Q4 2023 Navient Corp Earnings Call

Your telephone you will then hear an automated message advising your hand this race to win.

Speaker Change: Your question. Please press Star one again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today generic.

Speaker Change: Vice President Investor Relations. Please go ahead.

Speaker Change: Okay.

Generic: Hello, Good morning, and welcome to <unk> earnings call for the fourth quarter of 2023.

Generic: With me today are David Yellen, Navient CEO Edward Bramson.

Generic: Nice chair of the Navient Board of directors and Joe Fisher Navient CFO.

Speaker Change: Now that has a lot to share with you. This morning and have posted two separate presentations that will be referred to during this call. Both are available on Navient dot com slash investors.

Speaker Change: We will refer to a strategy update presentation, which you will find posted on our website.

Speaker Change: Our in depth review and strategy update discussion may take us past the half hour.

Speaker Change: Following this update Joe will discuss the fourth quarter results and outlook for 2024, you will refer to the fourth quarter 2023 presentation.

Speaker Change: Which you will also find posted on Navient dot com slash investors.

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

Joe Fisher: Before we begin keep in mind, our discussion will contain predictions expectations forward looking statements and other information about our business that is based on management's current expectations as of the date of this presentation.

Joe Fisher: Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors listeners should refer to those factors and the discussion of them on the company's Form 10-K, and other filings with the SEC.

Joe Fisher: During this conference call, we will refer to non-GAAP financial measures, including core earnings adjusted tangible equity ratio and various other non-GAAP financial measures are derived from core earnings our GAAP results descriptions of our non-GAAP financial measures and a reconciliation of core earnings to GAAP results can be found beginning on page eight.

Joe Fisher: <unk> of Navient fourth quarter 2023 earnings release, which is posted on our website. Thank you and now I will turn the call over to Dave.

Dave: Thanks, Jen good morning, everyone. Thank you for joining the call and for your interest in Navient.

Dave: As you know the board and management began an in depth review of our business a few months ago.

Dave: Its been a rigorous and comprehensive process.

Dave: Ask Ed Bramson, Vice chair of the Navient Board to join me this morning Adena.

Ed Bramson: Ed and I will describe the steps we're taking the.

Ed Bramson: The rationale of objectives and what they mean for Navient after that Joe will share our Q4 results and 2024 outlook. We will then open it up for Q&A.

Ed Bramson: There are three actions that we're taking coming out of our in depth review.

Ed Bramson: Outsourcing loan servicing exploring strategic options for bps, and reshaping our shared service infrastructure and corporate footprint.

Ed Bramson: At a high level and in the near term. These actions are intended to simplify our business.

Ed Bramson: <unk>, our expense base and increase our financial and operating flexibility over.

Ed Bramson: Over the long term, we believe these actions will increase the value shareholders derived from our loan portfolios and the returns we can achieve on a business building investments.

Ed Bramson: Let me turn to slide two of our strategy update.

In May 2023, the executive team and the board launched an in depth review of our business to ensure we were on the right path for success and value creation.

Ed Bramson: This review has confirmed that changes are necessary for navient to deliver its full value and potential.

Ed Bramson: Our review included extensive and intensive analysis of costs.

Focus on the size purpose and allocation of all costs by business unit and shared service activities like it.

Ed Bramson: As well as unallocated costs within our corporate and other segment.

At the same time, we start the benchmark and compare a cost of important activities, including loan servicing to the.

Ed Bramson: The cost of third party providers, we analyzed our projected in house servicing costs over the remaining life of our loan portfolio and compared it to third party costs through a competitive RFP process.

Ed Bramson: Our current costs were found to be comparable to third party providers.

Ed Bramson: But it was also clear that our in house cost to service with not continued re competitive with third party costs as our legacy portfolio advertises and our economies of scale begin to disappear.

Ed Bramson: As a result, we have decided to transition to an outsourced servicing model.

Ed Bramson: Once completed this will create a variable cost structure for the servicing of our student loan portfolios and provide attractive unit economics across a wide range of servicing volume scenarios.

Ed Bramson: Through our competitive process, we selected mohit as our servicing partner <unk>, a leading provider of student loan servicing for government and commercial enterprises.

Ed Bramson: We are committed to a seamless transition for our customers in a few months' time.

Ed Bramson: Many of our servicing employees are expected to transfer along with this transaction.

Ed Bramson: Now to our second strategic action.

Ed Bramson: Our in depth review highlighted that a significant part of our cost base and infrastructure is shared between loan servicing and bps at especially within Bps's government services business.

Ed Bramson: Businesses involved many similar activities such as call center operations payment processing and Omnichannel customer interactions such as telephony are taxed among others.

Ed Bramson: Given the earnings multiple the market assigns to our shares our bps businesses did not receive the value assigned to comparable standalone businesses with <unk>.

Ed Bramson: <unk> ability to realize these businesses full potential and value such as through larger investments in organic or inorganic growth for example.

Ed Bramson: Therefore, we are exploring strategic options for bps, including but not limited to divestments with the goal of realizing the full value and potential of these businesses we have.

Ed Bramson: Engaged financial and legal advisors to help us with these efforts and we will provide updates along the way.

Ed Bramson: Pursuing divestments simultaneously with the decision to outsource servicing maximizes the potential for shared cost reduction.

Ed Bramson: We expect to be able to identify and more quickly eliminate stranded costs.

Third we intend to reshape our shared services functions and corporate footprint to align with the needs of our more focused flexible and streamlined company.

We've identified opportunities and some of the steps that need to be taken are included in our 2020 for outlook.

Ed Bramson: Full scope and timing of these opportunities will depend on the progress of the outsourcing and potential divestiture transactions.

Ed Bramson: This will define any transition services requirements as well as separation and stranded costs.

Ed Bramson: If you look at our 2023 operating expenses approximately $400 million.

Ed Bramson: Which is net of expected outsource servicing expenses could be eliminated under a scenario in which we had already completed the three steps we're announcing today.

Ed Bramson: That scenario would also not include bps revenue under a full business divestiture scenario.

Ed Bramson: We expect to finalize all three actions during 2024.

Ed Bramson: Implementation is expected to be largely complete over the next 18 to 24 months.

Ed Bramson: With that let me turn it over to Ed.

Thank you David.

Ed Bramson: I think all the things that David spoken about that we are actually doing a relatively clear.

Ed Bramson: But.

While we thought might be helpful. Today is good for the last eight 910 years.

Ed Bramson: Navient is in a steady state you can predict more or less what it is going to do and starting in 2025, it's going to be steady state again.

Ed Bramson: So the coming years sort of transactional.

Ed Bramson: You could think about this turnaround year.

Ed Bramson: The firm that I'm, rather invest principally in turnaround. So we thought it might be helpful to provide some perspective on not just what they are doing but why we're doing it and David asked me I think the where do you actually use was delegated give me.

David Yellen: To take.

David Yellen: Thank you Sir from that perspective, so starting on page three.

Speaker Change: You could obviously say well.

David Yellen: Why would the board look at during this now as opposed to in the future or having done it in the past.

If you look at the first bullet is it basically says that the share price since the spin off in 2014 has gone down a little bit, but it's not the worst to bear to see but I think the board concluded that it's not a tremendous return for 10 years work. So the question is why do you do about it and as David said.

The first step was to do a really solid Bruce.

David Yellen: Review of costs.

David Yellen: That project.

David Yellen: It involved in quite a few.

David Yellen: Turnaround situations was one of the best interactions between board and management than I've ever seen. So this is a unified.

David Yellen: Approach I think is very long term.

David Yellen: The basic issue it had to address is if you think about navient compared to other companies.

David Yellen: A very high proportion of our costs are allocated.

David Yellen: Directly attributable.

David Yellen: But that tends to mean and practices, we spend a lot of time, deciding which bucket the cost that should go into which doesn't leave much time to figure out whether you should have them or not and this study is sort of broken through that.

David Yellen: It's provided a lot of useful data.

David Yellen: Obviously, it helps with what David is talking about a cost reduction.

David Yellen: I'll also point, you to what Darren to extra capital allocation or growth or whatever.

And.

David Yellen: What are the long sort of ends up saying is that for turnarounds is somewhat unusual situation.

David Yellen: <unk>.

David Yellen: The likely cash that's going to be available in the next few years.

Actually is higher than the market our entire market cap. So a lot of what the strategic plan that will ultimately have to be about how do we use that wisely. So I'd like to take you through our thinking on that.

David Yellen: Yes.

David Yellen: If you go to page four.

David Yellen: The.

David Yellen: Major driver of.

David Yellen: Our financial performance since the spin off had to be in.

Loans, we inherited at the time of the spin off of about 135 billion of loans.

David Yellen:

David Yellen: And the intention was not to replace them. They were intended to run off the intention was to do other things with them.

David Yellen: And so we have made some efforts in that regard I prepared should we generated about $9 billion of new loans.

David Yellen: But.

I think over time and I go back and looked at some of the sell side research people were probably a little too optimistic about how soon you could start to get to the inflection point, where new revenues grew faster than <unk>.

David Yellen: In reality as you can see.

We've had a runoff of about $19 billion loans, we've added about $9 billion of new ones. So that might be on track to some inflection point in revenue, but it's not near term. So the inflection is to focus on are the ones that David talking about which are inflections in earnings or a shareholder value in the shipyard.

David Yellen: Five.

David Yellen: This helps to put in perspective, what we're focused on short term.

David Yellen: The revenue is coming down is not really the principal issue at a loss.

The issue is.

The operating leverage that creates and so during that period as you can see if you take net interest income.

David Yellen: As drop.

David Yellen: $1 $1 billion.

David Yellen:

David Yellen: On an annual basis, our operating expenses have come down by $80 million, so lots of reasons and background to that which I won't get into but whereas the.

David Yellen: The ratio.

David Yellen: But we're getting here is 15 to one unfortunately, it's a negative ratio and Thats what favorite assuming goes right. Now there is a second contributory issue, where it comes out and diverse which we'll come back to a little bit later on which is as we thought that the revenue inflection is coming fairly soon as receded.

Operator: Press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Denarius, Vice President, Investor Relations. Please go ahead.

David Yellen: You tend to get a reduction in the PE multiple and we'll get into what the consequences of that are in just a second.

David Yellen: If you go to page six.

David Yellen: During the period, we did make a lot of investments support PPS and border I missed and some other things. The biggest single investment. We made was in share repurchases as you. Perhaps know we have bought back since the spin off about 75% of our original shares outstanding.

Unnamed Speaker: Hello, good morning, and welcome to Navient's earnings call for the fourth quarter of 2023. With me today are David Yowan, Navient CEO, Edward Bramson, Vice Chair of the Navient Board of Directors, and Joe Fisher, Navient CFO. Navient has a lot to share with you this morning and has posted two separate presentations that will be referred to during this call. Both are available on Navient.com under investment. We will refer to a strategy update presentation, which you will find posted on our website. Our in-depth review and strategy update discussion may take us past the half hour mark. Following this update, Joe will discuss the fourth quarter results and outlook for 2020. He will refer to the fourth quarter 2023 presentation, which you will also find posted on Navient.com slash invest. After the prepared remarks, we will open the call up for questions.

David Yellen: And that program did what it was intended to do.

David Yellen: Which essentially was to maintain earnings per share.

David Yellen: And these data in the tables, a little bit messy.

David Yellen: There is a difference between GAAP and core but I think it's fair to say that if you looked at it it's maintained earnings flat to slightly up.

David Yellen: What is intended to do.

David Yellen: On the other hand.

David Yellen: Problem, we've had is because of the change in perceptions of strategy.

David Yellen: The multiples have been coming down so even though the earnings per share flat to up because of our declining multiple the share prices come down and Thats, an issue that we need to deal with as well and we'll talk about that shortly.

Unnamed Speaker: Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements, and other information about our business that is based on management's current expectations as of the date of this presentation. However, actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to those factors in the discussion of them in the company's Form 10-K and other filings with the SEC. During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio, and various other non-GAAP financial measures that are derived from core earnings. Our GAAP results, description of our non-GAAP financial measures, and a reconciliation of core earnings to GAAP results can be found beginning on page 18 of Navient's fourth quarter 2023 earnings release, which is posted on our website. Thank you. And now I will turn the call over to you today. Thanks, Jen. Good morning, everyone.

David Yellen: So.

David Yellen: With the the joint project trim Board management done.

David Yellen: What are the immediate priorities.

David Yellen: First one is obviously too.

David Yellen: Get your operating expenses down and there are two elements to that there is an obvious one which is good.

David Yellen: Sure.

David Yellen: The loan portfolios by and large with one exception were not designed to be replaced.

David Yellen: So every dollar that you spend of overhead or other expenses connected with them just comes out of the value of the portfolio.

David Yellen: So our biggest single asset today as the loan portfolios.

David Yellen: Less money you spend collecting everything else equal the badger.

David Yellen: I think the more subtle ratios that are major future asset as the businesses, we're trying to grow.

David Yellen: And then an allocated environment.

David L. Yowan: Thank you for joining the call and for your interest in Navion. As you know, the board and management began an in-depth review of our business a few months ago. It's been a rigorous and comprehensive process. I've asked Ed Bramson, Vice Chair of the Navient Board, to join me this morning.

David Yellen: As the legacy businesses shrink their allocated costs get reallocated to new businesses, which are the ones who are trying to grow risk going forward.

David Yellen: It had the effect of smothering that effort, so that needs to be dealt with.

David Yellen: And I think the other thing coming back to the rising cost of equity is risk.

David L. Yowan: Ed and I will describe the steps we're taking, their rationale and objectives, and what they mean for NAVI. After that, Joe will share our Q4 results and 2024 outlook, and we will then open it up for Q&A.

David Yellen: If you accept that we are going to have a tremendous amount of cash relative to our market cap to either return to investors or invest over the next two or three years.

David Yellen: It needs to be disciplined in how you think about it so think about it this way.

David L. Yowan: There are three actions that we're taking coming out of our in-depth review, outsourcing loan servicing, exploring strategic options for BPS, and reshaping our shared service infrastructure and corporate footprint. At a high level, and in the near term, these actions are intended to simplify our business, reduce our expense base, and increase our financial and operating flexibility. Over the long term, we believe these actions will increase the value shareholders derive from our loan portfolios and the returns we can achieve on our business building and value. Let me turn to slide two of our strategy update. In May 2023, the executive team and the board launched an in-depth review of our business to ensure we were on the right path for success and value creation. This review has confirmed that changes are necessary for Navient to deliver its full value and potential. Our review included an extensive and intensive analysis of cost.

David Yellen: We take $100 of cash.

David Yellen: And we put it into an investment and it makes it to 10% return that's $10 an.

