Navient Corporation (NASDAQ:NAVI) Q2 2024 Earnings Call Transcript

Navient Corporation (NASDAQ:NAVI) Q2 2024 Earnings Call Transcript July 24, 2024

Navient Corporation misses on earnings expectations. Reported EPS is $0.29 EPS, expectations were $0.42.

Operator: Good day, and thank you for standing by. Welcome to the Navient Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions] 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, Investor Relations. Please go ahead.

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’s CEO, and Joe Fisher, Navient’s CFO. After their prepared remarks, we will open up the call for questions. A presentation accompanies today’s discussion, which you can find on navient.com/investors. 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. 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.

During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio and various other non-GAAP financial measures that are derived from core earnings. Our GAAP results, description of our non-GAAP financial measures and 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.

David Yowan: Thanks, Jen. Good morning everyone. Thank you for joining the call 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 month to 24 month time frame.

During the quarter, we’re pleased we completed major steps in our first strategic action, our servicing outsourcing agreement with MOHELA. Outsourcing is a key facilitator of our ability to achieve lasting expense reduction. Nearly 900 Navient employees have now transferred to MOHELA and our variable cost servicing model is in effect. Our more than 2 million borrowers will continue to use the same account numbers, phone numbers and payment plan. We’ve transferred several proprietary and customized technology tools and solutions to MOHELA. As we’ve previously shared with you, we will provide a limited number of services and activities under transition services agreements. We expect to complete substantially all of this initiative by the first half of next year.

Moving to 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 acquirers 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. We did not wait for the BPS divestment process to be completed to get started on our third strategic action, to reduce our shared service infrastructure and corporate expense footprint.

With outsourcing well underway and the BPS divestment process becoming clearer, we took decisive action during the second quarter to deliver on this initiative’s objectives. A new organizational structure was effective on July 1. This management structure is flatter, 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. 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 MOHELA 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. 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 lifetime 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 refi 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 divestment of our business processing division. At the same time, the elevated level of FFELP prepayment activity has accelerated the timing of a portion of those loan cash flows. 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 in our opportunities to earn returns in excess of our cost of 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 FFELP loans is being monetized at book value, we believe that discount represents an opportunity to deliver more value to shareholders. 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. All colleagues have contributed with commitment and resilience to our progress on these complex undertakings. Next, Joe will show our results for the quarter, which reflects strong performance against the items within our control.

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. 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 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 $0.19 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. I’ll provide additional detail by segment, beginning with the federal education loan segment on Slide 5. 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 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.

The FFELP 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%. 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 repaying their loans to take advantage of beneficial programs that are only offered to direct loan customers. Looking forward, some of the policy actions that clearly incurred 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. 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 FFELP net interest margin in the high 40s. Now let’s turn to our consumer lending segment on Slide 7. Net interest margin in this segment was 289 basis points in the quarter compared to 297 basis points a year ago. 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 is $898 million. We released $2 million for FFELP 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. 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 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 start-up costs which impacted the year-ago quarter. Turning 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% 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 repurchase of 2.5 million shares. In total, we returned $55 million to shareholders through share repurchases and dividends. Turn to 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 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 BPS transaction.

In summary, our updated full year 2024 core earnings per share outlook from $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 for any questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Rick Shane with JPMorgan. Your line is now open.

Rick 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 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 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, 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. Through the loan cash flows and through the potential divestment of BPS, we continue to expect a substantial amount of cash, and we have three alternatives with respect to that cash, largely speaking. Again, investor 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 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. 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.

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.

Rick Shane: 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.

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

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 will be any impact from the recent court decisions on the SAVE program?

Joe Fisher: So, on your, 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 the first quarter and the second quarter. 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 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 guidance of high 40s NIMs 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 paydown 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.

Terry Ma: Okay, got it. Thank you.

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

Sanjay Sakhrani: Thanks. Good morning. Hey, Joe, on your point on 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.

Joe Fisher: 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 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 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 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 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. And happy to take that offline with you, Sanjay, if you want to get more technical. But that’s a general good rule of thumb.

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 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, 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.

David Yowan: Hey, Sanjay. Good morning. Thanks for the question. I think with respect to BPS, look, I think we feel like the macro environment for exploring strategic options and divestment is a, benign if not supportive one. 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. 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. 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 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. 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. 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. 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. What we’re saying today is we’re committed to, we’re confident in our ability to 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. We don’t view that as an overdeliver. We view that as we’re taking out all that category of expense. So there’s a 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. On the CFPB part, our total reserve now is in excess of $100 million. Those reflect 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.

Sanjay Sakhrani: Thank you.

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

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

David Yowan: Hey, Jeff.

Jeff Adelson: 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 completing your strategic action around the BPS sale is something that will have an impact there. Just from a modeling standpoint, the comment you made on the 80% to 90% reduction in the employee base, should we — restructuring expenses aside on the way to get there, should we be thinking about a similar type of reduction to your compensation expense for that line?

David Yowan: Yeah. So, let me — I think you’re asking two question, sort of timing and then amount. Let me try to address both of them in sort of a consolidated answer. There are three initiatives, and there’s sort of three, you can think of it as three different swim lanes with different timelines. We are clearly the farthest along on outsourcing. I won’t say that 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 MOHELA. Think of that as like desktop services, for example, that we need to ultimately transfer over. I don’t mean to minimize those, but I think that you could think of the tail of that as thinner maybe than some of the other initiatives.

