NAVI - NASDAQ

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

Thank you Shannon. Hello, good morning, and welcome to Navient's earnings call for the first quarter of 2023. With me today are Jack Remondi, Navient's CEO; and Joe Fisher, Navient's CFO. After their prepared remarks, we will open up the call 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 the discussion of those factors on the company's Form 10-K and other filings with the SEC. During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio, and various other non-GAAP financial measures that are derived from core earnings. We will also refer to adjusted core earnings, which are measurements derived from core earnings and adjusted to exclude expenses related to regulatory and restructuring costs. Our GAAP results and description of our non-GAAP financial measures can be found in the first quarter 2023 supplemental earnings disclosure, which is posted on Navient.com/investors. You will find more information about these measures beginning on Page 15 of Navient's first quarter 2023 earnings release. There is also a full reconciliation of core earnings to GAAP results included in the disclosure. You can view and download presentation slides, including slides you may find useful during this call. On the events and presentations section of Navient.com/investors. Thank you. And I now will turn the call over to Jack.

Thanks, Jen. Good morning, everyone, and thank you for joining us today for a review and discussion of a very good first quarter's results. And thank you for your interest in Navient. Our first quarter's results demonstrate the stability of our business even in varying economic environments as we execute the four pillars of our strategy, delivering on our growth potential, maximizing loan portfolio performance, continuously improving operating efficiency, and disciplined capital management. Our results this quarter include adjusted core EPS of $1.06, strong FFELP and private net interest margins, strong and improved credit performance, and continued operating efficiency gains. Combined, we delivered a core return in equity of 19% this quarter. Turning to the business segment results, we remain very focused on delivering on our growth potential. In consumer lending, we are preparing for the coming lending season. In this quarter, we originated $168 million in private education loans. While demand for in-school loans is seasonally low in the first quarter, we remain confident in our guidance to more than double new in-school loan originations in 2023. In business processing solutions, we're off to a strong start, with revenue from traditional services increasing 26% over the year ago quarter. Here, we continue to promote our data driven processing and customer contact capabilities, which we forecast will deliver 10% growth in revenue along with a high teens EBITDA margin for the full-year. As Joe will discuss more fully, while this quarter's results include expected start-up costs that reduced profitability by $0.03 per share, our full-year profit forecast remains intact. Last year, we saw accelerated prepayments in our FFELP portfolio. FFELP prepayments have now fallen well below the store level levels. The resulting slower amortization of loan premiums drove this quarter's $10 million FFELP loan loss provision. Our effective funding programs and interest rate management helped to deliver stable net interest margins in both our FFELP and private loan portfolios even as interest rates rose again in the quarter. Importantly, our strategy of funding our loan portfolio for the life of the loan via asset backed securities, currently 85% of our funding mix really shows its value during times of liquidity challenges. Credit performance remains an area of strength. We saw improvements in delinquencies and private loan defaults were significantly lower than expected for the quarter. Our results also include two significant items impacting the provision for loan losses this quarter. One was a $52 million benefit from an accounting rule change for modified loans. This was reflected as a reduction in the provision for loan losses. And the second was an agreement to resolve several bankruptcy related class actions resulting in an increase in provision for loan losses of $23 million. We believe this agreement provides a clear framework for the treatment of loans and bankruptcy from these legacy student loan programs. This nationwide agreement, which is subject to court approval, resolves several class proceedings related to this limited category of legacy private loans originated years before Navient was formed. Navient has never made any loans in these categories. Navient has long advocated for student loan bankruptcy reform along with calls for a clear and consistent treatment for loans and bankruptcy that are easily understood by borrowers and lenders. Our focus on efficiency delivered a reduction in operating expense versus the fourth quarter. First quarter operating expense includes several significant seasonal items and also includes start-up expenses associated with new business processing contracts. We will continue to pursue initiative to improve our overall operating efficiency. Now, on capital management, we repurchased 4.9 million shares to pay $21 million in dividends in the quarter. We earned a core return on equity of 19% and improved our adjusted tangible equity ratio to 8.5%. These results demonstrate our commitment and ability to deliver strong risk adjusted returns by investing your capital and attractive opportunities, while returning excess capital to you, all while maintaining a strong capital position. Our results this quarter are a strong start for Navient that reflect our commitment and ability to generate high quality, high value products and services, and deliver solid financial results even in volatile and challenging markets. They also reflect our ongoing commitment to simplify our business model and reduce risk. More importantly, our efforts to build the foundation from which to create and deliver value. Our affirmation of our guidance for 2023 reflects our confidence and our ongoing ability to deliver on our growth potential, maximize portfolio performance, deliver better margins through operating efficiency, and deliver attractive risk adjusted returns on capital. I want to thank my colleagues for their efforts and commitment to our success. And together, we look forward to delivering another great year of results in 2023. Joe will now provide a more detailed review of our results. Thank you for your time. And I look forward to your questions later in the call. Joe?

