Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to be Navigant fourth quarter 2019 earnings call.
This time, all participants ARNA listen only mode. After the speaker presentation, there will be a question and answer session to ask a question. During this session. You want me to press Star one on your telephone I when I went to hand, the conference over to your Speaker today, Joe Fisher. Thank you. Please go ahead.
Thank you Sean.
Good morning, and welcome to now means 2019 fourth quarter earnings call.
With me today, our Jack Monday, our CEO and Crisslow our CFO .
After their prepared remarks, we'll 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 maybe 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 FCC.
During this conference call will refer to non-GAAP measures, we call our core earnings a description of core earnings reconciliation to GAAP measures and our GAAP results can be found in the fourth quarter 2019 supplemental earnings disclosure. This is posted on the investors page at Naveen dotcom.
Now I'll turn the call over to Jeff.
Thanks, Joe Good morning, everyone and thank you for joining us today for your interest and Navient.
I'm thrilled to share with you our exceptional results for the quarter in for 2019 overall.
Our results illustrate success in executing our strategy of maximizing cash flows from our loan portfolios.
Improving our funding and operating efficiency.
Leveraging our scale and expertise and our business processing.
In generating high quality loans at attractive risk adjusted returns.
I'm very pleased with the results in each of these areas in 2019.
The strong foundation and momentum they've created for us to continue the success in 2020.
Our actions. This year also demonstrate our commitment to manage capital efficiently to maintain a strong balance sheet, while returning meaningful capital to shareholders.
The results adjusted core earnings increased 16% for the quarter to 67 cents per share.
26% for the full year to $2.64 per share.
Adjusted core net income also increased in 2019 by 12% to 616 million.
Our federal Education loan segment delivered stable net interest margins in 2019.
Benefits from declining interest rates and the execution in a more efficient funding strategies more than offset.
A negative basis spread environment, and the natural trying to lower margins.
Total fee income in this segment increased 8% in 2019 unexceptional performance from our asset recovery services.
Which generated $230 million, an asset recovery revenue in the year, a 67 million dollar increase as we delivered outstanding results for our clients.
And our consumer lending segment, we originated $4.9 billion and high quality high value education loans, a 75% increase over the prior year.
Our fishing and customer focused origination platform makes it easy for clients to refinance their loans its rates based on the credit. They have earned generating typical savings of thousands of dollars and lower interest expense.
Our digital marketing approach to live it's a low cost of acquisition.
And our underwriting model delivers best in class portfolio performance.
The result is a portfolio of loans that generates a very attractive risk adjusted return.
As a result to the outstanding success from our team our ending private education loan balance has grown in each of the last few quarters.
Our private education loan net interest margin improved to 3.3% as we continue to execute more efficient funding strategies that more than offset the increasing mix of lower margin, but higher quality Wi Fi loans on the total portfolio.
It also led to a 3% increase in net interest income in the fourth quarter.
The continued improvement in credit performance in this portfolio contributed to a 73 million dollar reduction in provision expense this year.
And we are seeing stronger performance in delinquency and default levels driven by a strong economy and our data driven approach to support our customers.
As discussed last quarter, the launch of art in school loan product did not meet our expectations.
We have been hard at work, taking the learnings from this experience to eliminate the issues that prevented us from achieving our goals.
We continue to see value creation, a value creation opportunities here and we are determined to demonstrate this in the upcoming back to school season.
And our business processing segment, we absorbed the impact of two significant contract losses, one on price in 2018 in one this year when the state ended the program we supported.
We won numerous new contracts in both the government in health care segment and in particular revenue in the health care Division grew by 12% in 2019.
We continue to see value in this business segment.
In 2019, we applied a concerted effort to leverage our operating efficiency skills and customer simplification solutions to improve our operating margins in this segment.
So while revenue declined by $9 million, our cost reduction efforts led to an 11% increase in EBITDA to $49 million for the year and a 12% increase in our EBITDA margin to 19%.
Our focus on increasing both revenue and efficiency will continue in 2020.
