Navient Corporation

Good day and thank you for standing by. Welcome to the Navient fourth quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this time, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nathan Rutledge, Head of Investor Relations. Please go ahead.

Thanks, Debra. Good morning and welcome to Navient's fourth quarter 2021 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, and forward-looking statements, and other information about our business that is based on management's current expectations as of the date of this presentation. Actual results in the future may be materially different from those discussed here. 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. During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio, and other various non-GAAP financial measures derived from core earnings. Our GAAP results and description of our non-GAAP financial measures and with a full reconciliation to GAAP can be found in the fourth quarter 2021 supplemental earnings disclosure. This is posted on the investors page at Navient.com. Thank you, and now I'll turn the call over to Jack.

Thanks, Nathan. Good morning, everyone, and thank you for joining us today and for your interest in Navient. 2021 was a year that presented some significant opportunities along with a few challenges. Our company responded to both with agility, determination, and success, positioning us well for 2022 and beyond. In 2021, we delivered outstanding financial results, simplified and de-risked our business, and demonstrated a continued ability to deliver attractive returns and sustainable growth. For example, in consumer lending, we originated $6 billion in attractive ROE student loans, a 30% increase, making Navient the largest private education lender in the country. In federal education loans, we achieved a major objective to simplify and de-risk the business with a constructive solution to transfer our Department of Education loan servicing contract to a third party. This provided a seamless transition for millions of borrowers, ensured ongoing servicing capacity for the department, and ongoing employment for 700 teammates. We leveraged our business processing platform to provide technology-enabled solutions to address pandemic-related needs. This included retraining existing resources, hiring 9,000 temporary customer service representatives, and providing data analytics to improve performance and efficiency for our clients. We responded to the pandemic with payment relief options across our loan programs and then assisted hundreds of thousands of customers who were ready to successfully return to repayment. Today, in both our federal and private loan portfolios, delinquency and forbearance rates are below pre-COVID levels. And we continue to execute on new financings and transactions that reduce interest expense and improve our net interest margin. For example, we identified an opportunity to sell an older portfolio of loans, delivering both a significant gain and reducing our reliance on our most expensive funding source. Recognizing and capturing diverse opportunities across our business is not unique at Navient. We are deploying these same skills in 2022 to continue creating and delivering value for our shareholders with our strategy to maximize cash flows, invest in our growth businesses, and return excess capital to investors. While Joe will provide the financial highlights for the quarter in the full year, I would describe our performance in 2021 as our most complete and successful year ever. It was a year where we exceeded all of our goals. This execution drove adjusted core earnings to $4.45 per share, 31% above 2020 results. New loan originations increased, as already mentioned, by 30% in 2021 to $6 billion, even as the federal direct loan interest and payment pause was in place for the full year after being extended several times. We are generating this volume efficiently and profitably. We are also achieving very high customer satisfaction scores. Credit performance has also been strong. The rebound in the economy and numerous stimulus programs have helped consumers strengthen their overall financial position. In fact, private credit loan losses are well below pre-pandemic levels as are delinquency and forbearance rates. Our multi-channel approach to communication continues to help our customers learn about and evaluate their options and avoid the negative consequences of delinquency and default. We also made significant progress in simplifying our business and reducing our risk profile. First, we completed the transfer of our Department of Education contracts, and while we delivered strong performance for the department, this business was a small contributor to revenue, was no longer growing, and presented a challenging political risk profile that was unlikely to change. The solution we developed ensured a smooth transition for millions of borrowers, and ongoing employment for our teammates. In addition to simplifying our business and focus, it also materially reduces our operating risk. Following this, we announced the resolution of all of the state lawsuits and investigations. These matters began more than eight years ago and have consumed significant resources and expense. During these years, the exhaustive examination and discovery process identified no evidence to substantiate the theories and claims made. This is the outcome we knew to be the case. Unfortunately, the legal process was and remains lengthy and costly. Our decision to resolve these cases eliminates the significant time and expense we would incur to pursue our defense to the end. Closing these cases in this manner is a net positive and it simplifies our business. While the CAPB action, which is based on virtually identical claims, remains outstanding, it is much further along and we remain committed to a vigorous defense. These two actions mark another set of milestones in our active management of our cost-based and efficiency optimization. Together with the sale of the loan servicing technology platform, we have created a significantly more efficient and variable long-term cost structure for our business. Throughout 2021, we also supported our team members with flexible work locations, thousands of hours of training, and new leadership development programs and employee resource groups, yielding strong increases in employee engagement. And Team Navient was active in our communities through local and national organizations, including a significant national partnership with the Boys and Girls Club of America. We're also proud to have received recognition for board diversity and military support, among other awards. As we begin the new year, we are excited to be able to turn our full focus to creating value. We will maximize cash flows, grow loan originations with high-quality, high-value products, and grow business processing revenue, improve operating efficiency, and still return excess capital to investors. In consumer lending, our goal is to originate at least $7 billion in refi and in-school loans, an increase of 16% over 2021. Our product design, application flow, and underwriting expertise have driven significant growth in market share with lower-than-market acquisition costs and better-than-market credit performance. We remain committed to our profitability targets for both refi and in-school loans, and we see a significant opportunity to deploy our capital at scale at attractive ROEs. In BPS, virtually all of our COVID project work ended in 2021, with just a small carryover into the new year. This project work totaled $265 million in revenue last year. And as our clients return to more normal operational volume, we expect to grow traditional BPS revenue by 10% in 2022. and we remain confident in our ability to continue to grow revenue at similar double-digit rates over the next several years. While the COVID projects may have been short-term, the relationships we built with key states and municipal clients are not. These partnerships have accelerated BPS's relevance, reputation, and growth potential. Our BPS business leverages our platform and capabilities to generate attractive margin, asset light, fee income. On capital, our first priority remains the generation and retention of sufficient capital to support our growth businesses and our dividend. The balance will be returned to shareholders through our projected $400 million in share repurchases in 2022 as part of the billion-dollar authorization approved by the Board in the fourth quarter. Our capital generation supports a strong balance sheet, maintenance of our credit ratings, and the ability to support meaningful growth while returning capital to shareholders. I couldn't be more pleased with our 2021 results and would like to thank my colleagues across Team Navient for their contributions. Our 2021 results reflect our strong commitment and focus on delivering high-quality, high-value services to our customers and clients and an intentional effort to simplify our business model and reduce risk. Our ability to identify and capture new opportunities created and delivered clear value. And it was particularly satisfying to see investor recognition of this success and the strong share price appreciation. I'm even more excited about the opportunities ahead of us, and I'm confident of our ability to continue to maximize cash flow, grow loan originations and BPS revenue, and return excess capital to investors as we deliver sustainable earnings growth year after year. I'll now turn the call over to Joe, and I look forward to your questions later in the call. Joe?