Thank you, Jack, and thank you to everyone on today's call for your interest in Navient. During my prepared remarks, I will review the first quarter results for 2023. I'll be referencing the earnings call presentation, which can be found on the company's website in the Investors section. The first quarter's strong results position us well to meet our full-year 2023 guidance targets with key highlights from the quarter beginning on Slide 3, including first quarter adjusted core EPS of $1.06, which includes a net provision release that I will provide additional detail on later in my remarks. Achieved an ROE of 19% and an overall efficiency ratio of 53%, FFELP NIM of 112 basis points, private NIM of 312 basis points, origination of $168 million, EPS revenues of $72 million, and increased our adjusted tangible equity ratio to 8.5%, while returning $106 million to shareholders through dividends and repurchases. Provide additional detail by segment beginning with Federal Education Loans on Slide 5. In the Federal Education Loans segment, we achieved a net interest margin of 112 basis points, compared to 104 basis points a year ago. Since November, there has been a significant decline in prepayment activity and we are seeing consolidation requests that are below historical levels. Our expectation for full-year 2023 FFELP NIM of 100 basis points to 110 basis points assumes that prepayment speeds remain at these levels for the remainder of 2023. Compared to the fourth quarter, self-delinquency rates decreased to 14.4% from 15.6%, and forbearance rates decreased to 16.9% from 18.1%. We saw charge-offs increase to 22 basis points in the quarter, and we anticipate a net charge-off rate between 10 basis points and 20 basis points for full-year 2023. While credit trends have improved, the slowdown in prepayments that we are experiencing is expected to increase the life of the portfolio, which results in an increase to unamortized premium allocated to expected future defaults. As a result, we added $10 million in provision in the quarter for FFELP loans. Let's turn to our Consumer Lending segment on Slide 6. Net interest income in the quarter was $153 million and resulted in a net interest margin of 312 basis points, an improvement of 32 basis points, compared to the prior year, driven largely by improved funding spreads. We continue to see a slowdown in prepayment speeds in the overall portfolio as borrowers with fixed interest rates and less of an incentive to refinance and the current rate environment, which is benefitting net interest income. We anticipate our full-year net interest margin for 2023 to be between 280 basis points and 290 basis points. Our credit performance improved from the prior quarter as total delinquency rates declined from 5% to 4.5% with forbearance rates improving from 2.1% to 1.9%. Net charge-offs remained flat at 1.6% and $75 million compared to the fourth quarter. While credit trends are improving, the net $24 million release of provisions private education loans in the quarter was largely driven by the adoption of the new accounting guidance for modified loans. Our private education loan modification program provides borrowers with options to successfully navigate their loan process in times of financial hardship. During which we offer a lower interest rate to help the customers successfully make a lower payment that amortizes the loan. Prior to adopting the new accounting guidance, we calculated the present value of the amount of interest forgiven for loans currently in the modification program and included it as part of the allowance for loan loss. This reserve element is no longer allowed when borrowers enter new loan modification programs. At the end of 2022, our loan loss allowance included $77 million related to this practice. We elected to adopt this new guidance prospectively, resulting in a release of this allowance over time as borrowers that had previously entered into modification program