Navient Corporation

Thank you, Andrew.

Good morning and welcome to Naviant's third quarter 2020 earnings call. With me today are Jack Raimondi, our CEO, and Joe Fisher, our CFO. After their prepared remarks, we will open up the call for questions. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements, and information about our business that is based on management's current expectations as of the date of this presentation. Actual results in the future 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. For Navient, these factors include, but are not limited to, the risks and uncertainties associated with the severity, magnitude, and duration of the COVID-19 pandemic and the related economic impacts. As reported previously, the work from home policies and travel restrictions that have been put in place have not negatively affected our ability to close our books and maintain financial reporting systems, internal controls, and other over-financial reporting or disclosure controls and procedures. 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 derived from core earnings. A description of our non-GAAP financial measures and a full reconciliation to GAAP measures and our GAAP results can be found in the third quarter 2020 supplemental earnings disclosure. This is posted on the investors page at Navient.com. Thank you, and I'll turn the call over to Jack.

Thank you, Nathan. Good morning, everybody. Thank you for joining us today and for your interest in Navient. Before I begin my comments on the quarter, I'd like to welcome Joe Fisher to his first earnings call as CFO. Joe brings a wealth of knowledge of our business and an outstanding commitment to help us deliver value. And for those of you who have worked with Joe in his role in investor relations, you know this already. I'm excited to see Joe take on this important and challenging role, and I look forward to working with him even more closely, and I'm confident in his ability to succeed. Congratulations, Joe. I also want to acknowledge and thank Ted Morris, our controller, who bridged the gap as acting CFO. This was no small task, and he did it while maintaining his responsibilities as controller. Thanks, Ted, for stepping up and for helping out. While the pandemic continues to create significant challenges, our business model continues to deliver outstanding results. Once again, this quarter's results demonstrate the resiliency, adaptability, and commitment of our team and our business model as we continue to meet the needs of customers and clients. Throughout this pandemic, we have helped millions of borrowers adjust to their individual economic challenges with payment relief and other assistance. We've also deployed thousands of our teammates to help residents apply for and receive unemployment benefits and assist communities in COVID contact tracing. In doing so, we kept our team safe and employed and even added thousands to our payroll. I'm extremely proud of how our team continues to perform in this challenging environment and in their commitment. Our results this quarter were outstanding, and they exceeded our plan. For the quarter, adjusted core earnings per share rose a substantial 58% over the year-ago quarter to $1.03, and we delivered a core earnings return on equity of 33% in the quarter. The quarter's results were driven by continued strong credit performance, increasing demand for our credit products, a favorable interest rate environment, significant demand for business processing solutions, and our active focus on improving operating efficiency. In other words, every area of the business contributed to our strong results. While Joe will provide more details on the quarter shortly, I will start with some of the highlights. Net interest income continued to benefit from a favorable interest rate environment and improving funding spreads. The increase in refi originations also contributed to the $12 million increase in net interest income over the year-ago quarter. And despite the floor reset on July 1st that eliminated $30 million in floor income this quarter, net interest income fell by only $8 million compared to the second quarter. Given the current rate environment and funding execution, we expect our full-year net interest margin for both FELP and private loans to be greater than the original guidance provided at the beginning of the year. With the onset of the pandemic, we provided significant payment relief to millions of borrowers. As the economic situation began to recover, requests for forbearances fell, and the majority of borrowers successfully returned to repayment. For example, forbearance rates decreased from a peak of 28.5% in our felt portfolio to 14.3% at quarter end, and from a peak of 14.7% in our private loan portfolio to 4% at quarter end. In both portfolios, forbearance rates are consistent with pre-COVID levels. The initial usage of forbearance did reduce delinquencies and defaults in both our FELP and private portfolios year-to-date. At borrowers' return to repayment, private loan delinquency rates have remained very low, and our substantial loan loss reserves provide the ability to absorb significant losses if necessary. While we expect delinquencies and defaults to increase next year, Our substantial reserves are set for this and are adequate to cover expected losses. In our consumer lending segment, we saw strong demand for our refi loan products as we relaunched marketing in the quarter. Refi originations this quarter totaled $1.3 billion with attractive spreads and very strong credit characteristics and in line with our mid-teen ROE targets. The demand for loans to fund in-school programs was higher than last year, but lower than planned, as fewer students were enrolled and many schools operated in a virtual environment. This, along with conservative underwriting, kept new loan originations at the low end of our plan, including second disbursements, commitments in the academic year total $60 million, with $37 million disbursed through the third quarter. Our BPS segment saw record revenue in EBITDA in the quarter, with an EBITDA margin of 25%. Revenue was driven by the continued but slow recovery of business in health care and transportation, and in our ability to assist states to provide much-needed services to their residents. The strong performance of this segment is expected to continue through year-end. Our efforts to improve our operating efficiency also contributed to our strong results. Even as we hired 2,000 teammates to meet growing demand, total operating expense fell $20 million, and our core operating efficiency ratio improved 8% to 45% in the quarter. Operating efficiency remains a top priority for us. At the same time, we're continuing our work to improve customer experience and leveraging new technology. For example, we've launched an AI-powered online assistant and are creating video channels to make it easier for constituents to do business with our government clients. Finally, we continue to strengthen our capital ratios while returning $96 million to shareholders in the quarter, including the repurchase this quarter of 4% of our outstanding shares. Given our earnings outlook and strong capital position, we will continue to return excess capital to shareholders. Every area of our business contributed to this quarter's outstanding results. It is a clear demonstration of the strength of our business model, the strong credit profile of our loan portfolio, and our ability to originate high-quality attractive loans. It also reflects our ability to leverage our business processing skills to assist our clients and win new business and our ability to deliver increasing operating efficiency in a very challenging environment. Our earnings, along with the capital released from our amortizing legacy loan portfolios, also provide substantial resources to support the business, maintain our dividend, and return surplus capital to investors. And all this while maintaining a position of substantial financial and operational strength. We expect this strong performance to continue, supporting another increase in our core earnings forecast to between $3.25 and $3.28 for the full year. I also would like to acknowledge my teammates and their commitment to our customers and clients. Adjusting to new work arrangements and new services while juggling the uncertain environment and increasing family needs has not been easy. Thank you. I appreciate your interest in listening in today, and I look forward to your questions later in the call. I'm very pleased now to turn the call over to our new CFO, Joe, for a summary of this quarter's results. Joe?