Since we launched Navy and in 2014, we've had a strong focus on maximizing cash flow and improving efficiency.
During the year, we conducted detailed reviews of the projected cash flows from our loan portfolio.
And the study to how to accelerate our operating efficiency.
These project help these projects helped us sharpen our focus and accelerate our progress.
This continued focus on operating efficiency led to a 3% decline in comparable operating expense in 2019.
Even as we meaningfully grew asset recovery revenue in new loan volume.
Also while the more visible owned federal loan portfolio declined 19% in the year.
The total federal loan volume, we service for ourselves and third parties declined by a much smaller 2% due to new account placements from the department of education.
The ending loan balance in our customer segment was also unchanged at year end.
[laughter].
While significant attention is applied to operating expense interest expense is by far our largest cost.
In 2019, we continue to implement innovative solutions to more efficiently fund our loan portfolios.
These efforts have both reduced our highest cost funding source unsecured debt and lowered the cost of our structured financing solutions.
As a result of our efforts in 2019, we reduced the interest expense, we would have incurred by over $90 million, while providing the liquidity to retire $2 billion an unsecured debt.
Continuing to improve and accelerate our funding and operating efficiency remains a top priority for us.
We have numerous initiatives underway that will continue to accelerate improvements in 2020.
Another key component of our enterprise value is maximizing the cash flow generated by our loan portfolios.
In 2019, the education loan portfolios generated $5.3 billion in cash flow, including $2.7 billion from financing activities.
This strong cash flow allowed us to retire $2 billion, an unsecured debt and return $587 million to shareholders via dividends and share repurchases.
In addition to a dividend yield in 2019 of nearly 5% our share repurchase program decreased outstanding shares by 13%.
Our strong earnings allowed for this impressive capital return, while we maintained a strong balance sheet.
As a result, we are extremely well positioned for the implementation of Cecil.
Our confidence in our capital generation forecasts led to the new 1 billion dollar share repurchase program announced last October which we began implementing this year.
Our results this quarter in year were exceptional we saw strong contributions from all areas of the company.
We are confident that our efforts in 2019 will continue to deliver strong results and 20 money.
Thank you for your time and interests and I'll now turn the call over to Chris for a deeper review of our financial results. Chris. Thank you Jack and thank you to everyone on today's call for your interest in Evian.
During my prepared remarks, I will review the fourth quarter and full year results of 2019.
I'll be referencing the earnings call presentation, which can be found on the company's website in the investor section.
Starting on slide three adjusted core EPS was 67 cents in the fourth quarter and $2.64 for the full year.
Full year EPS was nearly 30% higher than our original guidance given at the beginning of 2019.
Key highlights from the quarter and full year include.
Refinance loan originations of $1.6 billion in the fourth quarter more than double our volume from a year ago, which contributed to net interest income growth in our consumer lending segment.
Total refile originations in 2019 of $4.9 billion.
Sustained improvement in credit quality across our entire education loan portfolio.
Further optimization of our capital structure.
Industry, leading efficiency ratio of 49% for 2019.
Core return on equity of 18% for the quarter and 19% for the full year and the return of $111 million to shareholders through dividends and the repurchase of 5.8 million shares.
It's moved to segment reporting beginning with federal education loans on slide four.
Core earnings were $136 million for the fourth quarter and $525 million for the full year.
The net interest margin was 87 basis points for the fourth quarter and 83 basis points for 2019.
These margins benefited from the continued improvements in our funding efficiency, along with a favorable interest rate environment.
As a portfolio of FFELP loans continues to amortize, we remain focused on managing our net interest margins across the portfolio and reducing charge offs and expenses to maximize cash flows.
Charge off rates have significantly declined from a year ago with the annual charge off rate at seven basis points. This performance exceeded our original estimate of eight to 10 basis points.
As previously reported by the Department of Education, our federal servicing contract was extended in December for a one year period with two additional six month options.
Asset recovery revenue increased 27% or $14 million from the year ago quarter.
The increase was primarily driven by our asset recovery teams impressive efforts to achieve higher account resolutions on a declining inventory of previously defaulted federal education loans.
