Navient Corp Q2 FY2023 Earnings Call

Thank you, Shannon. Hello, good morning and welcome to Navient's earnings call for the second quarter of 2023. With me today are Dave Yowan, Navient's CEO, and Joe Fisher, Navient's CFO. After their prepared remarks, we will open the call up for questions. You can view and download presentation slides, including slides you may find useful during this call on navient.com/investors. But 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, adjustable tangible equity ratio and other various non-GAAP financial measures that are also derived from core earnings. Our GAAP results and description of our non-GAAP financial measures can be found in the second quarter 2023 supplemental earnings disclosure which is also posted on navient.com/investor. You will find more information about these measures beginning on Page 18 of Navient's second quarter 2023 earnings release. There's also a full reconciliation of core earnings to GAAP included in the disclosure. Thank you. And I will now turn the call over to Dave.

Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. I want to begin with thanks to my new colleagues, team Navient for the open and warm welcome they've provided me since I assumed this role. As most of you know, about halfway through the second quarter, I transitioned from a member of Navient's Board of Directors to the role of Navient's CEO. And with a little more than 10 weeks under my belt, I can share that many of the views I held about Navient as a board member have been reaffirmed. Namely, I found a strong foundation of assets and capabilities, and a talented group of people. I've also become more familiar with the great work underway to simplify the business, reduce risk, and improve efficiency. These activities remain full steam ahead. On today's call, I plan to spend some time sharing my perspectives on Navient, specifically where and why I see value in the company today, and our future potential. I also want to share with you some information on the work we are undertaking to deliver more of that value to our shareholders. As we communicated when I was appointed in May, the board and I shared our view that it was the right time to explore and consider change. As such, I'm currently undertaking an in-depth and holistic review of our business, with the goal of identifying a range of alternative opportunities to deliver greater value to our shareholders. The board and I have a sense of urgency around this review, but also intend to be comprehensive in our analysis and thoughtful about any decisions and actions we may take. At this early point in this journey, it's too soon to report any observations or sense of direction from the review. I look forward to keeping you informed as we move through the process. Turning now to my current views of the business. Let me start with Slide 2. As a quick refresher, for those who might be newer to the organization, Navient is organized around three business segments, the Federal Education Loan segment, the Consumer Lending segment, and the Business Processing segment. The vast majority of revenue and margin in our Federal segment comes from our portfolio of FFELP loans. Our Consumer Lending segment's primary source of revenue and margin is from our private loan portfolio. That portfolio consists of two distinct parts. One includes refinancing and in-school loans originated by Navient in the past several years. The second consists of seasoned loans, the vast majority of which were originated prior to Navient's creation in 2014. And the third business segment, our Business Processing segment includes businesses that provide a variety of services to state, local and federal government entities, as well as revenue cycle management and other services to healthcare providers. Our strategy is underpinned by the four imperatives you see on Slide 3: maximize the cash flows from our loan portfolio; enhance the value of our growth businesses; maintain a strong balance sheet and distribute excess capital; and continuously simplify the business and increase efficiency. While executing these imperatives, we continue to help customers meet their financial needs, continuously strengthen our control environment, and be good citizens in the communities in which we operate. Now to provide an overview of our FFELP portfolio, there are substantial cash flows we project to receive over the next few years. As a reminder, these are cash flow forecasts after the related secured facilities are paid. On the right-hand side of Slide 4, you'll see the key assumptions used to make these projections. On Slide 