Navient Corp Q4 FY2023 Earnings Call

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. 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.

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 will 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.

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 derive 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 has confirmed 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 costs 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 involve 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 to 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.

Thank you, David. I think one of the things that David has spoken about that we're actually doing is 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 the coming year is sort of transitional, and you could think about it as a turnaround here. 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. 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. 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. What it 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. 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. The intention was not to replace them, as they were intended to run off. The intention was to do other things with them. We have made some efforts in that regard. We've actually generated about $9 billion of new loans. 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. 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. 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. 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. During the period, 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. 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. As you perhaps know, we've bought back since the spin-off about 75% of our original shares outstanding. That program did what it was intended to do, which essentially was to maintain earnings per share. 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 it was 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. 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. With the joint project and board management done, what are the immediate priorities? The first one is obviously to get your operating expenses down. There are two elements to that. The obvious one is that the loan portfolio is, by and large, with one exception, not designed to be replaced. Every dollar spent on overhead 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. In an allocated environment, as the legacy businesses shrink, their allocated costs get reallocated to new businesses, which can't afford them. So that needs to be dealt with. Also, if you accept that we're going to have a tremendous amount of cash relative to our market cap over the next two or three years, it needs to be disciplined on how to think about it. For example, if we take $100 of cash and we put it into an investment, at a 10% return, that's $10. At our current multiple, that means a market value of $70 for the $100 you put in. That's not viable; you can't do that. You either have to return that money or come up with something better. Where it leaves you today is you need to make about a 15% return on equity to justify doing anything. If you do, it’s sort of a wash. On page eight, as David said and I think I said at the beginning, this is a strategy update, how to think about strategy, it's not the strategy. The strategy is going to be driven by what you have to work with. The major components of the business include the loan portfolios, a large amount of unrestricted cash, and two operating segments. We have Earnest and we have BPS. If you go to page nine, this is the loan portfolio. The first piece of the portfolio is our loan assets. 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, almost all the loans that we have are securitized. They reside in trust against which those trusts have incurred borrowing. The real economic interest we have in the loan portfolio is what we get from those securitization trust, 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. 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 trusts over time as we speak, about half of that looking like it comes in over the next five years. It does cost some money to get from there to what shareholders receive. 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 those areas. I think Dave is already lining out for you what they are in servicing and corporate overhead. The objective here is to give you a realistic view of what these things are worth. We need to be able to give you all the data which we don't have yet. Hopefully, by the end of the year, we'll be able to line all of that out. David covered the outsourcing. I want to briefly say 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. Surprisingly, and this is a real compliment to the management team, when you benchmark it, our servicing costs are very competitive today. The problem, as David said, is as the base shrinks, they're going to get less competitive. 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 outsourcing 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're competitive, but as the portfolio shrinks, the benefits become very large by making it variable. That's the loan portfolio. On page 12, there's another item on restricted cash. The way to look at this is it's not part of the loan portfolios, but it goes with it. 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 we have coming up periodically. 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 belongs to the shareholders. 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 we have in addition to cash, it’s more like $10 a share. So if you think about that and 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 have cash available for distributions or investments that's actually in the next few years equal to more than our entire market cap. Obviously, the key to the situation is to do that wisely. If you go to page 13, I think from what I said earlier, it's obvious in which circumstances you would return cash to shareholders. Here’s an example of some things going on at Navient under the hood that perhaps aren’t well highlighted. I'll take Earnest. Earnest is something we bought five years ago or so. But the point is, it’s a new brand to Navient. It’s customer-focused and designed to focus on relationships. A relationship causes a customer to come back for another product after he got the first work. The reason you want that is it enables you to build attractive lifetime economics with customers. In that sense, it’s distinct from the Navient brand. There’s nothing wrong with the Navient brand, but it’s a servicing brand. 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. It’s not the right brand to build a business in the future. Earnest has been going for a while, is now running at a bit less than $200 million a year in 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. What we have today is a lending business which has generated essentially all our new loans in recent years and is highly efficient. We have about $9 billion of loans here. It’s also now quite profitable. 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. There’s another part of our industry which we’re calling a financial counseling platform. What it does is it enables us to address a much broader base of customers than we have today to build our relationships for the future and also to develop data for the sorts of things you might do next. The management team at Earnest is quite a bit younger than some of the other management at Navient. They have resisted some pressure to monetize this business too soon. So it generates a little bit of revenue. The way to think about it is it's all paid for within Earnest's operating budget. We’re trying to target a specific kind of customer 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. If you look at these attributes, what we find is that Earnest and its dealings with people is perceived as being fair, ethical, and reliable. What is not perceived as is being aggressive or arrogant. 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. On the lending side, the principal thing it does is graduate loan refinancing at the moment. It pays the rent. The reason that's good is it aligns with the sorts of customers you want to get. It’s also now quite profitable, making about $80 million pre-tax today. There’s a financial counseling platform that has grown fourfold, and you have almost 2 million users. Earnest has probably 150,000 customers. That means multiples of people we have relationships with above those we currently lend to today. The reason that’s important is that there may be future customers. We’re looking at product loan extensions. The most economical and least risky way of doing that is to test those things, do research, try them out rather than commit hundreds of millions and find out it was a bad idea. The management at Earnest is successfully targeting affluent customers, spending less money to attract those customers, and incurring lower losses. If you look at Earnest from 2023 to the end of last year, its revenue increased about $125 million. Its marketing expenses went up, but the operating expenses only went up by about $15 million. The ratio is a little better than 8 to 1 and it actually gets better as we grow. This looks like a classic example of online growth business economics. So it's something you will want to find a way to expand. 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. I’m going to turn it back to David.