Now, let's turn to slide five and our consumer lending segment.
Core earnings in this segment, where $89 million for the quarter and $316 million for the full year.
The year over year increase was driven by an improvement in net interest margins strong education refinance loan originations and improved credit quality.
I highlight of our effort to improve our funding efficiency was the restructuring of one of our bank facilities, which raised nearly $650 million in the fourth quarter at a significant interest savings.
Credit quality in this segment continued its strong performance as a total delinquency rate rate declined 22% and the forbearance rate declined 10% year over year.
The total private education portfolio of $22.2 billion was flat year over year, Herb primarily driven by the growth in Wi Fi originations.
During the quarter, we originated $1.6 billion of education refinance loans at attractive spreads.
In addition to the improvement in refi spreads we saw benefit from a favorable interest rate environment in the quarter.
Our 2020 net interest margin guidance of 310 of 300 to 310 basis points reflects a less favorable interest rate environment, along with a greater proportion of high quality refinance loans in the consumer portfolio.
We expect full year private education loan refinance loan originations of at least $5 billion in 2020.
Let's continue to slide six to review our business processing segment.
Total net income for the full year grew 10% to $33 million.
This was accomplished by growing EBITDA margins to 19%, which was at the high end of our guidance.
For the full year, we achieved EBITDA of $49 million and expect to see similar levels in 2020, as we replaced revenue from contract terminations in 2019 with new contracts in 2020 and continue to drive expense efficiencies.
Let's turn to slide seven which highlights our financing activity.
During the quarter, we returned $111 million to shareholders through dividends and share repurchases, reducing shares outstanding by 13% year over year.
As of yearend, we have $1 billion of authority remaining on our multiyear share repurchase program.
And ended the year in a very strong capital position as we approach the implementation of Cecil.
In the quarter, we issued $1.2 billion of term private education, ABS and $497 million of term FFELP ABS.
Our 2019 refi ABS transactions are being executed at attractive margins and inline with our long term our OE goals.
During the fourth quarter, we reduced our 2020 unsecured maturities through a make whole call of $1 billion, resulting in a loss of $14 million in the quarter.
Overall, we reduced unsecured maturities by $2 billion during the year unrealized gains of $33 million.
This has reduced our total unsecured outstanding debt to $9.6 billion.
As we have previously stated the implementation of Cecil reduced our capital ratios, which will rebuild quickly as a result of continued increased profitability in 2020.
We estimate our incremental pre tax allowance to be approximately $800 million on day, one of implementation, which is in the middle of our previously disclose range.
As we referenced on the third quarter earnings call with the implementation of Cecil and the growing mix a private education loans. The T. N. A ratio is less aligned with our capital management targets.
As our consumer assets become a greater overall percentage of our balance sheet. We feel it is appropriate to move to a tangible equity ratio that is more in line with the capital and leverage views the rating agencies and investors.
Adjusting for assets, an equity related to our FFELP portfolio, we plan to maintain a tangible equity ratio above 6% by year end 2020.
This change in metric does not change our capital return philosophy, and we remain committed to ensuring excess capital has returned to shareholders.
We expect our 2020 capital return to be broadly in line with 2019.
Before turning to GAAP results I'd like to recap our full year 2020, EPS guidance and targeted financial metrics on slide eight which excludes expenses associated with regulatory costs and restructuring expenses.
In 2020, we expect the targeted financial metrics on slide eight to contribute to core earnings per share between $3 in $3.10 core our ROE in the high teens to low twentys and a core efficiency ratio of approximately 50% well ending the year with an adjusted tangible equity ratio.
Joe above 6%.
Finally, let's turn to GAAP results on slide nine.
We recorded fourth quarter GAAP net income of $171 million or 78 cents per share compared with net income of $72 million or 28 cents per share in the fourth quarter of 2018.
The differences between core earnings and GAAP results are the marks related to our derivative positions and the accounting for goodwill and intangible assets.
