Q4 2020 Navient Corp Earnings Call
Yeah.
Thank you for standing by and welcome to the Navient fourth quarter 'twenty 'twenty earnings call. All lines have been placed on mute to prevent any background noise.
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 would like to withdraw your question press the pound key. Thank you Mr. Nathan Rutledge you may begin.
Thanks Andrea.
Good morning, and welcome to Navient fourth quarter 'twenty 'twenty 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 all the information about our business.
That is based on management's current expectations as of the day of this presentation.
Actual results in the future may be materially different from.
Those discussed here.
This could be due to a variety of factors, including among other things uncertainties associated with the severity magnitude and duration of the COVID-19 pandemic and the related economic impact 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 their books.
We maintain our financial reporting systems internal controls over financial reporting or disclosure controls and procedures.
Reported to the discussion of those factors on the Companys form 10-K, and other SEC other filings with the SEC.
During the conference call, we will refer to non-GAAP financial measures, including core earnings adjusted tangible equity ratio and other non-GAAP financial measures derived from core earnings our GAAP results and description of the of our non-GAAP financial measures.
With a full reconciliation to GAAP can be found in the fourth quarter 'twenty 'twenty supplemental earnings disclosure. This is posted on the investor page at Navient Dot com.
Thank you now I'll turn over the call to check.
Thanks, Nathan good morning, everyone and thank you for joining us today I appreciate your interest in Navient and I'm excited to share some highlights of how we deliver value in a challenging year as well as our outlook for 'twenty and 'twenty one.
'twenty 'twenty was a tumultuous year the pandemic impacted virtually every aspect of the economy, our business and the lives of our employees and customers.
Our response at Navient was rapid impactful and solutions driven.
Like other businesses, we rapidly moved our team out of our office to work from home the Swiss.
It's done quickly, while maintaining our quality standards and high levels of productivity.
We also responded to the rapidly changing needs of our customers and clients and we developed and implemented new programs to advance ratio of equity.
For our felt the private loan borrowers, we implemented and continue to offer payment relief options to help those in need by reducing or eliminating monthly payment obligations.
As the economy began to recover those who could return to repayment.
Today, our credit performance metrics are better than pre COVID-19 levels.
We also worked with our business processing clients, including federal agencies public sector entities in health care institutions to offer relief where needed.
These changes in both our loan servicing business processing area has dramatically reduced our daily transaction volume and our fee revenue.
At the same time, our team saw that our clients were quickly becoming overwhelmed in other areas.
We were able to reposition our teammates and adapt our platform to provide immediate resources to assist our clients, including processing much needed unemployment benefits and providing contact tracing services.
As the needs of our clients expanded our team once again delivered as we hired trained and deployed all virtually thousands of new employees to help clients provide these critical services to their constituents.
Our ability to respond efficiently and effectively is of great demonstration of our operational and platform agility.
My colleagues also demonstrated their deep personal commitment to meeting these needs and a recent example, our team literally worked around the clock over the weekend to ensure we could provide hundreds of new agents to meet our clients' growing requirements.
I'm Super proud of our response, the quality of our work and the commitment of our team.
The.
These efforts along with the quality of our portfolio and business. The design delivered truly exceptional results in a challenging year.
For the year, we earned $3.40 and adjusted core earnings per share of 29% increase over 2019 results.
Adjusted coordinate income increased nearly 8% to $663 million.
This year's results build on a solid trend.
Even with the 23 per cent decline in the last three years and our average student loan portfolio due to expected amortization of.
Our focus on new student loan originations in our processing business has helped us to deliver strong annual growth for several years now.
For example, we've delivered a three year compound annual growth rate of coordinated income of 10 per cent and.
The three year compound annual growth rate for core EPS of 28 per cent.
Our results this year were driven by strong performance across all areas of the business.
Net interest income increased 4%, even as our average managed loan portfolio declined 7%.
As we benefited from better funding costs and a favorable interest rate environment.
Yeah.
As mentioned credit performance was similarly strong across both our felt and private loan portfolios.
And this trend is expected to continue into 'twenty and 'twenty one.
The economy, however remains fragile so our reserves remain sizable and capable of absorbing significant credit losses.
And our business processing segment 'twenty 'twenty saw significant declines in transaction volume and fee revenue as people stayed home.
Our ability to deliver critical services in new areas generated over $95 million of new revenue more than offsetting this decline and leading to an 18% increase in year over year of bps segment revenue.
The ability to respond to these new needs illustrates the strength of our business model and client relationships and is a clear example of the operational platform of agility, we adult.
Yeah.
Our continuing efforts to deliver our services efficiently also contributed to our exceptional results.
Total adjusted operating expenses declined, 5% and 20 $20 million to $931 million, even as V. P. S segment expenses increase as we added the new services.
This resulted in an impressive efficiency ratio of 48 per cent.
