Navient Corporation (NASDAQ:NAVI) Q4 2023 Earnings Call Transcript

Navient Corporation (NASDAQ:NAVI) Q4 2023 Earnings Call Transcript January 31, 2024

Navient Corporation misses on earnings expectations. Reported EPS is $0.21 EPS, expectations were $0.77. NAVI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to the Navient Strategy Update and Fourth Quarter 2023 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 fourth quarter of 2023. With me today are David Yowan, Navient’s CEO; Edward Bramson, Vice Chair of the Navient Board of Directors; and Joe Fisher, Navient’s, CFO. Navient has a lot to share with you this morning and has posted two separate presentations that will be referred to during this call. Both are available on navient.com/investors. We will refer to a strategy update presentation, which you find posted on our website. Our in-depth review and strategy update discussion may take us past the half-hour. Following this update, Joe will discuss the fourth quarter results and outlook for 2024. He will refer to the fourth quarter 2023 presentation, which you will also find posted on navient.com/investors.

After the prepared remarks, we will open the call up for questions. 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 those factors in the discussion of them on the company’s Form 10-K and other filings to the SEC. During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio and various other non-GAAP financial measures that are derived from core earnings.

Our GAAP results description of our non-GAAP financial measures and a reconciliation of core earnings to GAAP results can be found beginning on page 18 of Navient’s fourth quarter 2023 earnings release, which is posted on our website. Thank you. And now I will turn the call over to Dave.

David Yowan: Thanks, Jen, good morning, everyone. Thank you for joining the call and for your interest in Navient. As you know, the Board and management began an in-depth review of our business a few months ago. It’s been a rigorous and comprehensive process. I’ve asked Ed Bramson, Vice Chair of the Navient Board to join me this morning. Ed and I will describe the steps we’re taking, the rationale and objectives and what they mean for Navient. After that, Joe will share our Q4 results and 2024 outlook. We will then open it up for Q&A. There are three actions that we’re taking coming out of our in-depth review; outsourcing loan servicing, exploring strategic options for BPS, and reshaping our shared service infrastructure and corporate footprint.

At a high-level and in the near-term, these actions are intended to simplify our business, reduce our expense base and increase our financial and operating flexibility. Over the long-term, we believe these actions will increase the value shareholders derived from our loan portfolios and the returns we can achieve on our business-building investments. Let me turn to slide two of our strategy update. In May 2023, the executive team and the Board launched an in-depth review of our business to ensure we’re on the right path for success and value-creation. This review is confirmed the changes are necessary for Navient to deliver its full value and potential. Our review included an extensive and intensive analysis of costs. We focused on the size, purpose and allocation of all costs by business unit and shared service activities like IT, as well as unallocated costs within our Corporate Other segment.

At the same time, we sought to benchmark and compare our costs of important activities including loan servicing to the cost of third-party providers. We analyzed our projected in-house servicing costs over the remaining life of our loan portfolio and compared it to third-party costs through a competitive RFP process. Our current costs were found to be comparable to third-party providers. But it was also clear that our in-house cost to service would not continue to be competitive with third-party costs as our legacy portfolio amortizes and our economies of scale begin to disappear. As a result, we’ve decided to transition to an outsourced servicing model. Once completed, this will create a variable cost structure for the servicing of our student loan portfolios and provide attractive unit economics across a wide range of servicing volume scenarios.

Through our competitive process, we selected MOHELA as our servicing partner. MOHELA is a leading provider of student loan servicing for government and commercial enterprises. We are committed to a seamless transition for our customers in a few months’ time. Many of our servicing employees are expected to transfer along with this transaction. Now to our second strategic action. Our in-depth review highlighted that a significant part of our cost base and infrastructure is shared between loan servicing and BPS and especially within BPS’ government services business. Both businesses involved many similar activities, such as call center operations, payment processing and omni-channel customer interactions, such as telephony or text, among others.

Given the earnings multiple, the market assigns to our shares, our BPS businesses do not receive the value assigned to comparable stand-alone businesses. This limits our ability to realize these businesses full potential and value, such as through larger investments in organic or inorganic growth, for example. Therefore, we are exploring strategic options for BPS, including but not limited to divestments with the goal of realizing the full value and potential of these businesses. We’ve engaged financial and legal advisers to help us with these efforts and we’ll provide updates along the way. Pursuing divestments simultaneously with the decision outsource servicing maximizes the potential for shared cost reduction. We expect to be able to identify and more quickly eliminate stranded costs.

Third, we intend to reshape our shared services functions and corporate footprint to align with the needs of a more focused, flexible and streamlined company. We’ve identified opportunities and some of the steps that need to be taken are included in our 2024 outlook. The full scope and timing of these opportunities will depend on the progress of the outsourcing and potential divestiture transactions. These will define any transition services requirements as well as separation and stranded costs. If you look at our 2023 operating expenses, approximately $400 million, which is net of expected outsourced servicing expenses could be eliminated under a scenario in which we had already completed the three steps we’re announcing today. That scenario would also not include BPS revenue under a full business divestiture scenario.

We expect to finalize all three actions during 2024. Their implementation is expected to be largely complete over the next 18 to 24 months. With that, let me turn it over to Ed.

Edward Bramson: Thank you, David. I think one of the things that David has spoken about that we’re actually doing are relatively clear. But what we thought might be helpful today is that for the last 8, 9, 10 years, Navient has been in a steady state. You can predict more or less what it’s going to do. And starting in 2025, it’s going to be steady state again. So in the coming year is sort of transitional and you could think about it as a turnaround here. And the firm that I’m with invests principally in turnarounds, so we thought it might be helpful to provide some perspective on not just what we’re doing, but why we’re doing it. And David asked me, I think the word he actually used was delegated me to take you through it from that perspective.

So starting on page three, you could obviously say, well, why would the Board look at doing this now as opposed to in the future or having done it in the past. And if you look at the first bullet, it basically says that the share price since the spin-off in 2014 has gone down a little bit. It’s not the worst you’ve ever seen. But I think the Board concluded that it’s not a tremendous return for 10 years’ work. So the question is, what do you do about it? And as David said, the first step was to do a really solid review of costs. And that project, and I’ve been involved in quite a few of these turnaround situations was one of the best interactions between Board and management that I’ve ever seen. So this is a unified approach, and I think it’s very well done.