5, you'll see the even more substantial cash flows we project to receive from our current consumer lending private education loan portfolio over the next few years. To be clear, this is a snapshot of the projected cash flows from our existing portfolio. They do not include additional cash flows from future loan originations. These are projected on the same basis as FFELP cash flows: loan cash inflows net of secured financing outflows. We've provided the cash flow projections like those on slides four and five in our investor presentation for several years now. We plan to continue to provide these estimates, which will include any new net cash flows from loans we bring onto our balance sheet each quarter. In fact, Slide 6 reminds you of the refinancing and in-school loan originations of the last several years, along with our target for full year 2023 originations. As you know, the addressable market for refinancing loans has declined in the current higher rate environment. The peak in-school origination period occurs during the third quarter of the year, as students begin their fall semesters, a cycle unique from those of other consumer finance products. Let me now turn to Slide 7, at the foundation of these businesses is a mission to support and build the financial futures of our customers. Helping borrowers manage their loans is an essential part of that. Customers report being highly satisfied with the simple and clear experience they have with our Earnest brand. In fact, Earnest is routinely recognized as a top student loan lender by various review sites and has some of the highest ratings in the industry according to Trustpilot reviews. These accolades are a testament to our customer-focused approach. Earnest supports students in their financial journey in other ways as well, including tools that help them identify, understand, and navigate grants and scholarships. Slide 8 combines the substantial cash flows from our two loan segments and provides some insights into what we're focused on in these portfolios. As you can see, the projections show that our portfolios will produce cash flows just shy of $1.5 billion each year for the next five years. We also have a proven record in effectively managing interest rate, funding, and credit elements of these loan portfolios. Our net interest margin, or NIM, has been relatively resilient to variations in the interest rate environment. As one proofpoint, Slide 9 shows the NIM on the two portfolios since Q4, 2019. This period includes a full Fed rate cycle, from interest rates being cut by the Fed at the onset of the pandemic to interest rate increases at incredible speeds as inflationary pressures emerged during the pandemic recovery period. Even with a 500-basis point increase on the Fed funds rate, the NIM on both of these portfolios remained relatively stable, in a narrow range. Slides 10 and 11 show credit performance as measured by net charge-offs, and our loan loss allowance coverage against these two portfolios over the same four-plus year time period, starting pre-pandemic Q4, 2019. Specifically, Slide 10 shows how FFELP allowance coverage has remained relatively stable over this period. As you know, the federal government guarantees 97% or more principal and interest on these loans. The allowance as a percent of outstanding balances reflects the federal guarantee on all but 3% of principal and interest. Net charge-offs in this portfolio over this period included pandemic forbearance and other borrower relief programs remained low and actually declined. As borrowers exited those programs, net charge-offs increased as expected. We attribute this increase to be a catch-up with charge-offs that would have otherwise occurred during the period of the pandemic. We expect charge-off levels to return to historical levels as this catch-up cycle runs its course, absent changes in macroeconomic variables. The net charge-off trends in the Consumer Lending portfolio reflect similar dynamics as FFELP with decreasing charge-offs while pandemic borrower relief programs were in place and increases, as expected, as borrowers exited the pandemic relief programs. Loan loss allowance coverage levels here are explained primarily by the changing mix of the portfolio over time. Our refinancing loan originations were substantial during the low-rate environment. They represent a significant and growing percent of the total portfolio. Because of the lower risk profile and demonstrated credit performance, the allowance held against refinancing loans is lower than the allowance held against seasoned or in-school boats. This trend has lowered