David Yellen: At our current multiple that means market value of $70 for 100, you put them that's not behind before he can't do that so you either have to return that money will come up with something better so where it leaves you today hopefully this will change as you need to make about a 15% return on equity to justify doing the same and if you do it.

David Yellen: A wash.

David Yellen: So as that as a background.

David Yellen: Well, we'd like to do on page eight.

Speaker Change: As David said I think I said at the beginning this is a strategy update as to how to think about the strategy is not the strategy.

Speaker Change: Strategy is going to be driven by what you have to work with.

Speaker Change: On this page we have the <unk>.

Major components of the business.

Speaker Change: So the loan portfolios will cover the second.

Speaker Change: The other items, we have we have quite a large amount of unrestricted cash and we have two operating segments, we have Ernest.

David L. Yowan: We focused on the size, purpose, and allocation of all costs by business unit and shared service activities like IT, as well as unallocated costs within our corporate other segment. At the same time, we sought to benchmark and compare our costs for important activities, including loan servicing, to the cost of third-party providers. We analyzed our projected in-house servicing costs over the remaining life of our loan portfolio and compared them to third-party costs through a competitive RFP process. Our current costs were found to be comparable to third-party providers.

Speaker Change: We have bps and both of those have some interesting aspects too and we'll cover a little bit.

Speaker Change: If you go to page nine this is the loan portfolios.

Speaker Change: Okay. So the first.

Speaker Change: Piece of the portfolio is our is our Atlanta assets.

Speaker Change: <unk>.

Speaker Change: I think it's important to explain that on our balance sheet. These are consolidated.

Speaker Change: It makes it a bit difficult to track what they are really worth in reality.

David L. Yowan: But it was also clear that our in-house cost of service would not continue to be competitive with third-party costs as our legacy portfolio amortizes and our economies of scale begin to disappear. As a result, we have decided to transition to an outsourced servicing model. Once completed, this will create a variable cost structure for the servicing of our student loan portfolios and provide attractive unit economics across a wide range of servicing volume scenarios. Through our competitive process, we selected Mohila as our servicing partner. Mohila is a leading provider of student loan servicing for government and commercial enterprises.

Speaker Change: All alone.

Speaker Change: First of all the loans that we have are securitized they reside in trust to guests.

Speaker Change: Those trusts incurred some borrowing so the real economic interest we have in the loan portfolios.

Speaker Change: What we get from the securitization trust and Thats, a combination of the future net interest income.

Speaker Change: Servicing fees.

Speaker Change: And the initial equity that report and that comes back at the end when the trust is liquidator. So if you take those inflows the table sort of puts together the things that you've seen before but maybe not in one place and what it essentially says is that we expected distributions to us from the trusts are about 13 billion.

David L. Yowan: We are committed to a seamless transition for our customers in a few months' time. Many of our service employees are expected to transfer along with this transaction. Now to our second strategic action. Our in-depth review highlighted that a significant part of our cost base and infrastructure is shared between loan servicing and BPS, and especially within BPS's government services. Both businesses involve many similar activities, such as call center operations, payment processing, and omnichannel customer interaction, such as telephony or text, among others.

Against that refinances in part with unsecured debt, which is a little less than $6 billion. So there's somewhere in the region of $7 billion to come in from those trust over time, as we speak and about half of that looks like it comes in in the next five years.

Speaker Change: However.

Speaker Change: It does cost some money.

Speaker Change: To get from there to what shareholders to proceed.

Speaker Change: So if you want to maximize that value you need to deal with loan servicing expense corporate overhead and the interest on our liabilities. We think there are opportunities in all of those areas.

Speaker Change: David has already lining up for you bought there in servicing and corporate overhead.

David L. Yowan: Given the earnings multiple the market assigns to our shares, our BPS businesses do not receive the value assigned to comparable stand-alone businesses. This limits our ability to realize these businesses' full potential and value, such as through larger investments in organic or inorganic growth, for example. Therefore, we are exploring strategic options for BPS, including but not limited to divestment, with the goal of realizing the full value and potential of these businesses. We've engaged financial and legal advisors to help us with these efforts, and we'll provide updates along the way. Pursuing divestment simultaneously with decision outsourcing maximizes the potential for shared cost reduction; we expect to be able to identify and more quickly eliminate stranded costs. Third, we intend to reshape our shared services functions and corporate footprint to align with the needs of a more focused, flexible, and streamlined company, which identified opportunities and some of the steps that need to be taken are included in our 2024 outlook. The full scope and timing of these opportunities will depend on the progress of the outsourcing and potential divestiture transactions, which will define any transition services requirements, as well as separation and stranded costs.

Speaker Change: The objective here is to give you a realistic view of what these things are worth we need to be able to give you all the data, which we don't have yet so hopefully by the end of the year, we'll be able to align all of that act.

Speaker Change: David covered the outsourcing I just wanted to say briefly on page 11.

Speaker Change: But the environment and what the decision.

But it is what it.

Speaker Change: It was spun off it had 12 million borrowers half of them were service for the education Department the other half of our loans. So.

Speaker Change: As you move along problem with one two thirds of the loans, which allows for the education department much larger.

Speaker Change: Infrastructure that we require for what we do today.

Speaker Change: So surprisingly and this is a real compliment to the management team.

Speaker Change: When you benchmark it our servicing costs are.

Speaker Change: Arc <unk>.

Speaker Change: Very competitive today.

Speaker Change: The problem as David said as the base shrinks that going to get less competitive. So there is an option to go ahead and invest in a smaller more flexible system to deal with that we think more desirable option is to outsource to somebody who has scale.

The expectation therefore.

David L. Yowan: If you look at our 2023 operating expense, approximately $400 million, which is net of expected outsourced servicing expense, could be eliminated under a scenario in which we had already completed the three steps we're announcing today. That scenario would also not include BPS revenue under a full business divestiture scenario. We expect to finalize all three actions during 2024, and their implementation is expected to be largely complete over the next 18 to 24 months.

Speaker Change: Not that we're going to save a lot of money on servicing in the short run because we are competitive but as the portfolio shrinks the benefits become very large by making a variable.

Speaker Change: So thats the loan portfolio.

Speaker Change: On page 12.

Speaker Change: There's another item unrestricted cash.

Speaker Change: I think.

Speaker Change: The way to look at this is it's not part of the loan portfolios, but it goes with it.

Speaker Change: And.

Speaker Change: The reason we have all the cash you see on the charts here.

Speaker Change: Is that it's a liquidity buffer for the large loan maturities that we have coming up periodically and so it's always been there.

Ed Bramson: With that, let me turn it over to David. I think a lot of the things that David spoke about that we're actually doing are relatively clear. But what we thought might be helpful today is that for the last eight, nine, ten years, Navier has been in a steady state. You can predict more or less what it's going to do. And starting in 2025, it's going to be steady state again.

Speaker Change: However, it is not always easy to get this started the financials.

Speaker Change: Unrestricted cash that's available for general corporate purposes, and that belongs to the shareholders.

Speaker Change: At the end of 'twenty three.

Speaker Change: That's about $7 50, a share of cash.

Speaker Change: So the shareholders in fact, if you look at some other liquid assets that we have in addition to cash it's more like $10 a share.

Ed Bramson: So the coming year is sort of transitional, and you could think of it as a turnaround year. And the firm that I'm with invests principally in turnarounds. So we thought it might be helpful to provide some perspective on not just what we're doing, but why we're doing it. And David asked me, I think the word he actually used was delegate, to take you through it from that perspective.

Speaker Change: So if you think about that and if you think about.

Speaker Change: The.

Speaker Change: Potential inflows from our loan portfolios.

Speaker Change: That's why I was saying earlier that even if you don't sell vps.

Speaker Change: Going to be having cash available for distributions or investments that's actually in the next few years equal to more than our entire market cap. So obviously the key to the situations to do that wisely.

Ed Bramson: Starting on page three, you could obviously say, well, why would the board look at doing this now as opposed to in the future or having done it in the past? And if you look at the first bullet, it basically says that the share price since the spinoff in 2014 has gone down a little bit. It's not the worst you've ever seen, but I think the board concluded that it was not a tremendous return for 10 years of work. So the question is, what do you do about it?

Speaker Change:

Speaker Change: So if you go to page 13.

I think what I said earlier sort of obvious embraced circumstances, you would just returning cash to shareholders, but here's an example of some things that are going on at Navient under the Hood.

Speaker Change: Perhaps not well highlighted so I was wondering going to tick as Ernest.

Speaker Change: And Ernest is something we board five years ago, or so but the <unk>.

Speaker Change: Point is because it's a new brand to AUM to Nab.

Ed Bramson: And as David said, the first step was to do a really solid review of costs. And that project – and I've been involved in quite a few turnaround situations – was one of the best interactions between board and management that I've ever seen. So this is a unified, I think it's very well done.

Speaker Change: Yes.

Speaker Change: And its customer focused.

Speaker Change: Designed to focus on relationships and what we mean by that.

Speaker Change: As a relationship is something that causes the customer to come back for another product. After you got the first one.

Speaker Change: The reason you want that is in April two to build attractive.

Speaker Change: Our lifetime economics with customers.

Ed Bramson: The basic issue it had to address was that, compared to other companies, a very high proportion of Navient's costs are allocated rather than directly attributable. What that tends to mean in practice is you always spend a lot of time deciding which bucket the costs should go into, which doesn't leave much time to figure out whether you should have them or not. This study has sort of broken through that, and it's provided a lot of useful data. Obviously, it helps with what David's talking about in cost reduction, but it also points you to what to do next with capital allocation or growth or whatever. And what it all sort of ends up saying is that for terrorists, it's a somewhat unusual situation.

Speaker Change: In that sense as distinct from the Navient brand Theres nothing wrong with the Marriott brand, but its a servicing brown. So the interaction you have with it.

Speaker Change: Collecting alone that might've been written by the Education Department, maybe it's one of our old ones. We do the best we can to treat you properly we try and be efficient.

Speaker Change: And sympathetic to the extent necessary, but at the end of that relationship you don't expect to see us again.

Speaker Change: So it's not the right sort of brand to build a business in the future. So Ernest has been going for a while.

Speaker Change: We're running at about less than $200 million a year of revenue.

Speaker Change: It's principally focused on education industry types of products that environment. Our objective is to move that out into a broader set of product lines.

Speaker Change: At some point in the future, but what we have today is a lending business.

Ed Bramson: The likely cash that's going to be available in the next few years actually is higher in amount than our entire market cap. So a lot of what the strategic plan will ultimately have to be about is how do you use that wisely. So we'd like to take you through our thinking on that. If you go to page four... Hmm.

Speaker Change: Which has generated essentially all of our new loans in recent years, which is highly efficient and we'll tell you about it in a second there is another part of earnings which recalling your financial counseling platform really for lack of anything more imaginative colder.

Ed Bramson: The, The major driver of our financial performance since the spinoff had to be the loans we inherited. At the time of the spinoff, there were about $135 billion in loans, and the intention was not to replace them. They were intended to run off.

Speaker Change: And my own work in engineering.

Speaker Change: Would be the difference between say was something he is and what it does so in financial counseling renews, where it is.

What it does.

Speaker Change: Is that it enables us to address a much broader base of customers that we have today to build relationships potentially for the future and also to develop data for the sorts of things you might do next.

Ed Bramson: The intention was to do other things, and so we have made some efforts in that regard. We've actually generated about 9 billion in new loans. But I think over time, and I've gone back and looked at some of the sell-side research, people were probably a little too optimistic about how soon you could start to get to the inflection point when new revenues grew faster than the ones you found. And in reality, as you can see, we've had a runoff of about $90 billion of loans, and we've added about $9 billion of new ones. So we might be on track to some inflection point in revenue, but it's not near term. So the inflections to focus on are the ones that David's talking about, which are inflections in earnings or shareholder value.

The management team at <unk> is quite a bit younger.

Some of the other managed services.

Speaker Change: And one of the things that they've done I think quite well is to resist some pressure to monetize this business too.

Speaker Change: So it does generate a little bit of revenue February to think about it is it's all.

Speaker Change: Page four within their in their software and budget.

Speaker Change: So.

Speaker Change: Quickly covering the brand for it.

Speaker Change: As we said, we're trying to target a certain kind of customers try and target them efficient.

Speaker Change: Yes.

Speaker Change: What's on the page here is that Navient periodically does a brand's health survey.

Ed Bramson: And if you go to page five, I think this helps to put in perspective what we're focused on in the short run. The revenues coming down are not really the principal issue, odd enough. The issue is the operating leverage that it creates. And so during the period, as you can see, if you take net interest income, we've had a drop of about $1.1 billion www.larryweaver.com on an annual basis. Our operating expenses have come down by $80 million. There are lots of reasons and background for that, which I won't get into.

Speaker Change: There are 11 brands in here.

Speaker Change: One of them is Matthew one of them has earned us the oven line, they're competitive companies.

Speaker Change: There are lots of attributes we just picked some of them.

Speaker Change: But as you know generally speaking.

Speaker Change: Financial services companies are not super worldwide by their customers.

Speaker Change: But if you look at these attributes watch find.

Speaker Change: Is that.

Speaker Change: Ernest in its dealings with people is perceived as being fair as being ethical being reliable.

Speaker Change: Why does not perceived as is being aggressive or arrogant.

Speaker Change: So if you come back to the efficiency of acquiring customers if you treat them properly.

Ed Bramson: But whereas the ratio that we're getting here is 15 to one, unfortunately, it's a negative ratio, and that's what David's dealing with right now. There's a second contributory issue that comes out of this, which we'll come back to a little bit later on, which is, as we thought that the revenue inflection was coming fairly soon, has receded, you tend to get a reduction in the PE multiple. And we'll get into what the consequences of that are in just a sec. And if you go to page six... and, During the period, we did make a lot of investments to support BPS, to support our industry, and some other things. The biggest single investment we made was in Sherry purchases, and as you perhaps know, we have bought back since the spinoff about 75% of our original shares outstanding. And that program did what it was intended to do, which essentially was to maintain an experience. And The data in the table is a little bit messy. There's a difference between the gap and the core.

Speaker Change: Come back and Thats much cheaper than getting a new one so thats the point I think that will extend thanks.

Speaker Change: Sure.

Speaker Change: So just to.

From a bit of an insight into how we are in the steering.

Speaker Change: On the lending side. The principal thing. It does is graduate loan refinancing at the moment. This 5% to 10 percentage represents Google lending, but I don't think it's relevant to this discussion.

It's not the only thing we want to do.

Speaker Change: But it's a good place to start and that pace of the ramp.

Speaker Change: The reason that as good as it aligns with the sorts of customers you want to get in the characteristics you want and it's something we know how to do.

Speaker Change: It's been successful our market share in this field is either one or two for most of the last few years and we've generated about 9 billion of loans here.

