Ladies and gentlemen, thank you for standing by and welcome to the Navient Second Quarter 2020 Earnings 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]. It is now my pleasure to turn the call over to your host, Mr. Joe Fisher. Mr. Fisher, the floor is yours.

Thank you, Celia. Good morning and welcome to Navient's 2020 second quarter earnings call. With me today are Jack Remondi, our CEO, and Ted Morris, our Controller and Acting 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 and forward-looking statements. 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. For Navient, these factors include, among others, the risks and uncertainties associated with the severity, magnitude, and duration of the COVID-19 pandemic and the related economic impact. The work from home policies and travel restrictions that have been put in place did not negatively affect our ability to close our books and maintain our financial reporting systems, internal controls over financial reporting or disclosure controls and procedures. During this conference call, we will refer to non-GAAP measures we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures, and our GAAP results can be found in the second quarter 2020 supplemental earnings disclosure. This is posted on the Investors page at navient.com. Thank you. And now, I'll turn the call over to Jack.

Thanks, Joe. And good morning, everyone. Thank you for joining us today and for your interest in Navient. Before I start, I would like to welcome Ted Morris to today's earnings call. Ted has been with Navient since 2003 where he's been an outstanding member of our finance team. As Joe said, in addition to his role of acting CFO, he's also our controller and he's our resident expert in two of my favorite accounting policies, derivative accounting and CECL. While we are sorry to see Chris move on – and I wish him well – I have tremendous confidence in Ted and the rest of the finance team. So, welcome Ted. The COVID-19 crisis continues to present ongoing new challenges. Our customers and clients have seen disruptions in their lives, work and financial health. And while it continues to produce significant uncertainty as to what comes next, we have responded. We have provided relief to millions of borrowers in need through forbearances and other payment relief options. We have worked together with many state attorneys general and consumer protection agencies to provide a uniform set of private education loan relief nationwide. And we are assisting states to meet the surge in demand for services such as unemployment claims and contract pricing. I'm extremely proud of how our team immediately and actively responded to the crisis and the needs of those we serve. In response to the uncertain environment, we took decisive action. We increased our reserves and our ability to absorb credit losses, reduce marketing campaigns for new loans and increase our liquidity on hand and our retained capital. In an effort to keep our teammates safe, we continue to allow those who can, about 90% of our team, to work from home. Our infrastructure and technology allowed this…

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 second quarter results for 2020 and provide additional color on the impact of COVID-19 pandemic on our business. I will be referencing the earnings call presentation which can be found on the company's website in the Investors section. Starting on slide 5, key highlights from the quarter include: Delivered GAAP EPS of $0.64 cents and adjusted core EPS of $0.91; provided immediate payment relief to over 6 million borrowers impacted by COVID-19; reduced operating expenses by 11%; originated $238 million of private refinance loans; improved on our strong liquidity position; and increased our adjusted tangible equity ratio to 3.6% or 6% after excluding the cumulative negative mark-to-market losses related to derivative accounting. Let's move to segment reporting beginning with the Federal Education Loans on slide 6. On both our FFELP and private portfolio, we continued to grant disaster related forbearance to those in need. As we provide payment relief to those impacted by COVID-19, forbearance rates on our FFELP loan portfolio increased to 26.6% at June 30, which is down from the peak of 28.5%, and our delinquency rate decreased 22% to 8.2%. Today, we are seeing forbearances that are 300 basis points lower than quarter-end as borrowers began to transition back to paying statuses. While the portfolio continues to amortize, the net interest margin improved 26 basis points for the second quarter, which led to the overall net interest income increasing 18% to $171 million in the quarter. The increase from the year-ago quarter was largely driven by the continued drop in interest rates that began in Q1 and accelerated into Q2. This favorable interest rate environment resulted in a significant increase in unhedged floor…

[Operator Instructions]. Your first question comes from the line of Vincent Caintic from Stephens.