The basic issue it had to address is if you think about Navient compared to other companies, a very high proportion of our costs are allocated rather than directly attributable. And what that tends to mean in practice is you always spend a lot of time deciding which bucket the costs should go into, which doesn’t leave much time to figure out whether you should have them or not. And this study has sort of broken through that and has provided a lot of useful data. Obviously, it helps with what Dave was talking about in cost reduction, but it also points you to what to do next with capital allocation or growth or whatever. And what is all sort of ends up saying is that for a turnaround, this is somewhat unusual situation. The likely cash that’s going to be available in the next few years actually is higher in amount than our entire market cap.

So a lot of what the strategic plan will ultimately have to be about is how do you use that wisely. So I would like to take you through our thinking on that. If you go to page four. The major driver of our financial performance since the spin-off had to be the loans we inherited. At the time of the spin-off, there were about $135 billion of loans. And the intention was not to replace them. They were intended to run off. The intention was to do other things with them. And so we have made some efforts in that regard. We’ve actually generated about $9 billion of new loans. But I think over time and I’ve gone back and looked at some of the sell-side research, people were probably a little too optimistic about how soon you could start to get to the inflection point when new revenues grew faster than old ones declined.

And in reality, as you can see, we’ve had a runoff of about $90 billion of loans. We’ve added about $9 billion of new ones. So we might be on track to some inflection points in revenue, but it’s not near term. So the inflections to focus on are the ones that David is talking about, which are inflections in earnings or shareholder value. And if you go to page five, I think this helps to put in perspective what we’re focused on in the short run. The revenues coming down is not really the principal issue in us. The issue is the operating leverage that creates. And so during the period, as you can see, if you take net interest income, we’ve had a drop of about $1.1 billion on an annual basis. Our operating expenses have come down by $80 million.

There are lots of reasons and background for that, which I won’t get into. But whereas the ratio that we’re getting here is 15 to 1. Unfortunately, it’s a negative ratio, and that’s what David’s dealing with right now. There’s a second contributory issue that comes out of this, which we’ll come back to a little bit later on, which is as we thought that the revenue inflection is coming fairly soon, has receded, you tend to get a reduction in the PE multiple, and we’ll get into what the consequences of that are in just a second. And if you go to page six. During the period, we did make a lot of investments. We bought BPS, we bought Earnest and some other things. The biggest single investment we made was in share repurchases. And as you perhaps know, we have bought back since the spin-off of about 75% of our original shares outstanding.

And that program did what it was intended to do, which essentially was to maintain earnings per share. And the data in the table is a little bit messy. There’s a difference between GAAP and core. But I think it’s fair to say that if you looked at it, it’s maintained earnings flat to slightly up. So it achieved what is intended to do. On the other hand, the problem we’ve had is because of the change in perception of strategy, the multiple has been coming down. So even though the earnings per share are flat to up, because of our decline in multiple, the share price has come down. That’s an issue that we need to deal with as well, and we’ll talk about that shortly. So with the joint project and board management done, what are the immediate priorities.

The first one is obviously to get your operating expenses down. And there are two elements to that. There’s an obvious one, which is that the loan portfolio is, by and large, with one exception, are not designed to be replaced. So every dollar that you spend of overhead on them or other expenses connected with them, just comes out of the value of the portfolio. So our biggest single asset today is the loan portfolios. The less money you spend collecting them, everything else equal the better. I think the more subtle issue is that our major future asset is the businesses we’re trying to grow. And in an allocated environment, as the legacy businesses shrink, their allocated costs get reallocated to new businesses, which are the ones you’re trying to grow, which can’t afford them.

So they had the effect of smothering that effort. So that needs to be dealt with. And I think the other thing, coming back to the rising cost of equity is this. If you accept that we’re going to have a tremendous amount of cash relative to our market cap to either return to investors or invest over the next two, three years, it needs to be disciplined in how you think about it. So think about it this way. If we take $100 of cash and we put it into an investment and the mix a 10% return, that’s $10. At our current multiple, that means market value of $70 for the $100 you put in. That’s not viable, you can’t do that. So you either have to return that money or come up with something better. So where it leaves you today, and hopefully, this will change is you need to make about a 15% return on equity to justify doing anything and if you do it’s sort of a wash.

So that as a background, what we’d like to do on page eight. As David said and I think I said at the beginning, this is a strategy update, how to think about the strategy, it’s not the strategy. But the strategy is going to be driven by what you have to work with. And on this page, we have the major components of the business. So the loan portfolios, we’ll cover in a second. The other items we have, we have quite a large amount of unrestricted cash and we have two operating segments. We have Earnest and we have BPS. And both of those have some interesting aspects to and we’ll cover a little bit in brief. If you go to page nine, this is the loan portfolio. Okay. So the first piece of the portfolio is our loan assets. And I think it’s important to explain that on our balance sheet, these are consolidated, which makes it a bit difficult to track what they’re really worth.

In reality, all the loans that almost all the loans that we have are securitized. They reside in trust against which those trusts have incurred some borrowing. So the real economic interest we have in the loan portfolio is what we get from those securitization trust. And that’s a combination of future net interest income, servicing fees and the initial equity that we put in that comes back at the end when the trust is liquidated. So if you take those inflows, the table sort of puts together the things that you’ve seen before, but maybe not in one place. And what it essentially says is that the expected distributions to us from the trusts are about $13 billion. Against that, we finance it in part with unsecured debt, which is a little less than $6 billion.

So there’s somewhere in the region of $7 billion to come in from those trust over time as we speak. And about half of that looks like it comes in, in the next five years. However, it does cost some money to get from there to what shareholders receive. And so if you want to maximize that value, you need to deal with loan servicing expense, corporate overhead and the interest on our liabilities. We think there are opportunities in all of those areas. And I think Dave is already lining out for you what they’re in servicing and corporate overhead. The objective here is to give you a realistic view of what these things are worth. We need to be able to give you all the data which we don’t have yet. So hopefully by the end of the year, we’ll be able to line all of that out.