We will continue our focus on improving operating efficiency.
Okay.
Capital and liquidity remained strong throughout 2020, and our strong capital levels allowed us to return $523 million to investors during the year.
While we used we also used our liquidity to fund new originations and retire over $1 billion of unsecured debt.
Our.
Wrong financial performance term funding approach and Conservative capital management will allow us to continue to return excess capital in 'twenty and 'twenty, one with the planned $400 million allocated for share repurchases and a continuation of our dividend during the year.
We are projecting that the strong performance of our franchise in 2020, we will continue with the 'twenty 'twenty, one adjusted core EPS forecast of $3.10 to $3.25.
Our results this year of demonstrate the strength of our business model and our ability to deliver predictable and meaningful cash flow and earnings in all types of economic environments.
Several factors, including 2000, Twenty's EPS growth of 29%.
Our three year compound annual growth rate of 28% or.
Our strong and consistent capital return, including the dividend yield of $5 four per cent.
And our 'twenty 'twenty one earnings for cash come on combined to make a very compelling investment opportunity.
Yeah.
Finally, I would like to acknowledge my appreciation for my teammates.
'twenty 'twenty was a challenging year.
The fear and anxiety caused by the pandemic could have led many to hunker down.
My colleagues whoever chose not to focus on what couldn't be done, but how they could help those impacted by the pandemic with relief programs and the.
At the end solutions.
I'm proud of their efforts and commitment and it's an honor to lead our company and this team.
Thank you for your time and I look forward to your questions later in the call I'll now turn it over to Joe for more color on the quarter and our outlook for 'twenty and 'twenty one.
Thank you Jack and thank you to everyone on today's call for your interest in Navient.
During my prepared remarks, I will review the fourth quarter and full year results for 2020.
Ill be referencing the earnings call presentation, which can be found on the company's website in the investors section.
Before I turn to the highlights of the quarter I'd like to Echo Jack's comments on the outstanding work. The team Navient has been delivering on behalf of our customers throughout this crisis.
We have meaningfully outperformed our original 2020 targets that were set in January of last year, and our outperformance would not have been possible without the dedication of our thousands of employees across the country.
As a result of their efforts, we are well positioned for 'twenty 'twenty, one and beyond.
Our outlook for 'twenty and 'twenty, one as provided on slide four we are providing 2021 adjusted core earnings per share guidance of $3.10 to $3 25 per share.
Our outlook excludes regulatory and restructuring costs reflects the favorable interest rate environment that we expect to continue for the full year and includes $400 million of planned share repurchases.
Provide additional detail on our outlook as I walk through the fourth quarter and full year results. The begin on slide five.
Key highlights from the quarter and full year include delivered fourth quarter GAAP EPS of <unk> 99 per share and full year GAAP EPS of $2 12.
Adjusted core EPS of <unk> 97 per share and full year adjusted core EPS of $3 40.
Nearly 10% higher than the high end of our original projected guidance at the beginning of 'twenty 'twenty.
Provide continued payment relief options to borrowers impacted by COVID-19.
Originated $4 $6 billion of private refi loans in the year.
It's achieved bps EBITDA margin of 23% in the quarter and 19% for the full year.
Improved efficiency ratio to 48% for 2020 strengthened our capital position.
Reduced outstanding unsecured debt by $1 $1 billion per the year, while returning 523 million to shareholders in the form of repurchases and dividends.
And increased our adjusted tangible equity ratio to 5% or seven 1% after excluding the cumulative negative mark to market losses related to derivative accounting.
Moving to segment reporting beginning with federal education loans on slide six.
Our portfolio continues to reflect strong positive trends is felt borrowers transition back to repayment, resulting in continued reductions in forbearance usage to 13, 8%.
Down over 50% since peaking at 28, 5% in the second quarter.
The net interest margin improved to 106 basis points from the year ago quarter, which led to overall net interest income increasing 9% to $162 million in the quarter, even as the balance of loans declined 10%.
The increase from the year ago quarter was driven by the favorable interest rate environment, we are experiencing an ongoing improvement in funding costs.
The current outlook for interest rates should continue to positively impact the net interest margin on our felt portfolio and we expect the 'twenty 'twenty one net interest margin to be in the mid to high 90 basis point range.
The income and operating expenses in this segment declined primarily as a result of the expected decreases in asset recovery volume impact of COVID-19 on certain operational activities and improvements in operating efficiencies.
Now, let's turn to slide seven and our consumer lending segment.
Forbearance usage peaked at 14, 7% during the second quarter and has declined to three 9% the.
The stable level of forbearance compared to the third quarter as a result of continued disaster related forbearance provided to those in need.
The trends, we are seeing as borrowers exit forbearance remain encouraging.
Our delinquency rate declined 43% to two 6% from a year ago and the charge off rate fell to 53 basis points the.
