Q2 2024 Navient Corp Earnings Call

Good day, and thank you for standing by.

Operator: At the time, all participants on a listenly mode. After the speaker's presentation, there will be a question-and-answer session. So ask the question during the session; you will need to press star one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one again.

Operator: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jen Earyes, Vice President of Investor Relations. Please go ahead.

Speaker Change: Welcome to the Navient Second Quarter 2024 Earnings Conference Call. At this time, all participants are on a listen-only mode.

After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded.

Operator: Please be advised that today's conference has been recorded.

Jen Earyes: I would now like to hand the conference over to you today, Jen Earyes, Vice President and Vice Relations.

Jen Earyes: Please go ahead. Hello, good morning, and welcome to Navient's earnings call for the second quarter of 2024.

Speaker Change: I would now like to hand the conference over to your speaker today, Jen Earyes, Vice President, Investor Relations. Please go ahead. Thank you.

Jen Earyes: Hello, good morning, and welcome to Navient's Earnings Call for the second quarter of 2024. With me today are David Yowan, Navient CEO, and Joe Fisher, Navient CFO.

David Yowan: With me today are David Yowan, Navient CEO, and Joe Fisher, Navient CEO. After the prepared remarks, we will open up the call for questions. A presentation accompanies today's discussion, which you can find on navient.com slash investors.

Jen Earyes: Hello, good morning and welcome to Navient's earnings call for the second quarter of 2024. With me today are David Yowan, Navient CEO , and Joe Fisher, Navient CFO .

Jen Earyes: After the prepared remarks, we will open up the call for questions. A presentation accompanies today's discussion, which you can find on Navient.com slash investor. 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.

Speaker Change: After the prepared remarks, we will open up the call for questions. A presentation accompanies today's discussion, which you can find on Navient.com slash investors.

David Yowan: Before we begin, keep in mind our discussion to contain prediction expectations for looking statements and other information about our business that is based on management's current expectations as of the date of this presentation. 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 the discussion of those factors on the company's Form 10-K and other filings with the SEC.

Jen Earyes: 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.

Jen Earyes: Listeners should refer to the discussion of those factors 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, the adjusted tangible equity ratio, and various other non-GAAP financial measures that are derived from core earnings. Our GAAP results, a description of our non-GAAP financial measures, and the reconciliation of core earnings to GAAP results can be found in Navient's second quarter 2024 earnings release, which is posted on our website. Thank you, and I now will turn the call over to Dave. Thanks, Jen.

Jen Earyes: 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 the discussion of those factors on the company's Form 10-K and other filings with the SEC.

David Yowan: 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 gap results, description of our non-gap financial measures, and the reconciliation of core earnings to gap results can be found in Navient's second quarter of 2024 earnings release, which is posted on our website.

Jen Earyes: 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.

Jen Earyes: Our GAAP results, description of our non-GAAP financial measures, and the reconciliation of core earnings to GAAP results can be found in Navient's second quarter 2024 earnings release, which is posted on our website.

Jen Earyes: Thank you, and I now will turn the call over today. Thanks, Jen.

David L. Yowan: Good morning, everyone. Thank you for joining the call and for your interest in Nav. I will start by providing an update on the three strategic actions we announced six months ago. I'm pleased that we have completed several key steps in our journey to becoming more focused, flexible, and efficient. In addition, we're aggressively and deliberately making meaningful progress on future milestones. We remain confident that we can achieve the significant expense reductions we presented in January.

David Yowan: Good morning, everyone. Thank you for joining us all and for your interest in Navient. I will start by providing an update on the three strategic actions we announced six months ago. I'm pleased that we've completed several key steps in our journey to becoming more focused, flexible, and efficient. Further, we're aggressively and deliberately making meaningful progress on future milestones. We remain confident that we can achieve the significant expense reductions we presented in January. These are in the hundreds of millions of dollars annually. We're already beginning to deliver on these planned reductions and believe we can attain these expense goals within the original 18-24 month time frame.

Jen Earyes: Thank you, and I now 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: I will start by providing an update on the three strategic actions we announced six months ago.

Dave: I'm pleased that we've completed several key steps in our journey to becoming more focused, flexible, and efficient.

Dave: Further, we're aggressively and deliberately making meaningful progress on future milestones.

Dave: We remain confident that we can achieve the significant expense reductions we presented in January .

David L. Yowan: These are in the hundreds of millions of dollars, and we're already beginning to deliver on these planned reductions and believe we can attain these expense goals within the original 18 to 24 month time frame. During the quarter, we're pleased we completed major steps in our first strategic, are servicing outsourcing agreement with Mohele. Outsourcing is a key facilitator of our ability to achieve lasting expense savings. Nearly 900 Navient employees have now transferred to Mohela, and our variable cost servicing model is in effect; more than two million borrowers will continue to use the same account numbers, phone numbers, and We've transferred several proprietary and customized technology tools and solutions.

Dave: These are in the hundreds of millions of dollars annually.

Dave: We're already beginning to deliver on these planned reductions and believe we can attain these expense goals within the original 18 to 24 month time frame.

David Yowan: During the quarter, we're pleased we completed major steps in our first strategic action, our servicing outsourcing agreement with Mojila. Outsourcing is a key facilitator of our ability to achieve lasting expense reduction. Nearly 900 Navi employees have now transferred to Mojila, and our variable cost servicing model is in effect. Our more than two million borrowers will continue to use the same account numbers, phone numbers, and payment plans. We've transferred several proprietary and customized technology tools and solutions to Mojila. As we previously shared with you, we will provide a limited number of services and activities under transition service.

Dave: During the quarter we're pleased we completed major steps in our first strategic action.

Dave: are servicing outsourcing agreement with Mohela.

Dave: Outsourcing is a key facilitator of our ability to achieve lasting expense reduction.

Dave: Nearly 900 Navi employees have now transferred to Mohela, and our variable cost servicing model is in effect.

Dave: Our more than two million borrowers will continue to use the same account numbers, phone numbers, and payment plans.

Dave: We've transferred several proprietary and customized technology tools and solutions to Mojiva.

David L. Yowan: As we previously shared with you, we will provide a limited number of services and activities under transition services. We expect to complete substantially all of this initiative by the first half of next year. Moving on to our second strategic action, we remain engaged in active and encouraging discussions about the divestment of our business processing solutions. At this point, the interest we have received from potential acquirers gives us confidence that we will achieve our objective. We're actively evaluating our options to finalize the strategy designed to maximize shareholder value.

Dave: As we previously shared with you, we will provide a limited number of services and activities under transition services agreements.

David Yowan: Services agreements. We expected complete substantially all of this initiative by the first half of next year.

Dave: We expect to complete substantially all of this initiative by the first half of next year.

David Yowan: Moving for our second strategic action, we remain engaged in active and encouraging discussions about the divestment of our business processing solutions division. At this point, the interest we have received from potential choirs gives us confidence that we will achieve our objectives. We're actively evaluating our options to finalize the strategy designed to maximize shareholder value. We expect to be able to provide more information about the divestment process, potential proceeds, and the implications for our expense reduction timeline during the second half of this year.

Dave: Moving to our second strategic action, we remain engaged in active

Dave: and encouraging discussions about the divestment of our Business Processing Solutions Division.

Dave: At this point, the interest we have received from potential acquirers gives us confidence that we will achieve our objectives.

Dave: We're actively evaluating our options to finalize the strategy designed to maximize shareholder value.

David L. Yowan: We expect to be able to provide more information about the divestment process and Financial Proceeds, and the implications for our expense reduction timeline, during the second half of this year. We did not wait for the BPS divestment process to be completed to get started on our third strategic objective, to reduce our shared service infrastructure and corporate expenses. With outsourcing well underway and the BPS divestment process becoming clear, we took decisive action during the second quarter to deliver on this initiative. A new organizational structure was effected on July 1st. This management structure is splatter.

Dave: We expect to be able to provide more information about the divestment process.

Dave: Potential proceeds and the implications for our expense reduction timeline during the second half of this year.

David Yowan: We did not wait for the BPS to best be processed to be completed to get started on our third strategic action to reduce our shared service infrastructure and corporate expense footprint. Without sourcing well underway and the BPS divestment process becoming clear, we took decisive action during the second quarter to deliver on this initiative's objectives. A new organizational structure was affected on July 1st. This management structure is splatter with fewer management layers and a smaller executive team. It establishes a clear path and accountability for accomplishing the servicing and BPS transitions and expense reductions, some of which have begun to be realized.

Dave: We did not wait for the BPS divestment process to be completed to get started on our third strategic action.

Dave: to reduce our shared service infrastructure and corporate expense footprint.

Dave: With outsourcing well underway and the BPS divestment process becoming clear, we took decisive action during the second quarter to deliver on this initiative's objectives.

Dave: A new organizational structure was effected on July 1st.

Dave: This management structure is splatter, with fewer management layers and a smaller executive team.

David L. Yowan: It establishes a clear path and accountability for accomplishing the servicing and BPS transitions and expense reduction, some of which have begun to be realized. It also establishes the organization needed to manage our going forward business, including substantial reductions in our corp. Our going forward organization is preparing for an employee count that is 80% to 90% lower than when we announced the strategic plan. The MoHILA transfers that have already occurred represent roughly 20% of them.

Dave: It establishes a clear path and accountability for accomplishing the servicing and BPS transitions and expense reductions.

David Yowan: It also establishes the organization needed to manage our going forward businesses, including substantial reductions in our corporate footprint. Our going forward organization is preparing for an employee count that is 80 to 90% lower than when we announced the strategic actions. The MoPILA transfers that have already occurred represented roughly 20% of that workforce. Our results for the quarter reflect restructuring expenses, largely for transfers and job eliminations that are part of these organizational changes. We're also taking steps to reduce our facilities and IT footprints. Most of our operating expense categories will be smaller, although not at the same magnitude as the employee count.

Dave: some of which have begun to be realized.

Dave: It also establishes the organization needed to manage our going forward businesses.

Dave: including substantial reductions in our corporate footprint.

Dave: Our Going Forward organization is preparing for an employee count that is 80-90% lower than when we announced the strategic actions.

Dave: The MoHELA transfers that have already occurred represented roughly 20% of that workforce.

David L. Yowan: Our results for the quarter reflect restructuring, largely for transfers and job eliminations that are part of these organizational changes. We're also taking steps to reduce our facilities and IT. Most of our operating expense categories will be smaller, although not at the same magnitude as the. Now turning to our earnest.

Dave: Our results for the quarter reflect restructuring expenses.

Dave: largely for transfers and job eliminations that are part of these organizational changes.

Dave: We're also taking steps to reduce our facilities and IT footprints.

Dave: Most of our operating expense categories will be smaller.