Hey, thanks. Good morning, guys. And a great result this quarter. First, wanted to ask about forbearance and how we should think about that affecting the interest income in the near term. And then also, some of the investor questions I get is about – a worry about funding mismatch between the lack of cash flows on the forbeared loans versus your securitizations. Maybe you could talk about that in more detail and how the cash flows work. Thank you.

Sure. So, we offered – immediately in response to the COVID crisis, we allowed our borrowers to defer payments through what we call a disaster forbearance program and we applied those options to both our FFELP and our private loan portfolios. As Ted shared, as one of the slides in the investor deck shows, we saw a significant increase in demand and is now starting to recede as economic outlooks for many people are starting to become a little bit more clear. We're just – when someone exits a forbearance, they are required to make a payment. Their first payment due is 30 days later. So, we're just starting to see those payment due dates come in, and we're very pleased by what we're seeing so far. An overwhelming majority, somewhere around 80% or more, are actually successfully making their payments. But it is still relatively early and the sample size is small. We'll see more of those borrowers scheduled to make payment due dates starting in the second half of this month and into August. From a net interest income perspective, a loan and a forbearance for both our FFELP and private loan portfolio doesn't change the interest accrual. So, we continue to accrue interest on those loans and have no impact on interest income as reported. From a cash flow perspective, certainly if a borrower is not making payments, there is a reduction in cash flow, although our securitization trusts on both the FFELP and the private side of the equation have more than sufficient cash flow to cover all payments in terms of interest accruals on the bonds, servicing costs, and they are still cash flowing back to the company, meaning that there is more than enough excess cash coming into the trust, so that we continue to be able to sweep a component portion out of that. And I think the liquidity build that Ted mentioned is an example of that, right? We were able to build liquidity during this process despite the significant increase in forbearance [Technical Difficulty].

Okay, great. Thank you. And then, just another follow-up on the floor income. So, that was a nice jump this quarter. So, when we think about the rest of the year, is it simply keeping the 20 basis point benefit, taking out the other 20 basis point benefit from the reset loans and then just continue in that for the rest of the year? Just kind of wondering if how we should think about that and maybe any help on the sensitivities to benchmark rates. Thank you.

Sure. Yeah. And I think you're right. Overall, related to the annual floor component, that was $30 million of income for the quarter. That goes away third quarter. So, it's as simple as that. As far as the fixed floors, unhedged, they were earning about $30 million in the quarter as well. So, we would expect that to continue. Obviously, there's a natural decline of the balance, but that's not very significant when you go from third to fourth quarter. Where rates are today, as far as one-month LIBOR being around 20 basis points, that's expected to be relatively consistent, not just this year, but for the next several years if you look at the forward curve. So, I think that's a fair way to look at it as far as the floor component there as far as the $30 million comes out beginning in the third quarter.

Okay, great. Thank you very much.

Your next question comes from the line of Sanjay Sakhrani from KBW.

Thanks. Good morning. Good results. Ted, maybe just a follow-up on that last comment you made. Just to be clear, so if the rate environment doesn't change materially, we should expect the FFELP NIM to sort of stay here in the mid-90s. Just wanted to be clear with that. And then, maybe just talk about the consumer lending segment margin, expected to decline some for the rest of the year. Maybe you could explain what's driving that.