In summary, 2019 was a very successful year, we meaningfully exceeded our targeted financial metrics for the year saw significant margin improvement grew a refi business maintain expense discipline and strengthens our capital position, while returning nearly $600 million to shareholders through dividends and share repurchases.
We look forward to continue in this momentum into 2020 and I will now open the call for questions.
As a reminder.
Tim.
Our one on your telephone again that star and the number one.
Question press the pound key please standby, while we compile the Q and a roster.
Your first question is from the line of Rick Shane with JP Morgan.
Hey, guys. Thanks for taking my questions. This morning.
[noise] weighted to the read five portfolio.
Two questions. When we look at this on a seasonal basis, what should we roughly assume as a lifetime loss rate.
For that product.
So great question, though it's 1.5%.
We estimate life loan loss and what I'd highlight is and you can see this in the trust data. We are running well ahead of that as a life alone estimate but that is the estimate we're utilizing well below it well below it sorry.
Perfect. Thank you and then when I look at slide 17.
And so we're trying to reconcile the volumes with the deals that you did during the year that makes sense.
I'm not showing necessarily understand the free cash flow metric, though.
If you could just put a little if you could just articulate or explain that a little bit more.
Related to the deal size and the free cash flows.
So so that's a great question because it may have been a little confused and that's the free cash flow estimate of the underlying borrower. That's a key metric that ABS investors look at to determine credit worthiness assist another metric along with FICO et cetera for people to determine the underlying credit of the of the broader portfolio.
Got it okay perfect. Thank you so much.
Your next.
Your next question is from the line of Mark Devries with Navient.
Yeah, I guess as James companies change jobs there Mark.
So.
Once again.
Consolidations really came in quite strong above expectations.
Just give us some color on kind of.
What's what's driving that kind of what's your outlook is going forward.
Yes, I think there is a growing awareness of the opportunity by consumers in this space and when you look at.
The way that federal loan programs work and some other private loan programs for the in school side of the equation.
They have a higher interest rates.
In particular on the private side, but also in the Grad Grad plus arena and for the many customers those higher interest rates reflect the uncertainty of the customers' ability to graduate are the likelihood that they'll graduate and what kind of job opportunity. They get when we come to the rifai side of the equation.
We're addressing customers had been in repayment for three to four years and as Chris indicated on the last question have substantial.
Free cash flow.
That gives them the ability to.
Demonstrate their credit worthiness stronger and so we're able to reprice those loans saving the customer thousands of dollars often thought often thousands of dollars a year.
Interest expense.
And so more and more people are becoming aware that and taking advantage of it.
Overall, it's still a small fraction of the amount of loans that are made in the federal loan space. So we estimate the annual originations to be around about $16 billion, a year and re fi compared to about $100 billion a year of federal loans than another.
15, or so 12 to 15 of private education loans a year.
On the outlook for 2020, as Chris said, we expect to originate at least $5 billion.
And we nothing we see at this stage in the game, where we said at this point in January would indicate anything other than a continued strong demand for the program.
Okay got it.
And then.
Chris indicated that.
The NIM guidance, you provided contemplates less favorable rate environment, and I guess, some mixing out of some of the lower rate refined.
Nations, but I think Jack you alluded to.
Seeing additional efforts in 2020 to continue to improve the funding cost is that.
Contemplated.
And your guidance and it's not.
Does that mean, there's upside there as you execute on those opportunities.
It is contemplated and but we continue to.
Look for ways to improve on that side of the equation. So that comes from.
Executing at a at attractive spreads, we just priced and ABS deal yesterday at a at very attractive spreads.
I think the the way the market prices working today, our function at the moment.
That's a good opportunity to for us to continue to improve efficiency.
Some of the financing transactions that the finance team took on this year really leverage the.
The excess collateral in our securitization transactions that allowed us to borrow at substantially lower rates than where we would have traditionally in the past and the unsecured markets and you're seeing that in the and the net interest margins into in 2019 in the roughly $90 million.
Interest savings that.
We experienced start benefited from and this year.
Okay got it thank you.
Yes.
