Navient Corporation

Good day and thank you for standing by. Welcome to the Naviance of First Quarter 2022 Earnings Call. At this time, all participants are in the listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to our speaker today, Mr. Nathan Rutledge, Head of Investor Relations. Sir, please go ahead.

Thanks, Renz. Good morning, and welcome to Navient's first quarter 2022 earnings call. With me today are Jack Ramondi, 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 other information about our business that is based on management's current expectations as of 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 various other non-GAAP financial measures derived from core earnings. Our GAAP results and description of our non-GAAP financial measures and the full reconciliation to GAAP can be found in the first quarter 2022 supplemental earnings disclosure and is posted on the investor page at Navient.com. Thank you and I'll now turn the call over to Jack.

Thank you Nathan. Good morning everyone and thank you for joining us today and for your interest in Avian. Our year is off to a strong start and we are excited to share with you the results of another very successful quarter. For the quarter we earned 90 cents in adjusted core earnings ahead of our forecast and consensus. Our earnings were driven by strong across the board performance For example, net interest income, provision for loan losses, fee revenue, and operating expense all outperformed our forecast and contributed to this quarter's results. Our ability to deliver consistently strong financial performance is a direct result of our focus on profitably building our growth businesses, actions we have taken to minimize exposure to interest rate volatility, our focus on generating high-quality assets, and maintaining strong reserves for future credit losses, our constant efforts to improve operating efficiency, and our disciplined capital allocation. Our earnings generated a very healthy 21% core return on equity this quarter, demonstrating our ability to consistently generate and deliver value for investors. With a very strong start to the year, our success in managing a volatile interest rate environment, and demonstrated agility in capturing opportunities for growth, we're raising guidance for full year earnings to $3.20 to $3.30 per share. In consumer lending this quarter, we originated just under a billion dollars in new student loans. Since the start of the year, higher than expected increases in interest rates have decreased the potential value of refinancing. In addition, the Biden administration extended the 0% interest rate period on federally owned loans again, increasing borrower perception that this waiver will continue and that loan balances may be canceled. These recent developments have and will continue to significantly reduce the overall demand for student loan refi products in 2022. We do expect demand for refi loans will rebound once direct federal loans return to repayment. We believe in the value and the long-term potential of our refi products, which provide qualified borrowers with the ability to reduce their interest rate, save thousands in interest expense, and realize their financial goals as they pay off their loans faster. We will remain disciplined in our focus on originating high quality loans that meet our return targets. Our outlook for in-school volume is getting stronger. We now expect faster growth as we deliver high value products to students and families. Our updated forecast for combined new refi and in-school loan volume is $3 billion for the year. In our VPS segment, we are also more optimistic about our growth opportunities this year as we leverage our pandemic-related experience to secure new business. And we are seeing steady growth in our traditional services. Our results this quarter provide a good example of our ability to leverage this experience to grow revenue and deliver high value for our clients. Credit performance has been stronger than our forecast at the start of the year. The pandemic led to an unprecedented pause in federally-owned student loans, helping people navigate the challenges created during the pandemic. We also offered relief programs to our federal and private loan borrowers based on need. As our programs ended, we planned for elevated delinquency and default trends compared to pre-pandemic levels. To date, these rates have remained below those pre-pandemic levels. While we have retained our prior higher loss forecast as we monitor the future impact of the end of the federal payment pause, portfolio performance to date and our outlook are very positive. We successfully reduced operating expense by 14% versus the fourth quarter. The reduction is the result of our ongoing business simplification efforts and the transfer of our Department of Education loan servicing business. We expect to realize ongoing operating expense reductions as the transition services we are providing end over the course of 2022. Also contributing to this quarter's results and our outlook is our ongoing focus on operating efficiency. Our capital management and allocation approach has delivered strong capital ratios and the capital needed to support our growth. As of March 31st, our adjusted tangible equity ratio was a very healthy 7%. Consistent with our capital allocation plans, we returned $139 million in capital to investors, $24 million in dividends, and $115 million in share repurchases. We plan to complete an additional $285 million in share repurchases in 2022. Our highly predictable capital generation will allow us to continue to meet our capital ratio targets while we fund the projected growth in our business and complete our share repurchase plans. We are off to a very strong start to the year. Our focus on profitably building our growth businesses, successfully managing interest rate volatility, generating high-quality assets, improving operating efficiencies, and our disciplined capital management is delivering value for our customers, clients, and investors. I am pleased with our strong financial performance, and I am excited and confident in our ongoing ability to continue to produce strong results. I want to thank my colleagues for their efforts and contributions in a challenging environment. Their commitment, passion, and agility helps Naviant deliver for our customers, clients, and investors. Before I turn the call over to Joe, I'd also like to acknowledge Board Member Kate Lehman, who is not standing for reelection due to changing professional responsibilities. Kate has been an outstanding board member, and I thank her for her guidance and support to me, the management team, and the board. And earlier this month, our board nominated Ed Bramson, partner of Sherburn Investors, our largest shareholder, to the proxy slate. I look forward to Ed joining the board subject to his election by shareholders. With that, I'll now turn the call over to Joe for more details in the quarter, and I look forward to your questions later in the call. Thank you.