Sure, absolutely. So, to your point, on page four where we give updated guidance, we expect the FFELP NIM to be in the low to mid 90s for the year. When you see that NIM is at 1.05% for the second quarter, when you move to third quarter, you lose that $30 million worth of annual reset floor. Partially offsetting that, you do pick up some additional benefit related to – if you remember, in the first quarter, when rates started moving on the FFELP side, it's a daily one-month LIBOR reset. It's funded by one-month LIBOR that resets monthly. So, the margin was compressed in the first quarter. We got a little bit of that back in the second quarter. We get the rest of that back in the third quarter. So, that's what's partially offsetting the decline in the floor income there when you go from second quarter to third quarter when you try to do the math there as far as year-to-date 94 and staying in the 90s there. On the private side, as far as what you're seeing there, as far as the kind of sequential decline in the NIM for the four quarters, again, the opposite occurred first quarter this year on the private side. There was a benefit as far as the prime assets did not reset in the first quarter, but the LIBOR funding came down. That was a pretty significant benefit in the first quarter. You get some of that back in the second quarter and you get the rest of it back in the third quarter. Also contributing to the decline sequentially across the four quarters, obviously, is just the natural growth in the refi portfolio. Although that's a great risk adjusted return, it has a lower NIM because losses are obviously much lower. So, that becomes a larger percentage of the portfolio that just naturally decreases the overall NIM. And then, some other items going on there in the second quarter when we had loans move to forbearance. Some of those loans moved out of the modification program. And some of those loans that were delinquent went into forbearance and it resulted in some relief on our 90-day reserve. Just like most financial institutions, we have a policy of reserving 90-day interest. So, as we moved to third and fourth quarter, as loans come out of forbearance, there's going to be some build on the 90-day reserve and we'll also have some loans going back into the modification program. So, those are the elements that kind of bring your NIM down across all four quarters there.

Okay, perfect. And then, Jack, a couple of your competitors have decided to move away from the private loan market. I'm just curious how you think that positions Navient. I assume it helps, but maybe you can just walk us through how you're positioning for that.

Yeah. So, one of the reasons – there's several reasons why we like our abilities and prospects to enter the in-school origination market. Certainly, the asset returns that we think we can generate in this area are particularly attractive in the high teens. We also believe that we've got tremendous insight in terms of credit modeling and predictions in terms of losses that can help us in that side of the equation. And we know from our servicing operations, and this has been true when we pick up private loan portfolios for servicing, we're able to materially reduce the loss rates on that portfolio by working with customers to find payment plans they can afford. But to your point, we do see people leaving the space. I think this can be a difficult product on a bank balance sheet because of the combination of the CECL capital tax and the equity that is required, the capital that's required to be maintained on the portfolio. And so, I do believe you will see fewer banks in this space. And that creates opportunity for us overall. But that's an upside potential from our original estimates.

Right. Thank you.

Your next question comes from the line of Mark DeVries from Barclays.

Can you talk about the decision to exit the Department of Ed servicing contract? And kind of the timing for those accounts to move off your platform? And also, in the past, you've mentioned, it's about a breakeven contract. So, how should we think about the cost supporting that business, how much is variable versus fixed and how much of that fixed can be taken out?

Sure. So, we've been a – obviously, we have a long, long history of servicing federal student loans, and we believe our insight, our data driven strategies, and the processes that we've been able to bring to this make us not only a very efficient player, but a very effective player in this space. We've talked historically about our significantly lower default rates on federal student loans that we service, being approximately 35% lower than everybody else. And we were interested in continuing to provide services to the department in this important loan program, but they had to be not only under terms and conditions that were reasonable, but they also had to be terms and conditions where we could be successful. Unfortunately, the offer letter we received from the department did not allow for that. They transferred too much risk to the servicer and at rates and terms that we believe are effectively below cost for everybody. So, it was a hard decision. But – or disappointing, I guess, I should say, decision, but it was not a hard decision to turn that down. The contract itself kicks in once the department begins to move loans off of the servicing software platforms that exist today to what's called the new next generation EPS award. That contract award was just cancelled by the department and is going to be reissued. So, the timing of that is unclear. They cannot move servicing operations call center, back office operations to another entity until that system issue is determined and the loans are actually transferred there. That's the timing. I'd be guessing, but it seems unlikely that we would see those loans move in the next 18 to 24 months.

Okay, got it. And then, just on the expenses, how much of your expenses on that business are variable versus fixed?