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 third quarter results for 2020 and provide additional color on the impact of the COVID-19 pandemic on our business. I will be referencing the earnings call presentation, which can be found on the company's website in the investor section. Starting on slide five, key highlights from the quarter include delivered GAAP EPS of $1.07 and adjusted core EPS of $1.03, provided continued immediate payment relief options to borrowers impacted by COVID-19, originated $1.3 billion of private refi loans, achieved record BPS EBITDA margins of 25%, reduced operating expenses by 8% and improved our efficiency ratio to 45%, maintained our strong liquidity position and capital position, repurchased $65 million of common shares, and increased our adjusted tangible equity ratio to 4.1% or 6.4% after excluding the cumulative negative mark-to-market losses related to derivative accounting. Move to segment reporting beginning with federal education loans on slide six. On both our FELP and private portfolio, we continue to grant disaster-related forbearance to those in need. As borrowers begin to transition back to repayment, we have seen a decline from the peak forbearance usage rates of 28.5% that occurred during the second quarter down to 14.3% at the end of the third quarter. While the portfolio continues to amortize, the net interest margin improved 21 basis points from the prior year, which led to overall net interest income increasing 12% to $161 million in the quarter. The increase from the year-ago quarter was largely driven by the favorable interest rate environment we are experiencing. This resulted in a significant increase in unhedged floor income compared to the prior year. In the quarter, unhedged floor income contributed 18 basis points to the segment's net interest margin of 103 basis points. The current outlook for interest rates should continue to positively impact the net interest margin on our FELT portfolio, and as a result, we are raising our full-year net interest margin expectations to be in the mid to high 90 basis point range. The higher net interest margin, along with lower operating expenses, contributed to a $9 million increase in net income from the prior year. Now let's turn to slide 7 in our consumer lending segment. Forbearance usage peaked at 14.7%, or $3.4 billion during the second quarter, and has declined to 4.0%, or $867 million at quarter end. On the following page, you can see the trajectory of forbearance usage of borrowers that have successfully exited forbearance and have not requested any additional payment relief options available to them. Our delinquency rate declined 50% to 2.4%, and the charge-off rate fell by 53% to 75 basis points. The early trends we are seeing as borrowers exit forbearance are encouraging. For example, 98% of our refinance education loan customers that have exited forbearance have made a payment. As borrowers continue to transition out of forbearance, we expect both charge-offs and delinquencies will increase from these historic lows beginning in the fourth quarter. Based on the performance we have seen to date, and absent a significant deterioration in the economy from this point, we feel confident that we are adequately reserved given the well-seasoned and high credit quality of our portfolio. The provision of $10 million in the quarter primarily related to $1.3 billion of newly originated education loans in the quarter. The average FICO associated with these loans is 764. Net interest income of $189 million was driven by the stability in our net interest margin combined with an increase of our private education refinance loan balance offsetting the natural amortization of our legacy portfolio. The net interest margin of 324 basis points was better than expectations, largely due to a lower interest reserve related to a decline in late-stage delinquencies and lower loan modifications. Our updated full-year net interest margin guidance of 315 to 320 basis points assumes an interest reserve build related to increased late-stage delinquencies and loan modifications. In addition, operating expenses declined by 16% year-over-year, while growing our average balances and increasing net income to $110 million. Let's continue to slide 9 to review our business processing segment. In the third quarter, we saw the results of our ability to leverage our existing technology and infrastructure in order to respond rapidly to support states in providing unemployment benefits and contact tracing services. These new opportunities contribute to a 36% increase in total revenue from the prior year and record EBITDA margins of 25%. Let's turn to slide 10, which highlights our financing activity. During the third quarter, we issued $1.6 billion of term private education refi ABS. We continue to see attractive demand for our high-quality assets as we have securitized $4.8 billion year-to-date of private education loans and $1.5 billion of FELP loans. On October 14th, we priced our second FELP deal of the year. The investor book was oversubscribed by nearly 2.6 times. This allowed us to take in pricing that was 15 basis points tighter than our last FELP AVS transaction. At quarter end, we had additional capacity in our funding facilities of $2.2 billion for private education loans and $122 million for FELP loans to go along with $2.5 billion of primary liquidity, of which $1.8 billion is cash. As a result, we ended the quarter in a very strong liquidity position. In the quarter, we acquired 7.7 million shares, or 4% of the shares outstanding for an average price of $8.42. We ended the quarter with an adjusted tangible equity ratio of 4.1%. The cumulative negative mark-to-market losses related to derivative accounting declined by 5% to $657 million in the quarter and in line with expectations. Excluding these temporary mark-to-market losses that will reverse to zero as contracts mature, our adjusted tangible equity ratio is 6.4%. Turn to GAAP results on slide 11. We recorded third quarter GAAP net income of $207 million, or $1.07 per share, compared with net income of $145 million, or 63 cents per share, in the third quarter of 2019. In summary, the strong results this quarter benefited from a favorable interest rate environment and our ability to leverage our existing infrastructure to win new BPS contracts. Assuming that credit performance remains consistent with the early results, we feel confident that we can exceed our original core EPS guidance range of $3 to $3.10 per share and deliver core EPS between $3.25 and $3.28 per share. Before I turn the call over to questions, I would like to express my appreciation to Ted, the entire finance team, and all of Team Navient for supporting me in my new role and their hard work and effort in these unprecedented times. In a year that has presented many unique challenges, I am extremely proud of how we have responded to our customers and clients with innovative solutions to help them navigate the current environment. I will now turn the call over to questions.

