Q3 2020 Navient Corp Earnings Call
Thank you for standing by and welcome to <unk> third quarter Twentytwenty earnings call.
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After the speakers remarks, there will be a question and answer session.
If you would like to ask a question during that time simply press Star then the number one on your telephone keypad if you.
If you would like to withdraw your question first about the key.
Thank you Mr., Nick Rutledge you may begin.
Thank you Andrew Good morning, and welcome to Navient third quarter 2020 earnings call with me today are Jack Remondi, our CEO and Joe Fisher 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 forward looking statements and information about our business that is based on management's current expectations as of the date of this presentation.
Actual results in the future maybe materially different from those disclosed discussed here.
This could be due to a variety of factors listeners should refer to the discussion of those factors on the Companys form 10-K.
And other filings with the FCC.
So naveen. These factors include but are not limited to the risks and uncertainties associated with the severity magnitude and duration of the COVID-19 pandemic relate.
Related economic and the related revenue and I'll come back.
As reported previously the work from home policies and travel restrictions that have been put in place have not negatively affected our ability to close our books and maintain financial reporting systems internal controls and other over financial reporting or just closure controls and procedures.
During this conference call, we will refer to non-GAAP financial measures, including core earnings adjusted EBITDA, adjusted tangible equity ratio and various other non-GAAP financial measures derived from <unk>.
A description of our non-GAAP financial measures and a full reconciliation to GAAP measures and our GAAP results can be found in the third quarter 2020 supplemental earnings disclosure.
This is posted on the investors page and I didn't dotcom, Thank you and I'll turn the call over to Jack.
Thank you Nathan good morning, everybody.
Thank you for joining us today and for your interest in Navios I before I begin my comments on the quarter I'd like to welcome Joe Fisher to his first earnings call as CFO.
Joe brings a wealth of knowledge of our business and an outstanding commitment to help us deliver value and for those of you have worked with Joe and his role in Investor Relations. You know this already I'm excited to see.
I'm excited to see Joe take on this important in challenging role.
Look forward to working with them, even more closely and I'm confident in his ability to succeed congratulations show.
I also want to acknowledge and thank Ted Mars, our controller to bridge the gap as acting CFO. This was no small task and he did it while maintaining his responsibilities as controller, thanks, Ted for stepping up and for helping out.
Well the pandemic continues to create significant challenges our business model continues to deliver outstanding results once again.
Once again this quarter's results demonstrate the resiliency adaptability and commitment of our team and our business model as we continue to meet the needs of customers and clients.
Throughout this pandemic, we had helped millions of borrowers adjust to their individual economic challenges with payment relief and other since we've also deployed thousands of our teammates to help residents apply for and receive unemployment benefits and assist communities in Kobe contact tracing.
In doing so we our team safe and employed and even added thousands to our payroll.
I'm extremely proud of how our team continues to perform in this challenging environment and in their commitment.
Our results this quarter were outstanding and they exceeded our plan for the quarter adjusted core earnings per share rose a substantial 58% over the year ago quarter to one dollar and three cents and we delivered a core earnings return on equity of 33% in the quarter.
The quarter's results were driven by continued strong credit performance and.
Increasing demand for our credit products.
A favorable interest rate environment.
Significant demand for business processing solutions, and our active focus on improving operating efficiency.
In other words every area of the business contributed to our strong results.
Well, Joe will provide more details on the quarter shortly I will start with some of the highlights.
Net interest income continued to benefit from a favorable interest rate environment and improving funding spreads.
The increase in Rifai Rejuvenation has also contributed to the 12 million dollar increase in net interest income over the year ago quarter.
And despite the floor reset on July 1st that eliminated $30 million in floor income this quarter.
Net interest income fell by only $8 million compared to the second quarter.
Given the current rate environment and funding execution, we expect our full year net interest margin for both FFELP and private loans to be greater than the original guidance provided at the beginning of the year.
With the onset of the pandemic, we provided significant payment relieved to millions of borrowers as the.
As the economic situation began to recover request for Forbearances fell and the majority of borrowers successfully returned to repayment.
For example, forbearance rates decreased from a peak of 28.5% in our FFELP portfolio to 14.3% at quarter end and from.
And from a peak of 14.7% in our private loan portfolio to 4% at quarter end.
In both portfolios forbearance rates are consistent with pre cobot levels.
The initial the initial usage of forbearance did reduce delinquencies and defaults in both our FFELP and private portfolios year to date as borrower.
As borrowers returned to repayment private loan delinquency rates have remained very low and our substantial loan loss reserve is provide the ability to absorb significant losses if necessary.
While we expect delinquencies and defaults to increase next year are.
Our substantial reserves are set for this and are adequate to cover expected losses.
In our consumer lending segment, we saw strong demand for our Wi Fi loan products as we re launch marketing in the quarter.
Re Fi originations this quarter totaled 1.3 billion with attractive spreads and very strong credit characteristics and in line with our mid teen are are we targets.
Demand for loans to fund in school programs was higher than last year, but lower than planned as fewer students were enrolled in many schools operated in a virtual environment.
This along with conservative underwriting kept new loan originations at the low end of our plan.
Including second disbursements commitments in the academic year totaled $60 million with 37 million dispersed through the second to the third quarter.
Our bps segment saw a record revenue and EBITDA in the quarter with an EBITDA margin of 25%.
Revenue was driven by the continued but slow recovery of business in health care and transportation and in our ability to assist states to provide much needed services to their residents.
The strong performance of this segment is expected to continue through year end.