David Yowan: Now turning to our earnest business, Earnest continues to efficiently generate high-quality private student loans, both refinance and in-school loans. We also continue to explore opportunities to deepen relationships with students and college grads that deliver attractive life-time economics. We're on track to hit our growth target for lending for the year. As is always the case, we would expect further increases in refund volume if rates drop before year-end. We described six months ago the potential for a substantial amount of cash flow from the combination of our loan portfolios and the assessment of our business processing division. At the same time, the elevated level of felt repayment activity has accelerated the timing of a portion of those loan cash flows.

Dave: although not at the same magnitude as the employee count.

David L. Yowan: Ernest continues to efficiently generate high-quality private student loans, both refinanced and in school. We also continue to explore opportunities to deepen relationships with students and college grads, to deliver an Attractive Lifetime.

Speaker Change: Now turning to our earnest business.

Ernest: Ernest continues to efficiently generate high-quality private student loans.

Ernest: both refinanced and in-school loans.

Ernest: We also continue to explore opportunities to deepen relationships with students and college grads that deliver attractive lifetime economics.

David L. Yowan: We're on track to hit our growth target for lending. As is always the case, we would expect further increases in refi volume, although rates dropped before. We described six months ago the potential for a substantial amount of cash flow, and the combination of our loan portfolios and the divestment of our business process, at the same time, the elevated level of self-retainment, has accelerated the timing of a portion of this cash will be available over time to invest, reduce outstanding debt, or distribute to shareholders. We will invest that cash deliberately only if we have clear visibility into our opportunities to earn returns in excess.

Ernest: We're on track to hit our growth target for lending for the year.

Ernest: As is always the case, we would expect further increases in refi volume if rates drop before year-end.

Ernest: We described six months ago the potential for a substantial amount of cash flow from the combination of our loan portfolios and the divestment of our business processing division.

Ernest: At the same time, the elevated level of felt repayment activity has accelerated the timing of a portion of those loan cash flows.

David Yowan: This cash will be available over time to invest, reduce outstanding debt, or distribute to share. Golders. We will invest that cash deliberately only if we have clear visibility in our opportunities to earn returns in excess of our cost to capital. We will also be guided by the relationship between tangible book value and market value per share. At the end of Q2, our shares had a tangible book value of $18.81 per share. Our recent share price reflects roughly a 20% discount to that tangible book value. During a period when our investment in a substantial volume of felt loans is being monetized at book value, we believe that discount represents an opportunity to deliver more value to shareholders.

Ernest: This cash will be available over time to invest, reduce outstanding debt, or distribute to shareholders.

Ernest: We will invest that cash deliberately only if we have clear visibility in our opportunities to earn returns in excess of our cost of capital.

David L. Yowan: We will also be guided by the relationship between tangible book values and MarketValue for Shares. At the end of Q2, our shares had a tangible book value of $18.80. Our recent share price reflects roughly a 20% discount to that tangible book value, during a period when our investment in a substantial volume of felt loans is being monetized at book value. We believe that this gap represents an opportunity to deliver more value to our shareholders.

Ernest: We will also be guided by the relationship between tangible book value and market value per share.

Ernest: At the end of Q2, our shares had a tangible book value of $18.81 per share.

Ernest: Our recent share price reflects roughly a 20% discount to that tangible book value.

Ernest: During a period when our investment in a substantial volume of felt loans is being monetized at book value,

David Yowan: In closing, I'd like to thank my colleagues, especially those who learn this quarter that their roles will no longer be with the company as part of these strategic actions. All colleagues have contributed with commitment and resilience to our progress on these complex undertakings.

David L. Yowan: In closing, I'd like to thank my colleagues, especially those who learned this quarter that their roles would no longer be with the company as part of the strategic plan. All colleagues have contributed with commitment and resilience to our progress on these complex. Next, Joe will share our results for the quarter, which reflects strong performance against the items within our. With that, let me turn it over to Joe. I look forward to your questions.

Ernest: We believe that discount represents an opportunity to deliver more value to shareholders.

Ernest: In closing, I'd like to thank my colleagues, especially those who learned this quarter that their roles will no longer be with the company as part of these strategic actions.

Ernest: All colleagues have contributed with commitment and resilience to our progress on these complex undertakes.

Joe Fisher: Next, Joe will share our results for the quarter, which reflects strong performance against the items within our control.

Ernest: Next, Joe will share our results for the quarter, which reflects strong performance against the items within our control.

Joe Fisher: With that, let me turn it over to Joe. I look forward to your questions later in the call. Thank you, Dave, and everyone on today's call for your interest in navigation. During my prepared remarks, I will review the second quarter results for 2024 and provide updated guidance underlying our outlook for the remainder of the year. In the second quarter, we reported GAAP EPS of 32 cents. On a core basis, we delivered second quarter EPS of 29 cents. The results included 8 cents of regulatory expenses, primarily related to the CFPB lawsuit, and our ongoing effort to put this matter behind us, and 11 cents of restructuring expenses.

Ernest: With that, let me turn it over to Joe. I look forward to your questions later in the call.

Joe Fisher: Thank you, Dave, and everyone on today's call for your interest in Navient. During my prepared remarks, I will review the second quarter results for 2024 and provide updated guidance underlying our outlook for the remainder of the year. In the second quarter, we reported GAAP EPS of $0.32. On a core basis, we delivered second quarter EPS of $0.29.

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

Joe: During my prepared remarks, I will review the second quarter results for 2024 and provide updated guidance underlying our outlook for the remainder of the year.

Joe: In the second quarter, we reported GAAP ETS of $0.32.

Joe Fisher: The results included $0.08 of regulatory expenses primarily related to the CFPB lawsuit and our ongoing effort to put this matter behind us, and $0.11 of restructuring expenses. The restructuring expenses were driven by the strategic actions we are undertaking to reshape and right-size the expense base of the company. We are updating our full-year guidance to a range of $1.35 to $1.55. This change is primarily driven by the 19 cent impact of these items. This does not include any potential future regulatory and restructuring expenses that may be incurred in the remainder of the year.

Joe: On a core basis, we delivered second quarter EPS of $0.29.

Joe: The results included $0.08 of regulatory expenses primarily related to the CFPB lawsuit in our ongoing effort to put this matter behind us and $0.11 of restructuring expenses.

Joe Fisher: The restructuring expenses were driven by the strategic actions we are undertaking to reshape and right size the expense base of the company. We are updating our full-year guidance to a range of $1.35 to $1.55. This change is primarily driven by the 19 cents impact of these items. It does not include any potential future regulatory and restructuring expenses that may be incurred in the remainder of the year.

Joe: The restructuring expenses were driven by the strategic actions we are undertaking to reshape and right-size the expense base of the company.

Joe: We are updating our full year guidance to a range of $1.35 to $1.55.

Joe: This change is primarily driven by the 19 cent impact of these items.

Joe: It does not include any potential future regulatory and restructuring expenses that may be incurred in the remainder of the year.

Joe Fisher: I will provide additional detail by segment, beginning with the federal education loan segment on slide 5. The net interest margin took on 36 basis points from 55 basis points in the first quarter, as prepayments increased to $2.5 billion compared to $1.6 billion in the first quarter and $600 million a year ago. As a reminder, loan prepayments reduced future net interest income but accelerate loan principal payments within our life of loan cash flow projections. This contributed to the higher cash balance in the quarter. The main driver of the decline in net interest margin in the quarter was the write-off of unamortized loan premium that accompanies higher than expected prepayments.

Joe Fisher: I'll provide additional detail by segment, beginning with the federal education loan segment on slide five. The net interest margin declined 36 basis points from 55 basis points in the first quarter as prepayments increased to $2.5 billion compared to $1.6 billion in the first quarter and $600 million a year ago. As a reminder, loan prepayments reduce future net interest income but accelerate loan principal payments within our life-of-loan cash flow projection. This contributed to the higher cash balance in the court. The main driver of the decline in net interest margin in the quarter was the write-off of unamortized loan premium that accompanies higher-than-expected prepayments. The Zelle portfolio continues to perform as expected from a credit perspective.

Joe: I'll provide additional detail by segment beginning with the federal education loan segment on slide 5.

Joe: The net interest margin declined 36 basis points from 55 basis points in the first quarter as prepayments increased to $2.5 billion compared to $1.6 billion in the first quarter and $600 million a year ago.

Joe: As a reminder, loan prepayments reduce future net interest income, but accelerate loan principal payments within our life-of-loan cash flow projections.

Joe: This contributed to the higher cash balance in the quarter.

Joe: The main driver of the decline in net interest margin in the quarter was the write-off of unamortized loan premium that accompanies higher-than-expected prepayments.

Joe Fisher: The self-portfolio continues to perform as expected from a credit perspective. Compared to the prior year, our greater than 90 data frequency rates improved to 7%; the charge-off rate improved to 14 basis points; and for balance rates increased to 16.8%.

Joe Fisher: Compared to the prior year, our greater-than-90-day delinquency rates improved to 7 percent, the charge-off rate improved to 14 basis points, and forbearance rates increased to 16.8 percent. Slide six illustrates the rise in prepayments over the last few quarters as borrowers consolidated to the direct loan program. We continue to encourage borrowers who are experiencing or have historically experienced difficulty repaying their loans to take advantage of beneficial programs that are only offered to direct loan customers.

Speaker Change: The Zelle portfolio continues to perform as expected from a credit perspective. Compared to the prior year, our greater-than-90-day delinquency rates improved to 7%, the charge-off rate improved to 14 basis points, and forbearance rates increased to 16.8%.

Joe Fisher: Slide 6 illustrates the rise of prepayments over the last few quarters as borrowers consolidated to the Direct Loan program. We continue to encourage borrowers who are experiencing or have historically experienced difficulty retain their loans to take advantage of beneficial programs that are only offered to Direct Loan customers. Working forward, some of the policy actions that clearly encourage consolidation have expired. The administration continues to propose and implement additional loan forgiveness and debt reduction programs on a regular and frequent basis. Consolidation requests we receive have declined very recently since the expiration of some of these policies. We cannot predict whether this decline is temporary or reflects a change in prepayment trends.

Speaker Change: Slide six illustrates the rise of prepayments over the last few quarters as borrowers consolidated to the direct loan program.

Speaker Change: We continue to encourage borrowers who are experiencing or have historically experienced difficulty repaying their loans to take advantage of beneficial programs that are only offered to direct loan customers.

Joe Fisher: Looking forward, some of the policy actions that clearly encourage consolidation have expired. The administration continues to propose and implement additional loan forgiveness and debt reduction programs on a regular and frequent basis. However, consolidation requests we received have declined very recently since the expiration of some of these policies. We cannot predict whether this decline is temporary or reflects a change in prepayment trends.

Speaker Change: Looking forward, some of the policy actions that clearly encourage consolidation have expired.