At this time, if you would like to ask a question, please press star, then the number one on your telephone keypad. Once again, to ask a question, please press star, then the number one. Your first question comes from the line of Mark Devery of Barclays.

Yeah, thanks. Let me be the first to congratulate you, Joe, again on your new role. Can you, and thanks for the guidance on the NIM for the rest of the year, but Can you talk a little bit more about kind of the drivers of that strength and how we should think about that into 2021?

So there are a couple of things. In the federal portfolio, we are continuing to benefit from the favorable interest rate environment. And although the annual reset floor income declined, you know, our fixed rate floor income continues to be a material contributor to our spread. As Joe indicated as well, you know, the funding side of the equation, our cost of funds on new transactions has been met with very strong investor demand, and that's allowed us to execute at tighter spreads than our original plans had anticipated. On the private side of the equation, we're benefiting as well from the favorable spread between Prime and LIBOR, and unique aspect of CECL accounting, which as there are fewer loans delinquent, we are required to set aside less coverage for the accrued interest, accrued and unpaid interest on those delinquent accounts, and that's also a contributor to that. And then lastly, on the private side, we're getting a benefit as well as we're seeing fewer borrowers needing interest rate relief through our loan modification programs.

Got it. And then, you know, the BPS revenue has also been quite strong, like you highlighted. Can you just unpack the different pieces there and give us some color on what's more permanent and what's more temporary so we get a better sense of kind of what the run rate could be going forward?

So the significant amount of the work that we have been doing in the third quarter and continuing into the fourth is related to what I would call project or contract work with states. Ideally, we're not doing that work long term because there'll be less demand for unemployment insurance and COVID contact tracing. Right now, those contracts tend to roll in monthly or quarterly aspects, so we're anticipating the majority of that revenue to roll off or end in the fourth quarter and not continue into next year. That can change depending upon the demand at each of the individual states, but as it stands right now, that's what we're anticipating. At the same time, we're beginning to see a return of transactional activities in our other clients, particularly in health care and transportation, and so that is something that – you know, as those businesses begin to pick up and the economic recovery becomes more stable, we should see those businesses return to normal as well.

Okay.

Thank you.

Your next question comes from the line of Moshi Orenbach of Credit Suisse.

Great. And, Joe, congratulations, and thanks for taking our questions. The first – The question I had basically was about capital. You know, you made good progress, but, you know, you kind of, you know, went and started repurchasing stock again. Could you talk a little bit about, you know, I mean, that's better than, you know, what you had said three months ago. So maybe give us a little bit of background as to, you know, what you're now thinking in terms of the equity ratios that you're targeting and, you know, what that means for buyback, you know, over the, you know, in the future.

Sure. So, Moshe, I think when we think about the remainder of this year and beyond, obviously we've given our guidance for our adjusted tangible equity ratios of that 4.5% to 5%, and the way we think about it for the remainder of the year, you know, in terms of share buybacks and other capital returns is we're looking to meet those hurdles in terms of what we have set out for the rating agencies and our debt investors. So to the extent that we return any additional capital in the form of share purchases this year, it's really going to come down to any excess capital levels we have above and beyond what our targeted ratios are. And as we enter into 2021, I think we're in a much stronger position in terms of as we build those ratios specifically to the rating agencies where you're going to be seeing more normalized levels of what we have done. Obviously, we'll look to be opportunistic when we can, but I would say that I would think of it as more of an even pace where if there's opportunities at hand, we will take advantage of those.

Got you. Maybe as a follow-up, somewhat related, you know, looking, you know, you're continuing to, you know, not huge changes, but continuing to kind of move your debt stack, you know, kind of lower and, you know, and more even. Could you talk about any opportunities that you see, you know, are there opportunities in the current environment, you know, to kind of do anything that would allow you to, you know, to take any steps to optimize the right-hand side of the balance sheet there?