Our efforts to improve our operating efficiency also contributed to our strong results even as we hired 2000 teammates to meet growing demand total operating expense fell $20 million in our core operating efficiency ratio improved 8% to 45% in the quarter.
Operating efficiency remains a top priority for us.
At the same time, we're continuing our work to improve customer experience and leveraging new technology.
For example, we have launched an AI powered online assistant and creating video channels to make it easier for constituents to do business with our government clients.
Finally, we continue to strengthen our capital ratios, while returning $96 million to shareholders in the quarter, including the repurchase this quarter, a 4% of our outstanding shares.
Given our earnings given our earnings outlook and strong capital position, we will continue to return excess capital to shareholders.
Every area of our business contributed to this quarter's outstanding results.
It is a clear demonstration of the strength of our business model strong credit profile of our loan portfolio and our ability to originate high quality attractive loans.
It also reflects our ability to leverage our business processing skills to assist our clients and win new business.
And our ability to deliver increasing operating efficiency in a very challenging environment.
Our earnings along with the capital release from our amortizing legacy loan portfolios also provide substantial resources to support the business.
Maintain our dividend and return surplus capital to investors.
And all this while maintaining a position of substantial financial and operational strength.
We expect the strong performance to continue supporting another increase in our core earnings forecast to between $3.25 and $3.28 for the full year.
I also would like to acknowledge my teammates and their commitment to our customers and clients adjusting to new work arrangements and new services, while juggling the uncertain environment and increasing family needs is not been he has not been easy. Thank you.
I appreciate your interest in listening in today and I look forward to your questions later in the call I'm very pleased now to turn the call over to our new CFO Joe for a summary of this quarter's results Joe. Thanks.
Thank you Jackie and thank you to everyone on today's call for your interest in that in.
During my prepared remarks, I will review the third quarter results for the 2020 and provide additional color on the impact of the COVID-19 pandemic when our business.
I will be referencing the earnings call presentation, which can be found on the company's website in the investors section.
Starting on slide five.
Key highlights from the quarter food delivered GAAP EPS of one dollar seven and adjusted core EPS of one dollarsthree.
Provided continued immediate payment relief options to borrowers impacted by COVID-19.
Originated $1.3 billion of private refi loans achieved record bps EBITDA margins of 25%.
Reduced operating expenses by 8% and improved our efficiency ratio to 45%.
We maintained our strong liquidity position and capital position repurchased $65 million of common shares and increased our adjusted tangible equity ratio to 4.1%.
Or 6.4% after excluding the cumulative negative mark to market losses related to derivative accounting.
Let's move to segment reporting beginning with federal education loans on slide six.
On both our FFELP and private portfolio, we continue to grant disaster related forbearance to those in need.
As borrowers begin to transition back to repayment, we've seen a decline from the peak forbearance usage rates of 28.5% that occurred during the second quarter down to 14.3% at the end of the third quarter.
Well the portfolio continues to amortize the net interest margin improved 21 basis points from the prior year.
Which led to overall net interest income increasing 12% to $161 million in the quarter the.
The increase from the year ago quarter was largely driven by the favorable interest rate environment. We are experiencing this risk.
This resulted in a significant increase in unhedged floor income compared to the prior year.
In the quarter unhedged floor income contributed 18 basis points to the segment's net interest margin of 103 basis points.
The current outlook for interest rates should continue to positively impact the net interest margin on our FFELP portfolio and as a result, we are raising our full year net interest margin expectations to be in the mid to high 90 basis point range.
The higher net interest margin along with lower operating expenses contributed to a $9 million increase in net income from the prior year.
Now, let's turn to slide seven and our consumer lending segment.
Forbearance usage peaked at 14.7% or $3.4 billion during the second quarter and has declined to 4.0% or $867 million at quarter end.
On the following page you can see the trajectory of forbearance usage of borrowers that have successfully exited forbearance and have not requested any additional payment relief options available to them are delayed.
Our delinquency rate declined 50% to 2.4% and the charge off rate fell by 53% to 75 basis points. The early trends, we are seeing as borrowers exit forbearance are encouraging.
For example, 98% of our refinance education loan customers that have exited forbearance have made a payment as borrowers continue to transition out of forbearance, we expect both charge offs and delinquencies will increase from these historic lows beginning in the fourth quarter.
Based on the performance, we've seen to date and absent a significant deterioration in the economy from this point, we feel confident that we are adequately reserved given the well seasoned and high credit quality of our portfolio.
The provision of $10 million in the quarter, primarily related to $1.3 billion of newly originated education loans in the quarter. The average FICO associated with these loans is 764.
Net interest income of $189 million was driven by the stability in our net interest margin combined with an increase of our private education refinance loan balance offsetting the natural amortization of our legacy portfolio the new.
The net interest margin of 324 basis points was better than expectations largely due to a lower interest reserve related to a decline in late stage delinquencies and lower loan modifications. Our updated full year net interest margin guidance of 315 to 320 basis points assumes an interest reserve build related to increase.
This late stage delinquencies and loan modifications.
In addition, operating expenses declined by 16% year over year, while growing our average balances increasing net income to $110 million.
Continuing to slide nine to review our business processing segment in the third.
In the third quarter, we saw the results of our ability to leverage our existing technology and infrastructure in order to respond rapidly to support states and providing unemployment benefits and contact tracing services.
These new opportunities contributed to a 36% increase in total revenue from the prior year and record EBITDA margins of 25%.
Turning to slide 10, which highlights our financing activity.
