up build.

But the percentage of portfolio of excess Phelps statistic.

Private side of the equation, our forbearance rates.

Our more thieves seven 8% range.

And what we're looking at in those periods in particularly what we saw up for example in some of our customers who are and the dentistry.

World.

Borrowers look for payment relief, while their practices were shot but as their practices reopened those customers are able to re establishing themselves and continue to make payments on their loans.

So we feel like we're in if you look at the performance of the portfolio to look at the.

How delinquency rates fell you look at the portion of the dollar balance of loans that are up to date, meaning.

Zero days past due not even not even one day delinquent those numbers are very strong and continue to improve each day.

And I guess I would say just a follow up on Jack said, we use Moody's analytics for our modeling here, which is obviously a well known model that's used by many other financial institutions.

And like other companies, we do a waiting of a baseline worst case best case are waiting right now puts the allowance between baseline and worst case and just like Jack said it is a bottoms up approach. So loan status is one of the attributes that's highly correlated to economic attributes such as unemployment.

And GDP so for those loans that are in forbearance theres, a specific expectation based on unemployment and GDP, how they would perform based on the performance. The previous 40 years of experience we have.

Got it okay. That's very helpful guys. Thank you both.

Your next question comes from the line of Lee Cooperman from Omega family.

Good morning, congratulation on a good quarter.

Let me issue I don't really much care about any one years earnings I care about earning power.

When you guys look at your business what do you view is your recurring normalized earnings.

So we think.

As I said on Lee.

There are lot of puts and takes this quarter and I think we we we spend our prepared remarks talking about some of the highlights in terms of floor income, helping credit performance, helping the overall numbers, but we look at our fee other fee income and the cobot related disease.

As processing service contracts that we won.

This this quarter.

But we also had revenue reductions as as I mentioned.

Transactional activity that we process for parking tolls hospitals.

We had a number of federal agencies, we do work for that asked us to pause on our contingency our asset recovery businesses, Jack I understand or that I guess.

Basis. So the question is because of all those puts and takes when you look at everything.

You had much more knowledge, we have what do you see good normal recurring earnings.

So in 2016 years $1.83 that it down 90 down 95 to 44% to 95% throughout this year.

Maybe a little bit inflated this year, what do you think it normally heading to a different series of questions, but what do you think your normalized earnings or you think your salad to 40 to 50 or in a typical year less than that.

I think this is I mean, I think our earnings this year so.

Reflect that kind of more than what our earnings power is for sure because of the puts and takes.

Thanks.

We are $3.

Well, but you have to take you have to subject you have to take into consideration Lee that the vast majority our earnings come from our legacy portfolio, which is amortizing about 10% year. So you have that you have to bake that into the processes.

Well I'm, assuming myself to your salary as you go to 250 type or to.

I'm heading to different direction.

What does the status of your buybacks. The question was ASP you didn't really answer what is the and.

Utilized.

Authorization and what is your intentions regarding it.

Yeah. So early at the beginning of this year, we estimated that we would acquire about $400 million or allocate about $400 million to share repurchases.

We have about $65 million remaining under that that plan.

We paused it in the second quarter, we didn't know share repurchases in the second quarter as we wanted to see how the economic environment would shake out as our customers exit the disaster forbearance is and we are able to confirm the performance that we expect to see in that portfolio.

We as I said in my comments, we would expect to complete our planned.

Capital distributions are returned to shareholders through the balance of this year. So sometime in the second half when we discuss my vote, which was not going to surprise you.

You said you didn't know where your stock was trading it's a 28.

30 offers last I checked that's a 7.7% yield at 830.

If you Couldnt recurring we earn over 20% in your book you worth more than book value you booked value I think is $10. A 90 cents. So we're very mispriced and I would say you should quite a way of being and I understand it met the virus. The uncertainty you should find a way would be more aggressive five years ago. When I question, you and stuck with.

Purchase you were buying a new low twentys Miss you thought it was the run of value was 30 or better.

Well clearly that was the wrong view, but.

To not be in the market currently when your stock is cheaper than it's ever been where you can retire a 770 yield which is very accretive to the remaining distribution and buy back at a discount to book when the business is worth more than book based upon your returns and book I think is making a series mistake. So I would just put my.

Vote into that.

That I would reactivate in a more aggressive fashion, even if you sold off some assets it.

Didnt have fully worked to buy somebody is showing a half of what it's worth its a worthwhile trade.

That's the only got to say, but congratulations on the quarter.

Thank you.

Your next question comes from the line of Mark Hammond from Bank of America High yield.

Thank you Hi, Jack 10, Joe.

So on slide 14, the cash flow for the next five years.

Compared that slide.

