Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Neb hit first quarter 2020 earnings Conference call. At this time all participants are in listen only mode. After the speaker presentation. There will be a question in are sufficient to ask a question. During this session you will need to press star one on your Thomas.
Please be advised that todays conference is being recorded if you require any further assistance. Please press star zero I would now like to had a conference over to your speaker for today Mr. Joe Fisher. Thank you. Please go ahead.
Thank you wish Ana good morning, and welcome to Navients, 2021st quarter earnings call with me today, our Jack money, our CEO and Chris loan our 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 maybe materially different from those discussed here.
This could be due to a variety of factors.
Listeners should refer to the discussion are those factors on the company's form 10-K, and other filings with the FCC.
For Navient. These factors include among others, the risks and uncertainties associated with the severity magnitude and duration of the cobot 19 pandemic.
The work from home policies and travel restrictions that's been put in place did not negatively affect our ability to close or books and maintain our financial reporting systems internal controls over financial reporting for disclosure controls and procedures.
During this conference call, we will refer to non-GAAP measures, we call or core earnings.
A description of core earnings a full reconciliation to GAAP measures and our GAAP results can be found in the first quarter 2020 supplemental earnings disclosure. This is posted on the investors page at <unk> Dot com. Thank you and I will turn the call over to Jack.
Thanks, Joe Good morning, everyone and thank you for joining us today.
I Hope you and your families are healthy and staying safe.
These are challenging times. This morning, we will share the steps we've taken in response to the crisis review our quarterly results discussed the estimates we have made about future financial impacts.
Let me start with our response to the Cobot 19 crisis.
As this crisis evolve we took early and decisive action to protect the health and safety of our teammates.
We expanded our work from home capabilities and implementing best practices and safety in hygiene to protect those who needed to come to the office.
We were able to quickly and successfully moved 90% of our team to a work from home status.
As a result, we have thankfully had less than a handful of positive cases, among our employees.
We've also focused on meeting the needs of our customers on clients.
Our team Roshe This challenge.
Not only meeting the normal workflow.
A rapidly implementing and deploying cobot relief information in options across our businesses.
And my call listening it is clear that the programs. We have implemented are providing important relieved to our customers some of whom are on the front lines.
We've also responded to those impacted by the ongoing cobot 19 crisis by deploying hundreds of teammates to assist states in processing the surge of unemployment claims they are receiving.
With just a few days to prepare we were able to respond to incoming calls and provide support.
This is a great example of how team Navient is re purpose seen our skills to help during the crisis.
As we prepare to our team in our business for the rapidly changing environment. We also thought about how we could help support our communities.
Our prior business continuity planning process had included stockpiling to supply than 95 mass.
Clearly these mass met a higher need with the frontline responders in our communities.
So we donated our stock pile of nearly 10000 mass to local hospitals and others to help protect those who are treating the SEC.
To me the best news of this quarter is that we kept our team healthy met the needs of our customers and clients and kept everyone on our team gainfully employed.
Turning to our financial results core earnings this quarter were 51 cents per share.
Compared to 67 cents in the fourth quarter and 58 cents in the year ago quarter.
Earnings this quarter included a 95 million dollar provision for loan losses, or 36 cents a share.
On the financial side, our company remains strong.
We are carefully managing our expenses capital expenditures and balance sheet.
We believe we have ample liquidity and we're seeing steady performance in cash flow from our student loan portfolio and processing businesses.
Early in the first quarter, we completed our plan unsecured financing activity for the year, raising new proceeds and extending the maturities of short term bonds.
We also completed 1.9 billion and term ABS issuance and most recently expanded the size and extended the maturity of some of our warehouse funding facilities.
Looking forward cash flow from our loan portfolio and services contracts remain a strong source of liquidity as our very seasoned loan portfolio has experienced lower levels of stress.
To be clear, we are here to assist our customers and clients who are impacted by the virus and its economic consequences.
We offer numerous relief options, including immediate payment relieved to those a need and we'll continue to do so.
We've also seen most borrowers continue to make payments according to their payment plans.
And while forbearance rates have risen the balance of loans delinquent has not.
This trend has continued into April.
As a result, we expect that defaults in both our private and FFELP portfolios will be significantly lower in 2020 than expected at the start of the year.
While we were paying close attention to our customers. It is too early to know the full impact of this crisis or the path and timing of the recovery.
How long does this crisis last how many more will lose work and what the recovery will look like are all questions. We can only guests that.
Nonetheless, we have look toward other significant economic crises, including the great recession and the more recent regional natural disasters to guide us.
As a result, our provision for loan losses, this quarter totaled $95 million, bringing our total reserves of 2 billion dot to $2 billion at quarter end, which represents reserves equal to 7.1% of our private loan portfolio and 25% of the risk sharing component of our FFELP portfolio.
While our portfolio strong credit characteristics and the historic resilience of the U.S. economy provide hope for the best we're prepared for things to get worse.
Our student loan portfolio is very seasoned and conservatively funded.
Despite the volatility in rates and basis spreads over the last few weeks net interest income was inline with expectations.
Volatility in the basis spreads of our assets and liabilities was a negative this quarter far FFELP net interest margin, which was offset by higher levels of floor income.
We expect this basis spread to improvement in the second quarter.
Other notable items for the quarter include new Rifai originations of $1.9 billion up 92% over the year ago quarter.
Demand was very strong for our products through March.
Given the uncertainty with both funding costs in the economic outlook, we materially reduced our marketing efforts and tightened credit to reduce future originations.