David covered the outsourcing. I just want to say briefly on page 11 what the environment and what the decision that created it is. When that negative was spun off, it had 12 million borrowers, Half of them were serviced for the education department, the other half were our loans. So as you move along probably 2/3 of the loans were financed for the education department, much larger infrastructure that we require for what we do today. So surprisingly, and this is a real complement to the management team. When you benchmark it, our servicing costs are very competitive today. The problem, as David said, as the base shrinks, they’re going to get less competitive. So there is an option to go ahead and invest in a small and more flexible system to deal with that.

We think a more desirable option is outsourced to somebody who has scale. The expectation, therefore is not that we’re going to save a lot of money on servicing in the short-term because we are competitive, but as the portfolio shrinks, the benefits become very large by making it variable. So that’s the loan portfolio. On page 12, there’s another item on restricted cash. And I think the way to look at this is it’s not part of the loan portfolios, but it goes with it. And the reason we have all the cash you see on the charts here is that it’s a liquidity buffer for the large loan maturities that we have coming up periodically. And so it’s always been there. However, it’s not always easy to get this out of the financials, it’s unrestricted cash that’s available for general corporate purposes and it belongs to the shareholders.

And as at the end of ’23, that’s about $7.50 a share of cash that belongs to the shareholders. In fact, if you look at some other liquid assets that we have in addition to cash, it’s more like $10 a share. So if you think about that and if you think about the potential inflows from the loan portfolios, that’s why I was saying earlier that even if you don’t sell BPS, you’re going to be having cash available for distributions or investments that’s actually in the next few years, equal to more than our entire market cap. So obviously, the key to the situation is to do that wisely. So if you go to page 13, I think from what I said earlier, it’s sort of obvious in which circumstances you would just return cash to shareholders. But here’s an example of some things that are going on at Navient under the hood that perhaps aren’t well highlighted.

So what I’m going to take is Earnest. And Earnest is something we bought five years ago or so. But the point is that it’s a new brand to Navient. And it’s customer-focused, and it’s designed to focus on relationships. And what we mean by that is a relationship is something that causes a customer to come back for another product after he got the first work. The reason you want that is enables you to build attractive lifetime economics with customers. In that sense, it’s distinct from the Navient brand. There’s nothing wrong with the Navient brand, but it’s a servicing brand. So the interaction you have with it is collecting a loan that might have been written by the education development or maybe it’s one of our own ones. We do the best we can to treat you properly.

We try and be efficient and sympathetic to state necessary. But at the end of that relationship, you don’t expect to see us again. So it’s not the right sort of brand to build a business in the future. So Earnest has been going for a while, is now running at a bit less than $200 million a year of revenue. It’s principally focused on education industry types of products at the moment. Our objective is to move that out into a broader set of product lines at some point in the future. But what we have today is a lending business which has generated essentially all our new loans in recent years, which is highly efficient and we’ll tell you about it in a second. There’s another part of our industry, which we’re calling a financial counseling platform, really for lack of anything more imaginative to call it.

And in my own work in engineering, this would be the difference between saying what something is and what it does. So financial counseling is what it is. What it does is that it enables us to address a much broader base of customers than we have today to build our relationships potentially for the future and also to develop data for the sorts of things you might do next. But the management team at Earnest is quite a bit younger than some of the other management at Navient. And one of the things that they’ve done, I think, quite well is to resist some pressure to monetize this business too soon. So it does generate a little bit of revenue. But the way to think about it is it’s all paid for within Earnest operating budget. So just quickly covering the brand point.

As we said, we’re trying to target a certain kind of customer, trying to target them efficiently. What’s on the page here is that Navient periodically does a brand health survey. There are 11 brands in here. One of them is Navient one of them is Earnest the other nine are competitive companies. And there are lots of attributes. We just picked some of them. But as you know, generally speaking, financial services companies are not super well-liked by their customers. But if you look at these attributes, what find is that Earnest and its dealings with people is perceived as being fair, is being ethical, being reliable. What is not perceived as is being aggressive or arrogant. So if you come back to the efficiency of acquiring customers, if you treat them properly, they come back and that’s much cheaper than getting a new one.

So that’s the point I think we will turn. So just to give you a bit of an insight into how our industry is doing. On the lending side, the principal thing it does is graduate loan refinancing at the moment. There’s 5% to 10% of the in-school lending, but I don’t think it’s relevant to this discussion. It’s not the only thing we want to do, but it’s a good place to start and it pays the rent. The reason that’s good is it aligns with the sorts of customers you want to get and the characteristics you want, and it’s something we know how to do. It’s been successful. Our market share in this field is either one or two for most of the last few years, and we’ve generated about $9 billion of loans here. It’s also now quite profitable that went from a loss in 2020, about $8 million to making about $80 million pre-tax today.

The counseling platform, I think the point to make here is that over that time, it’s grown fourfold, a bit more so. And so you are almost 2 million users. Earnest has probably 150,000 customers. So it’s multiples of people that you have relationships with above those that you actually currently lend to you today. The reason that’s important is that there may be future customers, but coming back to a point we made earlier, we’re looking at product loan extensions. And the most economical way and least risky way of doing that is to test into those things, to do research, to try them out rather than commit hundreds of millions and find out it was a bad idea. And there’s an industry celebrity who I have not met personally, who has, I think, a rather way of interesting way of describing consumer lending.

He says, people go into it with wide eyes and they come out with black eyes. So one of the principal values of this platform is to enable us to be judicious as we start to add new products. Then on Earnest itself, its business model, why is it distinct? We talked about the brand. But if you think about financial services, generally, it’s very difficult to have a lower cost of funds than other people. Product differentiation is something people talk about, but at best, is fleeting. So neither of those are going to be advantages for us. So what Earnest is focused on is targeting customers who are efficient and then managing that process efficiently. So if you think about a lot of people in the industry generally talk about they say, well, our NIM will be better because we’ll charge people more for the same product than other people will get or we’ll fund it cheaper than other people can do or our cost of customer acquisition will be less.