So, I mean, it's a difficult process there, in part because I think the demand for our outstanding unsecured debt has been particularly strong. And, you know, the opportunity for us to kind of enter into the marketplace and repurchase that periodically to change the mixed structure isn't as easy as one would hope. But I think what we've done over the last couple of years has been pretty significant in terms of restructuring that side of the balance sheet, taking advantage of not just traditional ABS financing vehicles, but really leveraging the equity that has been building up in some of those securitization trusts and borrowing against those at rates that are, you know, 300, 350 basis points cheaper than unsecured funding costs which would have been the traditional alternative. And as a result of that, we've been able to bring our unsecured debt balances down through maturities principally, but bring them down faster than otherwise would have been expected. We have a significant amount of debt maturing. We have coming up this quarter and then into 2021, so that will give us some opportunity. But You know, I would have hoped we would have been able to find more of that debt available in open market transactions than we have.

Gotcha. And then just last one for me, you know, the efficiency ratio, you know, you show here in the slides that, you know, 47% year-to-date, your guidance about 50. What's the... What's the driver why you don't think that's going to be sustained at that level? Is it what you were talking about with business process servicing revenues? What's the plan, I guess, on expenses and how should we think about that?

We remain absolutely focused in terms of hitting the targets that we put out, especially on the operating efficiency ratios. And from that standpoint, obviously, as you touched on the BPS segment, that is a market business that we're focused on hitting in the mid to high teens. So a little down from this quarter, but certainly within our targeted range. So we feel confident that we're on a pace to achieve or exceed that target, or I should say, from a positive, obviously, be on the better end of that 50% target ratio. But as we go forward, I think you have to look at us and look across other companies. I mean, this efficiency ratio pairs very well against our competitors, and that's something that we focus on and looking to maintain those levels, not exceed them as the portfolio amortizes over time.

Great. Thanks, guys.

Thanks, Michael.

Your next question comes from the line of Aaron Saganovich of Citi.

Thanks. Congrats, Joe, and good luck on the new role. The drop in the Pell that's forecasted, I guess, for the fourth quarter, based on your guidance, you mentioned the interest reserve bill. I assume that that's what's driving the Pell NIM to come down there. The other comment about Cecil driving this, you know, benefit because of the low delinquencies, are you expecting delinquencies to rise in 2021? Is this going to be a bit of a headwind into next year?

Yes. So, there's no question that when we granted pretty wide use of disaster forbearance, many customers who were delinquent and might have defaulted in 2020 went into a forbearance status, and ultimately those delinquencies and defaults get pushed into 2021. So, when we look at the loss rates, the charge-off rates in our private loan portfolio this year, they're substantially below what we had expected at the beginning of the year. Those losses, in our view, don't disappear. They're more moving from calendar year 20 to calendar year 2021. And as those delinquencies build, that's where the provision for the accrued interest expense would come in. That said, you know, as customers are coming out of forbearance and entering repayment, the performance of those loans is better than what we would have expected. And so we'll be watching those trends. And we spend, you know, I think one of the hallmarks and real attributes of our servicing operation is that how we use data and different strategies to connect with borrowers and help them find a payment plan that keeps them keeps them on track and successfully helps them amortize their loan balances. And you can see that even in our TDR portfolio statistics where the amortization of that portfolio has been quite good over the last year, which is just something we strive for.

And, Aaron, just on the reserve as well, as Ted mentioned on the last call, The standard practice for most financial institutions is a policy that reserves for the 90-day interest through net interest margins. So it's not all delinquencies. It's really as loans come out of forbearance, there's going to be some build as they move through 30, 60-day buckets into your 90 days where you would have that build occur. And as you saw from prior quarter, our 90-day delinquency actually declined. But if you look at the dollar amount in the 30 and 60 days, you can see how that build can occur from this quarter to next quarter on the 90-day delinquency bucket.

Just so I can try to get my head around the magnitude, what are we thinking in terms of the magnitude of the headwind into 2021?

I think if you think about the guidance that we gave for the remainder of 2020, that 315 to 320, just backing out the math of what that would mean for an impact just from this alone for the fourth quarter. If you're at delinquency levels that are closer to historic levels, you could see as much as I call it 20 to 30 basis point impact, depending on the level of delinquencies that hit 90. So if you're assuming essentially 100% of what's in 30 to 60 days rolls through into 90, you could see that much of an impact on the high end.

And then just, I don't know if you can comment much on this, but it does appear we're headed towards a potential Democratic sweep in the election. What do you think that's going to mean for NAVY over the next four years?

Well, I think there's been, you know, I think student debt has received a wide range of kind of commentary during this whole primary and less than the general election side of the equation. But there has been a growing focus on segments of the population that are struggling with student loan debt, and this is particularly true in the federal loan side of the equation. And we would agree with that. We see, you know, a number of – you know, the biggest challenge is happening not so much with borrowers with high debt balances, but borrowers who have relatively modest debt balances, $10,000 and less, who – acquired that debt by starting school but not finishing. And as I've shared with you all before, two-thirds of all the defaults in the federal program come from students who borrow less than $10,000. So we think there are some ways that the federal government should step in and provide some relief here. And more importantly, because providing relief and then not doing anything about repeating itself only means you're going to have to do it again down the road, really helping students and families have a better understanding of what their financial plans need to be as they start school, what the consequences are of borrowing for that degree, making sure they earn it, and making sure that that debt balance is matched properly to the economic prospects that that degree presents. And I think we've had a number of very good conversations over the last, you know, two years with policymakers on those fronts to, you know, help to share the insights that we have from the front lines of where the challenges are and make sure that relief programs are targeted to those most in need. Thank you.