Until we have a greater visibility and funding costs and economic outlook.
[noise] private loan charge offs in the first quarter declined 30% to 68 million compared to 97 million in the fourth quarter.
This decline was driven by the strength of the economy into March.
We expect charge offs during the balance of 2020 to be lower than 2019, and our original forecast for 2020, given the increased use of payment relief options.
Private loans, and forbearance increased to $1.6 billion or 6.9% of the portfolio at March 31st.
This increase is entirely driven by our covert 19 relief options.
Loans and forbearance continue to increase in April to $2.8 billion as of April 15th.
This quarter also saw continued improvements in operating efficiency and while total opex was unchanged from the fourth quarter. This quarter includes $9 million and seasonal payroll related expenses.
At quarter end, our adjusted tangible net equity ratio declined to 3.2%.
Well, Chris will provide greater detail later in the call I would like to remind folks that the portion of our derivative book hedging floor income is mark to market each period and reduces equity in falling rate environments.
The offsetting value, we receive and floor income however is not mark to market and therefore, its value, which increases and falling rate environment is not reflected in our equity.
The significant decline in rates delivered a larger than normal negative mark this quarter.
As a result at March 31st our GAAP equity position is reduced by a cumulative $629 million for derivative valuations.
That will reverse to zero as hedge contracts mature.
As a result, while our equity ratio is below our target range, we're comfortable with our position and our outlook.
While our response to the crisis has taken center stage. We've also continue to work on other important initiatives. For example, we continue our efforts to move our remaining systems off our mainframe.
We remain focused on delivering our in school loan products for the upcoming academic year.
The covert 19 crisis has created unprecedented challenges across all aspects of our lives.
Your company entered this crisis from a position of substantial financial and operational strength to see this crisis through.
Our team has responded with flexibility resilience in innovation to meet the needs of our clients and customers.
I'm inspired by that commitment and I'm thankful for their health and safety.
Now I'll turn the call over to Chris for a deeper review of this quarter's results Chris.
Thank you Jack and thank you to everyone on today's call for your interest in Naveen. During these unprecedented times.
I'd like to add my thanks to team that in their incredible resilience and support helping our customers navigate this challenging environment.
During my prepared remarks, I'll review, the first quarter results for 2020 and provide additional insights on the portfolio and the impact of Cobot 19 pandemic on our business through April 15th.
I'll be referencing the earnings call presentation, which can be found on the company's website in the investor section.
Starting on slide four key highlights from the quarter include delivered adjusted core EPS of 51 cents per.
Provided immediate pain relief to over 200000, Mevion borrowers impacted by Kobin 19 as of April 15th.
Originated $1.9 billion in student loan Rifai.
Loans compared to $984 million from a year ago.
And returned $366 million to shareholders through dividends and the repurchase of 23 million shares.
Let's move to segment reporting beginning with the federal education loans on slide five.
Since quarter end, we've seen our for parents rate increased to 19% and our delinquency rate fall slightly to 10.3% as we provide additional payment release to those impacted by cobot 19.
To add some additional context over 50% of the felt borrowers who have requested repayment relief were previously in a delinquent or forbearance status.
The increase in charge offs in the quarter was primarily a result of the implementation of Cecil which requires the company to include the premium or discount related to defaulted loans in the charge off number.
Going forward, we anticipate charge offs and delinquencies to decline through the rest of 2020 as a greater percentage of borrowers seek payment release.
The net interest margin was 81 basis points for the first quarter within our guidance.
In the quarter, we earned $35 million of unhedged floor income on $16.2 billion of loans as a result of the lower interest rate environment.
The rate on $6.8 billion of these loans reset annually on July Onest and so therefore, we do not anticipate earning floor income on this portion of loans for the second half of the year.
The benefit in the quarter from the unhedged floors was offset by the differences in timing between our assets that are not an average daily reset basis, and our funded primarily with monthly resets.
While we remain cautious the current outlook for interest rates should positively impact the net interest margin on our FFELP portfolio during the rest of 2020.
Now, let's turn to slide six and our consumer lending segment.
Much like the FFELP portfolio, we have seen an increase in forbearance and a decrease in delinquencies from the prior quarter.
Since quarter end, we've seen our forbearance rate increased to 12% and our delinquency rate rise slightly from 3.6% to 3.9% as we provide additional payment relief to those impacted by covert 19.
During the quarter, we saw a 24% decline in the charge off rate and expect further reductions this year as impacted borrowers seek immediate repayment relief.
Year over year increase in net interest margin to 331 basis points was primarily driven by an improvement in the cost of funds.
The increased volatility in rates that occurred in March is implicit anticipated to negatively impact the spread on $10 billion of our primary loans that are funded with LIBOR.
We anticipate this dislocation will continue and need to a net interest margin that is at the low end of our original full year guidance of 300 to 310 basis points.
Total private education portfolio grew 1% to $22.3 billion, primarily driven by the growth in require originate.
During the quarter, we originated $1.9 billion of high quality education refinance loans.
Through the first 15 days of April we have originated $80 million.
We have updated pricing on new originations to reflect the increase in cost of funds in the ABS market and anticipate managing to lower volumes until we see increased activity in the ABS market.
Let's continue to slide seven to review our business processing segment.
Through the first 15 days of April we are seeing significantly lower transaction unrelated placements and both government services and healthcare revenue cycle management compared to the first 15 days of the previous month.
However, we have been able to transition hundreds of our experience bps colleagues to support stay clients working to help their newly unemployed residents excess benefits implemented in the cares Act.