All of those things are important, but what really counts is the end-to-end deficiencies. So taking a few data points there. Earnest is acquiring customers at an annualized cost of about 30 bps. And what that is, it’s a little bit more than a percent to get one you keep in about four years. Another element of efficiency is that we’re targeting more affluent customers. So the average balance at Earnest at the moment is about $50,000, which is almost three times what our legacy portfolio is. And in fact, that $50,000 is trending a little bit higher as we speak. And then the other point on here is the realized loss rate. And the 40 bps might sound attractive. It probably is helpful in generating NIM. But the more important point in an end-to-end analysis is all the people you don’t chase, you don’t have to worry about, you don’t have to think about it every day, don’t cost you money to manage.

And so in terms of efficiency, that’s probably the major advantage of targeting those kinds of customers. Just to wrap up on this, because this sounds like a plug, and I have to say that it really isn’t because we haven’t decided firmly what to do with it or about it. But having said that, we talked earlier about operating leverage. And one of the great things about the project that the guys did is you were able to identify these points of leverage, you do this, you get that in various elements. So Earnest is an example, I think, of positive operating leverage because you have well-controlled costs and you have a growing revenue base. So to put that in context, if you look at Earnest from 2023 to the end of last year, its revenue increased by, I’m going to call it $125 million.

Its marketing expenses went up. But if you get more customers, you have to spend more money to get them. What’s interesting though is that the other operating expenses went up by about $15 million. So that’s a ratio of a little bit better than 8:1. And as you grow, that ratio actually gets better. So what this looks like to us is a classic example of online growth business economics. So it’s probably something that you won’t want to find a way to expand. So with that not to say that there aren’t very interesting businesses within BPS. But that one, as you know, is subject to an analysis of strategic alternatives. So I’m going to turn it back to David, I’m going to get off now. And I’ll delegate it back to him.

David Yowan: Great. Thanks, Ed. So turning to page 18, let me provide a brief review of our BPS businesses. These businesses operate in two distinct markets with separate operations. Several of the businesses within this group were acquisitions. Our Healthcare business goes to market under the Xtend brand. Xtend offers revenue cycle management services to health care providers and is relatively independent from the rest of Navient from an operational perspective. The government services and transportation businesses operate under several brands and provide a variety of services to federal, state and local governments, its operations share costs, infrastructure and corporate support with the rest of Navient, particularly loan servicing.

While we’re at an early stage in exploring strategic options for this business, we will keep you updated as that process unfolds. Let me try to summarize on slide 19. We have identified and we’re taking steps to significantly reduce the expense base and simplify the company. These actions are designed to increase the value of the cash flows from our loan portfolios and increase the returns and transparency around growth initiatives. The cash we have on hand, the enhanced cash flows from our loan portfolios and the proceeds of any divestiture of BPS combined could generate significant cash flows in excess of our current market cap over the next few years. We will invest that cash in activities that are expected to generate market value in excess of the invested cash.

Excess cash will be distributed to shareholders. Shortly following my transition from the Board to the role of CEO, I shared with you my initial impressions from inside the company, namely that Navient has a strong foundation of assets, capabilities and talent. I also said that we would undertake a rigorous review to identify ways in which that foundation can deliver more to shareholders. These actions are the first steps in delivering our full value and potential, and we look forward to providing updates on our progress. With that, I will now turn it over to Joe to review our Q4 results and provide our 2024 outlook.

Joe Fisher: Thank you, David, Ed and everyone on today’s call for your interest in Navient. During my prepared remarks, I will review the fourth quarter and full year results for 2023. I will also provide more detailed guidance underlying our 2024 outlook for earnings per share of $2.10 to $2.30. Our 2024 outlook does not assume any of the strategic actions that we are announcing. It does not include potential benefits from the transition of servicing, any potential divestitures or any restructuring expenses related to these initiatives. This outlook also assumes a declining rate environment with four rate cuts. We will update our financial outlook throughout the year as these actions become clear. In 2023, we reported a fourth quarter GAAP EPS loss of $0.25, bringing our full year GAAP EPS to $1.85.

On a core basis, we delivered fourth quarter EPS of $0.21 and full year EPS of $2.45. The $0.21 includes a $0.49 reduction to EPS related to significant items in the quarter. Before I move on to the segments, I will provide further detail on two of these items. First, we have increased our accrual by $28 million in connection with the CFPB litigation bringing our total accrual to $73 million. We remain confident about the strength of our case, while open to finding a solution that is acceptable to all stakeholders in order to put this matter behind us. Second, in our private credit provision this quarter, we reserved $35 million due to internal policy changes we’ve made to meet new regulatory expectations related to school misconduct discharges on certain legacy private loans.

This increase reflects our assessment of the impact to the legacy portfolios, life of loan discharges from potential borrower claims. I’ll now provide additional detail by segment, beginning with Federal Education Loans on slide four. The quarter’s NIM of 86 basis points reflects the higher rate environment as floor income, including the amounts that were hedged continued to roll off in the second half of this year. We expect FFELP NIM to decline to the low 70s for 2024 due to our interest rate outlook of four cuts this year. Falling interest rate environment creates NIM pressure as our FFELP assets repriced more frequently than our liabilities. However, we do not forecast rates to fall far enough to reach a level where significant floor income is generated.

Our full year FFELP net interest income declined 8% to $480 million as the portfolio balance declined 13% to $38 billion. The full year FFELP NIM of 112 basis points was above our targeted range of 100 to 110 basis points provided at the beginning of the year. Credit metrics improved in our FFELP portfolio compared to the prior year and third quarter. The delinquency rate, forbearance rate and net charge-offs all declined from the prior year. Provision increased from the prior year as longer expected lives primarily driven by a greater percentage of borrowers and income-based repayment plans increases the projected amount of loan premium charged off in the future. The net charge-off rate of 19 basis points for the year was consistent with our expectations of 10 to 20 basis points for the full year.