Your next question comes from the line of Vincent Cantick of Stevens.

Thanks, and Joe, congratulations on a well-deserved promotion. So first, a question on just the student loan trends and the origination. So understanding, you know, third quarter kind of hit the low and under range as you updated your guidance. Any update to how October has been performing so far and how you expect this to trend, just because it seems like this time is – This year is somewhat different with the hybrid and maybe people coming on later.

So this is on the in-school side of the equation. The demand for credit in that product set is very seasonal. You tend to see the applications being submitted in the July-August timeframe with school certifications and disbursements happening in September and then again December, January. Just as we have in prior years, we're definitely seeing lower application volume at this time of the year because the kids are already enrolled and tuitions have been paid. I think it is possible that you could see higher demand for the second semester, but as we stand here at the end of October, schools really have yet to release their plans for how they're going to operate in January. And so until those plans become finalized, I don't think we're going to see, you know, see any changes until students and families have more visibility about what's going to happen next semester.

Okay, that makes sense and helpful. Second question, kind of a follow-up on the yield discussion question. So good NIM guidance and understanding that there's also some reserve built in there. But when we think about thinking of the 2021, benchmark rates are as low as they can go. We already had the annual reset. Is there anything else that could change the yield? And then when I think about NIM, kind of continued benefit from the cost of funds improvements, but anything else that you would call out there?

I think, as Jack mentioned earlier on the call, we're in a beneficial interest rate environment and that what we're seeing on the FELP portfolio should continue as interest rates remain low. And the other item I would just highlight that we have in the past on the private NIM is really just a mix shift as we originate more refinance loans at a lower rate. rate than what we have on our legacy book, that will also cause additional pressure. But obviously, those are very high-quality loans, and we're targeting mid-teens ROEs.

Okay, great. Thanks very much.

Your next question comes from the line of Mark Gimbrani of Borough Hanley.

Good morning, guys. Joe, congratulations. Great quarter, great progress on things you can control and improve the earnings power over time. I'm just curious, you know, Wells Fargo announced they're coming out of the business. And I just wonder what you guys think that means generally. And then, you know, there is a large portfolio potentially sitting out there. And if you would find that attractive or think there might be a chance that you could acquire that over time.

Thanks, Mark. So I do think, you know, one of the things that we have believed as CECL became the accounting rules for provisioning of consumer loans is that funding in-school loans on a bank balance sheet was going to become increasingly more difficult. And I think the move here from Wells is certainly significant. could be part of that. They have their other reasons that they may be taken into consideration. But long-term, we do see that as something that would be a positive in terms of demand for our in-school loan products, simply because they were a large and formidable player in that space. And while they continue to originate this academic year, So we would expect the origination benefit to us to come in the future. And like any opportunity, any kind of portfolio of loans that is available in the marketplace, we're always eager to find ways to participate in that and, you know, as best we can through a combination of servicing, loan ownership, et cetera. So we'll be looking at those opportunities should they present themselves.

Great. Thank you. It makes sense. All right.

Your next question comes from the line of Sanjay Sakrani of KBW.

Thank you. Good morning, and congrats, Joe. Well deserved. I guess I just wanted to go back on the NIM expectations as we move into next year. Just want to make sure I completely get it. For the FELP NIM, it sounds like you guys could probably sustain the 90s, the mid-90s levels, all else equal. And then on the private student loan NIM, is the expectation that you drop that 20 to 30 basis points, all else equal? And if rates stay the same, that's sort of where we level out next year. Just want to make sure I get that.

Yeah, so, I mean, if you look at our original guidance at the beginning of the year, right, we had been forecasting 3 to 310 basis points. And so as we get – as we end this year, I think what you'll see is that, you know, on the low end of that range as we add more loans and we think into next year, that that's an appropriate way to think about it is in that 300 basis points or south of that number just based on the mix shift.

And Phelps?

Yes, I think your statements on felt more accurate. I mean, the current interest rate environment and what we're seeing, the stability of that portfolio and the predictability, absent any obviously significant changes in the interest rate environment, that's where we feel comfortable with of what we're seeing really today and our guidance into the fourth quarter and beyond for 2021. Okay.

Yes, Sanjay, I would just add, you know, the There's certainly been some very positive headwinds in 2020, more on the felt side of the equation than on the private side, principally due to the floor income benefits we received on the annual reset loans. But we still look at, you know, as we get closer to wrapping up the fourth quarter here, and we'll provide guidance for what we think in 2021 back in January. You know, we're very optimistic about how earnings and how the company will continue to perform next year. So I wouldn't – while this interest reserve on the private side of the equation is certainly something that is a headwind – It is not a material headwind and shouldn't materially change our earnings outlook here.

Okay, great. And then just to follow up to Mark's question on the Wells Fargo opportunity, just thinking about this enrollment period, do you guys think it can have an impact on your pace of origination this specific year, given there's a big player that's exited? And then just maybe a follow-up on the regulatory side. There was a lawsuit in New Jersey. Obviously, the CFPB lawsuit still remains out there. Could you just comment on sort of where we are with all of this and if this New Jersey lawsuit poses any threat or is it sort of just a follow-on to similar lawsuits in other states?