Yep. One of the big decisions we made almost a year-and-a-half ago now was to sell our platform, which was effectively a set of fixed cost infrastructure for us and convert that to a variable rate structure. So, the vast majority of our expenses associated with loan servicing are now variable. We certainly have some components of fixed costs in terms of facilities, some management overhead and things like that. But this is something we think we can easily manage if and when those accounts are transferred off of our platforms.

Okay, that's helpful. And then, Jack, it'd nice to get your updated thoughts on just kind of appetite to repurchase your stock here.

So, obviously, our stock price – well, we'll see what it looks like later today. But, obviously, our stock price has been trading well below what we think it's worth. When we started this year back in January, we were expecting earnings of approximately $3 a share and had a stock price in the low teens. We today have an earnings forecasts of $3 per share despite the massive disruption that has been caused by COVID. And there's been a number of puts and takes. We talked about a lot of the benefits today of the rate environment and the $30 million of additional floor income. But there were also some significant negatives here as some of the processing work we do for entities like federal agencies, state and local governments, transportation entities, et cetera, reduced fee revenue by more than that. When we look at that environment, we think it shows the resiliency of the company, and would certainly expect to see that the $3 of earnings forecasts that we have today support a return to that stock price of the low to mid-teens.

Okay, thanks.

Your next question comes from the line of Rick Shane with J.P. Morgan.

Hey, guys. Thanks for taking my questions this morning. And also, I appreciate the effort to provide guidance. That's a little bit more rare today. And I think it's very helpful to investors. I am curious, when we think about sort of the three categories of loans, loans that are currently – current loans that are in forbearance and loans that are delinquent, how you think about the different reserve rates? And if you wouldn't mind, if you can relate that to how you expect the reserves to migrate as the loans come off forbearance in your experience and 80% payment rate on the loans that are rolling off forbearance.

So, under CECL, we are required to estimate the remaining life of loan – the remaining losses that we would incur on the portfolio over the life of the loans. We have 40 years of data and experience here. This crisis is obviously a little bit different. But we're able to use that experience to understand how borrowers who experience stress expect to – what we can expect to see in terms of recovery or alternative repayment programs that we can apply to help them manage through that process. Our models that we have employed for CECL take into consideration unemployment rates, growth in the economy or contraction in the economy, economic output. And through that process, we're able to forecast what we expect to be life of loan losses. Clearly, we've made – maybe not clearly. We have made a conservative set of assumptions as to what we think losses will be for borrowers who are exiting COVID-related forbearances, as well as the rest of the portfolio. We are heartened by a few things. Our portfolio is highly seasoned. So, on the legacy side of the equation, so these are borrowers who have been in repayment for a number of years, have been through other forms of financial stress, the most recent being the financial crisis, and so we can see what kinds of resiliency and expectations we can get out of that, what those customers are able to bear and continue to make payments. We look at where our borrowers are – where we think our borrowers are employed and we don't see a huge amount of borrowers in segments of the economy that have been more negatively impacted. Maybe the exception being the medical field where a lot of offices like non-COVID related medical practices were either closed, particularly dentist office, that are now starting to reopen, but we expect those customers to perform very well. And as I said, the way we look at this today is we look – if we look backwards and look at where our losses have been, what types of loss rates we've seen in our private loan portfolio during periods of economic stress, apply some of those to the current period, we think we are in an excellent position to be able to absorb those losses. And as I said, we're able to absorb significant losses in that area. The ending reserves at June 30 would cover 12% cumulative losses on the legacy portfolio. I think that's a pretty extraordinary rate and coverage ratio, particularly when you look at other consumer loan portfolios in the marketplace.

Jack, that's really helpful. And it's interesting because I think in some ways you described more of a top-down modeling exercise than a bottoms-up modeling exercise for CECL and we're assuming that it's probably a combination of both. With a quarter of the portfolio on forbearance, if you can help us understand a little bit better from a bottoms-up perspective, how you look at those loans in terms of the reserve rates, that would be really helpful.