exit those programs over the next few years. This quarter, $52 million of the $77 million was released as the majority of these programs are typically short-term in nature. Of the remaining 25 million in allowance, we expect a little over half to be released this year with the remainder in 2024. In the quarter, we reserved an additional $5 million related to new origination volume and $23 million pertaining to the bankruptcy related resolution that Jack discussed. We remain confident that we are adequately reserved for the expected life of loan losses given the well-seasoned and high credit quality of our portfolio and anticipate net charge-offs to remain in the 1.5% to 2% range for 2023. In the quarter, we originated $168 million of private education loans. This was comprised of $33 million of new in-school volume and refinanced loan origination volume of $135 million. The decline of the refi volume from the prior year is primarily driven by the higher rate environment and delay in Department of Education loans entering repayment. We anticipate quarterly refi origination volume to remain at these lower levels throughout 2023 as we expect the expiration of the CARES Act to provide no meaningful impact in the current rate environment. Continuing to Slide 7 to review our business processing segment, revenue from our traditional DTS services increased 26% from a year ago, partially offsetting the expected wind down of revenue from pandemic related services. First quarter revenues totaled $72 million and earned a 7% EBITDA margin. The margin was impacted by start-up costs, primarily related to new government services contracts, which reduced the overall margin by 600 basis points. We expect to see continued fee revenue growth of at least 10% in our traditional services in 2023. With full-year EBITDA margins in the high teens as we benefit from the addition of new contracts and efficiency initiatives throughout the year. Turning to our financing and capital allocation activity that is highlighted on Slide 8. The recent market turmoil emphasizes the importance of strong asset liability and capital management. We ended the quarter with 85% of our education loan portfolio funded to term and reduced our total unsecured debt outstanding by 14% or $1 billion. In addition, we reduced our share count by 3% through the repurchase of 4.9 million. In total, we returned $106 million to shareholders through share repurchases and dividends this quarter, while increasing our adjusted tangible equity ratio to 8.5% from 7% a year ago. Our 2023 guidance includes the repurchase of $225 million for the remainder of the year. Turning to GAAP results on Slide 9, we recorded first quarter GAAP net income of $111 million or $0.86 per share, compared to $255 million or $1.67 per share from a year ago. In closing and turning to our outlook for 2023 on Slide 10, the adjusted first quarter's results of $1.06 from the efficiency ratio of 53% and core return on equity of 19% reflect the steps we have taken to simplify the business, build capital, and provide consistency in the face of a volatile rate environment. The continued efforts to improve efficiency and success across all of our business lines contributed to the strong quarterly results. As a result of this quarter's performance and our outlook for the remainder of 2023, we are maintaining our EPS guidance range of $3.15 to $3.30 for the full-year. Our outlook excludes regulatory and restructuring costs and assumes no gains or losses from future loan sales or debt repurchase. It also includes the impact of provision related to the accounting change for the remainder of the year. A rate scenario that is based on the recent forward curve and assumes that we do not see an acceleration of prepayment speeds related to changes in the federal programs. Thank you for your time, and I will now open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Mark DeVries with Barclays. Your line is now open.