Thanks. Sure. Yeah, so on the in-school side of the equation, You know, I think the impact of a major player like Wells not originating loans is an academic year of 2021-2022 benefit for us. You know, this year, demand for lending in both federal and private was down in part because many students' enrollments across the country were down fairly significantly, and you also have a high percentage of students completing classes virtually, which means they're not on campus, they're not in dorms. And there was a, you know, there was a story yesterday, I think on Bloomberg or somewhere I read on, you know, how schools are suffering because no one's paying for room and board kinds of things. So hopefully, you know, hopefully COVID will be behind us for the next academic year and we'll have a more normalized situation. cycle, and I will say we've continued to receive very strong and favorable reviews from customers as they utilize our loan origination systems, just in terms of the ease and the logical flows that take place, and so a very, very positive customer experience overall. On the regulatory side of the equation, yes, New Jersey filed a lawsuit yesterday. It is a It is a copycat of what has been filed by the CPB and other states over the years. There's nothing new here, no new evidence, no new allegations. It's obviously extremely unfortunate that there was a decision made to file a lawsuit without any facts or circumstances. to support it, but we have consistently said that we will be defending these lawsuits because they are not supported by the facts and circumstances. I think everyone has had the opportunity to see the actual evidence that has been submitted by the CPB in their lawsuit. They came up with 15 witnesses who supposedly we steered into forbearance, all 15 of them acknowledged in depositions that Navient did, in fact, tell them about their repayment options, including income-driven repayment options. A number of them were actually enrolled in income-driven repayment plans, so I don't know how they could have been steered into something else if they're already in it. Several were committing fraud against the federal government. So, you know, we are very confident in terms of our outlook on these, and it's – you know, I – I would dare say these are nothing more than political statements, and these lawsuits that have been filed in many cases. Thank you.

And once again, to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Mark Hammond of Bank of America.

Thanks. Hi, Jack, Jill, and Nathan, and congrats to Jill and Nathan. On the adjustable tangible balance, equity ratio, the target of 4.5% to 5%, is that with or without the impact of cumulative derivative account mark-to-market?

So that includes the impact. So excluding that of where we are today, we're at 6.4%. And in this quarter, you saw the The mark declined by 5%, so that gives you a sense that we were in line with our expectations, so it gives you a sense of how to back that out going forward.

Got it. And then on the cash flow slide, slide 13, for the sell side of the portfolio, I noticed that since the second quarter to the third quarter, really that number didn't change as far as your expectations. So I was wondering if – are any assumptions changed in the – or expectations changed for the cash flow to be generated by the self-portfolio quarter over quarter for the rest of the portfolio's life, or just trying to understand what's going on there?

Sure. So, as we do every quarter, we obviously update with the forward yield curve, so that's something that we take into account as of We also, typically in the third quarter, as we've done in other quarters, but mainly in the third quarter, we adjust our CPR assumptions. So our CPR speeds did increase from the prior quarter and prior year. So essentially what we saw was that the Felt Stafford portfolio went from four – sorry, consolidation went from four to 5%, and Stafford went from eight to 9%. So those were really the big adjustments that we had occur in the quarter.

Got it. Thanks, Joe. And my last one, for the $500 million of high-yield unsecured notes that are maturing in five days, are you just going to use cash on hand to retire those, or is there some other means of financing to refinance those?

No, we intend to use the cash on hand.

Great. That's all for me. Thank you.

Thank you.

Your next question comes from the line of Rick Shane from J.P. Morgan.

Hey, guys. Good morning. Thanks for taking my questions. And, Joe, congratulations. I wanted to talk about the consumer lending segment, the private student loan portfolio a little bit. When we think about it, we think about it in three segments. There's the legacy book. There's the new in-school book. And then there is the refi and consolidation book. And it looks like the activity this quarter was primarily on the refi side. What's interesting to me is the allowance, the reserve rate on that is very low. As you guys pointed out, it's about 77 basis points. But it looks like the reserve rate for the entire portfolio actually stayed flat quarter over quarter. So did you change the assumptions on the legacy book, or is there something going on with the in-school book that's going to Keep that allowance ratio higher as you continue to drive business through the refi channel.

So the net provision that we made this quarter was primarily due to new loan volume, which, as you pointed out, is principally refi loans. Our loss expectations on that portfolio are a little over 1%. over the life of the loans and the net amount that you see there has to do with the amortization of the portfolio and some of the refinancing activities of existing loans that are included in the refi number. So some of the volume that we're generating is actually volume of borrowers who are refinancing existing loans with us.

Got it. Okay. That's That makes sense then. Okay. Over time, do you think that there will be additional granularity given the pretty different credit characteristics between in-school private student lending and the refi business?