The model is built by loan status. So, it is a bottoms-up build. But the percentage of portfolio, that's a FFELP statistic. Private side of the equation, our forbearance rates are more of the 7%, 8% range. And what we're looking at in those periods, and particularly what we saw, for example, in some of our customers who were in the dentist world, borrowers look for payment relief while their practices were shut. But as their practices reopened, those customers are able to reestablish themselves and continue to make payments on their loans. So, we feel like we're in – if you look at the performance of the portfolio, you look at how delinquency rates fell, you look at the portion of the dollar balance of loans that are up to date, meaning zero days past due, not even one day delinquent, those numbers are very strong and continue to improve each day.

And I guess I would say, just to follow-up on what Jack said, we use Moody's Analytics for our modeling here, which is obviously a well-known model that's used by many other financial institutions. And like other companies, we do a weighting of a baseline, worst case, best case. Our weighting right now puts the allowance between baseline and worst case. And just like Jack said, it is a bottoms-up approach. So, loan status is one of the attributes that's highly correlated to economic attributes, such as unemployment and GDP. So, for those loans that are in forbearance, there's a specific expectation based on unemployment and GDP, how they would perform based on the performance of the previous 40 years of experience we have.

Got it. Okay. That's very helpful, guys. Thank you both.

Your next question comes from the line of Leon Cooperman from Omega Family.

Good morning. Congratulations on a good quarter. Let me ask you, I don't really much care about any one year's earnings. I care about earning power. When you guys look at your business, what do you view is your recurring normalized earnings?

So, as I said, Lee, there are a lot of puts and takes this quarter. And I think we spent our prepared remarks talking about some of the highlights in terms of floor income helping credit performance, helping the overall numbers. But when you look at our other fee income and the COVID-related Business Processing Service contracts that we won this quarter, but we also had revenue reductions, as I mentioned, transactional activity that we process for parking, tolls, hospitals. We had a number of federal agencies we do work for that asked us to pause on our contingency – our asset recovery businesses.

I understand all that. The basis of the question is because of all those puts and takes, when you look at everything, you have much more knowledge than we have, what do you think the normal recurring earnings are? In 2016, you earned $1.83, then $1.90, $1.95, $2.44, $2.95 to $3 this year. This is maybe a little bit inflated this year. What do you think normally – I'm heading to a different series of questions. But what do you think your normalized earnings are? You think you're a solid $2.40, $2.50 earner in a typical year or less than that?

No, I think this is – I think our earnings this year reflect what our earnings power is for sure because of the puts and take. Thank you.

So, we're a $3 earner?

But you have to take into consideration, Lee, that the vast majority of our earnings come from our legacy portfolio, which is amortizing about 10% a year. So, you have to bake that into the process.

Well, I'm assuming myself that you're a solid $2.50 type earner. I'm heading to a different direction. What is the status of your buybacks? The question was asked, you didn't really answer. What is the unutilized authorization and what is your intention regarding it?

So, at the beginning of this year, we estimated that we would acquire about $400 million or allocate about $400 million to share repurchases. We have about $65 million remaining under that plan. We paused it in the second quarter. We did no share repurchases in the second quarter as we wanted to see how the economic environment would shake out as our customers exit the disaster forbearances and we are able to confirm the performance that we expect to see in that portfolio. As I said in my comments, we would expect to complete our planned capital distributions, our return to shareholders through the balance of this year, sometime in the second half.

Let me just cast my vote, which is not going to surprise you. You said you didn't know where your stock was trading. It's a $8.28 bid, $8.30 offer last I checked. That's a 7.7% yield at $8.30. If you can recurrently earn over 20% on your book, you're worth more than book value. Your book value, I think, is $10.90. So, we're very mispriced. And I would say you should find a way of being – and I understand about the virus and the uncertainty, but you should find a way of being more aggressive. Five years ago, when I questioned you on stock repurchase, you were buying it in the low 20s which you thought was – the run-off value was $30 or better. Well, clearly, that was the wrong view. But to not be in the market currently when your stock is cheap as it's ever been, where you can retire a 7.70% yield which is very accretive to the remaining distribution and buy it back at a discount to book when the business is worth more than book based upon your returns on book, I think is making a serious mistake. So, I would just put my vote into that, that I would reactivate in a more aggressive fashion. Even if you sold off some assets at less than they're fully worth to buy something that's selling a half of what it's worth, it's a worthwhile trade. That's all I got to say. But congratulations on the quarter.

