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Good morning and welcome to the Navient Corporate Reorganization Conference Call. This call is being recorded. Currently all participants are in a listen-only mode. Following the remarks, we will conduct a question and answer session. Instructions will be provided at that time. If anyone should require assistance during the call, please press the star key followed by zero on your telephone keypad. At this time, I will turn the call over to Roger Ian Koop, Navient's Head of Investor Relations. Please go ahead. Good morning. Thank you for joining today's call. With me are Edward Branson, Navient CEO and Chair of the Navient Board of Directors, and Steve Halber, Naviant CFO. After the presentation, we will open up the call to take your questions. During today's call, we will refer to a corporate reorganization presentation, which you can find on Naviant.com slash investors. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements, and other information about our business that is based on management's current expectations as of the date of this presentation. As part of the presentation, we will discuss illustrative financial models and statements related to our legacy and continuing businesses. This discussion is meant for illustrative purposes only and is not intended to be a forecast of future results. Actual results in the future may differ materially from those discussed today due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC. During this conference call, we may also refer to certain non-GAAP financial measures, including core earnings, adjusted tangible equity ratio, and various other non-GAP financial matters derived from core earnings. Listeners can refer to Navient's second quarter earnings release, which is posted on our website, for a complete reconciliation between GAAP net income and core earnings. Thank you, and I will now turn the call over to Ed. Thank You, Roger, and thank you everybody for joining us this morning. So we're going to talk about the presentation that's online about our recent corporate reorganization that we announced yesterday. To provide some context, this was another in a series of strategic moves that we've been making to enable us to increase shareholder value over time. That being the case, I'm not going to go through all of the details of what we've done, which we hope are clear from the disclosures we've made, but I will touch on a few of the strategic aspects as we play through the presentation. So if you go to page three, that new corporate structure. Hopefully what we've done here is pretty clear. I think the salient point, though, is that we now have our two businesses in separate legal entities, both of which are SEC registered and will be filing separate financial statements going forward. So that's the real point I want to make there. If you go to page four, this just sizes, what we're doing at the time of the reorganization. Almost all of the assets that Navier Corporation has are ending up in Navier.LC, which is effectively the successor. We are transferring to our new earnest subsidiary. Basically, at the moment, the intangible assets that relate directly to it, over time, because it's doing servicing and originations, will need some additional working capital. We're not expecting earnest to be carrying loans for extended periods of time. So it will sell those loans to the market or transfer them to management. And so earnest will continue to be relatively capitalized and the capital intensive business for residing management LLC. If you go to page five, the objectives of the structure, we really restarted the regionations in a serious way late in 24, so you didn't see the results until 25. But as a result of that, we're getting an increasing divergence between the legacy business and the continuing business, which we call earnest. And so we think it's to the point now where we need to get a greater differentiation between the two. And capital intensity is only part of the differentiation. As we focus more on earnest, it's managed differently. It has different growth characteristics. And we think it's a good idea to now start to differentiate how we measure business success. So for the legacy business, we're going to be using a number of metrics, but the key one is going to be the availability of cash after unsecured debt service. In earnest, what we're doing, because are building the business over time, the success metric here will be returned on attributable equity. I think the other point to make is that obviously there are arguments to manage valuation or other purposes that these companies should be split entirely. We think there are counter arguments at the moment um that argue for keeping them together so um what the reorganization has done there is in the event that we did decide to make a complete separation a lot of the work that's required to do that has already been done so if you go to page six it's just a an overview of what the differences between the businesses are. So if you look at the legacy business, its portfolio as of June was about $48 billion. Three-quarters of that, or thereabouts, is actually comprised of loans of types that we don't make anymore. And so that's why we refer to those as non-strategic. It's a good loan portfolio, but by its nature, it's shrinking. So when you have a shrinking portfolio, despite the fact that they're constantly reducing expenses, you have negative operating leverage. The other thing is most of the assets in the portfolio are securitized. As the securitisations age, the leverage drops, and so the return on equity also comes down. So it's not that it's a good business, but to run it for return on equity or earnings growth really isn't the right way to do it. So if you look at the second bullet on the page, what this is is basically information that we disclose, I think, every quarter. So in June, you can see how much cash we have. Every quarter, we forecast the expected inflows from our portfolios, net of the trust debt that is secured through security accounts. The new information on the page is the third-party cost of servicing these portfolios over their expected life. As you may remember, back in 2004, we outsourced most of the servicing to a third party in order to variabilize that cost. So at the moment, we're estimating about a $600 million lifetime servicing expense. And I think it's worth saying that had we not outsourced, that number would be a multiple of that. So anyway, the matter of it is, I think that we expect to have coming on for $5 billion of cash after all these items have been paid, but before overhead and before taxes. So, whatever those things turn out to be, I think it's reasonable to expect that there will be several billion of stationary cash available, and that can be used