Thank you, Jack, and thank you to everyone on today's call for your interest in Naviance. During my prepared remarks, I will review the fourth quarter and year-end results for 2021. I will be referencing the earnings call presentation, which can be found on the company's website in the investor section. Before I turn to the highlights for the quarter and year, I would like to acknowledge the hard work and dedication of the thousands of people who make up Team Navient, the success across all of our business lines, contributed to the strong quarterly results and full year EPS that exceeded our original guidance by 40%. As a result of this effort and the demonstrated agility to leverage our current platform and capabilities, we are well positioned for 2022 and beyond. Key highlights from the quarter and full year, beginning on slide five, include fourth quarter GAAP EPS loss of $0.07 and a full year GAAP EPS of $4.18. Fourth quarter adjusted core EPS of 78 cents and full year adjusted core EPS of $4.45. EPS results include debt repurchase losses of 21 cents in the quarter and 33 cents for the year as we took advantage of a favorable economic opportunity to retire unsecured debt early. We originated $1.4 billion of private education loans, bringing our total originations for the year to $6 billion. increased full-year BPS net income to $99 million while exceeding our high teen EBITDA margin targets, improved our adjusted tangible equity ratio to 5.9% while returning $707 million to shareholders through dividends and repurchases in 2021, achieving levels consistent with our target of 6%. Let's move to segment reporting beginning with federal education loans on slide six. Net interest margin decreased seven basis points from the year-ago quarter to 99 basis points and was unchanged for the full year. We expect the net interest margin to be in the mid-90s for 2022. VELP credit trends continue to be at or below pre-pandemic levels with total delinquency rates of 10.6% and forbearance of 12.4%, while charge-offs remain at historically low levels. Our expectation for 2022 is that charge-offs remain below 10 basis points. Fee revenue in this segment declined $12 million from the third quarter. This was attributable to our October transfer of the Department of Education servicing contract. This transfer resulted in a decline in servicing revenue by $31 million and was offset by a $20 million increase in other income that was primarily a result of our transition services agreement. for which we will receive offsetting revenue payments for the expenses we incur for the transition. Outside of this agreement, services provided through our federal education loan segment now pertain solely to FELP loans. Now let's turn to slide seven and our consumer lending segment. The total portfolio grew modestly from the third quarter. It was down 4% from a year ago as a result of the $1.6 billion in loan sales that occurred earlier this year that contributed $91 million of gains and a reversal of $107 million of allowance for loan losses. In the quarter, we originated $1.4 billion of total private education loans. For the full year, we originated $6 billion of private education loans compared to $4.6 billion a year ago. The increase of 30% was accomplished even though we saw multiple extensions of the CARES Act. Excuse me. that continue to provide a 0% interest for borrowers through May 1st, 2022. Our $6 billion of originations included $212 million of in-school private education loans compared to $73 million a year ago. These loans were made through our banking partner entirely to students attending not-for-profit institutions. Our total origination guidance of $7 billion for 2022 assumes that the CARES Act expires on May 1st of this year. We expect to see lower origination volumes in the first half of the year as borrowers delay refinancing decisions until after the extension ends and the rates on current loans move from 0% to their higher original stated rate. The expiration of the moratorium should be a significant tailwind for the refi origination backdrop, even as rates rise. As a reminder, we reserve for loan losses at origination. So for every dollar of new refi originations, we reserve approximately one and a quarter percent, and for new in-school originations, we reserve six percent. The full year net interest margin of 292 basis points exceeded our original target of 270 to 280 basis points. This quarter's NIM of 276 basis points is lower than a year ago, primarily as a result of the increase in interest reserve for late stage delinquencies that it was expected to occur as borrowers exited forbearance. Our full year 2022 net interest margin guidance of 255 to 