Q4 2021 Navient Corp Earnings Call

January 26, 2022

Good day, and thank you for standing by.

Welcome to the Navient fourth quarter 2021 earnings call.

At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

To ask a question. During this time, you will need to press star one on your telephone.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker today, Nathan Rutledge head of Investor Relations. Please go ahead.

Thanks Deborah.

Good morning, and welcome to <unk> fourth quarter 2021 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.

Mind, our discussion will contain predictions expectations and forward looking statements and other information about our business that is based on management's current expectations as of the date of this presentation.

Actual results in the future may be materially different from those discussed here.

Could be due to a variety of factors.

And you should refer to discussion of those factors on the Companys Form 10-K , and other filings with the SEC.

During this call the conference call, we will refer to non-GAAP financial measures, including core earnings adjusted tangible equity ratio and other various non-GAAP financial measures derived from our core earnings our GAAP results reconciliation.

And.

That results in a description of our.

non-GAAP financial measures and with a full reconciliation to GAAP can be found in the fourth quarter 2021 supplemental earnings disclosure. This is posted on the investors page at Navient Com. Thank you and now I'll turn the call over to Jack Thanks, Nathan Good morning, everyone and thank you for joining us today and for your interest in Navient.

2021 was a year that presented some significant opportunities along with a few challenges our company responded to both with agility determination and success.

<unk> us well for 2022 and beyond.

In 2021, we delivered outstanding financial results simplified and Derisked, our business and demonstrated a continued ability to deliver attractive returns and sustainable growth.

For example in consumer lending, we originated $6 billion, an attractive ROE student loans, a 30% increase making navient the largest private education lender in the country.

And federal education loans, we achieved a major objective to simplify and derisk the business with a constructive solution to transfer our department of education loan servicing contract to a third party.

This provided a seamless transition for our millions of borrowers and short ongoing servicing capacity for the department and ongoing employment for 700 teammates.

We leveraged our business processing platform to provide a technology enabled solution our technology enabled solutions to address pandemic related needs.

This included retraining existing resources hiring 9000 temporary customer service representatives.

And providing data analytics to improve performance and efficiency for our clients.

We responded to the pandemic with payment relief options across our loan programs and then assisted hundreds of thousands of customers who are ready to successfully returned to repayment.

Today in both our federal and private loan portfolios delinquency and forbearance rates are below pre COVID-19 levels.

And we continue to execute on new financings and transactions that reduced interest expense and improve our net interest margin.

For example, we identified an opportunity to sell an older portfolio of loans delivering both a significant gain and reducing our reliance on our most expensive funding source.

Okay.

Recognizing and capturing diverse opportunities across our business is not unique at navient.

We are deploying the same skills in 2022 and continue to continue creating and delivering value for our shareholders.

With our strategy to maximize cash flows invest in our growth businesses and return excess capital to investors.

Okay.

While Joe will provide the financial highlights for the quarter and the full year I would describe our performance in 2021, as our most complete and successful year ever it.

It was a year, where we exceeded all of our goals.

This execution drove adjusted core earnings to $4 45 per share, 31% above 2020 results.

New loan originations increased as already mentioned by 30% in 2021% to $6 billion, even as the federal direct loan interest in payment pause was in place for the full year after being extended several times.

We are generating this volume efficiently and profitably.

We are also achieving very high customer satisfaction scores.

Credit performance has also been strong the rebound in the economy and numerous stimulus programs have helped consumer strengthen their overall financial position.

In fact, private credit loan losses are well below pre pandemic levels as our delinquency and forbearance rates.

Our multichannel approach to communication continues to help our customers learn learn about and evaluate their options and avoid the negative consequences of delinquency and default.

We also made significant progress in simplifying our business and reducing our risk profile.

First we completed the transfer of our department of education contracts and while we delivered strong performance for the Department. This business was a small contributor to revenue was no longer growing.

Presented a challenging political risk profile that was unlikely to change.

The solution, we developed to ensure a smooth transition for millions of borrowers and ongoing employment for our teammates.

In addition to simplifying our business and focus it also materially reduces our operating risk.

Following this we announced the resolution of all of the state lawsuits and investigations. These.

These matters began more than eight years ago and have consumed significant resources and expense.

During these years, the exhaustive examination and discovery process identified no evidence to substantiate the theories in claims made.

This is the outcome we knew to be the case.

Unfortunately, the legal process was and remains lengthy and costly.