the loan loss allowance as a percent of loans outstanding. Using the past performance of Navient-sponsored FFELP-backed securities, you can gain a sense of the prepayments occurring on our FFELP portfolio over the same period. As you can see on Slide 12, there was an increase in prepayment rates during the second half of last year. This prepayment increase was driven largely by FFELP borrowers who consolidated into federal direct loans in expectation of participating in the administration's debt reduction proposals. You can see the prepayment activity has declined and stabilized in the first half of this year. Future prepayment levels remain uncertain under the administration's recently announced actions and proposals on reducing student debt. There's been a lot of talk in the news about federal direct student loan payments resuming this fall. Slide 13 shows that the vast majority of our consumer lending portfolio is in active repayments. The resumption of student loan payments you hear about in the news relates to only two loans owned by the U.S. government, not our portfolios. Within our portfolios, the percentage of borrowers in repayment declined at the outset of the pandemic, as borrowers entered relief programs that we offered at that time. For most borrowers, those programs ended in the first quarter of 2022. As a result, over 95% of this portfolio is currently in repayment status. Now for our third business segment, Slide 14 gives an overview of the broad array of services diversified customer segments served in our Business Processing Solutions division. We serve over 500 government and healthcare clients, and touch tens of millions of people in this business. Slide 15 shows revenue on our business processing segment over the last three years. You can see that total revenue rose significantly as we took on various pandemic-related services and then decreased as those contracts were phased out as the pandemic came to an end. Normalizing for that revenue, you can see that our revenue from traditional, that is non-pandemic contracts has grown strongly and steadily over this period, thanks to the good work of the BPS team. In fact, we were recently awarded our largest ever contract in this segment, and revenues from it and other contracts project revenue growth again this year. I want to take this moment to reiterate our longstanding capital allocation framework, as you can see on Slide 16. We are committed to maintaining a strong balance sheet, through which we retain the flexibility to support business growth, as well as to respond to unexpected adverse economic environments, and we are also committed to returning excess capital to shareholders. Slide 17 provides some additional color on our strategic imperatives. I've covered many of the items on this page. There are a couple of additional things I want to mention here. One, is how I think about what may be described as the free cash flows from our loan portfolios. The cash flow projections we showed on earlier slides are before we consider the cash flows from consolidated expenses. These include unsecured debt expenses and repayments, and all operating expenses such as loan servicing expenses, corporate function expenses and taxes, among others. Navient has experienced substantial changes in its business footprint. For example, Business Processing Solutions was created largely through acquisitions during the past few years. We originated refinance loans starting in 2017 with the acquisition of our Earnest subsidiary. We decided to exit the Department of Education Loan Servicing contract and transferred it in 2021. These changes, and others represented significant changes in the scale and scope of our business operations. In conducting the in-depth review, and in focusing on simplicity and efficiency, we want to ensure that the scale of our operations is aligned appropriately with the scale of our current and future business needs. In addition, where appropriate and when possible, we will seek to make our expense base more variable, which provides more operating and financial flexibility. These strategic imperatives around maximizing loan cash flows and simplicity and efficiency are designed to increase the free cash flows that are available to enhance the value of our growth businesses and return capital to shareholders. We will keep you apprised as we identify, with a sense of urgency, additional ways to increase these cash flows, and as we make decisions on how to best deploy them. With that, I will turn it over to Joe, to review this quarter's results. I look forward to your questions later in the call.