Speaker Change: The administration continues to propose and implement additional loan forgiveness and debt reduction programs on a regular and frequent basis.

Speaker Change: Consolidation requests we received have declined very recently since the expiration of some of these policies.

Joe Fisher: Our EPS guidance reflects a high level of prepayments over the second half of the year that is comparable to what we experienced in the first quarter of this year. As a result, we expect full year felt net interest margin in the high 40s.

Joe Fisher: Our EPS guidance reflects a high level of prepayments over the second half of the year that is comparable to what we experienced in the first quarter of this year. As a result, we expect full year felt net interest margin in the high 40s. Now, let's turn to our consumer lending segment on slide seven. Net interest margin in this segment was 289 basis points in the quarter compared to 297 a year ago.

Speaker Change: We cannot predict whether this decline is temporary or reflects a change in prepayment trends.

Speaker Change: Our EPS guidance reflects a high level of prepayments over the second half of the year that is comparable to what we experienced in the first quarter of this year. As a result, we expect full-year felt net interest margin in the high 40s.

Joe Fisher: Now let's turn to our consumer lending segment from slide 7. Net interest margin in this segment was 289 basis points in the quarter compared to 297 years ago. Originations grew over 40 percent to $278 million compared to $197 million a year ago and are in line with our expectations as we remain focused on generating growth from high-quality borrowers. Credit metrics in our consumer lending portfolio performed as expected, with late-stage delinquency and for balance rates relatively flat from the prior quarter at 2.2% and 1.8%, respectively. While the charge of rate improved to 1.65 percent from 2.4 percent.

Speaker Change: Now let's turn to our consumer lending segment on slide 7.

Speaker Change: Net interest margin in this segment was 289 basis points in the quarter compared to 297 a year ago.

Joe Fisher: Originations grew over 40% to $278 million compared to $197 million a year ago and are in line with our expectations as we remain focused on generating growth from high-quality borrowers. Credit metrics in our consumer lending portfolio performed as expected with late-stage delinquency and forbearance rates relatively flat from the prior quarter at 2.2% and 1.8%, respectively, while the charge-off rate improved to 1.65% from 2.4%. You can see on slide 8 that at the end of the second quarter, our allowance for loan loss for our entire education loan portfolio was $898 million. We released $2 million for FELP loans during the quarter as a result of the elevated prepayment activity, and new private education loan origination volume contributed $6 million to the allowance.

Speaker Change: Originations grew over 40% to $278 million compared to $197 million a year ago and are in line with our expectations as we remain focused on generating growth from high quality borrowers.

Speaker Change: Credit metrics in our consumer lending portfolio performed as expected with late-stage delinquency and forbearance rates relatively flat from the prior quarter at 2.2% and 1.8% respectively, while the charge-off rate improved to 1.65% from 2.4%.

Joe Fisher: You can see on slide 8 that at the end of the second quarter, our allowance for loan loss for our entire education loan portfolio is $898 million. We released $2 million for felt loans during the quarter as a result of the elevated prepayment activity, and new private education loan origination volume contributed $6 million to the allowance.

Speaker Change: You can see on slide 8 that at the end of the second quarter, our allowance for loan loss for our entire education loan portfolio is $898 million.

Speaker Change: We released $2 million for FELT loans during the quarter as a result of the elevated prepayment activity and new private education loan origination volume contributed $6 million to the allowance.

Joe Fisher: Let's continue to slide 9 to review our business processing segment. We achieved total fee revenue of $81 million in the quarter, with an improved even a margin of 25 percent compared to 10 percent a year ago. The result this quarter demonstrates the ability to operate this business at attractive margins while we continue to explore strategic options. The improved margin compared to the year-ago quarter is a result of recently implemented efficiency initiatives, as well as a decrease in expenses associated with new contract start-up costs, which impacted the year-ago quarter.

Joe Fisher: Let's continue to slide nine to review our business processing segment. We achieved total fee revenue of $81 million in the quarter with an improved EBITDA margin of 25% compared to 10% a year ago. The results this quarter demonstrate the ability to operate this business at attractive margins while we continue to explore strategic options. The improved margin compared to the year-ago quarter is a result of recently implemented efficiency initiatives, as well as a decrease in expenses associated with new contract startup costs, which impacted the year-ago quarter. Now, turn to our capital allocation and financing activity that is highlighted on slide 10.

Speaker Change: Let's continue to slide 9 to review our business processing segment.

Speaker Change: We achieved total fee revenue of $81 million in the quarter with an improved EBITDA margin of 25% compared to 10% a year ago.

Speaker Change: The results this quarter demonstrate the ability to operate this business at attractive margins while we continue to explore strategic options.

Speaker Change: The improved margin compared to the year-ago quarter is a result of recently implemented efficiency initiatives, as well as a decrease in expenses associated with new contract startup costs, which impacted the year-ago quarter.

Joe Fisher: Turn to our capital allocation and financing activity that is highlighted on slide 10. We continue to maintain disciplined asset liability and capital management strategies, with 84 percent of our education loan portfolio funded to term and an adjusted tangible equity ratio of 8.2 percent. During the quarter, we issued a $728 million asset-backed securitization at a targeted advance rate of 94 percent, with spreads that were nearly 60 basis points lower than our previous RIFI asset-backed securitization. In the quarter, we reduced our share count by 2% to the repurchase of 2.5 million shares. In total, we returned $55 million to shareholders through share repurchases and dividends.

Joe Fisher: 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 a $728 million asset-backed securitization at a targeted advance rate of 94% with spreads that were nearly 60 basis points lower than our previous refi asset-backed securitization. In the quarter, we reduced our share count by 2% through the purchase of 2.5 million shares. In total, we returned $55 million to shareholders through share repurchases and dividends.

Speaker Change: Turn to our Capital Allocation and Financing activity that is highlighted on slide 10.

Speaker Change: 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%.

Speaker Change: During the quarter, we issued a $728 million asset-backed securitization at a targeted advance rate of 94%, with spreads that were nearly 60 basis points lower than our previous refi asset-backed securitization.

Speaker Change: In the quarter, we reduced our share count by 2% through the repurchase of 2.5 million shares.

Speaker Change: In total, we returned $55 million to shareholders through share repurchases and dividends.

Joe Fisher: Turn to expenses on Slide 11. The strategic actions we are undertaking present opportunities over the next 18 months to meaningfully reduce expenses. We finalize our service and agreement with Mojila that will transition us to a more variable cost structure as the legacy portfolios continue to advertise. Total expenses for the quarter, excluding regulatory and restructuring expense, were down nearly 15% to $154 million. The amount and timing of other operating expense reductions, including certain shared service and corporate footprint reductions, depends on the nature and timing of a BTS transaction.

Joe Fisher: Exchange your expenses on slide 11. The strategic actions we are undertaking present opportunities over the next 18 months to meaningfully reduce expenses. We finalized our servicing agreement with Mohela that will transition us to a more variable cost structure as the legacy portfolios continue to amortize. Total expenses for the quarter, excluding regulatory and restructuring expenses, were down nearly 15% to $154 million. The amount and timing of other operating expense reductions, including certain shared service and corporate footprint reductions, depends on the nature and timing of a BPS transaction.

Speaker Change: Exchange your expenses on slide 11.

Speaker Change: The strategic actions we are undertaking present opportunities over the next 18 months to meaningfully reduce expenses.

Speaker Change: We finalized our servicing agreement with Mohela that will transition us to a more variable cost structure as the legacy portfolios continue to amortize.

Speaker Change: Total expenses for the quarter, excluding regulatory and restructuring expense, were down nearly 15% to $154 million.

Speaker Change: The amount and timing of other operating expense reductions, including certain shared service and corporate footprint reductions, depends on the nature and timing of a BPS transaction.

Joe Fisher: In summary, our updated full year, 2024, core earnings per share outlook of $1.35 to $1.55 reflects the strong progress we have made on our strategic actions to date while taking steps to address regulatory matters and enhance overall value for shareholders.

Joe Fisher: In summary, our updated full year 2024 core earnings per share outlook of $1.35 to $1.55 reflects the strong progress we have made on our strategic actions to date while taking steps to address regulatory matters and enhance overall value for shareholders. As I close, I'd like to express my appreciation to Navient team members for their hard work delivering for our customers while executing these strategic actions. Thank you for your time, and I will now open the call to any questions.

Speaker Change: In summary, our updated full year 2024 Core Earnings per Share Outlook of $1.35 to $1.55 reflects the strong progress we have made on our strategic actions to date while taking steps to address regulatory matters and enhance overall value for shareholders.

Joe Fisher: As I close, I'd like to express my appreciation to negative team members for their hard work delivering car customers while executing these strategic actions.

Speaker Change: As I close, I'd like to express my appreciation to Navient team members for their hard work delivering for our customers while executing these strategic actions. Thank you for your time, and I will now open the call for any questions.

Operator: Thank you for your time, and I will now open the call for any questions. Thank you. As a reminder, to ask a question, please press star 11 or you touch on telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.

Operator: Thank you. As a reminder, to ask a question, please press star 1-1 on your touch-tone telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Our first question comes from Rick Shane on behalf of J.P. Morgan. Your line is now open.

Speaker Change: Thank you. As a reminder, to ask a question, please press star 1 1 on your touchtone telephone and wait for your name to be announced.

Rich Chain: Our first question comes from the line of Rich Chain with JP Morgan. Your line is now open. Hey guys, thanks for taking my questions this morning. Look, clearly working very hard to execute the initiatives you have. Interesting to hear; to get the context on the size of the employee base going forward. But it does really sort of raise the ongoing question of ultimately, like, where do we see or where do you envision the growth at Navi and coming from? You're playing the cards that you've been handed as well as you can, but I'm curious what the next step is going to be.

Speaker Change: To withdraw your question, please press star 11 again.

Richard Barry Shane: Hey guys, thanks for taking my questions this morning and look, clearly working very hard to execute the initiatives you have. Interesting to hear, get the context on the size of the employee base going forward. But it does really sort of raise the ongoing question of, ultimately, like, where do we see or where do you imagine the growth at Navient coming from? You're playing the cards that you've been handed as well as you can, but I'm curious what the next step is going to be.

Speaker Change: Our first question comes from the line of Rick Shane with J.P. Morgan. Your line is now open.

Richard Barry Shane: Hey guys, thanks for taking my questions this morning.

Speaker Change: Clearly working very hard to execute the initiatives you have, interesting to hear, to get the context on the

Speaker Change: ...size of the employee base going forward, but it does really sort of raise the ongoing question of ultimately...

Speaker Change: Like, where do we see or where do you envision the growth at Navient coming from? You're playing the cards that you've been handed as well as you can, but I'm curious what the next step is going to be.