Now let’s turn to our Consumer Lending segment on slide five. Net interest margin was 291 basis points in the quarter and 304 basis points for the full year. This exceeded our original guidance of 280 to 290 basis points as we benefited from improved funding spreads. We anticipate that the consumer lending NIM will be in the low 300s for 2024. This includes projected new refi originations of $1 billion compared to $647 million in 2023. It also assumes projected growth of 10% in in-school originations. We expect the increase in refi originations to occur primarily in the back half of the year based on our outlook for a declining rate environment. Our consumer lending team is focused on generating high-quality loans with efficient acquisition costs and improved margins.

Credit metrics in our consumer lending portfolio performed as expected with delinquency rates, forbearance rates and charge-off rates relatively flat year-over-year. Our charge-off rate for full year 2023 of 1.5% was at the low end of our original guidance of 1.5% to 2%. Provision of $50 million is primarily driven by the changing regulatory expectations that I discussed earlier in my remarks. This is reflected in our change in allowance on slide six. At the end of 2023, our allowance for loan losses for our entire education loan portfolio is $1 billion. While much of our portfolio is amortizing, we reserved $5 million for FFELP loans during the quarter and $56 million during the year related to a projected extension in the life of the portfolio.

New origination volume contributed $4 million to the allowance in the quarter and $25 million for the full year. Continue to slide seven to review our Business Processing segment. Total revenue increased $11 million to $81 million in the quarter as revenue from our traditional BPS services increased $15 million or 23%, more than fully offsetting revenue associated with pandemic-related contracts from a year ago. The full year revenue of $321 million was comprised of $74 million in growth from traditional BPS services and well in excess of the long-term high single-digit growth that we see in the industry. Our full year EBITDA margin of 12% was driven by the onboarding of new government services contracts in the first half of the year. Our EBITDA margin of 15% in the quarter reflects the benefit from ongoing efficiency initiatives as we target high teens EBITDA margins for 2024.

Turning to our capital allocation and financing activity that is highlighted on slide eight. We continue to maintain disciplined asset liability and capital management strategies with 84% of our education loan portfolio funded to term and an adjusted tangible equity ratio of 8.2%. During the quarter, we issued $516 million of asset-backed securitizations and $500 million of unsecured debt. We also retired $850 million of maturities that were due in March of 2024. Our overall unsecured debt maturities declined by 16% to under $6 billion, the lowest levels in our history. In the year, we reduced our share count by 13% through the repurchase of 18 million shares. In total, we returned $388 million to shareholders through share repurchases and dividends.

We expect the adjusted tangible equity ratio to remain above 8% for 2024. Turning to expenses on slide nine. Total expenses for the year were $825 million. This includes $80 million of regulatory expense primarily related to accruals in connection with the CFPB matter. Operating expenses declined 32% in the Federal Education segment and 10% in the Corporate Other segment when adjusting for regulatory expenses. We achieved an efficiency ratio of 53% for the year, better than our original full year outlook of 55% to 58%. The strategic initiatives we are undertaking reflect our commitment to identify additional and more meaningful opportunities to reduce expenses. In closing, the full year results of $2.45 reflect the steps we have taken to achieve profitable growth, address regulatory matters and maintain strong capital while exploring alternative strategies to maximize cash flows and enhance value for shareholders.

Our full year 2024 outlook of $2.10 to $2.30 does not include the impact of strategic initiatives that Dave and Ed outlined occurring this year, though we are confident in our ability to execute on these initiatives. Before I close, I want to thank team Navient for their accomplishments this year and continued commitment to creating further value for all of our stakeholders. Thank you for your time, and I will now hand the call back to Dave.

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

The actions we are announcing today represent significant change. I know that as we navigate these changes, our team members will remain committed to servicing our customers and clients with distinction and care. With that, we’re ready to move to Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from the line of Mark DeVries from Deutsche Bank. Your line is now open.

Mark DeVries: Yes. Thank you. I was hoping you could give us a little better sense of kind of the net financial impact of these three major steps you talked about. I mean the $400 million of expense saves are obviously pretty significant. But I believe it’s less than kind of the consensus expectations for BPS revenue as we look out to 2025. So how should we think about kind of the net impact to earnings? And also how much incremental capital you may free up either through the sale of BPS to kind of offset any kind of potential earnings dilution?

David Yowan: Mark, thanks for the question. First, let me clarify the scenario that we’re using when we refer to the $400 million of expenses. So the scenario assumes that we have completed our outsourcing transaction, the one that we announced this morning. We have divested BPS in its entirety, and we have taken the steps to reduce our shared service footprint and our corporate footprint to reflect those two transactions. So that’s the scenario that underlies it. When you think about the financials of that, you might start with BPS and look at our 2023 actuals to calibrate this. During 2023, we had roughly $325 million worth of revenue in BPS, and we had $280 million worth of expenses. So either of those would be present under this scenario.

Our servicing expenses would no longer be present. The first-party servicing expenses that we incur today with no longer be present as well. Our shared service expenses, many of those shared between loan servicing and BPS would no longer be present as well as a smaller corporate footprint would mean that our operating expenses would be lower under that scenario. Now we have to add back the fact that we would now pay our outsourced vendors for servicing our loan portfolio. So you bucket all those things together and the cumulative impact on operating expenses is a reduction of $400 million with a revenue decline of $325 million. That’s how it would impact in 2023 actuals. Now it’s important to note that when we talk about finalizing these actions in 2024, what we’re talking about is becoming more certain about what that scenario actually is.

We have — we’re further along in the outsourcing process. And so we have more confidence and more visibility, not perfect yet, but we have more confidence and more visibility into what that will look like during 2024 and we’ll share those impacts with you. We’re less far along in the process relative to BPS. And so we’ll keep you updated along the way as we determine whether, in fact, we do divest all of it as in that scenario and/or whether there’s some variation of that. The shared service reductions and the corporate footprint reductions, the timing of those and the nature of those depends on those first two transactions as well. For example, if we don’t sell all of BPS, for example, then we may have more stranded costs to take out than if we sell all of it in a piece is an example of that.

The other pieces that we have not — that are not in the outlook is both the nature of the transactions that we end up doing. So what will be the scenario. And then if we sell BPS, what are the sale proceeds. So when we talk about giving greater visibility into the second half of the year, we’re talking about at that point, we will know what the scenario is, and we’ll have greater visibility into the timing and the amount of any transition items that get us there. Hope that’s responsive, Mark.