Thank you, Dave, and thank you to everyone on today's call for your interest in Navient. During my prepared remarks, I will review the second quarter results for 2023 and provide updated guidance for the remainder of the year. First, I would like to note that we will no longer be providing the non-GAAP financial measure of adjusted core earnings per share. Our full year 2023 earnings per share guidance will now include our expectations for regulatory and restructuring expenses. We believe this will make it easier to follow our reported earnings and provide for greater consistency in our coverage estimates. In addition, we've made formatting changes to our earnings presentation. To the extent information no longer appears in this presentation, you may still find it published alongside the full range of materials we provide, including our 10-Q. Turning to results, our year-to-date reported core earnings per share was $1.73 through the second quarter, and we are updating our full year guidance to a range of $3.15 to $3.30 core earnings per share. The updated positive guidance now includes expenses of $22 million, or $0.13 related to regulatory and restructuring expense that occurred through the first six months, along with our expected ongoing regulatory expense for the rest of 2023. Second quarter's positive results positioned us well for the remainder of the year, with key highlights from the quarter beginning on Slide 19, including second quarter GAAP EPS of $0.52 and core EPS of $0.70, both of which include $15 million of restructuring expenses, primarily associated with the CEO transition that took place in May. FFELP NIM of 97 basis points, private NIM of 297 basis points, originations of $197 million, business processing revenues of $83 million, and an overall efficiency ratio of 56% while maintaining an adjusted tangible equity ratio of 8.4% and returning $100 million to shareholders through dividends and repurchases. I'll provide additional detail by segment beginning with federal education loans on Slide 20. In the Federal Education Loan segment, we achieved a net interest margin of 97 basis points compared to 111 basis points a year ago. The decline from the year-ago period was primarily driven by a lower balance of loans eligible to earn income. Compared to the prior year, we saw net charge-offs increase to 22 basis points, which is consistent with the first quarter and we anticipate that the net charge-off rate will decline to fall in a range of 10 to 20 basis points for the full year. While credit trends are within our expectations, the slowdown in prepayments that we are experiencing is expected to increase the life of the portfolio, which results in an increase in future cash flows along with anticipated future defaults. Now let's turn to our Consumer Lending segment on Slide 21. Net interest income in the quarter was $143 million, resulting in a net interest margin of 297 basis points, an improvement of 31 basis points compared to the prior year, driven largely by our improved funding spreads. We continue to see a slowdown in prepayment speeds in the overall portfolio, as borrowers with fixed interest rates have less of an incentive to refinance in the current rate environment, which is benefiting net interest income. In the quarter we originated $197 million of private education loans, comprised of $142 million of refinancing loan origination volume and $55 million of new in-school origination volume. The decline in refinancing volume originations from the prior year is primarily driven by the higher rate environment. We anticipate quarterly refinancing origination volume to remain at these lower levels throughout 2023, as we expect the restart of Department of Education loan payments this fall to provide no significant impact in the current rate environment. As anticipated, we are seeing an improvement in credit from the first quarter. Compared to the first quarter, net charge-off rates improved to 1.39% from 1.63% and total delinquencies improved to 4.4% from 4.5%. Turning to the allowance for loan losses and related coverage on Slide 22, we remain confident that we are adequately reserved for the expected life of loan losses, given the well-seasoned and high credit quality of our portfolio. At the end of the second quarter, our allowance for loan losses was just over $1.1 billion for our entire education loan portfolio. While credit metrics are improving, we remain cautious in our outlook as borrowers with over $1.5 trillion in education loan balances held by the U.S. government will be required to start making payments for the first time since March of 2020. Although the portfolio was primarily amortizing, we reserved an additional $5 million for FFELP loans related largely to a project extension in the life of the portfolio and $6 million for private education, of which $4 million is related to new origination volume. Continuing to Slide 23 to review our Business Processing segment, revenue from our BPS services increased $11 million from the first quarter to $83 million. The EBITDA margin increased to 10% from 7%. We expect to be in the high-teens for the second half of the year, as we benefit from ongoing efficiency initiatives. We expect to see revenue of at least $310 million for the full year 2023 primarily driven by the addition of new government services contracts. Turning to our capital allocation and financing activity highlighted on Slide 24. We continue to maintain strong asset liability and capital management, with 84% of our education loan portfolio funded deterministically. During the quarter, we issued $500 million of unsecured debt and $718 million of asset-backed securities. Our adjusted tangible equity ratio of 8.4% is in line with our target range from 8% to 9% and up from 7.5% a year ago. In the quarter, we reduced our share count by 4% through the repurchase of 4.9 million shares. In total, we returned $100 million to shareholders through share repurchases and dividends. Our 2023 EPS guidance includes a further reduction in share count from the projected share repurchases of $145 million for the remainder of the year. Turning to operating expenses on Slide 25. The continued efforts to improve efficiency and success across all of our business lines have contributed to the strong quarterly results. The increases in consumer lending expenses are primarily related to marketing for the upcoming peak in-school origination season. We saw a 28% decline in expenses in the Federal Education segment due to lower transition services and a 17% decline in the overall FFELP portfolio. We achieved an efficiency ratio of 56% in the quarter, which is consistent with our full year guidance of 55% to 58%. In closing, the second quarter's core earnings results of $0.70 reflect the steps we have taken to simplify the business, maintain strong capital levels, and provide consistency in the face of a volatile rate environment. Our updated core EPS guidance range of $3.15 to $3.30 for the full year includes all regulatory restructuring costs incurred today, as a result of this quarter's strong performance and our outlook for the remainder of 2023. Our outlook assumes a rate scenario that is based on the recent quarter curve, and that we do not see an acceleration of prepayment speeds related to changes in the Federal Student Loan programs. As we continue to conduct the in-depth reviews that Dave mentioned in his remarks, I'd like to thank team Navient for their continued dedication and commitment to increasing value for all stakeholders. Thank you for your time. Now we'll open the call for questions.