David Yowan: Hey Rick, good morning. And thanks for your question. Look, I think I'd go back to we're still on the path that we laid out back in January, and we said then and would say today that the first order, or the first imperative for us, is to get the expense reduction initiatives behind us. Those are complex undertakings. I'm really pleased with the progress that we've made and the milestones that we've achieved. We through the loan cash flows and through the potential investment of BPS. We continue to expect a substantial amount of cash, and we have three alternatives with respect to that cash, largely speaking.

David L. Yowan: Hey Rick, good morning.

David L. Yowan: And thanks for your question. Look, I think I'd go back to we're still on the, The path that we laid out back in January, and we said then and would say today that the first order, the first imperative for us is to get the expense reduction initiatives behind us. Those are complex undertakings. I'm really pleased with the progress that we've made and the milestones that we've achieved. We, through the loan cash flows and through the potential divestment of BPS.

Richard Barry Shane: Hey Rick, good morning.

Richard Barry Shane: And thanks for your question. Look, I think I'd go back to, we're still on the...

Speaker Change: The path that we laid out back in January , and we said then and would say today that the first order, the first imperative for us is to get the expense reduction initiatives behind us. Those are

Speaker Change: complex undertakings. I'm really pleased with the progress that we've made and the milestones that we've achieved.

Speaker Change: We, through the loan cash flows and through the potential divestment of BPS, we continue to expect a substantial amount of cash.

David L. Yowan: We continue to expect a substantial amount of cash. And we have, you know, three alternatives with respect to that cash, largely speaking. Again, investor growth would largely be within reach. We can reduce our unsecured debt footprint, or we can do shareholder distributions.

David Yowan: We can invest for growth that would largely be within earnest. We can reduce our unsecured debt footprint, or we can do shareholder distributions. We'll have more to say about that when we get a clear sense of what the BPS and RIFI, but also in the INSPOL product. In the background, you don't see it in our results. We continue to build engagement with students and college graduates. We're really pleased with some increases in engagement through our financial counseling platform that we've seen in the first half of this year. We continue to believe that that presents an opportunity for us to attract customers at a relatively low acquisition cost, either for the existing products or for potential product extensions.

Speaker Change: And we have, you know, three alternatives with respect to that cash, largely speaking. Again, investor growth, that would largely be within earnest.

Speaker Change: We can reduce our unsecured debt footprint, or we can do shareholder distributions.

David L. Yowan: We'll have more to say about that when we get a clearer sense of what the BPS proceeds look like and try to lay out a clear path for investors on what that is. At Earnest, we continue to originate and grow high-quality loan originations. The biggest piece of that is in refi, but also in the in-school product. In the background, you don't see it in our results, we continue to build engagement with students and college graduates.

Speaker Change: We'll have more to say about that when we get a clearer sense of what the BPS proceeds look like and try to lay out a clear path for investors on what that is.

Speaker Change: At earnest, we continue to...

Speaker Change: originate and grow high-quality loan originations. The biggest piece of that is in REFI, but also in the in-school product.

Speaker Change: In the background, you don't see it in our results, we continue to build engagement with students and college graduates. We're really pleased with some increases in engagement through our financial counseling platform that we've seen in the first half of this year.

David L. Yowan: We're really pleased with some increases in engagement through our financial counseling platform that we've seen in the first half of this year. We continue to believe that that presents an opportunity for us to attract customers at a relatively low acquisition cost, either for the existing products or for potential product extension. We have some more work to do on that, and we continue to say that, you know, we've got to be clear before we make those investments that we think we can generate returns that are in excess of our cost of equity.

Speaker Change: We continue to believe that that presents an opportunity for us to attract customers at a relatively low acquisition cost.

Rich Chain: We have some more work to do on that, and we continue to say that we've got to be clear before we make those investments that we think we can generate returns that are in excess of our cost of equity. Got it. Okay. And thank you for the transparency on this. I realize it's a very complicated and challenging situation. And you guys have been very clear about the path you're taking. So thank you.

Speaker Change: either for the existing products or for potential product extensions.

Speaker Change: We have some more work to do on that. And we continue to say that, you know, we've got to be clear before we make those investments that we think we can generate returns that are in excess of our cost of equity.

David L. Yowan: Got it. OK. And thank you for the transparency on this. I realize it's a very complicated and challenging situation, and you guys have been very clear about the path you're taking. So, thank you.

Speaker Change: Got it. Okay. And thank you for the transparency on this. I realize it's a very complicated and challenging situation, and you guys have been very clear about the path you're taking, so thank you.

Terry MA: Thank you. Our next question comes from the line of Terry Ma with Barclays.

Operator: Thank you. Our next question comes from the line of... Terry Ma with Barclays. Your line is now open.

Terry MA: You want us to open? Hi. Thank you. Good morning.

Speaker Change: Thank you. Our next question comes from the line of Terry Ma with Barclays. Your line is now open.

Terry MA: Hi, thank you, and good morning. On the updated FFELP NIM for the full year, can you kind of remind us how many rate cuts are contemplated in that? And then, for the elevated prepayments on an FFELP portfolio, do you think there'll be any impact from the recent court decisions on the SAVE program?

Terry MA: On the updated self-nem for the full year, can you kind of remind us how many rate cuts are contemplated in that?

Terry MA: Hi, thank you. Good morning. On the updated FFELP NIM for the full year, can you kind of remind us how many rate cuts are contemplated in that? And then for the elevated prepayments on a FFELP portfolio, do you think there'll be any impact from the recent court decisions on the SAVE program?

Joe Fisher: And then for the elevated prepayments on a self portfolio, do you think there'll be any impact from the recent court decisions on a save program? So, on your, the first part of your question. Thank you, Terry. I would say that we do have one rate cut forecast for the back half of this year, but that is not the main driver here of what is obviously pressuring the name for the second half. It's the continued prepayments and what that means for the portfolio in terms of accelerating any premium amortization expense or deferred financing fees. So that driver, as you saw, contributed in the first half of this year, both the first quarter and the second quarter, to the second part of your question.

Joe Fisher: And so on the first part of your question, and thank you, Terry, I would say that we do have one rate cut forecast for the back half of this year, but that is not the main driver here of what is obviously pressuring the NIM for the second half. It's the continued prepayments and what that means for the portfolio in terms of accelerating any premium amortization expense or deferred financing fees. So that driver, as you saw, contributed in the first half of this year, both in the first quarter and the second quarter.

Terry MA: And so on your, the first part of your question, and thank you, Terry.

Speaker Change: I would say that we do have one rate cut forecast for the back half of this year, but that is not the main driver here of what is obviously pressuring them in for the second half.

Speaker Change: It's the continued prepayments and what that means for the portfolio in terms of accelerating any premium amortization expense or deferred financing fees.

Terry MA: So that driver, as you saw, contributed in the first half of this year, both the first quarter and the second quarter. So the second part of your question...

Joe Fisher: To the second part of your question, early indicators suggest we are seeing a significant decline in terms of consolidation requests. And so from the levels that we were seeing in April and May of this quarter, in terms of requests coming in, in early June, that has dropped off significantly, but that is not baked into our guidance. Our guidance of the high 40s NIMS assumes that we have those elevated prepayment levels like you saw in the first quarter.

Joe Fisher: The early indicators suggest we are seeing a significant decline in terms of consolidation requests. And so, from the levels that we were seeing in April and May in the quarter, in terms of requests coming in, in early June, that has dropped off significantly, but that is not baked into our guidance. We are our keep our guidance of high 40s. News assumes that we have those elevated prepayment levels like you saw in the first quarter. Got it. That's helpful.

Speaker Change: Early indicators suggest we are seeing a significant decline in terms of consolidation requests.

Speaker Change: And so from the levels that we were seeing in April and May in the quarter, in terms of requests coming in in early June , that has dropped off significantly, but that is not baked into our guidance. Our guidance of high 40s news assumes that we have those elevated prepayment levels like you saw in the first quarter.

Terry MA: Got it. That's helpful. And then the restricted cash from loan prepayments after the pay down of ABS debt. I think in your slide you called out some excess. Can you maybe just talk about your priorities for that?

Joe Fisher: And then the restrict the cash from loan prepayments after paydown of ABS debt. I think in your slide you called out some access. Can you maybe just talk about your priorities for that? Yeah, I would a second with Dave's comments from his prepare remarks and then just his response to the direction we look at it in terms of those three priorities of investing in the business, reducing our overall unsaccerative jet maturitys and then anything else would be a capital distribution. Okay, got it. Thank you.

Speaker Change: Got it. That's helpful. And then the restricted cash from loan prepayments after pay down of ABS debt. I think in your slide you called out some excess. Can you maybe just talk about your priorities for that?

Joe Fisher: Yeah, I would just echo Dave's comments from his prepared remarks and then just his response to Rick Shane. We look at it in terms of those three priorities of investing in the business, reducing our overall unsecured debt maturities, and then anything else would be capital distribution.

Dave: Yeah, I would just echo Dave's comments from his prepared remarks and then just his response to Rick Shane. We look at it in terms of those three priorities of investing in the business, reducing our overall unsecured debt maturities, and then anything else would be capital distribution.

Terry MA: Okay, I got it. Thank you.

Operator: Thank you. Our next question comes from the line of Sanjay Sakhrani with KVW. Your line is now open.

Sanjay Sakhrani: Our next question comes from the line of Sanjay Sakhrani with KVW; you're on his open. Thanks. Good morning. Hey, Joe, on your point on the slowing of consolidation requests, I guess, what's the risk that it re-excelerates? I'm just trying to think, is it just that they extend the program because it's expired already, or do they announce a new one? I'm just trying to think about the risks to it accelerating again. And so that's really what the volatility is, and that's what makes it so challenging from the first quarter to the second quarter: the extensions of these programs and then Terry's last question of the stays that we're seeing.

Speaker Change: Okay, got it, thank you.

Speaker Change: Thank you.

Speaker Change: Our next question comes from the line of Sanjay Sakhrani with KBW. Your line is now open.

Sanjay Harkishin Sakhrani: Thanks, good morning. Hey, Joe, on your point about the slowing of consolidation requests, I guess, what's the risk that it reaccelerates? I'm just trying to think, is it just that they extend the program because it's expired already? Or do they announce a new one? I'm just trying to think about the risks to it accelerating again.

Sanjay Harkishin Sakhrani: Thanks. Good morning. Hey, Joe, on your point on the slowing of consolidation requests, I guess

Sanjay Harkishin Sakhrani: What's the risk that it re-accelerates? I'm just trying to think, is it just that they extend the program because it's expired already or do they announce a new one? I'm just trying to think about the risks to it accelerating again.