Speaker Change: It's also.

Speaker Change: Now quite profitable.

Speaker Change: Went from a loss in 2020 about $8 million to making about $80 million pre tax today.

Speaker Change: The counseling program platform.

Speaker Change: I think the point to make here is that over that time, it's grown fourfold more so.

Ed Bramson: But I think it's fair to say that if you looked at it, it's maintained earnings flat to slightly up to achieve what it's intended to do. On the other hand, the problem is... because of the change in perceptions of strategy, the multiples have been coming. So even though the earnings per share are flat to up, because of our declining multiple, the share prices come down. That's an issue that we need to deal with as well. And we'll talk about that shortly.

Speaker Change: And so you've got almost 2 million users.

Speaker Change: Ernest has probably 150000 customers. So it's multiples of people that you have relationships with above versus you actually currently limits here today.

Speaker Change: The reason that's important is that they may be future customers, but coming back to appointment met earlier, we're looking at product line extensions.

Speaker Change: And the most economic way of the least risky way of doing that is to test into those things to do research to try them out rather than convert hundreds of millions and find that it was a bad idea and as an industry celebrity who I have not met personally who has I think robin wave interesting way of describing it.

Ed Bramson: With the joint project cream board management done, what are the immediate priorities? The first one is obviously to get your operating expenses down. And there are two elements to that. There's an obvious one, which is that... The loan portfolios, by and large, with one exception, are not designed to be.

Senior lending.

Speaker Change: People go into with wide eyes, they come out with black ops.

Speaker Change: One of the principal value of this platform is to enable us to be judicious as we sought to add new products.

Ed Bramson: So every dollar that you spend on overhead on them or other expenses connected with them just comes out of the value of the portfolio. So our biggest single asset today is the loan portfolios. The less money you spend collecting them, everything else equal, the better.

So then.

Speaker Change: On Ernst itself its business model and why is it strength, we talked about the brand.

Speaker Change: But.

Speaker Change: If you think about financial services generally.

Speaker Change: It's very difficult to have a lower cost of funds from other people.

Speaker Change: Product differentiation this stuff something people talk about but at best it's Lisa.

Ed Bramson: I think the more subtle issue is that our major future asset is the businesses we're trying to grow, and in an allocated environment. As the legacy businesses shrink, their allocated costs get reallocated to new businesses, which are the ones you're trying to grow, which can't afford them. So they have the effect of smothering that effort.

Speaker Change: So neither of those are going to be advantages for us.

Speaker Change: What <unk> is focused on is targeting customers who are efficient.

Managing that process sufficiently so if you think about what people against generally talk about disable our NIM will be badger because growth charge people more for the same product in other people think as well.

Ed Bramson: So that needs to be dealt with. And I think the other thing, coming back to the rising cost of equity. If you accept that we're going to have a tremendous amount of cash relative to our market cap to either return to investors or invest over the next two, three years, there needs to be discipline in how you think about it.

Well funded cheap and other people can do for our cost of customer acquisition of the west all of those things are important but what really counts is.

The end to end deficiency, so taking few data points there.

Speaker Change: Ernest is acquiring customers at an annualized cost of about 30 bps and what that is it's a little bit more than a percent to get one you keep a about four years.

Ed Bramson: So think about it this way. If we take a hundred dollars of cash and put it into an investment, and it makes a 10% return, that's $10. And our current multiple, that means a market value of $70 for the 100 you put in. That's not viable. You can't do that.

Another element of efficiency is that we are targeting more affluent customers.

Speaker Change: The average balance at this moment, it's about $50000, which is almost three times, what our legacy portfolio risk and in fact that 50000 is trending a little bit higher as we speak and then the other point on here.

Ed Bramson: So you either have to return that money or come up with something better. So where it leaves you today, and hopefully this will change, is you need to make about a 15% return on equity to justify doing anything. And if you do, it's sort of a.

Speaker Change: Is the realized loss rate and the 40 bps milestones attractive it probably is helpful in generating NIM.

Ed Bramson: So that's the background. What we'd like to do on page eight... As David said, and I think I said at the beginning, this is a strategy update. It's how you think about the strategy; it's not the strategy. But the strategy is going to be driven by what you have to work. And on this page, we have the major components of the business. So the loan portfolios, we'll cover in a second. The other items we have, we have quite a large amount of unrestricted cash, and we have two operating segments. We have EARNEST, and we have DPS.

Speaker Change: But the more important points and end to end analysis as all the people you don't Chase you don't have to worry about you don't have to think about every day don't cost you money to manage and so in terms of efficiency, that's probably the major advantage of targeting those kinds of customers.

Speaker Change: Yes.

So to wrap up orders because it sounds like a plug it would have to say that it really isn't because we haven't.

Cited firmly what to do with it or about it but having said that.

Ed Bramson: And both of those have some interesting aspects, too, and we'll cover a little bit of each. If you go to page 9, this is the loan portion. Okay, so the first... piece of the portfolio is Arlen Astin. And I think it's important to explain that on our balance sheet, these are consolidated, which makes it a bit difficult to track what they're really worth. In reality...

We talked earlier about operating leverage and one of the great things about the project that the guys did as you were able to identify these points of leverage.

Speaker Change: You do this you get bad and various elements so.

Speaker Change: And this is an example, I think is positive.

Speaker Change: Operating leverage.

Speaker Change: Because you have well controlled cost and you have a growing revenue base. So to put that in context. If you look at Ernest through 2020 threes.

Speaker Change: Last year.

Ed Bramson: The All in the Loans, or Almost All in the Loans that we have, are securitized. They reside in trusts against which those trusts have incurred some borrowing. So the real economic interest we have in the loan portfolios is what we get from those securitization trusts, and that's a combination of future net interest income, servicing fees, and the initial equity that we put in that comes back at the end when the trust is liquidated. So if you take those inflows, the table sort of puts together things that you've seen before but maybe not in one place, and what it essentially says is that Against that, we finance it in part with unsecured debt, which is a little less than $6 billion.

Speaker Change: Revenue increased by I'm going to call out a $125 million.

Speaker Change: Its marketing expenses went up but if you get more customers you have to spend more money to get them.

Speaker Change: While it's interesting there is that the other operating expenses.

Speaker Change: <unk> went up by about $15 million. So that's a ratio of a little bit better than eight to one.

Speaker Change: And as you grow that ratio actually gets better so what this looks like to US is a classic example of online.

Speaker Change: Growth business economics, so, it's probably something that you will want to find a way to experiment.

Speaker Change: <unk>.

Speaker Change: Not to say that they are not very interesting businesses within bps, but.

Speaker Change: That one is you know is subject to.

Ed Bramson: So there's somewhere in the region of $7 billion to come in from those trusts over time as we speak, and about half of that looks like it will come in in the next five years. However, it does cost some money to get from there to what shareholders receive. And so if you want to maximize that value, you need to deal with loan servicing expenses, corporate overhead, and the interest on our liabilities. We think there are opportunities in all of those areas. And I think David's already lined up for you what they are in servicing and corporate overhead. The objective here is to give you a realistic view of what these things are. We need to be able to give you all the data, which we don't have yet. Hopefully, by the end of the year, we'll be able to line all of that up. David covered the outsourcing of the work.

Speaker Change: And analysis of strategic alternatives, so I'm going to turn it back to David I am going to get off now.

David Yellen: Delegate it back to him.

David Yellen: Great. Thanks, Ed.

David Yellen: Turning to page 18, let me provide a brief review of our bps businesses.

David Yellen: These businesses operate in two distinct markets with separate operations. Several other businesses within this group where acquisitions, our health care business goes to market under the extend brand extend offers revenue cycle management services to health care providers and is relatively independent from the rest of the navi and from an operational perspective.

David Yellen: Dave.

David Yellen: The government services and transportation businesses operate under several brands and provide a variety of services to federal state and local governments.

David Yellen: Its operation share cost infrastructure and corporate support with the rest of Navient, particularly loan servicing.

Ed Bramson: I just want to say briefly on page 11 what the environment of the decision was. When Lanya was spun off, it had 12 million borrowers. Half of them were serviced through the Education Department; the other half were our loans. So as you move along, probably 1.2-thirds of the loans were financed... the Education Department, much larger infrastructure than we require for what we do today. So, surprisingly, and this is a real compliment to the management team, when you benchmark it, our servicing cost is. They are very competitive today.

David Yellen: While we are at an early stage in exploring strategic options for this business. We will keep you updated as that process unfolds.

David Yellen: Let me try to summarize on slide 19.

David Yellen: We have identified and we are taking steps to significantly reduce the expense base and simplify the company.

David Yellen: These actions are designed to increase the value of the cash flows from our loan portfolios and increase the returns and transparency around growth initiatives.

David Yellen: The cash we have on hand, the enhanced cash flows from our loan portfolios and the proceeds of any divestiture dps combined to generate significant cash flows in excess of our current market cap over the next few years.

Ed Bramson: The problem is, David said, as the base shrinks, they're going to get less competitive. So there is an option to go ahead and invest in a smaller, more flexible system to deal with that. We think a more desirable option is to outsource to somebody who already has. The expectation, therefore, is not that we're going to save a lot of money on servicing in the short run because we are competitive. But as the portfolio shrinks, the benefits become very large by making it variable. So that's the portfolio on page 12.

David Yellen: We will invest that cash in activities that are expected to generate market value in excess of the invested cash.

David Yellen: Excess cash will be distributed to shareholders.

David Yellen: Shortly following my transition from the board to the role of CEO.

David Yellen: I shared with you my initial impressions from inside the company.

David Yellen: Namely that Navient has a strong foundation of assets capabilities and talent.

David Yellen: I also said that we would undertake a rigorous review to identify ways in which that foundation can deliver more to shareholders. These actions are the first steps in delivering our full value and potential and we look forward to providing updates on our progress.

Ed Bramson: There's another item, unrestricted cash, and I think a way to look at this is that it's not part of the loan portfolios, but it goes with them. And the reason we have all the cash you see on the charts is that it's a liquidity buffer for the large loan recharges that we have coming up. And so it's always been.

David Yellen: With that I will now turn it over to Joe to review, our Q4 results and provide our 2020 for outlook.

Joe Fisher: Thank you David and everyone on today's call for your interest in Navient.

Ed Bramson: However, and it's not always easy to get this out of the financials, it's unrestricted cash. It's available for general corporate purposes, and it belongs to the shareholders. And as at the end of 23, that's about $7.50 a share of cash that belongs to the shareholders. In fact, if you look at some other liquid assets that we have in addition to cash, it's more like $10 a share. So if you think about that, and if you think about... the potential inflows from the loan portfolios, that's why I was saying earlier that even if you don't sell BPA.

Joe Fisher: During my prepared remarks, I will review the fourth quarter and full year results for 2023.

Joe Fisher: I will also provide more detailed guidance underlying our 2020 for outlook for earnings per share of $2 10 to $2 30.

Joe Fisher: Our 2024 outlook does not assume any of the strategic actions that we are announcing.

Joe Fisher: It does not include potential benefits from the transition of servicing any potential divestitures or any restructuring expenses related to these initiatives.

Joe Fisher: This outlook also assumes a declining rate environment with four rate cuts.

Joe Fisher: We will update our financial outlook throughout the year as these actions become clear.

Ed Bramson: You're going to be having cash available for distributions or investments that is actually, in the next few years, equal to more than our entire market cap. So, obviously, the key to this situation is to do that. So if you go to page 13... I think what I said earlier is sort of obvious, in which circumstances you would just return cash to shareholders, but here's an example of some things that are going on at Navient under the hood that perhaps aren't well-highlighted. So the one I'm going to pick is Ernest.

Joe Fisher: In 2023, we reported a fourth quarter GAAP EPS loss of 25.

Joe Fisher: Bringing our full year GAAP EPS to $1 85.

Joe Fisher: On a core basis, we delivered fourth quarter EPS of <unk> 21.

Joe Fisher: And full year EPS of $2 45.

The 21 includes a 49% reduction to EPS related to significant items in the quarter.

Joe Fisher: Before I move on to the segments I will provide further detail on two of these items.

Ed Bramson: And Ernest is something we bought five years ago, but the point is that it's a new brand to Madden. And it's customer-focused, and it's designed to focus on relationships. And what we mean by that is, a relationship is something that causes a customer to come back for another product after he's already got one. The reason you want that is it enables you to build attractive lifetime economics with customers. In that sense, it's distinct from the Navient brand.

First we have increased our accrual by $28 million in connection with the CFPB litigation, bringing our total accrual to $73 million.

Joe Fisher: We remain confident about the strength of our case, while open to finding a solution that is acceptable to all stakeholders in order to put this matter behind us.

Joe Fisher: Second in our private credit provision this quarter, we've reserved $35 million due to internal policy changes, we've made to meet new regulatory expectations related to school misconduct as charges on certain legacy private loans.

Ed Bramson: There's nothing wrong with the Navient brand, but it's a service brand. So the interaction you have with it is collecting a loan that might have been written by the education department, or maybe it's one of our own. We do the best we can to treat you properly; we try and be efficient and sympathetic to the extent necessary. But at the end of that relationship, you don't expect to see us. So it's not the right sort of brand to build a business.

Joe Fisher: This increase reflects our assessment of the impact to the legacy portfolios life of loan discharges from potential borrower claims.

Joe Fisher: I will now provide additional detail by segment, beginning with federal education loans on slide four.

Joe Fisher: The quarter's NIM of 86 basis points reflects the higher rate environment as floor income, including the amounts that were hedged continued to roll off in the second half of this year.

Ed Bramson: It is now running at a bit less than $200 million a year, and it's principally focused on education industry types of products at the moment. Our objective is to move that out into a broader set of product lines at some point in the future, but what we have today is a lending business that has generated essentially all of our new loans in recent years, which is highly efficient, and we'll tell you about that in a second. There's another part of Earnest, which we're calling a financial counseling platform, really for lack of anything more imaginative to call it. And in my own work in engineering, this would be the difference between saying what something is and what it does.

Joe Fisher: We expect felt NIM to decline to the low seventy's for 2024 due to our interest rate outlook of four cuts this year.

Joe Fisher: Falling interest rate environment creates NIM pressure as our felt assets repriced more frequently than our liabilities.

Joe Fisher: However, we do not forecast rates to fall far enough to reach a level where significant floor income is generated.

Joe Fisher: Our full year felt net interest income declined 8% to $480 million as the portfolio balance declined 13% to $38 billion.

Joe Fisher: The full year felt NIM of 112 basis points was above our targeted range of 100 to 110 basis points provided at the beginning of the year.

Ed Bramson: So financial counseling is what it is. What it does is that it enables us to address a much broader base of customers than we have today, to build our relationships potentially for the future and also to develop data for the sorts of things you might do next. The management team at Arren is quite a bit younger than some of the other managers.