Our decision to resolve these cases eliminates the significant time and expense, we would incur to pursue our defense to the end.

Closing these cases in this manner is a net positive and it simplifies our business.

While the CFPB action, which is based on virtually identical claims remains outstanding. It is much further along and we remain committed to a vigorous defense.

These two actions Mark another set of milestones in our active management of our cost base and efficiency optimization.

Together with the sale of the loan servicing technology platform, we have created a significantly more efficient and variable long term cost structure for our business.

Okay.

Throughout 2021, we also supported our team members with flexible work locations thousands of hours of training and new leadership development programs and employee resource groups, yielding strong increases in employee engagement.

And team Navient was active in our communities through local and national organizations, including a significant national partnership with the boys <unk> Girls Club of America.

We're also proud to have received recognition for board diversity.

And military support among other awards.

As we begin the new year, we are excited to be able to turn our full focus to creating value. We will maximize cash flows grow loan originations with high quality high value products and grow business processing revenue improve operating efficiency.

And still return excess capital to investors.

In consumer lending our goal is to originate at least $7 billion in refi and in school loans, an increase of 16% over 2021.

Our product design application flow and underwriting expertise have driven significant growth in market share with lower end market acquisition costs and better than market credit performance.

We remain committed to our profitability targets for both refi and in school loans and.

And we see a significant opportunity to deploy our capital at scale at attractive Roes.

And bps virtually all of our Covid project work ended in 2021 with just a small carryover into the new year.

This project work totaled $265 million in revenue last year.

And as our clients returned to more normal normal operational volume, we expect to grow traditional bps revenue by 10% in 2022.

And we remain confident in our ability to continue to grow revenue at similar double digit double digit rates over the next several years.

While the Covid projects may have been short term the relationships, we built with key state and municipal clients or not.

These partnerships have accelerated bps's relevance.

<unk> and growth potential.

Our bps business Leverages, our platform and capabilities to generate attractive margin asset light fee income.

On capital our first priority remains the generation and retention of sufficient capital to support our growth businesses and our dividend.

The balance will will be returned to shareholders through our projected $400 million in share repurchases in 2022 as part of the $1 billion authorization approved by the board in the fourth quarter.

Our capital generation supports a strong balance sheet maintain maintenance of our credit ratings and the ability to support meaningful growth.

Returning capital to shareholders.

It couldnt be more pleased with our 2021 results and would like to thank my colleagues across team Navient for their contributions are.

Our 2021 results reflect our strong commitment and focus on delivering high quality high value services to our customers and clients.

And an intentional effort to simplify our business model and reduce risk.

Our ability to identify and capture new opportunities created and delivered clear value.

And it was particularly satisfying to see investor recognition of the success and the strong share price appreciation.

I'm, even more excited about the opportunities ahead of us and I'm confident of our ability to continue to maximize cash flow.

ROE loan originations and bps revenue.

And return excess capital to investors.

As we deliver sustainable earnings growth year after year.

Now I'll turn the call over to Joe and I look forward to your questions later in the call Joe. 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 year end results for 2021.

I will 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 for the quarter and year I would like to acknowledge the hard work and dedication of the thousands of people who make up team navient.

The success across all of our business lines.

Contributed to the strong quarterly results and full year EPS that exceeded our original guidance by 40%.

As a result of this effort and the demonstrated agility to leverage our current platform and capabilities, we are well positioned for 2022 and beyond.

Key highlights from the quarter and full year beginning on slide five.

Include fourth quarter, GAAP EPS loss of <unk> <unk> and.

And our full year GAAP EPS of $4 18.

Fourth quarter.

<unk> adjusted core EPS of <unk> 78, and.

In full year adjusted core EPS of $4 45.

EPS results include debt repurchase losses of 21 in the quarter and 33 for the year as we took advantage of a favorable economic opportunity to retire unsecured debt early.

We originated $1 4 billion of private education loans, bringing our total originations for the year to $6 billion.

Increased full year bps, net income to $99 million, while exceeding our high teen EBITDA margin targets.

Improved our adjusted tangible equity ratio to five 9%, while returning $707 million to shareholders through dividends and repurchases in 2021, achieving levels consistent with our target of 6%.

Let's move to segment reporting beginning with federal education loans on slide six.

Net interest margin decreased seven basis points from the year ago quarter to 99 basis points and was unchanged for the full year we.

We expect the net interest margin to be in the mid Ninety's for 2022.