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

David Yowan: Yes. I think you’re thinking about it is exactly the way that we’re thinking about it, Mark. I think I commented on this in his remarks. I would think about the timing of BPS and our decision to explore strategic options is absolutely tied to our decision to outsource because we have this significant shared service infrastructure, and it makes sense to make a decision about those and analyze those as close to simultaneously as we can. We will look at — so I wouldn’t call it imperative, I would call it the timing makes sense for us. And then as you indicate, there’s — and as we called out, there are different uses and different reliance on that shared service infrastructure, even within our BPS businesses, we’ll clearly consider that and think about that as we decide on this scenario that we follow for that particular business.

Mark DeVries: Okay. Great. Thank you.

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

Arren Cyganovich: Thanks. Just thinking about it from a high-level perspective, if you exit BPS in your remaining businesses are very much simplified. You have a runoff portfolio that you’ve had all along and you have Earnest, which you laid out some of the benefits there. But Earnest is a little bit challenged in the near term, it seems like just from its primary business has been on refi and that’s facing some challenges because of the interest rate environment and the in-school businesses is quite small. I guess what’s really left to provide growth if you’re exiting BPS and you have this runoff portfolio.

David Yowan: So thanks for the question, Arren. I think a couple of things I’d call you to. First, I go back to Ed’s remarks and the way we’re thinking about Earnest in terms of not just a lend-centric or lend-first model, but a way to establish relationships and engagement with the student cohort that I think sets us up and gives us some optionality going forward to decide whether there’s other product lines or other services that we can provide to that cohort. I would also point out that our — the loan origination targets that Joe described for Earnest do represent a 40% growth on a combined basis, refi and SLO compared to our actuals for 2023. So I think that’s a significant growth rate and a demonstration of our confidence and commitment and our ability to compete effectively in those markets while focusing on our overall efficiency in creating those assets.

That’s really the goal that we have is to continue to minimize and optimize our cost of acquisition, our collection costs by selecting the right customer segments that allow us to continue to grow on that financial trajectory that we shared, I think, for the first time here this morning.

Arren Cyganovich: Okay. And then I was wondering if you could also provide any additional color on the $28 million of contingency loss. You have cited some recent developments in the CFPB matters.

David Yowan: Yes. So there’s two matters, right? One is the CFPB matter is just additional accrual based on the developments in the case, the litigation in the quarter, just like last quarter, we won’t comment on the development of those. So that’s what the $28 million is.

Arren Cyganovich: Okay. All right. Thank you.

Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Moshe Orenbuch with TD Cowen. Your line is now open.

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

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

David Yowan: And then Joe in terms of, sorry, go ahead.

Joe Fisher: Yes, I was just going to follow up on the second part of your question there about just future charges with all of the strategic actions that are potentially taking place. Our goal certainly is to limit any types of restructuring charges going forward. Our guidance does not include that. But our goal is to minimize the expenses associated with that. And certainly, the valuation is going to be a determinant event, and we’re going to look to maximize the value of these transactions, and that’s going to be — play a big role in determining obviously any capital implications going forward.

Moshe Orenbuch: Great. Thanks. And just as a follow-up, maybe a follow-up to Mark DeVries question on BPS. Could you talk a little bit about that you’re expecting a 15% kind of EBITDA margin. You had a 12% EBITDA margin this year. Just talk about the range of the various contracts in there around that 15%. And whether you’ve got indications of interest on any of those? And which of those are perhaps more likely or less likely and how to think about that in terms of the various elements within more BPS business? Thanks.

Joe Fisher: Sure. So just to make sure I’m capturing your question. Just the range of EBITDA within the various sectors, whether it’s health care, government services and contracts is what you’re asking?

Moshe Orenbuch: Yes, I mean, I’m assuming they all don’t average.

Joe Fisher: Yes. So ultimately, it does vary contract by contract. I think if you look at some publicly traded companies, typically, health care does earn a higher — certainly higher multiple and has higher EBITDA margins than those related to federal contracts. So it does vary contract by contract. And what you’ve seen over the last several years is that we’ve actually exited a number of our lower-margin contracts, which has contributed to the growth that we’ve seen and the benefits that we received in the EBITDA margin. So while full year was 12%, we ended this year at 15% for the quarter and guidance is for the high teens for next year. And as you can see in our presentation, if you look back in the appendix, there’s about a 10% revenue growth implied in that as well as achieving the margins that we’re laying out.

So ultimately, I think just if you look at this business, it’s a very attractive business that we historically have just not received the multiple that you see others getting in this space. And so that’s one of the things that we’re looking at here and certainly a driver of our — one of the drivers of our decisions.

Moshe Orenbuch: Okay. Thanks.

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

William Ryan: Good morning. Thanks for taking my questions. First, just going back to the high level question investors have been asking if I buy the shares of Navient, what exactly do I own? You’ve kind of outlined your commitment to Earnest and adding some new products, details somewhat forthcoming. But thinking about the sale of BPS and adding the products and services to Earnest, our acquisitions or bolt-on acquisitions and the thought process of maybe using some of the proceeds from BPS.

David Yowan: This is Dave. Thanks for the question. Look, I think it’s too soon in the process to talk about that. Again, the strategy that Ernest has had and will continue to execute against this year is to continue to build engagement with students through the financial counseling platform. That includes things like, for example, student loan manager, which is a capability that helps students that have federal loans to determine what the best payment and refinancing options are for them. At the same time, we’ll be, as I just indicated, growing our loan originations by almost 40% this year, while we’re looking at the different product lines, et cetera, that we might be able to build off that engaged user base when we find a set of products and services that we think we can offer.

There’s a variety of ways that we might do that. It could be through acquisition, it could be through an organic build, it could be through affiliates. I think you’ve seen all those models work in financial services. And I would say all those things would be on the table if we go down that route.