either for growth or for distribution of shareholders. If you go to page seven, I find at present the strategic reason for keeping the businesses together, it is fairly clear that the cash flow from the legacy business is available to fund Ernest as it's really in the early stages of its growth. So looking at Ernest, obviously it has been growing pretty quickly. You can see we're expecting the regionations for this year at about $3.8 billion. If you go back to 23, I think they were probably way less than the billions. So you're getting a lot of growth and originations. But at the same time, when we began the new strategy, we made a strategic shift, which is to focus on higher quality underlying assets. So that is not an effort to optimize margins. It's an effort not to optimize overall efficiency and return on equity. If you look at the second box, you can see that in contrast to what happens in the legacy business, the operating leverage for Ernest through its growth is actually very positive, and that's an element of efficiency. The other thing is in terms of financing efficiency, because of the, among other things, the change in the nature of the underlying assets, we're able to get a higher proportion of AAA financing in our securitizations than we did before so um all of these things are focused on a strategy of growth quality and efficiency and um we can't get the moment as we said that it's a good combination with our legacy business um what we talked about is what we've done at some point why we did it there's also a question why we can do it now and there are a a lot of reasons for that. But part of the reason for reorganization is that we're getting ahead of a potential constraint. ATE, Adjusted Tangible Equity, a percentage of that is a significant component of our unsecured debt rating. And I'm going to oversimplify, but what it basically is, is the percentage of tangible equity to our private loans, meaning excluding the ones that are government guaranteed. 90% probably of our assets, maybe more, are securitized. So they're sold in the true sale. We don't actually own the assets, but under GAAP we're required to consolidate them. As our changing strategy makes our financings more efficient, they require less equity, that actually puts pressure on the ATE ratio on a consolidated basis. So if you look at the range for our rating, current rating today, it runs 8 to 12 percent. At the end of June, we were at 9. So, if you go to the next page, What it shows is in the 24 when we started, we had about a 10 percent ATE, which is right in the middle of the range. As we started growing, you can see it's been coming down. It doesn't look like we have an immediate problem in 2027, but if we keep growing like this, certainly as you get out around 28, this could become a constraint. If you go to the next page, the organization helps with that in the sense that we want LLC to be our primary holder of loans that we haven't sold. If the ATE ratio for LLC gets too close to the bottom of the range and we want to keep a reasonable buffer, then we have the option of moving some of the securitizations to the holding company, which takes the related consolidation leverage with it. So that's probably a timing issue for what we do. page 11, there's some other items that aren't strictly related to the corporate reorganization. I think the first two of them kind of speak for themselves, so I'm not going to cover them. The third one, though, I think is strategically significant, because it represents a change in the philosophy of how we look at our existing loan assets. In the past, I think to oversimplify what we've done is we add assets, we say how are we going to finance them, and maybe we add unsecured debt or maybe we do something else. But the way we're looking at it now is that we have a portfolio of loans. Some of them are non-strategic in the sense that we're not getting new customers for those loans. So in the event that you have a non- strategic loan and we have a new loan that we want to make to someone that's part of a growth business for us, we have the option of, in essence, reallocating that capital from non-strategic to strategic by selling those loans. That's something that we'll look at going forward. The other thing is that this gives us the option of looking at selling loans to repay unsecured debt as it matures, or refinancing those loans with a new issue based on the relative economics. So both of these things, I think, are strategic shifts from what we've been doing before. Along that line, our assets are mostly securitized, and if they're not, they will be. And I believe that at the moment, we've got something like 130 individual securitisation trusts, and obviously we're adding some every quarter. So in characterizing those trusts, which we need to do, we have to look at what is the cash flow that they give to us in that particular time period? What is their return on equity, what is their risk retention status, what's their tax position, and are they strategic or non-strategic. And they may have forgotten some. So we're going to be in the process of characterizing a lot of the loans that we currently have, trusts we have outstanding on that basis. We've already started, and the first place to start was with our legacy private portfolio. You may recall that in June we classified, I want to say $600 million, something in that range, of the legacy portfolios held to sale. When we report Q3, you'll see that we've added another $1.4 billion of legacy private loans held to sell. So of the $5 billion plus of that loan category that we had in June, about $2 billion would be held to sale. This is a fairly long process to complete it for the whole portfolio, but we'll do that, and there'll probably be additional changes after we do. So that's really it for the presentation. I realize the market opens fairly soon, so we don't want to detain you, but I'm going to open it up for questions, but certainly Roger and Mike are available for any questions that come up after the call. So I'd like to turn it over for questions. If you have a question, please press star 1 on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. We'll take our first question from Rick Shane with JPMorgan. Please go ahead. Thanks, guys, for taking my questions this morning. Look, can we talk a little bit about the governance of the entities going forward? You know, you talked about two SEC, creating two SEC reporting entities. Is each company going to have its own board, its own CEO? How do we think about this going forward?" Well, I should say that Steve Hopper and Roger are with me, so they can certainly chip in. Each of them will have their own boards. And the continuing business does have somebody run the focal, not policing. The legacy business right now is reporting directly to