Yes, thanks. You called out, I think 15 million of revenue growth from ongoing government healthcare revenues for [BTS] [ph]. Can you talk one more about that and also, kind of what additional opportunities are to grow revenue in that segment?

Sure. We are continuing to see a strong pipeline for growth really leveraging some of the service – the skills that we have developed over the years and managing on servicing our internal student loan portfolios, and applying them to different businesses. So, we work with clients in government, in both government services, transportation, and healthcare. Each of them are a little bit different, but they're really relying on the same kinds of skills, the data analytics driven approach to helping customers, their clients, and customers resolve activity. So, where we see strong growth right now are really in the government services space. We did win a large new contract in that area last in the fourth quarter, it's being implemented in the first quarter as an example in that drag earnings this period. But it involves in-bound and outbound telephony, customer communication, and transaction processing related work. In healthcare, we also see similar growth opportunities and there we're working with hospitals, primarily as they manage their end-to-end patient admittance and revenue cycle management activities.

Okay, great. And are there any remaining pandemic related revenues in that segment that's still expected to run-off?

In this quarter, there are no pandemic related services.

Okay, great. Thank you.

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

Thanks guys. Just, you gave some good confirmation of the guidance that you provided earlier in the year, but I'm just – I'm wondering how do you see given all the, kind of moving – kind of the moving parts with respect to potential government policy changes and this and that and inflation and so forth. How do you see, kind of the demand trends for loans ramping up in the consumer category ramping over the year?

Yes. So, I think in the two different products in that side of the equation, and certainly in our refi loan product, this is a program that allows students who have graduated earned their degree and have demonstrated a track record of successful repayment to refinance their loans at a lower rate. Obviously, when interest rates are rising, that opportunity is smaller and we wouldn't – one, we wouldn't encourage borrowers to refinance if they can't get a lower rate. Demand is definitely lower. Our preparation for 2023 is to be ready when market conditions return and to be able to meet whatever demand comes from that side. Our focus in 2023 has been primarily on the in-school side of the equation. Here, this is a market that is – demand is driven primarily by new students enrolling in school. And those trends have been more positive. Enrollment levels were down coming out of COVID. They are now starting to rebound and that gives us the confidence to be able to say, we're going to double loan originations in 2023. Overall, we look at that market as growing about 5% to 6% a year. So, clearly, if we're doubling volume, we expect to be able – we're expecting to take market share in this arena. And we're doing so by an ease of an application process, an underwriting program that is, leverages our 40 years of experience in both originating and servicing student loans. And really working with customers to explain and help them understand the cost of attendance and how they can minimize their overall borrowing costs. One of the programs that we didn't talk about in our prepared remarks, but that we offer is a series of options that help students and families complete the [FAFSA] [ph], apply for scholarships, and then compare their overall financial award letters that they get once they're accepted. These are the types of things that we think can help elevate our products in the in-school marketplace to higher prominence and more value to the customer overall.

Okay. Thanks very much for that. And then a little follow-up on Mark's question before in the business processing segment. It seems like you're going to have a pretty strong ramp in the EBITDA margin throughout the rest of the year. Are the new contracts consistent like from a, call it from an economic perspective relative to the – call it maybe some more of the contracts that you've had over the years or are, kind of terms improving where you're going to get a better net margin over time as you scale?

Well, I think you get a little bit of both of that, but this quarter's margin was definitely negatively impacted by the start-up costs. So, just provisioning in the expenses that come with ramping up a large contract where we hired over 350 people to meet the needs of the client. And that's based and had to provision equipment, etcetera, to them. So, we certainly are expecting those margins to increase significantly on new contracts as we move through 2023.

Okay. Thanks very much.

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

Thanks. I was wondering if you could just talk a little bit more about the government contracts that you were just referencing. What are these specifically related to and what's the length and term of these? And is this a new area that you're going into? It sounded, obviously you said start-up cost. I don't know if that's just new because it's a new contract or if it's, kind of a new specific area that you're entering into?

Yes. So, it's not a new area for us. We've been providing services to various government municipal and state agencies for a number of years now. And most of these contracts rely on the same types of activities. It’s telephony, it's yielding in-bound and outbound communications with their clients. It's processing transactional activities. So, obviously no two contracts are identical, but the services that we are providing are leveraging the same technology platforms, the same telephony platforms, the same processing activities that we have done in our business processing solutions that are really leveraging our student loan servicing piece. The start-up costs here are just related to the new contract with just the share volume of starting up something new with a client, you're pre-positioning people, technology equipment into the field, etcetera, and revenue follows that. So, just a little bit of a timing related issue there.

Okay. And then in terms of – you listed a few one-time items in the prepared remarks. I don't know if I grabbed all of them and the start-up costs, the slower amortization, maybe you could just list what those are, I didn't see them in the release or the slide presentation?