Thank you.

Your next question comes from the line of Mark Hammond from Bank of America High Yield.

Thank you. Hi, Jack, Ted and Joe. So, on slide 14, the cash flow for the next five years, I had compared that slide and then the actual year-to-date cash flow that the company's produced and then that same slide from the 4Q 2019 earnings deck, and I see basically virtually no change in cash flow expectations. Is that right? And then, if it is, how you rationalize that virtually no change with the increased use of forbearance?

So, forbearance is a temporary delay in cash flows, not a permanent delay in cash flows. And there are many puts and takes. So, we have higher margins, higher net interest margins that we're incurring, more floor income that will accrue into the portfolio, minuses would be pushing some cash flows back out over time. But these numbers are recalculated each quarter and re-estimated based on the portfolio characteristics and our expectations for the next, in this case, five years of payment flows. So, they do reflect our best estimates of what we would expect to happen here, including all of those factors – forbearance, floor income, cost of funds, et cetera.

Got it, Jack. Yeah, no, that's great if there's no change for credit investors. On the unsecured credit rating, both Moody's and Fitch are low BB with negative outlooks. Would you be able to give me a sense for the importance of a BB rating from Moody's and Fitch and where that ranks on capital allocation or just priorities overall for Navient?

So, we obviously have a view that we are a stronger balance sheet than our ratings imply. And I think our performance in managing our unsecured debt balances and the consistency through really some challenging environments over the last 10 years to be able to continue to pay those down, I think really reflect the strength of the balance sheet that we have and the predictability of the cash flows. Your comment earlier about, it's great to see that despite COVID we're not seeing any material changes in expected cash flows, that's because our portfolio has a very predictable performance level and cash flow expectations because of the mix of between federal and private and the seasoning that exists there. So, yeah, we run our balance sheet, we run our business to make sure that we're able to create value for all stakeholders, and that means that we have the ability to both issue in the unsecured marketplace and be able to competently service that unsecured debt in all types of economic environment, and I think our performance [Technical Difficulty] reflects that.

Got it. The last one from me. Regarding your allowance for losses in the consumer loan segment, can you give a sense for the charge-off rate for the next year, for 2021, is that's built into that CECL assumption as of the end of the second quarter?

So, under the CECL process, we do make estimates on both annual and – our periodic as well as life of loan loss expectations, but there's much more volatility on where that loss might occur. And at this point in time, we're not prepared to provide guidance for 2021 in terms of what loss expectations are, although we would say, at 12%, the ability to absorb 12% cumulative losses on our legacy portfolio is extremely high and probably unmatched in the consumer lending space.

All right, great. Thanks, Jack, Ted and Joe. That's very good.

[Operator Instructions]. Your next question comes from the line of John Hecht from Jefferies.

Morning, guys. Congratulations on a good quarter. And thanks for all the details here. Most of my questions have been asked and answered. I'm curious. So, in the BPS segment, you quickly adapted – you're getting some revenue from tracing services. I understand we might think that could be a temporary thing given the circumstances. But I guess, what I'm interested in is, what capabilities do you have that enable you to quickly ramp that up? And how might those resources and capabilities be used over the long term?