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 these businesses within this group were acquisitions. Our Healthcare business goes to market under the Xtend brand. Xtend offers revenue cycle management services to healthcare 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 summarize on slide 19. We have identified and we are taking steps to significantly reduce the expense base and simplify the company. These actions are designed to increase the value of the cash flows from our loan portfolios and increase the returns and transparency around growth initiatives. The cash we have on hand, the enhanced cash flows from our loan portfolios, and the proceeds of any divestiture of BPS combined could generate significant cash flows in excess of our current market 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.

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 on 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 net interest margin 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 net interest margin to decline to the low 70s for 2024 due to our interest rate outlook of four cuts this year. Falling interest rate environments create NIM pressure as our FFELP assets reprice 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 net interest margin 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 in income-based repayment plans increased 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 net interest margin will be in the low 300s for 2024. This includes projected new refinance 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 refinance 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 for EBITDA margins for 2024. Turning to our capital allocation and financing activity 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.

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.

Thank you. We will now open the call for questions. Our first question comes from Mark DeVries from Deutsche Bank. Your line is now open.

Yes. Thank you. I was hoping you could give us a little better sense 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 the net impact to earnings? And also how much incremental capital you may free up either through the sale of BPS to offset any potential earnings dilution?

Thank you for the question, Mark. To clarify our discussion about the $400 million in expenses, this assumes we have completed the outsourcing transaction announced this morning and fully divested BPS. We will have taken necessary steps to reduce our shared service and corporate footprints to align with these changes. In terms of the financials, you can look at BPS and our 2023 actuals for context. In 2023, we generated approximately $325 million in revenue from BPS and incurred about $280 million in expenses. Under this scenario, our servicing expenses will be eliminated, as will the first-party servicing costs we currently incur. Additionally, many shared service expenses attributed to loan servicing and BPS will not be present, and with a smaller corporate model, our operating expenses will be reduced. However, we will need to factor in costs to pay outsourced vendors who will service our loan portfolio. Considering all these aspects, the overall impact on operating expenses results in a $400 million reduction alongside a $325 million decline in revenue. Looking ahead to 2024, we aim to finalize these actions, gaining more certainty regarding the scenario. We are progressing with the outsourcing process, which gives us greater confidence and visibility into what we can expect for 2024. Updates will be provided as we assess the divestiture of BPS and whether we will sell all of it or a portion. The timing and nature of the shared service and corporate footprint reductions will depend on these initial transactions. For example, if we don't divest all of BPS, we may face additional stranded costs compared to a complete sale. We also need to consider the specifics of the transactions we pursue, including sale proceeds from BPS. As we move into the latter half of the year, we aim to provide better visibility regarding the scenario, timing, and any transition items necessary to achieve our goals. I hope this answers your question, Mark.

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? Is it also possible to hold on to health care just given it doesn't have, as you mentioned, more self-contained? It doesn't share the same kind of corporate expense.

