Good day and thank you for standing by. Welcome to the Navient Strategy Update and Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jen Earyes, Vice President, Investor Relations. Please go ahead.

Hello, good morning and welcome to Navient's earnings call for the fourth quarter of 2023. With me today are David Yowan, Navient's CEO; Edward Bramson, Vice Chair of the Navient Board of Directors; and Joe Fisher, Navient's, CFO. Navient has a lot to share with you this morning and has posted two separate presentations that will be referred to during this call. Both are available on navient.com/investors. We will refer to a strategy update presentation, which you find posted on our website. Our in-depth review and strategy update discussion may take us past the half-hour. Following this update, Joe will discuss the fourth quarter results and outlook for 2024. He will refer to the fourth quarter 2023 presentation, which you will also find posted on navient.com/investors. After the prepared remarks, we will open the call up for questions. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements and other information about our business that is based on management's current expectations as of the date of this presentation. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to those factors in the discussion of them on the company's Form 10-K and other filings to the SEC. During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio and various other non-GAAP financial measures that are derived from core earnings. Our GAAP results description of our non-GAAP financial measures and a reconciliation of core earnings to GAAP results can be found beginning on page 18 of Navient's fourth quarter 2023 earnings release, which is posted on our website. Thank you. And now I will turn the call over to Dave.

Thanks, Jen, good morning, everyone. Thank you for joining the call and for your interest in Navient. As you know, the Board and management began an in-depth review of our business a few months ago. It's been a rigorous and comprehensive process. I've asked Ed Bramson, Vice Chair of the Navient Board to join me this morning. Ed and I will describe the steps we're taking, the rationale and objectives and what they mean for Navient. After that, Joe will share our Q4 results and 2024 outlook. We will then open it up for Q&A. There are three actions that we're taking coming out of our in-depth review; outsourcing loan servicing, exploring strategic options for BPS, and reshaping our shared service infrastructure and corporate footprint. At a high-level and in the near-term, these actions are intended to simplify our business, reduce our expense base and increase our financial and operating flexibility. Over the long-term, we believe these actions will increase the value shareholders derived from our loan portfolios and the returns we can achieve on our business-building investments. Let me turn to slide two of our strategy update. In May 2023, the executive team and the Board launched an in-depth review of our business to ensure we're on the right path for success and value-creation. This review is confirmed the changes are necessary for Navient to deliver its full value and potential. Our review included an extensive and intensive analysis of costs. We focused on the size, purpose and allocation of all costs by business unit and shared service activities like IT, as well as unallocated costs within our Corporate Other segment. At the same time, we sought to benchmark and compare our costs of important activities including loan servicing to the cost of third-party providers. We analyzed our projected…

Thank you, David. I think one of the things that David has spoken about that we're actually doing are relatively clear. But what we thought might be helpful today is that for the last 8, 9, 10 years, Navient has been in a steady state. You can predict more or less what it's going to do. And starting in 2025, it's going to be steady state again. So in the coming year is sort of transitional and you could think about it as a turnaround here. And the firm that I'm with invests principally in turnarounds, so we thought it might be helpful to provide some perspective on not just what we're doing, but why we're doing it. And David asked me, I think the word he actually used was delegated me to take you through it from that perspective. So starting on page three, you could obviously say, well, why would the Board look at doing this now as opposed to in the future or having done it in the past. And if you look at the first bullet, it basically says that the share price since the spin-off in 2014 has gone down a little bit. It's not the worst you've ever seen. But I think the Board concluded that it's not a tremendous return for 10 years' work. So the question is, what do you do about it? And as David said, the first step was to do a really solid review of costs. And that project, and I've been involved in quite a few of these turnaround situations was one of the best interactions between Board and management that I've ever seen. So this is a unified approach, and I think it's very well done. The basic issue it had to address is if you think…