Thank you. Our first question comes from Bill Ryan with Seaport Research Partners. Your line is now open.

Good morning. Thank you for taking my questions and welcome, Dave. I understand that you are not ready to discuss the individual lines of business and potential focuses, but could you address cash flows and your commitment to capital returns? My question pertains to EPS, which has been relatively stable over the past few years. Given the initiatives you're considering, should we anticipate any directional changes in EPS? I believe next year marks a revenue inflection point where recurring businesses may grow faster than the run-off. However, I am curious about your perspective on EPS in this context. Thank you.

Sure. So thanks, Bill. I'll take that one just in terms of guidance. And obviously, we're not yet providing 2024 guidance here, but as we think of the BPS business long-term, historically, we've thought of those non-pandemic-related services that business growing at about 10% a year in terms of organic growth, that's certainly the target that we look to achieve from a growth perspective. They're far exceeding that so far throughout this year. But with that 10% growth, we're also focused on high-teens margin. So how I would think about next year for 2024 is that we'll continue to target that 10% at those high-teens EBITDA margin levels, and then you can translate that to your EPS assumptions.

Okay, and one quick follow-up. If you could talk maybe a little about the competitive landscape here in-school originations. Obviously, you're kind of early on in the peak origination quarter. If you could talk about how Navient's product offering is being received in the marketplace? And do you still expect originations to roughly double this year?

So nice to meet you, Bill. Thanks for your question. And, look we feel, it's too early in the season to make a call on loan originations, as I'm sure you know with the third quarter being the peak season. We feel really good about the products that we're offering through the Earnest subsidiary. We're focused on being very disciplined about the margins and returns we hope to achieve on that. And we'll certainly be ready to give you a more robust update in the third quarter on volumes, but just in the call, but we feel really good about the products we're offering and the distribution channels that we have. The team at Earnest is very focused on providing our customers with a simple experience, and they have received some great reviews. I think it's a wait-and-see on in-school for this year. It's a little too early to make a call on that.

Okay, thanks for taking my questions.

You bet.

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

Yes, hi. Thanks for taking my questions, and Dave, congratulations on the new role. Just maybe to start on the comment that Joe made on, you don't expect any meaningful benefit to refi volumes as student loan repayments get going later this year. Another big lender in this space has been making some noise and saying that there's a ramp coming and they're pitching that borrowers are going to be refinancing into these longer-term loans as they look to lower their monthly payment. I'm just curious, is this something that you're not expecting or expecting? Or are there any differences in your approach to the market that are more idiosyncratic that we should be aware of?

So thanks for the welcome, Jeff, and thanks for the question. Look, as Joe indicated in his remarks, our experience and all of our insight into the market is that it is very much a rate-driven market. And given the fact that interest rates aren't declining, but the Fed may increase them at least one more time here, we don't see the addressable market increasing significantly because of payment pause. And so that's our view of it. We are absolutely open for business. Earnest has again demonstrated capacity to market those loans effectively at scale. We've got the operational and financial flexibility, if there's more demand, but you'll see in our loan forecasts that it was included in the slides that I spoke to, we've not increased that for the full year. So it's a wait-and-see. We're open for business, but we don't see a significant increase in that addressable market until and unless rates begin to decline.

Got it? That's helpful. And I think just one other question for me on the NIM outlook. Just wondering on the SOFR transition away from LIBOR. Are there any impacts we should be thinking about in your asset liability management? And how to think about the trajectory of impacts from here as rates change versus what was happening under the old construct?

No. So that was actually baked into our original guidance that we had provided. So I don't have any changes to the guidance at this point. And we have obviously changed our systems to implement the chain from LIBOR to SOFR, and things are going smoothly at this point.

Okay, got it. Thanks. That's all for me.

Thank you. And next question comes from the line of Rick Shane with JPMorgan. Your line is now open.

Thanks for taking my questions this morning. And we really appreciate the additional slides and the change in the way that you guys are providing guidance is helpful. I wanted to talk a little bit about the consumer lending segment, maybe private student lending. Two things, first, when we look at Slide 5, I'm assuming that the growth in cash flows over the next three years is just a reflection of in-school loans going to repayment and that's why we see the spike in '26, and then it starts to sort of decay as you would expect with the prepayment speeds.

So actually, there are no originations projected in those cash flow slides. So you do not get the benefit of the future originations. It's actually a cut-off as at June 30, with one portfolio out. But it is a good call-out in terms of the increase that actually has to do with certain financings that are taking place in those outer years. As you know, Rick, we have various repurchase facilities that we use to find existing trusts and then borrow against that over-collateralization. So what this reflects is calling those trusts at that time and refinancing them into more traditional securitizations after paying down that debt. So it is an increase, but it has to do with the way we finance today versus new originations.