Joe Fisher: And so that's really what the volatility is, and that's what makes it so challenging from the first quarter to the second quarter, the extensions of these programs and, then to Terry's last question, the stays that we're seeing. So we're trying to, despite what we've seen so far in terms of early indicators in late June and in July, where that consolidation activity has fallen, we're trying to capture that risk. If there is some type of new proposal or an extension here that brings those prepayment levels back to the first quarter and potentially the second quarter,

Speaker Change: And so that's really what the volatility is, and that's what makes it so challenging from the first quarter to the second quarter is the extensions of these programs, and then to Terry's last question, the stage that we're seeing. So we're trying to...

Joe Fisher: So we're trying to, despite what we've seen so far in terms of early indicators in late June and July, where that consolidation activity has fallen, we're trying to capture that risk if there is some type of new proposal or an extension here that brings those repayment levels back to the first quarter and potentially second quarter. But I would say, in terms of overall risk with that, the way I think about it is, for the premium amortization expense itself, there's about 350 million dollars on our balance sheet. Think about that for every 100 million that your advertising is about 1% of that. That would ultimately be accelerated, and that is the pressure that we get in terms of the basis points. I'm happy to take that offline with you.

Terry: Despite what we've seen so far in terms of early indicators in late June and in July where that consolidation activity has fallen, we're trying to capture that risk if there is

Terry: Some type of new proposal or an extension here that brings those prepayment levels back to the first quarter and potentially second quarter.

Terry: But I would say in terms of overall

Speaker Change: The way I think about it is, for the premium amortization expense itself, there's about $350 million on our balance sheet. Think about that for every $100 million that you're amortizing, it's about 1% of that. That would ultimately be accelerated, and that is the pressure that we get in terms of the basis points. I'm happy to take that offline with you, Sanjay, if you want to get more technical. But that's a general good rule of thumb.

Joe Fisher: But I would say, in terms of overall risk with that, the way I think about it is, for the premium amortization expense itself, there's about $350 million on our balance sheet. Think about that for every $100 million that you're amortizing, it's about 1% of that. That would ultimately be accelerated, and that is the pressure that we get in terms of the base points. I'm happy to take that offline with you, Sanjay, if you want to get more technical, but that's a general good rule of thumb.

Joe Fisher: Sanjay, do you want to get more technical? But that's a general good rule of thumb.

Sanjay Harkishin Sakhrani: Okay, great. And then, um, I guess I have a two-part question. Sorry. One is about the BPS sale.

Sanjay Sakhrani: Okay, great, and then I guess I have a two-part question. Sorry, one is on the BPS sale. Understand that you guys are having constructive discussions, and you guys mentioned sort of all the options you have in terms of what to do with any cash proceeds that you get from it. Is it fair to assume, though, that anything you do would be a creative to the earnings number? I'm just trying to think through the earnings impact of something that happens there, and then secondly on that CFPB.

Sanjay Harkishin Sakhrani: I understand that you guys are having constructive discussions, and you guys mentioned sort of all the options you have in terms of what to do with any cash proceeds that you get from it. Is it fair to assume, though, that anything you do would be accretive to the earnings number? I'm just trying to think through the earnings impact of something that happens there. And then, secondly, on that CFPB Accrual that you made.

Sanjay Harkishin Sakhrani: Okay, great. And then, um,

Sanjay Harkishin Sakhrani: I guess I have a two-part question, sorry. One is on the BPS sale. I understand that you guys are having constructive discussions and you guys mentioned

Speaker Change: Sort of all the options you have in terms of what to do with any cash proceeds that you get from it.

Speaker Change: Is it fair to assume, though, that anything you do would be...

Speaker Change: accretive to the earnings number. I'm just trying to think through the earnings impact of something that happens there. And then secondly, on that CFPB

Sanjay Harkishin Sakhrani: I mean, like, what does that mean? Like, where are we in the process there? Because it's seemingly happening still for quite some time.

Joe Fisher: A cruel that you made I mean like what does that mean like where are we in the process there because it's seemingly happening still for quite some time just trying to get an update there. Thank you. Good morning. Thanks for the question. You know, I think, let's respect to BPS. You know, look, I think we feel like the macro environment for exploring strategic options and the best man is a. You know the nine if not supportive one as we've gone out and solicited interest in those businesses. On kind of a micro perspective, I think we've been really encouraged by the level of interest that we've seen. You know, we're pretty far along in the process and we're in.

David L. Yowan: Just trying to get an update there. Thank you. Hey Sanjay, good morning.

Speaker Change: accrual that you made. I mean, like, what does that mean? Like, where are we in the process there? Because it's seemingly happening still for quite some time. Just trying to get an update there. Thank you. Transcribed by https://otter.ai

David L. Yowan: Hey Sanjay, good morning. Thanks for the question. You know, with respect to PPS, you know, look, I think we feel like the macro environment for exploring strategic options and investment is a benign, if not supportive one. As we've gone out and solicited interest in those businesses from kind of a micro perspective, I think we've been, we have been really encouraged by the level of interest that we've seen. You know, we're pretty far along in the process, and we're in active discussions with multiple buyers, and we're trying to sort through that process and hope to be able to give you the conclusion on that sometime in the second half of the year.

Sanjay Harkishin Sakhrani: Hey Sanjay, good morning. Thanks for the question. You know, I think with respect to BPS, you know, look, I think we, we feel like the

Speaker Change: macro environment for exploring strategic options and divestment is a you know benign if not supportive one.

Speaker Change: As we've gone out and solicited interest in those businesses on kind of a micro perspective, I think we have been really encouraged by the level of interest that we've seen.

Joe Fisher: Active discussions with. and multiple buyers, and we're trying to sort through that process and hope to be able to give you the conclusion on that sometime in the second half of the year. I think, with respect to the earnings piece, I'd say a couple of things. One is remember back in January that the outsourcing and DPS divestments are both facilitators and enablers. We've got a lot of shared service infrastructure between servicing and DPS, and particularly in DPS within our government services segment of DPS. The healthcare segment and DPS is much more stand alone than the other.

Speaker Change: You know, we're pretty far along in the process, and we're in active discussions with

Speaker Change: multiple buyers and we're trying to sort through that process and hope to be able to you know give you the conclusion on that sometime in the second half of the year

David L. Yowan: I think with respect to the earnings piece, I'd say a couple things. One is, remember back in January that the outsourcing and BPS divestment are both facilitators and enablers of our expense reduction objective. We've got a lot of shared service infrastructure between servicing and BPS, and particularly in BPS within our government services segment of BPS. The healthcare segment in BPS is much more standalone than the other.

Speaker Change: I think with respect to the earnings piece, I'd say a couple things. One is, remember back in January that the outsourcing and BPS divestment are both

Speaker Change: facilitators and enablers.

Speaker Change: of

Speaker Change: are expense reduction objectives. We've got a lot of shared service infrastructure between servicing and BPS, and particularly in BPS within our government services.

David L. Yowan: So you have to think about them in terms of a package. When we talk about taking out those expenses, obviously, the revenue from BPS would go away as well for the seller. And so the numbers back on a 2023 basis, the 2023 actual, were we would take out roughly $400 million of expenses across all the initiatives, and the BPS revenue for 2023 was, I think, $320 million. So that's sort of an operating impact.

Joe Fisher: So if you think about them in terms of a package, when we talk about taking out those expenses, obviously the revenue from DPS would go away as well with the seller. And so the numbers back on a 2023 basis, 2023 actual was we would take out roughly $400 million of expenses across all the initiatives, and the DPS revenue for 2023 was I think $320 million. So that's sort of an operating impact. Again, those are 2023 actual numbers. What we're saying today is we're committed to; we're confident in our ability to take out those expense numbers.

Speaker Change: segment of BPS. The health care segment in BPS is much more standalone than the other.

Speaker Change: So, you have to think about them in terms of a package. When we talk about taking out those expenses, obviously the revenue from BPS would go away as well with the seller.

Speaker Change: And so the numbers back on a 2023 basis, 2023 actuals, was we would take out roughly $400 million of expenses across all the initiatives.

Speaker Change: and the BPS revenue for 2023 was, I think, $320 million. So that's sort of an operating impact. Again, those are 2023 actual numbers.

David L. Yowan: Again, those are the 2023 actual numbers. What we're saying today is we're committed to, and we're confident in our ability to take out those expense numbers. They'll be different than the 2023 actuals.

David L. Yowan: For example, BPS expenses, because the business is growing, will be greater than the $280 million that they were in 2023. But we don't view that as an over-delivery. We view that as we're taking out all that category of excess. So there's accretion on an operating basis. And then the use of proceeds, if we either invest, the combination of investing, reducing unsecured debt, or shareholder distributions, could also have an accretive impact, as I'm sure you can appreciate.

Speaker Change: What we're saying today is we're committed to, we're confident in our ability to...

Joe Fisher: They'll be different than the 2023 actuals; for example, BPS expenses because the businesses growing will be greater than the 280 million that they were in 2023. We don't view that as an over deliver. We view that as we're taking out all that category of extents. So there's an accretion on an operating basis. And then the use of proceeds, if we either invest the combination of investing, reducing on to your debt or shareholder distributions, could also have an accretive impact, as I'm sure you can appreciate.

Speaker Change: Take out those expense numbers. They'll be different than the 2023 actuals. For example, BPS expenses, because the business is growing, will be greater than the $280 million that they were in 2023.

Speaker Change: We don't view that as an over deliver. We view that as we're taking out all that category of expense.

Speaker Change: So, there's...

Speaker Change: Accretion on an Operating Basis, and then the use of proceeds if we either invest a combination of investing, reducing unsecured debt, or shareholder distributions could also have an accretive impact as I'm sure you can appreciate.

Joe Fisher: On the CFPB part, you know, our total reserve now is an excess of 100 million. Those reflect the developments in the discussions that we're having during the quarter. That is for you to appreciate. I'm not going to go any farther than that, but that's where we are at the moment.

David L. Yowan: On the CFPB part, you know, our total reserve now is in excess of $100 million. That reflects the developments in the discussions that we're having during the quarter. And as I'm sure you can appreciate, I'm not going to go any further than that, but that's where we are at the moment from a monetary perspective.

Speaker Change: On the CFPB part, you know, our

Speaker Change: The total reserve now is in excess of $100 million. Those reflect the developments.

Speaker Change: In the discussions that we're having during the quarter, as I'm sure you appreciate, I'm not going to go any further than that, but that's where we are at the moment from a monetary perspective.

Jeff Adelson: Thank you. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is now open. A good morning. Thank you for taking my questions.

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

Speaker Change: Thank you.

Speaker Change: Thank you.

Jeffrey David Adelson: Hey, good morning. Thank you for taking my question. I guess maybe to ask a little bit more specifically, could you maybe give us the latest thinking on the timeline to achieving the expense reductions you're laying out? I obviously imagine that completing your strategic action around the BPS sale is something that will have an impact on that. And just from a modeling standpoint, the comment you made on the 80 to 90% reduction in the employee base, should we, you know, restructuring expenses aside on the way to get there, should we be thinking about a similar type of reduction in your compensation expense for that line?