Yeah. I think that's a great question. Obviously, COVID created new needs for many of our clients. The first item that really showed up was a need to help them process unemployment insurance claims. We were able to step in and help very, very quickly there. In some instances, we were up and running with call centers and assistance within three or four days of being requested to do so. And what our capabilities are really is the ability to take inbound calls, make outbound calls, use our systems and analytics to be able to kind of predict volume flows, triage accounts, and segment them into ways that they can be resolved quickly through the process. I think what we are hopeful here is that, as we've demonstrated these skills, demonstrated the operational skills, demonstrated the value of our analytics and capabilities that we will win some longer-term arrangements with some of these clients. Obviously, we would hope that unemployment insurance processing demand would come down dramatically. We would hope that COVID contact tracing would no longer be required, but that we can apply those same skills to other lines of businesses. Remember, at the same time that these businesses were ramping up, we had others that were declining rapidly in the BPS space. Our work for hospitals, for example, is a function of patient visits and transactions. When COVID struck, demand for these types of services that were not COVID related declined dramatically. Many hospitals saw 30%, 40%, even 50% declines in their revenue as a result of that. We don't do parking processing. We're not doing toll processing for people who aren't driving. And then, some of our federal contracts also asked us to pause, basically not do any work. That is now just starting to be turned back on, and so we're expecting that those revenues from the original businesses, plus the continued revenue from these COVID-related businesses will produce higher fee income in the third quarter.

Okay, that's very helpful color. Appreciate that. Second question is, do you guys have, I guess, details or, I guess, insight with respect to the kind of fall status of people going back to college? And does that even matter for refinancing volume? I guess, does the development of COVID affect any of your outlook for the ability to produce loan volume?

So, two different types of businesses. On the refi side of the equation, we are working with borrowers who have already graduated, have a demonstrated track record in their career, multiple years of repayment performance that we're able to evaluate and then, because of that, strong credit performance, high levels of free cash flow on their portfolio and stickiness or consistency of their employment history, we're able to offer them lower rates. That business, we don't expect to be impacted by what's going on in terms of school openings or not. And certainly, the low rate environment makes that business more attractive for some customers right now. On the in-school side of the equation, there's no question that we would expect overall demand for financing to be impacted by enrollment levels. We expect enrollment levels to be down for this upcoming academic year. And for students who are in-school, but not on campus, obviously, living expenses, room and board expenses will be reduced as well. But we're just starting in this space, and so we're capturing a relatively small segment of what we expect to be freshmen or first-time borrowers in the private student loan arena. And we have very modest expectations. And based on application flows that we're seeing, at this point in time in July, we are confident that we will hit or exceed our modest expectations for this year.

Okay, thank you. And then final question for me is, we're getting deeper into an election cycle. Is there anything from either side noted on a policy perspective that we should be monitoring at this point or is it too early to have any kind of perspective on that?

I think the biggest challenge in this student loan space has been policies that are more one size fits all. And what we see in our portfolios and see from our experiences that, while some borrowers have too much debt and do struggle, others got the value of their investment in higher education and are easily able to manage that. You can just look at the FFELP portfolio that we have and see the balance of customers who are able to continue to make payments without interruption during COVID or what we saw on the private side. So, solutions that treat all customers the same is probably not the best solution, particularly when one considers the costs. So, I think there's a lot of high-level concepts that are thrown out in terms of proposals here and relief options. And then the sticker price associated with those tend to be extremely large and harder to kind of execute on. So, we'll see what happens. But I think right now, there's a lot of talk, a lot of ideas flowing back and forth. And oftentimes, we see things that are significantly different in implementation down the road when the realities of costs come into the equation.

Yep. Okay. Appreciate the perspective. Thanks very much.

Your next question comes from the line of Moshe Orenbuch from Credit Suisse.

Great. Thanks, Jack. A couple of things. I guess, first, on expenses, expenses were really good this quarter. Anything in there that would have driven that one-time direction, either higher or lower, that we should be aware of?