So, just to be clear, our guidance of [315 to 330] [ph] is based off of the quarterly reported number of $1.06. So, that is how we're thinking about the remainder of the year. But in terms of the items that we're impacting the quarter that some analysts had in the model, some did not, but I'll highlight some obviously wouldn't have known about the 52 million was included in some of our analysts and some of the street's numbers not related to the accounting update and you had the 23 million related to the bankruptcy, potential settlements here that Jack discussed. I know a number of [balance] [ph] also did not have the 10 million of FFELP provision that I referenced, and then Jack referenced the $0.03 as it related to the start-up cost. So, those would have been, I would say, for significant items that were not either included in everyone's models or was at least a mix. But to be clear, our guidance of 315 to 330 is based off of the $1.06 for this quarter.

Great. Thank you.

Thank you. Our next question comes from the line of Moshe Orenbuch with Credit Suisse. Your line is now open.

Great. Thanks. Jack, you mentioned that and congratulations that the consolidation levels have kind of moved down. Could you talk a little bit about what we're likely to see from the federal programs [indiscernible] or what we could see various scenarios over the next couple of months and which of them would allow that to continue, which of them might cause it or anything that might cause it to change?

Sure. A crystal ball and predicting legal resolution and then congressional and administrative actions, a pretty good crystal ball. I'm not trying to [assess that] [ph]. But look, I think the environment here has been one where the focus I think right now from this administration has been on the direct loan portfolio and the forgiveness programs that they're looking to launch there. Our portfolio is more seasoned. They're in repayments. They're pretty well established at this point in time. I think we're super proud of the fact that we were able to work with our customers and return them, successfully return, help them return to repayment with lower delinquency rates and default rates than we saw pre-pandemic levels. When the administration offered up some additional one-time programs particularly on public student loan forgiveness, we did see a higher increase in consolidation activity that has effectively stopped, right? And as I said, their consolidation activity is now below historical levels. And so that's really been the positive for us. Our job in one of our key priorities is to really just maximize the performance of that portfolio. That means working with customers to keep them in repayment, successfully pay off their loans and inform them of different options as they become available. But I think it's a little hard to know exactly what happens next pending the Supreme Court decision.

Fair enough. Joe, on the margins both FFELP and Private, two kind of separate questions. I guess on the – there was a kind of a higher level of derivatives activity. I guess you probably, could you talk a little bit about how that impacted Q1 in any go forward impacts? And on the private side, you mentioned, kind of better funding spreads, but the most recent securitization deal, kind of showed that those margins have been declining pretty sharply. I mean, the cost of borrowing there is roughly equal to the yields on the loans. Could you just talk about those two things?

Yes. So, certainly from the hedging activity perspective, what you don't see in our recent securitization is the benefit we get from hedging against those interest rates, which would bolster the performance of that individual securitization by about 100, just under 140 basis points. So that's something that you don't get to see from in the reporting, that's external. So, you have to take into account that benefit. As it relates to the FFELP and private and in going forward, certainly it's been a fairly volatile environment the last several quarters and we've been consistent in our range and showing higher performance there. It's just one quarters of results, so feel very confident that we'll be in that 100 basis point to 110 basis point range as it relates to our first quarter's performance. So, we're just not in a position on both FFELP and private where we're going to raise that guidance and certainly feels very good about meeting and potentially exceeding on the private side. For the private NIM, again, to your point about just the funding spreads, we continue to see that improve year-over-year, as well as just from the prior quarter. So, we're very well-positioned to meet and potentially exceed, but it's just one quarter in a fairly fluid rate environment of which our latest forward curve would suggest two rate cuts in the back half of the year. So, those are things that we're taking into consideration as we didn't update our guidance for this quarter.

Great. Thank you.

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

Hi. This is actually [Stephen Fox] [ph] filling in for Sanjay. Thanks for taking my question. I guess just a follow-up around the NIM question. Just, like what would need to happen in order to get to the high versus the low-end of the guidance? How much sensitivity is there on prepayment speeds and other factors? Thanks.

