Q4 2024 Navient Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to Navient's fourth quarter earnings conference 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 session, you would need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised.
Speaker Change: And to withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would like now to turn the conference over to Jen Earyes, Head of Investor Relations. Please go ahead.
Jen Earyes: Hello, good morning, and welcome to the Navient Earnings Call for the fourth quarter of 2024. With me today are David Yowan, Navient CEO, Edward Bramson, Vice Chair of the Navient Board of Directors, and Joe Fisher, Navient CFO.
Jen Earyes: Navient has updates to share with you this morning and has posted two separate presentations that will be referred to during this call. Both are available on Navient.com slash investors.
Jen Earyes: First, we will refer to the January 2025 Strategy Update Presentation posted on our website. Then, we will move to discuss the 4th Quarter Results and Outlook for 2025. During this portion, we will refer to the 4th Quarter 2024 Earnings Presentation, which you'll also find posted to our website.
Jen Earyes: After the 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 other information about our business that is based on management's current expectations as of the date of this presentation.
Jen Earyes: Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC.
Jen Earyes: During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio, and various other non-GAAP financial measures that are derived from core earnings.
Jen Earyes: Our GAAP results, description of our non-GAAP financial measures, and a reconciliation of core earnings to GAAP results can be found beginning in Navient's fourth quarter 2024 earnings release, which is posted on our website. Thank you, and I now will turn the call over to Dave.
Dave: Thanks, Jen. Good morning, everyone. Thank you for joining and for your interest in Navient.
Dave: Let me start by laying out what we will share on this morning's call.
Dave: I'll provide a recap of 2024 and share some of our plans for 2025.
Ed will then provide a strategy update.
Ed: where we are in our transformation journey and how the actions we have taken deliver value and better position us for the future.
Ed: Lastly, Joe will share our fourth quarter results and our outlook for 2025.
We'll then open it up for Q&A.
Ed: A year ago, we set out to create a more focused and streamlined company. We set an ambitious goal of finalizing several key transactions during 2024 on an aggressive timeline.
Ed: I'm pleased to say we achieved our objectives within that aggressive timeline.
Ed: These transactions create a platform consisting of a consumer segment focused on growth through earnest and a legacy portfolio focused on maximizing cash flows through cost efficiency.
Ed: During the fourth quarter, we signed an agreement to divest the government services businesses within our business processing solutions segment.
Ed: We anticipate that this transaction will close during the first quarter.
Ed: This follows our servicing outsourcing agreement and the sale of our healthcare business earlier in the year.
Ed: In many ways, the government services is the most important of the three actions.
Ed: Divesting GS enables us to eliminate the substantial shared service infrastructure and related expenses that supported servicing and BPS.
Ed: We now have a clear line of sight on the transition services we will provide under all three of these transactions.
Ed: The transition services we provide for outsourcing and for healthcare are expected to wind down during the first half of this year.
Ed: The Government Services Transition Services are expected to extend into early 2026, with many services completing before then.
Ed: We have aggressive plans to eliminate these expenses as the TSAs expire.
Ed: And we will not stop there. We're identifying additional opportunities in all parts of our business to become more efficient.
Ed: We have already begun to realize the expense-reducing benefits of a variable cost servicing model.
Ed: This has occurred sooner than we expected, as our loan portfolios, especially our Felt portfolio, paid down more quickly.
Ed: The healthcare sale unlocked value in a non-strategic business that was not reflected in our stock price.
Ed: Proceeds from that sale gave us the flexibility to increase our share purchases during Q4 and retire some unsecured debt.
Ed: There were a number of factors that impacted 2024 results. Most significant was high levels of prepayment activity which accelerated cash flows as well as the amortization expense of loan premium.
Ed: The loss of a contract delayed the sale of government services and impaired its value.
Ed: We recorded regulatory and restructuring costs associated with our transformation and settlement of the CFPB's lawsuit.
Ed: In short, we put a number of significant headwinds behind us.
Ed: Our consumer lending business generated strong loan origination growth during 2024. Refi volume growth exceeded $1 billion, 60% higher than the prior year, despite a slightly higher average rate environment.
Ed: In-school volume grew 13% with improving margins and unit acquisition costs.
Ed: achieving the growth we set within our targeted segment of this market.
Ed: Consumer Lending is well positioned to continue to grow origination volume and demonstrate operating leverage in 2025.
Ed: We plan to increase loan origination volume by 30% this year.
Ed: A large portion of that growth is expected in the second half of the year based on the current interest rate environment and the seasonal pattern of in-school originations.
Ed: There are, as you all know, a number of comprehensive proposals the new administration may consider in determining federal education loan policies and practices.
Ed: These proposals contain elements that would produce expanded opportunities for private lending. Among these are a reduction or elimination of loan forgiveness programs and the elimination of the Grad Plus loan program.
Ed: The Grad Plus loans include a program for graduate students. Origination levels in this program are roughly the current size of private student lending.
A majority of our in-school lending is to graduate students.
Ed: It's a market we understand well and are offering products and a customer experience tailored to the needs of this segment.
Ed: It's too soon to tell what elements may be implemented or when they'll be implemented. But we possess the capacity, flexibility, products, and customer experience, and are excited about this potential sizable opportunity.
Ed: With that said, our 2025 plans do not yet assume any expanded opportunities for our products as a result of policy changes.
Thank you.
With that, let me turn it over to Ed.
Thank you, David.
Ed: What we want to achieve today is to update you on
Ed: the longer presentation that we did this time about a year ago. And at that time, we identified four areas to improve shareholder value, each of which we're going to touch on to some extent today.
Ed: Some of them in more detail than others, and we'll get into that as we go through it. Before we start, though, it might be worth saying that we, our firm that's invested in that, only invests in turnarounds, and has done that for decades.