265 basis points assumes a greater mix of our private refi product compared to our legacy book. As borrowers transition back to repayment, credit trends continue to exceed our expectations with total delinquency rates below pre-pandemic levels and charge-offs at historically low levels. While economic conditions continue to improve, our allowance reflects the uncertainty related to the potential negative impact to the portfolio from the end of various payment relief and stimulus benefits that recently occurred or are currently forecasted to end in May 2022. As borrowers continue to transition to repayment, we feel confident that we are adequately reserved for the expected life of loan losses given the well-seasoned and high credit quality of our portfolio. Let's continue to slide eight to review our business processing segment. In the fourth quarter, we continue to see the positive results of our ability to leverage our existing technology-enabled platform and infrastructure to support states in pandemic-related services. This agility contributed to a 19% increase in total revenue from the year-ago quarter and a 61% increase for the full year while exceeding our targets of high teen EBITDA margins. As discussed on prior calls, We anticipate that the expiration of pandemic-related contracts will decrease revenues in the BPS segment for 2022 as more traditional services return to normalized growth. For 2022, we are targeting revenues of at least $260 million with high teen EBITDA margins. Let's turn to our financing and capital allocation activity that is highlighted on slide 9. Over the last 12 months, we reduced our outstanding unsecured debt balance by 16%. While our primary source of funding remains ABS, we issued two unsecured transactions during the year, totaling $1.25 billion, and we purchased $2.6 billion of unsecured debt, reducing our interest expense and resulting in $73 million of debt repurchase losses. These transactions lowered our cost of funds and reduced our needs for future issuance as we have no existing maturities for all of 2022. During the fourth quarter, we issued $1 billion of private refinance loan ABS and $1 billion of FELP ABS. For the full year, we issued nearly $10 billion of ABS through 10 transactions. As we manage the growth of our high-quality private education loan portfolio, we continue to see increased demand from new investors in these transactions. During the year, we reduced our share count by 17 percent through the repurchase of 34 million shares. returning $707 million to shareholders through share repurchases and dividends, while increasing our adjusted tangible equity ratio to 5.9%. At today's price, our planned share repurchases for 2022 of $400 million will reduce our outstanding share count by 13%. Before turning to our outlook for 2022 on slide 10, I would like to highlight the efforts that we have taken to simplify and de-risk the business. During the quarter, we transferred the Department of Education servicing contract to a third party, reached agreements with various state attorneys general to reserve their previously disclosed litigation and investigations, and reduced our real estate footprint, resulting in an $18 million restructuring charge in the quarter. Our continued focus on efforts to simplify the business while improving efficiencies allowed us to achieve an overall efficiency ratio of 49% for the year compared to our original target of 52%. Our targeted efficiency ratio for 2022 of 54% is primarily a result of the growth businesses contributing a larger proportion of our overall revenue and expenses. We're providing 2022 adjusted core earnings per share guidance of $3 to $3.15 with targeted return on equity in the mid to high teens. Our outlook excludes regulatory and restructuring costs assumes no gains from loan sales, reflects a rising interest rate environment with the expectation of four rate hikes of 25 basis points occurring each quarter, and $400 million of planned share repurchases. Turning to GAAP results on slide 11, we recorded full year GAAP net income of $717 million, or $4.18 per share, compared with net income of $412 million or $2.12 per share in 2020. In summary, 2021 was a year where we exceeded all of our original financial targets, demonstrated the value of our education loan portfolio, leveraged our technology and infrastructure to grow BPS, increased returns to shareholders, strengthened capital, and took significant steps to simplify the business. I am proud of our accomplishments this year and look forward to continued success as we are well-positioned for meaningful and sustainable growth. Thank you for your time, and I will now open the call for questions.

Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. And your first question comes from the line of Sanjay Sakrani with KBW.

Thanks. Good morning. You guys have had a good productive year. I guess first question, Joe, on the interest rate sensitivity. You mentioned you guys are factoring in for rate hikes. But as we think about the timing of those rate hikes, I know there's some differences between short-term rates and long-term rates. How have you figured that into your NIM expectations?

Yeah, so I think one thing to continue to focus on is where one month LIBOR is. That determines the majority of what we're earning here on both the private and on the FELP side. And how we think about it is those four rate hikes evenly distributed over the year, so one occurring in each quarter. And how that impacts it on the FELP side of the equation is that our assets typically reset or are resetting daily, and there's a little bit of a funding lag. So you get somewhat of a benefit in terms of if there's a faster rise there that you're going to pick up on the asset side, but then you're going to lose some of that benefit, obviously, as rates rise with it impacting floor income. So overall, between where our projections are, compared to last year, that's where we felt comfortable in the mid 90s range. So from a floor income standpoint, we would anticipate based off of the current curve that we'd lose about $14 million in floor income over the course of the year. but we would benefit from some of the rate expectations here on the asset side as well as the financing decisions that we've made and activities that we've taken place over the last year that will offset that. So that's why we feel comfortable with the mid-90s range given the forecasted rate hikes. Okay, perfect. And then on the private side, we're very quick to adjust from a spread perspective. So as we look at rates and rates rise, you're going to see us, and as you've seen some competitors more recently, adjust the rates upward to factor in the rising rate environment.

Okay, great. And then I guess my follow-up question is a question I've been getting a lot from investors. Some of your competitors have gotten stronger, potentially now getting a bank charter. I'm curious if you feel like it affects the competitive environment or you guys feel pretty good going at it the way you're currently composed. Obviously, your guidance suggests continued strength there, but maybe you could just elaborate on that, Jack.

Sure. Certainly, we, over our years, as Sallie Mae, then Navient, have been competing against institutions with bank charters, large and small, and really don't see any significant difference by a new competitor obtaining a bank charter. But I would just note on the refi side of the equation product in particular, this is a product that we were able to leverage more efficiently than you could on a bank balance sheet, given the very low credit risk profile. And our funding efficiency has really been second to none in the securitization markets. And so we expect those positives to continue. And then the last point I would just make on that product side of the equation is we are far more efficient than the competition in this space. We believe we consistently run or incur a cost to acquire a new customer that runs about half the industry average. And if you look at our ABS transactions, you'll see credit performance in our portfolio is also running at about... credit losses running about half of the industry average. And those combination of factors really is what allows us to outperform in this space. And I don't think you have to look much further than the 30% growth that we generated in 2021 compared to the decrease in originations that most of our competitors saw. Thank you.

And your next question comes from the line of Aaron Stoganovic with Citi.