Your next question is from the line of Lee Cooperman with Omega.
Yes. Thank you good morning, congratulations on your excellent performance.
I have a question you have an authorization to $1 billion that you put in October .
Represents about 30% of the market cap.
Stock is trading at five times the earnings guidance that you provided yields for the half percent.
Have you ever thought about accelerating your program and doing a Dutch auction tender.
To get the shares out before the stock goes up a lot more.
Thanks for your comments Lee we have actually looked at a number of different ways that we can execute.
Our share repurchase programs both more efficiently.
And in some instances more quickly as well.
Because of the size of our program, where we're actually buying pretty close to 10% of the of the trading volume, which is about where you can kind of cap out there and when we look at some of these other programs light.
Sellers share repurchases or tenders, we actually don't expect that we would get a whole lot more than what we're acquiring in the open market. So to date. This has been our our view that this is the most efficient way to do that.
But we always look at new opportunities and evaluate this regularly going forward as well it may change tomorrow, but I noticed your top four holders oil reduced new exposure.
Then got shows 22.9 million shoes, They show 2 million shares in the third quarter Canyon reduced under 10% Blackrock reduced variability large holders. So 5 million shares in the fourth quarter seems to me that.
You might be able to get more strike and you think.
Tend to referred as highly accretive what does the housekeeping question what are the actual shares outstanding at year end.
The average CSC is about 222 million.
I don't know the as they actually was to 18 200 around 218 million from anywhere from 280 mood fund so billion dollars.
I assume most of the billion dollars is left.
Yes.
Just started executing against that are implement I would reconsider it distress. Your advice is what they think would happen.
Listen it seems that where they would do return on equity that you're projecting.
The stock deserves to be selling at a much higher price is trading at my guess is as you continue to shrink the cap. If you read produced results you're producing the stock will be higher I think the idea is to get it a lowest price possible at the highest price was just the thought but congratulations on your excellent performance.
Thank you.
Our next question is from the line of Sanjay Sakhrani with KBW.
Thanks, Good morning, Jack you mentioned the growth in the consumer lending Eni.
This quarter in the fourth quarter and I was wondering if we're getting to the point where that growth rates inflicted sustainably or maybe you could talk about when we get there.
Both in consumer lending and maybe in the future on a consolidated basis.
Well certainly the consumer lending portfolio as I said, the net interest income actually increase in the fourth quarter and that's benefiting from two things right one is improving NIM.
And the other is the addition of the of the re Fi business certainly as Rifai portfolio grows to be a more material percentage of the total private loan portfolio those factors will.
Combined to drive net interest income higher.
You know our forecast right now is for the.
Net interest margin to decline in 2020.
We had a big we had a nice benefit from the rate environment, particularly in the fourth quarter as.
When the fed cut relative to when the loan portfolio reset.
We're not anticipating a repeat of that and in 2020.
So that those those are some of the drivers there, but we're getting very very close to that inflection point as you point out.
Okay, and then I guess.
So a follow up question on some of these regulatory items that are outstanding could you just give us an update maybe on the CFP be some of the contracts as well and.
Maybe also just touch on what might be out there in the marketplace in terms of portfolio acquisitions. Thank you yes.
So on the regulatory front.
With that the these cases just move to add a.
Unfortunately at a snails pace.
And that's just a function of the of the legal process process and the civil matters.
At this stage on the CFPB side of the equation, where through fact discovery, we're in the midst of of expert witness.
Discovery and resolution, we hope to have that wrapped up sometime in the.
First half of this year.
That would then allow us to.
File our typical motions for summary judgment is we've pointed out in as the courts have actually we leased information we have.
Summaries of the depositions of the witnesses that the CFPB plans to present.
At the trial and as we pointed out in the past not a single one of those witnesses.
Has at has actually asserted that we failed to disclose the information that the CPB has said we had in fact, they all said no Navios did provide me with information about driven repayment and a third of them, we're actually enrolled and income driven repayment program. So.
Little perplexing on that side.