Sure. Thank you. That's really helpful. And David, I apologize. Welcome. I wanted to ask you a question related to the segment as well. As you're conducting your strategic review, if you were going to go out and create a bank today, it would look very different than the way you created a bank even a decade or two decades ago. If you think about re-entering the private student lending market and growing market share there, what do you see strategically that you will do different than perhaps the way the business was done a decade ago? Was it about chasing preferred lenders' lists or is it more about direct marketing and online? How does that business evolve if you were to create it in 2023?

Thank you for the welcome, Rick, and for your feedback on the slides. We appreciate the opportunity to provide clear and helpful information. In Consumer Lending, we can highlight what we are currently doing, especially with Earnest, which aims to deliver a predominantly digital experience for customers from the start. It's designed to be straightforward. Many financial products tend to lose a significant number of potential customers at the initial engagement due to the need for information that isn’t easily accessible. Our focus has been on ensuring simplicity at the point of sale. It's evident that we do not need to be a bank to maintain that simplicity. Regarding our financial structure, we are confident in our ability to utilize cost-effective sources of capital to fund our loans. Navient has a solid record of navigating various market conditions. I can attest that our team excels at accessing capital efficiently to manage interest rates and other financial risks associated with these loans. Our emphasis is on simplifying the point of sale, introducing innovative products, whether they are driven by weight or payment, and having robust financial resources to back our business. We are satisfied with what we have today and will continue seeking ways to improve across all our businesses. We are confident about our foundation of assets and capabilities, which position us to compete effectively.

Okay, thank you. And we look forward to hearing what's next.

Thank you. Our next question comes from Sanjay Sakhrani with KBW. Your line is open.

Thanks. Welcome, Dave. Maybe if you could just elaborate a little bit more on the review you're undertaking. I know you mentioned you're in the process. And you're talking to touch a little bit on it before. But I was also just hoping you could elaborate on the philosophy that you might apply versus what was the case before? Obviously, you were on the board as well. So maybe you can just give us a little bit of a lay of land in terms of how we should think about this on a go-forward basis.

Thank you, Sanjay, for your question. I want to highlight the core priorities we've outlined, which are the four key focus areas I'm concentrating on. As you noted, these priorities are not new; they include maximizing cash flows, enhancing growth value, simplifying operations, and returning capital to shareholders while ensuring strong balance sheet growth. A change in leadership often provides a fresh perspective, allowing for a broader view of these imperatives. I believe these four focus areas are appropriate for the company and are unlikely to change. However, new leadership typically approaches matters differently. I have been tasked by the board to explore options with an open mind and consider everything. It's premature to make specific proposals, but I did share some preliminary thoughts. The company has experienced significant changes, such as acquiring the Business Processing segment, resuming loan origination as seen in the Sallie Mae era, and exiting the educational servicing contract, which has notably altered our loan servicing scope. I emphasized the importance of aligning our operational scale with our current and future business needs. Additionally, I discussed the necessity of variable expenses, which is crucial whether we're growing or facing declines in certain areas, like FFELP revenue. Our history shows we can adapt; for instance, we sold our servicing platform a couple of years ago, transforming a fixed expense into a more flexible expense model. This example illustrates our approach, and we will seek more opportunities for similar initiatives.

Got it. And I guess along those same lines, you know that CFPB litigation is still sort of looming out there. I'm just curious where we're at how amenable you might be to have a different outcome in some ways in terms of the process. I mean, maybe you can update us on that as well.

Sure. So, as you know, both parties filed motions for summary judgments in May of 2020. Those motions have been briefed. No trial or hearing date has been set for those motions. We feel really confident about the strength of our case. But having said that, I think we are certainly open and we'd like to find a solution that's acceptable to all parties that would put the matter behind us.

Okay. Great, thank you.

Thank you. Our next question comes from Courtney Bahlman with Barclays. Your line is open.

Hi, thanks for the question. And welcome, David. Just a really quick one for me. Most of my questions have already been answered. I apologize if I missed, but is there any change to the way that you all are thinking about bond repurchases or liability management exercises in the course of operations here?