Thanks. Jack, you mentioned that you've formed a lot of relationships with states and municipalities during your pandemic work. And maybe just talk a little bit about some of the types of conversations you might be having with additional types of work for BPS. And then I just want to clarify what the base is that you're growing the 10% off of in terms of BPS revenue.

in your 2023 expectations? Sure. So, you know, I think the work we've been able to do with states here has been not just about providing resources of additional people to answer, you know, a higher volume of calls. I think one of the things where we've been able to distinguish ourselves compared to some of the other vendors that work for states is the analytics and insight that we've been able to provide that dramatically improve efficiency and or outcomes. So when one of our larger clients, for example, where we were working alongside a number of different vendors to respond to and submit unemployment insurance claims during the pandemic, our client repeatedly told us that we were running at about a 30% greater efficiency rate than everybody else in that space. And as a result of that, as volume was declining, all the other vendors ended their contracts or their contracts were ended ahead of ours. And so I think that's an example of the type of value that we're able to produce. And so as states are now looking to return to a more normalized effort, it's how can they continue to capture some of those add, you know, value-added services and benefits that we bring to the table of improved insight, efficiency, and effectiveness. And those conversations are, in fact, happening, and we're pretty excited about the opportunities in that space. In terms of the growth from the BPS side of the equation, I'll let Joe answer.

Yeah, so the numbers Jack was referencing, so of the $488 million of revenues that we had this year, roughly around 260 million of that was related to pandemic-related services. So take that out of the equation, then the growth of 10% on the more traditional businesses that had not yet fully recovered, plus a little bit of lag of some pandemic contracts that are ending here in January and February. So our assumption of that at least 260 million revenues assumes that all of those contracts end at their stated expiration dates and that there's no additional pandemic-related contracts.

Got it. Thanks. And then secondarily, the maturities, it's nice you have none for 22, but you do have some fairly larger pieces in 23 and 24. What are your plans in terms of reducing those, if any, prior to maturity?

So we don't have any... plans projected in our guidance of reducing that within 2022 for that 2023 maturity that you're referencing. As we have done in the past, we've been opportunistic. If there's an advantage to us versus that cost of carry for cash, we'll look to reduce that ahead of time. Or if there's pockets where we can buy at a discount, you've seen us do that in the marketplace as well. So our current forecast for 2022 does not assume debt repurchase losses. Got it. Thank you.

I do think it's important just to reemphasize on the debt repurchase losses that when we do incur those types of, do enter into those types of transactions and those losses are generated, it's because it's economically attractive for us to incur them now and recapture that through lower interest expense in future periods.

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

Thanks for taking my question. Just to be clear, so when we talk about the 10% growth on the BPO, that is really off the 260 number? I was a little confused. I thought I had it, but then I got a little confused.

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

Got it. Okay. And then second question. Look, obviously the runoff of the FELP portfolio is well understood. But when we look at the balance sheet, both the... The consumer lending segment continues to shrink modestly as well. When do you think there is the inflection point where that business will start to grow? I'm just starting to think about the balance sheet and where we will see growth and what's the timeframe.

Well, I think obviously on the Phelps side of the equation, there's no real additions to that portfolio. And so that portfolio is going to amortize on a fairly steady rate. I think one of the things that we've been able to do very successfully over the course of time is maintain the margins in that business as the portfolio amortizes and really generate significantly higher levels of cash flow than our forecast would have indicated just a few years ago. On the private side, on the consumer lending portfolio, our portfolio actually would have increased this year, but for the loan sales that were completed in the first quarter. So I actually think we see an opportunity to continue to grow that portfolio in size. The contribution of earnings is changing a little bit as the refi portfolio, given its super prime credit profile, has lower net interest margins than the legacy private loan book. But we do believe that balances in that portfolio in fact, are growing except for loan sales. Got it.

And clearly understood on the felt side. But when we think about the consumer segment, is the inflection really in terms of accelerating that growth this year with the incentives to consolidate as rates move higher and as you move to more on-campus in-school lending?

I think it's a combination of the two. We see our opportunities in this space as being very interesting and strong in both the in-school lending side of the equation and in the refi marketplace. And in the in-school side, our focus is on probably on the higher end side of credit quality, really trying to address some of the concerns that you've seen in the marketplace about you know, the value of a college degree and the ability of that degree to support the debt that is taken on in that side. So we're very focused on students who are attending schools where they have high graduation rates and high value added as a result of completion. We also have designed our programs to help students and families and we really look at this as being a kind of a joint venture between the parents and the students here to support the repayment to provide greater insight and information that allows them to better appreciate how making payments during the in-school period can reduce the overall finance cost of the product and so that these products are effectively more affordable and helpful to the students and the families. On the refi side of the equation, there's no question that the pause and the 0% interest rate on the direct loan portfolio reduce demand. We can't help a student or a borrower with outstanding direct loans reduce their interest expense if the government's charging them zero. And so we encourage those borrowers to take advantage of that 0% interest rate And once, as Joe mentioned, once that moratorium is lifted and the loans return to the statutory rate, that's when we would expect to be able to offer borrowers the programs that allow them to refinance their debt, save thousands of dollars in interest expense, and equally important, pay their loans off faster. That's been the value-add of that product since the beginning, and it has been the focus in 2020 and it will be our focus in 2022.