The increase in 90 day delinquencies from the third quarter is trending better than our expectations as early stage delinquencies remained flat as.
As borrowers continue to transition out of forbearance, we expect that the charge off rate will rise from these historic lows and will settle between one 5% and 2% for the year.
We feel confident that we are adequately reserved given the well seasoned and high credit quality of our portfolio.
The provision of $2 million in the quarter, primarily relates to the provision for newly originated education loans in the quarter of $1 $1 billion offset by realized charge offs that were lower than expected in the quarter. The average FICO score associated with newly originated loans in the quarter was 771 week.
And we expect to originate at least $5 5 billion of high quality private education refi loans from 'twenty 'twenty one.
The net interest margin of 302 basis points was inline with expectations as the decline from the third quarter was largely driven by higher interest reserve related to the increase in late stage delinquencies.
Our full year 2021, net interest margin guidance of 270 to 280 basis points assumes a greater mix of our private refi product compared to our legacy book, along with an expected increase in loan modifications for borrowers exiting forbearance.
In addition, operating expenses declined by 8% from the year ago quarter, while our average balances declined 1%.
With the continued to slide eight to review our business processing segment.
In the fourth quarter, we continued to see the positive results of our ability to leverage our existing technology and infrastructure in order to respond rapidly to support the states and providing unemployment benefits and contact tracing services.
These new opportunities contributed to a 58% increase in total revenue from the year ago quarter, and an 18% increase from the full year in spite of the impact of COVID-19, which resulted in lower volume and processing activity on our existing business during the year.
The strong results in this segment were achieved while delivering EBITDA margins of 23% for the quarter and 19% for the full year.
The $25 million increase in expenses in the quarter associated with the growth in revenue in this segment contributed to increased total operating expenses for the company of $5 million from the year ago quarter.
As our growth businesses become a larger portion of our overall revenue and expenses, we expect our total efficiency ratio to increase.
Our outlook for the 2021 efficiency ratio of approximately 52% for the company includes this change in mix.
Turn to slide nine which highlights our financing activity during.
During the year, we reduced our share count by 14% through the repurchase of $30 6 million shares.
At today's share price, our planned repurchases of $400 million would reduce our outstanding share count by nearly 20%.
In addition, we returned $123 million to shareholders in the form of dividends.
During the fourth quarter, we issued $1 $6 billion of term private education, refi, ABS and $777 million of L. P. B S year to date, we issued seven 9 billion of term funded a b S. On.
On January 19th we priced our first private education refi securitization of the year.
The Investor book was oversubscribed by more than 16 times. This allowed us to take pricing that was over 50 basis points inside of our last transaction.
We continue to explore ways to lower our overall cost of funds through alternative sources of funding as we see increased demand for our attractive well seasoned and high quality assets.
At quarter end, we had additional capacity in our funding facilities of $2 $2 billion for private education loans, and 506 million per felt loans to go along with $1 $7 billion of primary liquidity of which $1 2 billion as cash as a result, we ended the quarter in a solid liquidity position.
In the quarter, we retired $1 1 billion of unsecured debt, including the $579 million of debt that was originally set to mature in March of 2021.
We ended the quarter with an adjusted tangible equity ratio of 5%, which was in line with our updated forecast.
The cumulative negative mark to market losses related to derivative accounting declined by 6% to $616 million in the quarter due to the passage of time and in line with expectations.
Excluding these temporary mark to market losses, which will reverse the zero as contracts mature our adjusted tangible equity ratio is seven 1%.
Let's turn to GAAP results on slide 10.
We reported fourth quarter GAAP net income of $186 million or <unk> 99 per share compared with net income of $171 million or <unk> 78 cents per share in the fourth quarter of 2019.
For the full year, we recorded GAAP net income of $412 million or $2 12 per share compared with net income of $597 million or $2 56 per share in 2019.
In summary, while we experienced many challenges associated with the impact of COVID-19, our team quickly responded by providing innovative solutions for our customers and clients as.
As a result of their innovation agility and perseverance throughout the year, we exceeded our targeted financial metrics strengthened our capital position, all while returning $523 million to shareholders through dividends and share repurchases I'm looking forward to 'twenty 'twenty, one and building on this momentum.
We'll now open the call for questions.
At this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Sanjay <unk> of K B W.
Good morning.
The results I guess first question is sort of of the EPS targets you guys are thinking about this year and their sustainability I know the business processing segments benefiting from some of the contact tracing.
The programs and such the could you just talk about the sustainability of that EPS and sort of maybe parsing out debt.
Benefit in the bps segment.
Sure. So Sanjay this is Jack and thanks for your comment and question him on the on the fee income side of the equation. We are continuing to see lower transaction volume and some of our you know in both the transportation and health care areas. They have not yet fully recovered.