During the third quarter, we issued $1.6 billion of term private education Wi Fi ABS, we continue to see attractive demand for our high quality assets as we have securitize 4.8 billion year to date, a private education loans and 1.5 billion of FFELP loans on October 14th we priced our second FFELP deal of the.
We are the Investor book was oversubscribed by nearly 2.6 times. This allowed us to take in pricing that was 15 basis points tighter than our last FFELP ABS transaction.
At quarter end, we had additional capacity and our funding facilities of $2.2 billion for private education loans and $122 million for FFELP loans to go along with 2.5 billion, a primary liquidity of which $1.8 billion cash as a result, we ended the quarter in a very strong liquidity position.
In the quarter, we acquired 7.7 million shares or 4% of the shares outstanding for an average price of $8.42.
We ended the quarter with adjusted tangible equity ratio of 4.1%.
The cumulative negative mark to market losses related to derivative accounting declined by 5% to $657 million in the quarter and inline with expectations. Excluding these temporary mark to market losses that will <unk> first to zero as contracts mature our adjusted tangible equity ratio is 6.4%.
Turning to GAAP results on slide 11.
We recorded third quarter GAAP net income of $207 million or one dollar seven cents per share compared with net income of $145 million or 63 cents per share in the third.
In the third quarter of 2019.
In summary, the strong results this quarter benefited from a favorable interest rate environment, and our ability to leverage our existing infrastructure to win new bps contracts.
So you mean, the credit performance remains consistent with the early results. We feel confident that we can see exceed our original core EPS guidance range of $3 to $3.10 per share and deliver core EPS between $3.25 and $3.28 per share.
Before I turn the call over to questions I would like to express my appreciation to Ted the entire finance team and all of team Navient for supporting me in my new role and their hard work and effort in these unprecedented times.
A year that has presented many unique challenges I am extremely proud of how we have responded to our customers and clients with innovative solutions to help them navigate the current environment I will now.
I will now turn the call over to questions.
At this time, if he would like to ask a question. Please press Star then the number one on your telephone keypad once again to ask a question. Please press Star then the number one.
Your first question comes from the line of Mark Devries of Barclays.
Yeah. Thanks, let me be the first to congratulate you Joe again on your new role.
Can you and thanks for the guidance on the on the NIM for the rest of the year, but can you talk a little bit more about kind of the drivers of that strength and how we should think about that into 2021.
So there are a couple of things in the.
Federal portfolio, we are continuing to benefit from the favorable interest rate environment and although the annual reset floor income declined.
Our fixed rate floor income continues to be a mere material contributor to our spread.
As Joe indicated as well you know our fund the funding side of the equation our cost of funds on new transactions.
It has been met with very strong investor demand and that's allowed us to execute at tighter spreads than than our original plans had anticipated on the private side of the equation were benefiting as well from a favorable spread between prime and LIBOR floor and you know you know.
You know unique aspect of Cecil accounting, which.
As loans are as there are fewer loans delinquent we are required to set aside less coverage for.
The accrued interest accrued and unpaid interest on those delinquent accounts and that's also a contributor to that and then lastly on the private side where.
We're getting a benefit as well as were seeing fewer borrowers.
Needing a interest rate relief through our loan modification programs.
Got it and then you know the bps revenue has also been quite strong I think you highlighted can you just unpack the different pieces, there and give us some color on whats more permanent and what's more temporary so we get a better sense of kind of what the run rate could be going forward.
Right so.
A significant amount of the work that we have been doing.
Been doing in the in the third quarter and continuing into the fourth is related to you know what I.
What I would call project or contract work with states you know.
I'd really we're not doing that work long term, because there'll be less demand for unemployment insurance and and covert contact tracing right now.
Right now those those contracts tend to roll in monthly or quarterly and aspects. So we're anticipating the majority of that revenue too.
Roll off in the end.
Our end in the fourth quarter and not continue into the into the into next year.
That can change depending upon the demand.
The demand at each of the individual states, but as it stands right now that's that's what we're anticipating.
At the same time, we're seeing we're beginning to see a return.
Of transactional activities and our other clients, particularly in health care and transportation and so that is something that.
As those because those businesses begin to pick up and the economic recovery becomes more stable, we should see those businesses return to normal as well.
Okay. Thank you.
[laughter].
Your next question comes from the line of Moshe Orenbuch of Credit Suisse.
Great and Joe Congratulations and thanks for.
Thanks for taking my questions.
The first.
The question I had basically was about capital.
You made good progress.
But you know you kind of went.
And started.
Purchasing stock again [noise] could.
Could you talk a little bit about you know I mean, that's that's better than what you had said three months ago. So maybe give us a little bit of background as to what you're now thinking in terms of.
Equity ratios that you're targeting and do you know what that means for buyback.
With.
In the future.
Sure. So Moshe I think when we think about the remainder of this year and beyond obviously weve given our guidance for adjusted tangible equity ratios of that 4.5% to 5% and the way we think about it for the remainder of the year.
In terms of share buybacks and other capital returns is we're looking to meet those hurdles in terms of what we have set out for the rating agencies and our debt investors. So to the extent that we return any additional capital in the form of share repurchases. This year, it's really going to come down to any excess capital levels, we'd have above and beyond what our.
Targeted ratios are and as we enter into 2021 and I think we're in a much stronger position in terms of as we build those ratios specifically to the rating agencies, where you're going to be seeing more normalized levels of what we have done obviously, we'll look to be opportunistic when we can but I would say that.
I would think of it as more of an even pace, where if there's opportunities at hand, we will take advantage of those.