Yes. So, I think where – in terms of the prepayment speeds, I think you're seeing the benefit from this to slow down on both the – on both the private and the federal side. So, I would say the reverse would be something we're to occur where there's an increase in prepayment speeds where that could impact negatively the NIM. We're not assuming that occurs. It's based off of the activity we're seeing in our current forecast for this year's interest rate environment. Other things that would potentially improve our outlook here would just be improved funding [Technical Difficulty] just reference the ABS market, you're seeing higher credit spreads than normal. So, any improvement there could be a benefit to us as we look to issue in the ABS market or potentially issue unsecured debt if it was found to come down at attractive levels.

Got it. Got it. And then just a clarification around what's the ongoing impact from the TDR allowance change?

So, for the remainder of the year, sorry, for the next two years, there's $25 million of allowance remaining and although we are estimating as little more than half of that will come through in provision release for the next nine months.

And is there anything on the P&L side or is it just on the allowance side?

Well, that's the impact from the accounting change. It's just on the provision side.

Understood. Great. Thanks for taking my questions.

Thank you. 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 question, I know you guys always are focused on efficiency. And looking at the FFELP, federal loan segment, you had a nice drop in expenses. Could you maybe talk about what drove the reduction expenses and is the $20 million roughly a run rate we should be thinking about going forward?

So I mean, there's a couple of things, Bill, that go into that. I mean, certainly, as we've been winding down some of the fee revenue contracts we were able to reduce the expenses associated with those. Those were all planned activities. But in the loan servicing side of the equation, the big drivers for us are automation in different techniques that we use to identify what a customer needs and that will be able to respond to that in some form of highly efficient way. So, examples we have over 85% of our customers communicating us with us electronically on a monthly basis, that's a way to reduce postage and print expense. The other thing that we benefit from is, as delinquency rates come down, delinquent accounts are our most expensive cost to service. And so, we get a little bit of relief as we see improvements on that side of the equation as well. And then the last piece I would just mention is, consolidation activity. So, when consolidation activity is happening, we incur transaction costs associated with that. So that volume has come down. We benefit from it as well.

Okay. And just one follow-up, just kind of going to a high level and thinking about into the future. What do you see as your market share potential in the in-school channel over call it a long period of time?

Well, our aspirations right now is, we want to be a top 3 lender in the in-school origination side of the equation and we don't see any reason why we can't get there.

Okay, thanks for taking my questions.

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

Good morning and thanks for taking my questions. One thing I'd be curious about is and you may have touched on it during the call already is, the potential for, kind of a recovery in refinance volumes and specifically what I'm curious about is, kind of the roles of profitability, I mean by that [indiscernible] some upfront provisions, but those have relatively low seasonal charges. So, curious in a sense, when you start originating a new vintage or ramping up, does it become kind of profitable on an EPS basis within the two quarters or three quarters or thinking about that timeline.

Sure. So, I mean, the demand here is really a function of borrowers who have been in repayment, successfully been in repayment and their ability to obtain a lower rate. So, as interest rates have been rising, new federal originations have been – and private loans are being originated at higher interest rates. When we get to a more stable interest rate environment, we can start to see demand returning in that side of the equation. And if we start see a falling rate environment, which is, kind of what's forecasted for later in 2023, you can start to see an acceleration of demand in that space. In terms of profitability, when you originate a loan whether it's a refi loan or consumer loan, CECL accounting requires you to book 100% of the provision that you expect for our life of loan losses day one. So that hurts profitability in that particular period. And then subsequent quarters are generally profitable from a going forward perspective.

That's great. And then [this topic was somewhat touched] [ph] on during the call as well. But when you think about the FFELP NIM, obviously there's some positive carry dynamics when rates move up. I'd be curious if you think about, kind of what's the stabilized and should be for the adult portfolio once things normalize a bit more rather than obviously a rising rate environment like we're currently in?