Ed: One of the things you find about turnarounds is that often it seems like there's a lot of work going on and nothing's really happening as a result, and then suddenly it does. So it's good to be able to report on some positive things that are happening as we go through things today.
Jen Earyes: To begin with Earyes, putting the primary focus on today, the first one is cost reductions. We're going to talk about phase one of that right now.
Jen Earyes: We've been titling this Cost Reductions Phase 1, which implies, as David said, that there's quite a bit more to come.
Jen Earyes: As David said, the disposal of BPS and the outsourcing of loan servicing not just simplified the business, but it was critical to being able to go after one of the first major cost reduction opportunities.
and what that is, a miracle of last year, we...
classified
Jen Earyes: the business into two pieces, our total operating expenses in 2003 were
Jen Earyes: $700-odd million dollars. Of that, about $200 million was incurred by Ernest and the extended part of BPS.
Jen Earyes: Both of those entities essentially were stand-alone from a financial standpoint. So what that leaves is the corporate and shared expense segment that David referred to.
Jen Earyes: And what was in that in 23 was the government services part of DPS, our internal loan servicing operations, and then our corporate overheads.
Jen Earyes: And all of those things were significantly shared expenses. So, if you take just that part of NAFTA last year, it spent $523 million.
and you can see that on the table.
Jen Earyes: It also brought in $200 million of revenue. So a simple way to think about it is that loan servicing and corporate overheads on a net basis were about $320 million in 2023.
Jen Earyes: If you look at the 2025 column, we're calling it continuing because
Thank you.
Jen Earyes: It takes account of all of the reductions in transition service expenses that David identified, and Joe will talk about later. So a way to think about it is that $204 million that you see is something you could call a run rate that we're currently at.
Jen Earyes: So, if you take the difference, what that shows is that the first series of cost reductions is usually something like $120 million of annual savings.
I think what's interesting about that is that
Jen Earyes: That's almost 40% of our shared costs in the overhead that have been reduced already.
Jen Earyes: But, importantly, none of the costs that have come out have any effect on our ability to grow or introduce new products or anything else. They're strictly, in essence, recurring overhead costs or reduced cost of servicing from us, so to say.
So, it's a good place to be.
Sometimes it's important to put cost reductions in context.
And if you think about it,
Jen Earyes: The cash flow impact, which is the first one, basically says that our legacy loan portfolio, I think Joe's latest number later in the presentation, after unsecured debt,
Joe Fisher: It has a positive inflow of about six and a half billion dollars, I guess, for the cost of collecting it.
Jen Earyes: So by reducing our cost of collection and overheads by $120 million, we've added something like $1 billion to $1.5 billion of future cash flow to what we would previously have had.
Jen Earyes: And I think an aspect of that to focus on is that what it also means is you have a recurring source of new capital to invest or return to shareholders each year. And so how you deploy that gets to be important.
Jen Earyes: The other aspect of defrost reductions is the impact on earnings.
and in essence what you get is roughly a dollar.
uplift one ton each to the journey's capacity.
Jen Earyes: And at the moment, it's a little bit less than a dollar, actually. But as the benefits from the outsourcing of servicing continue to grow, it's going to trend towards more than a dollar. So we're calling it a dollar earnings per share for simplicity.
Jen Earyes: The third point on the chart is actually the strategic part.
Thank you.
Jen Earyes: because now that we've reduced our costs by this amount, hopefully more, our break-even level for the consumer business, in essence, is less than it used to be. What that means is two things. First of all, you can now grow the consumer business.
Jen Earyes: and incur the expenses of doing that while remaining profitable because your breakeven is lower. The other thing is, our expenses are lower. And what that means is Navient is now more competitive in anything it chooses to do. And that's an important strategic item, I think, going forward.
Jen Earyes: The other piece of context is that if we had chosen just to grow the consumer business to get to the same point, we would have had to have net something like $10 billion of new consumer loans.
Jen Earyes: That would have taken quite a while to do, and quite a lot of capital as well. Where we are today is we have the equivalent of adding those loans. We got them now, and there's no additional capital involved. So I think it does put us in a much better competitive and strategic position going forward.
and the Conjunctivates, Bob.
You mentioned the consumer segment very much.
Jen Earyes: And the reason for that is that the federal segment, although it's a nice business, can't grow. They don't make felt anymore.
Jen Earyes: So the consumer segment could grow. It's actually, we don't always focus on this, it's more than 70% of revenue nowadays.
It's about $500 million.
question
Jen Earyes: and what's been happening in part is that five years ago...
Jen Earyes: default revenue was 60 percent of the total, and that's down to 30 percent. And that's as a result of the shrinkage of the product but what it's also doing is it's making it easier for us to generate net grab growth in the future than it has been in the past.
Thank you.
Jen Earyes: David also mentioned Erin Est, and last year we focused to quite some extent on Erin Est, and you can go back and look at last year's slides to refresh yourself if you'd like to.
Jen Earyes: But we, in essence, write all of our new business under the earnest ground.
Jen Earyes: and the brand has very positive attributes and it has very positive consumer ratings. So it's a major asset if you want to grow your brand.
Jen Earyes: The other thing is, the business model is distinct from what Navien has done in the past. It's essentially online.
Jen Earyes: and the impact of that is that you can generate very positive economics from growth because online costs tend to stay fixed as the revenue grows. So it's an interesting opportunity for us. At the moment...
Jen Earyes: with the additional capital that we're generating from the cost savings and so on.
that you can certainly see.
opportunities to grow revenue in the products we currently have.
Jen Earyes: And we're probably going to do some of that just to get some revenue momentum going again. In the longer run, there are other products that we're considering moving into. At the moment, they're in testing, so we'll probably talk about those a bit more later in the year.
Thank you.
Jen Earyes: To get to page 6, another item that we touched on last year was our cost of equity.