Gotcha, and maybe as a follow up somewhat related.
Looking you are continuing to do they're not huge changes, but continuing to kind of move.
Your your debt stack, you know kind of lower and you know and more even talk about any opportunities that you see you know are there opportunities in the current environment, you know to kind of do anything that would allow you to.
To to take any steps to optimize the right hand side of the balance sheet.
Thanks.
So.
So I would I mean, that's a it's a it's a difficult.
Process there in part because I think the the dumb.
The demand for our outstanding on <unk>.
Unsecured debt has been particularly strong and the opportunity for us to kind of add.
Enter into the marketplace and repurchase that periodically to change the mix structure.
It isn't as easy as one would hope but.
But I think what we've done over the last couple of years has been pretty significant in terms of restructuring that side of the balance sheet, taking advantage of not just traditional ABS financing vehicles, but really leveraging the equity that has been building up in some of those securitization trusts and borrowing against those.
At rates that are 300, 350 basis points cheaper than unsecured funding costs, which would have been the traditional alternative and as a result of that we have been able to bring our unsecured debt balances down through maturities, principally but bring them down faster.
Faster than otherwise would have been expected.
We have a significant amount of debt maturing we have coming up this quarter and then into 2000.
2021, so that will give us some opportunity but.
I would have hoped we would have been able to find more of that debt available in open market transactions than we have.
Got you and then just last one from me on the efficiency ratio you showed your in the slides that 47% year to date your guidance about 50, what's the what's the driver why you don't think that's going to be sustain that level is what you're talking about with business process servicing revenues, what what's the what.
What's the plan I guess on expenses and how should we think about that.
No. We we remain absolutely focused in terms of hitting the targets that we put out, especially on the operating efficiency ratios and and from that standpoint, obviously as you touched on the bps segment that is Martin business that we're focused on hitting in the mid to high teens, so little down from this quarter, but certainly.
Lee within our targeted range. So we feel confident that we're on a pace to achieve or or exceed that target or I should say.
From a positive obviously be.
On the on the better end of that 50% target ratio, but as we go forward I think you have to look at us in a book across other companies I mean, this efficiency ratio compares very well against our competitors and that's something that we focus on and looking to maintain those levels not exceed them as the portfolio amortizes over time.
Great. Thanks, guys.
Thanks, Patrick.
Your next question comes from the line of Aaron's again of each city.
Thanks, Congrats Joe in and good luck on the new rule.
The drop in the tail that forecast that I guess for the fourth quarter based on your guidance you mentioned the interest reserve build I I assume that that's what's driving that depend on them to come down there.
Other comment about it.
Seasonal driving this you know benefit because of the low delinquencies or are you expecting delinquencies to rise in 2021 is this going to be a bit of a headwind into next year.
Yes. So there's no question that when we granted a pretty wide use of disaster forbearance, many customers, who are delinquent and and might have defaulted in 2020 went into a forbearance status and ultimately those delinquencies and defaults.
Pushed into 2021, so when we look at the loss rates the charge off rates in our private loan portfolio. This year. There is substantially below what we had expected at the beginning of the year those losses in our view don't don't disappear and they just that there are more moving from calendar year 20 to calendar year 2021.
And as those delinquencies build.
Yeah, that's where the provision for the.
For the entire accrued interest expense would come in that said you know as as customers are coming out of forbearance and entering repayment the ports.
The performance of those loans is better than what we would have expected.
And so we'll be watching those trends and we spend I think one of the hallmarks and real attributes of our servicing operation is that.
How we use data and and different strategies to connect with borrowers and help them find a payment plan that keeps them.
Keeps them on track and successfully helps them amortize their loan balances.
And you can see that even in our TDR.
Portfolio statistics, where the amortization of that portfolio has been quite good.
Quite good over the last year, which is just something we strive for and Aaron just on the reserve as well as 10 as Ted mentioned on the last call. The standard practice for most financial institutions as a policy that reserves for the 90 day interest through net interest margin. So its not ultimately agencies, it's really is low.
It's come out of forbearance theres going to be some build as they move through 30 60 day buckets into your 90 days, where you would have that build occur and as you saw from prior quarter. Our 90 day delinquency actually declined but if you look at the dollar amount in the 30 and 60 days you can see how that builds can occur from this quarter to next quarter on the night 90 day delinquency bucket.
Just just so I can try to get my head around the magnitude what are we thinking in terms of the magnitude of the headwind into 2021.
I think if you think about the guidance that we gave for 22. The remainder of 2020 that 315 to 320, just backing out the math of what that would mean for an impact just from this alone for the fourth quarter. If youre at delinquency levels that are closer to historic levels, you could see as much as I call. It 22.
The 30 basis point impact depending on the level of delinquencies that hit 90, so if you're assuming.
Essentially 100% of what's in 30 to 60 days rolls through into 90, you could see that much of an impact on on the high end.
Got it and then.
And then just.
I don't know if you can comment.
Comment much on this but it does appear we're headed towards a potential democratic sweep in the election.
What do you think that's going to mean for for NAV you have for the next four years.
Well I think there's been I think student dad has received a wide range of kind of commentary during this whole pricing.
Primary and and lessen the general election side.
Side of the equation.
But theres, but there has been a growing focus on segments of the population that are struggling with student loan debt and this is particularly true in the <unk> and the federal loan side of the equation and we would we would agree with that we see you know a number of you know the biggest challenge is happening not so much with borrowers with.
High debt balances, but borrowers who have relatively modest debt balances $10000 and less who who.