Yes. So, our current forecast as I said earlier just includes two rate cuts in the back half of the year, so the rest would be negative pressure associated with that as we've discussed in a rising rate environment, the assets themselves reset quicker than the liabilities, so you get a benefit. So, you would get some pressure should that come to fruition in terms of a decreasing rate environment. In terms of normalized levels that we've seen over the last two years, really between that call it low-90s to mid-to-high 110 range. I would say in that somewhere in that range is where we would anticipate in terms of a flat rate environment is closer to 100 basis points, but that's something that we just haven't seen a flat environment in several quarters here.

That's great. Thank you very much, and thanks for answering my questions. I'll jump back in the queue.

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

Yes, hi. Thanks for taking my question. Related to the provision expense for the bankruptcy related items this quarter, based on what you know today and what you see in the portfolio, are there any potential items that could come through in the future on this? Maybe as we get some more bankruptcy related reform in the future?

Well, this is less of a political reform issue and more of an interpretation change that's been happening at some of the [court side] [ph] of the equation and it really impacts loan categories that we inherited at the separation from Sallie Mae. They were originated a long time ago, we don't originate any loan products in these categories today. They're generally non-title [for schools] [ph] and then loans that were dispersed directly to the student rather than through the schools. The courts have been moving around in terms of different interpretations of what qualifies as dischargeable and what doesn't. This resolution brings a – hopefully brings a uniform approach to these categories of loans. And to the extent that it has an impact in the future per future deposit will be for loans that file for bankruptcy from these categories in the future. That is included in our estimates of our life of loan losses.

Got it. Helpful. And then just to circle back on the comment that more [indiscernible], no meaningful benefit to refi volumes. I guess just trying to think through like what rate – what might you need to see from rates before you do start to see meaningful uptick or maybe something back towards pre-pandemic levels of volumes. You do have this backlog and you've got disbursements that are coming through at higher rates. Do we need to see something like the two-year drop below 3%, is it more like 2% just trying to think through how meaningful the benefit can be if rates do drop?

Well, pre-pandemic volume was certainly benefiting from a pre-interest rate increase volume was benefiting from the fact that rates were so low relative to historical loan origination activities. Today most of our refinance demand is coming from borrowers that have existing private student loans. And so, you're seeing those customers particularly ones with variable rates looking to find solutions that allow them to lock in a fixed rate program for themselves and capture better terms and conditions. In terms of getting that volume activity back up to where we saw in years past, we're looking at a fairly significant decrease in rates that are measured in percentage points versus basis points.

Thank you. [Operator Instructions] Our next question comes from the line of Rick Shane with JPMorgan. Your line is now open.

Thanks guys for taking my questions this morning. So, when we adjust for the significant items in the quarter in terms of provision, we get a quarterly earnings number in the low 80s implicitly for the remainder of the year based upon guidance and what you've earned to date. It suggests a run rate of about $0.75 a quarter at the high-end. Should we think about – and again, in the context of GAAP earnings, core earnings, adjusted core earnings, should we think about recurring earnings being in that sort of $0.75 to $0.85 range, is that a good place to be [centered] [ph]?

So, adjusted core earnings is how we give our guidance and how we have been for several years. So, I think that's the appropriate way to think about it. And Rick, you're right, if you're just taking that $1.06 versus the 3.15 to 3.30 you're in that 70 to – high $0.70 range depending on the quarter to get to that math. So, that's an appropriate way to think about it. There is…

We're [Multiple Speakers]. Sorry, Joe. Go ahead.

No, I just said, we're not going to give quarter-by-quarter guidance, but obviously there is some movement when you think about the third quarter of in-school originations in the way CECL accounting works, but you're taking larger provisions [indiscernible] just on the front end there. So, those are things that you have to consider the cost associated with in-school origin and provisions upfront that you would be taking in the third quarter that you wouldn't see in other quarters. So, there is some movement from quarter-to-quarter. So, overall, you should be in that range. It's a decent way to think about it.

Got it. That's helpful. Yes. And again, we understand the rationale for the adjusted core, but at the same time just, sort of getting that level set in terms of, again excluding seasonality, the recurring earnings power is a helpful way to look at it too. So, thank you.

Thank you. And I'm currently showing no further questions at this time. I'd like to hand the call back over to Jen Earyes for closing remarks.

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