These new opportunities are expected to reduce the negative impact bps is seeing as a result of cobot 19.
In the quarter total bps EBITDA margin fell to 7% from 21% a year ago.
The decline in margin was primarily driven by a contract by contract terminations and expirations that occurred in the second half of 2019 combined with planned investments to improve long term operating efficiencies and the impact of cobot 19.
Let's turn to slide eight which highlights our financing activity.
We successfully accessed the funding markets during the first quarter, beginning with the issuance of $700 million of unsecured debt that matures in March 2027.
$190 million of this issuance was used to reduce 2021 maturities.
In the quarter, we issued $1.9 billion of term private education, ABS and refinanced $472 million, a private education repurchase facilities that both expense extended term and reduced overall costs.
On April Onest, we extend the they felt facility to 2022 and expanded the total capacity in our private education refinanced facility to $2.6 billion.
We ended the quarter with an adjusted tangible equity ratio of 3.2% and $1.7 billion, a primary sources of liquidity of which $1.1 billion as cash.
Let's move to slide nine to provide greater detail on the movement that occurred in our equity and allowance during the quarter.
It.
The implementation of Cecil reduced our capital ratios, which we plan to rebuild over the course of 2020.
The adoption of seasonal reduced equity by $620 million, which was within our previously disclosed range.
In addition to get back to do is reduced as a result of the accelerated repurchase of shares that occurred in January and as a result of the change in derivative marks that occurred on derivatives that hedge interest rates.
The mark to market on the derivatives reduced shareholders' equity in the first quarter by $394 million, bringing the cumulative negative mark to $629 million.
Importantly, these negative marks will reverse to zero as the hedge contracts mature over the next several years.
Finally, let's turn to GAAP results on slide 10.
We recorded a first quarter GAAP net loss of $106 million or a negative 53 cents per share compared with net income of $128 million or 52 cents per share in the first quarter of 29 team.
The net loss in the first quarter was the result of $236 million, a pre tax mark to market loss on derivatives and hedging activities as a result of the significant reduction in interest rates.
In summary, we began 2020 with a strong start to the year executed on a variety of financings that positions us well for the current environment.
Lastly, transitioned our workforce to a work from home model and our providing solutions to our borrowers and customers to help them successfully navigate this pandemic.
Well, we are uniquely positions with robust liquidity and a well seasoned and partially guaranteed loan portfolio. The difficulty of providing guidance at this time as a result of the pandemic has led us to temporarily suspend our full year guidance.
Ill now open the call for questions.
As a reminder, if you would like to ask a question. Please press star followed by the number one on your telephone keypad again any star one for questions. We'll pause for just a moment, where we've compiled the given a roster.
Your first question comes from the line of Mark did rise with Barclays.
Yes. Thank you good morning.
Could you give us sense of how much more forbearance activity you might anticipate and also a little more color on kind of the trajectory of credit from here it sounds like.
Near term the forbearance, you know who's going to push charge offs delinquencies lower but how should we think about it going into 2021 and beyond.
Thanks Mark.
So that the forbearance rates certainly.
Accelerated the demand for forbearance was accelerating as we exited March and into April and this is why we gave the April 15th data point.
Since then the pace of demand has been declining although it's still increasing by.
In the tens of millions of dollars.
Each day.
Over the last couple over the last week I still at this at the at this point in time, we still have about 78% of our private loan portfolio is current meaning they're not even one day past due in their payments and over 80% of the portfolio is either current or less.
Less than 30 days past due.
Most and so were that's obviously a very optimistic.
Outcome here, which means that our current borrower base with a mixture of very seasoned private student loans and are more recently originated re fi loans are kind of weathering. This.
This crisis better than most consumers the things that we're looking at here as we grew as we point to is other forms of disaster forbearance is that have happened in the past and what type of payment recovery happens as those crises.
Move away and that's going to be that Big challenge here right is how long does this crisis last how deep how much deeper does it go in terms of job loss. Those are the things were monitoring, but as we sit here today, our customer base appears to be managing this.
As well as can as well as can be hope for.
Okay, Great and can you give us a sense for.
What we should expect from credit performance.
Kind of your seasoned loans versus your newer.
Consolidation loans and.
And how you reserve against those two different.
Groups loans.
Yeah, So we definitely model them outcomes differently and have expect and have.
Expected cumulative future losses are very different for each of those we use the Moody's analytics models to as part of our Cecil bottling expectations and included.
Higher awaits to their severe stress scenarios.
For this quarter's estimate.
But if you look at our portfolio overall as I said, we have a 7.1% reserves now against our total private loan portfolio.
When you look at what others have been publishing in terms of expectations on student student debt and consumer debt.
Our coverage ratios.
Our well within.
The ranges that people are publishing there if you think about it a little bit differently and said the weighting differences of our mix view assume that.
Credit losses on the Rifai portfolio might.
Move from say, 1.5% to over the remaining life to 3% that would imply a coverage ratio of over 9% for the legacy private loan portfolios. So.
Certainly.
Economic conditions can change and.
And the duration of this could have a different impact, but from where we set right now.
We think we're in a very conservative position.
Okay, great. Thank you.
Your next question comes from the line Vincent tick with Stephens.
Hey, Thanks, good morning.
Could you remind us how youre thinking about your capital ratios in this time and.
Also how you're thinking about capital return.
Great. So as you remember in the last call. We had put out guidance that we would get to adjusted tangible equity ratio of about 6% or better by year end as we mentioned in her remarks, we're at 3.2% there will be a lot of.