Great. Thanks, Ed. So turning to page 18, let me provide a brief review of our BPS businesses. These businesses operate in two distinct markets with separate operations. Several of the businesses within this group were acquisitions. Our Healthcare business goes to market under the Xtend brand. Xtend offers revenue cycle management services to health care providers and is relatively independent from the rest of Navient from an operational perspective. The government services and transportation businesses operate under several brands and provide a variety of services to federal, state and local governments, its operations share costs, infrastructure and corporate support with the rest of Navient, particularly loan servicing. While we're at an early stage in exploring strategic options for this business, we will keep you updated as that process unfolds. Let me try to summarize on slide 19. We have identified and we're taking steps to significantly reduce the expense base and simplify the company. These actions are designed to increase the value of the cash flows from our loan portfolios and increase the returns and transparency around growth initiatives. The cash we have on hand, the enhanced cash flows from our loan portfolios and the proceeds of any divestiture of BPS combined could generate significant cash flows in excess of our current market cap over the next few years. We will invest that cash in activities that are expected to generate market value in excess of the invested cash. Excess cash will be distributed to shareholders. Shortly following my transition from the Board to the role of CEO, I shared with you my initial impressions from inside the company, namely that Navient has a strong foundation of assets, capabilities and talent. I also said that we would undertake a rigorous review to identify ways in which that foundation can deliver more to shareholders. These actions are the first steps in delivering our full value and potential, and we look forward to providing updates on our progress. With that, I will now turn it over to Joe to review our Q4 results and provide our 2024 outlook.

Thank you, David, Ed and everyone on today's call for your interest in Navient. During my prepared remarks, I will review the fourth quarter and full year results for 2023. I will also provide more detailed guidance underlying our 2024 outlook for earnings per share of $2.10 to $2.30. Our 2024 outlook does not assume any of the strategic actions that we are announcing. It does not include potential benefits from the transition of servicing, any potential divestitures or any restructuring expenses related to these initiatives. This outlook also assumes a declining rate environment with four rate cuts. We will update our financial outlook throughout the year as these actions become clear. In 2023, we reported a fourth quarter GAAP EPS loss of $0.25, bringing our full year GAAP EPS to $1.85. On a core basis, we delivered fourth quarter EPS of $0.21 and full year EPS of $2.45. The $0.21 includes a $0.49 reduction to EPS related to significant items in the quarter. Before I move on to the segments, I will provide further detail on two of these items. First, we have increased our accrual by $28 million in connection with the CFPB litigation bringing our total accrual to $73 million. We remain confident about the strength of our case, while open to finding a solution that is acceptable to all stakeholders in order to put this matter behind us. Second, in our private credit provision this quarter, we reserved $35 million due to internal policy changes we've made to meet new regulatory expectations related to school misconduct discharges on certain legacy private loans. This increase reflects our assessment of the impact to the legacy portfolios, life of loan discharges from potential borrower claims. I'll now provide additional detail by segment, beginning with Federal Education Loans on slide…

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. [Operator Instructions] And our first question comes from the line of 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 kind of the net financial impact of these three major steps you talked about. I mean the $400 million of expense saves are obviously pretty significant. But I believe it's less than kind of the consensus expectations for BPS revenue as we look out to 2025. So how should we think about kind of the net impact to earnings? And also how much incremental capital you may free up either through the sale of BPS to kind of offset any kind of potential earnings dilution?

Mark, thanks for the question. First, let me clarify the scenario that we're using when we refer to the $400 million of expenses. So the scenario assumes that we have completed our outsourcing transaction, the one that we announced this morning. We have divested BPS in its entirety, and we have taken the steps to reduce our shared service footprint and our corporate footprint to reflect those two transactions. So that's the scenario that underlies it. When you think about the financials of that, you might start with BPS and look at our 2023 actuals to calibrate this. During 2023, we had roughly $325 million worth of revenue in BPS, and we had $280 million worth of expenses. So either of those would be present under this scenario. Our servicing expenses would no longer be present. The first-party servicing expenses that we incur today with no longer be present as well. Our shared service expenses, many of those shared between loan servicing and BPS would no longer be present as well as a smaller corporate footprint would mean that our operating expenses would be lower under that scenario. Now we have to add back the fact that we would now pay our outsourced vendors for servicing our loan portfolio. So you bucket all those things together and the cumulative impact on operating expenses is a reduction of $400 million with a revenue decline of $325 million. That's how it would impact in 2023 actuals. Now it's important to note that when we talk about finalizing these actions in 2024, what we're talking about is becoming more certain about what that scenario actually is. We have -- we're further along in the outsourcing process. And so we have more confidence and more visibility, not perfect yet, but we have more confidence…

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

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

Okay. Great. Thank you.