Well, certainly, in some areas where we were not doing work on like asset recovery sides of the equation, we would definitely have seen a decrease in that space. But if you look at where our operating expenses overall, we were down really across the board. We saw lower expenses in our technology team and servicing and BPS, asset recovery and even in our corporate overhead functions. The only area that was really flat was consumer lending as we continue to kind of build out our origination capabilities for in-school volume. And this is really a function, Moshe, just – there's definitely some revenue-related items that cause expenses to decline. But we're examining all of our expenses, as I said. We continuously look for opportunities to improve our operating efficiencies through technology, automation, AI, anything that can help us drive better efficiency ratios, but at the same time maintain the service levels that we seek to deliver here. So, this quarter's results, I think, are a good example of a combination of activities, but operating efficiency is a contributor here.

And obviously, you'd get some revenue rebound, but how much should we expect from things like the recovery business and the refi business kind of stepping back up in the second half, like how much, all other things equal, would that add?

So, like refi, suspending marketing spend doesn't really hurt or hit our operating expense line item because most of those dollars end up getting capitalized as under accounting rules to the originated loan. So, that expense gets spread effectively through net interest income over time. But on the BPS side of the equation, there's no question if we're not doing – one of our businesses, for example, is we manage asset recovery for federal guaranty agencies, and we do that work both internally and we farm it out to different entities. Under accounting rules, if we do that, the expenses associated with those third parties are recognized on our books, right, and then the revenue is grossed up to match it. That obviously didn't happen this quarter as an example. But, overall, you would definitely see – we continue to expect that our operating expense numbers will be kind of similar levels for the balance of this year.

Okay. Thanks. Thanks, Jack. Just to kind of talk a little bit about the refi business and capital implications, you've been rebuilding the capital ratio post the CECL and the derivatives charge. And you've got at least one of the rating agencies who pretty much has a pretty harsh capital treatment of your refi loans, treats them kind of the same as the amortizing legacy private loans. I guess I'm struck by the fact that the $2 billion that you expect to originate in the second half, if you kind of multiply that by your capital, required capital ratio, at least according to S&P, that's 10% of your market cap, I guess. And so, how should we kind of think about that? Because it just feels like there's – kind of echoing what Lee had said earlier, given where the stock is trading, it just feels like there should be a little more kind of looking for money in a bunch of other places, I guess.

So, I hear your point here. And when we look at our capital allocation model, we look at a variety of different opportunities. We think that we can originate loans based on the capital that we are allocating to businesses and generate mid-teen ROEs. That's an attraction long-term business versus not being in that space. We can manage that business and the capital implications through a variety of ways. We did it last year. You saw in the year-ago quarter, we monetized the value of that refi portfolio by selling some of those loans and booking a gain. It may not be the best opportunity to do something like that in today's marketplace. But we believe that that would be an attractive place for us to look as credit outlook becomes more stable. So, I think there's a combination of things that one can do. But, ultimately, I think companies are valued more highly with – they have an ongoing franchise capability where they can continuously create and deliver long-term value. And that's really what we're looking to do. And balance that against the amortizing business that is generating or releasing – generating and releasing significant amount of capital that we can return to shareholders. And that's done through both our dividend and our share repurchase programs.

All right, thank you.

Your final question comes from the line of Arren Cyganovich from Citi.

Thanks. In the earlier answered about production levels, I think you said that in-school would be a modest amount. Could you comment on what your expectations for refi production will be in the second half?

Yes, we said $2 billion.

Okay, got it. And then, I guess, kind of to that last point about what level of equity you need to have – at pro forma adjusted tangible at 6%, is that at the level that you feel comfortable to complete share purchases or do you want to see that rise higher to feel comfortable with sending out more capital?

No, no. I think we've said that 6% is – based on the mix of the portfolio today is the right number for us.

Okay. All right. Thank you.

Ladies and gentlemen, at this time, I will now turn the call back to Mr. Joe Fisher for any closing remarks.

Thank you, Celia. I'd like to thank everyone for joining us on today's call. Please contact me or my colleague, Nathan Rutledge, if you have any other follow-up questions. This concludes today's call.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation and ask that you please disconnect at this time.