Joe Fisher: Credit metrics improved and are felt portfolio compared to the prior year and third quarter.

Joe Fisher: The delinquency rate forbearance rate and net charge offs all declined from the prior year.

Joe Fisher: Provision increased from the prior year as longer expected lives, primarily driven by a greater percentage of borrowers in income based repayment plans increases the projected amount of loan premium charged off in the future.

Joe Fisher: The net charge off rate of 19 basis points for the year was consistent with our expectations of 10 to 20 basis points for the full year.

Ed Bramson: And one of the things that they've done, I think, quite well is to resist some pressure. So it does generate a little bit of revenue, but the way to think about it is that it's all paid for within our in-house operation budget. So just quickly covering the brand. As we said, we're trying to target a certain kind of customer, and we're trying to target them efficiently. What's on the page here is that Navier periodically does a brand health survey. There are 11 brands in all. One of them is Navient, one of them is Arranist, and the other nine are competing companies. And there are lots of attributes.

Joe Fisher: Now, let's turn to our consumer lending segment on slide five.

Joe Fisher: Net interest margin was 291 basis points in the quarter and 304 basis points for the full year.

Joe Fisher: This exceeded our original guidance of 280 to 290 basis points as we benefited from improved funding spreads.

Joe Fisher: We anticipate that the consumer lending them will be in the low three hundreds for 2024.

Joe Fisher: This includes projected new refi originations of $1 billion compared to $647 million in 2023.

Joe Fisher: It also assumes projected growth of 10% and in school originations.

Ed Bramson: We just picked some of them. But, as you know, generally speaking, financial services companies are not super well liked by their customers. But if you look at these attributes, what you find is that Ernest and his dealings with people are perceived as being fair, as being ethical, and being reliable. What it's not perceived as is being aggressive or arrogant. So, when it comes to the efficiency of acquiring customers, if you treat them properly, they will come back, and that's much cheaper than getting a new one.

Joe Fisher: We expect the increase in refi originations to occur primarily in the back half of the year based on our outlook for a declining rate environment. Our consumer lending team is focused on generating high quality loans with efficient acquisition cost at improved margins.

Joe Fisher: Credit metrics and our consumer lending portfolio performed as expected with delinquency rates for barron's rates and charge off rates relatively flat year over year.

Joe Fisher: Our charge off rate for full year 2023 of one 5% was at the low end of our original guidance of one 5% to 2%.

Ed Bramson: So that's the point, I think. So just to give you a bit of an insight into how we're doing, um, on the lending side, the principal thing it does is graduate loan refinancing at the moment. There's 5-10% of it that's for in-school lending, but I don't think it's relevant to this discussion. It's not the only thing we want to do. But it's a good place to start, and it pays the rent.

Joe Fisher: Provision of $50 million is primarily driven by the changing regulatory expectations that I discussed earlier in my remarks. This is reflected in our change in allowance on slide six.

Joe Fisher: At the end of 2023, our allowance for loan losses for our entire education loan portfolio was $1 billion.

Joe Fisher: While much of our portfolio is amortizing and reserved $5 million for felt loans during the quarter and $56 million during the year related to our projected extension in the life of the portfolio.

Ed Bramson: The reason it's good is it aligns with the sorts of customers you want to get and the characteristics you want, and it's something we know how to do. It's been successful. Our market share in this field has been either 1 or 2 for most of the last few years, and we've generated about $9 billion in loans here. It's also now quite profitable, going from a loss in 2020 of about $8 million to making about $80 million pre-tax today. Thank you. I think the point to make here is that over that time, it's grown fourfold, a bit more, and so you've got almost 2 million users.

New origination volume contributed $4 million to the allowance in the quarter and $25 million for the full year.

Joe Fisher: Continue to slide seven to review our business processing segment.

Joe Fisher: Total revenue increased $11 million to $81 million in the quarter as revenue from our traditional bps services increased $15 million or 23% more than fully offsetting revenue associated with pandemic related contracts from a year ago.

Joe Fisher: Our full year revenue of $321 million was comprised of $74 million in growth from traditional bps services and well in excess of our long term high single digit growth that we see in the industry.

Ed Bramson: Ernest has probably 150,000 customers, so there are multiples of people that you have relationships with above those that you actually currently lend to. The reason that's important is that they may be future customers. But coming back to a point we made earlier, we're looking at product line extensibility, and the most economical and least risky way of doing that is to test for those things, to do research, to try them out, rather than commit hundreds of millions and find out it was a bad idea. And there's an industry celebrity who I have not met personally who has, I think, a rather unusual way of, an interesting way of describing Kinshima Lending.

Joe Fisher: Our full year EBIT margin of 12% was driven by the Onboarding of new government services contracts in the first half of the year.

Joe Fisher: Our EBIT margin of 15% in the quarter reflects the benefit from ongoing efficiency initiatives as we target high teen EBITDA margins for 2024.

Turning to our capital allocation and financing activity that is highlighted on slide eight.

We continue to maintain disciplined asset liability and capital management strategies with 84% of our education loan portfolio funded to term and an adjusted tangible equity ratio of eight 2%.

Ed Bramson: He says, people go into it with wide eyes, and they come out with black eyes. One of the principal values of this platform is to enable us to be judicious as we start to have these... On Ernst itself, its business model, why is it distinct? We talked about the brand. But if you think about financial services generally, it's very difficult to have a lower cost of funds than other people.

Joe Fisher: During the quarter, we issued $516 million of asset backed securitizations and $500 million of unsecured debt.

Joe Fisher: We also retired $850 million of maturities that were due in March of 2024.

Our overall unsecured debt maturities declined by 16% to under $6 billion.

Joe Fisher: The lowest levels in our history.

In the year, we reduced our share count by 13% through the repurchase of 18 million shares.

Ed Bramson: Credit differentiation is something people talk about, but at best, it's a mirage. So neither of those is going to be advantageous. So what Ernest is focused on is targeting customers who are efficient and then managing that process efficiently. So if you think about what people in the industry generally talk about, they say, well, our NIM will be badgered because we'll charge people more for the same product than others, or we'll fund it cheaply, so other people can do it, or our cost of customer acquisition. All of those things are important, but what really counts is the end-to-end efficiencies. So, taking a few data points. Ernest is acquiring customers at an annualized cost of about $30,000. And what that is, it's a little bit more than a percent to get one you keep in the box.

Joe Fisher: In total we returned $388 million to shareholders through share repurchases and dividends.

Joe Fisher: We expect the adjusted tangible equity ratio to remain above 8% for 2024.

Joe Fisher: Turning to expenses on slide nine.

Joe Fisher: Total expenses for the year were $825 million.

Joe Fisher: This includes 80 million of regulatory expense, primarily related to accruals in connection with the CFPB matter.

Joe Fisher: Operating expenses declined 32% and the federal education segment and 10% in the corporate other segment when adjusting for regulatory expenses.

Joe Fisher: We achieved an efficiency ratio of 53% for the year better than our original full year outlook of 55% to 58%.

Joe Fisher: The strategic initiatives, we are undertaking reflect our commitment to identify additional and more meaningful opportunities to reduce expenses.

Ed Bramson: Another element of efficiency is that we're targeting more affluent customers, so the average balance for Ernest at the moment is about $50,000, which is almost three times what our legacy portfolio is, and in fact, that $50,000 is trending a little bit higher as we speak. And then the other point here is the realized loss. And the 40 bips might sound attractive, but it probably is helpful in generating nibs.

Joe Fisher: In closing the full year results of $2 45 reflect the steps we've taken to achieve profitable growth <unk>.

Joe Fisher: Address regulatory matters and maintained strong capital, while exploring alternative strategies to maximize cash flows and enhanced value for shareholders.

Joe Fisher: Our full year 2024 outlook of $2 10 to $2 30.

Ed Bramson: But the more important point in an end-to-end analysis is all the people you don't chase, you don't have to worry about, you don't have to think about every day, and they don't cost you money to manage. And so, in terms of efficiency, that's probably the major advantage of targeting those kinds of customers and Mark Hammond. To wrap up on this, because it sounds like a plug, and I have to say that it really isn't because we haven't decided firmly what to do with it or about it. But having said that... We talked earlier about operating the system. And one of the great things about the project that the guys did is that you were able to identify these points of leverage. You do this; you get that in various elements.

Joe Fisher: It does not include the impact of strategic initiatives that Dave and Ed outlined it occurring this year. So we are confident in our ability to execute on these initiatives.

Joe Fisher: Before I close I want to thank team Navient for their accomplishments this year and continued commitment to creating further value for all of our stakeholders.

Joe Fisher: Thank you for your time and I will now hand, the call back to Dave.

Dave: Thanks, Joe.

Dave: As I said at the outset, we had a lot to share this morning.

Dave: While we pursue the actions we're announcing today, we remain focused on meeting the needs of our borrowers on growing our bps businesses by delivering the services, our customers and clients seek from us and with earn outs on growing loan originations and building engagement and deepening relationships.

Ed Bramson: And this is an example, I think, of a positive one because you have well-controlled costs and you have a growing revenue base. So to put that in context, if you look at Earnest from 2023 to the end of last year, revenue increased by, I'm going to call it, $125 million. And marketing expenses went up, but if you get more customers, you have to spend more money to get them. What's interesting, though, is that the other operating expenses went up by about 15. So that's a ratio of a little bit better than 8 to 1. And as you grow, that ratio actually gets better.

We will update you on our progress and call out the impacts within our 2024 results as needed.

Dave: As they come into sharper focus by the second half of the year, we expect to be able to provide our revised outlook in our going forward opportunities and plans.

Dave: I also want to acknowledge and thank my colleagues across the organization will continue to serve our customers and clients.

Dave: Actions, we are announcing today represent significant change I noted as we navigate these changes our team members will remain committed to servicing our customers and clients with distinction and care.

Ed Bramson: So what this looks like to us is a classic example of online growth Business Economics. So it's probably something that you will want to find a way to. So with that, not to say that there aren't very interesting businesses within BPS, but that one, as you know, is subject to... I'm going to turn it back to David. I'm going to get off now.

Speaker Change: With that we're ready to move to Q&A.

Speaker Change: Thank you.

Speaker Change: As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press star one again, please wait for your name to be announced we ask that you. Please limit yourself to one question and one follow up.

Speaker Change: Please standby we compile the Q&A roster one moment for your first question. Please.

David L. Yowan: And I'll delegate it back to him. Great. Thanks, Ted. According to page 18, let me provide a brief review of our BPS business. These businesses operate in two distinct markets with separate operations. Several of the businesses within this group were acquisitions. Our healthcare business goes to market under the Xtend brand. Xtend offers revenue cycle management services to health care providers and is relatively independent from the rest of Navient from an operational standpoint. The government services and transportation businesses operate under several grants and provide a variety of services to federal, state, and local governments. However, their operations share costs, infrastructure, and corporate support with the rest of Navient, particularly loan services.

Speaker Change: And our first question comes from the line of Mark to rise from Deutsche Bank. Your line is now open.

Mark: Yes. Thank you.

Was hoping you could give us all a better sense of kind of the <unk>.

Mark: Net financial impact of these three major steps you talked about I mean, the $400 million expenses are obviously, a pretty significant but.

Mark: I believe it's the last time kind of a consensus expectations for EPS revenue as we look out to 2025. So how should we think about kind of a net impact to earnings and also how much incremental capital you may free up either through sale of bps to kind of offset any kind of potential earnings dilution.

Speaker Change: Great Mark Thanks for the question.

David L. Yowan: While we're at an early stage in exploring strategic options for this business, we'll keep you updated as that process unfolds. Let me try to summarize on slide 19. We have identified and are taking steps to significantly reduce the expense base and simplify the company. These actions are designed to increase the value of the cash flows from our loan portfolios and increase the returns and transparency around growth initiatives. The cash we have on hand, the enhanced cash flows from our loan portfolios, and the proceeds of any divestiture of BPS, combined, could generate significant cash flows in excess of our current market gap over the next few years. We will invest that cash in activities that are expected to generate market value in excess of the invested cash. Excess cash will be distributed to shareholders shortly following my transition from the board to the role of CEO. I shared with you my initial impressions from inside the company, namely that Navient has a strong foundation of assets, capabilities, and talent.

Mark: First let me clarify.

Speaker Change: The scenario.

Mark: We're using when we.

Mark: Refer to the $400 million of expenses. So the scenario assumes that we have completed our outsourcing transaction. The one that we announced this morning.

Mark: We have divested EPS in its entirety and we have taken the steps to.

Mark: To reduce our shared service footprint and our corporate footprint to reflect those two transactions. So that's the scenario that underlies. It when you think about the financials of that he might start with Etfs and look at our 2023 actuals.

Mark: To calibrate tests.

Mark: During 2023, we had roughly $325 million worth of revenue in bps, and we had $280 million worth of expenses. So neither of those would be present under this scenario.

Mark: Our.

Mark: Servicing expenses would no longer be present, there first party servicing expenses that we incurred today would no longer be present as well.

David L. Yowan: I also said that we would undertake a rigorous review to identify ways in which that foundation can deliver more to shareholders. These actions are the first steps in delivering our full value and potential, and we look forward to providing updates on our. With that, I will now turn it over to Joe to review our Q4 results and provide our 2024 outlook. Thank you Dave and Ed and everyone on today's call for your interest in Navi.

Our shared service expenses many of those shared between loan servicing and bps would no longer be present.

Mark: As well as a smaller corporate footprint would mean that our operating expenses would be lower under that scenario.

Mark: Now we have to add back the fact that we would now pay our outsource standard for our servicing for.

Mark: For servicing our loan portfolio. So you bucket all those things together and the cumulative impact on operating expenses as a reduction of $400 million.

Joe Fisher: During my prepared remarks, I will review the fourth quarter and full year results for 2023. I will also provide more detailed guidance underlying our 2024 outlook for earnings per share of $2.10 to $2.30. Our 2024 outlook does not assume any of the strategic actions that we are announcing.

Mark: With a revenue decline of $325 million.

Mark: Al would impact in.

Mark: 2023 actuals.

Mark: Now it's important to note that when we talk about finalizing these actions in 2024, what we're talking about is.

Joe Fisher: This does not include potential benefits from the transition of servicing, any potential divestitures, or any restructuring expenses related to these initiatives. This outlook also assumes a declining rate environment with four rate cuts. We will update our financial outlook throughout the year as these actions become clearer. In 2023, we reported a fourth-quarter gap EPS loss of 25 cents, bringing our full-year gap EPS to $1.85. On a core basis, we delivered fourth-quarter EPS of $0.21 and full-year EPS of $2.45. The $0.21 includes a $0.49 reduction to EPS related to significant items in the quarter.