Felt credit trends continue to be at or below pre pandemic levels with total delinquency rates of 10, 6% and forbearance of 12, 4% while charge offs remain at historically low levels or.

Our expectation for 2022 does that charge offs remain below 10 basis points.

Fee revenue in this segment declined $12 million from the third quarter.

This was attributable to our October transfer of the department of education servicing contract.

This transfer resulted in a decline in servicing revenue by $31 million and was offset by a $20 million increase in other income that was primarily a result of our transition services agreement for which we will receive offsetting revenue payments for the expenses weaker for the transition transition.

Outside of this agreement services provided through our federal education loans segment now pertains solely to felt loans.

Now, let's turn to slide seven and our consumer lending segment.

The total portfolio grew modestly from the third quarter.

It was down 4% from a year ago as a result of the $1 $6 billion in loan sales that occurred earlier this year that contributed $91 million of gains and the reversal of $107 million of allowance for loan losses.

In the quarter, we originated $1 4 billion of total private education loans for the full year, we originated $6 billion of private education loans compared to $4 6 billion a year ago.

The increase of 30% was accomplished even though we saw multiple extensions of the cares Act.

They continue to provide a zero percent interest for borrowers through May one 2022.

Our $6 billion of originations included $212 million of in school private education loans compared to $73 million a year ago.

These loans were made through our banking partner entirely to students attending not for profit institutions.

Our total origination guidance of $7 billion for 2022 assumes that the cares act expires on May one of this year.

We expect to see lower origination volumes in the first half of the year as borrowers delay refinancing decisions until after the extension ends and the rates on current loans moved from zero percent to their higher original stated rate the.

The exploration of the moratorium should be a significant tailwind for the refi origination backdrop, even as rates rise.

As a reminder, we reserve for loan losses at origination.

So for every dollar of new refi originations, we reserve of approximately 1.25% and for new in school originations, we reserved 6%.

The full year net interest margin of 292 basis points exceeded our original target of 270 to 280 basis points.

This quarters NIM of 276 basis points is lower than a year ago, primarily as a result of the increase in interest reserve for late stage delinquencies that it was expected to occur as borrowers exited forbearance.

Our full year 2022, net interest margin guidance of 255 to 265 basis points assumes a greater mix of our private refi product compared to our legacy book.

As borrowers transition back to repayment credit trends continue to exceed our expectations with total delinquency rates below pre pandemic levels and charge offs at historically low levels.

While economic conditions continue to improve our allowance reflects the uncertainty related to the potential negative impact to the portfolio from the end of various payment relief and stimulus benefits that recently occurred four are currently forecasted to end in May 2022.

As borrowers continue to transition to repayment, we feel confident that we are adequately reserved for the expected life of loan losses, given the well seasoned and high credit quality of our portfolio.

Let's continue 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 enabled platform and infrastructure to support states and pandemic related services. This agility contributed to a 19% increase in total revenue from the year ago quarter, and a 61% increase for the full year, while exceeding our <unk>.

<unk> of high Teen EBITDA margins.

As discussed on prior calls we anticipate that the exploration of pandemic related contracts will decrease revenues in the bps segment for 2022 as more traditional services returned to normalized growth.

For 2022, we are targeting revenues of at least $260 million.

With high Teen EBITDA margins.

Let's turn to our financing and capital allocation activity that is highlighted on slide nine.

Over the last 12 months, we reduced our outstanding unsecured debt balance by 16%.

While our primary source of funding remains ABS, we issued two unsecured transactions during the year totaling $1 5 billion.

And we purchased $2 6 billion of unsecured debt, reducing our interest expense and resulting in $73 million of debt repurchase losses.

These transactions lowered our cost of funds and reduced our needs for future issuance as we have no existing maturities for all of 2022.

During the fourth quarter, we issued $1 billion of private refinance loan ABS and $1 billion of <unk> ABS.

For the full year, we issued nearly $10 billion of ABS through 10 transactions as we manage the growth of our high quality private education loan portfolio. We continue to see increased demand from new investors and these transactions.

During the year, we reduced our share count by 17% to the repurchase of 34 million shares returning $707 million to shareholders through share repurchases and dividends.

While increasing our adjusted tangible equity ratio to five 9%.

At today's price our planned share repurchases for 2000 $20 million to $400 million.

We've reduced our outstanding share count by 13%.

Before turning to our outlook for 2022 on slide 10, I would like to highlight the efforts that we've taken to simplify and Derisk the business.