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 first quarter results for 2022. I will be referencing the earnings call presentation, which can be found on the company's website in the investor section. Key highlights from the quarter, beginning on slide four, include first quarter GAAP EPS of $1.67, first quarter adjusted core EPS of $0.90, originated $966 million of private education loans, reported BPS revenues of $94 million while exceeding our high team EBITDA margin targets, increased our adjusted tangible equity ratio to 7% while returning $139 million to shareholders through dividends and repurchases. I am pleased to report that the continued success across all of our business lines contributed to the strong quarterly results. As a result of this quarter's performance and our revised outlook, We are increasing our EPS guidance to a range of $3.20 to $3.30 for the full year. This guidance includes using a rate scenario that is based on the forward curve as of April 14th, which implies a Fed funds target of 225 to 250 basis points by the end of the year and assumes that the CARES Act is extended to the end of 2022. Let's move to segment reporting beginning with federal education loans on slide five. Net interest margin increased seven basis points from the year-ago quarter to 104 basis points. As a reminder, our FELP assets are primarily earning off of a daily reset index and are funded with liabilities that largely reset monthly. In this rising rate environment, the benefit of this mismatch contributed to both the increase over the prior quarter and prior year and partially offset the loss of unhedged floor income. As expected, felt delinquency rates increased to 13.5%, and forbearance rates declined to 12.9% from the year-ago quarter, with charge-off rates at seven basis points. Fee revenue in this segment declined $20 million from the fourth quarter. This was attributable to our October transfer of the Department of Education servicing contract. This decline in revenue was more than offset by a $24 million reduction in operating expenses in this segment. Let's turn to slide six in our consumer lending segment. In the quarter, we originated $941 million of private education refi loans. This quarter saw a decline in demand with the extension of the CARES Act and higher interest rates on new refi volumes. The most recent extension of the CARES Act now provides a 0% interest rate for borrowers through August 31, 2022. While this latest extension is scheduled to end in August, our guidance anticipates the CARES Act will be extended for an eighth time through the end of the calendar year. Since its enactment in March of 2020, borrowers of federally held loans have not been required to make any payments. From this combination of factors, we expect to see quarterly refinance origination for the overall market that are about half of the first quarters. We are well positioned to continue to hold our market position while maintaining our target margins and expect to refi approximately 50% lower quarterly volume compared to the first quarter's origination. As borrowers with federal loans 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. The loss of expected net interest income in the year from this volume is offset by the benefit of the expected decline in the provision for new loans. As a reminder, we reserve pre-expected loan losses at origination. So for every dollar of new refi originations we reserve, approximately one and a quarter percent. This quarter's net interest margin of 280 basis points was four basis points higher than the fourth quarter, primarily as a result of the decrease in interest reserve for late-stage delinquencies as fewer borrowers entered late-stage delinquency compared to the prior period. While credit trends continue to exceed our expectations with total delinquency rates below pre-pandemic levels, We expect charge-off rates to rise back to more normalized levels that are in line with our guidance of 1.5% to 2% for the full year. Our life of loan 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 that we currently forecast to end in 2022. 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 seven to review our business processing segment. First quarter revenues totaled $94 million with increasing revenue from our more traditional government and healthcare BPS services, partially offsetting the expected wind down of revenue from pandemic-related services in the quarter. We continue to provide dynamic solutions that meet emerging market demand and maintain a positive outlook on our ability to secure opportunities in the space. Our ability to leverage our existing technology-enabled platform and infrastructure contributed to the 20% EBITDA margin in the quarter, exceeding our high team targets. Let's turn to our financing and capital allocation activity that is highlighted on slide eight. During the quarter, we reduced our share count by 4% through the repurchase of 6 million shares. returning $139 million to shareholders through share repurchases and dividends, while increasing our adjusted tangible equity ratio to 7%. At today's price, our planned repurchases for the remainder of 2022 of $285 million would reduce our outstanding share count by an additional 11%. During the first quarter, we issued $952 million of private education refinance loan, ABS. While spreads have widened across all asset classes, we continue to see strong demand for our ABS due to the high quality of the underlying assets. We mitigate the risk of rising rates on our refi portfolio by hedging our expected loan volume originations and issuing fixed rate securitizations, locking in margins for the life of each loan. These actions have benefited us in recent quarters as rates continue to rise. allowing us to achieve our mid-teens return on equity targets in a volatile environment. Let's turn to GAAP results on slide nine. We recorded first quarter GAAP net income of $255 million for $1.67 per share, compared with net income of $370 million for $2 per share in 2021. Turning to our outlook for 2022 on slide 10. Our continued focus on efforts to simplify the business while improving efficiencies in the face of a challenging macroeconomic environment allowed us to achieve an overall efficiency ratio of 51% and core return on equity of 21% in the quarter. The updated 2022 adjusted core earnings per share guidance of $3.20 to $3.30 is an increase of 6% compared to our original expectations. This updated outlook excludes regulatory restructuring costs, assumes no gains from loan sales or debt repurchases, reflects a continued rising interest rate environment, and the extension of the CARES Act through December 31st, 2022. Before I turn to questions, I'd like to welcome back the thousands of Navient teammates who have returned to the office and recognize all of my teammates whose efforts to serve our customers throughout a challenging environment contribute to the continued success and positive results in the quarter. Thank you for your time, and I will now open the call for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. Again, note would be star 1 on your telephone. We have our first question from the line of Mark DeVries with Barclays. Your line is now open.