Mark: Becoming more certain about what that scenario actually yes, we have we're farther along in the outsourcing process and so we have more confidence and more visibility not perfect yet, but we have more confidence and more visibility into what that will look like during 2024, and we will share those.

Mark: Impacts with you.

Mark: Less far along in the process relative to Bts and so we'll keep you updated along the way as we determine whether in fact, we do divest all of it is in that scenario and or whether there is some variation of that.

Joe Fisher: Before I move on to the segments, I will provide further detail on two of these items. First, we have increased our accrual by $28 million in connection with the CFPB litigation, bringing our total accrual to $73 million. We remain confident about the strength of our case while open to finding a solution that is acceptable to all stakeholders in order to put this matter behind us. Second, in our private credit provision this quarter, we've reserved $35 million due to internal policy changes we've made to meet new regulatory expectations related to school misconduct discharges on certain legacy private loans. This increase reflects our assessment of the impact on the legacy portfolio's life of loan discharges from potential borrower claims. I'll now provide additional detail by segment, beginning with federal education loans on slide four.

Mark: The shared service reductions and the corporate footprint reductions the timing of those and the nature of the areas depends on those first two transactions as well for example, if we do.

Mark: Don't sell all of Etfs. For example, then we may have more stranded costs to take out if we sell all of their data and a piece as an example of that.

Mark: The other.

Mark: Other pieces that we have.

Speaker Change: I have not.

Speaker Change: Or not in the outlook gears.

Speaker Change: It is both the nature of the transactions that we end up doing so what will be the scenario and then if we sell bps what are the sale proceeds.

Speaker Change: So when we talk about giving greater visibility into.

Speaker Change: We entered the second half of the year, we're talking about at that point, we will know what the scenario is and we'll have greater visibility into the timing and the amount of any transition items that get us there.

Joe Fisher: The quarter's NIM of 86 basis points reflects the higher rate environment as floor income, including the amounts that were hedged, continued to roll off in the second half of this year. We expect Felt-Nim to decline to the low 70s for 2024 due to our interest rate outlook of four cuts this year. A falling interest rate environment creates NIM pressure as our FELP assets reprice more frequently than our liability. However, we do not forecast rates to fall far enough to reach a level where significant floor income is generated. Our full year felt net interest income declined 8% to $480 million as the portfolio balance declined 13% to $38 billion.

Speaker Change: Thats responsive mark.

Speaker Change: Yes.

Speaker Change: That's helpful. Thank you and just.

Speaker Change: A follow up on Bts is is the divestiture there kind of a.

Speaker Change: An imperative just given the decision to outsource servicing given some of the significant shared expenses at least on the government services side.

Speaker Change: So is it is it also.

Speaker Change: Possible to hold onto healthcare, just given that doesn't have that.

Speaker Change: As you mentioned, it's more self contained it doesn't share the same kind of corporate expense.

Speaker Change: Yes.

Speaker Change: Youre thinking about it exactly the way that we're thinking about it more.

Speaker Change: I think Ed commented on this in his remarks, I would think about the timing of GPS and our decision to explore strategic options is absolutely tied to our decision to outsource because we have this <unk>.

Joe Fisher: The full-year Felt NIM of 112 basis points was above our targeted range of 100 to 110 basis points provided at the beginning of the year. Credit metrics improved in our FFELP portfolio compared to the prior year and third quarter. The delinquency rate, forbearance rate, and net charge-offs all declined from the prior year.

Speaker Change: Difficult shared service infrastructure and it makes sense to make a decision about those and analyze those.

Speaker Change: Close to simultaneously as we can.

Speaker Change: We will look at so I wouldn't call. It imperatives I would call. It the timing makes sense for US and then as you indicate there is and as we called out there are different uses and different reliance on that shared service infrastructure, even within our EPS business.

Joe Fisher: Provision increased from the prior year as longer expected lives, primarily driven by a greater percentage of borrowers and income-based repayment plans, increase the projected amount of loan premium charged off in the future. The net charge-off rate of 19 basis points for the year was consistent with our expectations of 10 to 20 basis points for the full year. Now let's turn to our consumer lending segment on slide five. That interest margin was 291 basis points in the quarter and 304 basis points for the full year. This exceeded our original guidance of 280 to 290 basis points as we benefited from improved funding spread. We anticipate that consumer lending NIM will be in the low 300s for 2024.

Clearly since.

Speaker Change: Consider that and think about that as we decide on the scenarios that we followed for that particular business.

Speaker Change: Okay, great. Thank you.

Thank you one moment for our next question. Please.

Speaker Change: Our next question comes from the line of Erin <unk> with Citi. Your line is now open.

Speaker Change: Thanks.

Erin: Just thinking about it from a high level perspective.

Erin: If you exit vps.

Erin: Your your remaining businesses are very much simplified you have a run off portfolio that you've had.

And you have Ernest which you laid out some of the benefits there, but hurt us.

Joe Fisher: This includes projected new refi originations of $1 billion compared to $647 million in 2023. It also assumes projected growth of 10% in in-school originations. We expect the increase in refi originations to occur primarily in the back half of the year based on our outlook for a declining rate environment. Our consumer lending team is focused on generating high-quality loans with efficient acquisition costs in improved markets. Credit metrics in our consumer lending portfolio performed as expected, with delinquency rates, forbearance rates, and charge-off rates relatively flat year over year.

Erin: A little bit challenged in the near term it seems like just from its primary business has been a student loan refi.

Erin: Facing some challenges because of the interest rate environment and in the school businesses is quite small.

Erin: I guess what's.

Erin: Whats really left to provide growth.

Erin: If you're if you're exiting bps and you have this run off portfolio.

Speaker Change: So thanks for the question Darren I think a couple of things I'd call you to first I'd go back to.

Speaker Change: Ed's remarks.

Speaker Change: We're thinking about Ernest.

Speaker Change: In terms of not just a lend centric our lens first model, but as a way to establish relationships and engagement with the students awards that I think sets us up and it gives us some optionality going forward to decide whether there is other product lines or other services that we can provide.

Joe Fisher: Our charge-off rate for full year 2023 of 1.5% was at the low end of our original guidance of 1.5% to 2%. The provision of $50 million is primarily driven by the changing regulatory expectations that I discussed earlier in my remarks. This is reflected in our change in allowance on Slide 6. At the end of 2023, our allowance for loan losses for our entire education loan portfolio will be a billion dollars. While much of our portfolio is amortizing, we reserved $5 million for felt loans during the quarter and $56 million during the year related to a projected extension in the life of the portfolio. New origination volume contributed $4 million to the allowance in the quarter and $25 million for the full year.

Speaker Change: Did that cohort.

Speaker Change: Also point out that our loan origination targets that Joe described for Ernest.

Speaker Change: Do represent a 40% growth on a combined basis, we saw an SLO.

Speaker Change: There too.

Speaker Change: Our actuals for 2023, so I think thats it.

Speaker Change: A significant growth rate and a demonstration of our confidence and commitment and our ability to.

Speaker Change: To compete effectively in those in.

Speaker Change: In those markets, while focusing on our overall efficiency and creating those assets that's really.

Speaker Change: The goal that we have is is to come.

Continue to minimize and optimize our cost of acquisition our collection costs by selecting the right customer segments that allow us to continue to grow on.

Joe Fisher: Continue to slide 7 to review our business processing segment. Total revenue increased $11 million to $81 million in the quarter, as revenue from our traditional BPS services increased $15 million, or 23%, more than fully offsetting revenue associated with pandemic-related contracts from a year ago. The full-year revenue of $321 million was comprised of $74 million in growth from traditional BPS services and well in excess of the long-term, high single-digit growth that we see in the industry. Our full-year EBITDA margin of 12% was driven by the onboarding of new government services contracts in the first half of the year. Our EBITDA margin of 15% in the quarter reflects the benefit from ongoing efficiency initiatives as we target high-teen EBITDA margins for 2025.

Speaker Change: Pat.

Speaker Change: Our financial trajectory that we've shared I think for the first time here this morning.

Speaker Change: Okay, and then I was wondering if you could also provide any additional color on.

The $28 million of contingency loss, yes, I did some recent developments developments in the CFPB matters.

Speaker Change: So there is two matters right one is.

Speaker Change: <unk>.

Speaker Change: The CFPB matter, it's just.

Speaker Change: Additional accrual based on the developments.

Speaker Change: <unk>.

Speaker Change: Base.

Speaker Change: The litigation in the quarter, just like last quarter, we don't won't comment on the developments of those so that's what the <unk>.

Speaker Change: $8 million.

Speaker Change: Okay alright, thank you.

Speaker Change: Thank you.

Speaker Change: One moment for our next question please.

Speaker Change: Our next question comes from the line of Moshe Orenbuch with TD Cowen. Your line is now open.

Joe Fisher: Turn to our capital allocation and financing activity that is highlighted on slide 8. We continue to maintain disciplined asset liability and capital management strategies with 84% of our education loan portfolio funded to term and an adjusted tangible equity ratio of 8.2%. During the quarter, we issued $516 million of asset-backed securitizations and $500 million of unsecured debt. We also retired $850 million of maturities that were due in March 2024. Our overall unsecured debt maturity declined by 16% to under $6 billion, the lowest levels in our history. During the year, we reduced our share count by 13% through the repurchase of 18 million shares.

Speaker Change: Great.

Speaker Change: Okay.

Moshe Ari Orenbuch: You talked a lot about cash that's available, but you also talked about kind of maintaining above an 8% TCE ratio could you talk about number one how much share repurchases in year 2000 and for guidance and.

Moshe Ari Orenbuch: How you think about the impacts of this plan on TCE, whether theyre charges that you might have to take to get out of expenses in contracts and other things and severance and other things like that.

Moshe Ari Orenbuch: And any other kind of things that might be.

Moshe Ari Orenbuch: Impact during during 'twenty four.

Speaker Change: Okay. Thank you Moshe I think on the capital ratio and just overall guidance, what's embedded in our $2 10 to $2 30.

Speaker Change: Is share repurchases just under $140 million, so that will help you with.

Moshe Ari Orenbuch: Adjusted tangible equity ratio, which we believe will be above 8% and as you know the biggest driver of that ratio is just a success and we buy and score as we hold 5% capital on the refi boats and 10% for our in school loans, So thats going to be the biggest determinant.

Joe Fisher: In total, we returned $388 million to shareholders through share purchases and dividends. We expect the adjusted tangible equity ratio to remain above 8% for 2024. Turn to expenses on slide 9. Total expenses for the year were $825 million.

Moshe Ari Orenbuch: How far above or.

Moshe Ari Orenbuch: Really above that 8% range that we end up in a big driver of that is just can be what you think about obviously the interest rate trajectory for the back half of the year.

Joe Fisher: This includes $80 million of regulatory expense primarily related to accruals in connection with the CFPB matter. Operating expenses declined 32% in the federal education segment and 10% in the corporate other segment when adjusting for regulatory expenses. We achieved an efficiency ratio of 53% for the year, better than our original full-year outlook of 55% to 58%. The strategic initiatives we are undertaking reflect our commitment to identify additional and more meaningful opportunities to reduce expenses. In closing, the full year results of $2.45 reflect the steps we have taken to achieve profitable growth, address regulatory matters, and maintain strong capital while exploring alternative strategies to maximize cash flows and enhance value for shareholders. Our full year 2024 outlook of $2.10 to $2.30 does not include the impact of strategic initiatives that Dave and Ed outlined for this year, though we are confident in our ability to execute on these initiatives. Before I close, I want to thank Team Navient for their accomplishments this year and their continued commitment to creating further value for all of our stakeholders. Thank you for your time, and I will now hand the call back to Dave. Thanks, Joe.

Moshe Ari Orenbuch: Yes.

Speaker Change: Okay, and then Joe could you.

Joe Fisher: Yeah, Okay, sorry go ahead.

Joe Fisher: Yes, I was just going to follow on the second part of your question here about the future charges with all of the strategic actions better potentially taking place.

Our goal certainly is to limit any types of restructuring charges going forward. Our guidance does not include that but our goal is to minimize the expenses associated with that and certainly the valuation is going to be determined then we're going to look to maximize the value of these.

Joe Fisher: And thats going to be play a big role in determining obviously.

Joe Fisher: Capital implications going forward.

Joe Fisher: Great.

Speaker Change: Thanks, and just as a follow up maybe follow up to Mark decreases question on bps could you talk a little bit about that you expect to get 15%.

Speaker Change: EBITDA margin you had a 12% EBITDA margin. This year just talk about the range of the various contracts in there.

Speaker Change: Around that 15% and whether you've got.

Speaker Change: Indications of interest on any of those which of those are perhaps more likely less likely and how to think about.

Speaker Change: Out of that.

Speaker Change: In terms of.

Speaker Change: Theories elements, we take more Pts business. Thanks.

Speaker Change: Sure. So just so it make sure I'm capturing your question just the range of EBITDA within the various sectors, whether it's health care government services and contracts is what you're.

David L. Yowan: As I said at the outset, we had a lot to share. While we pursue the actions we're announcing today, we remain focused on meeting the needs of our borrowers, on growing our BPS businesses by delivering the services our customers and clients seek from us, and with Ernest on growing loan originations, building engagement, and deepening relationships. We will update you on our progress and call out the impacts within our 2024 results, as needed. As they come into sharper focus by the second half of the year, we expect to be able to provide a revised outlook and our going forward opportunities and plans. I also want to acknowledge and thank my colleagues across the organization who continue to serve our customers and clients.

Speaker Change: Asking.

Speaker Change: Yes, I mean, I am assuming they all go on average yes.

Speaker Change: So yes, so ultimately it does vary contract by contract and I think if you look at.

Speaker Change: Publicly traded companies typically health care guys.

Speaker Change: A higher <unk>.

Speaker Change: Higher multiple and has higher EBIT margins and those related to federal contracts. So that does vary contract by contract and what you've seen over the last several years is that we've actually exited a number of our lower margin contracts, which has contributed to the growth.

Speaker Change: We've seen and the benefits that we received in the EBIT margin. So while full year was 12%. We ended this year at 15% for the quarter and guidance for the high teens for next year.

Operator: The actions we are announcing today represent significant change. I know that as we navigate these changes, our team members will remain committed to serving our customers and clients with distinction and care. With that, we're ready to move to Q&A. Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced.

Speaker Change: You can see in our presentation. If you look back in the appendix there is about a 10% revenue growth implied in that as well as achieving the margins that we're laying out. So ultimately I think if you look at this business. It's a very attractive business that we historically have not received the multiple that we see.

Speaker Change: Others getting.

Speaker Change: In this space and so that's one of the things that we're looking at here and certainly a driver of artists one of the drivers of our decisions.

Speaker Change: Thanks.