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

Joe Fisher: I guess maybe to ask a little bit more specifically, could you maybe give us the latest thinking on, you know, the timeline to achieving the expense reductions you're laying out? I obviously imagine completing, you know, your strategic action around the BPS sale is something that will have an impact there. And just from a modeling standpoint, is, you know, the comment you made on the 80 and 90% reduction in the employee base, should we, you know, restructuring expenses aside on the way to get there, should we be thinking about? Thank you.

Jeffrey David Adelson: Hey, good morning. Thank you for taking my questions.

Jeffrey David Adelson: I guess maybe... Okay.

Jeffrey David Adelson: I guess maybe to ask a little bit more specifically, could you maybe give us the latest thinking on...

Speaker Change: You know, the timeline to achieving the expense reductions you're laying out. I obviously imagine completing...

Speaker Change: You know, your strategic action around the BPS sale is something that will have an impact there.

Speaker Change: Just from a modeling standpoint, the comment you made on the 80-90% reduction in the employee base, should we, you know, restructuring expenses aside on the way to get there, should we be thinking about

David L. Yowan: Yes, let me, I think you're asking two questions, sort of timing and then amount. Let me try to address both of them in sort of a consolidated answer. You know, there are three initiatives, and there's sort of three you can think of as three different swim lanes with different timelines. We are, clearly, the farthest along on outsourcing. But I won't say that.

Speaker Change: A similar type of reduction to your compensation expense for that line.

Speaker Change: Yes, let me, I think you're asking two questions, sort of timing and then amount.

Speaker Change: Let me try to address both of them in sort of a consolidated answer. You know, there are three initiatives and there's sort of three, you can think of as three different swim lanes with different timelines. We are.

Speaker Change: clearly the farthest along on outsourcing.

David L. Yowan: All the heavy lifting has been done, but a lot of the heavy lifting has been done. There are some really important borrower transitions in terms of rebranding, if you will. There are some services that we're still providing to MoHIRA. Think of that as like desktop services, for example, that we need to ultimately transfer over. I don't mean to minimize them, but I think that you can think of the tail of that as thinner maybe than some of the other initiatives.

Speaker Change: I won't say that.

Speaker Change: All the heavy lifting has been done, but a lot of the heavy lifting has been done. There are some...

Speaker Change: Really important borrower transitions in terms of rebranding, if you will. There's some services that we're still providing to Mohila, think of that as like desktop services, for example, that we need to ultimately transfer over.

Speaker Change: I don't mean to minimize those, but I think that you could think of the tail of that as

David L. Yowan: I'd also remind you, from an expense reduction perspective, that we said this in January: outsourcing is not a near-term and substantial expense reduction. It is, By moving to a variable cost model, we believe that it will substantially and significantly reduce our life of loan servicing expenses, and the smaller the loan and borrower account becomes. The more quickly and the larger the savings from a variable cost model become, so that's not an option.

Speaker Change: thinner maybe than some of the other initiatives.

Speaker Change: I'd also remind you, from an expense reduction perspective,

Speaker Change: And we said this in January , outsourcing is not a near-term and substantial expense reduction. It is a...

Speaker Change: By moving to a variable cost model, we believe that it will substantially and significantly reduce our life of loan servicing expenses.

Speaker Change: And the smaller the loan and borrower account become, the more quickly and the larger the

David L. Yowan: The implementation of that is, farther along, we said we'd be complete with that in the first half of the year. PPS, as I said, is going to depend on both the timing and the nature of any transaction that we announce. And so we have to wait and see what happens.

Speaker Change: savings from a variable cost model become. So that's not a

Speaker Change: The implementation of that is, farther along, we said we'd be complete with that in the first half of the year.

Speaker Change: PPS is, as I said, it's going to depend on both the timing and the nature of any transaction that we announce, and so we have to wait and see that. A variable would be, for example,

David L. Yowan: A variable would be, for example, In Mohila, we transferred 900 of our employees to them. That means that we don't have to take out those 900 employees and the costs associated with them. And so that's a great thing for us. We hope it's a win for Mohila.

Speaker Change: In Mohila, we transferred 900 of our employees to them. That means that we don't have to take out those 900 employees and the costs associated with them. And so that's a great thing for us. We hope it's a win for Mohila. It's a win for the colleagues.

David L. Yowan: It's a win for the colleagues. We don't know yet in BPS; we're not ready to describe what the nature of those deals will be. But the more costs that go with the deal, then the shorter our timeframe to take out the remaining costs that are associated with that. So more to come on that.

Speaker Change: We don't know yet in BPS. We're not ready to describe what the nature of those deals will be, but

Speaker Change: The more costs that go with the deal, then the shorter our timeframe to take out the remaining costs that are associated with that. So more to come on that.

David L. Yowan: The third piece is the corporate expense reduction and the Shared Service Infrastructure, and that's where, with MOHELA in place, and BPS becoming more clear to us, we've begun to take action. We talked about a change in the organizational structure. That's a significant change, I can tell you.

Speaker Change: The third piece is the corporate expense.

Speaker Change: Reduction and the Shared Service Infrastructure, and that's where, with MOHELA in place,

Speaker Change: and BPS becoming more clear to us, we've begun to take action. We talked about a change in the organizational structure. That's a.

David L. Yowan: The employee count is like one measure of that, I think, which tells you how meaningful the reductions are. That story is, I'd say, a little thicker at the end of 2025, because we still need many of our colleagues who will not be in what we would call the point of arrival organization. We very much need them in order to manage the first two work streams and to help us get that corporate expense reduction.

Speaker Change: significant change. I can tell you the employee count is like one measure of that I think which tells you how meaningful the reductions are.

Speaker Change: That tale is, I'd say, a little thicker into the end of 2025, because...

Speaker Change: We still need many of our colleagues who will not be in what we would call the point-of-arrival organization. We very much need them in order to manage

David L. Yowan: So that's got a little bit longer tail into 2025. I talked when I responded to Sanjay a little bit about how to think about the amounts here. We described the $400 million in terms of 2023 actuals. You can think of that as what we're saying today: we're confident we're going to take out the categories of expenses in the proportions of expenses that existed in 2023. So we're expressing confidence about that. We've taken some steps. BPS might be a great example.

Speaker Change: The first two work streams and to help us get that corporate expense reduction. So that's got a little bit longer tail into 2025

Speaker Change: I talked, when I responded to Sanjay, a little bit about how to think about the amounts here.

Speaker Change: We described the $400 million in terms of 2023 actuals. You can think of that as, what we're saying today is we're confident we're going to take out the categories of expenses.

Speaker Change: in the proportions of expenses that existed in 2023. So we're expressing confidence about that. We've taken some steps.

David L. Yowan: Part of the 400 million that we articulated was the segment operating expenses for BPS. In 2023, those were $280 million. They will be higher this year because the business is growing and will take out more than $280 million. We're not actually thinking of that internally as a greater expense reduction. We're just taking out those expenses that exist today in servicing because the loan count has declined, in part because of the prepayment. We'll take out fewer dollars, but we'll take out all the expense categories in the amounts that we planned and articulated to you in January. So I know that's a long question or a long answer, but hopefully, that gives you some color in terms of timing and how we're thinking.

Jeffrey David Adelson: That's really helpful. Thanks for all the color.

Speaker Change: BPS might be a great example. Part of the $400 million that we articulated was the

Speaker Change: segment operating expenses for BPS. In 2023, those were $280 million. They will be higher this year because the business is growing. We'll take out more than $280 million. We're not actually thinking of that internally as

Speaker Change: greater expense reduction. We're just taking out those expenses that exist today.

Speaker Change: in servicing because loan count has declined, in part because of the prepayments.

Speaker Change: We'll take out less dollars, but we'll take out all the expense categories in the amounts that we planned and articulated to you in January . So I know that's a long question, or a long answer, but hopefully that gives you some color in terms of timing and how we're thinking about this.

Jeffrey David Adelson: And if I could just follow up on, you know, the in-school origination channel. I know, David, late last year, you sort of talked about kind of re-evaluating the capital contribution to that business, not exiting, but sort of re-evaluating. I'm wondering if recent developments, you know, from the exit of a very large player there and what that's done to the origination channel and competition, have changed your thinking on that sort of, you know, pause on capital allocation.

Speaker Change: That's really helpful. Thanks for all the color. And if I could just follow up on the in-school origination channel. I know, David, late last year you sort of talked about kind of re-evaluating the capital contribution to that business, not exiting, but sort of re-evaluating.

Speaker Change: I'm wondering if you've given any more thought to that business, and have recent developments from the exit of a very large player there, and what that's done to the origination channel and competition change your thinking on that sort of pause on capital allocation?

David L. Yowan: Yeah, look, we are, um... Joe will give you an update on our loan arrangements to date. We are confident at the moment in the four-year growth across REFI and in-school that we talked about. Weak Eye, as you well know, is very dependent on the rate environment. We'll see what happens there.

David: Yeah, look, we are...

David: Joe will give you an update on our loan originations to date. We are confident at the moment in the full year growth across REFI and in-school that we talked about. REFI, as you well know, is...

David L. Yowan: But at the current levels, you know, we feel good about where we are. As you know, the in-school season is a little bit like the Christmas season for a retailer. And we're here on November 1, effectively. So there's not a lot of visibility in that. It's all going to be packed into a short period of time, targeted.

Speaker Change: Very dependent on the rate environment. We'll see what happens there.

Joe: But at the current levels, you know, we feel good about where we are.

Joe: As you know, the in-school is a little bit like Christmas season for a retailer.

Joe: And we're here on November 1st, effectively, so there's not a lot of visibility in that, it's all going to be packed into a short period of time. You know, I think the way we think about it, if you think about the January presentation and the strategy, right?

David L. Yowan: Customer Segment and Targeted Customer Profile has a couple characteristics. This is true in LEFI. It's true in SLO.

Joe: targeted

Joe: Customer Segment and Targeted Customer Profile has a couple characteristics. This is true in Lefi, it's true in SLO. It tries to take advantage of the things where we think we can have an advantage.

David L. Yowan: It tries to take advantage of the things where we think we can have an advantage and therefore deliver all in economics, including capital costs, funding costs, and everything else that achieves the returns that we're trying to achieve. Those characteristics are high credit quality and relatively high balance. Those two things keep servicing costs and credit costs relatively low. Also, low cost of acquisition. We're very selective about where we lend. For example, we don't lend to for-profit schools. Our borrower population, as we showed last year, is much more heavily weighted towards graduate versus undergraduate students. And so I know we get questions a lot about competitors leaving. If I could only use a...

Joe: and therefore deliver all in economics, including capital costs, funding costs, everything else that achieves the returns that we're trying to achieve. Those characteristics are high credit quality,

Joe: relatively high balance. Those two things keep servicing costs and credit costs relatively low. Low cost of acquisition. We're very selective on where we lend. For example, we don't lend to for-profit schools.