Got it. And then just last question, because it helps us tie out our model. You show a core earnings number of a loss of $67 million. You show an adjusted core number of $122 million. You say that this excludes $229 million of restructuring and regulatory expenses. What's the tax rate on that? Because again, there's a little bit of, there's a walk that's missing connecting those two numbers, the 122 or those three numbers.

Yeah. So overall, just think of our tax rate just as that 23 and a half long term when we talk about guidance. But as the numbers you're referring to, part of that was not tax deductible. So that's where the disconnect is in terms of that number. So Going forward, just think about our guidance here of $3 to $3.15 is using a 23.5% tax rate.

Understood. And I'm just trying to tie out, was the tax rate about 17% on the adjustment this quarter?

I think that's roughly true, yes. Okay.

Thank you, guys.

And your next question comes from the line of Moshe Orenbock with Credit Suisse.

Great, thanks. I was hoping to just talk a little bit about the forecast for the margin on the private side. How much of that do you think, you know, kind of is mixed, you know, now that, you know, you've got the really dominant piece of it really is the refinance business? And kind of tie it into your comments on, you know, being able to – you know, to raise price. I mean, it seems that Ernest had been at kind of the lower end, not the lowest, but the lower end of competitors in terms of the rates they'd been charging, at least on fixed rate. Maybe you can kind of talk about it both from a financial and a competitive standpoint.

So just from a mixed shift, if you think about last year, our refi product represented about just under 40% of our book. This year, we're just under 50%. So a large driver of as we look into this year and beyond is that second half of the year with the end of or the expected end of CARES Act and what that means for our mix. So I would say that that is more the driver here of our guidance and it's something that we've been talking about for several quarters just as that mix comes through here. For this quarter you saw the impact of the reserve against the the 90-day delinquencies as that bucket moved. But we feel confident that that's something that, you know, as borrowers enter into repayment, that you'll see an elevated level of delinquencies before coming back down to more normalized levels. And offsetting that somewhat, again, is going to be the mix of the high-quality refinance loans that were originating here.

Joe, maybe I'm not getting it, but the impact from the loans going 90 days past due, that's all on the legacy private portfolio. That's not on the refi portfolio because the total delinquency there was very low, right?

Correct. But when talking about the overall NIM for the company, that's what I was referring to.

If that's the case, that would actually help. In other words, that would mean that the impact from the private NIM excuse me, from the refinance NIM has to be even larger because you actually had a lower NIM than quote unquote normal on, you know, on, on the, you know, on the legacy portfolio. Right. I mean, and if you're talking about something, I mean, you're talking about a decline of, you know, of 10% in your NIM, right. You know, on average about 30 basis points on 300, right. Maybe if you, you know, I guess I'm just trying to understand arithmetically. how that makeshift kind of works.

Well, I do think this is Jack Moshe. I think one of the things to remember is that because of the COVID payment relief options, the reserve on interest was virtually non-existent in the portfolio. As few loans, as borrowers were going into delinquent statuses, they were offered forbearance relief at higher rates. as those programs came to an end in 2021 and borrowers returned to repayment, you get back to a more normalized level of interest reserve there, but the buildup is what's unusual, right? So that was the initial step of going from zero to whatever our delinquency rates would be in a normalized environment is what drives that.

Jack, I'm right with you there. I'm just saying that if you're talking about a 10-point mix shift, on a 3% margin and a 30 basis point drop, the margin on that 10 points has got to be zero to bring the average down 30, right? Isn't that just arithmetic?

Well, I mean, there's a combination of factors that go into this, but it's the shorter average life of the portfolio and the impact that that particularly has and it's the combination of the declining component of the legacy side of the equation. And I would also just add the piece that comes into this as well is that when we sold some of the loans earlier in the year, we're selling some of the – that was a higher-risk portfolio, and so it had higher margins than some of our other legacy-related assets.

All right.

So there's movement on the legacy side as well.