Speaker Change: Thank you one moment for our next question. Please.

Mark C. DeVries: We ask that you please limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. One moment for our first question. And our first question comes from the line of Mark DeVries from Deutsche Bank. The line is now open.

Speaker Change: Our next question comes from the line of Bill Ryan with Seaport Research Partners. Your line is now open.

Morning, Thanks for taking my questions first just going back to the high level.

Bill Ryan: A question investors have been asking is if I buy the shares at NAV, yet what exactly do I own you've kind of outlined your commitment to.

David L. Yowan: Yes, thank you. I was hoping you could give us a little better sense of the kind of net financial impact of these three major steps you talked about. I mean, the 400 million expenses are obviously pretty significant, but I believe it's less than kind of a consensus expectation for BPS revenue as we look at 2025. So how should we think about kind of the net impact to earnings and also how much, you know, incremental capital you may free up either through the sale of BPS to kind of offset any kind of potential earnings dilution? Mark, thanks for the question.

Bill Ryan: To Ernest and adding some new products detailed somewhat forthcoming but.

Bill Ryan: Thinking about the sale of bps, and adding the products and services to Ernest our acquisitions or bolt on acquisitions in the thought process of maybe using some of the proceeds from EPS.

Bill Ryan: Okay.

This is Dave Thanks for the question look I think it's too soon in the process to talk about that.

David L. Yowan: First, let me clarify the scenario that we're using when we refer to the $400 million in expenses. So the scenario assumes that we have completed our outsourcing transaction, the one that we announced this morning. We have divested BPS in its entirety, and we have taken the steps to reduce our shared service footprint and our corporate footprint to reflect those two transactions. So that's the scenario that underlies it.

Bill Ryan: Dan.

Dave: Strategy that Ernest has had and will continue to execute against this year is to continue to build engagement with students through the financial counseling platform that includes things like.

Dave: For example, a student loan manager, which is a capability that helps students that have.

Dave: Federal loans to determine what the best paint.

Payment and refinancing options are for them at the same time will be.

Dave: As I just indicated our growing our loan originations by almost 40% this year.

David L. Yowan: When you think about the financials of that, you might start with BPS and look at our 2023 actuals to calibrate this. During 2023, we had roughly $325 million worth of revenue in BPS, and we had $280 million worth of expenses. So neither of those would be present under this scenario, and Um, servicing expenses would no longer be present.

Dave: Looking at the different product lines et cetera that we might be able to build off that engaged user base when we.

Dave: Find has set of products and services that we think we can offer there is a variety of ways that we might do that it could be through acquisition. It could be through an organic build it could be through affiliates I think you've seen all of those models work in financial services I would say all of those things would be on the table. If we go down that route.

Speaker Change: And one follow up just on the.

David L. Yowan: The first party servicing expenses that we incur today would no longer be present, as would shared service expenses. Many of those shared between loan servicing and BPS would no longer be present, as well as a smaller corporate footprint would mean that our operating expenses would be lower under that scenario. Now we have to add back the fact that we would now pay our outsourced vendor for servicing our loan portfolio. So you bucket all those things together, and the cumulative impact on operating expenses is a reduction of $400 million with a revenue decline of $325 million. That's how it would impact in 2023.

Speaker Change: Felt margin guide I know that the.

Speaker Change: Floor income contracts are running off et cetera, and the interest rate environment is going to be a little bit more adverse to the margin, but for Joe it's kind of thinking it is.

Speaker Change: As you exit 2024, you got it obviously to the margin being below 70 for the full year is the margin going to be lower as we exit 2024 or fairly steady over the course of the year.

Speaker Change: So it's.

Speaker Change: It's going to be lower as you get into the back half of 'twenty four just from the margin pressure component of it so as that.

Using the four type scenario that we're projecting here that pressure itself, we would estimate contributes about 10 basis points of pressure.

Speaker Change: Throughout the year, but more so in the back half as those rates are not projected as early in the front half of the year. So we should see.

David L. Yowan: Now, it's important to note that when we talk about finalizing these actions in 2024, what we're talking about is becoming more certain about what that scenario actually is. We have we're farther along in the outsourcing process until we have more confidence and more visibility, not perfect yet, but we have more confidence and more visibility into what that will look like in 2024. And we'll share those impacts with you; we are less far along in the process relative to BPS, and so we'll keep you updated along the way as we determine whether in fact we do divest all of it as in that scenario or whether there's some variation of that. The shared service reductions and the corporate footprint reductions, the timing of those, and the nature of those, depend on those first two transactions as well.

Speaker Change: That impact back half the floor component youre going to start to see that early in the first quarter and you've already started to see that this quarter. There was about five basis point contribution this quarter versus last quarter from the Florida Rolling off that goes to about 15 basis points as we get into the first quarter.

Speaker Change: Okay. Thank you for that color.

Speaker Change: Thank you.

Speaker Change: One moment for our next question please.

Speaker Change: Our next question comes from the line of Sanjay <unk> with <unk>. Your line is now open.

Sanjay: Thank you good morning, I wanted to go back to slide nine because to me it seems like Thats. The most critical part of the story going forward.

Sanjay: And it seems like the name of the game should we be trying to optimize the flow through of all of these cash flows and I know thats sort of what youre working on with all of these initiatives. David maybe you could just help us think about Dimensionalize ing.

David L. Yowan: For example, if we don't sell all of BPS, for example, then we may have more stranded costs to take out than if we sell all of it in one piece, as an example of that. The other pieces that we have not, that are not in the outlook, are both the nature of the transactions that we end up doing. So what will be the scenario?

Sanjay: How much can float it doesn't seem like there's a lot that flow through if you have the current cost structure, but obviously the adjustments you're making as you've indicated substantially free up the flow through but maybe you could just talk about that.

Sanjay: Aim over the next five years and beyond.

David L. Yowan: And then, if we sell BPS, what are the sale proceeds? So when we talk about giving greater visibility into the second half of the year, we're talking about at that point, we will know what the scenario is, and we'll have greater visibility into the timing and the amount of any transition items that get us there. Hope that's responsive, Mark.

Sanjay: How much of that flowed through we can get because obviously, that's a big part of the thesis.

Sanjay: The market cap is lower than these cash flows.

Speaker Change: Yeah. Thanks, Sanjay good morning, So theres a couple of pieces to that I'd say are just that.

Speaker Change: One piece is just the.

Speaker Change: Financial implications of the three strategic actions that we took that I ran through the financials a bit earlier, so I would call you back to that that clearly.

Mark C. DeVries: Yeah, that's, that's helpful. Thank you. And just a follow-up on BPS: is the divestiture there kind of an imperative given the decision to outsource servicing given some of the significant shared expenses, at least on the government services side? So is it also, you know, possible to hold on to healthcare just given it doesn't have that, you know, as you mentioned, it's more self-contained, it doesn't share the same kind of corporate expense?

Speaker Change: In that scenario reduces expenses by more than the revenue.

Speaker Change: Were no longer be present.

Speaker Change: I think the second thing is that moving to <unk>.

Speaker Change: Variable.

Speaker Change: Servicing model has some pretty powerful leverage for us relative to where we are today. We don't project for you our servicing costs out over the remaining life of the loan but I think you can think about that in terms of we have a fixed cost base and we have a variable cost basis.

David L. Yowan: Yeah, I think you're thinking about it exactly the way that we're thinking about it, Mark. I think Ed commented on this in his remarks. I would think about the timing of EPS and our decision to explore strategic options is absolutely tied to our decision to outsource because we have this significant shared service infrastructure, and it makes sense to make a decision about those and analyze those as close to simultaneously as we can. We will look at, so I wouldn't call it imperative; I would call it the timing that makes sense for us.

Speaker Change: As loans.

Speaker Change: Payoffs in the portfolio amortize is.

Speaker Change: It is done.

Speaker Change: On a net basis for all but one year in Navient history.

Speaker Change: When we originated $6 billion of refi loans in 2019, so when that amortizing scenario you have seen the variable costs come out as the loan count goes down but at some point.

Speaker Change: Our fixed cost base doesn't go down as rapidly as the loan count is going down.

Speaker Change: So the variable cost model, we think produces significant not just operational flexibility but significant.

David L. Yowan: And then, as you indicate, and as we pointed out, there are different uses and different reliance on that shared service infrastructure, even within our BPS businesses. We'll clearly consider that and think about that as we decide on the scenario that we follow for that. Okay, great.

Speaker Change: Substantial financial benefits as an SBA loan portfolio continues to amortize.

Speaker Change: Very different than the model that we have today.

Speaker Change: I think the third piece is just the financing piece and the cost of that both unsecured and secured our liabilities and.

Arren Cyganovich: Thank you. Thank you. One moment for our next question. Our next question comes from the line of Arren Cyganovich with Citi. Your line is now open.

Speaker Change: We have the team has done a terrific job over the years of optimizing and reducing that we think there are some other opportunities that give us some.

David L. Yowan: Thanks. Just thinking about it from a high level perspective, if you exit BPS, and your, you know, your remaining businesses are very much, you know, simplified, you have a runoff portfolio that you've had, you know, all along, and you have earnest, which you laid out some of the benefits there, but earnest is, A little bit challenged in the near term, it seems like, just from, you know, its primary business has been student loan refi, and that's, you know, facing some challenges because of the interest rate environment, and the in-school business is quite small, you know, I guess what's, What's really left to provide growth, you know, if you're if you're exiting DPS and you have this runoff portfolio? So, thanks for the question, Arren.

Speaker Change: Reality and flexibility that we're going to be looking out over the coming months. So those are the three buckets.

Speaker Change: Largely reducing the corporate footprint and their business profile that is slimmer and leaner that includes corporate expense reduction.

Speaker Change: Moving to a variable cost model and then.

Reducing our cost of financing as well those are the three levers that we have.

Speaker Change: Okay. That's very helpful and then.

Speaker Change: Maybe just a follow up question on bps I would answer the questions were asked already but when you're thinking about like Pearl NIM preliminary indications of interest.

Speaker Change: Any dimensionalize Asian of what kind of valuation that business can get because it seems as you got as Joe sort of alluded to that.

David L. Yowan: I think a couple of things I'd call you on. First, I'd go back to Ed's remarks and the way we're thinking about Ernest, in terms of not just a LEND-centric or LEND-first model but a way to establish relationships and engagement with the student cohorts that I think sets us up and gives us some optionality going forward to decide whether there are other product lines or other services that we can provide to that cohort. I would also point out that the loan origination targets that Joe described for earnest do represent a 40% growth on a combined basis, refi and SLO, compared to our actuals for 2023. So I think that's, you know, a significant growth rate and a demonstration of our confidence and commitment and our ability to compete effectively in those in those markets while focusing on our overall efficiency in creating those assets. That's really the goal that we have to continue to minimize and optimize our cost of acquisition and collection costs by selecting the right customer segments that allow us to continue to grow on that financial trajectory that we've shared, I think, for the first time. Okay.

Speaker Change: Is a higher valuation business and what sort of suggested in the valuation of your stock are or are there. Some nuances there that we should be aware of.

Speaker Change: Thank you Sanjay I think it's just too early to comment on that but I would just point to.

Sanjay: Public companies in that space and you can look at the multiples both on the health care RCM side as well as government services bps, and then just more diversified BPL businesses, all receiving a higher multiple than what we received today.

Speaker Change: Correct just ask one more question on in school originations is that.

Speaker Change: No longer are going to happen.

Speaker Change: I think I heard anything about that but maybe you could just clarify on that thank you.

Speaker Change: Okay.

Speaker Change: I think as Dave reiterated in my comments. So we are looking to grow 10% on the in school side and overall just from a origination perspective.

Speaker Change: North of 40% when you combine refi and in school. So we're certainly very committed to growing this business.

Speaker Change: Alright, thank you.

Speaker Change: Thank you.

Speaker Change: As a reminder to ask a question you will need to press star one on your telephone.

Speaker Change: For our next question. Our next question comes from the line of John Hecht with Jefferies. Your line is now open.

John Hecht: Good morning, guys. Thanks for the update and thanks for taking my question one point of clarification, David you'd mentioned I think its $400 million of kind of identified potential crossroads.

Joe Fisher: And then I was wondering if you could also provide any additional color on the $28 million in contingency loss. You cited some recent developments in the CFPB matter. Yeah, there are so there's two matters, right?

John Hecht: That would come with $325 million or less I guess.

Speaker Change: <unk> revenues.

John Hecht: Just want to clarify is that net.

John Hecht: Of the outsource servicing or does that include the total concept of the outsource servicing.

Joe Fisher: One is the CFP matter is just the additional accrual based on the developments in the case, uh, the litigation in the quarter just like last quarter we don't won't comment on the developments of those so that's what the uh 28 million. Okay. All right. Thank you. Thank you. One moment for our next question, please. It comes from the line of Moshe Orenbuch with TD Cowan. Your line is now open.

David Yellen: So thanks for the question when we say that it means it considers the fact that we would need to pay an outsource provider for servicing our allowance. So thats. What so it is included and the expense reduction is net of what we would pay to that provider.

David Yellen: That's how we would think about it and I would just remind you that those numbers that were using are based on 2023 actuals. So if you add that scenario and that was in place for 2023, that's where we got the <unk>.

Moshe Ari Orenbuch: Great. Both of you know, Dave, you talked a lot about cash that's available. But you also talked about, you know, kind of maintaining above an 8% TCE ratio. Could you talk about number one, how much share repurchase is in your 24-guidance and how you think about the impacts of this plan on TCE, whether there are charges that you might have to take to get out of expenses and contracts and other things and severance and other things like that, and any other kind of things that might impact during 2014. Thank you, Moshe.

David Yellen: Volumes in the amounts that we've shared with you.

David Yellen: Okay.

Speaker Change: Second question.

Speaker Change: I think Joe said, the origination from Airbus for refi originations would be <unk>.

Speaker Change: Back way to just because of interest rate reduction for me, maybe a little bit more kind of information on the cadence for how sensitive.

Speaker Change: Our originations two rate cuts in that front.

Speaker Change: Yep.

Speaker Change: I think certainly as.

Speaker Change: <unk> rate cuts.

Speaker Change: If that does happen I think there's a tremendous opportunity certainly, especially if it's beyond four rate cuts. So.

Speaker Change: The way I think about it is that if I'm looking at the first quarter fairly similar to what we've seen in this fourth quarter and then starting to pick up in the back half of the year.

Joe Fisher: I think on the capital ratio and just overall guidance, what's embedded in our $2.10 and $2.30 is share repurchases of just under $140 million, so that will help you with the adjusted tangible equity ratio, which we believe will be above 8%. And as you know, the biggest driver of that ratio is just our success in refi and in-school, as we hold 5% capital on the refi books and 10% for our in-school loans So that's going to be the biggest determinant of how far above or really above that 8% range that we end up, and the big driver of that is just going to be what you think about, obviously, the interest rate trajectory for the back half of the year. Joe, could you put, yeah, sorry, go ahead.