Joe: Our borrower population, as we showed last year, is much more heavily weighted towards graduate versus undergraduate students.

Joe: And so I know we get questions a lot about competitors leading. If I could use a swimming analogy, I just describe the lane that we're in.

David L. Yowan: Swimming analogy: I just described the lane that we're in, to the extent that somebody, Exit, another lane, you shouldn't expect us to go over and try to dive into that part of the pool. To the extent that their exit allows us to capture a bigger part of the lane that we're in, we're aggressively trying to do that. We're now on the approved lender lists at over 1000 schools, for example; we've got a team that's working really hard in that swim lane, where we think we can compete effectively and generate returns for our shareholders. And that's what you should expect us to continue to do.

Speaker Change: To the extent somebody

Speaker Change: exits.

Speaker Change: another lane, you shouldn't expect us to go over and try to dive into that part of the pool.

Speaker Change: to the extent that their exit allows us to capture a bigger part of the lane that we're in.

Speaker Change: We're aggressively trying to do that. We're now on the approved lender lists at over a thousand schools, for example. We've got a team that's working really hard in that swim lane where we think we can compete effectively and generate the returns for our shareholders.

Jeffrey David Adelson: Great Thank you for taking my questions.

Speaker Change: And that's what you should expect us to continue to do.

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

Speaker Change: Great, thank you for taking my questions.

Speaker Change: You bet.

Speaker Change: Thank you. Our next question comes from the line of Bill Ryan with Seaport Research Partners. Your line is now open. Thank you and good morning, Dave and Joe. A couple of questions. First,

William Haraway Ryan: Thank you and good morning, Dave and Joe. A couple of questions. First, in the appendix, it shows a little bit of a reduction in the expected cash flows both from the FFEL portfolio and from the consumer portfolio. Joe, could you kind of address what gives you comfort about the FFEL portfolio, i.e., kind of like what are the embedded assumptions now in the updated cash flow outlook, and then can you maybe talk about some of the revisions as it relates to what's happening in the consumer loan portfolio as well?

William Haraway Ryan: In the appendix, it did show a little bit of reduction in the expected cash flows, both from the FFEL portfolio and from the consumer portfolio.

William Haraway Ryan: Joe, if you could kind of address, you know, what gives you comfort on the FFELP portfolio, i.e., kind of like what are the embedded assumptions now in the updated cash flow outlook, and then if you can maybe talk about some of the revisions as it relates to what was, what's happening in the consumer loan portfolio as well.

Joe Fisher: And so I'll start with the Consumer Lending Portfolio and then go back to the FFEL Portfolio. So the biggest driver of the decline that you saw in the out years here in 25 and 26 was some of the refinancing activities that took place during this quarter. So not only did we do the securitization that I mentioned, but we also refinanced a number of repurchase facilities. That generated over $300 million worth of cash that was accelerated into this period.

Joe: And so I'll start with the Consumer Lending Portfolio and then go back to the FFEL Portfolio.

Speaker Change: So the biggest driver of the decline that you saw in the out years here in 25 and 26 is some of the refinancing activities that took place during this quarter.

Joe: So not only did we do the securitization that I mentioned, but also we refinanced a number of repurchase facilities. That generated over $300 million worth of cash that gets accelerated into this period. So that is taken from those outer year, or those...

Joe Fisher: So that is taken from those outer years or those next few years here and accelerated into this period. So that's the biggest driver of that movement from first quarter to second quarter on the consumer lending side on the Felt portfolio. And so in terms of confidence in the numbers, as I said, there's obviously a lot of volatility in terms of what we're seeing from prepayments. But at the end of the day, that's an acceleration of cash into those near-term periods.

Joe: next few years here and accelerated into this period. So that's the biggest driver of that movement from first quarter to second quarter on the consumer lending side.

Joe: on the Bell portfolio.

Joe: and myself in terms of the confidence in the numbers. As I said, there's...

Joe: Obviously, a lot of volatility in terms of what we're seeing from prepayments.

Joe Fisher: So we did benefit, again, in the quarter in terms of cash that was coming into this period, but that comes with the expense of the previous year. So you see that across each year in terms of where that's being pulled from, why those are lower from 25, 26, and so on versus what we saw in the first quarter. So it really is driven by that prepayment activity. Now, having said that... That cash flow, just to be clear, in terms of the FFEL portfolio, we are not assuming in that appendix slide that this prepayment activity that we saw in the first two quarters continues in the third quarter and fourth quarter, but that is included in our guidance. So I just want to be clear on that in terms of what those assumptions are for the cash flows versus what our EPS guidance is.

Joe: At the end of the day, that's an acceleration of cash into those near-term periods. So we did benefit, again, in the quarter in terms of cash that was coming.

Joe: into this period, but that comes with the expense of the outer year. So you see that across each year in terms of where that's being pulled from, why those are lower from 25, 26 and on versus what we saw in the first quarter. So it really is driven by that prepayment activity. Now, having said that,

Joe: We are not assuming in that appendix slide that the prepayment activity that we saw in the first two quarters continues third quarter and fourth quarter, but that is true.

Joe: included in our guidance. So I just want to be clear on that in terms of what those assumptions are for the cash flows versus what our EPS guidance is.

William Haraway Ryan: Okay, and thanks for that color. Second question, just on the expense side, I mean, I'm very impressed with the expense reduction here to date, down to $154 million in the second quarter. You know, it sounded like from the prepared remarks that that may be kind of a baseline until there's a divestiture of the BP unit. But then it's also indicated that there was a new organizational structure went into effect on July 1st, but that we may not really see the full benefits of that until 2025. So is $154 million kind of like a good baseline for the next couple quarters until we get resolution on the BP unit?

Speaker Change: Okay, and thanks for that color. Second question, just on the expense side, I mean I'm very impressed with expense reduction here to date down to 154 million.

Speaker Change: in the second quarter.

Speaker Change: It sounded like from the prepared remarks that that may be kind of a baseline until there's a divestiture of the BP unit.

Speaker Change: But then it's also indicated there's a new organizational structure that went into effect on July 1st. But then we may not really see the full benefits of that until 2025. So is the $154 million kind of like a good baseline for the next couple quarters until we get resolution of the BP unit?

Joe Fisher: Yeah, I think that's a good way to think about it. Obviously, Dave went through the various moving pieces and the timing component.

Speaker Change: Yeah, I think that's a good way to think about it. Obviously, Dave went through the various moving pieces and the timing component. But as we think about the next couple quarters, you don't

Joe Fisher: But as we think about the next couple of quarters, you don't get the full benefit of the restructuring expenses as that has to do more with the timing of departures. So some of those departures have not yet occurred. So you will still see similar expense levels in the third and fourth quarter. One thing I would say though, just from a seasonality perspective, on the consumer lending side, there are expenses associated just with in-school origination. So, outside of that component, I would say that your model should be fairly consistent with what you saw in the second quarter.

Speaker Change: The full benefit of the restructuring expenses is that it has to do more with timing of departures. So some of those departures have not yet occurred, so you will still see similar expense levels.

Speaker Change: in that third and fourth quarter. One thing I would say though, just from a seasonality perspective is on the consumer lending side, there are expenses associated just with the in-school origination. So outside of that component, I would say that your model should be fairly consistent with what we saw in the second quarter.

William Haraway Ryan: Okay, thanks for that.

Operator: Thank you. As a reminder to ask a question at this time, please press star 11 on your touchtone telephone. Our next question comes from the line of Moshe Orenbuch with TD Cowen. Your line is now open.

Speaker Change: Okay, thanks for that.

Speaker Change: Thank you. As a reminder, to ask a question at this time, please press Star 1-1 on your touch-tone telephone.

Moshe Ari Orenbuch: Great, thanks. Maybe just to follow up on a couple of those questions, I think it mentioned in the, you know, on your private lending segment that marketing, a reduction in marketing, was a key driver of the expense reduction. If you kind of had historical levels of originations, where would you expect those marketing costs to be relative to where they are now?

Moshe Ari Orenbuch: Our next question comes from the line of Moshe Orenbuch.

Speaker Change: With T.D. Cowan, your line is now open.

Moshe Ari Orenbuch: Great, thanks. Maybe just to follow up on a couple of those questions. I think it mentioned on the

Moshe Ari Orenbuch: You know, on your private lending segment, that marketing, a reduction in marketing was a key driver of the expense reduction. If you kind of had historical levels of originations, where would you expect, you know, that those marketing costs to be relative to where they are now?

Joe Fisher: Yeah, so I would say that that impact was under $10 million in terms of lower origination costs and marketing costs.

Speaker Change: Yeah, so I would say that that impact was under $10 million in terms of the lower origination costs, the marketing costs, sorry.

Moshe Ari Orenbuch: And I think, Dave, when you talked about the BPS objectives, maybe you could kind of just lay out for us what the objectives are of that sale over and above, you know, kind of outsourcing the, you know, the, or getting, you know, getting the expenses out. Like, you know, are there any guidelines as to the level of value that you're going to achieve and any kind of broad strokes about the thought of the use of proceeds?

Speaker Change: All right, thanks.

Speaker Change: And I think, Dave, when you talked about the BPS objectives, maybe you could kind of just lay out for us what the objectives are.

Speaker Change: of that sale, over and above, you know, kind of.

Speaker Change: outsourcing the you know that or getting you know getting the the expenses out like you know are there any guidelines as to the like the the level of value that you're going to achieve and any kind of broad strokes about the thought of the use of proceeds because obviously you've got you know needs for debt repayment but you know we have no way of knowing how you're thinking about it so maybe

Moshe Ari Orenbuch: Because, obviously, you've got needs for debt repayment, but, you know, we have no way of knowing how you're thinking about it. So maybe, you know, is there some way you can kind of, you know, kind of give us any sort of broad strokes on those two?

Speaker Change: You know, is there some way you can kind of give us any sort of broad strokes on those two?

Moshe Ari Orenbuch: Yeah, I'd say, Moshe, there are at least three motivations or objectives with respect to exploring BPS. We've talked mostly about them in this forum about how they facilitate expense reduction, right? Once we've decided to outsource servicing, we look at our expense base; there's a significant proportion of our shared service infrastructure expense base that is shared between servicing and BPS. They have many of the same kinds of activities, call center, multi-channel telephony, things like that.

Speaker Change: Yeah, I'd say, Moshe, there's at least three motivations or objectives with respect to exploring BPS.

Speaker Change: We've talked mostly about, in this forum, about the

Speaker Change: They facilitate expense reduction, right, once we've...

Speaker Change: decided to outsource servicing, we look at our expense base, there's a significant proportion of our shared service infrastructure expense base.