Yeah, thank you. I have a question for Joe. Both your FELP and private NIM margins are tracking higher than kind of your old full-year guide. Can you just give us a little more color on how you're thinking about that trending over the course of the year?

So certainly it's just one quarter, so we didn't update our targets for the full year, even though we did update the full-year EPS. We feel very confident about the results we just delivered and our ability to meet or in some instances exceed the expectations of the guidance that was laid out through the beginning of the year. I would say that the rising rate environment and the mismatch that I described on the FELP portfolio, that we do have that benefit as rates rise, we pick up Benefit on the assets is they are resetting daily, and the liabilities are resetting either monthly or quarterly. So there is that pickup that we obviously weren't forecasting nine hikes when we came into the year-end earnings that is going to offset the floor income. On the private NIMS side, the stability that you've seen and the beat versus where our forecast was, that part of that has to do with just a general slowdown that we're seeing in prepayments. The other piece that I would say is that from a delinquency perspective, we saw less borrowers entering into late-stage delinquencies, so you're not putting up a reserve against that interest as they enter into 90-day plus. So again, that's a pickup in the quarter versus what our expectations were, and that's part of the overall theme, that we are seeing credit that is better than our expectations.

Got it. And then a question for Jack. With the private student loan originations kind of coming in lower than you're expecting at the beginning of the year, just given the extension of the CARES Act and what's happening with rates, how should we think about how you're going to deploy kind of the capital that that frees up?

Yes, well, certainly, you know, as we – The pause that has occurred in the federal direct loan portfolio, we looked at 0% interest rates as being a challenge to compete with when it was temporary. As the perception changes and actual actions have extended that indefinitely, it makes it much more challenging. This year, the impact is relatively modest, but we would certainly look at our capital ratios, where they stand, what we expect loan volume to be in future periods, and then make decisions about where best to allocate that capital. Certainly, the last thing we would want to see is that it would sit on the balance sheet underutilized, and so we will revisit that as our forecasts and expectations for loan volume in both 22 and 23 begin to materialize and take shape.

Okay. And does the commentary you provided on kind of expectations for repurchases at the end of the year already kind of contemplate this dynamic?

Well, they contemplate the extension of the CARES Act through the end of the year. And, you know, this perception that, you know, we'll end up with that the zero percent interest rate will continue. As you know, the Biden administration extended it through the end of August. We're assuming it's going to continue through the end of the year. And there is this growing perception that loan balances from borrowers are going to be transferred from the student borrower to taxpayers. And that is definitely out there as well.