Capital build that'll happen naturally throughout the year, obviously profitability.
[music].
Somewhere around 25% if interest rates stay the same of our of our marks on our derivative portfolio will reverse out.
So there are a number of positives that will help us build capital throughout the year trying to get back to that 6% 80 ratio. We have already completed pretty significant portion of our buyback program for 2020, and so we will be very flexible and opportunistic throughout the rest of the year.
So that is how were thinking looking about capital, but we feel very good about our capital build we feel.
Great about our liquidity position. So it really is just managing that build and getting us back to the right place over the next 12 to 18 months.
Okay, great. Thank you and.
Thanks. So appreciate the guidance you gave on the segment the NIM.
If you break that out a little bit so funding nice to see that you're able to get different funding sources that we can describe said the ability of.
Funding of the price you're getting there and then how should we think about.
So asset yields and also the floor income we should expect going.
So obviously an interest rate environment. We have floor income will will continue to accrue although I mentioned that we have there our annual resets that are part of our Florida portfolio that after July Onest, we expect to start receiving Floorings Oman.
So so that inevitably is an important component, but on the on the financing side. We obviously got a significant amount done in the first quarter more than we were expecting more than our plan. We accelerated some of our financing activities. So we got up the 700 million dollar how you'll done at the lowest rate this company's ever posted.
Hi yields coupon.
And so we actually for the rest of year have no real financing needs. We have we obviously would like to the ABS markets to recover.
Improve and we'll watch there and we will look to execute on those when the market gets back, but we have really no real pressure here for the rest of the year from a financing capacity.
Perfect. Thanks very much.
Your next question comes from line of my Gosh.
With credit Suisse.
Great. Thanks.
Could you could you talk to you in a Christian and check a little bit about the cash flows.
Thank you that you're likely to see from the portfolio the rate of change given all of these changes obviously.
You've got the for parents and you've got to general probably slow down in prepayments I mean, how do we think about that and and anything that that means in terms of both.
The amount of cash you're likely collect over the balance of this year in next.
The license.
Yes.
Okay. Great question. Thanks for asking so as you also obviously, we remove the cash flow forecast from our materials only because there's a forward looking guidance number instead wanted to pull them out what I could tell you as we've done a significant amount of stress testing on our cash flows over the last.
Three to four weeks you.
And with our own revised internal estimates, we don't expect our cash flows to be that meaningfully impaired.
Obviously, there will be a slight decline im residual cash flows, but service and cash flows are top of the waterfall.
And our expectation is we are and they still pretty strong.
Cash flow position.
Versus what we were expecting before this crisis I think inevitably ways of moves that are helpful. But there really wasn't that significant move in our stress testing as a result of this and obviously that's as of today is to be economic environment gets significantly worse, there will be there will be some some deterioration, but I would just tell you.
But there is a significant amount of resiliency and round their cash flows, giving the conservative giving the servicing component, giving the return a component of principal versus interest that really benefit the company.
I would just add and that led the way our financing structures work you know the principal payments are our coming down as borrowers are using forbearance the duration of our liabilities that are funding those assets through the ABS markets are extending and so its a.
I said, it's a match off in terms of those cash flows which is why are.
Stress scenarios hold up so so strongly during this during crises does.
Got it.
And.
I would assume that the that life extension, though does mean that there's cash flows into future periods that I mean, if we had those tables in front of us you'd be adding more interested in later periods. Just said is that correct right and in the absolute value of them would be higher as well because you're you're asked.
It has a longer average life.
All right.
Right Okay.
Hi, I guess could you maybe just give a little more detailed at one of the previous answers about these annual resets on the floor income like how significant is that have now.
Much of an impact second to have in the back half.
Slide $6.8 billion of our 16 ish billion dollar.
Portfolio, but I'd also say given the low interest rates that were there's a huge benefit anyway on the phone portfolio. So right now.
We believe.
It's not a wash, but it clearly.
Isn't as impactful as that 6.8 versus the 16 billion sounds.
I would just add on this obviously our original guidance for the year did not have any floor annual resets lower income in the second half of the year anyways and very rarely do we ever earn floor income on annual reset loans, just because of the way the formula to.
Work so each may when the rate is set up for the July Onest through June Thirtyth time frame. It set out of the money and so rates have to fall a fairly significant amount before they come into any value which have.
Happened obviously.
Beginning late in the fourth quarter and into the into the first quarter. This year, yes. So it was a very unique year for that portfolio compared to serve here is what we did not happen.
So effectively a step up in Q2 step down in Q3, but still higher than it is expected as at the beginning of year.
Because of where rates are yes.
Okay, great. Thanks, a lot.
Thank you.
Your next question comes on line of Lee Cooperman with the Omega family.
Thank you good morning, Im glad to hear that the majority the staff is in good shape into your functioning fine.
I'm a little bit.
Can confused.
And I'd like you to help me out.
You use words like unprecedented times, but we're flexible enough opportunistic.
On the $335 million your spend their stock repurchased about 23 million shares that means you pay $14. A 56 cents for stock you bought back in the first quarter.
Currently is around 60, they have 660 I assume the stock is different a different prices, but if you thought we were were 14 56 in the first quarter.
If things change enough.
That you saw you bought back to stock. Obviously, you started because you basically pay too much but we did not motivate you to be more aggressive these lower prices.