And then the actual unique cash flow Thats companies produced and then that same slide from the for Q 19 earnings deck and I see basically virtually no change in cash flow expectations from that is that right and then if it is how you rationalize.

That that virtually no change with.

The increased use of forbearance.

So forbearances a temporary.

Delay in cash flows not not a permanent delay in cash flows and there are many puts and takes so we have higher margins higher net interest margins that were incurring more floor income.

That will.

Accruing to the portfolio minuses would be pushing some some cash flows back out overtime.

But this is these these numbers are recalculated Egypt.

And we estimated based on the portfolio characteristics and our expectations.

Regarding.

For the next in this case five years.

Yeah.

A payment flows so they are they do reflect our best estimates of what we would expect to happen here.

Including all of those factors forbearance floor income.

Cost of funds et cetera.

Got it Jack Yes, that's.

Great if theres no change.

For credit investors on the unsecured credit rating, both Moody's and Fitch or low double will be negative outlooks would you be able to give me a sense for the importance of.

Double b rating from Moodys, and Fitch, and where that ranks on capital allocation or just priorities overall for naveen.

So I mean, we obviously have a view that we are stronger balance sheet than our ratings imply and I think our our performance and managing our unsecured debt balances and the consistency through really some challenging environments over the last 10 years to be able to.

To continue to pay those down.

I think really reflected.

The strength of the balance sheet that we have and the predictability of the cash flows your comment earlier about it's great to see that despite co bid, we're not seeing a any material changes and expected cash flows that's because our portfolio has a very predictable.

[music].

So yes, we we run our we run our balance sheet, we run our business to make sure that we're able to create value for all stakeholders and that means that we have the ability to both the issue in the unsecured marketplace and be able to confidently service that unsecured debt.

All types of economic environment, Thank our performance.

No it reflects that.

Got it in the last one from me regarding your allowance for losses in the consumer loan segment.

Okay can you give a sense for what chart the charge off rate for the next year for 2021.

Is that is built into that.

Total assumption.

As of the.

And in the second quarter.

So Cecil ceased under the Cecil process, we do make estimates on both annual in LIFO, our periodic as well of life of loan loss expectations, but but there's much more volatility on the.

Where where that loss might occur and at this point in time, we have not we're not prepared to provide guidance for 2021 in terms of what loss expectation our expectations are although we would say at 12%.

The ability to absorb 12% cumulative losses on our legacy portfolio is.

Is extremely high end.

Probably unmatched in the consumer lending space.

Hi, great. Thanks, Jack 10, Joe.

Okay great.

At this time I would like to remind everyone. If you will like to ask a question. Please press star one on your telephone keypad.

Your next question comes from the line of John Hecht from Jefferies.

Great.

Morning, guys congratulations on a good quarter and thanks for all the details here.

Most of my questions have been asked and answered that I'm curious, though in the business and the Bts segment you guys.

Yes, you quickly adapted you're doing some you're getting some revenue from Princeton services, you I understand we might think that.

That could be a temporary thing given the circumstances, but yes, I guess, what I'm interested in is what.

What.

Capabilities do you have that enable you to quickly ramped that up and how might those.

Resources and capabilities being used over the long term.

Yes, so I think that's a great question.

Obviously coded created new needs for many of our clients. The first item that really showed up was I need to help them process unemployment insurance claims.

We were able to step in and help.

Very very quickly there and some in some instances, we were up and running with call centers and.

Yes dense within three or four days of being requested to do so.

And what our capabilities are really is the ability to take inbound take inbound calls make outbound calls use our our systems and analytics to be able to kind of predict.

Volume flows triage accounts and segment them into ways that they can be resolved.

Quickly through the process.

I think what we are hopeful here is that as we've demonstrated the skills demonstrated the operational skills demonstrated the value of our analytics and and capabilities.

That we will win some longer term arrangements with some of these some of these clients.

Obviously, we would hope that unemployment insurance processing demand would come down dramatically, we would hope that cobot contact racing.

With no longer be required.

But that we can apply those same skills to other other lines of businesses remember at the same time that these businesses. We're ramping up we had others that were declining rapidly in the bps space. Our work for our hospitals for example, as a function of revenue about patient visits and transactions when cobot struck.

Demand for these types of services that were not covert related decline dramatically. Many hospitals soft 30, 40, even 50% declines in their revenue as a result of that.

We don't do parking processing, we're not doing toll processing for people who are driving.

And then some of our federal contracts.

[music].

Also asked us to pause basically not do any work that is now just starting to be turned back on and so we're expecting that those revenues from the the original businesses plus the continued revenue from these cobot related businesses will produce higher fee income in the in.

The third quarter.

Okay, that's very helpful.

Color appreciate that second question is.

Do you I mean do you guys have I guess details or I guess in say with respect to yield the kind of fall.