Jen Earyes: which puts us at a significant disadvantage today. We have a high cost of equity relative to any of our peers and also in the absolute sense.
Jen Earyes: And what essentially accounts for that is that because our legacy portfolios have been running off at quite a high rate, and a rate that's higher than our expenses have been coming down, our profitability has declined, and our term leakage has come down, and you see that in the evaluation metric.
Jen Earyes: As you can tell from what we've been talking about already, we're getting ahead of that expense issue.
Jen Earyes: But nonetheless, as you sit here today, we trade at 60% roughly in terms of index value.
So when you're looking at allocating capital...
Jen Earyes: If you look at it statically, what you would say is for every dollar that you put into something new, you end up with a market value of 60 cents. So that's not an attractive position to be in, and that's where the cost of equity is going to be an issue for us going forward.
Jen Earyes: We put a little table on the chart. Typically we wouldn't use price to book.
Jen Earyes: for calculating cost of equity, but it's a good way of illustrating our point. So, for the reasons we mentioned,
Naviance Trading is about 62% of the book.
Jen Earyes: The peer group we've put there, who they are at the bottom of the page, is not particularly aspirational, but they're the ones that we're compared to. They, on average, trade at something like twice book, and you can see what the range is from the chart.
Jen Earyes: Interestingly, if you scan them, what you'll see is that their return on equity generally runs from low to middle teens.
Jen Earyes: and their expected growth rate in revenue is 2 to 4 percent. And both of those are better than nothing it's been doing.
Jen Earyes: but neither of them are things that we couldn't reasonably aspire to do.
Jen Earyes: And in starting to do that, obviously, getting the consumer segment growing again organically is something that might have the effect of driving the re-raising and have a positive effect on our cost of equity.
Thank you.
Jen Earyes: So if you're going to pay seven, this is also something that we talked about last year. And a shorthand way of saying capital allocation as we see it, is that you put a dollar into something and you end up with market value of more than a dollar, that's your objective.
Thank you.
So, um...
If you look at where we are today...
Jen Earyes: We have the likelihood of more cash to invest in the future because of what we're doing.
Jen Earyes: and we're moving our philosophies on how to make that decision a little bit.
based on what we think the markets value.
that the shareholders is going to do.
Jen Earyes: from allocating one way or another. And obviously the change, a change in the evaluation metrics would affect that decision.
Jen Earyes: So carry purchases in recent years have been our default option because it's really been probably the best way of returning capital efficiently.
Thank you.
Jen Earyes: It's not a bad use of capital by any means if we're trading at 60% of the book.
And we're still growing our earnings.
Jen Earyes: maybe buying stock at less than 50% of future value. So, it's not a bad investment, but there are two things that Militate Against continuing to do it exclusively.
Jen Earyes: One of them is obviously it could reduce your capital to grow in the future.
Jen Earyes: I don't think that's a significant issue for management today, but it is something to think about. I think probably more important, if somewhat nuanced, is that we've already done more than $5 billion of buybacks in the last 10 years.
Jen Earyes: And, leaving aside their investment merits, one of the things that's done is to shrink our market capitalization to the point where our liquidity is not what it used to be.
Jen Earyes: So, one of the things that we have been keeping in the back of our minds is the effect of share repurchases.
um
the investability, if you like.
of investors to become interested in that area.
Chris
which I'm not really going to go through.
Jen Earyes: But what we're trying to do now is to provide perspective on what our new strategy and the turnaround is directed towards killing and to tie the various strands of it together and in a very simple sense.
Jen Earyes: What we're saying is we're reducing our fixed cost base in ways that don't affect our ability to grow. And that gives us the opportunity to get positive operating leverage.
Jen Earyes: We're financing that growth with equity that we generate internally from our improved cost position.
just as we expect that produces better returns.
on equity and better earnings.
Jen Earyes: We hope to leverage that by recapturing that valuation discount that we have. So the combination of improving returns and improving valuation is what we're working towards, and it's potentially an interesting investment thesis.
Joe Fisher: So, there is more to come, David and I will come back and update you again in the second half of the year, but for now I'm going to turn it over to Joe to review last year's performance and some guidance and all of us will stay around for questions at the end.
Speaker Change: Thank you, Ed, and everyone on today's call for your interest in Navient.
Joe Fisher: I will review the fourth quarter and full year results for 2024 and provide our outlook for 2025 earnings per share.
Joe Fisher: Our fourth quarter GAAP earnings per share was 22 cents, bringing our full year GAAP earnings per share to $1.18.
Joe Fisher: On a core earnings basis, the fourth quarter results were a loss per share of $0.24.
Full year, core earnings per share were $2.
Joe Fisher: Significant items included in the quarter included 20 cents loss from the expected sale of our government services business.
Joe Fisher: Six cents of regulatory and restructuring expenses are narrowly driven by the strategic actions we are undertaking to restate and right-size the expense base of the company.
Joe Fisher: and 23 cents related to lower expected recovery rates and reserve bills for our private education loan portfolio.
Joe Fisher: Adjusting for these significant items, we earn 25 cents on a core basis.
Joe Fisher: Before I go into the segment, I'd like to pause and acknowledge the devastating wildfires that struck Southern California this month.
Joe Fisher: I encourage all borrowers who have been impacted by this disaster and other natural disasters in recent quarters to take advantage of the various relief programs that we and the Department of Education offer to help you during these challenging times.
Joe Fisher: Let me now provide further detail on results by segment beginning with a federal education loan segment on slide 4.
The net interest margin for Q4 was 43 basis points.
Three basis points lower than the prior quarter.
Joe Fisher: For the full year, segment NIM was 45 basis points, and we expect full year NIM to increase in 2025 to a range of 45 to 60 basis points.
Joe Fisher: Pre-payment activity was significantly lower in the fourth quarter than we experienced earlier in the year.