Acquired that debt by starting school, but not finishing and as I've shared with you all before two thirds of all the defaults in the federal loan programs come from students, who borrow less than $10000. So we think there are some ways that the federal government should step in and provide some.
Separately here and more importantly, because you know per.
Providing relief and then not doing anything about it repeating itself only means you're going to have to do it again down the road really helping students and families bet.
Better have a better understanding of what their financial plans need to be as they start school what the what the consequences are a borrowing for that degree making sure they earn it and making sure that that debt balances matched to the economic prospects at that degree.
Presents and I think we've had a number of very good conversations over the last.
You know two years with policymakers on those fronts to help to share the insights that we have from the front lines.
Where the challenges are and make sure that relief programs are targeted to those most in need.
Thank you.
Your next question comes from the line of Vincent Caintic Stephens.
Thanks, and Joe Congratulations well deserved promotion.
So first a question on just the student loan trends with the origination so understanding.
No third quarter kind of hit the glow on underage as you stated your guidance any.
Any update to how October has been performing so far and how you expect this to the trend just because it seems like there's tightness.
This year's somewhat different with the hybrid and maybe people coming on later.
So we havent. So this is on the in school side of the equation the demand for credit in that market and that product set is very seasonal you tend to see the applications being submitted in the July August timeframe, which school certifications and disbursements happening and.
September and then again December January.
Just as we have in prior years were definitely seeing lower.
Application volume at this time of the year, because it's not the kids are already enrolled and.
Intuitions have been paid.
I think we it is possible that you could see higher demand in the SEC for the second semester, but as we stand here at the end of October schools really have yet to release their plans for how they're going to operate in January and so until those plans become finalized I don't think were.
Are going to see.
See any any changes until students and families have more visibility.
Visibility about what's going to happen next semester.
Okay that makes sense helpful.
Second question on that kind of a follow up on the yield discussion so.
So good news.
NIM guidance and understanding that there's some there's also some reserve build in there, but when we think about.
Looking at the 2021, a benchmark rates are as low as they can go we already had the annual reset.
Is there anything else that could change the yield and then when I think about NIM kind of continued benefit from the cost of funds improvements, but anything else that you would call out there.
I think as Jack mentioned earlier on the call I mean, we're in a beneficial interest rate environment and that what we're seeing on the FFELP portfolio should continue as interest rates remain low and the other item I would just highlight that we have in the past on the private NIM is really just a mix shift as well.
Originate more refinance loans at a lower rate than what we have on our legacy book that will also cause some additional pressure, but obviously those are very high quality loans and we're targeting mid teens are always.
Okay, great. Thanks very much.
Your next question comes from the line of Mark Kimbrough, only borrow handling.
Good morning, guys congrats.
Graduations.
Great quarter, Great progress on things, you can control and improve the earnings power over time.
I'm just curious you know wells Fargo announced are coming out of the business as.
And I just wonder what you guys think that means generally and then.
There is a large portfolio potentially sitting out there and if you would.
Find that attractive for.
There might be a chance that you could acquire that overtime.
Thanks, Mark So I do think one of the things that we have believed.
Believed as Cecil became the accounting rules for provisioning of consumer loans.
Is that a funding in school loans on a bank balance sheet was going to become increasingly more difficult and and I think.
I think the move here from wells is certainly.
Could be part of that they have their other other reasons that they may be taking into consideration but.
But long term, we do see that as something that would be a positive in terms of demand for our in school loan products. So.
Simply because they were a large and formidable player in.
Player in that space.
And while they continue to originate this academic year with so we would expect the origination benefit to us to come in in the future and like any opportunity any anytime a portfolio of loans that is available.
In the marketplace, we're always eager.
We're always eager to find ways to participate in that and.
As best we can through a combination of servicing loan ownership et cetera. So we'll be looking at those opportunities should they should they present themselves.
Great. Thank you it makes sense.
Mark.
Your next question comes from the line of Sanjay Sakhrani of KBW.
Thank you good morning, and congrats.
I guess.
I guess I just wanted to go back on the NIM.
Expectational as we move into next year, just want to make sure I completely get it for the fair.
For the FFELP NIM it sounds like you guys could probably sustain the ninetys the mid nineties levels.
All else equal and then on the private student loan NIM is the expectation that you drop that 20 to 30 basis points all else equal and.
And if rates stay the same that's sort of where we level out next year, just want to make sure I get that.
Yeah. So I mean, if you look at our original guidance at the beginning of the year right. We had been forecasting three to 310 basis points and so as we get a.
As we end this year I think what you'll see is that on the low end of that range as we add more loans and we think to next year that that's an appropriate way to think about it is.
That 300 basis points or south of that number just based on the mix shift.
And felt.
Yes, I think your statements on FFELP are accurate I mean, the the current interest rate environment, and what we're seeing the stability of that portfolio and the predictability.
Absent any obviously significant changes in the interest rate environment.
That's where we feel comfortable with what we're seeing really today in our guidance into the fourth quarter and beyond for 2021.
Okay, Yes sounds right I would just add the we certainly have been some very positive headwinds into in 2020.
More on the FFELP side of the equation and then on the private side principally due to.
The floor income benefits, we received on the annual reset loans.
But we still look at you know as we as we are.
Get closer to wrapping up the fourth quarter here and we'll provide guidance for what we think in 2021 back in January.
We're very optimistic about where how earnings and how the company will continue to perform next year.
So I wouldn't while this interest reserve on the private side of the equation is certainly something that is a headwind it is not a material headwind and shouldn't materially change our earnings outlook here okay.