And your next question comes from Mark Debris with Barclay.

Yeah, thank you. Had a follow-up question on the FELP NIM. Could you just talk about the sensitivity of your guidance to the number of rate hikes, kind of what the upside-downside is if you get more or fewer hikes than expected? Sure.

Sure. So the way that the rate hikes are forecasted over the course of the year, if we were to have less rate hikes than expected, again, it's more on the shape of the curve and what the expectations are going in. So I would, again, focus on one-month LIBOR. But ultimately, just from a hedge perspective and where we are, I think, as I quoted earlier, the $14 million of loss of floor income assumes those four rate hikes over the year. If that does not occur, then you would see relatively flat floor income. If LIBOR continues to maintain at these low levels and you don't see that, we would certainly benefit. The question is, what are expectations and whether you get those asset resets? So from that standpoint, I'd say $14 million is really your sensitivity in terms of a potential upside on putting us back in the high 90s or beyond.

Okay, great. And then just a question on how we should expect kind of the in-school originations to ramp. Any color on, as you look at 2021, how much was from First-time borrowers and what 2022 looks like as you try to recapture those and then market to new students?

In terms of in-school originations, as I talked about on the third quarter, which is the primary driver or the primary source of our originations for the year, a little over 70% of our loans were from first-time borrowers.

Okay, got it. Thank you.

Again, ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. Your next question comes from a line of John Hecht with Jefferies.

Hey, guys. Thanks very much for taking my questions. Going back to the business payment services, so the $260 million run rate, is that evenly distributed over the course of the year, or are some pandemic-related contracts going to be expiring over the year and then also you know on top of that what's the run rate of servicing related uh revenues and asset recovery related revenues um you know in that kind of in that category of business sure so you do have a little bit of a benefit from the pandemic related contracts in january and february as there's uh expiration dates that that are occurring so

In terms of that 260, you're probably in that call it 10 to $15 million range in terms of a benefit in the first quarter compared to future quarters if we do not see any extensions of those contracts. In terms of the servicing revenues going forward, are you referring just to BPS or are you looking at the federal education loan segment as well?

Yeah, the stuff on top of the BPS, the 260, because you guys have additional servicing revenue and asset recovery revenue as well.

Right. So I would characterize that as solely on the federal education side and the servicing solely related to FELP loans at this point. So just as the natural amortization of the FELP portfolio, that's a decent amount. way to proxy it, all else being equal, is just as the portfolios run down and FELP continues to amortize, although there's some moving pieces that that's a general rule of thumb of how that portfolio or how that revenue is going to decline.

Okay, so that $18 million of servicing revenue will just kind of linearly move lower with the FELP portfolio. And then what about asset recovery activity?

I would say that that's a fair number as well in terms of asset recovery in that line item. So again, at this point, in terms of the federal education portfolio, that is all FELT related. So going forward, that $12 million you saw last quarter, it was $13 million. I would say just, again, assume that from a modeling perspective that it runs alongside the amortization of FELT.

OK. And then second question is the transfer to Maximus. You guys mentioned I think 20 million of offsetting payments I think in the fourth quarter. What do we think about adjustments and compensation related to that going forward and how long does that last?

So the vast majority of the expenses occurred here in the fourth quarter as it relates to the TSA. So going forward and that was the transfer of the employees that occurred in the fourth quarter. So that 20 million is a fairly decent number to actually use for the full year. So that 20 million, just as you exit certain aspects of that agreement, is going to run down. But just to be clear, 20 million for the fourth quarter related to the TSA, and then our expectations for the full year of 2022 would be 20 million. And is that in other income, or where do we get that? That is in other income. So that is where you saw the shift from servicing income that I talked about in the third quarter to other income. Okay.

And then final question is just refresh me. As rates go up, how do private loans reset? Is there a period of time during the year you're allowed to reset it, or does it just reset immediately with some benchmark? for new originations or for our... Well, generally speaking, for the private loan portfolio.

Yeah, so for the portfolio, it depends on the securitization, but it'll be typically either monthly or quarterly resets. Okay. Great. Thank you guys very much.

And your next question comes from the line of Bill Ryan with Seaport Research.

Good morning. Thanks for taking my questions. Just... Following up first on the expected volume, you talked about a 10% increase to about, I think, $7 billion. If you break it apart between consolidation and in-school, what kind of relative growth rates are you expecting between the two? And then in relation to that question, if the payment holiday is extended beyond May 1st, how do you see that impacting the overall number?