Joe Fisher: Prepayments were $300 million, or 1% of the felt portfolio in the fourth quarter. This compared to average prepayments for the first nine months of the year of $1.7 billion per quarter.
Joe Fisher: recently issued injunctions on certain federal forgiveness benefits and resulted in a lower consolidation activity.
Joe Fisher: We anticipate that our felt portfolio balance will total nearly $27 billion at the end of 2025.
Joe Fisher: Compared to the prior year, our greater-than-90-day delinquency rates increased to 8.7 percent, the charge-off rate improved to 11 basis points, and forbearance rates decreased to 14.7 percent.
Joe Fisher: Now let's turn to our consumer lending segment on slide 5.
Thank you. Thank you.
Joe Fisher: Net interest margin in this segment was 277 basis points in the quarter compared to 284 basis points in the third quarter.
Joe Fisher: For 2025, we anticipate our consumer lending MIM will be between 270 and 280 basis points, and our balance of private education loans will decline by 4% as our legacy book runs off and the refinanced loans become a greater percentage of our consumer lending book.
Joe Fisher: Originations grew over 60% to $363 million compared to $223 million a year ago.
Joe Fisher: Full year origination volume grew to $1.4 billion compared to $970 million a year ago.
Joe Fisher: Late-stage delinquencies increased from the prior quarter to 2.7 percent while forbearance rates decreased from the prior quarter to 2.7 percent.
Joe Fisher: The decrease in forbearance is primarily a result of the disaster relief that was granted to the borrowers impacted by federally declared natural disasters in the third quarter that returned to repayment in the fourth quarter.
Bye.
Joe Fisher: Our allowance for loan loss, excluding expected future recoveries on previously charged-off loans for our entire education loan portfolio, is $800 million, which is highlighted on slide 6.
Joe Fisher: Private education loan origination volume during the quarter added six million dollars to the allowance.
Joe Fisher: $32 million is related to the bill for private education loan balances as we continue to see reduced collections for private education loans.
Slide 7 shows the results from our business processing signals.
Joe Fisher: We anticipate closing on our divestment of the government services business in the first quarter.
Joe Fisher: During the fourth quarter, we classified the business as held for sale and recognized a loss of $28 million for $0.20 per share.
Joe Fisher: After this week's classification, the government services business had a book value of approximately $40 million.
Joe Fisher: In the third quarter, we completed the sale of our equity interests in the healthcare services business for $369 million, resulting in a $219 million gain on sale.
Joe Fisher: Together, these two transactions will result in over $400 million of net proceeds and represent the divestment of the entirety of Navient's business processing segment.
Joe Fisher: Under the terms of these agreements, we will continue to provide services to STEM and ETS businesses for a period of time.
Joe Fisher: Our expenses in providing these services and the revenue we receive under these Transition Services Agreements, or TSAs, as well as the TSA supporting the transfer of servicing, will be reported in the other segment.
Let's turn to expenses beginning on slide 8.
Joe Fisher: Total expenses for the quarter were lowered by 25% to 151 million dollars.
Joe Fisher: We anticipate that the expenses related to the total transition costs of our BPS businesses and outsourced servicing will total approximately $60 million for 2025, with approximately 40% offset by revenues related to the TSAs.
Joe Fisher: The completion of the TSAs are important steps in our ability to remove these expenses.
Joe Fisher: remain confident in our ability to achieve the level of expense savings outlined in the slides that Ed reviewed with you earlier.
Joe Fisher: Let's turn to our Capital Allocation and Financing Activity that is highlighted on slide 9.
Joe Fisher: In the quarter, we repurchased 4.4 million shares for $65 million.
Joe Fisher: In the year, we reduced our share count by 9% through the repurchase of 11.5 million shares while increasing our adjusted tangible equity ratio to 10% from 8.2% a year ago.
Joe Fisher: In total, we returned $249 million to shareholders through share repurchase and dividends.
Joe Fisher: We continue to maintain disciplined asset liability and financing strategies. As we look at the next 12 months, we have $722 million of cash on hand and are well positioned to significantly grow our high-quality loan products, manage our outstanding debt, and distribute to shareholders.
Joe Fisher: Our 2025 outlook reflects a transition year in which we begin to take advantage of the more streamlined and leaner enterprise we are creating. Our primary focus will be on growing loan originations while delivering expense reduction.
Joe Fisher: Our 2025 Core Earnings Guidance is $1 to $1.20 per share.
Joe Fisher: This range is after the 26 cents of net expenses related to the transition services agreements discussed earlier.
Joe Fisher: Separately, identifying these net expenses is designed to provide a sense of earnings on a continuing basis.
Joe Fisher: We anticipate full year total loan originations to grow by 30% as we remain focused on high-quality borrowers.
Joe Fisher: With the current expectation for moderately lower rates in the back half of 2025, we expect this growth to be back-loaded into the second half of the year.
Joe Fisher: Our approach to share repurchases during 2025 will balance capital reallocated to loan growth with excess capital available to repurchase shares.
Joe Fisher: Our EPS range does not assume any additional share repurchases. Our current cash and capital positions provide ample capacity to repurchase shares, and we believe the current discount to tangible book value presents an attractive opportunity.
Joe Fisher: As I close, I'd like to thank all of our Navient team members for their significant accomplishments over the past year and continued dedication to generating value for all stakeholders.
Joe Fisher: Thank you for your time, and I will now open the call for any questions.
Joe Fisher: Thank you. As a reminder to ask a question please press star 1 1 on your telephone and wait for your name to be announced. To withdraw the question please press star 1 1 again.
And the first question will come from...
Sanjay
Sakrani with KBW, your line is open.
Thank you. Good morning.