Okay. Got it. Thank you.

Thank you. Our next question is from the line of Sanjay Sakrani with KBW. Please go ahead.

Thanks. Good morning. Jack, could we just touch on that point you just made? Could you just talk about this loan forgiveness potentially? There's some big numbers being thrown out there. How does that impact your business?

Well, the biggest place is And what they're proposing here is effectively transferring the loan balances that are outstanding from student borrowers to taxpayers in general. And there are no specific proposals on the table. There's just this concept and perception. You certainly have certain members of Congress making certain recommendations, but there's statutory proposed legislation or nor has the administration issued any specific plan there as well. So this is more of a perception issue and what it does is it causes borrowers who have graduated and may have looked to re-buy their loans to sit and pause while they wait and see what the administration may or may not do here. So that's the biggest driver. that we see. Obviously, the zero percent interest rate and the fact that that keeps extending is a large competing factor as well in terms of impacting overall demand for refi loan volume, and not just at Navient, but across all of the industry here.

And I guess when we think about potential paydowns of balances, if there is forgiveness, I mean,

how does that affect your pool effective you know as a whole well again there are no proposals so it's a little hard to to know exactly what would happen most most of the administration's activities to date have focused on loans owned by the department of education directly and you know so it's not clear what would happen to portfolios of federal loans or private loans that are outside of that sphere. But obviously there'd be no debate as to whether or not this is capable of being enacted by administrative fiat or whether or not it needs to go through some form of legislative process. It does seem a bit ironic that a single individual could choose to spend hundreds of billions of dollars of taxpayer dollars without oversight from Congress, but I'm not a constitutional lawyer.

Yeah, there's never a dull moment there. Just one follow-up. Jack, you also mentioned the Sherbourne representative potentially joining your board, and obviously they've amassed a sizable position in the company's Could you just talk about, you know, any intentions that they've stated on your part? Thanks.

Well, I think the, you know, specifically you probably would want to, I don't want to speak for Ed or for Sherborne here, but all of the dialogue and activities to date have been extremely positive and constructive. I would say they see the opportunities in a very, very similar way, that this is a company that generates a significant amount of capital. We see significant opportunities for growth in some of our, certainly in the core areas that we've identified of loan origination and BPS, and how can we best execute that? I think there's definitely also a shared view that capital reinvested in the business generates more value for shareholders in the long run than does, you know, capital return. But, um, obviously we, we follow a disciplined approach of, you know, our first priority is being able to reinvest capital that we generate back into the growth opportunities that we see, um, to the extent that those are not available. We want to, of course, um, need to support our dividend, and then any additional capital that remains is returned to investors through share repurchases. But our first interest is, of course, reinvesting it at attractive returns in the business.

Okay. Thank you.

Thank you. Our next question is from the line of Mosh Orenbach with Credit Suisse. Your lines are open.

Great, thanks. I guess given, you know, the uncertainty both around debt forgiveness and the moratorium, which may not be a moratorium, maybe a removal of interest payments, how should we think about the refinance business in 2023? You know, also given, you know, two other factors, you'd be at a higher level of kind of market interest rates and I know you talked a little bit about the still ability to access the ABS markets given the high quality nature of the collateral, but spreads are wider also. So could you just talk about, from both standpoints, the level of demand and the industry's ability to, given the changes in the financing markets, how that might impact the refinance market in 2023? Thanks.

Sure. So, you know, if you look at the, you know, we look at the universe of what is the potential opportunity for borrowers to refinance. It comes from primarily the federal direct student loan portfolio and more likely than not those students who have borrowed under either the Grad Plus program or unsubsidized Stafford loans where the interest rates are higher. Our big benefit in that business is new volume is generated every year. And it's generated at market rates. So as interest rates rise, a new supply is being generated in that space. And as those students move through school and graduate and obtain employment, they create opportunities that they have earned to lower their interest rate by their better credit and income capabilities. The other area is private student loans. The in-school student lending marketplace is priced very differently than the refi marketplace for good reasons. The two biggest risk factors are unknown at this point. Will the student graduate, and will their income be sufficient to service their debt? In the refi space, you know the answers to both of those questions, and so you're able to, again, return a lower rate to the borrower based on the fact that they've earned it through obtaining their degree and getting the job they need to support and service their debt. So the long-term outlook here is, in our view, very positive. If this was just an interest rate-related issue, we would definitely see some ebbs and flows in demand. But the big impact that we're seeing here is driven more by policy positions that are not economic driven, they're more politically driven at this point. And we'll have to see how that unfolds between now and the midterm elections probably in November.