So we're expecting significantly higher growth rates, Bill, in our in-school lending, primarily because we're starting off a small base. And as Joe mentioned, the vast majority of the loans we made this year were to first-time borrowers. So we expect to add new first-time borrowers and then grow off of the loans we made this year through a serialization process as we finance the next academic year. growth rates over 100% in that book of business. We're overall in total forecasting a 16% increase in originations from $6 billion to $7 billion. And as we said, that takes into consideration an assumption of four rate hikes and a return or the ending of the 0% interest rate at the end of May. If it doesn't happen, obviously that would reduce some demand on the refi side of the equation. But I think as we pointed out and demonstrated in 2021, we were still able to grow originations by 30% last year, even though the 0% interest rate was in place for the full year. And that was simply by focusing more on students with private student loans and where there was a distinct benefit from refinancing those loans to a lower rate. Obviously, we're continuing to market and trying to expand that segment of our population as well.

Okay. One just follow-up question. You got a new shareholder, obviously, in December. It sounds like that might be a little bit more of an activist-type shareholder. Looking at your history, there's been previous attempts to let's just say, expedite the value extraction. You did a very good job of that last year with the loan sale. I'm kind of curious how you're viewing the new shareholder. What's the dialogue been like with them? Are you kind of viewing it as more of a normal shareholder, or do you think they might be a little bit more activist? Thanks.

Well, I think that the big difference is it's a very large percentage holding shareholders. But like all shareholders, we work with We work with them. We look to understand what their points of view are to be able to explain how we are running the business, how we think we can create and deliver value, and we would expect to have that kind of similar dialogue here. We'll have to see how this evolves over time, but I think to date it's been very constructive, very positive, and don't see why that would change going into 2022. Thank you.

And your next question comes from the line of Shaina Cui with Bank of America.

Hey, good morning, guys. You mentioned that you could be opportunistic in buying back debt in the open market. Could you just comment on whether that would be more focused on near-term maturities trading at premiums or kind of the longer-dated bonds that are trading below par?

And so typically what you've seen from us is a focus on the front end of the curve. At this point, we feel very confident in terms of our cash position, where we are today and going into 23 and beyond. So from that perspective, I would say, yes, if there's opportunities to buy back on the front end, we'll look at that. And that's traditionally where our focus has been. But just if you look in the last three years, we've also bought bonds that are maturing beyond 2030. So it really depends on what we're looking at, what the opportunities are here, who's willing to trade at levels that are attractive to us. And we look at that as just managing our cash flows to the maturity schedule. So today we're in a great position going into 2022, 2023. That is why we don't have any forecasted debt repurchases going on this year into 23. But if there's an opportunity that presents itself, much like in years past, we'll take advantage of that.

Thanks. And then I guess a follow-up question, just wanted to touch on credit ratings. With COVID, you guys were downgraded by S&P. And just wanted to get your thoughts on whether you have goals to kind of get back to the double B ratings at S&P. And just given the context of your $400 million share purchases and the ongoing CFPB case that you guys mentioned, you would potentially have a resolution this year.

So I think we have a constructive dialogue and positive relationship with the rating agencies. Certainly, much like most companies, we feel that we should be rated higher than where we are. I think we've done a great job of de-risking the company this year, specifically putting, as you mentioned, the AG matters behind us. So if you look at what the rating agencies have pointed to over the last several years, it has been our maturity profile. Right now we're in one of the best positions we've ever seen as Naviant going into 2022 and 23. So that has been taken off the table and you don't see that in the dialogue from any of the agencies. The other points that they've made in the past is just demonstrating the growth of our other businesses. What do we look like five years from now? I think we've got great color and visibility into that. So again, From that perspective, we've taken that argument off of the table as well. For us, the RAC ratio, as you referenced S&P, that's something that we talk about our adjusted tangible equity ratio of 6%. It's something that factors into their RAC ratio. And again, quantitatively, we should be rated a notch higher than where we are. So we feel we've done a good job of positioning ourselves for at least moving towards a positive outlook and a potential ratings upgrade from where we are today, and that factors in the $400 million of share repurchases that we have planned for this year.

Great. Thank you.

And there are no further questions in queue at this time, so I would like to turn the call back over to Nathan Rutledge.

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

Ladies and gentlemen this does conclude today's conference call. Thank you for your participation. You may now disconnect your lines.