Speaker Change: So, a question for David and Ed, I definitely appreciate the strategic discussion and sort of flushing out the progress being made and how to think about it going forward.
Speaker Change: I'm just curious, you know, like, is the decision to do this firm so, you know, we should really expect you guys to curtail?
Speaker Change: capital return, really focus on growth, and then maybe just specific to the growth, could you just talk about how you guys plan to accelerate originations and growth and, you know, when we can get to that expense run, right, that you guys discussed on the $200 million? Thanks.
and David Yowan.
Thank you.
Oh, perfect.
Thank you. Thank you.
Speaker Change: Sanjay, this is Ed. It's like my colleague's appointment with me, so I think, you know, just to put the thing in context, we said, look, we're in the middle of a turnaround, so there's a lot more detail that needs to be fleshed out, which we'll do in the second half, but the basic
Speaker Change: A question you're asking is, what's the company going to look like? And what we're saying is that, at the moment, it's valued as if it's sort of going away.
Speaker Change: so just take the existing assets and value them. I think what we're saying is there's an opportunity here.
Speaker Change: to have it start to be stable to growing and that'll change perceptions. I don't want, I don't think it's right to get ahead of ourselves because we're in the middle of a time where I'm trying to tell you everything. But hopefully we'll have good news for you later in the year.
and the expense run rate.
Speaker Change: Sorry, what's your question on expenses? You guys talked about how, you know, sort of the core can come down to something more like $200 million. Yeah. Is that just a philosophical... I'm sorry, I just want to make sure I understood that.
Speaker Change: That's a real number based on TSA expenses running off from all the current spending. What it doesn't include is the next set of things we'll be doing, which we don't want to give you a number for yet. And it also doesn't include earnest, by the way, which wasn't part of that process.
Got it.
Speaker Change: And maybe just a follow-up question for Joe, you know, the same question I had last earnings call on the provisions. Maybe you could just talk about how you feel about recovery rates now that you've taken another one. It sounded like you guys were comfortable.
Speaker Change: last quarter, but you know, there's been more adjustments. Can you just walk through that again? Thanks, Joe.
Thank you, Sanjay, and I would say that.
Sanjay: As we continue to just monitor our portfolio, we have seen delinquencies stick up both in the felt and the private portfolios, and so a portion of our reserve, $14 million, was related to a reserve bill on the roughly $16 billion portfolio.
Sanjay: That's a obviously there's a number of factors here at play whether it's inflation interest rates and some of the Obviously the federal portfolio and changes in policy potentially impacting the private portfolio
Sanjay: But at this point, we certainly feel appropriately reserved, but it is something that we'll monitor throughout the year.
Okay, great, thank you.
Speaker Change: And the next question will come from Bill Ryan with Seaport Research. Your line is open.
Bill Ryan: Good morning, thanks for taking my questions. First one, obviously there's some incremental excitement and student lending about the possibility of some government programs which you mentioned.
Bill Ryan: Moving to the private sector, some of your peer stocks have kind of responded already to it in anticipation of the move.
Bill Ryan: I was wondering if you could maybe talk a little about your infrastructure, because I know you're predominantly graduate loans in the in-school channel already, and you're in over a thousand schools, but what is the capacity that you see in the company right now to ramp that up if that opportunity becomes available?
Yeah, thanks, Bill. As you know, there's a number of...
Comprehensive Proposals
Bill Ryan: Some focused more on federal education lending policy, some focused on broader parts of the government structure, but they include potential changes in federal education loan policy. And within those proposals, there's a large number of elements. I think there's...
Bill Ryan: Two things in all those proposals that are foreseeable and the impact and potential opportunity for us are foreseeable as well. The first is
Bill Ryan: lower levels of loan forgiveness and perhaps changes in IDR programs.
Bill Ryan: Those have an impact on our federal, our FFELP portfolio, for example.
Bill Ryan: which was impacted last year by a high level of consolidation activity, which in turn was driven by a high level of loan forgiveness programs that were offered in the federal loan program. So, to the extent those are more predictable and even lower than they have been in the past.
Bill Ryan: that extends the life of our existing health portfolio, which obviously we think is a good thing.
The second impact of...
lower levels of forgiveness is that
Bill Ryan: If you have a federal loan today and you're considering refinancing it to a lower rate,
Bill Ryan: You have to consider the possibility of that loan being forgiven or having some other IDR or other payment programs that might make that debt a little less burdensome than it is today. And so you'd hold off and not do that. So forgiveness could have...
two impacts on us that are foreseeable.
Bill Ryan: The second is, foreseeable impact, is the discussion about the potential elimination of the Grad Plus program. And that's a federal market today that is about equal to the size of the private loan market as it exists today.
and this is a
Bill Ryan: customer segment, the graduate, that we have emphasized where a majority of our in-school origination is in the grad program. So we absolutely feel like we've got
the products that meet the needs of that segment.
Bill Ryan: We've got the customer experience that seems to delight them based on all of the work that we do.
Bill Ryan: and we certainly have the financial and operational capacity to take on greater volumes if and when they present themselves.
Speaker Change: Okay, and just one quick follow-up. You're talking about the 26 cents of expenses.
Speaker Change: some of that kind of carrying through into 2026 as well, you know, just kind of thinking about the elimination of it, you know, is it going to be like first quarter of 2026 and how much residual spillover will be into the next year?
Speaker Change: So the way I think about it, we've made some really great progress so far today as highlighted.
Speaker Change: If you think about, if you go to slide 8 and look at the corporate expenses, one thing to think about there is we had $55 million in the fourth quarter of 2023.
Speaker Change: We have $50 million of expenses in the fourth quarter of 2024, roughly $7 million of that is related to TSA expenses, so that gives you about a $12 million quarterly delta between the two years, so it just demonstrates the progress we've made year over year.