Speaker Change: Just think about the scenario that I am referring to is you get 50 basis points 75 basis point cuts overall.

Speaker Change: Overall that should be more of an impact and what youre seeing today, so that growth should occur and be more back loaded and then more back loaded to obviously the fourth quarter versus the first quarter, just depending on where rates are.

Speaker Change: Okay and then.

Speaker Change: A final question if I can remember.

Speaker Change: I know this is out there by Ernest you've talked about incremental products and services.

Speaker Change: Is this going to be one centric business or.

Ernest: Or is there going to be other fee oriented products and if so could you just give us some examples of what those might look like.

Ernest: Yes.

Ernest: Both things are on the table, obviously from a number of a good mix.

Ernest: As a consumer centric enterprise. So the first thing to do will be to try to.

Joe Fisher: I was just going to follow up on the second part of your question here about future charges with all of the strategic actions that are potentially taking place. Our goal certainly is to limit any types of restructuring charges going forward. However, our guidance does not include that.

Ernest: Find and identify unmet needs or needs that cut.

Ernest: Customers have that we can serve thank you you've.

Ernest: Done a nice job of demonstrating that particularly in the refi space and then if you think about product line extensions that would encompass potentially both additional lending products, but also potential.

Joe Fisher: But our goal is to minimize the expenses associated with that, and certainly, valuation is going to be a determinant of that. We're going to look to maximize the value of these transactions, and that's going to play a big role in determining, obviously, any capital implications going forward. Thanks.

Ernest: Our fee generating products.

Ernest: Rather than lending products as well again that could include.

Ernest: <unk>.

Ernest: Third party referrals based on our cost of acquisition of a customer it could involve other kind of.

Ernest: Products.

Ernest: Work is underway we have.

Joe Fisher: And just as a follow-up, maybe a follow-up to Mark DeVries' question on BPS, could you talk a little bit about that, you know, you're expecting a 15% EBITDA margin. You had a 12% EBITDA margin this year. Could you talk about the range of the various contracts in there, you know, around that 15% and whether you've got... Indications of interest in any of those and which of those are perhaps more likely or less likely and how to think about, you know, that in terms of the, you know, the various elements within that BPS business. Sure, so just to make sure I'm capturing your question, just the range of EBITDA within the various sectors, whether it's healthcare, government services, and contracts is what you're... Asking. Yeah, I mean, I'm assuming they all don't average the same.

Speaker Change: As we as was asked for some time to come back to you later in the year.

Where we can add on that give some initial thoughts.

Speaker Change: Okay. Thanks, I appreciate that thank you.

Speaker Change: Thank you one moment for our next question. Please.

Speaker Change: Our next question comes from the line of Rick Shane with Jpmorgan. Your line is now open.

Thanks, everybody for taking my questions.

Rick Shane: Look I think we reflect on the last six or seven years.

Rick Shane: In terms of capital returns both to equity holders and bond holders I think you guys have done a good job.

Rick Shane: In terms of maintaining operating efficiency in the context of a shrinking business I think you guys have done a reasonably good job.

Rick Shane: The challenge has been growing revenues.

Rick Shane: What I heard today is a strategy that seeks to maximize shareholder value by optimizing the cash flows and staying very disciplined about returning those cash flows to investors to stakeholders again very consistent with what we've seen over the last five or six years.

Joe Fisher: Yeah, so ultimately, it does vary contract by contract. I think if you look at some publicly traded companies, typically healthcare does earn a higher, certainly a higher multiple and has higher even margins than those related to federal contracts. So it does vary contract by contract. And what you've seen over the last several years is that we've actually exited a number of our lower margin contracts, which has contributed to the growth that you've seen and the benefits that we've received in the EBITDA margin. So while the full year was 12%, we ended this year at 15% for the quarter, and guidance is for the high teens for next year. And as you can see in our presentation, if you look back in the appendix, there's about 10% revenue growth implied in that as well as achieving the margins that we're laying out. So ultimately, I think just if you look at this business, it's a very attractive business that historically, we have just not received the multiple that you see others getting in this space. And so that's one of the things that we're looking at here and certainly a driver of our, one of the drivers of our decision. Thanks.

Rick Shane: Yeah.

Speaker Change: At the end of the day you guys are just still kind of squeezing the same fruit tighter and tighter.

Speaker Change: Where is the growth going to come from we hear about Ernest.

Speaker Change: We hear about the in school initiatives, but again that seems to be a pretty big opportunity given.

Speaker Change: <unk> seen two of the largest players exit in the last three years.

Speaker Change: The market share objectives to 10% growth are pretty modest why not be more aggressive there or where are the other opportunities to actually start driving top line again.

Speaker Change: Okay. Thanks, Gregg for the question I think I'd go back to what we have done.

Speaker Change: I think the team has done a good job of.

Managing the expenses over time.

Speaker Change: Shrinking portfolio environment what.

Speaker Change: What we're trying to communicate today is that there is.

Speaker Change: A lot more work that these reactions are designed to address.

Speaker Change: It's not just about expense with LNG, but as Ed indicated.

Bill Ryan: Thank you. One moment for our next question. Our next question comes from the line of Bill Ryan with Seaport Research Partners. Your line is now open. Good morning.

Speaker Change: <unk>.

Speaker Change: Overhead.

Speaker Change: If you will in a broad sense the shared service functions.

Speaker Change: Overhead and our cost of equity.

David L. Yowan: Thanks for taking my questions. First, just going back to, you know, the high level. You know, the question investors have been asking is, you know, if I buy the shares of Navient, you know, what exactly do I own? You've kind of outlined your commitment to Ernest and adding some new products, details somewhat forthcoming, but, you know, thinking about the sale of BPS and adding products and services to Ernest. Our acquisitions are bolt-on acquisitions in the thought process of maybe using some of the proceeds from BPS. Hey, this is Dave.

Speaker Change: All conspire to make.

Speaker Change: Growth initiatives.

Speaker Change: More challenge than they need to be right because the portfolio is shrinking if we don't get rid of those.

Speaker Change: Central costs, then they get allocated to growth initiatives that burdens them in a way that doesn't allow them to reach their full potential or gives us the capacity to make them. So the first thing we're going to what we're trying to accomplish is accurate.

Speaker Change: <unk> burden.

Speaker Change: The growth initiatives that also at the same time and in the same way increases our capacity to invest by increasing the amount of legacy loan cash flows that we have the decision to make capital allocation decisions to make about return and otherwise.

David L. Yowan: Thanks for the question. Look, I think it's too early in the process to talk about that. Again, the strategy that Ernest has had and will continue to execute against this year is to continue to build engagement with students through the financial counseling platform. And that includes things like, for example, Student Loan Manager, which is a capability that helps students that have federal loans determine what the best payment and refinancing options are for them. At the same time, we'll be, as I just indicated, growing our loan originations by almost 40% this year. While we're looking at the different product lines, etc., that we might be able to build off that engaged user base, when we, you know, find a set of products and services that we think we can offer, there are a variety of ways that we might do that. It could be through acquisition, it could be through an organic build, or it could be through affiliates.

Speaker Change: With respect to the earnest growth proposition I think we tried to lay out what Ernest has accomplished over the last three or four years I think thats impressive from a financial perspective.

Speaker Change: Brand health is a good indication that.

Speaker Change: Ernest has found a way to surprise and delight the customers that have engages with the customer experience I know that in and then Ed indicated this my experience in financial services is that that's a really hard thing to do and accomplish that that's a really good foundation for us to think about how we can take those relationship.

Speaker Change: And that positive brand attribute that Ernest has which does not exist in the Navient brand and see what opportunities we have to grow off of that.

Speaker Change: That's more to come on that we're not ready to share that with you today, but that's the foundation that we see for growth.

Speaker Change: Yes.

Speaker Change: Got it look at the track record in earnest has been very good and obviously.

Speaker Change: The movement in rates has been a headwind, but that's I mean, that's beyond your control I think in hindsight, that's proven to be a very thoughtful investment and ultimately.

David L. Yowan: I think you've seen all those models work in financial services. I would say all those things would be on the table if we went down that route. Okay, and one follow-up just on the felt margin guide, you know. I know that the floor income contracts are running off, etc., and the interest rate environment is going to be a little bit more adverse to the margin. But for Joe, it's kind of thinking is, you know, as you exit 2024, you got it, obviously, to the margin being low 70s for the full year. Is the margin going to be lower as we exit 2024, or fairly steady over the course of the year? Oh, yeah. It's going to be lower as you get into the back half of 24, just from the margin pressure component of it.

Speaker Change: We will create value.

Speaker Change: But what I'm hearing is there is a chicken and egg problem, which is that the cost of capital makes it.

Speaker Change: In the high hurdle rate mix investing in growth on attractive, but because there is no growth I think the cost of capital is is elevated.

Speaker Change: You guys in your slide link the multiple compression.

Speaker Change: Two the decline of efficiency and I think that Thats, a very fair conclusion.

Speaker Change: But I would suggest also that the decline in multiple is really a reflection of topline shrinking almost every year for the past decade, and I do wonder if there is some opportunity to break that paradigm that it might be painful in the.

David L. Yowan: So using the four-cut scenario that we're projecting here, that pressure itself, we would estimate contributes about 10 basis points of pressure throughout the year, but more so in the back half as those rates are projected as early in the front half of the year. So we should see that impact back up at the floor component. You're going to start to see that early in the first quarter, and you've already started to see it this quarter.

Speaker Change: Short term to invest in by the way I think if we think about the history of of Ernest and that acquisition. There was disappointment at the time in that investment, but it is manifested into something that's valuable is it time to break the paradigm again.

Speaker Change: Yes, I think.

Speaker Change: I think you summarized maybe in a little different way, what we've been trying to communicate in the strategy update.

David L. Yowan: There's about five basis points of contribution this quarter versus last quarter from the floors rolling off. That goes to about 15 basis points as you get into the first quarter. Okay, thank you for that color.

Speaker Change: It is a.

Speaker Change: Quite a vicious circle, but it is a it is a cycle that we're in that has driven our cost of equity and so we're addressing the things that we can address.

David L. Yowan: Thank you. One moment for our next question, please. Our next question comes from the line of Sanjay Sakhrani with KBW. Your line is now open. Thank you. Good morning.

Speaker Change: Is to give ourselves some.

Speaker Change: Financial capacity and flexibility give you give investors more transparency on the growth initiatives. I think this is the first time, we've broken out our financials, it's been within the consumer lending segment, which has both private legacy run off and.

Sanjay Sakhrani: I want to go back to slide nine, because to me, it seems like that's the most critical part of the story going forward. And it seems like the name of the game should be trying to optimize the flow through of all these cash flows. And I know that's sort of what you're working on with all of these initiatives. David, maybe you could just help us think about dimensionalizing. How much can flow?

Speaker Change: Earnings growth within it.

Speaker Change: So we're trying to provide the transparency to the market. So you can more clearly see the growth and.

Speaker Change: Get a sense of the growth potential and the opportunities that Ernest.

David L. Yowan: It doesn't seem like there's a lot that flows through if you have the current cost structure, but obviously, the adjustments you're making, as you've indicated, substantially free up the flow through. But maybe you could just talk about the aim over the next five years and beyond, sort of how much of that flow-through we can get, because obviously that's a big part of the thesis, where the market cap is lower than these cash flows. Thanks. Yeah, thanks, Sanjay. Good morning.

Speaker Change: Very fair and by the way I should say I very much appreciate.

Speaker Change: The transparency.

Speaker Change: With that you guys provided today in terms of the strategy.

Speaker Change: It's very helpful and one of the more honest things.

We've seen in terms of company sharing their outlooks ever so thank you very much.

Thank you. Thank you one moment for our next question. Please.

David L. Yowan: So there's a couple pieces to that. One piece is just the financial implications of the three strategic actions that we took that I ran through the financials a bit earlier. So I'll call you back to that. That clearly reduces expenses by more than the revenue that would no longer be present. I think the second thing is that moving to a variable servicing model has some pretty powerful leverage for us relative to where we are today. We don't project for you our servicing costs out over the remaining life of the loan, but I think you can think about that in terms of we have a fixed cost base, and we have a variable cost base. And so as loans pay off, and the portfolio amortizes, as it has done on a net basis for all but one year in Navient's history when we originated $6 billion of refi loans in 2019. So in that amortizing scenario, you've seen the variable costs come out as the loan count goes down.

Speaker Change: Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is now open.

Jeff Adelson: Hey, guys. Good morning, Thank you for taking my questions.

Jeff Adelson: I guess I just wanted to circle back on <unk>.

Jeff Adelson: In slide 13.

Jeff Adelson: Talk about how it is currently profitable at the $200 million.

Jeff Adelson: Revenue run rate and I appreciate the new disclosure there.

Jeff Adelson: I'm just curious is that more of a run rate today, and Miss environment, where originations have slowed and you don't.

Obviously that revenue number just trying to understand how to think about the profitability of the business over a cycle.

Jeff Adelson: Where you think kind of the core returns our return on equity could be for that business over the longer term because.

Jeff Adelson: As you lean into originations later this year, presumably next year that does come with that higher she saw reserve charge at first and it sounds like youre going to be building out <unk>.

David L. Yowan: But at some point, that fixed cost base doesn't go down as rapidly as the loan counts go down. And so the variable cost model, we think, produces significant not just operational flexibility but some significant substantial financial benefits. As in, if the loan portfolio continues to amortize, that's very different than the model that we have today.

Jeff Adelson: And adding on some products, which probably first will cost some money. So just trying to think through what you think the profitability metrics and returns are for that business.

Speaker Change: Yes, you are right to bring it into the seasonal accounting here. The more successful we are in terms of the refi environment, a higher provision that its taken so that impacts the current year. So ultimately I think it's a good projection of where we're headed so as we think about the current environment, we're in and the growth potential.

David L. Yowan: And I think the third piece is just the financing piece and the cost of that, both unsecured and secured liabilities. And we have the team that has done a terrific job over the years of optimizing and reducing that. We think there are some other opportunities that give us some optionality and flexibility that we're going to be looking at over the coming months. So those are the three buckets, largely reducing the corporate footprint and the business profile that is slimmer and leaner, that includes a corporate expense reduction. It's moving to a variable cost model and then reducing our cost of financing as well. Those are the three levers that we have.

Speaker Change: So that's going to lead to obviously future growth down the line and 25 and 26, but if there is a dramatic downturn in rates and we have that opportunity to originate more loans that will put pressure on the current year's income just because we'd have a higher provision because of the life of <unk>.