And the other side of that in terms of the increase that you would expect to see in your own cost of funds to access that market?

Well, certainly, I mean, all of those factors come into play, right? Rising interest rates. Most refined loans are fixed rate, are offered as fixed rate loans. And so certainly a rising rate means the coupons that we need to charge for to refinance borrowers is certainly higher than it was a year or two ago. And, you know, that to a lesser extent, you know, as credit spreads widen here, And they have widened in the beginning part of this year. That gets translated into higher coupons as well. If you look at our credit performance in our portfolio, however, I think what you're seeing is the opposite trends, is that credit performance is extremely strong and with that strength and the ability to persist in that strength in kind of more challenging economic environments. we think the product is going to, you know, will be well received by, is a good asset for us and then also well received by our ABS investors. And I'll just point out, Moshe, in the past, you know, this refi business is not something that's completely new to Navient. For years ago, we offered private loan consolidation opportunities for borrowers. And so we've got 40 years of history of how consumers who have graduated from school with a degree with an income, how they have performed in different rate environments, in different economic environments, and the performance there has been consistent and outstanding. And that's really reflected in the capital that we allocate to this business, the loss forecast that we assume, and the rates that we offer to the consumer.

Got it. Separately, you know, you were able to extract expenses this quarter, given, you know, the changes in the servicing. Just maybe any plans, you know, over the balance of the year, anything we should be aware of from the expense front. Thanks.

Yep. Well, operating expenses actually declined from the fourth quarter really across the board. So if you look at this, they declined by almost $33 million last year. About 12 of that was related to the Department of Ed contract. The balance came from other areas of the company as we gained operating efficiencies and the different business and volume mix that's going on. First quarter is also a seasonally high expense month for us as some of the costs associated with some of the compensation plans that take place after year end are booked in the quarter due to vesting issues and things of that nature. So we would expect operating expense to continue to outperform our expectations that we laid out at the beginning of the year. Certainly the lower loan volume will be a contributor to that as well. And I did mention as well that there are some transition services that we are providing to our to the entity that took on the Department of Ed contract, and those will wind down during the course of the year. Thanks, Jack.

Thank you. Our next question is from the line of Bill Ryan with Seaport Research Partners. Please go ahead.

Good morning. A couple questions. Just, you know, with the curtailment in the refi outlook and, you know, I believe SOFI made an announcement a few weeks ago as well about their expectations. Are you seeing any additional efforts in the in-school channel? And again, thinking back to SOFI, I believe they are trying to make some inroads into the in-school channel in light of the curtailment of refi activity. And then secondly, you know, you mentioned that the volume reduction outlook that you provided was a combination of higher rates versus the payment and the payment moratorium. I don't know if there's any way to kind of distinguish, you know, the reduction in the outlook between those two factors. Thanks.

So on the in-school side of the equation, you know, these are very different markets when you're marketing to students. new college students and families, and the other you're marketing to graduate school students. So we run them separately with different product managers and different campaigns of that sort. What we are excited about is really the opportunity to continue to leverage the origination flow process that we've developed, which we think is easier for both students and families, particularly as you invite a cosigner into the loan. But we've also been building capacity in other areas that help students and families kind of better finance their higher education objectives. This means minimize the amount that they have to borrow. We offer, for example, through one of our subsidiaries, the opportunity to apply for scholarships that are – and it's the only scholarship platform that's a both nationwide and local related scholarships. It has an application that allows students and families to simplify the completion of the FAFSA form, which is a pretty complex federal form on its own. And then more recently, we've begun offering an opportunity for families to load the information that they receive from their schools, their offer letters, if you will, for acceptance that detail out how much it's going to cost and how the school expects them to pay for it, to be able to compare those offers from one school to the next on more of an apples-to-apples basis. Schools don't package all of that information in the same way, and so it can be a complex task for folks. Those combination of activities are driving an expectation that we will see higher demand for our in-school loan products in this upcoming academic year of 2022-2023. So we're very optimistic about that. As to your second question, it's a little hard because, I mean, at the end of the day, a consumer is deciding not to pursue a refi loan. You know, it's hard to know how much of it it is rate, As I said earlier in the call, 0% is tough to compete with, and that's what we're looking at here is 0%. So as long as that continues to get extended, I think that's going to continue to be the biggest barrier we see and reap by demand. All right. Thanks, Jack. More federal department. Yep. Sure.