The forecast for 2021 does not assume they recover fully until very late in the year. So as you move beyond 'twenty 'twenty. One we would expect that a combination of you know the.
Wind down of the Covid related projects and the ramp up of our traditional activities.
You know would start taught offset one another we're also working hard with our clients and the state and municipal side of the equation.
And I think this the.
Work, we have done for them on some unemployment insurance and the contact tracing and.
More recently some of the vaccine management activities are demonstrating what our capabilities are and the both the sophistication of the technology platforms, we're able to bring the analytics and insight that we can add to the equation and we're working with.
Them to see where those where those types of skills can be used in a more long term.
The more permanent opportunities.
Okay, Great and then.
The the $20 million of regulatory related expenses could you just drill down on sort of what those were and maybe give us an update on where we are with the CFPB lawsuit too. Thanks.
Sure. So these regulatory expenses come from both of the legal defense related activities as well as some reserves we have for some of the open items with the on the federal student loan program side.
On the cases of both the state attorney generals and the CFPB cases, they continue their frustratingly slow process through the legal system.
You know we were you know we're obviously very active are very interested in getting are these cases to particularly on the CFPB side getting the two trial and having the opportunity to defend ourselves in that two of that legal process. It is just the unfortunately slow slog I do think also the.
Transition here of change in administrations.
And both at the state and the federal level of slowing that down a little bit but there are no.
New developments of new a new issues associated with those cases at this point.
And as we've said before and in through the legal documents.
There's.
Despite tons of time and access to documents and information to do their discovery.
You know in the CFPB case, I've, yet to find the borrower that supports their claims.
Alright, thank you.
Hmm.
Your next question comes from the line of Bill Ryan with Compass point.
Thanks, John Good morning, a couple of questions.
The first question on Slide 13, just looking at the cash flows it looks like the cash flow is off the portfolio are expected to they were down about 600 million.
Quarter over quarter of but also your unsecured debt was down $1 2 billion. So you had a net positive of about 600 million in that number and the run off analysis.
Could you talk about the dynamics of that I mean was that related to better cash flows that you're seeing or just a redeployment of excess liquidity and then second line.
Any of them. This is probably going to be an ongoing question, but it's it's any update on the department of education servicing contract is this something that you think we could end up being talking about for another three or four years. So I'm just curious as to what your thought processes on that thanks.
Sure. So I'll take the first part of that all on the cash flows as we updated our cash flow assumptions there weren't.
Accuse me of any.
Any material changes to the assumptions as you look at the five year forecast and obviously, we provide a greater outlook in terms of the over all of 20 years. So no real changes in terms of CPR assumptions, there I think where the benefit is the 600 million came in a little higher than what our short term expert.
Expectations, whereas we continue to benefit from this favorable interest rate environment and as we think about it.
The greatest sort of of expenses here in the company, it's really the interest expense so the.
Utilizing that those excess cash flows to reduce our maturities over the next several years and smooth them out to better match. The the cash flow forecast that we have it's certainly of primary objective and reducing the overall interest expense. So we saw an opportunity here to.
Reduce the the total debt outstanding of one through just natural maturities, but also by rich.
Retiring some of our debt that was coming due in March early here. So in terms of our capital expectations for next year, we talk about $400 million being returned in the in the form of share repurchases and we will look to lower our overall unsecured debt footprint as well.
And as Joe described here I mean, I think as you're pointing out if you look at what our forecast net of unsecured debt.
Outstanding was it at the end of 2019 to where it is at the end of 2020.
The cash that we.
Collected.
Our balances are up $1 $4 billion higher than what you would've expected and that is the combination of.
Lowering our interest expense by being more creative and innovative in our funding strategies.
The favorable interest rate environment and of course. The addition of new loans, new loans that we're originating and are both refi and in school of business segments.
On the department of Ed loans servicing.
This has been you know obviously of long of also a long drawn out process.
Most recently the department.
Pulled back its latest RFP for.
For the servicing contract and announced that it is going to look to extend the existing contracts with the existing service providers for another two years as it tries to figure out what what's the right direction to take.
For the long term.
We haven't seen the proposal yet we're waiting for it you know I think one of the things we've been able to demonstrate over the last year.
Is more insight and a.
System's capabilities to be able to respond to some of the changes that came in very very rapidly in terms of Oh, wow, bringing interest rates to zero.
Bringing payments on par putting payments on pause for long periods.
And that's something that has been.
I think appreciated of noticed.
We've also participated.
Trying to provide insight as to how different programs or aspects of the of the whole student loan program could better serve our borrowers Bolton during the pandemic as well as beyond post COVID-19.
Time frames.
Thank you.
Your next question comes from the line of Rick Shane with J P. Morgan.
Hey, guys good morning, and thanks for taking my questions.
You provide good guidance and detailed guidance across the board.