William Ryan: Okay. And one follow-up just on the FFELP margin guide. I know that the floor income contracts are running off, et cetera, and the interest rate environment is going to be a little bit more adverse to the margin. But for Joe, it’s kind of thinking is as you exit 2024, you guided obviously to the margin being low 70s for the full year. Is the margin going to be lower as we exit 2024 or fairly steady over the course of the year?

Joe Fisher: So it’s going to be lower as you get into the back half of ’24, just from the margin pressure component of it. So as the — using the four cut scenario that we’re projecting here, that pressure itself, we would estimate contributes about 10 basis points of pressure throughout the year, but more so in the back half as those rates and objective is early in the front half of the year. So we should see that impact back at the floor component. You’re going to start to see that early in the first quarter, and you’ve already started to see that this quarter. There was about five basis point contribution this quarter versus last quarter from the floors rolling off. That goes to about 15 basis points as you get into the first quarter.

William Ryan: Okay. Thank you for that color.

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

Sanjay Sakhrani: Thank you. Good morning. I want to go back to slide nine because to me, it seems like that’s the most critical part of the story going forward. And it seems like the name of the game should be trying to optimize the flow through of all these cash flows. And I know that’s sort of what you’re working on with all of these initiatives. David, maybe you could just help us think about dimensionalizing how much can flow. It doesn’t seem like there’s a lot that flow through if you have the current cost structure. But obviously, the adjustments you’re making, as you’ve indicated, substantially free up the flow through. But maybe you could just talk about the aim over the next five years and beyond sort of how much of that flow through we can get? Because obviously, that’s a big part of the thesis where the market cap is lower than these cash flows. Thanks.

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

So in that amortizing scenario, you’ve seen the variable costs come out as the loan count goes down. But at some point, that fixed cost base doesn’t go down as rapidly as the loan count going down. And so the variable cost model, we think produces significant not just operational flexibility, but significant substantial financial benefits as and if the loan portfolio continues to amortize that’s very different than the model that we have today. And I think the third piece is just the financing piece and the cost of that, both unsecured and secured liabilities and we have — the team has done a terrific job over the years of optimizing and reducing that. We think there are some other opportunities that give us some optionality and flexibility that we’re going to be looking at over the coming months.

So I think those are the three buckets. It’s largely reducing the corporate footprint in the business profile that is slimmer and leaner. That includes a corporate expense reduction. It’s the moving to a variable cost model and then reducing our cost of financing as well. Those are the three levers that we have.

Sanjay Sakhrani: Okay. That’s very helpful. And then maybe just a follow-up question on BPS. I know some questions were asked already. But when you’re thinking about like preliminary indications of interest, any dimensionalization of what kind of valuation that business can get? Because it seems, as you go — as Joe sort of alluded to, that it is a higher valuation business and what sort of suggested in the valuation of your stock? Or are there some nuances there that we should be aware of?

Joe Fisher: Thank you, Sanjay. I think it’s just too early to comment on that, but I would just point to public companies in that space and look at the multiples, both on the health care RCM side as well as government services, BPS and then just more diversified BPO businesses, all receiving a higher multiple than what we received today.

Sanjay Sakhrani: Could I just ask one more question on in-school originations. Is that no longer going to happen? Or because I don’t think I heard anything about that, but maybe you could just clarify on that. Thank you.

Joe Fisher: And I think as Dave reiterated in my comments, we are looking to grow 10% on the in-school side and overall, just from an origination perspective, north of 40% when you combine refi and in-school. So we’re certainly very committed to growing this business.

Sanjay Sakhrani: All right. Thank you.

Operator: Thank you. [Operator Instructions] One moment for our next question. Our next question comes from the line of John Hecht with Jefferies. Your line is now open.

John Hecht: Good morning, guys. Thanks for the update and thanks for taking my question. One point of clarification David, you mentioned, I think it’s $400 million of kind of identified potential cost saves that would come with $325 million that’s, I guess, the BPS revenues. I just want to clarify, is that net of the outsourced servicing? Or does that include the total concept of the outsourced servicing?

David Yowan: So thanks for the question. When we say net, it means it considers the fact that we would need to pay an outsourced provider for servicing our loans. So that’s what — so it is included and the expense reduction is net of what we would pay to that provider. So those are — that’s how we would think about it. And I would just remind you that those numbers that we’re using are based on 2023 actuals. So if you had that scenario and that was in place for 2023, that’s where we got the volumes and the amounts that we’ve shared with you.

John Hecht: Okay. And second question, I think Joe said the originations in Earnest, the refi originations would be more back weighted just because of interest rate reductions. I mean maybe a little bit more kind of information on the cadence there and how sensitive our originations to rate cuts in that segment?

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

John Hecht: Okay. And then a final question is, Earn, if I can. I know this is out there, but Earnest, you talked about incremental products and services. Is this going to be event-centric business? Or is there going to be other fee-oriented products? And if so, could you just give us some maybe examples of what those might look like?

David Yowan: Yes. I think both things are on the table. Obviously, from a number of — a good mix, I mean, Earnest is a consumer-centric enterprise. So the first thing to do will be to try to find and identify unmet needs or needs that customers have that we can serve. I think they’ve done a nice job of demonstrating that, particularly in the refi space. And then if you think about product line extensions, that would encompass potentially both additional lending products, but also potential fee-generating products rather than lending products as well. Again, that could include third-party referrals based on our cost of acquisition of a customer, it could involve other kind of products. That work is underway. We have as we’ve asked for some time to come back to you later in the year with where we came out on that, give some initial thought.

John Hecht: Okay. Thanks. Appreciate that. Thank you.

Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Rick Shane with JPMorgan. Your line is now open.

Richard Shane: Thanks, everybody, for taking my questions. Look, I think we reflect on the last six or seven years in terms of capital returns, both to equity holders and bondholders, I think you guys have done a good job. In terms of maintaining operating efficiency in the context of the shrinking business. I think you guys have done a reasonably good job. The challenge has been growing revenues. What I heard today is a strategy that seeks to maximize shareholder value by optimizing the cash flows and staying very disciplined about returning those cash flows to investors, to stakeholders. Again, very consistent with what we’ve seen over the last five or six years. At the end of the day, you guys are just still kind of squeezing the same fruit tighter and tighter.