Now, there's no change, Courtney. From our perspective, we're in a very good position in terms of our upcoming maturities. We have $1.3 billion of cash on hand, we have the future cash flows coming over the next several quarters that we described in our presentation, as well as $1.4 billion of unencumbered loans and another just over $5 billion of OC that we have the ability to borrow against. So we feel we are in a very good position here to address the upcoming charities. And as I've spoken with you before, there are opportunities to get those bonds at a discount; we certainly evaluate that, but there just haven't been as many opportunities recently.

Understood, easy enough. Thank you.

Thank you.

Thank you. Our next question is a follow-up from Bill Ryan with Seaport Research Partners. Your line is now open.

Thanks. Just a quick follow-up. There have been some proposals made on changes to IDR and debt forgiveness. What's the process by which those changes would be implemented? Like what kind of timeframe? And second, do you see any potential impact on your portfolio from the changes specifically in the Federal Loan segment?

Sure Bill, so the way I think about just the various programs that have been announced, is that there are over 56 different repayment options available to Federal Student Loan borrowers today. So there are a host of ways to reduce payments to have forgiveness. And I view this as another option that's again, more attractive. So we saw, obviously, pre-payments increase a year ago with the announcement surrounding debt forgiveness. While we would anticipate some level of prepayment activity with another program, at this point, it's just too early to gauge what that would look like. But as I've said in the past, there have been significant opportunities over the years, whether interest rate reductions, debt forgiveness, various IDR programs. And you've just got a very well-seasoned FFELP portfolio at this time. So with each introduction, there's been less and less of an impact.

Okay. And then, what kind of a timeframe are we thinking about if they get implemented as is with a year from now or so?

Yeah, I think that's a tough one to tell. But I think your timeframe is the right way to think about it.

Okay. Thank you.

Welcome.

Thank you. Our next question comes from the line of Giuliano Bologna with Compass Point. Your line is now open.

Good morning. Thanks for taking my questions, and congratulations on the new role. The one question that I would be curious about, and this might be a little bit of a follow-up to what Bill is just touching on, is if you can provide a sense of what percentage of your FFELP book is enrolled in IDR plans currently, just as it is a way to think about how that could flow through to some of the newer kind of forgiveness programs related to IDR clients.

Yep. So in terms of IDR programs today, it's extended the overall portfolio. It's about 35% of borrowers and 45% of balances.

It's very helpful. Then I realized a lot of these questions have been asked in many different forms. But I'd be curious, when you think about the opportunities in the review process, do you think there's a greater emphasis on figuring out ways to optimize the cost structure or on the other side, is there a greater focus on trying to figure out new growth verticals for the different businesses? Or is it kind of all-inclusive just trying to get a sense of if you can enhance focus on growth versus cost-cutting or vice versa?

Thank you for the question. At this stage, our approach is quite broad. It certainly involves improving efficiency by analyzing our operating expenses and the scale of our operations in detail. We aim to make as many expenses variable as possible. Additionally, we want to enhance the value of our growth businesses. Increasing the free cash flows from our portfolios is part of that strategy, as it allows us more flexibility to invest in these growth areas and return capital to shareholders. Our initial focus is on finding ways to boost those free cash flows, and once we achieve that, we will outline how we intend to use those funds. However, it is too early to prioritize one approach over the other at this time.

That's helpful. I have one quick follow-up on that topic. Obviously, the funding position was strong, and we have a great capital and cash flow structure. I'm curious if you are considering mergers and acquisitions for asset manufacturing platforms, or if you believe you currently have sufficient internal asset growth platforms or the capability to build them internally.

I would say two things. First, everything is being considered. However, we feel very confident about our ability to originate private education finance loans. Earnest has shown, especially in the low-rate environment, the capability to effectively originate refinancing and education finance loans at scale, which has satisfied customers and provided strong returns for our shareholders. We believe that our platform still has more potential. Overall, we feel good about our current position. While we are open to all options, I am quite comfortable with our current ability to scale the origination of private education loans.

That's great. Well, thank you so much for taking my questions. And I will jump back in the queue.

Thanks.

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

Thank you, Shannon. We'd like to thank everyone for joining us on today's call. Please contact me if you have any follow-up questions. This concludes today's call.

This concludes today's conference call. Thank you for participating. You may now disconnect.