Within the consumer lending segment can you give us a little bit more idea of what the strategy will be for on campus lending. This year. It's obviously been a slower ramp can you talk about disbursements as we move into the second semester, but more importantly.
Sort of what the strategy will be given the strength of.
The refi programs that you guys have.
Affected door, so we see that the two programs as being being complementary.
To one another and the work we're doing on the in school side of the equation is really focused on first time borrowers and so as the result of that you expect the ramp to be much.
Much slower at the beginning because youre not making any second loans of serial loans to two borrowers as they come back to school. This academic year, obviously was a.
Perry of unusual we saw just an enormous level of disruption in terms of the students going back to school, who was going back to school, who was doing virtual learning just enrollment levels in general were down and then you also saw very significant increases I think in financial aid.
Packages from schools to families and all of that combined to reduce.
Borrowing levels.
We would expect as we get back to a more normal academic environment of on campus learning yet.
You would start to see demand returning in that side of the equation. Our focus in addition to first time borrowers our focus in the in school Arena is also on.
A much more of a narrow segment of the total college.
College going population, we're focused on students attending.
Higher quality for your educational institutions and really looking at the value proposition of what that tuition is relative to job prospects and ultimately earnings.
Very similar to what we do on the refi side of the equation, which is very much focus on.
A very high quality borrower.
And the financial benefits associated with that investment and and one's education.
Great. Thank you and if I can pivot that question a little bit towards Joe Joe can you talk.
About the loss component you would expect.
The two private student loans the refi.
The on campus and how you look at the from a seasonal perspective.
Sure. So on the refi product the way, we think about the last component in provisioning.
You would estimate over the life of the loan that that would be somewhere probably a little south of one in the quarter per cent in terms of our life of loss expectation on the refi, obviously, we're seeing something much lower than that today than we have historically if you look at our trust data youre talking about numbers that are.
Half of that at this point, so very encouraged by the signs that we're seeing so far early on in that product in terms of the in school component, obviously, it's a little bit of a different dynamic because the the greatest indicator of whether or not that borrow will repay the loan as whether they graduate.
So to Jack's point in terms of what we're targeting its traditional four year institutions. So when we think of life of loan loss expectations, historically, you're somewhere around 6%.
For those types of schools, obviously, we're not targeting of it at this stage of any <unk>.
The profit schools or other schools that may have led to a higher default rate expectations in the past.
Got it and I'm on the.
Assuming given the guidance.
That the mix is going to remain highly highly skewed to refi given the seasonal impacts and how we would think about that for.
Your outlook.
That's right. So for your for your modeling purposes, I think of good way to think about it is for every billion or so of originations you were talking about somewhere around $12 million of provision expenses associated with that.
Great.
Thank you guys very much.
Your next question comes from the line of Erin, It's again of each of the city.
Thanks.
On credit quality, maybe you could just talk a little bit about your.
Consumer lending estimate for net charge offs and how that relates to your current reserve.
Whether or not.
And that level of net.
Charge offs and still supported by bad debt reserve level. So.
You just mentioned that the new originations will essentially be the the main driver of future provisioning.
So we look at them.
Obviously the trends in the performance of our borrowers and the vast majority of our borrower base is still.
What we would call of older legacy loans, alright, so not not not just the new refi of the new Oriental.
The in school.
Volume.
What we are seeing and as Joe.
You mentioned in his comments, we're seeing that as borrowers have been exiting the disaster Forbes debt forbearance that we provided early on in this pandemic that as jobs held income levels held these borrowers have been able to return to repayment and the delinquency statistics that we're seeing are better then.
What we were seeing pre COVID-19.
I think there's a lot behind that I mean, obviously I think the pandemic and keeping people home has left.
Some some folks with more disposable income.
It's also impacted other folks are much more severely and for those we are providing continuing to provide payment relief.
Through continuation of disaster forbearance is for interest rate reductions in order for them to be able to continue to make progress in paying down there down their loans.
What we what our reserve levels are still assume and are forecasting.
A fair amount of risk in the economy as I said the economy still remains very fragile.
And I think as a result of that we're being conservative in terms of potential.
Potential.
Delinquencies and defaults that might result of that.
Our view is is that our reserve levels as they stand today are capable of.
Absorbing significantly higher credit losses, reflecting that potential outlook.
But we're seeing good signs right now and that's something we will continue to monitor as we move through 2021.
Okay. Thanks.
And then on to the share repurchases as the.
The intent to have it more ratably.
Throughout the year or would you expect to do an accelerated share repurchase earlier in the year.
I think for your purposes, just assume it's going to be ratably over the year, but.
Certainly if there's opportunities, we'll look to take advantage of that but for modeling evenly across each quarter.
Got it okay. Thank you.
Your next question comes from the line of Vincent <unk> of Stephens.
Hey, good morning, Thank you for taking my questions.