Thank you. As a reminder, if you would like to ask a question, you will need to press star 1 on your telephone. Again, that would be star one on your telephone. Our next question is from the line of Rick Shane with JPMorgan.

Good morning, everybody. Thanks for taking my question. I want to look at the guidance a little bit and the underlying metrics. When you look at them, obviously you haven't changed at this point any of the key assumptions, but you've raised guidance I suspect some of this is confidence versus the previous metrics because of how strong Q1 results were. But I'm also curious, can you talk a little bit about attribution? How much of the differential in increasing earnings guidance is a reflection of lower provision expense due to lower volume?

I'll take that, Rick, and good questions. I think I'll answer your last question first. In terms of the provision, as I said in my prepared remarks, I would anticipate, as a reminder, we reserve one and a quarter percent for all new loan originations on the refi side. So if you think about for every billion dollars what that represents, roughly $12.5 million in terms of provision, the lowered expectation is then offset by the fact that we aren't going to be earning the net interest income off of those loans. So over the course of the year, based off of the timing of when we were expecting those loans, they roughly offset one another for the full year. And then for the rest of the guidance, while it is certainly, I would say, we are in a very good position, it is a challenging environment that we're looking at over the next year in a volatile environment, but we feel very confident based off of what we saw, first quarter results that we've moved to Really, that 6% EPS range is a reflection of being more confident in hitting sort of those higher end ranges, so either meeting or exceeding. Also, this was a beat across the board, so this isn't pointing to just one specific item to raise that target guidance. So I really feel that it's a reflection of the confidence in front of this challenging environment.

Great. Okay. That's very helpful. Thank you.

Thank you. Our next question is from the line of Kwaku Abruqua with Goldman Sachs. Your line is open.

Hi, guys, and congrats on the quarter, and thanks for taking my call. With respect to capital allocation, can you guys help us understand sort of the timeline of when or how you intend to deal with the upcoming 2023 unsecured maturities? I'm just trying to get a picture of sort of the cadence as we approach 2023. I know there's quite a bit of time between now and then.

And so we have a billion of maturities coming due here in January. We are well positioned from a liquidity standpoint to meet that with cash on hand and future cash generated. So as you've seen in the past, we have been opportunistic in terms of buying back debt early if it makes economic sense. So to the extent those opportunities present themselves, we would take advantage of that. But we do not have any debt repurchases in our planned guidance here for the remainder of the year.

Perfect. Thank you so much for that color. And, and just as a follow on, what are the puts and takes? You know, I saw that the Felf's 30 plus day delinquencies ticked up a bit on a quarter over quarter basis. It's just, just the fact that you were able to get borrowers out of the forbearance and some of them slipped into the DQs.

Yeah. So there's, you know, when we, when, when the pandemic hit, like the department of ed, we, we offer payment relief options to borrowers. And so, um, did you take advantage of those nonpayment periods? And as we, if the pandemic ended and the economic environment continued to improve, we worked with borrowers to return them to repayment. If you look at our delinquency rates in both our federal and private loan portfolios, private are clearly below pre-pandemic levels. The federal, if you look at historic averages, we're right in line with where you typically see delinquency and default rates in the federal book. over a normalized period of time. So nothing unusual. They just look like they are significant increases because they're coming off artificially suppressed levels.

Yeah, that's what I thought. And given the fact that you're basically a steady state, we shouldn't expect any sort of big variation on a go-forward basis. That's right. Perfect. And moving on, I saw that there was like a $20 million increase sort of decline in the Phelps other revenue, is that sort of also related to the novation of the Department of Education contract? And obviously your underlying OPEX also declined by a significant amount. Is that fair to say?

So I would say roughly half of that is related to the novation of the contract, and you can see that in the other income line on the federal education segment. The other piece is the decline in the asset recovery section within federal education loans from 12 to 3. And that's just mainly a function of the extension of CARES Act, as we've seen a decline in third-party collections on FELP loans, which is baked into our guidance that assumed run rate of roughly 3 million.

Got it. Got it. And final question here for me.

And then to your second part, right, so we reduced expenses associated with both of those activities and exceeded the revenue that we lost in terms of the total expenses that we removed.