During the quarter, we transferred the department of Education servicing contract to a third party.

<unk> agreements with various state attorneys general to reserve their previously disclosed litigation and investigations.

And reduced our real estate footprint, resulting in an $18 million restructuring charge in the quarter.

Our continued focus on efforts to simplify the business, while improving efficiencies allowed us to achieve an overall efficiency ratio of 49% for the year compared to our original target of 52%.

Our targeted efficiency ratio for 2022, a 54% is primarily a result of the growth businesses contributing a larger proportion of our overall revenue and expenses.

We are providing 2022 adjusted core earnings per share guidance of $3 to $3 15 with.

With targeted return on equity in the mid to high teens.

Our outlook excludes regulatory and restructuring costs assumes no gains from loan sales reflects a rising interest rate environment with the expectation of four rate hikes of 25 basis points occurring each quarter and $400 million of planned share repurchases.

Turning to GAAP results on slide 11.

<unk> full year GAAP net income of $717 million were $4 18 per share compared with net income of $412 million or $2 12 per share in 2020.

In summary, 2021 was a year, where we exceeded all of our original financial targets demonstrated.

Demonstrated the value of our education loan portfolio.

Leveraged our technology and infrastructure to grow EPS increased returns to shareholders strengthened capital and took significant steps to simplify the business I am proud of our accomplishments. This year and look forward to continued success as we are well positioned for meaningful and sustainable growth.

Thank you for your time and I'll now open the call for questions.

Deborah.

Okay.

Separately you can open the line to questions.

Okay.

Although we're having some technical difficulties here.

Ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.

Again that is star one to ask a question.

And your first question comes from the line of Sanjay stock Ronny with K B W.

Thanks, Good morning.

You guys have had a productive year.

I guess first question Joe on the interest rate sensitivity. You mentioned you guys are factoring in for rate hikes.

We think about the timing of those rate hikes, I know theres some differences between sort of short term rates and long term rates, how have you figured that into your NIM expectations.

Yes, So I think one thing to continue to focus on is where one month LIBOR is that determines the majority of our of what we're earning here on both the private and on the <unk> side.

And how we think about it is those four rate hikes evenly distribute distributed over the year, so one occurring in each quarter.

And how that impacts on the film side of the equation is that our assets typically reset or a resetting daily and there is a little bit of a funding lags. So you've got somewhat of a benefit in terms of if there is.

A a faster rise there that youre going to pick up on the asset side, but then youre going to lose some of that benefit obviously as rates rise with it impacting floor income so overall between where where our projections are.

Compared to last year, that's why we felt comfortable in the mid Ninety's range from a floor income standpoint, we would anticipate based off of the current curve that we'd lose about $14 million and floor income over the course of the year, but we would benefit from some of the the rate expectations here on the asset side as well as the financing does.

<unk> that we've made in activities that we've taken place over the last year that will offset that so that's why we feel comfortable with the mid ninety's range given the <unk>.

Casted rate hikes okay.

And then on the on the private side.

We're very quick to adjust from a spread perspective, so as we look at rates and rates rise you're going to see us and as you've seen some competitors more recently adjust the rates upward to factor in the rising rate environment.

Okay.

And then I guess my follow up question. This is a question I've been getting a lot from investors.

Some of your competitors have gotten stronger potentially now getting a bank charter I am curious if you feel like it affects the competitive environment or you guys feel pretty good going out of the way.

You are currently composed obviously your guidance suggests continued strength there, but maybe you could just elaborate that on that Jack.

Sure.

So certainly we go over our years.

As Sallie Mae and Navient have been competing against <unk>.

Institutions with bank charters large and small and really don't see any significant.

Difference by a new competitor obtaining a bank charter, but I would just note on the refi side of the equation product in particular this is a product of that.

We were able to leverage more efficiently than you could on a bank balance sheet.

Given the very low credit risk profile and our funding efficiency is really been second to none.

In the securitization markets and so we expect those those positives to continue and then the last point I would just make on those on that product side of the equation is we are far more efficient than our competition and the competition in this space.

We believe we consistently run at a <unk> or incur a cost to acquire a new customer that runs about half the industry average.

And if you look at our ABS transactions Youll see credit performance and our portfolio is also running at about.

Credit losses running about half of the industry average and those combination of factors are really is what allows us to outperform in this space.

And I don't think you have to look much further than the 30% growth that we generated in 2021 compared to.

The decrease in originations at most of our competitors.

Thank you.