Speaker Change: I would say if you factor that in, thinking about how we'll end at the end of the year, you're roughly about 50% of the way there in terms of taking out expenses.
Speaker Change: I'll say a wild card in all of this is TSAs could go longer than we anticipated, but as I highlighted in the last quarter's call, our expectation is that
Speaker Change: Our extended transaction here with Coral Health, that would end at some point in the first quarter and we feel that we're anticipating that that would end in the first half of the year towards the back end of the first half.
Okay, thanks again.
Speaker Change: And the next question will come from Rick Shane, JP Morgan. Your line is open.
Rick Shane: Hey guys, good morning. Thanks for taking my questions. I apologize if I am a bit confused but we'll try to hopefully we'll get some clarity here.
When we...
There's $110 million remaining on the repurchase authorization.
Are you...
Guidance excludes any additional repurchases.
Rick Shane: Are you going to be opportunistic? Are you going to be programmatic? Or are you essentially saying, hey, in anticipation of these potential opportunities, we're going to really dial back on the repurchases?
Thank you.
Rick Shane: So in the past, when we've given this guidance in terms of what our plans are for the year, that was fairly programmatic throughout the year and done for modeling purposes.
Rick Shane: We will be opportunistic here, and we expect to be purchasers at these levels. Certainly, the discount to tangible book value is attractive to us. But what we want you to take away is, for modeling purposes, to assume zero. That in no way means that we will not be buying shares this year. In fact, we are looking at it today in our purchasers as well.
Speaker Change: Got it. Yeah, obviously, if you're going to be opportunistic given where you're trading versus tangible, that's helpful clarification.
Speaker Change: Look, the other thing here is, and there's been conversation, you guys pointed out your
Speaker Change: discounted book. You pointed it out on a relative basis. Implicitly, your guidance at the midpoint for 2025 suggests about a 5% ROE.
Speaker Change: If you add back the potential expense savings, which don't sound like they're going to materialize until really 26, you're talking about maybe a 6% ROE.
Speaker Change: In that context versus the peers that you guys pointed out, the valuation actually kind of makes sense. I'm curious what you think the...
Speaker Change: So, Rick, I mean, the first thing I'd say is that, you know, it's...
call you back to, you know, last year, we
Speaker Change: this year. Again, most of that will be back-loaded, so it's going to be a, you know, a combination of factors of return and etc. Ed talked about the fact that one of the benefits of
Speaker Change: The expense reduction that we've done is it gives us an opportunity to lower our break even Which helps us Grow a little faster as well and so we'll come back to you in the second half of the year with a better sense of what
Speaker Change: those growth opportunities are and the levels that we can achieve with a lower expense base and the opportunities we see to grow that.
Kimner.
Thank you very much.
Speaker Change: I'd like to just add something about wave clarification because it probably hasn't come across very clearly.
Speaker Change: If you raise a question like this, what does it take to get book value?
Speaker Change: You can sort of say arithmetically what it is because nothing else has changed. One of the things that we're trying to evaluate in the next few months
Speaker Change: is, if you think about it, let's say that you're not growing and your return on equity has to be 10-12% to make work.
Speaker Change: So that's what you need to do. If you're starting to grow, you might need a lower return on equity to justify that.
Speaker Change: So, the reason I think that David and I are giving you a less than direct answer is because we're trying to figure out what the best combination of growth and return would be for future share price.
Speaker Change: Got it. Is the way somewhat to think of this that...
Bureau
generating a
Speaker Change: a return that is below hurdle right now because you're essentially preserving capital for a potential opportunity. Again, a
Speaker Change: effectively a doubling, some probability of a doubling of your TAM and so it's a little bit like insurance you have to pay for it now you don't necessarily like it but if you need it in the future you need that capital in the future you're going to be really glad you have it.
That's exactly right.
Maybe I'm less confused than I thought. Thanks guys.
and John F. Kennedy. Thank you. Thank you.
Speaker Change: And the next question will come from Moshe Ormbach with TD Co. and your line is open.
Great. Thanks.
Speaker Change: I guess, given that your guidance for the, I mean, the portfolio is running off and the guidance for originations at 30% higher basically still leaves you with 4% decline in
Speaker Change: the private portfolio in 2025. I mean, how long do you think it would take to get, how many years would it take to get to a point where the business actually in total is growing?
Speaker Change: or I mean are there other products I mean or is this just reliant on kind of changes in the grad program you know from a from an administrative or regulatory standpoint
Speaker Change: Moshe, I think there's, you know, three parts of our answer to that, at least three parts of our answer to that. One part is I think we've demonstrated growth and we think there's additional growth in the products that we've had and that's reflected in the refibrogenation growth that we've had and that we're targeting.
There are.
Speaker Change: potential opportunities to expand growth in those products, particularly in the in-school market if there's federal education loan policy changes. We're not counting on those. We're not assuming any of those.
Speaker Change: But we have the capacity to do that, and if those opportunities present themselves, we want to be ready for that.
Speaker Change: And the third opportunity is expansion in the product set, which we talked about.
Speaker Change: somewhat last year, a little bit more, you know, that's more to come on that, but that's another opportunity for us to, you know, grow our balances more rapidly than we have historically.
Speaker Change: Got it. And maybe just to put a finer point on the 2025 guidance, the dollar to dollar 20, if you think about it, besides the 26 cents, which you'll get back as you know, as the, you know, the expenses are reduced and the TSAs run off.
Speaker Change: But besides that, that dollar to dollar twenty, is the run rate higher or lower at the end of 2025 than it is at the beginning? Because, you know, you've got, as we said, a smaller portfolio, you do have some element of share repurchase, although it sounds like it's going to be significantly smaller after 2025. So when you think about that run rate...
Speaker Change: of 25 to 30 cents a quarter, or the average of that $1 to $1.20. Is that going up or down over the course of 2025? And if so, what are the drivers that you're thinking of?