Okay, Great and then.
And then just a follow up to Mark's question on the Wells Fargo opportunity I'm, just thinking about this enrollment period do you guys think it can have an impact on your pace of originations. The specific here given there's a big player. That's exited and then just maybe a follow up on the regulatory side. There was a lawsuit in new Jersey.
Obviously, the CFPB lawsuit still remains out there could you just comment on sort of where we are with all of this and if this new jersey lawsuit poses any threat or is it sort of just a follow on to.
Similar lawsuits and other states. Thanks.
Yes, so on the on the in school side of the equation.
I think the impact of a major player like wells not originating loans is a 20 in academic and academic year 2021, 2022, a benefit for US you know this.
This year demand for for lending in both federal and private was down impart because many students enrollments across the country were down fairly significantly and you also had a high percentage of students complete.
Completing classes virtually which means they're not on campus, they're not in dorms and there was a there was a story yesterday, I think on bloomberg or or somewhere I read on how.
How schools are suffering because no one is paying for room and board.
Signs of things. So hopefully you know as hopefully cobot will be behind us for the next.
Academic year, and we'll have a more normalized.
Lending cycle, and we I will say, we've continued to receive very strong and favorable reviews from customers as they utilize our loan origination systems just in terms of the ease and the logical flows that take place and so a very very positive customer experience overall.
Okay.
On the regulatory side of the equation, Yes, New Jersey.
Filed a lawsuit a yesterday it is a it is a copycat of what has been filed by the CPB and other other states over the years.
There's nothing new here no new evidence no new allegations, it's obviously extremely unfortunate that.
There was a decision made to file a lawsuit without any facts or circumstances.
To support it but you know we have consistently said that we will be defending these.
Lawsuits because they are not super.
Not supported by the facts and circumstances I think everyone has had the opportunity to see the actual evidence that has been submitted by the CPB and their lawsuit they came up with 15 witnesses Hussein.
Who supposedly we steered into forbearance, all 15 of them it now.
Acknowledged in depositions that Naveen did in fact.
Tell them about their.
Repayment options, including income driven repayment options a number of them were actually enrolled in income driven repayment plans. So I don't know how they could have been steered into something else. If they are already in it.
Several we're committing fraud against the federal government. So we are very confident in terms of our outlook on these and it's you know I I would dare say these are nothing more than political statements. In these lawsuits have been filed in many cases.
Thank you.
And once again to ask a question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Mark Hammond with Bank of America.
Thanks, Jack Joe a nascent and congrats to Jim and Nathan.
On the adjustable tangible.
Equity ratio the target of 4.5% to 5% is that with or without the impact of cumulative derivative accounting mark to market.
So that includes the impact so excluding that of where we are today, we're at 6.4% and the.
The in this in this quarter you saw the the market declined by 5%. So that gives you a sense that we were in line with our expectations. So it gives you a sense of how to back that out going forward.
Got it and then on the cash flow.
The cash flow slide slide 13 for the sell side of the portfolio I noticed that.
Since the second quarter to the third quarter really that number didnt change as far as your expectations. So I was wondering if there are any.
Is there any assumptions changed in the EUR expectations changed for it.
Cash flow to be generated by this health portfolio quarter over quarter for the rest of the portfolio is life or just trying to understand what what's going on there.
Sure. So as we do every quarter, we obviously update with the forward yield curve. So that's something that we take into account as of 930. We also typically in the third quarter as we've done in other quarters, but mainly in the third quarter, we adjust our CPR assumptions. So our CPR speeds did increase from the from the prior.
Quarter and prior year, so essentially what we saw was that the the FFELP Stafford portfolio went from four I'm, sorry consolidation went from 4% to 5% and Stafford went from 8% to 9%. So those are really the big adjustments that we had occurred in the quarter.
Got it thanks, Joe and my last one.
For the 500 million.
Hi on unsecured notes that are maturing and in five days, you just going to use cash on hand and to retire those or is there some financing.
Yes.
We intend to use the cash on hand.
Great. That's all for me thank you.
Thank you.
Your next question comes from the line of Rick Shane from JP Morgan.
Hey, guys. Good morning, Thanks for taking my questions and Joe Congratulations.
I wanted to talk about the consumer lending segment, the private student loan portfolio a little bit.
When we think about it we think about it in three segments. There is the legacy book, there's the new in school book and then there is the refined consolidation block and it looks like the activity. This quarter was primarily in the on the refinance side.
What's interesting to me is that the allowance, though reserve rate on that is very low.
As you guys pointed out it's about.
77 basis points, but look.
But it looks like the reserve rate for the entire portfolio actually stayed flat quarter over quarter soon.
Quarter over quarter. So do you change the assumptions on the legacy book or is there something going on with the in school book on that is going to keep that allow.
Keep that allowance ratio higher as you continue to drive business that the revised channel.
So the net provision that we made this quarter was primarily due to new new loan volume, which as you pointed out is principally rifai Wi Fi loans, our loss expectations on that portfolio or a little over 1%.
Over the life of the loans and the net amount that you see there has to do with the amortization of the portfolio and some of the refinancing activities of.
Existing loans that are included in the refi number so some some some of the volume that we're generating is actually volume of borrowers who are refinancing existing loans with us.
Got it okay that makes sense.
Makes sense okay.
Over time do you think that there will be additional granularity, giving the pretty different credit characteristics between on in school private student lending and the re Fi business.
So so we do look at each of these business I think the portfolio segments and the three categories that you mentioned and certainly as these become larger components of the overall mix.