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

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

So thanks for the question, Arren. I think a couple of things I'd call you to. First, I go back to Ed's remarks and the way we're thinking about Earnest in terms of not just a lend-centric or lend-first model, but a way to establish relationships and engagement with the student cohort that I think sets us up and gives us some optionality going forward to decide whether there's other product lines or other services that we can provide to that cohort. I would also point out that our -- the loan origination targets that Joe described for Earnest do represent a 40% growth on a combined basis, refi and SLO compared to our actuals for 2023. So I think that's a significant growth rate and a demonstration of our confidence and commitment and our ability to compete effectively in those markets while focusing on our overall efficiency in creating those assets. That's really the goal that we have is to continue to minimize and optimize our cost of acquisition, our collection costs by selecting the right customer segments that allow us to continue to grow on that financial trajectory that we shared, I think, for the first time here this morning.

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, right? One is the CFPB matter is just additional accrual based on the developments in the case, the litigation in the quarter, just like last quarter, we won't comment on the development of those. So that's what the $28 million is.

Okay. All right. Thank you.

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 kind of maintaining above an 8% TCE ratio. Could you talk about, number one, how much share repurchases in your '24 guidance? And how you think about the impacts of this plan on TCE, whether they are charges that you might have to take to get out of expenses and contracts and other things and severance and other things like that and any other kind of things that might impact during '24.

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

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. But our goal is to minimize the expenses associated with that. And certainly, the valuation is going to be a determinant event, and we're going to look to maximize the value of these transactions, and that's going to be -- play a big role in determining obviously any capital implications going forward.

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

Yes, I mean, I'm assuming they all don't average.

Yes. So ultimately, it does vary contract by contract. I think if you look at some publicly traded companies, typically, health care does earn a higher -- certainly higher multiple and has higher EBITDA margins than those related to federal contracts. So it does vary contract by contract. And what you've seen over the last several years is that we've actually exited a number of our lower-margin contracts, which has contributed to the growth that we've seen and the benefits that we received in the EBITDA margin. So while full year was 12%, we ended this year at 15% for the quarter and guidance is for the high teens for next year. And as you can see in our presentation, if you look back in the appendix, there's about a 10% revenue growth implied in that as well as achieving the margins that we're laying out. So ultimately, I think just if you look at this business, it's a very attractive business that we historically have just not received the multiple that you see others getting in this space. And so that's one of the things that we're looking at here and certainly a driver of our -- one of the drivers of our decisions.

Okay. Thanks.

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 kind of outlined your commitment to Earnest and adding some new products, details somewhat forthcoming. But thinking about the sale of BPS and adding the products and services to Earnest, our acquisitions or bolt-on acquisitions and the thought process of maybe using some of the proceeds from BPS.

This is Dave. Thanks for the question. Look, I think it's too soon in the process to talk about that. Again, the strategy that Ernest has had and will continue to execute against this year is to continue to build engagement with students through the financial counseling platform. That includes things like, for example, student loan manager, which is a capability that helps students that have federal loans to determine what the best payment and refinancing options are for them. At the same time, we'll be, as I just indicated, growing our loan originations by almost 40% this year, while we're looking at the different product lines, et cetera, that we might be able to build off that engaged user base when we find a set of products and services that we think we can offer. There's a variety of ways that we might do that. It could be through acquisition, it could be through an organic build, it could be through affiliates. I think you've seen all those models work in financial services. And I would say all those things would be on the table if we go down that route.

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

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

Okay. Thank you for that color.