Speaker Change: One reserve that we have to take so it's a good way to think about it is that.

Speaker Change: If you think about just the interest rate environment last year and the shift we would have had even higher net interest income coming into this year, but because of the higher interest rates, it's been about that $200 million.

David L. Yowan: Okay, that's very helpful. And then maybe just a follow-up question on BPS. I know some questions were asked already, but when you're thinking about like preliminary indications of interest, any dimensionalization of what kind of valuation that business can get? Because it seems, as Joe sort of alluded to, that it is a higher valuation business than what's sort of suggested in the valuation of your stock, or are there some nuances there that we should be aware of? At night.

Speaker Change: Run rates, but the opportunity for growth going forward is going to be primarily driven on the refi side by the opportunities here and there.

Speaker Change: Projected rate environment.

Jeff I would just add.

Jeff Adelson: I encourage you to look as I know you did at 16 and 17 as well because <unk> talks about.

Jeff Adelson: Overall efficiency of loan originations from our cost of acquisition.

Sanjay Sakhrani: Thank you, Sanjay. I think it's just too early to comment on that. But I would just point to public companies in that space. And you can look at the multiples, both on the healthcare RCM side, as well as government services, BPS, and then just more diversified BPO businesses, all receiving a higher multiple than what we received today. Could I just ask one more question on in-school originations?

Jeff Adelson: Servicing cost and from a reserving perspective, and then 17 by breaking out the marketing expense, obviously, that's going to be variable with our cost of acquisition, but we are.

Jeff Adelson: You can see it on page 17 actually be.

Jeff Adelson: Operating leverage positive operating leverage that Ed referred to.

Jeff Adelson: Implicit in the kind of distribution model that Ernest so theres a temper.

Joe Fisher: no longer going to happen. I don't think I heard anything about that, but maybe you could clarify that. Thank you. And, as Dave reiterated in my comments, we are looking to grow 10% on the in-school side, and overall, just from a origination perspective, you know, north of 40% when you combine refi and in-school. So we're certainly very committed to growing this business here. Thank you. As a reminder, to ask a question, you'll need to press star 1-1 on your telephone.

Jeff Adelson: Temporary there'll be an increase in marketing expense.

Jeff Adelson: Yes.

Jeff Adelson: Provision expense excuse me with higher originations will get some operating leverage on the.

Jeff Adelson: We expect to continue to have operating leverage on that other line and obviously those originations are building a revenue stream to increasingly fund additional originations or some of the growth strategies that we're talking about.

Speaker Change: Okay, great and as my follow up.

John Hecht: One moment for our next question. Our next question comes from the line of John Hecht with Jeffries. Your line is now open.

Speaker Change: Wanted to circle back on John's question on.

Speaker Change: The cost to outsource I know you are discussing.

David L. Yowan: Morning guys, thanks for the update and thanks for taking my question. One point of clarification, David, you mentioned I think it's 400 million of some kind of identified potential cost saves. That would come with 325 million less, I guess, BPS revenues. I just want to clarify, is that net of the outsource servicing, or does that include the total concept of the outsource service? So thanks for the question. When we say net, it means it considers the fact that we would need to pay an outsourced provider for servicing our loans.

Speaker Change: Net it out of the number and then you move into a more variable cost model there, but could you maybe help us understand what how to quantify what that cost out resources.

Speaker Change: Yes, So look I think we've said a couple of things that I would just refer you to first of all when we did the outsourcing.

Speaker Change: Are the RFP exercise, we did find that our current cost is comparable and so.

Speaker Change: We're not.

Speaker Change: Quintin you are guiding you to look to a significant reduction in servicing expense in the near term, we won't be pointing to that and you shouldnt look and find that but if you go to the loan cash flow page that we have.

David L. Yowan: So that's what, so it is included, and the expense reduction is net of what we would pay to that provider. So that's how we would think about it. And I would just remind you that those numbers that we're using are based on 2023 actuals. So if you had that scenario, and that was in place for 2023, that's where we got the volumes and the amounts that we've shared. Okay, and second question. I think Joe said that the originations and earnest refi originations would be more back way to just because of interest rate reductions. I mean, maybe a little bit more kind of information on the cadence there and how sensitive originations are to rate cuts in that segment.

Speaker Change: Think about.

Speaker Change: 10 year of the portfolio that we have over the lifetime of that loan having our servicing costs, 100% variable versus a mixture of fixed and variable. We think has some really powerful operating leverage to us over the remaining life of the franchise.

Speaker Change: Leave it at that it's a question of.

Speaker Change: It's not a lower unit cost, it's a different mix between fixed and variable that drives operating leverage.

Speaker Change: Not present in our current cost structure and our current status.

Speaker Change: Got it thank you for taking my questions.

Speaker Change: Thank you.

And that is all the time that we have for questions today I'll turn the call back over to Mr. Jim.

Joe Fisher: I think, certainly, as rate cuts can, if that does happen, I think there's a tremendous opportunity, certainly, especially if it's beyond four rate cuts. The way I think about it is that if I'm looking at the first quarter, fairly similar to what we've seen in this fourth quarter, and then starting to pick up in the back half of the year. Just think about the scenario that I'm referring to, as you get 50 basis points, 75 basis point cuts overall, that should have more of an impact than what you're seeing today. So that growth should occur and be more backloaded, and then more backloaded to, obviously, the fourth quarter versus the first quarter, just depending on where rates are. Okay.

Speaker Change: Jim Eric <unk> for closing remarks.

Jim Eric: Thanks, Norm I know that there are remaining questions that we have not been able to scale. This morning. So please contact me if we were not able to take your question or if we were if you have any other follow up questions happy to chat.

Jim Eric: We'd like to thank everyone.

Speaker Change: Joining on todays call. This concludes our call. Thank you.

Joe Fisher: And then the final question is, Ernest, if I can, I know this is out there, but Ernest, you talked about incremental products and services. Is this going to be an event-centric business, or are there going to be other fee-oriented products? And if so, can you just give us some examples of what those might look like?

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Okay.

Speaker Change: [music].

David L. Yowan: Yeah, I think both things on the table, obviously, from a number of a good mix. I mean, Ernest is a consumer-centric enterprise. So the first thing to do will be to try to find and identify unmet needs or needs that customers have that we can serve. I think you've done a nice job of demonstrating that, particularly in the rebuy space. And then if you think about product line extensions, you know, that would encompass potentially both additional lending products but also potential fee-generating products rather than lending products as well. Again, that could include third-party referrals based on our cost of acquisition of a customer. It could involve other kinds of products.

Speaker Change: Okay.

Speaker Change: [music].

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: [music].

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Speaker Change: Yeah.

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Speaker Change: So.

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David L. Yowan: That work is underway. We have, as we asked, asked for some time to come back to you later in the year with, you know, where we come out on that, gives some initials on this. Okay, thanks.

Speaker Change: Okay.

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John Hecht: I appreciate that. Thank you. Thank you.

Rick Shane: One moment for our next question. Our next question comes from the line of Rick Shane with J.P. Morgan. Rick, your line is now open.

David L. Yowan: Thank you everybody for taking my questions. Look, I think we should reflect on the last six or seven years in terms of capital returns, both to equity holders and bond holders. I think you guys have done a good job in terms of maintaining operating efficiency in the context of a shrinking business. I think you guys have done a reasonably good job.

David L. Yowan: The challenge has been growing revenues. What I heard today is a strategy that seeks to maximize shareholder value by optimizing cash flows and staying very disciplined about returning those cash flows to investors and stakeholders. Again, very consistent with what we've seen over the last five or six years, at the end of the day, you guys are just still kind of squeezing the same fruit tighter and tighter.

David L. Yowan: Where is the growth going to come from? We hear about earnest, we hear about the in-school initiatives, but again, that seems to be a pretty big opportunity given you've seen two of the largest players exit in the last three years. The market share objectives for 10% growth are pretty modest. Why not be more aggressive there?

David L. Yowan: Where are the other opportunities to actually start driving the top line? So, thanks Rick for the question. You know, I think I'd go back to what we did.

David L. Yowan: I think the team has done a good job of managing the expenses over time in a shrinking portfolio environment. What we're trying to communicate today is that there's a lot more work that these three actions are designed to address. And it's not just about expense reduction, but, as Ed indicated, that overhead, if you will, in a broad sense, the shared service functions, corporate overhead, and our cost of equity all conspired to make the Growth Initiative more challenging than they need to be, right? Because the portfolio is shrinking. If we don't get rid of those central costs, then they get allocated growth initiatives that burden them in a way that doesn't allow them to reach their full potential or give us the capacity to do so.

David L. Yowan: So the first thing we're going to, what we're trying to accomplish is actually to unburden the growth initiatives that also, at the same time, and in the same way, increase our capacity to invest by increasing the amount of legacy loan cash flows that we have a decision to make, a capital allocation decision to make about return and otherwise. With respect to the earnest growth proposition, I think, you know, we tried to lay out what earnest has accomplished over the last three or four years. I think that's impressive from a financial perspective. The brand health is a good indication that Earnest has found a way to surprise and delight the customers that it engages with in the customer experience.

David L. Yowan: I know that in, and Ed indicated this, my experience in financial services is that that's a really hard thing to do, and they've accomplished it. That's a really good foundation for us to think about how we can take those relationships and that positive brand attribute that Earnest has, which does not exist in the Navient brand, and see what opportunities we have to grow off of that. And there's more to come on that. We're not ready to share that with you today, but that's the foundation that we see for growth and, Okay. Look, I...

David L. Yowan: The track record at Earnest has been very good, and obviously, the movement in rates has been a headwind, but that's beyond your control. I think, in hindsight, that's proven to be a very thoughtful investment and ultimately will create value. What I'm hearing is there's a chicken and egg problem, which is that the cost of capital and the high hurdle rate make investing in growth unattractive, but because there's no growth, I think the cost of capital is elevated.

David L. Yowan: You guys in your slides link the multiple compression to the decline of efficiency, and I think that's a very fair conclusion, but I would also suggest that the decline in the multiple is really a reflection of... the top line shrinking almost every year for the past decade. And I do wonder if there is some opportunity to break that paradigm, though it might be painful in the short term to invest. And by the way, I think if we think about the history of Ernest and that acquisition, there was disappointment at the time in that investment, but it has manifested into something that's valuable. Is it time to break the paradigm again? Yeah, I think so.

David L. Yowan: I think you summarized, maybe in a little different way, what we've been trying to communicate in the strategy update. It is a, I won't call it a vicious circle, but it is a cycle that we're in that has driven our cost of equity. And so we're addressing the things that we can address, which is to give ourselves some financial capacity and flexibility and give investors more transparency on their growth initiatives. I think this is the first time we've broken out earnest financials. It's been within the consumer lending segment, which has both private legacy runoff and earnest growth within it. So we're trying to provide transparency to the market so you can more clearly see the growth and get a sense of the growth potential and the opportunities. Very fair. And by the way, I should say, I very much appreciate the transparency, uh, with which you guys provided today in terms of the strategy. Uh, it's very helpful.

David L. Yowan: And one of the more honest things, uh, we've seen in terms of companies sharing their outlooks ever. So thank you very much. Thank you. Thank you.

Jeff Adelson: One moment for our next question. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is now open. Hey guys, good morning.

Joe Fisher: Thank you for taking my questions. Um, I guess I just wanted to circle back on Ernest and, you know, in slide 13, talked about how it's currently profitable at the $200 million revenue run rate and appreciate the new disclosure there. I'm just curious, is that more of a run rate today in this environment where originations have slowed and you don't, you know, I know this is a revenue number, just trying to understand how to think about the profitability of the business over a cycle, where you think kind of the core returns or return on equity could be for that business over the longer term, because as you lean into origination later this year, presumably next year, that does come with that higher seasonal reserve charge at first, and it sounds like you're going to be building out and adding on some products, which probably at first will cost some money.

Joe Fisher: So just trying to think through what you think the profitability metrics and returns are for that. You're right, Seth, to bring it into CECO accounting here. The more successful we are in terms of the refi environment, the higher the provision that's taken, so that impacts the current year. So, ultimately, I think it's a good projection of where we're headed. So, as we think about the current environment we're in and the growth potential, that's going to lead to, obviously, future growth down the line in 2025 and 2026. But if there is a dramatic downturn in rates and we have that opportunity to originate more loans, that would put pressure on the current year's income just because we'd have a higher provision because of the life of the loan reserve that we have to take.

Joe Fisher: So, a good way to think about it is that if you think about just the interest rate environment last year and the shift, we would have had even higher net interest income coming into this year. But because of the higher interest rates, it's been about that $200 million run rate. But the opportunity for growth going forward is going to be primarily driven on the refi side by the opportunities here in the projected rate environment. Jeff, I would just add, you know, I'd encourage you to look, as I know you did, at 16 and 17 as well, because 16 talks about the overall efficiency of loan originations from a cost of acquisition, from a servicing cost, and from a reserve perspective.

David L. Yowan: And then 17, by breaking out the marketing expense, obviously that's going to be variable with their cost of acquisition, but where you can see it on page 17, actually, the operating leverage, positive operating leverage that Ed referred to implicit in the kind of distribution model that Ernest has. So there's a temporary increase in marketing expense and provision expense, excuse me, with higher originations. We'll get some operating leverage on the, and we expect to continue to have operating leverage on that other line. And obviously, those originations are building a revenue stream to increasingly fund additional originations or some of the growth strategies that we're talking about.

Joe Fisher: Okay, great. And as my follow-up, I just want to circle back on John's question on the cost to outsource. I know you're discussing how it's netted out of the number and that you're moving to a more variable cost model there, but could you maybe help us understand how to quantify what that cost to outsource is? Yeah, so look, I think we've said a couple of things that I'd just prefer you to, you know, first of all, when we did the outsourcing or the RFP exercise, we did find that our current cost is We won't be pointing to that, and you shouldn't look for or find that.

Joe Fisher: But if you go to the loan cash flow page that we have and think about the tenure of the portfolio that we have, over the lifetime of that loan, having our servicing costs 100% variable versus a mixture of fixed and variable, we think has some really powerful operating leverage for us over the remaining life of the franchise. And I'll just leave it at that. It's a question of, It's not a lower unit cost. It's a different mix between fixed and variable that drives operating leverage that's not present in our current cost structure and our current service model.

Jeff Adelson: Got it. Thank you for taking the time to answer my question. Thank you. And that is all the time that we have for questions today. I'll turn the call back over to Ms. Jen Ares for her closing remarks. Thanks, Norma. I know that there are remaining questions that we have not been able to field this morning. So please contact me if we were not able to take your question or, if we were, if you have any other follow-up questions. I'd be happy to chat. We'd like to thank everyone for joining on today's call. This concludes our call. Thank you. Copyright comrades