Absolutely. I saw that and just wanted to clarify on it. Thank you so much for that. And lastly, in terms of the expenses on a go forward, I guess you guys are signaling that you still have more expenses that can potentially come out given that first quarter is the highest expense quarter. Is there a way to kind of quantify the cadence or the magnitude of the potential opportunity here in the cost house over the next three quarters?

Not getting that specific, but we do expect it to be lower with each quarter here. As Jack had said in his earlier comment that the first quarter is historically high, but we would anticipate continued reductions throughout each quarter to end the year.

Thank you so much, guys, and have a great rest of the year. Thank you.

Thank you. Our next question is from Guiliano Bologna with Compass Point. Your line is open.

Good morning. I guess coming back to a little bit of a topic that's come up a couple times already. Thinking about the origination guidance, you're obviously taking the volume down roughly $4 billion. If I run that at 1.25%, that comes up to an after-tax number around $38.5%. million dollars granted you have to buy some in-school loans in there as well but yes the question with that is so that what you're effectively saying is the offset there because you should get the benefit of not having a provision on those loans should you know what should be offset by or would have been offset had you originated those loans by the the min in the year and then the next question is how do you kind of adjust for that going into 23 because obviously your portfolio will be a little bit smaller going into 23, it'll probably have a push up in originations that will create a similar impact or the opposite impact in 23. Can you return more capital in the near term or use some of your capital to offset some of that impact?

That's the right way to think about it for 2022 in terms of the offset from the NIM versus the provision. Obviously we'd rather have these loans on our books and hold them for a longer period of time. I think to Jack's point, the great unknown is when does the zero percent extension actually end here? And how to think about that is that there would be a significant or we believe there could potentially be a significant wave as borrowers move from zero percent to a higher stated rate. So just thinking about that opportunity, that would put pressure on the provision earlier in the year. I would say the earlier that that would occur, the better the benefit that is to us in terms of net interest income for the full year. So absent of that coming back, I would think about next year's balances or ending this year, I would say, as relatively flat on the private lending side, as we would anticipate just naturally prepayments slow in a rising rate environment as borrowers have less of an opportunity to refinance their loans.

That's great. And what I was curious about was when I look at the develop segment, obviously our service revenues come down a lot. You have $11 million of other income. I'm curious if there's anything that that's related to or, you know, if there's anything recurring that should be flowing to other income.

No, that $21 to $11 is really a reflection of the wind-down of the transition services agreement that we have in place, and it relates to the innovation of the Department of Education service and contract. So that should ultimately go away by the end of the year, and that $11 million is offset by expenses associated with that contract. So those expenses should be removed as well.

That sounds good. Thank you very much.

Thank you. Our next question is from the line of John Hecht with Jefferies. Please go ahead.

Hey, guys. Good morning. Most of my questions about educational lending have been asked. So maybe just a quick moment on the business processing segment. Understanding you guys have been talking about the kind of runoff of COVID-related services, maybe give us a sense for the cadence of that. And then you talked about health care and other kind of segments within that category doing well. Maybe just give us an update on that stuff, too.

So you're right, I mean, the COVID-related project work that we took on over the last two years has, for the most part, has run off at this point. There's some small components that trailed into the first quarter, but we're really seeing here is an opportunity to replace these with longer-term arrangements, really driven by the fact that we've been able to demonstrate to our clients the value of the services that we provide, And so it's more than just meeting increasing demand. It also helped provide more or greater insight into different components of their business activities and a view that between the combination of processing efficiency that we brought and data insight, we were actually adding incremental value across a number of different activities. So we are expecting to see and realize new business opportunities as a result of that service experience. And then our traditional businesses, particularly in healthcare, a lot of health institutions also paused in terms of restructuring or taking a look at their business operations to determine what could be more efficient for them during the pandemic. And as the pandemic has I guess waned, or maybe become more normalized, those hospitals are now re-looking at different opportunities as well as, so we're winning new contracts in that space, but they're also seeing higher revenue structures as there's been a return to elective procedures, et cetera, that are driving demand for our services. So we're very optimistic about the outlook in BPS across our different business activities. and really looking forward to continue to demonstrate the value that we bring to our clients from both a processing efficiency as well as a performance effectiveness side of the equation. Great. Thanks for the cover.

Thank you. I'm showing no further questions at this time. Mr. Rutledge, please continue.

Thanks, Renz. 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.

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