As the environment deteriorated more rapidly than the price of the stock has deteriorated that's what I'm really asking one is what is the status and intention to the buyback and it likely to be as explicit there's possible what does your status and attention the buyback question number one.
A question number two do you envision any scenario, where you would need government assistance.
The reason I'm asking that question is these are left wingers, who are recommending that you eliminate your dividend and stopped buying back stock who don't understand capitalism. You know there. They have no case, if you're not looking for government assistance. So I'd like to address those two things. The first one is quite important to my thinking.
I asked you five years ago, why you were buying back stock in the Twentys. Any response would you thought it was worth 30, well if you bought back as much stock as you bought back at an average price it maybe 14 to 15 that.
30, you thought you were worth is a lot more than 30, which clearly is academic but you know I think it's important to come clean and just explained to people what your expectations or and when do you think this buyback philosophy of yours is you'll be vindicated by the market.
Thanks for your question late so you know this has been a our story has been a capital return story and that principally because of the fact that we have an amortizing portfolio of legacy FFELP and private credit loans and as the as those portfolios generated earnings and release capital to their amortization.
And our policy and practice was to return that back to shareholders through dividends and share repurchases.
Typically we repurchased shares through a normal kind of a price averaging kind of concept where were buying back shares on or on a regular basis through the course of a year.
And that amount is sat based on our our financial forecasts of how much capital excess capital. We would have available to return. This year, we expected that number to be approximately $400 million.
Of share repurchase capital return.
And unusual and this year is that we had an opportunity back in January to buy back a large.
Share block at Ace in time and normally.
That's a difficult.
We don't get those opportunities on our daily basis, where we've been typically buying back about 10 little around the 10% amount of died daily activity trading activity. So that was a unique opportunity. Obviously, if I had to play that hand, again you'd love it to have been different I'd, rather be buying back the shares today then.
I did at the January price.
But I can't really obviously can't reverse that so our plan was to do $400 million a share we've done as you point out $336 million through the first quarter.
Right now that that doesn't leave a whole lot left for the balance of this year. We also have the capital.
Ratio targets that were trying to hit so I wouldn't expect us to see I wouldn't expect anyone to see that number rise above what we had originally forecasted for for the year.
In terms of government assistance.
As we've laid out this morning, we think we're in a very strong financial position from both a balance sheet and cash flow perspective, and while government assistance programs may be available to our customers in the form of.
Some payment relief on federal lease federal federally owned student loans.
It's possible that they may extend some of those benefits to FFELP portfolios. Those are benefits that are received by the borrowers not by the company.
And we would expect to not need any government assistance.
You know.
Through this process.
Similarly, we didnt get or use any government assistance during the last financial crisis.
I I anticipated. The answers you gave the question I just ask out loud I asked myself you spent billions of dollars of capital buying back stock or two and half times the crime price.
You know, we're showing get $4 a sure show below book value.
Does it seem that intelligent to you to say that we got $65 million left to buy back stock should we not look to accelerate some asset sales to buy something back at a fraction of what do you think it's worth would you change your view, but the value of the business the words.
People want fixed income now okay. So we have historically low valuations of your stock historically high valuations of your assets in terms of the government backed fixed income why not sell off more of those assets release capital and buyback at double for 30 or 40 cents.
Went up be more creative I thought process.
Yeah, I mean, we certainly evaluate and look at opportunities.
Oh are effectively what we own when we securitize, a whether it's a federal or private student loan is the equity component in that securitization transaction, a 3% alone or something like that right all right well or yeah. It's the residual whatever that residual interest as its wide around private and smaller on on felt.
We have sold some of those transactions in the past, we view that market is not a particularly efficient market and and unfortunately in today's market conditions, even though the student loan portfolios on the FFELP side, our government guaranteed.
Market.
Pricing would indicate that those spreads have widened in the crisis not tightened.
So we still would.
And the limit there is limited opportunities I think in terms of buyers there that doesn't mean, we wouldn't look at things if they get the situations presented themselves, but at this stage in the game I wouldn't expect that those would be realistic opportunities who.
Well the sad thing is you have 60 fluently and those lift to buy something it listed here for you pay for recently just seems to be that.
I would be more creative but what do I know thank you. Good luck. Thanks, I think there's four.
Your next question comes from the line of Rick Shane with JP Morgan.
Hey, guys. Thanks for taking my questions.
You cited a your Moody's models.
I'm curious if you could help us understand.
The timing of the economic assumptions that were embedded in those models and what the key.
Assumptions were in terms of unemployment at that time versus where they are today.
Thanks, Rick So if you look at our Cecil process will when we were updating our seasonal number for quarter end, what we ran as the March 27 pandemic Moody's model and then there they're scenarios for at March 30, Onest. So those scenarios are all public and you can you can see the inputs generally.
What I would highlight.
I think we'll use what you're seeing as we looked across the financial universe is that is very much in line with work what most of the banks a have reported using and we relied on heavily as well and so I think your question is.
Post March 30, Onest impose those Moody's numbers, what will be updated Moody's model show mobile the impact there obviously has been some some continued deterioration since quarter end.
But it's still very much up in the area, where we're going to end up at quarter end second quarter, but we did rely on what were the most up to date Moody's models and our primary foundation was a pandemic model.
Got it great that's helpful.
Second question and you know look there's I think theres. Some confusion when we think about life of loss reserves and historically things like forbearance and TD ours, historically have had life of loss reserves.
And.
Current loans in delinquent loans do not and so there's been this perception of the convergence between the two.