Where is the growth going to come from? We hear about Earnest. We hear about the in-school initiatives. But again, that seems to be a pretty big opportunity given you’ve seen two of the largest players exit in the last three years. The market share objectives to 10% growth are pretty modest. Why not be more aggressive there? Or where are the other opportunities to actually start driving top line again?

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

So the first thing we’re going to — what we’re trying to accomplish is actually to unburden the growth initiatives but also at the same time and in the same way, increases our capacity to invest by increasing the amount of legacy loan cash flows that we have a decision to make a capital allocation decision to make about return and otherwise. With respect to the Earnest growth proposition, I think, we tried to lay out what Earnest has accomplished over the last three or four years. I think that’s impressive from a financial perspective. The brand health is a good indication that Earnest has found a way to surprise and delight the customers that it engages with and a customer experience. I know that Ed indicated this, my experience in financial services, that’s a really hard thing to do, and they’ve accomplished that.

That’s a really good foundation for us to think about how we can take those relationships and that positive brand attribute that Earnest has, which does not exist in the Navient brand and see what opportunities we have to grow off of that. And that’s more to come on that. We’re not ready to share that with you today. But that’s the foundation that we see for growth in Earnest.

Richard Shane: Got it. Look, the track record at Earnest has been very good. And obviously, the movement in rates has been a headwind, but that’s I mean that’s beyond your control. I think in hindsight, that’s proven to be a very thoughtful investment and ultimately will create value. What I’m hearing is there’s a chicken and egg problem, which is that the cost of capital makes it in the high hurdle rate makes investing in growth on attractive, but because there’s no growth, I think the cost of capital is elevated. You guys, in your slides link the multiple compression to the decline of efficiency. And I think that, that’s a very fair conclusion, but I would suggest also that the decline in multiple is really a reflection of top line shrinking almost every year for the past decade.

And I do wonder if there is some opportunity to break that paradigm that it might be painful in the short-term to invest. And by the way, I think if we think about the history of Earnest in that acquisition, there was disappointment at the time in that investment, but it has manifested into something that’s valuable. Is it time to break the paradigm again?

David Yowan: Yes. I think you summarized maybe in a little different way what we’ve been trying to communicate in the strategy update. It is a — I won’t call it a vicious circle, but it is a cycle that we’re in that has driven our cost of equity. And so we’re addressing the things that we can address, which is give ourselves some financial capacity and flexibility, give investors more transparency on the growth initiatives. I think this is the first time we’ve broken out Earnest Financials. It’s been within the Consumer Lending segment, which added both private legacy runoff and Earnest growth within it. So we’re trying to provide the transparency of the market. So you can more clearly see the growth and get a sense of the growth potential and the opportunities within Earnest.

Richard Shane: Very fair. And by the way, I should say I very much appreciate the transparency with — that you guys provided today in terms of the strategy, it’s very helpful and one of the more honest things we’ve seen in terms of company sharing their outlooks ever. So thank you very much.

David Yowan: Thank you

Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is now open.

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

So just trying to think through what you think the profitability metrics and returns are for that business.

Joe Fisher: You’re right, Jeff, to bring it into the CECL accounting here. The more successful we are in terms of the refi environment, the higher provision that it’s taken so that impacts the current year. So ultimately, I think it’s a good projection of where we’re headed. So as we think about the current environment we’re in and the growth potential that’s going to lead to, obviously, future growth down the line in ’25 and ’26. But if there is a dramatic downturn in rates, and we have that opportunity to originate more loans that would put pressure on the current year’s income just because we have a higher provision because of the life of loan reserve that we have to take. So it’s a good way to think about it is that if you think about just the interest rate environment last year and the shift, we would have had even higher net interest income coming into this year, but because of the higher interest rates, it’s been about that $200 million in run rate, but the opportunity for growth going forward is going to be primarily driven on the refi side by the opportunities here in the projected rate environment.

David Yowan: Jeff, I would just add, I’d encourage you to look, as I know, you did at 16 and 17 as well because 16 talks about the overall efficiency of loan originations from a cost of acquisition from a servicing cost and from a reserving perspective. And then 17 by breaking out the marketing expense, obviously, that’s going to be variable with our cost of acquisition, but we’re — you can see it on page 17 actually the operating leverage — positive operating leverage that Ed referred to implicit in the kind of distribution model that Earnest has. So there’s a temporary — there’ll be an increase in marketing expense and provision expense, excuse me, with higher originations, we’ll get some operating leverage on the — we expect to continue to have operating leverage on that other line. And obviously, those originations are building a revenue stream to increasingly fund additional originations or some of the growth strategies that we’re talking about.

Jeffrey Adelson: Okay. Great. And as my follow-up, I just want to circle back on John’s question on the cost to outsource. I know you’re discussing how it’s netted out of the number and then you’re moving to a more variable cost model there. But could you maybe help us understand what — how to quantify what that cost outsource is?

David Yowan: Yes. So, look, I think we’ve said a couple of things that I’d just refer you to. First of all, when we did the outsourcing or the RFP exercise, we did find that our current cost is comparable. And so we’re not pointing you or guiding you to look to a significant reduction in servicing expense in the near term. We won’t be pointing to that and you shouldn’t look and find that. But if you go to the loan cash flow page that we have and think about the tenure of the portfolio that we have over the lifetime of that loan, having our servicing cost 100% variable versus a mixture of fixed and variable, we think, has some really powerful operating leverage to us over the remaining life of the franchise. And I’ll just leave it at that. It’s a question of — it’s not a lower unit cost. It’s a different mix between fixed and variable that drives operating leverage that’s not present in our current cost structure and our current servicing model.

Jeffrey Adelson: Got it. Thank you for taking my questions.

Operator: Thank you. And that is all the time that we have for questions today. I’ll turn the call back over to Mr. Jen Earyes for closing remarks.

Jen Earyes: Thanks, Narma. I know that there are remaining questions that we have not been able to deal this morning. So please contact me if we were not able to take your question or if we were, if you have any other follow-up questions, happy to chat. We’d like to thank everyone for joining on today’s call. This concludes our call. Thank you.