Obviously, our desire is for Swift Justice here were confident on the facts and circumstances of the case, we lead the industry and enrollments in income driven repayment, we have developed innovative solutions that help borrowers.
Enrolled on the program more easily you know just.
Take a little side tour here.
We implemented a program that the way the income driven repayment program works under the Department of Ed is that the customer has to leave a services web site and go to student loans I got to complete a 10 page application and we found that customers either weren't doing that where the complexity of the form was a bit overwhelming and so we were seeing only.
About 27% of customer success, who we were qualifying for a lower monthly payment under IDR.
Successfully completing that foreman 60 days, we developed and electronics solution, where we take that information populate the application for the customer.
Send it to them for E signature and we were able to increase the success rate from 27% in 60 days to 72% and 10 days.
And so were really making these are the types of efforts in innovation that we bring to the table to help our customers.
Fine solutions.
That keep them out of delinquency and default.
We hope these cases get resolved quickly and as I said, our case, our facts and circumstances remain strong on the development side of the equation the opportunities to buy federal portfolios is obviously getting smaller and smaller we acquired about $500 million in 2019.
Most of that is.
Rehabilitation loans and certainly as the portfolio continues to amortize.
On our books, you're seeing the same opportunities amortize away on on other entities and just that the share volume of sellers is relatively small.
At this at this point in time.
Thank you.
Welcome.
Your next question is from the line of Marc Hoffman with Bank of America.
Hi, Jeff christened Joe.
On the capital held why is over 6% or 6% the right level for basically private loans.
Great. Thanks for the question.
The primary reason it aligns with the rating agencies.
There are metrics to keep our ratings.
Where they are and so it really is a metric that supports the where the other rating agencies metrics or.
So our analysis, which we just somewhere above 6% keeps us in compliance pick out I'd just add to that if you look at our securitization transactions in the advance rates, it's kind of it's more or less consistent with that processing with the adoption of Cecil.
We're no longer.
We've moved from holding capital for unexpected losses in the near term to reserving for the full expected life of loan losses and so.
The combined the combination of the loan loss reserve and the capital levels are are actually much much higher than just a 6% level that you have seen historically.
Sure.
On the FFELP loan delinquencies year over year, they were up 150 basis points.
Just wondering if you guys are seeing anything.
More broadly that can explain that.
Trend.
Most of what so as we came out of 2018. There are number of natural disaster forbearance has that got applied. It. These are program rules have been issued by the department of education, So if a county or areas to.
They declare a natural disaster any delinquent accounts has brought current.
And then held in forbearance until the disaster period is lifted and so you end up with a.
Yes, those disasters or lifted you end up with a little bit of a bubble that moves through the curve and thats really what you're seeing in the delinquency statistics, there overall, our performance and our expectations on delinquency and default.
Continues to be extremely strong where at or near all time lows in terms of both delinquencies and defaults on the both federal and private loan portfolios and see that continuing in 2020.
Given the current strength of the economy.
Got it.
That's helpful and then last one from Chris.
Cost of debt spread basis is at a five year low.
I wondered roughly what's the difference between the cost of funding on that restructured bank facility you mentioned.
Impaired.
Thank you could raise unsecured funding.
So it's definitely narrowed by its kind of pega somewhere around 100 basis points, but obviously there is theres term and the high yield market, depending on 10 or so obviously, we also have noticed.
And and been encouraged by our or credit spreads getting back to where they should be are continuing to tighten.
But there still is a little bit of delta between the two although I would highlight that obviously the tenor is different and that is important as well.
Totally so roughly 100 basis points.
I think today, where you're talking I mean, I think you're probably quoting something in the low fives ish and who knows but with a further including the LIBOR spread so it's somewhere around 100.
Okay.
Perfect.
Thank you.
Your next question is from the line of Henry Coffey with Wedbush.
Yes, good morning, and let me add my congrats on a great year.
On the political front.
I know you mentioned a little bit about the servicing contract I hope I got that right I do get on late but on the political front or the education reform front. The Trump administration spaces, we got a year to go.
Are there any initiatives that.