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

Yes. Thanks, Sanjay. Good morning. So there's a couple of pieces to that. I'd say I just -- one piece is just the financial implications of the three strategic actions that we took that I ran through the financials a bit earlier, so I'd call you back to that. That clearly in that scenario, reduces expenses by more than the revenue that would no longer be present in the company. I think the second thing is that moving to a variable servicing model has some pretty powerful leverage for us relative to where we are today. We don't project for you our servicing costs out over the remaining life of the loan. But I think you can think about that in terms of we have a fixed cost base and we have a variable cost base. And so as loans pay off and the portfolio amortizes as it has done on a net basis for all but one year in Navient's history, when we originated $6 billion of refi loans in 2019. So in that amortizing scenario, you've seen the variable costs come out as the loan count goes down. But at some point, that fixed cost base doesn't go down as rapidly as the loan count going down. And so the variable cost model, we think produces significant not just operational flexibility, but significant substantial financial benefits as and if the loan portfolio continues to amortize that's very different than the model that we have today. And I think the third piece is just the financing piece and the cost of that, both unsecured and secured liabilities and we have -- the team has done a terrific job over the years of optimizing and reducing that. We think there are some other opportunities that give us some optionality and flexibility that we're going to be looking at over the coming months. So I think those are the three buckets. It's largely reducing the corporate footprint in the business profile that is slimmer and leaner. That includes a corporate expense reduction. It's the moving to a variable cost model and then reducing our cost of financing as well. Those are the three levers that we have.

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

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

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

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

All right. Thank you.

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

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

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

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

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

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

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 very disciplined about returning those cash flows to investors, to stakeholders. Again, very consistent with what we've seen over the last five or six years. At the end of the day, you guys are just still kind of squeezing the same fruit tighter and tighter. Where is the growth going to come from? We hear about Earnest. We hear about the in-school initiatives. But again, that seems to be a pretty big opportunity given you've seen two of the largest players exit in the last three years. The market share objectives to 10% growth are pretty modest. Why not be more aggressive there? Or where are the other opportunities to actually start driving top line again?

Thanks, Rick, for the question. I think I could back to -- while we have done -- I think the team has done a good job of managing the expenses over time in a shrinking portfolio environment. What we're trying to communicate today is that there's a lot more work that these three actions are designed to address. And it's not just about expense reduction, but as Ed indicated, that overhead, if you will, in a broad sense, the shared service functions, the corporate overhead and our cost of equity all conspire to make growth initiatives more challenged than they need to be, right? Because the portfolio is shrinking. If we don't get rid of those central costs, then they get allocated growth initiatives that burdens them in a way that doesn't allow them to reach their full potential or give us the capacity to make them. So the first thing we're going to -- what we're trying to accomplish is actually to unburden the growth initiatives but also at the same time and in the same way, increases our capacity to invest by increasing the amount of legacy loan cash flows that we have a decision to make a capital allocation decision to make about return and otherwise. With respect to the Earnest growth proposition, I think, we tried to lay out what Earnest has accomplished over the last three or four years. I think that's impressive from a financial perspective. The brand health is a good indication that Earnest has found a way to surprise and delight the customers that it engages with and a customer experience. I know that Ed indicated this, my experience in financial services, that's a really hard thing to do, and they've accomplished that. That's a really good foundation for us to think about how we can take those relationships and that positive brand attribute that Earnest has, which does not exist in the Navient brand and see what opportunities we have to grow off of that. And that's more to come on that. We're not ready to share that with you today. But that's the foundation that we see for growth in Earnest.

Got it. Look, the track record at Earnest has been very good. And obviously, the movement in rates has been a headwind, but that's I mean that's beyond your control. I think in hindsight, that's proven to be a very thoughtful investment and ultimately will create value. What I'm hearing is there's a chicken and egg problem, which is that the cost of capital makes it in the high hurdle rate makes investing in growth on attractive, but because there's no growth, I think the cost of capital is elevated. You guys, in your slides link the multiple compression to the decline of efficiency. And I think that, that's a very fair conclusion, but I would suggest also that the decline in multiple is really a reflection of top line shrinking almost every year for the past decade. And I do wonder if there is some opportunity to break that paradigm that it might be painful in the short-term to invest. And by the way, I think if we think about the history of Earnest in that acquisition, there was disappointment at the time in that investment, but it has manifested into something that's valuable. Is it time to break the paradigm again?

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

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

Thank you

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 and you don't -- I know this is a revenue number. Just trying to understand how to think about the profitability of the business over a cycle, where you think kind of the core returns or return on equity could be for that business over the longer term? Because as you lean into originations later this year, presumably next year, that does come with that higher CECL reserve charge at first, and it sounds like you're going to be building out and adding on some products, which probably first will cost some money. So just trying to think through what you think the profitability metrics and returns are for that business.

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

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

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

Got it. Thank you for taking my questions.

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

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