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 a, 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 become, the more quickly and the larger the savings from a variable cost model become. So that’s not a, the implementation of that is farther along. We said we’d be complete with that in the first half of the year. BPS 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, in MOHELA, 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 MOHELA. 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. 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. The employee count is like one measure of that, I think, which tells you how meaningful the reductions are.

That tail is, I’d say, a little thicker into the end of 2025 because we still need many of our colleagues who will not be in the, 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. 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 is 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.

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. We’ll take out more than $280 million. We’re not actually thinking of that internally as greater expense reduction. We’re just taking out those expenses as they exist today in servicing because loan count has declined in part because of the prepayments. 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.

Jeff Adelson: 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 reevaluating the capital contribution of that business, not exiting, but sort of reevaluating. Wondering if you’ve given any more thought to that business and have recent developments from exit of a very large player there and what that’s done to the origination channel and competition changed your thinking on that sort of pause on capital allocation?

David Yowan: Yeah, look, we are — Joe gave 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 very dependent on the rate environment, we’ll see what happens there, but at the current levels, we feel good about where we are. As you know, the in-school is a little bit like 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. I think the way we think about it, if you think about the January presentation and the strategy, right, our targeted customer segment and targeted customer profile has a couple of characteristics.

This is true in Refi, it’s true in SLO. 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, everything else that achieves the returns that we’re trying to achieve. Those characteristics are high credit quality, 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 it 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 use a swimming analogy, I just describe the lane that we’re in.

To the extent somebody exits 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 the returns for our shareholders. And that’s what you should expect us to continue to do.

Jeff Adelson: Great. Thank you for taking my questions.

David Yowan: You bet.

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

Bill Ryan: Thank you and good morning, Dave and Joe. A couple of questions. First, in the appendix, it did show a little bit of reduction in the expected cash flows, both from the FFELP portfolio and from the consumer portfolio. Joe, if you could kind of address 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’s happening in the consumer loan portfolio as well.

David Yowan: So, I’ll start with the consumer lending portfolio and then go back to the FFELP portfolio. 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. 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 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 FFELP portfolio in itself, in terms of the confidence in the numbers, I said there’s obviously a lot of volatility in terms of what we’re seeing from prepayments.

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 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, cash flow, just to be clear, in terms of the FFELP portfolio, we are not assuming in that appendix slide that this prepayment activity that we saw in the first two quarters continues 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.

Bill Ryan: Okay, and thanks for that color. Second question, just on the expense side, I mean, very impressive expense reduction year to date down to $154 million in the second quarter. 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 there’s a new organizational structure went into effect on July 1, but that 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 of quarters until we get resolution at 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 but as we think about the next couple quarters, you don’t get the full benefit of the restructuring expenses. That 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 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.

Bill Ryan: Okay. Thanks for that.

Operator: [Operator Instructions] Our next question comes from the line of Moshe Orenbuch with TD Cowen. Your line is now open.

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

Joe Fisher: So, I would say that that impact was under $10 million in terms of the lower origination costs and marketing cost side.

Moshe Orenbuch: Got it. Thanks. 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 kind of outsourcing the, or getting the expenses out. Like, are there any guidelines as to the, like 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 needs for debt repayment, but we have no way of knowing how you’re thinking about it. So maybe is there some way you can kind of give us any sort of broad strokes on those two?

David Yowan: Yeah, I’d say, Moshe, there’s at least three motivations or objectives with respect to exploring BPS status, right? We’ve talked mostly about, in this forum about the facilitate expense reduction. 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, multichannel telephony, things like that. 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.

The second is within Navient, the EBITDA and the earnings that we believe the market is valuing those businesses at is substantially below what standalone or comparables in the marketplace would be. And so we’re — part of what we’re trying to achieve in that the divestment is to close that, find the best value for Navient shareholders, and try to achieve a higher multiple on those businesses. I’d say, thirdly is a scale question. And so as we think about some of the people that have 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 us.

So those are the three things that I would focus on. I don’t think I have anything more to say. I’m sorry. Go ahead.

Moshe Orenbuch: No, no, I apologize. I didn’t mean to cut you off.

David Yowan: 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. I think what you would expect for us to do is to 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. I think it’ll be a deliberate plan with respect to those proceeds. We want to be really thoughtful about it. So — but it’s dependent at this point, the expense reduction, which is our first order objective, is 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 objectives.

Moshe Orenbuch: 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 FFELP portfolio. Year-end, you had three — $38 billion of FFELP 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, how do we think about the risk that that nearly $6 billion actually kind of the prepays accelerate over the remaining life, and it’s less than that $5.9 billion?

Joe Fisher: I think the biggest things to think about is you’ve got about $3.2 billion below — related to the FFELP securitizations or secured funding, and then just under $200 million of unencumbered FFELP. 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 additional interest earned. So to the extent that that is fully accelerated into the period, you’re getting that 3. — roughly $3.4 billion of principal returned to you and the loss using that 100% scenario is really what’s at risk.

Moshe Orenbuch: Got it. Thank you.

Operator: Thank you. Our next question comes from the line of John Hecht with Jefferies. Your line is now open.

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

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 will 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 upfront. 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. 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 moves 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, as 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 75 basis points, 100 basis points or more lower opportunity. I think that’s where you start to really move the needle. And you can see just three years ago obviously how much more significant our loan originations were on that refi space as a result. And so that’s where I think the real opportunity starts to come into play.

And 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.

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

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.