I wanted to talk about the potentials.
Potential of student debt relief that the 10000, that's been talked about by the bottom of the administration and what that would mean for Navient seems like it's more likely to happen now but wanted to get your thoughts there and then specifically on it.
Wanted to get your math on how much net cash would come to navient.
We're to get those accelerated payments and after you retired the related leverage thank you.
So I think at the stage in the game that the answers to that question are a little difficult in part because there've been no real specifics other than you know.
The talk of a potential 10000 dollar.
The loan forgiveness.
There are no specifics for example, as to who would get it.
Which loans would be prioritized them or even when that would happen.
Obviously, if we were the if it were to be broad base. If there was a broad based loan forgiveness program, where every borrower.
The loans that we own or service is has a $10000 loan forgiveness.
Would have an impact on earnings, but I think as you point out of a meaningful impact on earnings, but as you point out.
It would also have a positive meaningful impact on cash flow.
As loans are paid in cash is received from from those payments, but also released from the trust of the various trusts that we have.
And you know our.
Rough estimates of that would be is a very significant number.
That could be in there in the range of in the in the high hundreds to just under $1 billion.
Net.
Okay very helpful.
Thank you for that next just a quick follow up on the NIM.
And so it's nice to see the high mid high Ninety's Guide range.
Kind of wondering if you could talk about how the.
Exiting 2021 in terms of of run rate just because I know there were some benefits of choice one of you had the.
The low interest rates.
Maybe some of that research this year.
If you could just talk about how 2021 exits in terms of the film NIM. Thank you.
Sure so the.
There are some dynamics that occur in the first quarter, where typically your NIM is lower than where you are for the second and third quarter in terms of just the the day count and how the the floors are actually paid here. So when you think about where we're going to exit the fourth quarter at the stage if the interest rate environment remains.
Stable and favorable as were expecting we would anticipate being higher in the fourth quarter than we would in the first quarter, but ultimately within that band So I think.
And to give you color on that I would say first quarter should be our lowest.
Our lowest quarter in that range all else equal.
Okay very helpful. Thanks, so much.
Your next question comes from the line of Mark Devries Barclays.
Yes. Thank you.
Can you just remind us what kind of macro assumptions are embedded in your reserves and also just how your current forecast of credit trends are comparing to those assumptions.
Sure. So we're we're certainly performing much favorable of the core favorably to what our assumptions had predicted in both the second and the third quarter as Jack.
Reference.
We're somewhat conservative here is there's a lot of it was.
Still unknowns the early on in this year. So we use like many other financial institutions. The the Moody's model and from that standpoint, we feel very adequately reserved in terms of our assumptions based off of the the current economic environment as well as our ability to absorb any significant losses that could.
Potentially occur here over the next couple of quarters.
Okay.
That's helpful and then.
The.
Ability to kind of quantify force if credit continues to trend as it has been how much reserve.
Could ultimately come back.
Yeah, I think it's too early to make that kind of assertion certainly we feel very.
Comfortable of where we are and as I introduce stress. It is early but the trends are positive and we've seen that now for a few months so continuing to see that trend.
Obviously, you have us take a look at that allowance, but at this stage. It's just it's early given a lot of uncertainty here early in the year.
Okay, and then what do you need to see.
From a macro perspective or within your own portfolio to get a little bit more comfortable.
With that and think about releasing some of your reserves.
Well I think you need to see more consistency in terms of of a forecast of the economic outlook right now as Joe said as of this.
A lot of variability here and.
John.
And a lot of well if this happens that could happen type of of commentary.
So I think that that's really the big question and probably on everyones mind is at what point do we start to return to an economic activity in this country that is more normal right and.
Until we have more visibility on that and both in terms of its size and timing I think it's prudent for us to be.
You know to be cautious in terms of our reserve outlook.
Okay. Thank you.
Your next question comes from the line of Lee Cooperman with Omega family Office. Thank you I'm looking at the table and I'm just like you to comment on it yes.
The S&P 500 is 23 times earnings.
Three six times earnings the S&P is four times book value here of about 87 per cent of book value.
The S&P was 1.55% of you you'll fly 0.4 per cent the.
The pes, earning 23 per cent of equity and you were earning in the high Twenty's call. It 26% return on equity.
What do you think the market is thinking about you and the.
Can you be more aggressive in capitalizing which seems to be a mispricing of the of equity.
I assume you would think of your book value is real so you have the chance to buy it back the discount to book, which accrete. The remaining shares I think you started your whole buy back a number of years ago. When your stock was close to 30.
Why are we not more aggressive, but I understand the environment, but it seems to me that they would forgive the student debt you're going to of a lot more cash to deal with.
So I agree with your comparisons obviously.
As it has been frustrating and as I mentioned in my opening remarks.
We've got a three year track record here of.