But the reality is that the performance of all the loan under forbearance is different than our current loan. Despite the fact that might be reserving for them now using the same methodology should we think about as forbearance increases.
And you're experiencing that in the portfolio that that will continue to have an impact on.
Youre Cecil reserve policies.
So.
Cecil obviously moves everything to effectively the same kind of reserve methodology is what was a TDR life of loan loss.
Serve expectations.
Certainly forbearance loans and a forbearance datas versus loans that are current have very different loss expectations, but I would argue and our experience over 40 years has shown that you know alone that's end forbearance and a positive economic environment.
Is different than alone Knutsen, forbearance and a crisis like we have today and so what we look at as we look at who are borrower types are aware they are in their repayments cycle.
You know as an example of that a borrower who was recently.
Just graduating or just recently out of school is going to be a different risks and someone who's been in reached successfully been and repayment for five plus years, which is the majority of our of our private loan portfolio.
We have seen over the last several years that our charge off rates on our private book have been coming down materially they came down again in the first quarter.
Because we do have more flexibility as a.
Nonbank entity, we do offer more flexible repayment options during periods and relief during periods like we're in right now and.
As a result of that you know, even though we expect unemployment rates to rise and forbearance usage to increase we expect defaults in 2022 decline and so.
We look forward in terms of what is the economy forecast that to look like in 2021 as borrowers might be exiting forbearance and what the delinquency and default rates would likely be.
For many of our customers.
Basically some of our with professional degrees and such we expect the.
On their jobs to recover in their income to recover and their ability to continue to make payments are going forward to return, but that's obviously a big question Mark here is how deep is this.
Packed and when does that recovery look like and what does it what shape or does it take those are those are obviously.
Difficult to predict right now and Rick I'll, just add that forbearance is a component of our seasonal modeling exercise and we have a pretty long history and understanding of how forbearance plays out given.
All the natural disasters, we've seen the economic.
Declines we've seen over the last 40 years, and so forbearance isn't a new thing as part of the seasonal modeling process and so it's all it is it is contemplated in our life alone reserve in what we will have something we'll continue to watch in model.
Terrific, that's very helpful guys and.
Thank you for all the hard work you have done to manage through this and it sounds like.
You've been able to do some good thanks for your employees in your customer so thank you.
Thank you. Thank you.
Your next question comes at a line of Marc Hoffman with Bank of America of America High yield.
Thank you hi, good morning.
So on the on earlier comment about not thinking cashless would be many meaningfully impaired.
Just give a sense for the near term like 2020, a cash flows on the private Ed and the FFELP side as well in terms of what meaningfully impaired might mean is it a 10% hit so for example into private Ed loans at the end of the year, you 2020 would be about 1.4 billion.
As cash flows.
From your slide deck then.
What's not meaningfully impaired mean, just as far as thinking about cash on in the near term.
That's an in broad strokes I think something inside of 10% in what we saw at quarter end is broadly inline with what we're expecting like I said, our cash position.
It is not expected to be materially different by by year end or of our liquidity position is relatively similar as good as quarter end.
And so inevitably we will see some of the forbearance come into play over the next three quarters, but you're sort of tense, 10% instead of 10% number is not a far off.
Chris Donat Thats really helpful. In the same for felt to I suppose.
Yeah.
Actually maybe probably even less impacted.
Got it and there's a lot of terminal in that year to date, maybe because the servicing flows there was already a pretty high component of quote unquote for parents are people not and repayment.
So a slightly different animal.
Got it yet as you.
Going to ask you think you answered your own.
Just any nuances and or differences between the two and turn to securitization cash flow between private and then help.
It really goes back to how much the servicing component is the cash flows as sort of interesting coming out in the amount of forbearance or nonpaying.
That was already a part of the portfolio and that the relative change or impact.
You know I think one of the important thing. So highlight two if these trusts are incredibly resilient. There is a lot of built in resiliency to these trust. So like I said, we did a significant amount of stress testing over the last three or four weeks and I just the.
But we feel very comfortable with a where we are today in our position over the next year.
All right that thanks for answering my questions much appreciated.
Your next question comes on line of Sanjay Sakhrani with KBW.
Thanks Hope you guys are well.
Couple of questions. One you guys talked about the season portfolio and how some of your customers might come out of this better than others. I was just wondering if there's any breakdown of the portfolio across.
Some of the more.
Professional occupations that you feel better about going through cycle versus others do we have any cleric clarity in terms of those exposures.
So it obviously.
We don't have a high concentrations in in across the entire portfolio, but in our revise space you know one of our more impacted segments of the population would be medical professionals in particularly in in the dental area dentist. Obviously are are not working right now.
But that's a group that we would expect to be once the recovery starts to happen that those practices will be back up and running.
And and those borrowers will recover you know better than areas, where jobs might disappear for a longer period of time.
We don't have a breakdown of how much is dental medical.
No. We don't we don't know disclosed that that kind of detail, but but you know I I would look back in it look at the portfolio statistics that I mentioned earlier and that you know 80% of our private loan portfolio in of the total private loan portfolio is.
Either current the vast majority is current meaning no days past due or 30 less than 30 days past do that poor that portion of the portfolios holding up I'm extremely well and I think is a statement about the you know that the seasoning and strain of the customer base as a whole.
Obviously, we continue to be there to help customers, who need a relief by offering them immediate payment relief options like forbearance or changes in their payment rates. So that they can managed to their adjusted cash flows into their households, but.