We can certainly break break some of those statistics out.
There's no question the refi loan.
Portfolio performance at a is a much much higher quality much much lower risk portfolio than you would see in other and other lending activity. Just you know went in school lending. Your two risks are well the students graduate and will they get a job.
Produces an income level sufficient to manage their debt in a re Fi alone you don't have those risks knew the you know that the student has already graduated and you've got anywhere between four to five years of of earnings and income to be able to underwrite again. So as a result, you see significantly lower loss.
And we can certainly going forward look to break those out in a little bit more detail for folks both in terms of spread credit.
Credit loss expectations and performance.
You, obviously can see a lot of this through the ABS financing transactions themselves, but we can certainly do more of that on the and the quarterly disclosures yes.
Yeah that would that would be terrific as yeah. There's there's clearly significant positive selection related to the re five portfolio answer to be able to see that and understand that especially as it grows will be helpful.
Thank you guys very much.
Right.
Your next question comes from the line of Lee Cooperman of Omega family Office.
Very much I have a series of questions to lead me to a observation, but the first question is as you guys sit around and look at all these pushes and pulls what do you think a normalized recurring earnings or.
You know you talked about 325 to 28 this year is that.
To give you what you think are recurring earnings recurring earnings materially lower but what do you think your recurring earnings are.
I'll get to the real question after that.
Yes, I mean.
If you're kind of looking for a little bit of guidance into 2021, but I got to talk in the long term.
Talking long term you, obviously have a view because you've spent billions of dollars buying back stock. So you must have a view of value in the value derived from recurring normalized earnings just curious what you would think.
I, we would look at this as being able to obviously you are fighting off the leg of the amortization of a large legacy loan portfolio that we could sustain earnings and that very high twos low $3 range 60, Ultramist because you say I went on a Bloomberg terminal Okay and this is all of a Bloomberg.
In terms of reasonably accurate S&P 25 times earnings and have you done three times earnings price to book 3.6 Times book S&P, having an 88 times nominal book value slight premium to tangible book value dividend yield S&P oneseven dividend yield NAV in six and a half or are we.
It should be 24% or are we now being 25% you mentioned in the quarter, we did 35%.
Okay. The stock price in my opinion is an embarrassment to the company you have decided over the many years. We've been on these calls from that for a decade to return the money to the shareholders through stock repurchases, which I could appreciate it looks very cheap, but you haven't convinced anybody the average price target of the analysts that cover us was 11.
I was 61 cents, we started buying stock back I think in the high Twentys because you thought it was worth in the Thirtys and highest price objective is 14.
Has the board you thought about the possibility of bumping the dividend, which has been unchanged for five years as a way of making a statement to the market that we think are recurring earning power is not appreciated by the market.
I I honestly don't know the answer because you know I feel like this.
The grant flooded moonstruck, we said that it always confused.
Normally say buying back stock would make an enormous amount of sense, but the market doesn't seem to care.
You know the investors are hungry for income you've been paying I think what the 16 cents a quarter for five years.
That 64% 64 cents I look at the Dupont Formula, which is return on equity kind of retention rate sustainable growth. We're not really growing. So you you have the ability of paying out a little bit more and if you bumped the dividend say, 10% there'll be $12 million more in cash which is nothing 'cause it caught me that size. So.
What do you see the interplay between the dividend and the repurchase and possible adjustment to the program.
Okay, and I don't know what I believe to be honest with you because that you use the six or so appealing I can understand why you want to buy back stock buyback, whether you're buying but I'm just wondering whether the consensus in the street or just right. You know all the experts to cover you leave them ask questions. This morning.
The objectives that are not terribly different to price the stock.
And it's more in your stock is trading down 50 cents.
You would think are terrific quarter.
So nobody cares about it.
I'm, sorry for going on because you understand the nature of the question.
Yes, yes, thanks, Thanks, Lee and I share your frustration on the stock price.
Particularly when you look at our RP ratio and our price to book.
Given the consistent strength in our earnings that we've been able to generate you know in both positive and challenging economic environments. I mean this this environment here is a briton been a pretty challenging environment for me.
Environment for many companies and to be able to outperform and raise guidance through the cycle. I think is shows the strength of the company not not a weakness in it and would argue for a higher multiple not a lower multiple exactly.
I you know I think there are a number of factors that.
That people weigh more heavily than they should I think political risk ways more heavily on the stock than it has ever had as an economic impact on the stock, but hopefully maybe in a in a couple of weeks, we'll we'll see a change of that as people can see.
With the decisions made and and can price price to stock more appropriately I think.
I think the balance between dividends and share repurchases is you know our if we had a relatively low yield I would see that as a as something that could make a difference, but I think with our yield well above.
The financial services space or really almost any company in the marketplace, it's difficult to see how pushing that higher has this has a benefit relative to being able to buy back stock below or below book value.
And so I would definitely be more inclined to be repurchasing shares at these levels.
Increasing the dividend, but ultimately that's a decision and discussion that we have with the board regularly and we will be updating that as we get as we start to move into 2021 <unk>.
You know, it's it's complicated but you know reality is.
The the repurchase.
Your own stock repurchase the repurchase for the company is.
One signal that the market is totally ignored the other signal is confidence in the recurring nature of your earnings power.
And do it through the bumping the dividend and I don't think you know 10% increase in the dividend, we'd only be about $12 million.
But whenever I hear you I I have.
I have my own confusion, but good luck and congratulations to Joe.
Thank you.
Your next question comes from the line of John Hecht of Jefferies.