So we do look at each of these business, I think the portfolio segments and the three categories that you mentioned. And certainly as these become larger components of the overall mix. We can certainly break some of those statistics out. There's no question the refi loan portfolio performs at a much, much higher quality, much, much lower risk portfolio than you would see in other lending activities. When in-school lending, your two risks are will the student graduate And will they get a job that produces an income level sufficient to manage their debt? In a refi loan, you don't have those risks. You know that the student has already graduated, and you've got anywhere between four to five years of earnings and income to be able to underwrite again. So as a result, you see significantly lower loss rates. And we can certainly, going forward, look to break those out in a little bit more detail for folks, both in terms of spread – credit loss expectations, and performance. You obviously can see a lot of this through the ABS financing transactions themselves, but we can certainly do more of that in the quarterly disclosures.

Yeah, that would be terrific because, yeah, there's clearly significant positive selection related to the REFI portfolio, and so to be able to see that and understand it, especially as it grows, will be helpful. Thank you guys very much.

Your next question comes from the line of Lee Cooperman of Omega Family Office.

Thank you very much. I have a series of questions leading me to an observation. The first question is, as you guys sit around and look at all these pushes and pulls, what do you think your normalized recurring earnings are? You talked about 325, 328 this year. Is that indicative of what you think are recurring earnings or are recurring earnings materially lower? What do you think your recurring earnings are? I'll get to the real question after that one.

Yeah, I mean, you're kind of looking for a little bit of guidance into 2021. No, really, I'm talking long-term.

You obviously have a view because you've spent billions of dollars buying bad stock, so you must have a view of value and the value derived from recurring normalized earnings. Then I'm just curious what you would think.

We would look at this as being able to, you know, obviously you're fighting off the amortization of a large legacy loan portfolio that we could sustain earnings in that very high to low $3 range.

Okay, that's what I figured you'd say. I went on a Bloomberg terminal, okay, and this is all off of Bloomberg, and I think the numbers are reasonably accurate. S&P 25 times earnings, Navient three times earnings. Price to book 3.6 times book S&P. Navient, 88 times nominal book value, slight premium to tangible book value. Dividend yield, S&P, 1.7. Dividend yield, Navient, 6.5. ROE, S&P, 24%. ROE, Navient, 25%. You mentioned in the quarter we did 35%. The stock price, in my opinion, is an embarrassment to the company. You have decided over many years, I've been on these calls for now for a decade, to return the money to the shareholders through stock repurchase, which I can appreciate. It looks very cheap, but you haven't convinced anybody. The average price target of the analysts that cover us is $11.61. We started buying stock back, I think, in the high 20s, but you thought it was worth in the 30s. The highest price objective is 14. Has the board and you thought about the possibility of bumping a dividend, which has been unchanged for five years? as a way of making a statement to the market that we think our recurring earning power is not appreciated by the market? I honestly don't know the answer because, you know, I feel like the grandfather of the moon struck when he said that, you know, he's confused. You know, I would normally say buying back stock would make an enormous amount of sense, but the market doesn't seem to care. So, you know, investors are hungry for income. You've been paying, I think, what, 16 cents a quarter for five years. That's 64 cents. I look at the DuPont formula, which says return on equity times retention rate equals sustainable growth. We're not really growing, so you have the ability of paying out a little bit more. If you bump a dividend, say, 10%, that would be $12 million more in cash, which is nothing for the company of that size. So what do you see as the interplay between the dividend and the repurchase and the possible adjustment of the program? Okay. And I don't know what I believe, to be honest with you, because your statistics are so appealing. I can understand why you want to buy back stock. I'd buy back more than you're buying. But I'm just wondering whether the consensus in the street is just right. You know, all the experts that cover you, many of them asked questions this morning. They have price objectives that are not terribly different than the price of the stock. And this morning the stock is trading down 50 cents on what you would think are a terrific quarter. So nobody cares about us. But I'm sorry for going on, but you understand the nature of the question.

Yes. Thanks, Lee. I share your frustration on the stock price. I think particularly when you look at our PE ratio and our price to book, given the consistent strength in our earnings that we've been able to generate, you know, in both positive and challenging economic environments. I mean, this environment right here has been a pretty challenging environment. environment for many companies, and to be able to outperform and raise guidance through this cycle, I think, shows the strength of the company, not a weakness in it, and would argue for a higher multiple, not a lower multiple. Exactly. You know, I think there are a number of factors that people weigh more heavily than they should. I think political risk is weighs more heavily on the stock than it has ever had as an economic impact on the stock. You know, but hopefully maybe in a couple of weeks we'll see a change of that as people can see, you know, where the decision is made and can price the stock more appropriately. You know, I think the balance between dividends and share repurchases is, you know, our – If we had a relatively low yield, I would see that as something that could make a difference. But I think with our yield well above the financial services space or really almost any company in the marketplace, it's difficult to see how pushing that higher has a benefit relative to being able to buy back stock below book value. And so I would definitely be more inclined to be repurchasing shares at these levels then increasing the dividend. But ultimately, that's a decision and discussion that we have with the board regularly, and we'll be updating that as we start to move into 2021.

You know, it's complicated, but, you know, the reality is the repurchase, your own stock repurchase, the repurchase by the company is one signal that the market is totally ignored. The other signal is the confidence in the recurring nature of your earnings power and through the bumping of the dividend. And I don't think, you know, a 10% increase in the dividend would only be about $12 million. But whatever, I hear you. I have my own confusion. But good luck and congratulations to Joe. Thank you.

Your next question comes from the line of John Hecht of Jefferies.