I believe you're thinking about this in the same way we are, Mark. I addressed this in my comments. The timing of BPS and our choice to explore strategic options is connected to our decision to outsource since we have a substantial shared service infrastructure. It makes sense to evaluate these decisions as closely together as possible. While I wouldn't say it's crucial, the timing is favorable for us. Additionally, as you pointed out, there are various uses and different dependencies on that shared service infrastructure even within our BPS businesses. We will certainly take that into consideration as we decide on the approach we will take for that specific business.

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

Thanks. Just thinking about it from a high-level perspective, if you exit BPS and 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?

So thanks for the question, Arren. 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 are other product lines or other services that we can provide to that cohort. I would also point out that our 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 to compete effectively in those markets while focusing on our overall efficiency in creating those assets. That's the goal 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've shared.

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.

Yes. So there's two matters. 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.

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.

Great. Dave, you talked a lot about cash that's available. But you also talked about 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.

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 the adjusted tangible equity ratio which we believe will be above 8%. As you know, the biggest driver of that ratio is just a success in refinancing and in-school as we hold 5% capital on the refi book and 10% for our in-school loans. That's going to be the biggest determinant of how far above or really above that 8% range that we end up. 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.

And then Joe in terms of, sorry, go ahead.

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. Our goal is to minimize the expenses associated with that. 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 play a big role in determining the capital implications going forward.

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.

Sure. Just to make sure I'm capturing your question. Just the range of EBITDA within the various sectors, whether it's healthcare, government services, and contracts is what you're asking? Yes, it varies contract by contract. If you look at some publicly traded companies, typically healthcare earns a higher multiple and has higher EBITDA margins than those related to federal contracts. It does vary contract by contract. 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 we've seen and the benefits received in the EBITDA margin. While full year was 12%, we ended this year at 15% for the quarter and guidance is for high teens for next year. Just if you look at this business, it's a very attractive business that we historically have just not received the multiple you see others getting in this space.

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.

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 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, are acquisitions or bolt-on acquisitions and the thought process of maybe using some of the proceeds from BPS.

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 Earnest 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 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.

Okay. And one follow-up just on the FFELP margin guide. I know that the floor income contracts are running off, etc., and the interest rate environment is going to be a little 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?

So it's going to be lower in the second half of '24 due to margin pressure. Based on the four cut scenario we're projecting, we estimate that this pressure contributes about 10 basis points throughout the year, most significantly in the second half, as those rate objectives are realized early in the first half of the year. We should start seeing that impact from the floor component early in the first quarter, and there has already been a five-basis-point contribution this quarter compared to last quarter due to the floors rolling off. This will increase to about 15 basis points as we enter the first quarter.

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

Thank you. Good morning. 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. 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 can 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.

Yes. Thanks, Sanjay. Good morning. There are a couple of pieces to that. I'd say one piece is just the financial implications of the three strategic actions that we took that I ran through the financials a bit earlier. This clearly in that scenario reduces expenses by more than the revenue that would no longer be present in the company. The second thing is that moving to a variable servicing model has some 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 think about that in terms of we have a fixed cost base and we have a variable cost base. 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. In that amortizing scenario, you've seen the variable costs come out as the loan count goes down. But at some point, the fixed cost base doesn't go down as rapidly as the loan count going down. The variable cost model, we think produces significant not just operational flexibility but substantial financial benefits as and if the loan portfolio continues to amortize that's very different than the model that we have today. The third piece is just the financing piece and the cost of that, both unsecured and secured liabilities. 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 looking at over the coming months. Those are the three buckets. It's largely about reducing the corporate footprint in the business profile that is slimmer and leaner. That includes a corporate expense reduction. It's about moving to a variable cost model and reducing our cost of financing as well. Those are the three levers we have.

That's very helpful. I have a follow-up question regarding BPS. I understand some questions have already been raised. When considering preliminary indications of interest, can you provide any insights into the potential valuation of that business? It seems that, as Joe mentioned, it could be valued higher than what is currently reflected in your stock valuation. Are there any details we should consider regarding this?

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 healthcare RCM side as well as government services, BPS and then just more diversified BPO businesses, all receiving a higher multiple than what we've received today.

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

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% as we combine refi and in-school. We're certainly very committed to growing this business.