Thanks, very much guys clearly lot of questions have been asked and answered. So just a couple of incremental ones. What it's Joe I think you said, 5%.
Decline of the Mark to market accounting for derivatives. So should we think that the pace of that is as 5% a quarter or will there be any acceleration of that that change over time.
I mean the.
Primary elections behind that Mark obviously, you are in terms of the derivatives. The weighted average life. There is about three years and the decline that we saw there is obviously some other moving pieces in that but I think for modeling purposes, and your purposes, 5%. It's fair to think about obviously, if there's an increase in interest rates that would accelerate.
That a return to the market. So I would say that 5% comment is more of an all else being equal in terms of the interest rate environment.
Okay and then the second question is I think we talked a little bit about.
The fact that wells is leaving the market what that might mean, some of the bank portfolio opportunities what about the re Fi side. I mean, you I mean, the markets have been somewhat more resilient than we would have anticipated.
But you guys clearly have better access to capital than some of the other emerging competition in that category interest rates are lower so I assume that has an impact on the addressable market is that how do you think about competition on the refi side and how that might change over the next year or two just given the overall potential market dislocations.
So we think there's a couple of things certainly whether it's re fi or in school lending you know obviously your access to capital and attractive funding markets are important and in both of those areas. We think we have a competitive advantage, but I.
But I think our biggest competitive advantage remains our servicing capabilities we now.
We know when we put loans on our books and we service those loans are they perform substantially better than.
They do another lender servicer hands and so if you look at our Wi Fi ABS transactions are cume cumulative default rates on those portfolios outperform the industry average when you look at our our federal loan statistics. This is an apples to apples kind of comparison we.
We consistently outperform all other servicers, you know year to year anywhere in the high Twentys to mid Thirtys percent in terms of lower cohort default rates and that makes a difference. It makes a difference in terms of the customer experience Ah that someone's working with them to help them find a payment plan.
That keeps them on track it allows us to generate.
Generate higher earnings and returns on loans, we make.
And it's those combination of factors that I think will allow us to continue to outperform in the origination side, particularly on refining the last.
The last piece I would just add on re Fi is that we are principally a digital marketing program in this area and we do believe we also have an advantage on our on our cost to acquire so we think our CTO or cost to acquire alone runs about half the industry average as well so those those combination of factors.
Yours.
Do allow.
Do allow us to be more competitive.
And you saw that in terms of the ability to rebound origination volume and grow it to $1.3 billion. After pausing in the in the second quarter.
Great. Thanks for the color look forward to working with Joe wouldn't and then there are the new rules.
Thank you.
Your final question comes from the line of Henry Coffey of Wedbush.
Yes, good morning, everyone and let me add my congratulations to a long list Joe that's it's very exciting.
You.
A couple of points, but first you know going going back to Lees comments.
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When we look at all the adjustments you make of that we talk about it.
We talk about in terms of earnings in capital ratios and other factors. The one part we haven't discussed this tangible book value is.
Is it is it fair to assume that all of those reversals. So that you discuss in terms of capital also apply to the calculation of tangible book value.
And if so could you just give us some insight into you know is all of that fair value or is there there's some some cash and capital related.
Just months that should be made as well.
And so that that market right absolutely impacts the tangible book value. So you're talking about him probably $650 million Mark that is going to come back over time. So that's just a natural bleed through in into GAAP equity that we would benefit from over the next several quarters here.
Yeah, and if the accounting rules were different which they arent you that that mark wouldn't even be there correct.
It would not it would not correct.
On a on a wholly other related topics.
Wells Fargo is primarily a or was my this is my understanding originated most of their student loans and the branch.
And you're more likely from just listening to your comments your focus more on digital channels.
How does that play out from a marketing point of view, if you're looking to sort of go after a piece of that business and is there any arrangement you couldn't make with wells above and beyond buying the portfolio that would drive more of that business your way.
So the vast majority of in school student loans are originated through through online processes, principally with assistance through the financial aid office. So.
Brent branch activity is not as big a factor as you might normally think here and so we do think there is an ability to trying to try.
Translate this into origination volume for us we don't.
We don't see other other banks I'm getting into the in school marketplace I'm in any meaningful way certainly no national banks.
Playing in this this with with Wells departure, you know there really is no no National branch Bank player left originating in school loans so with.
We think this is a good opportunity for US we think we can run this business.
In a very appropriate conservative way, we're targeting I'm really just a a four year a not for profit educational institutions in graduate school lending where credit performance is more predictable more stable and demand in normal times is more per day.
Double or more stable as well.
I mean your greatest strength as you've said is your servicing and I would add to that given all the data and the years of experience you've had is sort of insight into not only how traditional means.
In school loans perform but how loans in the private education sector perform.
Yes, even though that's a riskier channel is.
Is there an opportunity there that overtime should be explored or are you just going to stick to that.
Traditional in school market.
I think the marketplace right now is is strongest in the traditional in school marketplace for US you know, it's the largest opportunity. It has in our view the greatest opportunity for us to penetrate and access and generate high quality returns.
Once we you know I think we can look at expanding beyond that footprint somewhere down the road, but I would be.
We would be cautious.
Lending in that space to students and families who can truly benefit from the product not just make alone at you know at an attractive return.
Great. Thank you very much.
Thank you.
I would now like to hand, the call over to Mr. at least for any closing remarks.
Thanks, Andrew I would like to thank everyone for joining us on todays call. Please contact me. If you have any follow up questions. This concludes today's call.
Thank you for your participation. This concludes today's call you may now disconnect.
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