Delivering compound annual strong compound annual growth for our business that Manny I think look at as you know something that was going to be amortizing and declining.
We've been able to offset the declines in the in the legacy portfolio through new loan originations and some additional fee income.
I think when we started this year in.
In terms of our ability to return capital more aggressively we had to.
The adjust.
Our outlook here for the implications on capital as a result of seasonal.
Which you know, although I would argue is nothing more than a geography line item.
It did.
You know the rating agencies.
I think look at that as being more of an increased capital requirements for financial institutions. So we've been restoring that and building it where we're close to where we want to be.
And as a result, you'll see us I think.
Proportionately.
It continued to be aggressive in terms of our share repurchases. So even though our capital base is lower.
Expected to return a similar amount of capital in 2021, as we did in 2020.
And you know our goal here is of course is to demonstrate what we are able to do the consistency of our earnings and cash flows in all economic environments.
And you know get get folks to focus on that part of the story versus perhaps you know what this what the new administration might do it.
The student loan space.
Mhm.
I guess my dog of I would either raise the dividend or accelerate the repurchase of one of the two but.
Do the fine job you know I guess from school of law, whatever you think.
Alright, Thank you Lee.
Your next question comes from the line of Lance just run of Jefferies.
Hey, Thanks for taking my question today, guys I'm on for John Hecht Super quick question for you guys.
Alright.
Keep going on the share repurchases, but as we think about the adjustable tangible equity ratios and how they are how they affect the share repurchases.
Are there any limitations there essentially for you guys and how should we think about that.
Sure. So the $400 million takes into account getting back to that five 5% adjusted tangible equity ratio, we monitor certainly the rating agencies and where they are and what they are comfortable with so to the extent we.
Outperform from an earnings perspective, or Theres opportunities that we can address both debt and accelerate share buybacks are and be above that threshold. We would look to take advantage of that so I would say that the five and a half in the 400 million get us comfortably within where we need to be for our cash.
Current ratings outlook and any excess that could be derived during the year, it's an opportunity the T. The buyback additional shares but we will also of a focus on reducing unsecured debt.
Sounds good thanks, and then one more quick one on the expenses. So is the 50% efficiency ratio a bit more of.
Kind of the the going assumption for 'twenty, one and 'twenty, two and what's a little bit baked into that compared to it was it was a little closer to the 47.
During 2020 outside of the last quarter.
So our current guidance of the 52% for next year really takes into account the shifting mix of our growth businesses. So that would be both the consumer lending and the business processing solutions here. So from that standpoint, obviously, the the federal education loans segment continues to represent less of a.
A portion or a less of a percentage of our overall revenue expense mix. So as that comes down and our growth businesses grow youre going to see a little bit of the pressure in terms of the efficiency ratio because of the attractive margins that we're earning on the bps, obviously, it's a capital light business.
In the mid teens, just that general mix shift is going to increase your efficiency ratio.
Sounds good thank you very much.
And once again to asking the question. Please press Star then the number one on your telephone keypad. Your next question comes from the line of Mark Hammond of Bank of America.
Hi, Jack and the Nathan I had two.
So the first is on the adjustable tangible equity ratio target and just seeing how you arrived at that five in the half and whether.
Whether or not debt longer term or if it's a longer term 6% target. The he came out with originally in 2020, if that still stands longer term.
Yes.
And so.
When we came out with that above 6% guidance that was not contemplating the impact of Cecil and the very quick change or the rapid change that we saw in terms of the interest rates in the derivative Mark that came along with that so as we think about our longer term focus we are focused on maintaining the rating agency metrics.
And that five 5% growing to 6% puts the us in that range in terms of if you look at the rack ratio for S&P that would be 7% that they are using and then sort of a similar levels for Moody's and Fitch. So as we grow here over the next year.
And beyond that we feel comfortable above five 5% and ultimately as those derivative marks come back that should get us above those above that 6% level.
Okay. So it's more of the.
Longer term I mean beyond 2021, or if it's still stands really.
So.
If you exclude the derivative marks today or you're above 7%.
Yeah.
Alright.
And then my second question is just a follow up on an earlier question I think it was meant to ask about debt forgiveness of debt high hundreds or.
Under our 1 billion figure that.
Jackie is that net of secured debt pay down and allocated unsecured debt pay down or just.
Secured debt pay down.
It's net of the secured debt pay downs.
But on the film side of the equation.
Virtually all of the loans are funded with secured debt at this point.
Thank you.
Your next question comes from the line of Henry Coffey of Wedbush.
Good morning, and let me add my congratulations on one of what's been an amazing year for Navient.
Two items.
Both completely unrelated.
So phi is merging with the spec at a valuation level that one would call modestly frothy.
40 times plus earnings.
<unk>.
And is there anything that they're doing in their student loan refinance business and in terms of harvesting that valuation of opportunity.