me, but we might look at changing that going forward. And I just want to add on this, Steve. So on the SEC registrant piece, just to clarify there, so there'll be the holding company, Navient Holdings Inc., will be a registrant, as will Navient LLC. And then so for both of those entities, you have the typical governance you would see with the board of directors and kind of for both those entities and all the normal related governance structure that you would expect. Got it. And then in terms of things like, so Onus is going to be an originator, it is going to, it sounds like, sell loans to partners, it's going to sell loans the LLC. How are transactions negotiated on an arm's length basis under that construct? Yeah, that's something that in terms of the, of course, anything that would be sold publicly, that obviously is at, or it's external folks, that would obviously be at arm's length. In terms of sales from Ernest to Navient LLC, those will be done at a cost basis, which is not uncommon for this type of structure. Got it, okay. For me, I guess I'm still trying to understand this a little bit and, you know, benefited it out here and all that. But to some extent, I'm trying to figure out if we're making the pizza bigger or we're just cutting it into different slices today. And I think everybody's wrestling with that. Well, think about it and give us a call. Okay. Thank you. Thank you, and we'll move next to Alec LaBoffe. Good morning, and thank you for taking my question. Just curious on the earnest standalone structure in 2027, do you expect the business to be profitable in 2037? And if not, kind of what's the trajectory? What level of originations or scale does earnest need to reach before you see that break even? I think those are all very good questions. I would say is that we are looking at resegmenting in 2027 to give better clarity on both sides of the business. I think it would probably be best for us to wait until we've settled on that, and then we can give you a more comprehensive answer. So I think that's where we are today. Got it. Thank you. And then just on the legacy business, you mentioned the $4.7 billion of cash from the legacy business? And how should we think about allocation between funding earnest and then returning capital to shareholders? And How quickly do you think there could be some distributions? Thank you. Yeah, I mean, the on the 4.7, you've got, I think, three things to bear in mind, one of them is the timing. And if some of that comes in later, some of it comes sooner. And then you do have to take out taxes and operating expenses. I think we could talk about that at another time, but the outlook for those is relatively favorable. So if you think about where we are, the simplest thing to do is to buy stock at 40% a book or whatever it is. So we're making an equity bet here that is better to grow earnest. So I think the way we're going to look at it is that there should be cash for both. As you look at things at the time, you decide whether it's better for shareholders to do buybacks or to invest in originations. So, we're not going to have a fixed formula. To some extent, the market will determine that. Got it. That's all from me. Thank you. Thank you. And once again, if you would like to ask a question, please press the star and one on your telephone keypad now. And we will take our next question from Giuliano Bologna with Compass Point. Please go ahead. Giuliano, thanks for the time. One thing I'd be curious about is thinking about the strategy over time. Obviously, this creates some of the split to really identify earnest and the value proposition earnest and earning potential and capital within that entity and really separate that out, which I think is very helpful for the market to be able to do that. But over time, in some ways, does this create a better opportunity in some way to further split off or create an opportunity to sell an equity interest in the legacy runoff asset book? And in a sense, would you ever consider taking that as a second step where you could effectively put that out there and put a valuation marker on that in the markets on its own? And would that be helpful in some ways over time to create income as a true split and have a real market valuation on both sides independently? I think you certainly could. Right now, we think it's better to keep things together because you're growing something and you have have cash to invest in doing it. Both of these things have listings, so you could have equity securities in both. I would say it's not something you've actually looked at at the moment, but certainly that's conceivable based on the reorganization. That's very helpful. I appreciate the time, and I'll come back to you, Kim. Thank you. And we'll move next to Moshe Orenbuk with TD Cowen. Please go ahead. Great. Thanks. Given that this will obviously shine a brighter light on the returns from Ernest, could you just talk a little bit about how that looks right now, given what you've got for yields in the refinance business, and then the cost of funds and securitizations, both the last one you did and perhaps how that might have evolved given the rise in rates and spreads towards the end of Q3? Yes. I mean, I think that we're in a transition where earnest has been principally student loan refi. And I think it's fairly well known that that is a cyclical business. So basically, in that area, you'd want to get every customer you can, provided you can afford to do it. So with rates where they are, it's less affordable than it was. but that's why we're now in the fortunate position with our in-school business being in a better strategic position and moving into PL. We can basically manage the portfolio to get the combination of growth and margin that we think we need. So I agree with you that with if rates moving up does not help in any way. Maybe just as a follow-up, how do you think about that from a capital allocation perspective? You're obviously doing a much higher level of originations into that environment as opposed to other forms of use of the capital of the company. You mean like your buybacks? Yeah, I'm saying, you know, in other words, the returns that you're getting on the incremental dollar of, you of student loan refinance would seem to me to be lower than what your returns could be from a buyback. You have to look at it that way. There's a strategic issue. It's a difficult one to balance. You know, what's the value in the longer run of growth versus clearly you can make a good case for buybacks today. So I don't want to say that we don't have a rigid rule for for that, Moshe, but it's something that we've got to look at. Thank you. Thank you That concludes today's call. If you have any follow-up questions, please contact Roger Yancoup or Micah Andrews. Thank you for joining. Thank you very much.