Thanks very much, guys. Clearly a lot of questions have been asked and answered. So just a couple incremental ones. One is, Joe, I think you said your 5% decline of the mark-to-mark accounting for derivatives. So should we think of the pace of that as 5% a quarter, or will there be any acceleration of that change over time?

I mean, there are Primary metrics behind that, Mark, are obviously in terms of the derivatives. The weighted average life there is about three years. And the decline that we saw, there's obviously some other moving pieces in that. But I think for modeling purposes and your purposes, 5% is fair to think about. Obviously, if there's an increase in interest rates, that would accelerate that return of the mark. So I would say that 5% common is more of an all else being equal in terms of the interest rate environment.

Okay. And then the second question is, you know, I think we talked a little bit about the fact that Wells is leaving the market, what that might mean, some of the bank portfolio opportunities. What about the refi side? I mean, the market's been somewhat more resilient than we would have anticipated. But, you know, you guys clearly have better access to capital than some of the other emerging competition in that category. interest rates are lower, so I assume that has an impact on, you know, addressable market. How do you think about competition on the refi side and how that might change over the next year or two, just given, you know, overall potential market dislocations?

So we think there's a couple of things. Certainly, whether it's refi or in-school lending, you know, obviously your access to capital and attractive funding markets are important. And in both of those areas, we think we have a competitive advantage. But I think our biggest competitive advantage remains our servicing capabilities. We know when we put loans on our books and we service those loans, they perform substantially better than they do in other lender-servicer hands. And so if you look at our refi ABS transactions, You know, our cumulative default rates in those portfolios outperform the industry average. When you look at our federal loan statistics, this is an apples to apples kind of comparison. You know, we consistently outperform all other servicers, you know, year to year, anywhere in the high 20s to mid 30s percent in terms of lower cohort default rates. And that makes a difference. It makes a difference in terms of the customer experience, that someone's working with them to help them find a payment plan that keeps them on track. It allows us to, you know, generate higher earnings and returns on loans we make. And it's those combination of factors that I think will allow us to continue to outperform in the origination side, particularly on refi. The last piece I would just add on refi is that we are principally a digital marketing program in this area, and we do believe we also have an advantage on our cost to acquire. So we think our CTA, or cost to acquire alone, runs about half the industry average as well. So those combination of factors do allow us to be more competitive. and you saw that in terms of the ability to rebound origination volume and grow it to $1.3 billion after pausing in the second quarter.

Great. Thanks for the call, and I look forward to working with Joe and Nathan in their new roles.

Thank you.

Your final question comes from the line of Henry Coffey of Red Busch.

Yes, good morning, everyone, and let me add my congratulations to a long list, Joe. It's very exciting. Thank you. A couple of points, but first, you know, going back to Lee's comments, when we look at all the adjustments you make that we talk about in terms of earnings and capital ratios and other factors, the one part we haven't discussed is tangible book values. Is it fair to assume that all of those reversals that you've discussed in terms of capital also apply to the calculation of tangible book value? And if so, can you just give us some insight into, you know, is all of that fair value or is there some cash and capital-related adjustments that should be made as well?

So that mark, you're right, absolutely impacts the tangible book value. So you're talking about a probably $650 million mark that's going to come back over time. So that's just a natural lead through an into-gap equity that we would benefit from over the next several quarters here.

Yeah, and if the accounting rules were different, which they aren't, that mark wouldn't even be there, correct? It would not. It would not, correct. On a wholly other related topic, Wells Fargo is primarily a, or was, but this is my understanding, originated most of their student loans in the branch. And you're more likely from just listening to your comments, you're focused more on digital channels. How does that play out from a marketing point of view if you're looking to sort of go after a piece of that business and Is there any arrangement you could make with Wells above and beyond buying the portfolio that would drive more of that business your way?

So the vast majority of in-school student loans are originated through online processes, principally with assistance through the financial aid office. So branch activity is not as big a factor as you might normally think here. And so we do think there is an ability to translate this into origination volume for us. We don't see other banks getting into the in-school marketplace in any meaningful way. Certainly no national banks playing in this. With Wells' departure, you know, there really is no national branch bank player left originating in-school loans. So... We think this is a good opportunity for us. We think we can run this business, you know, in a very appropriate, conservative way. We're targeting really just the four-year, not-for-profit educational institutions and graduate school lending where credit performance is more predictable, more stable, and demand in normal times is more predictable and more stable as well.

I mean, your greatest strength is, as you've said, is your servicing. And I would add to that, given all the data and the years of experience you've had, is sort of insight into not only how traditional in-school loans perform, but how loans in the private education sector perform. Even though that's a riskier channel, is there an opportunity there that over time should be explored, or are you just going to stick to the – traditional in-school market?

I think the marketplace right now is strongest in the traditional in-school marketplace for us. It's the largest opportunity. It has, in our view, the greatest opportunity for us to penetrate and access and generate high-quality returns. I think we can look at expanding beyond that footprint somewhat down the road, but I would be We would be cautious lending in that space to students and families who can truly benefit from the product, not just make a loan at an attractive return.

Great. Thank you very much.

Thank you.

I would now like to hand the call over to Mr. Rutledge for any closing remarks.

Thanks, Andrea. We'd like to thank everyone for joining us on today's call. Please contact me if you have any follow-up questions. This concludes today's call.

Thank you for your participation. This concludes today's call. You may now disconnect.