Net value prop in terms of bringing in new products.
That you need to be looking at.
That would help accelerate the growth.
The offer a whole suite of products, maybe that some of that you should be considering or are you sort of satisfied with the way the business is running.
So you know.
I do think there are customer relationships on the refi side in particular are super strong.
We have a net promoter scores from that customer base that that generally run in the low seventies and that that which is a very very high for financial service products and we do think at some point it might make sense for us to partner with others to.
Explore the potential to sell other products to those customers I think in <unk> case, the other piece of the I mean, they made a big deal in their presentation about cross selling but they also have a big technology platform that seems to be.
A part of their evaluation story, but.
I made the I made the case for the fact that our our fundamentals here.
Justify in support of much higher stock price, but I wasn't arguing for Sofia multiple.
I thought you were.
No I mean, it's just it's worth noting and you are right. They have some of the.
The tech products are of very small part of the overall earnings and revenue contribution, though the they do add a little bit to the fraud.
And.
Weighted.
Matter of that the derivative accounting impact on an equity.
How quickly does that get recaptured or how quickly can that $616 million getting recaptured into earnings.
And so the the speed is going to be somewhat a function of the interest rate environment. So if the interest rate environment remains as it is forecasted today that should be somewhat ratable over the next three years. If we have an increase in rates. The way. The derivative marks would work is that would actually come back faster to us.
But just the passage of time is going to.
Cause that to happen and in fact, the the majority of the increase in the ratio. This quarter from September was just because of the passage of time.
Great. Thank you very much.
Your next question comes from the line of Moshe Orenbuch of Credit Suisse.
Great. Thanks, and the most of my questions have been asked and answered but congrats on the buyback.
Good step.
On the private margin chart, just talk a little more of that how much of an impact to expect in 'twenty, one and then beyond from the whole modification of the loans coming off of forbearance.
And is there an opportunity and in the past few harvested some cash from the structures in that in that portfolio are there are there other opportunities to do that.
As we go forward.
Yeah. So so two questions there on the on the private loan net interest margin.
There's more variability.
Sometimes on a seasonal basis, but.
But really driven by the changing mix of the portfolio, so as our refi loans become a higher.
Proportion of our total.
Private loan balance obviously, the net interest margin is impacted by that and I think we're.
Up words of.
That ratio has has moved from about 26 per cent of the average loans a year ago in the year ago quarter to 36, almost 37% this quarter.
One of the other factors that is impacting.
The net interest margin in that portfolio is seasonal and when loans become 90 days past due we are taking into the net interest margin.
The effectively the reserve on that interest of putting those loans on non accrual effectively.
In the interest components, so as the loan delinquency rates were coming down in 2020 that was a positive and as they are starting to move back up.
Particularly in the fourth quarter of that becomes.
But more of it more of a drag.
It was.
More than half of the driver between the of the impact in the in the net interest margin. This quarter for example.
In terms of funding I think one of the things that we have been.
Very focused on it and as Joe Joe made it mentioned in his comments interest expense is our largest expense significantly larger than the operating expense and over the last several years, we've made of very strong effort too.
Take advantage of kind of innovative financing strategies to lower that expense and as you point out we've been able to.
You called it harvests, we've been able to borrow against the.
The excess collateral that has been building up in our securitization trust, particularly our private loan trust at at rates that are three of 400 basis points lower than what our traditional funding sources would've been which was unsecured debt.
We continue to take advantage of those opportunities, we continue to broaden our investor base and our ABS Securities. The deal. We did just a couple of weeks ago.
Was 50 basis points inside the deal we did in the fourth quarter. So very strong performance and obviously all of that serves to.
Reduce reduce our overall interest expense and we will continue continue that effort overall.
Thanks check the SEC.
The question that I had has to do with the in school market.
And Unfortunately accounting you know you've seen a number of players.
The Big Wells Fargo and others.
The thing, we're selling them, even selling many of its selling of a significant percentage of its production on an annual basis because of the cost related to the C. So I.
I guess given how critical the.
The whole capital.
Net return function is.
How do you think about that debt.
Business and your capital plans as you go forward.
So we obviously are our view of the business attractively since we're working to get into the business I think.
Your point I think there's a lot of creative there's a lot of different strategies that can be executed as to how one finances those loans long term.
The through direct ownership of our through our whole loan sales or some other.
Funding vehicles that address.
The capital tax debt Cecil places on long duration assets like this.
And those would certainly be part of our approach and overall balance sheet management going forward.
Okay. Thank you.
Yeah.
And at this time there are no further questions I would like to hand, the call back to Mr. Elich for any closing remarks.
Thanks, Andrea we'd like to thank everyone for joining us on today's call. Please contact me if you of any other follow up questions. This concludes today's call.
Thank you for your participation. This concludes today's call you may now disconnect.
Okay.
John.
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