Speaker Change: And so there's a couple things. It's not just a straight line in every single quarter, and I'll try to avoid giving quarterly guidance here specifically, but I would say that you are at the, our anticipation would be that you're at the high end of that range that you're talking about by the time you enter the fourth quarter.
Speaker Change: In the first and third quarter, there are seasonal factors that do pressure some of the expenses, so notably in the third quarter, you're in school originations, or you're taking a larger provision at that time, and you tend to have higher expenses associated with that in the quarter.
Speaker Change: Also, in the first quarter, we will have a little bit of additional expenses from the BPS business. As Dave and I both mentioned, it has not closed at this point in time. So there were
Speaker Change: I know that's a long answer, but a long way of saying that we would anticipate that you'd be on the higher end of that range as we enter into the fourth quarter, absent anything that is out of our forecast from the interest rate environment.
Thanks.
Nate Richam: And our next question will come from Nate Richam with Bank of America. Your line is open.
Good morning and thank you for taking my questions.
Nate Richam: I was just curious how y'all are thinking about approaching this year in terms of the in-school loan products?
Nate Richam: I think he noted 30% origination growth on a total private portfolio.
Speaker Change: Just wondering if you can break that down further between in-school and refinance and then on that topic Just how many rate cuts are you guys expecting in your outlook?
Speaker Change: Sure, so I'll tackle the second question first and then address the first one as well. So the second question, it's two rate cuts, so a relatively flat curve at this point. So, the first one being in the.
Speaker Change: first half of the year towards the back end and then the last cut at the end of the year, so
Speaker Change: There would be obviously pressure associated with that on the Felt portfolio, which you wouldn't necessarily get the benefit as it relates to additional floor income in this year, so that would be a positive going into 26 should those two great cuts occur.
Speaker Change: In terms of origination guidance, the way we think about it, as Dave highlighted as well, we do think that originations, we'll see that in the back half of the year.
Speaker Change: But breaking down that 30%, it's roughly what you've seen from an in-school perspective, 10% consistent growth, high-quality borrowers, predominantly the graduate students. And on the refi side, that would translate to roughly about 40% to 50% growth, again, in the back half of the year.
Speaker Change: Okay, thank you. And then I apologize if you address this with Rich's question, but.
Speaker Change: Can you just like talk a little bit about the return profile of the earnest business? I think you guys previously mentioned you're targeting around like mid-teens returns there, but just given the dynamics that we're seeing with like higher loss rates, delinquency rates, and the lower recovery outlook.
Speaker Change: I guess, like, how do these recent vintages line up with their target return profile?
Speaker Change: dependent on growth rates and our operating expenses, the operating leverage that we have.
in that business.
Speaker Change: You know, you may see us take advantage of opportunities we see in the market to grow a little more rapidly, but, you know, in a steady state run rate, we think that business could be a double-digit, rich-term business.
Speaker Change: That's all from me. Thank you. Your second question on the recovery rate, I'm sorry. Yeah, I was just curious like the recovery outlook just changed anything or that's like really in certain villages or not.
I'm
Speaker Change: Yeah, so look, I'd characterize the recovery rate as a really small change on a
Speaker Change: a large volume amount that is very much a legacy issue for us.
Speaker Change: We've got, you know, a large number of loans that were originated decades ago.
Many of them were charged off.
Speaker Change: years and years ago, and as we continue to try to recover against those loans, we have a set of assumptions about that recovery that's in our reserve rate, and we're continuously updating that.
Speaker Change: But this is not a reflection, obviously, of credit quality on the existing portfolio and the recovery rate on the much smaller amount of charge-off loans.
Speaker Change: more recent vintages is absolutely in line with their expectations. So this is very much a legacy issue and a relatively small change that we continue to update as we learn more and have more experience in recovering the account.
Tom Stanton.
Got it. Okay. Thank you.
Thank you for watching.
Terry MA: And our next question comes from Terry Ma with Barclays. Your line is open.
Terry MA: Hey, thank you. Good morning. I just want to follow up on the grad plus opportunity. I would imagine if that materializes, you would kind of compete for it more aggressively. So maybe just talk about how that business or potential business.
Terry MA: could kind of fit alongside Ernest because it kind of looked like Ernest mainly refides kind of grad loans but then you would potentially be also kind of originating.
Terry MA: grad loans should the PLUS program be curtailed. So can those two businesses be complementary?
Terry MA: Yes, so they are complementary today in terms of we are originating two graduate students, so the opportunity, if I'm understanding the question right, is if grad plus were eliminated, is there additional opportunity for us? And I would say yes, that is very much in our wheelhouse. That is, as Dave mentioned, what we're doing today from an in-school origination perspective, so we feel that that's attractive and fits very well with the earnest brand.
Speaker Change: Got it. I guess I'm just questioning what's to stop, you know, potential grad students from kind of walking next door and just kind of refinancing with earnest?
Oh, so once they've graduated?
Sorry, so what once you
Speaker Change: I was thinking about a grad plus, so once they have graduated from school, they'll certainly evaluate their options, and that's going to be an interest-free play at that point for most of those borrowers, and it's going to depend on their credit history and certainly how quickly they went from an undergrad to a graduate program and then graduated.
Speaker Change: for that, whether they would get a better rate or not. It's also going to depend on whether they have a cosigner. But we think that establishing the brand early on and that familiarity with Ernest, as Ed highlighted, they have very high promoter scores, very well-received. So we think that relationship would just add value, the fact that while interest rates do play a significant part in refinancing, I would think the relationship would help as well.
Got it. Thank you.
Speaker Change: And our next question will come from Jeff Adelson with Morgan Stanley. Your line is open.
Hey, good morning. Thank you for taking my questions.