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

Good morning, guys. Thanks for the update and for taking my question. One point of clarification, David, you mentioned, I think it's $400 million of identified potential cost saves that would come with $325 million that’s 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?

Thank you for your question. When we refer to net, we mean it takes into account the payments we would need to make to an outsourced provider for servicing our loans. Therefore, it is included. The expense reduction reflects what we would pay to that provider. The figures we are using are based on actuals from 2023. If you consider that scenario for 2023, that's where we derived the volumes and amounts we have shared with you.

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?

I believe that if rate cuts occur, particularly if there are more than four, it presents a significant opportunity. Looking ahead to the first quarter, I expect it to be fairly similar to the fourth quarter, with improvement likely in the latter half of the year. In the scenario I have in mind, with overall cuts of 50 to 75 basis points, the impact would be much more pronounced than what we are currently experiencing.

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

Yes. I believe both options are possible. Earnest is focused on consumer needs, and our first step will be to identify unmet needs that we can address. They've effectively demonstrated this, especially in the refinancing space. When considering product line extensions, this could mean adding more lending products as well as fee-generating services. This might involve third-party referrals based on our customer acquisition costs or other types of offerings. We’re currently working on this and have asked for some time to provide an update later in the year on our findings.

Okay. Thanks. Appreciate that. Thank you.

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.

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 disciplined about returning those cash flows to investors. 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?

Thank you for the question. I believe the team has done well managing expenses over time, especially in a shrinking portfolio environment. What we want to convey today is that the three actions we are discussing address much more than just expense reduction. As Ed mentioned, the overhead, including shared services and corporate costs, makes growth initiatives more difficult than necessary, particularly because the portfolio is contracting. If we do not eliminate those central costs, they end up being allocated to growth initiatives, which hinders their full potential and limits our ability to invest in them. Our goal is to relieve the burden on growth initiatives while simultaneously increasing our investment capacity through enhanced legacy loan cash flows that we can decide on regarding returns. Regarding the Earnest growth proposition, we’ve detailed what Earnest has achieved over the past few years, which is impressive financially. The brand health indicates that Earnest has successfully engaged and delighted its customers. From my background in financial services, I understand that this is quite challenging, and they have succeeded. This provides a strong foundation for us to explore how we can leverage those relationships and positive brand characteristics of Earnest, which are not present in the Navient brand, to find growth opportunities. We aren’t ready to share specifics today, but we see significant potential for growth in Earnest.

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.

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? 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.

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.

Jeff, I would encourage you to review slides 16 and 17, as slide 16 discusses the overall efficiency of loan originations in terms of acquisition costs, servicing costs, and reserves. Slide 17 breaks down the marketing expenses, which will vary with our acquisition costs. You can see on page 17 the positive operating leverage that Ed mentioned, stemming from Earnest's distribution model. There will be a temporary increase in marketing and provision expenses due to higher originations; however, we expect to maintain operating leverage on that other line. These originations are creating a revenue stream that will increasingly support additional originations and some of the growth strategies we are discussing.

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.

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. 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 disciplined about returning those cash flows to investors. 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?

Yes. I appreciate the feedback, Rick. As I've said, we recognize the need to create sustained shareholder value and that involves focusing on the key metrics. Our strategy moving forward is about positioning Navient to capitalize on both the current dynamics of the market and our unique assets. While we acknowledge the challenges, we’re determined to navigate through them with strategic actions that drive growth. We believe that initiatives focused on Earnest, our commitment to relationships, and our SaaS developments tie back to the broader growth strategy. Overall, while we recognize the need to be aggressive, our approach is to balance the need for sustainable growth with measured action that reflects the realities of our operational environment.

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.

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? 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.

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.

Jeff, I encourage you to review slides 16 and 17 as they provide insights into the efficiency of loan originations, covering aspects from the cost of acquisition to servicing and reserving. Slide 17 highlights the marketing expenses, which are tied to our cost of acquisition. You will notice the positive operating leverage in Earnest's distribution model mentioned by Ed. Although we are currently experiencing a temporary rise in marketing and provision expenses due to increased originations, we anticipate maintaining operating leverage in that area moving forward.

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

Thanks, Narma. I know that there are remaining questions that we have not been able to deal with this morning. 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.