Fall status of people going back to college and does that even matter for refinancing volume.

I guess does does does the development of Kogut effect kind of your outlook for the ability to produce loan volume.

Yes, so two different.

Types of businesses in the refi cited the equation, we are working with borrowers who have already graduated habit demonstrated track record in and their career multiple years of repayment outperformance that we're able to evaluate and then because of that strong credit performance.

Hi levels of free cash flow on their portfolio and sticking asked our consistency of their employment history, we're able to offer them lower rates and so we that business.

We don't expect to be driven impacted by what's going on in terms of school openings are not and certainly the low rate environment makes that business more attractive for some for some customers right now.

On the in school side of the equation. There's no question that we would expect overall demand for.

On.

Financing to be impacted by enrollment levels, we expect enrollment levels to be down for this upcoming academic year in for students who are in school, but not on campus obviously.

Living expenses room, and board expenses are will grow we will be reduced as well.

But we're just starting in this space and so were capturing a relatively small segment of what we expect to be freshman.

Our first time borrowers in the in the private student loan arena, and we have very modest expectations and based on application flows that we're seeing at this point in time in July.

We are confident that we will hit or exceed our modest expectations for this year.

Okay. Thank you and then final question for me is.

Getting deeper into an election cycle is there anything.

From either side noted a policy perspective that we should be monitoring at this point or is it too early to.

Have any kind of perspective on that.

And.

I think I think the biggest challenge in the in this in the student loan space has been.

Policies that are more one size fits all and what we see in our portfolios and see from our experiences that.

While some borrowers.

Have too much debt induced struggle.

There is.

Got the value of their investment in there in higher education and are easily able to manage that you can just look at the FFELP portfolio that we have and see the balance of customers, who are able to continue to make payments without interruption during cove, it or what we saw in the private side.

So solutions that treat all treat all customers the same is probably.

[music].

Probably not the best solution, particularly when one considers the costs. So I think theres a lot of high level.

Concepts that are thrown out in terms of proposals here in relief options.

And then the stecher, thus the sticker price associated with those tend to be extremely large and harder and harder to kind of.

Skewed on.

So we'll see what we'll see what happens, but I think right now is there's a lot of talk.

A lot of a lot of ideas flowing back and forth and.

Oftentimes, we see things that are significantly different in implementation.

Down the road when when the realities of costs come into the equation.

Yes, Okay I appreciate the.

The perspective, thanks very much.

Your next question comes from the line of Moshe Orenbuch from Credit Suisse.

Great. Thanks.

Couple of things I guess first just on expenses <unk> expenses were really good this quarter anything in there that that would have driven that one time direction, either higher or lower.

That we should be aware of.

Well certainly in some areas where we.

We're not doing.

Work on like asset recovery sides of the equation.

We would definitely have seen a decrease in that space, but if you look at where are our operating OXXO operating expenses overall.

We were down really across the board, we saw lower expenses in our technology teen in servicing mbps.

Asset recovery and even in our corporate overhead functions you only area that was really flat was consumer lending as we continued to kind of build out our.

Origination capabilities for in school volume.

And this is really a function Moshe just you know there's definitely some revenue revenue related items that costs expenses to decline, but where we're examining all of our expenses as I said, we're looking we continuously look for opportunities to improve our operating efficiencies through technology.

Automation AI anything that can help us drive.

Better efficiency ratios, but at the same time maintain the service levels.

That we that we seek to deliver here.

So this is like this is a in this quarter's results I think are a good example of a combination of activities, but operating efficiency as a contributor here.

And obviously you get some revenue rebound, but how much should we expect from things like the recovery business and the refi business kind of stepping back up in the second half.

How much.

All other things equal with that.

So like Rifai suspending marketing spend doesn't really hurt our hit our operating expense line on because most of those dollars end up getting capitalize us under accounting rules to the to the originated loan.

So they that expense gets spread effectively through net interest income over time.

On the bps side of the equation. There's no question, if we're not doing.

One of our businesses for example, as we manage asset recovery for.

Federal guarantee agencies, and we do that work both internally and we farm it out to different entities under accounting rules. If we do that the expenses associated with those third parties or recognize on our books right and then the revenue is grossed up to match it that obviously didnt happen this quarter as an example.

But.

But overall you would definitely see.

We continue to expect that our operating expense numbers will be at kind of similar levels for the balance of this year.

Okay, just kind of thanks, Thanks, Chuck just to kind of talk a little bit about the refi business and capital implications and you've been.

Rebuilding the capital ratio post Cecil and the derivatives charging you've got at least one of the rating agencies.

Who who pretty much has a pretty harsh capital treatment pure.

Rifai loans treats them kind of the same as the.

Amortizing legacy private loans.

I.