They're looking at in the department of Ed that our of substance that you think will get accomplished by year end I mean by by next January or what exactly I mean, we had great expectations going in.
What exactly is the agenda and what are likely accomplishments that would help education funny inside of the department of Ed.
If any.
Well the Big Big initiative that the Department of Ed is working on is the next generation.
Servicing platform.
And that that process has been underway and been through various rounds of Rps now for a couple of years.
The expectation is that they will actually award contracts.
In 2020.
But to be honest I would have said the same thing in the beginning of 2019. So we'll have to see how that goes there is a new leadership team at FSC, they're very focused on the customer experience.
And improving outcomes, so and really working.
With servicers to be able to achieve that kind of.
A collaborative way, which we view as a positive.
So those those are probably the biggest initiatives that that we have going on.
Theres a lot of talk of course about borrower activity, how much whose whose financing their loans, whether or not there affordable.
There's also discussion about some of the repayment options that have.
That allow for lots of negative amortization on the loan programs and those are things that we have talked about in the past.
And pointed out that needs to be maybe some better solutions to helping customers be successful.
In pursuing higher education, completing it and then also how they finance.
And it's well how would you judge the probability of us getting something of substance done by the end of 2020.
There I mean, it would it's good for a goal.
And I.
I would say, it's good I would say it's good.
Alright, Thank you very much.
Your next question and I am sorry, as a reminder to ask a question you May press star and the number one again that star and the number one. Your next question is from the line of Moshe Orenbuch with credit Suisse.
Great. Thanks.
You guys have mentioned that you're kind of core expenses were flat with the third quarter and a year ago and the guidance for 2020 use a 50% overhead ratio up from 49. This year could you kind of maybe square the circle on that a little bit I mean are you expecting given that the margins are expected to be down and 22.
Could you talk a little bit about what the actual outlook for expenses kind of isn't in 2020 front in dollars.
So we're giving the efficiency ratio as an estimate obviously that can give you guidance around from a from a dollar perspective, we didn't give a dollar perspective, but I can tell you is from a dollar perspective will be down.
As we continue to amortize or as we continue to work on our expense base and drive expenses down so expenses will be down efficiency ratio will be relatively flat.
But we didnt give a specific dollar range this year.
We are working on a number of a of initiatives to continue to improve operating efficiency. When we sold our servicing platform. We began a process which were continuing to do work for the acquire on that space. We expect many of those things to wrap up in 2020.
We expect to be able to retire our mainframe as an example, which.
These are some of these items that as we complete this year and move into 2021, I will continue to see ongoing improvements and our overall operating efficiency ratios.
We're pleased with what we've been able to accomplished to date as Chris said, we expect total expenses to be down again in 2020, despite continued growth in loans.
Loan origination volume and relatively flat.
Service levels surface volume for the loan portfolios.
Right I mean, I guess I just.
Struggle with the fact that.
The interest rate environments been very very healthy and you doing the absolute right thing to take advantage of that as much as much as you counted for as long as that persist but.
There's no kind of guarantee the stat.
It's kind of stays with you and it's good that your your your expectations for 2020 do have some.
Some some pressure on that net interest margin, but I guess, that's that's where it's it's kind of tricky I guess.
Question and there is.
You know if as you think about the refi business long term I mean, no doubt the demand will be there, but how do you think about.
Quote unquote normal interest rate environment what.
Thanks to volumes you would be willing to do.
Well I think the volumes are really the opportunity here is not just the demand side of what customers want but what we're willing to finance I think the the presentation includes that.
A summary of the financing transactions, we completed in in 2019 for Rifai rejuvenation and those types of margins are kind of what you we would expect to be able to continue to deliver.
Where pricing our product for relative to our funding costs.
And we expect to generate.
Attracted to get to the are are we targets that were shooting for these are the types of margins. We think we need to continue to.
Continue to target.
Okay, what demand would be is really a function of what the underlying interest rates are in the borrowers loans. So.
You know for Grad plus and.