Again, it all depends on what you know what where you'd think the this where where do you think the impacts of this economy are going to be and how long are they going to be felt as well ultimately drive the outcomes here and Sundays is to provide a little more detail in the medical what we're seeing these a lot or proprietorships or <unk>.
Well you've had his them having to shut their offices down for 2468 weeks, but inevitably to us it's a delay in cash flow as Jack said, it's on elimination of jobs in corporations is people who've had to shut down practices, either medical or dental, which will ran back up and so what you saw it.
Forebears usage, but our expectation is.
That the these these businesses will get up and running again and people go back to using dental and medical services. The way they did before so for US it's really a delay on their part not a a job elimination or unemployment scenario.
Got it I guess my follow up question is on the competitive environment and opportunities that could arise as a result of this period of weakness.
He had a rise in these fintech companies that it sort of been biting at the ankles up some of the incumbent I'm just curious.
How you guys are thinking through any opportunities that might present themselves or you know or whether or not there would be opportunities presented a given there being an extended period of a downturn.
Yeah, you know I think I I think the real challenge with that's on J. is is what is the outlook look you know what what is the economic outlook.
You are using in in your estimates here and because of the lack of visibility, it's a little hard to execute on some of those some of those opportunities right now as I mentioned in my comments at the beginning you know we've cut back on our our marketing of our Rifai loan products.
Really because there's not a lot of clarity in terms of long term funding costs through A.B.S. issuance or.
The economic outlooks here, when when those become a little bit more visible or where more competent about them I think there's an opportunity for us to execute a and take.
You know take market share where we can.
I think one of the things, where we've been very responsive and have been able to be reactive less on the fintech side is on our operational side of the equation and that we've been able to reposition our <unk>, our our team to respond to things like unemployment claim processing.
And those have been you know that that that tells you a little bit about the flexibility we have within our operational infrastructure. How we can read reposition call centre activity, including folks who are working from home to do this to be to be responsive and help.
Help states, who need the assistance, but also create opportunities for our team. So as I said you know we've been able to keep our 100 per cent of our team gainfully employed through this crisis, which.
You know I'm I'm very proud of that that ability. Some data also highlight the the in school opportunity and that we have we are now signed up with a bang partner, we have the technology and ways to be able to originate loans for the next academic quarter. It's an early read but I think you're going to see further bank withdrawal from that market.
Which would increase some opportunity there as well and so I think is Jack said, it's it's tough to navigate given the uncertainty around what's gonna happen, but we do see that as a real opportunity man I believe there may be more space in that market not less in the next academic year, regardless of what happens and we are prepared and ready to roll it out.
More robust way.
Okay, and can you remind me who that bank partners.
When American bag, Okay cool.
One final clarification. These cove it and I know you has talked about several there, but the <unk> 19 relief options you guys will provision for them.
After that period is done the deferral period is done or are you guys, making some kind of assumption inside the the <unk> the reserve today.
No. It's it's made it's not just where they are today, it's where we expect the loans to be over the next several months. So we.
If our forecasts model says you know unemployment is going to increase by X. and and you know another wiper signs going to need forbearance that would be incorporated in the model.
Okay.
Alright, great. Thanks.
Once again.
You have a question please print star.
Keypad.
Your next question comes on the line of John Heck Jeffrey.
It's more than guys and thanks very much for the call. This morning, most of my questions have been and certain asked I I'm just wondering though.
With with the changing kind of forbearance patterns do your.
<unk>, Yeah, we did they change at all when you have kinda hire poor man's rate.
So on our our department of Education servicing contract, we are paying based on the status of the account and.
We do expect to see some slight a decrease and monthly revenue as a result of the status changes.
For those loans granted onto the cares act, but you know during that interim during that forbearance period, you know our our some of our operating expenses change as well frankly, our biggest you know our biggest operating operational concern right now is planning for the exit those borrowers back into repayment.
And that is something it's it's much easier to put to to move customers in we're going to have to manage that flow out through both communications and phone calls and things and that's something we've been working on I I would I mentioned that is only because I think one of the things but.
Done I'm extremely well I think the team across that accompanies done extremely well his his plan and prepare you know our preparation for <unk> began back in February when we started to see some of these issues, we bought the equipment the licenses and the bandwidth necessary. So that we could get 90% of.
Our team to a work from home status.
You know, we we were able to implement that cares act provisions are extremely quickly and and as quick are faster than anyone else in the space and we are preparing today for what it's gonna take to return those customers back.
Into repayments status as in our teammates back to a in the office type of arrangement as conditions warrant and allow.
Okay. That's that's helpful color and then within the within the business processing segment <unk>. Obviously some of the municipalities have been disrupted on these things like the or toll and.
You know obviously gets impacted how do you guys think about the recovery that and there are there any other kind of opportunities present themselves and that's kind of environment for special servicing you know for different elements of state governments.
So there's no question in our B.P.S. business transactions drive, our our opportunity right and so if we're managing parking or Cole's for an authority and those volumes are down as they are that impacts our our work flow in our health care side of the equation medical bills.
<unk> are down.
You know across as I'm all types of optional services have been delayed.
So what we have been able to do and his reposition a good chunk of of our efforts to assisting states and new issues that are a rising for them and helping their residents. So image. We mentioned the unemployment processing for example, we've done work now.
A number of states, where you know they called and said we need help and we need it now and within a day or two where our phone. Our representatives are on the phone answering questions and providing a the services that the residents of those states need to.
Take advantage of those programs. So those are the things that we're doing and will continue to look for as.
The market conditions, you know change change the opportunities here.