Moshe Ari Orenbuch: And so pairing, once we made the decision to outsource servicing, which gets us to the variable cost model, divesting BPS is a way to address the shared service infrastructure in a unified kind of once and for all way. And so that's the motivation, not just to do it, but to do it now, if you will.

Speaker Change: that is shared between servicing and BPS. They have many of the same kinds of activities, call center, multi-channel telephony, things like that.

Speaker Change: And so pairing, once we made the decision to outsource servicing, which gets us to the variable cost model.

Speaker Change: Divesting DPS is a way to...

Speaker Change: address the shared service infrastructure in a unified kind of once and for all way and so that's the motivation not just to do it but to do it now if you will. The second is the within Navient

David L. Yowan: The second is within Navient. The EBITDA and the earnings that we believe the market is valuing those businesses at are substantially below what standalone or comparables in the marketplace would be. And so part of what we're trying to achieve in the divestment is to close that, find the best value for Navient shareholders and try to achieve a higher multiple on those businesses. You know, I'd say thirdly, is a scale question.

Speaker Change: The EBITDA and the earnings that we believe the market is valuing those businesses at is substantially below what stand-alone or comparables in the marketplace would be, and so part of what we're trying to achieve in the divestment is to

Speaker Change: Close that, find the best value for Navient shareholders and try to achieve a higher multiple on those businesses. You know, I'd say thirdly is a

David L. Yowan: And so, you know, as we think about some of the people that have an interest in these businesses, we've been pleased with a combination of strategic buyers and sponsors. And so some of those, both of those, but strategic buyers in particular, could bring greater scale to the organization, be able to unlock acquisition activities that, with our multiple, may not have made sense for. So those are the three things that I would focus on.

Speaker Change: scale question. And so, you know, as we think about some of the people that have interest in

Speaker Change: These businesses, we've been pleased with a combination of strategic buyers and sponsors, and so some of those.

Speaker Change: Both of those, but strategic buyers in particular, could bring greater scale to the organization, be able to unlock acquisition activities that with our multiple may not have made sense for us.

Moshe Ari Orenbuch: And I don't think I have anything more to say. I'm sorry, go ahead, Nish.

Speaker Change: So those are the three things that I would focus on.

David L. Yowan: No, no, I apologize; I didn't mean to cut you off.

Speaker Change: I don't think I have anything more to say, I'm sorry, go ahead, Misha. No, no, I apologize, I didn't mean to cut you off.

Moshe Ari Orenbuch: Yeah, and then I don't think we have anything more to say on the use of proceeds. There are sort of three buckets that we've had you think about. You know, I think what you would expect us to do is, ultimately, lay out a plan and a set of principles that we'll use when we think about those three uses. It could be a combination of those things.

Speaker Change: Yeah, and then I don't think we have anything more to say on use of proceeds. There's sort of three buckets that we've had you think about.

Speaker Change: You know, I think what you would expect for us to do is ultimately lay out a...

David L. Yowan: I think it'll be a deliberate plan with respect to those proceeds. We want to be really thoughtful about it. So, you know, but it's dependent at this point. The expense reduction, which is our first order objective, is that we need to really understand what the nature of BPS divestment looks like. So we have a better sense of the work we need to do to achieve the expense reduction.

Speaker Change: a plan and a set of principles that we'll use when we think about those three uses.

Speaker Change: It could be a combination of those things. I think it'll be a deliberate plan with respect to those proceeds. We want to be really thoughtful about it, but it's dependent at this point.

Speaker Change: The expense reduction, which is our first order objective, is we need to really understand what the

Speaker Change: nature of BPS divestment looks like so we have a better sense of the work we need to do to achieve the expense reduction objectives.

Moshe Ari Orenbuch: Got it. And if I could just sneak in a quick third one, you know, feeding off Bill's question also about the prepayments and cash flows on the FELP portfolio. Year-end, you had $38 billion of FELP loans with $6.2 billion of cash expected over the life. Now $33 billion with $5.9 billion expected over the life. And that difference of roughly $300 million is pretty much what you actually received in the six months.

Speaker Change: Got it. And if I could just sneak in a quick third one. Feeding off Bill's question also about the prepayments and cash flows on the Felt portfolio. Year-end, you had $38 billion of Felt loans with $6.2 billion of cash expected over the life. Now $33 billion with $5.9 billion expected over the life. And that difference of roughly $300 million is pretty much what you actually received in the six months. So I guess, you know, how do we think about the risk that that

Moshe Ari Orenbuch: So I guess, you know, how do we think about the risk that those that that, you know, nearly $6 billion actually kind of, you know, the prepays accelerate over the remaining life, and it's less than that $5.9 billion? And so I think that they just...

Speaker Change: Nearly $6 billion actually, the prepays accelerate over the remaining life and it's less than that $5.9 billion.

Joe Fisher: Things to think about are you've got about $3.2 billion of O.C. related to the FELP securitizations or secured funding, and then just under $200 million of unencumbered FELP. So think about that as principal return. The biggest risk would be just the delta between that and the numbers you just quoted, as that comes from, obviously, servicing fees, along with additional interest earned. So to the extent that that is fully accelerated into the period, you're getting that roughly $3.4 billion of principal return to you, and the loss in that 100% scenario is really what's at risk.

Speaker Change: And so I think that they just...

Speaker Change: The things to think about is we've got about $3.2 billion of O.C. related to the FELP securitizations or secured funding, and then just under $200 million of unencumbered FELP. So think about that as principal return. So the biggest risk would be just the delta between that and the numbers you just quoted, as that comes from, obviously, servicing fees, along with

Speaker Change: Additional Interest Earned. So to the extent that that is fully accelerated into the period, you're getting that roughly $3.4 billion of principal returned to you, and the loss in that 100% scenario is really what's at risk.

Operator: Thank you. Our next question comes from the line of John Hecht with Jeffreys. Your line is now open. Hey, guys. Thanks.

Speaker Change: All right, thank you.

John Hecht: Hey guys, thanks very much for taking my questions. The first one's sort of just a modeling one. In the private student loan portfolio, the ALL has dropped a little bit over the past year. I'm wondering, are we at a level where you think it'll be stable, or should we expect more reductions as credit improves, or how do we think about that?

Speaker Change: Thank you. Our next question comes from the line of John Hecht with Jeffreys. Your line is now open.

John Hecht: Hey guys, thanks very much for taking my questions.

John Hecht: First one is sort of just a modeling one. In the private student loan portfolio, the ALL has dropped.

Speaker Change: A little bit over the past year. I'm wondering, are we at a level where you think it'll be stable, or should we expect more reductions as credits improves, or how do we think about that?

Joe Fisher: In terms of the allowance for loan loss, we feel pretty good about where we are. The components, obviously, broken out on the slide, new originations, we'll continue to add to that. So, as we originate on the in-school side and the refi side, there would be a continued build, just the way that the CECL accounting works. We take that all up front.

Speaker Change: In terms of the allowance for loan loss, we feel pretty good about where we are. The components, obviously broken out on the slide, new originations, we'll continue to add to that. So as we originate on the in-school side and the refi side, there would be a continued build just the way that the CECL accounting works. We take that all up front.

Joe Fisher: But that's something that we're reviewing quarterly, and as you can see, we added $16 million in the quarter. $6 million of that was related to new originations, and $10 million was just the overall outlook of the total portfolio and the credit.

Speaker Change: But that's something that we're reviewing quarterly, and as you can see, we added $16 million in the quarter, $6 million of that was related to new originations, $10 million was just overall outlook of the total portfolio and the credit.

John Hecht: Okay, and then the second question is, I guess I'm trying to just figure out how sensitive the business, the originating side, and the private student loan book would be to reductions in interest rates. You know, does 25 basis points start moving the market, or do we need a more significant move for the refi business? And then, similarly, what happens to the in-school opportunity as rates go lower.

Speaker Change: Okay.

Speaker Change: And then the second question is, I guess I'm trying to just figure out how sensitive...

Speaker Change: The business, the originating side in the private student loan book would be to reductions in interest rates.

Speaker Change: Does 25 basis points start moving the market or do we need a more significant move for the refi business? And then similarly, what happens to kind of the in-school opportunity as rates go lower?

Joe Fisher: I don't think 25 basis points really move the needle that much, and that's reflected in our guidance in terms of what we expect to achieve for the back half of this year or for the full year. I think where you start to see a more significant pickup is as you get to 75 basis points, 100 basis points, if that becomes more meaningful to the borrower in terms of the terms that they have today, I mean, the federal programs, and taking advantage of that, whether it's 7,500 basis points or more, lower opportunity, I think that's where you start to really move the needle.

Speaker Change: Thank you. Bye bye.

Speaker Change: I don't think 25 basis points really move the needle that much, and that's reflected in our guidance in terms of what we expect to achieve for the back half of this year or for the full year.

Speaker Change: I think where you start to see a more significant pickup is as you get to 75 basis points, 100 basis points. If that becomes more meaningful to the borrower in terms of the terms that they have today in the federal programs and taking advantage of that, whether it's 7,500 basis points or more, lower opportunity, I think that's where you start to really move the needle.

Joe Fisher: And you can see just three years ago, obviously, how much more significant our loan originations were in that refi space as a result, and so that's where I think the real opportunity starts to come into play. Today, you just don't see that. A lot of borrowers are waiting on the sidelines to see whether rates move and also just for updates in terms of any loan forgiveness proposals that may or may not be implemented going forward.

Speaker Change: and you can see...

Speaker Change: Just three years ago, obviously, how much more significant our loan originations were on that reply space.

Speaker Change: as a result. And so that's where I think the real opportunity starts to come into play.

Speaker Change: Today, you just don't see that. A lot of borrowers are waiting on the sidelines to see any rate move and also just for updates in terms of any loan forgiveness proposals that may or may not be implemented going forward.

John Hecht: Great. That's very helpful. Thanks.

Jen Earyes: I would now like to hand the conference call back over to Jen Earyes for closing remarks. Thank you, Shannon. For everybody on the call, please contact me if you have any follow-up questions.

Jen Earyes: I would now like to hand the conference call back over to Jen Earyes for her closing remarks.

Speaker Change: Great, that's very helpful. Thanks.

Speaker Change: Thank you. I would now like to hand the conference call back over to Jen Earyes for closing remarks.

Jen Earyes: For everybody on the call, please contact me if you have any follow-up questions. We'd like to thank everyone for joining us on today's call. This concludes the call.

Jen Earyes: We'd like to thank everyone for joining us on today's call. This concludes the call. Thank you for your participation. You may now disconnect.

Jen Earyes: Thank you, Shannon. For everybody on the call, please contact me if you have any follow-up questions. We'd like to thank everyone for joining us on today's call. This concludes the call.

Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.

Jen Earyes: This concludes today's conference call. Thank you for your participation. You may now disconnect.