And your next question comes from the line of Erin.

<unk> with Citi.

Thanks.

Jack you mentioned that you've formed a lot of relationships with states and municipalities during your pandemic work.

Maybe just talk a little bit about some of the types of conversations you might be having with additional types of work for bps and then I just wanted to clarify what the base is that you're growing mid 10% off of.

Terms of GPS revenue.

In your in your 2023 expectation.

Sure so.

I think the work we've been able to do with states here is.

Ben not just about providing resources of additional people.

To answer.

Higher volume of calls I think one of the things, where we've been able to distinguish ourselves compared to some of the other vendors that work for state is the analytics and insight that we have been able to provide that dramatically improve efficiency or outcome <unk> outcomes. So when one of our large.

Our clients for example, where we were working on.

Alongside a number of different vendors to respond to and submit unemployment insurance claims during the pandemic.

Our client repeatedly told us that we were running at about a 30% greater efficiency rate.

And then everybody else on that in that space and as a result of that as volume was declining all the other vendors ended their contracts or the contracts are entered ended ahead of ours and so I think Thats. An example of the type of.

The value that we're able to produce and so as states are now looking.

<unk> returned to a more normalized effort, it's how can they continue to capture some of those.

Value added services and benefits that we bring to the table of improved insight efficiency and effectiveness and those conversations are in fact happening and we're pretty excited about the opportunities in that space.

In terms of the growth.

From the bps side of the equation.

Joe Yes so.

The numbers Jack was referencing so of the $488 million of revenues that we had this year roughly around $260 million of that was related to pandemic related services. So.

Take that out of the equation than the growth of 10% on the more traditional businesses that have not had not yet fully recovered plus a little bit of.

Lag of some pandemic contracts that are ending here in January and February so our assumption of that at least $260 million revenues assumes that all of those contracts and at their stated expiration dates and that Theres no additional pandemic related contracts.

Got it thanks, and then secondarily the maturities.

Nice you have none for 'twenty, two but you do have some fairly larger.

Pieces in 'twenty, three and 'twenty four what are your plans in terms of.

Reducing those.

If any.

Prior to maturity.

And so we don't have any.

Plans projected in our guidance of reducing that within 2022 for that 2023 maturity that youre referencing.

As we have done in the past we've been opportunistic if there is a advantage to us versus that cost of carry for cash will look too.

We will look to reduce that ahead of time or if there's pockets, where we can buy at a discount you've seen us do that in the marketplace as well. So our current forecast for 2022 does not assume debt repurchase losses.

Got it thank you.

I do think it's important just to reemphasize on the debt repurchase losses that when we do incur those types of do enter into those types of transactions on those losses are generated it's because there's an.

Economically attractive for us to incur them now and recapture that through lower interest expense in future periods.

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

Got it thanks for taking my question.

Just to be clear so when we talk about the 10% growth.

On the BP.

That is really off the $2 60 number.

It was a little confused I thought I had it but then I got a little confused.

Going forward I think that going forward into 2023, we're looking at this as long term a business that can grow double digits. So 10% that's appropriate as you think about the out years. So this is 23 and beyond.

Got it okay.

And then second question.

Look obviously the run off of the <unk> portfolio is well understood.

But when we look at the balance sheet both the.

The consumer lending segment continues to shrink.

Mostly as well when do we think when do you think there is the inflection point, where that business will start to grow I, just starting to think about the balance sheet, and where we will see growth and what's the timeframe.

Well I think obviously on the outside of the equation. There is no real additions to that portfolio and so that portfolio is going to amortize.

Steady rate.

One of the things that we've been able to do.

Very successfully over the course of time is maintain the margins in that business as the portfolio amortize and really generate significantly higher levels of cash flow than our forecast would have indicated just a few years ago on the private side on the consumer lending portfolio or our portfolio actually would.

<unk> increase this year, but for the loan sales that were completed in the first quarter. So I actually think youre seeing.

There is.

We see an opportunity to continue to grow that portfolio and size. The contribution of earnings is changing a little bit as the refi portfolio given its.

Super Prime credit profile.

Has lower.

Net interest margins than than the legacy private loan book.

But we do believe that balances in that portfolio.

In fact, our growing.

Except for loan sales.

Got it and clearly understood on the film side, but when we think about the consumer segment.

Or is the inflection.

Really in terms of accelerating that growth this year with the incentives to consolidate as rates move higher and as you move.

Q4 2021 Navient Corp Earnings Call

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