Hey, you guys very much.
Your next question.
<unk>.
Yes, good morning, and thank you for taking my question.
In the Idiots guide to see so is it fair to assume given your your outlook in terms of delinquencies in charge offs that yes, Moody's keeps their covert forecast, where it where it was in March that your provision levels stay fairly light.
Oh or is that gonna also be impacted by for example rises and forbearance or other issues.
Yeah.
Well clearly we'll have to rule out we'll from modern a portfolio, but the Moody's models.
Think about it the life alone reserving the sees the model is to encompass though the entire future of alone and so those models weigh heavily on what we think that future will be and what the impact will be obviously, there is some overlay components into our own portfolio and what we see his performance et cetera.
But a lot of that is really driven by the the moody's input than the other inputs. We have so I'd say, it's kind of an 80 20 rule that you're 80, 90% right that if movies did the same that development should relatively be what we see but if we do see they're better or more adverse.
Reactions that are important below there would be some <unk> there would be true observer overlays that we would apply to our number.
I know there was extensive discussion around the buyback, but the other side or return a capital was the dividend. You've obviously you have the earnings to cover it what is the thought process in in terms of you know when you look at stress testing and the cash flow issues et cetera, what <unk> what is your thoughts.
US on the dividend.
As well in here. So we we think a capital return to you know as Jack mentioned, we would put a capital plan in place every year, which looks at our Capitol cash flows or or capital builds or release, and then we inevitably divide that capital return between dividends and buybacks you know today or <unk>.
I have a 99% yield which is even pretty high attractive yield we bought back $336 million of stock. We're we're going to maintain that plan or try to see him on that plane given what happens over the next three quarters. So we don't see any altered to our dividend payout ratio, especially given out <unk>.
His today, but it's something we think about we talk about we analyze but we feel confident in the position weren't today.
Great. Thank you very much.
Thank you.
Your final question comes from the line of our <unk>, let's see.
Thanks, just stuff on the for income issue you know the the one month library, it's been kind of out of whack, it's getting a little bit better, but it's still pretty far off of of where we would expect it to be you know relative to the the treasury's.
<unk> as that kind of continues to normalize will that further improve your your for income that you'll be earning on the portfolio.
Yeah. So that's a great question, because there's actually two parts to a one yes. It obviously will help a if that as you said one month libraries about C. was yesterday 62 basis points raid the curves do show getting back to like the low twenties or where it should be there's been a lot of dislocation because of the the money market funds and the intervention by that but.
The U.S. government. So a a should improve wearing can be it also has an impact on our prime portfolio. Our prime portfolio is obviously the essence their benchmarked against Prime and funded primarily with <unk> and therefore, when you see is <unk> as that historically that relations.
Chip has been about 300 basis point margin and inevitably in dislocation that can can change meaningfully and we've seen that dislocate over the last three weeks. It's actually as you mentioned been improving the woman Labore was sorta 99, 100 basis 0.3 weeks ago, It's now I'm a low sixties, we expected.
So I talked about that this location or consumer boy, which is which is probably ruined primarily been impacted by our prime portfolio, but we do expect that to to improve as well over the next couple of months and that's where the curves were suggesting but it's something we're watching closely.
So you'll actually get a benefit on both sides of your books and <unk>, well, yeah, but but the whole <unk> yeah. It depends on how fast it improves obviously, we don't have guidance out right now, but what we've seen is that that one must live or is the curves are moving faster even over then over the last.
Last couple of weeks to getting back to that lower number. So every kind of weak that curve seemed to be has been moving lower faster than the previous weeks curves suggested.
And and did the did the resets you know I guess the the the portion of the book that the July 1st reset it does it have to be I guess.
Fixed by that period for that portion of the of the what the book.
Yeah, we would not expect that that annual reset <unk> book.
Earns floor income it for for after July 1st when they reset on July 1st they said.
Out of the money, so 50 basis points typically out in the money. So so rates would have to both 50 based negative.
[laughter] okay.
Yeah exactly yeah.
Sorry that portfolio I mean that that happening was.
Not usual and so it's it's just it was a benefit in the last year, but it's not something we've had consistently for though for a very long period of time.
<unk> and then just Leslie is there any room to cut expenses in your business services area. Now that you know, we're gonna have a bit of a slow down there.
So we are looking pretty aggressively at all or expenses I mean, the positive thing on the B.P.S. side as we were actually not only able to reallocate B.P.S. people may have been furloughed potentially given what happened but to put them into other opportunities on the stateside and in fact, we're we're x.
Really looking to for additional capacity or different digital people given the opportunity that we see over the next few quarters and so from an expense perspective on the People's which is the majority of the expands we've actually probably short staffed given the opportunity we have in in the short to medium term, which is a great place to be in the car and.
Environment, but there may be opportunities around office space.
There there may be opportunities around technology.
And as you know I mean expenses is.
We put out an efficiency ratio target, we still want to try to hit the target even might have lower profitability and so we are continually focused on how we can get expenses down and not only it'd be P.S., but incorporated in our consumer lending business. It as a primary focus that we've been digging into over the last post for six weeks.
Okay, Alright, thank you very much.
Yeah.
There are no additional questions I would now like to turn a conference back over to your Mr. Joe Fisher.
Mm.
[laughter]. Thank you shana like to thank everyone for joining US one today's call. Please contact me or my colleague Nathan Rutledge. If you have any other follow up questions. This concludes days call.
<unk> today's carpet you may know all disconnect.
[laughter].
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