And private student loans, the coupons on those zones are relatively high and in some instances, particularly private the majority of those loans of variable and so customers are looking to take advantage of the fact that they borrowed when they were unemployed and a prospective good credit.
234 years into repayment are now an excellent actual credit and they that prices that we can offer them on those loans based on that credit profile are substantially better than one can get.
From being a prospective good credit.
Got it thanks.
Yes.
Thanks.
Your next question is from the line of John Hecht with Jefferies.
Thanks, guys for taking my questions.
Most of my questions have been asked and answered. So a couple of yes, a couple of kind of interesting ones number one as you guys have had very strong originations is there any characteristics.
That you would say we're.
Sourcing momentum is persistent.
I think our success in the refi space is really driven by.
A couple of its one is the the way customers can apply for US a re fi loan here, it's very intuitive, it's very customer friendly. It's very it's our at the user experience is we believe is the best in the industry.
The underwriting model, we approach that we employ I'm also gives us greater insight into.
Prospective capabilities not just stuff you know the trailing FICO score.
That free cash flow number is an important part of our our underwriting metrics.
And it allows us to be able to.
Better better manage and understand the credit profile of the customer and then the last few trial just add on that side of the.
Application flow as the customers and in these in this area are really looking more about.
How much making a payment based on what they can what they want to fit within their budget and so oftentimes instead of saying I want a 10 year loan or a seven year alone. They're looking at this and I want to pay X dollars per month and that equates to a 7.2 year alone and our underwriting process and pricing models.
Hi are geared towards that which means that they can get rates that are more in triple it relative to a five or seven year term that say a competitor might be offering.
And then the last piece I would say is our our marketing approach is principally a digital marketing approach and so we are working through digital channels, which is where our customers I really want to.
Really live and our active.
And that's meeting them, where they are but it also drives a cost of acquisition of a typical typical account that we estimate is about half of what the national averages in this space.
Because we don't.
Have a heavy reliance on things like direct mail.
Okay. Thanks, very much for that color and then second question.
You guys. Historically, you evaluated purchasing FFELP portfolios you bought some special servicing platforms, just wondering any any discussion points around a an acquisition pipeline or opportunities around that.
I think the opportunities to acquire.
Legacy student loan portfolios continues to shrink as we would have expected we made a concerted effort when we.
Were launched in 2014 to do that I think cumulatively, including refi loans, we've now acquired.
Thirtys 37 billion dollars' worth of student loans since 2014.
The majority of those would have been FFELP and private loan portfolios acquired.
But our focus today is now on.
The greater opportunity, which is originations at both re Fi and then for the upcoming back to school season.
In school lending.
Alright, great. Thanks, guys.
Your next question is from the line of Aaron Scyon of it with Citi.
Thanks the.
Contingent collections receivables for.
For the business processing business or have been rising, but you still have a declining amount in the federal side is there any opportunity to get awarded additional.
On the defaulted federal side, and if not should be expect just the total asset recovery revenues to decline in in 2020.
Yes on the federal side, we were we received a onetime very significant placement from accounts from the department of Ed back in 2018 in that portfolio is what contributed to the growth and asset recovery revenue.
That has been that has been shrinking or though we'll continue to be a meaningful dollar amount in 2020, we certainly are looking for more opportunities in that space.
With the department.
One other things that we would point out is that our recovery rates, which is.
Really a function of assisting customers, who have previously defaulted on a federal loan rehabilitate that loan get it back into good standing.
And give them the opportunity to be able to perhaps.
Continue to pursue their education and complete it has been far ahead of the competition.
There were.
In terms of the just a success rates in that space, we estimate that we were about 46% better.
The next best performing collection agency in that space in terms of recovery rates. So we will certainly continue to pursue opportunities in that are in that arena going forward.
Thanks.
And at this time I'd like to turn the conference back over to Joe Fisher.
Hi, Thanks, Sean like to thank everyone for joining us on todays call. Please contact me or my colleague Nathan Rutledge. If you have any other follow up questions. This concludes todays call.
Thank you all for joining today's conference call you may now disconnect.