Jeff Adelson: Just on the new product expansion potential, I know you're in the testing phase still. Sounds like we'll get something later this year. We've asked about this in prior calls.
Jeff Adelson: Any sort of incremental learnings you've had on that front as you've gone through the testing. Do you think you've identified something that's tangible that you'll be ready to announce later in the year and just maybe
Jeff Adelson: Any more incremental color on what those products or enhancements might look like at this point?
David Yowan, David Yowan, David Yowan
Jeff Adelson: So I wouldn't go it's too soon to go into the products, but I think the way I could describe this if you think about
the assets that we think Ernest brings to the marketplace.
But they include
Jeff Adelson: an ability to create a simplified process for people to help.
Jeff Adelson: manage their debt burdens. That's effectively what the REFI product has done. We feel like our credentials and capabilities there are very, very strong.
We've got a
Jeff Adelson: A customer experience after origination that surprises and delights customers as well.
Jeff Adelson: And so we're looking for ways that other market opportunities where we can take the advantages that we have
Jeff Adelson: and try to find a match between the capabilities we can bring to the marketplace.
Jeff Adelson: that it can also provide a substantial return for our shareholders as well. So it's going to be built off the assets that we think we have relative to the opportunities in the marketplace where we think we can apply those assets.
Jeff Adelson: And just to circle back on GradPlus, have you done any work on how much of that volume, that $14-15 billion, would actually be in your sort of credit box or what you'd be willing to actually pursue against others?
Jeff Adelson: Yeah, look, we've done some internal assessment. I'm not going to share that with you. I would just say that a lot of it is going to depend on exactly what the public policy changes are, but if you
Jeff Adelson: look at a couple scenarios. I think there's a possibility here where the opportunity for us, a fair share of the underwritable part of that market, could be a substantial opportunity for us, and I would just leave it at that.
Jeff Adelson: If I could just add two things on your first question. One of the things that we're really testing for and looking at to talk about later in the year is some of the overall business model question because there's certain kinds of products you can do.
that have relatively low headline, but very good operating economics.
Jeff Adelson: And then you've got products that are more expensive to manage and generate and so on, which have higher headwinds. The real question I think you're asking is, can you run those two in tandem? And that's something we want to think about. And when we come back and talk later in the year, we'll be able to tell you what we're going to try.
I hope that's helpful.
[inaudible]
Great, thank you.
And the next question will come from Mark.
DeVries with Dauchie Bank. Your line is open.
Mark Devries: Thanks. I had a question for Joe. Could you discuss how expected paydowns on the Felt portfolio match up with your debt maturities and needs to access money markets down the road and and how the repositioning you guys are undergoing has kind of impacted your ability to access those markets?
Mark Devries: And so, over the years, obviously, we've done a fairly good job in terms of matching up the maturity profile with our cash flows. You may remember, Mark, you covered us long enough, seven years back when we used to talk about the towers that are ahead of us. We've really reduced that and given ourselves much more funding flexibility.
Mark Devries: the ability today to go through multiple periods here without issuance. Having said that, I think if there's opportunities that are attractive to us, we would look to issue just to continue obviously demonstrating access in that marketplace, but also funding any future opportunities that we see. So we feel very good with where we are position-wise.
Mark Devries: even considering the slowdown in the FELP portfolio that we're seeing.
Mark Devries: As you know, over the last several years, we've seen prepayments pick up and then come down, but our forecast here is more in line with what you've seen historically in terms of prepayments, and that should give you a pretty decent sense of how those cash flows will match up.
Speaker Change: Okay, got it. Thanks. And I apologize if I missed this, but I saw there was a, you know, more than 500 basis point increase in felt delinquencies in the quarter. Could you discuss what drove that and kind of the implications for your business?
Yeah, so...
Speaker Change: It's always difficult to say exactly what was the driver, just given that there's a number of factors today that I highlighted of whether that's overall interest rate, environment, and just the economy in general. But I would say that
Speaker Change: The tougher challenge for us on the Felt portfolio is how much of the noise from just loan forgiveness and loan policy has limited some of the ability for connection with some of these borrowers.
Speaker Change: So it's something we'll continue to monitor. Obviously, you've seen forbearance and other rates improved here, but the delinquencies in the early stage did spike up and we did take a small provision in the quarter.
Okay, got it. Thank you.
Ryan Shelley: And our next question comes from Ryan Shelley with Bank of America. Your line is open.
Ryan Shelley: Hey guys, I appreciate the question. Most of mine have been answered. Just one quick one here. As we think about sort of the growth opportunities going forward, it sounds like we'll get more color as the year goes on.
Ryan Shelley: But from a debt holder point of view, would you consider funding any of these potential growth opportunities by coming back to the market and just...
Speaker Change: On capital allocation as well, where should we think about ranking repayment of unsecured maturities? Thank you.
Speaker Change: I'll start the first part of that question. So certainly, if there's significant growth opportunities in front of us, unsecured debt issuance would play a part of that. Today, we have also other
Speaker Change: funding options available to us. You know, we have over $700 million of cash on hand. We also have unencumbered loans that we can borrow against totaling about $1.3 billion. And then as we've demonstrated before in our encumbered portfolio, the OC there is another $4.8 billion. So we do have other levers to pull in terms of pulling cash forward if we want to invest versus unsecured debt issuance. Having said that, I think it really depends on the level of growth that we would see in both the in-school product, the real
Speaker Change: and anything else that we determine we're going to pursue going forward. So I think it would play a role and just it depends on really the size and what changes in the market over the next two years.
Got it. Thank you.
Thank you.
Speaker Change: Thanks Michelle and I want to thank everybody for joining today's call. Please contact me if we were not able to take your question or if you have any other follow-up questions. This concludes today's call.
Thank you for watching!
Speaker Change: This does conclude today's conference call. Thank you for participating. You may now disconnect.