Navient Corp (NAVI) 2017 Q4 法說會逐字稿

Good morning. My name is Christy, and I will be your conference operator today. At this time, I would like to welcome everyone to the Navient Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions)

I will now turn the conference over to Joe Fisher. Please go ahead.

Thank you, Christy. Good morning, and welcome to Navient's 2017 Fourth Quarter Earnings Call. With me today are Jack Remondi, our CEO; and Chris Lown, 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. 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 measures we call our core earnings. A description of core earnings, a full reconciliation to GAAP measures and our GAAP results can be found in the fourth quarter 2017 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, Joe. Good morning, everyone, and thank you for joining us today and for your interest in Navient. This morning, I will share my perspective on 2017's operating results and also provide color on my outlook for the year.

2017 was a successful year on a number of fronts. Highlights for the year include: adjusted core net income of $502 million or $1.79 a share; acquisitions of a $10 billion in student loans, including $1.2 billion in refinancing loans; we generated $475 million in business services revenue; private credit charge-offs fell 14% to $443 million, the lowest level in over 10 years; we reduced 2018 unsecured debt maturities by 1/3; and we returned $616 million to shareholders in dividends and share repurchases. While 2017 started with the challenge of the CFPB and Attorney General lawsuits, I'm particularly proud that our team did not let these unsubstantiated claims distract us from executing our business plan.

For example, in 2017, we continued to deliver exceptional service to our student loan clients, customers, outperforming the industry and student loan delinquency and default rates, in fact, 37% better; delivering high levels of income-driven repayment enrollment with more than half of loan balances serviced for the government enrolled in IDR; and we piloted numerous initiatives to improve customer outcomes by making it easier for borrowers to navigate the complexity of the federal student loan programs.

We also continued to win new business across all areas of the company, including new and renewed federal contracts, state and municipal contract wins, significant student loan acquisitions and new healthcare revenue cycle management contracts. And nor did it distract us from growing our franchise capabilities through corporate acquisitions as we welcome Duncan Solutions and Earnest to our franchise.

Our financial results, new contract wins and business expansions demonstrate the commitment and dedication of our team to focus on our customers, clients and business objectives. I'm extremely proud of what team Navient accomplished in 2017.

There is one area in particular, however, that does not reflect what was accomplished in the year and the foundation we built for 2018 and beyond, our stock price. Our goal is to continue to demonstrate the embedded value in our legacy student loan business, the growth and value potential in our business processing and asset-generation businesses and to put to rest the negative pressures impacting the values here.

During 2017, we invested over $450 million in capital and student loan portfolio purchases and corporate acquisitions, which we believe will generate returns well in excess of our cost of capital. These transactions leverage our existing infrastructure and skill sets and will meaningfully contribute to our growth in 2018.

On the regulatory front, we continue to present the facts, which clearly demonstrate the quality of our work, the superiority of our results and the clear and accuracy of the claims. We'll continue to defend our performance and put forward solutions that address the real issues impacting student borrowers, most notably college completion.

While the legal process is slower than we would like and it's incredibly frustrating to have to deal with these false accusations, I'm eager to move as quickly as possible to the presentation of the facts and the resolution of these cases.

The passage of the Tax Reform Act in December was big news and big value for Navient. While it resulted in a $224 million reduction in our deferred tax asset, it will ultimately have a very positive impact. Most significantly, it will materially lower our effective tax -- federal tax rate to 21% and increase our net cash flow. The increase in net cash flow will help support investments in new products, people, systems and services. It will also allow us to be more competitive and will result in better returns for investors. You'll see this immediately in our projections for 2018.

In December, we announced our plans to invest some of the benefits of the tax change in our team. We paid out an immediate $1,000 bonus to over 6,500 teammates or 98% of all employees, and we're also committed to evaluating other ways to invest in our people, products and systems to deliver increased value.

Our business objectives for 2018 are focused on maximizing value from our legacy student loan business, growing our business services revenue and generating at least $1.5 billion in student loans through our refinancing programs. We are also focused on continuing to improve our operating efficiency. And to expand on this, we expect our legacy student loan portfolios will continue to deliver predictable cash flows as the portfolios amortize, and to maximize those cash flows, we are focused on interest expense, credit performance and continuing to materially improve our operating efficiency.

In business services, we expect to deliver 30% growth in our noneducation-related services and improve our operating margins. We expect growth here will come from both our government municipal clients and our healthcare clients.

We expect to originate $1.5 billion of refinancing student loans. We believe our product offerings, digital marketing strategies and origination platform provide a unique competitive advantage, allowing us to generate very attractive assets with excellent risk-adjusted returns.

And finally, our focus on operating efficiency will result in meaningful cost reduction, with operating expense 3% lower compared to 2017 and 12% lower when normalizing for our in-year corporate acquisitions, saving over $110 million.

Our 2017 financial results reflect the value of our business franchise and the commitment of our team to our customers, clients and investors. Our investments in products, systems and people built momentum during the year, and that positioned us to improve operating efficiency, maximize our legacy cash flows and deliver on the growth potential of our business services and student loan originations in 2018. I'm excited about the year and looking forward to delivering on the franchise strengths in 2018.

Thank you for your interest, and I look forward to your questions later in this call. I'm now going to turn it over to Chris for a deeper look at the quarter and the year's results.

Great. Thank you, Jack, and thank you to everyone on today's call for your interest in Navient. During my prepared remarks, I will review both the quarterly and year-end results for 2017. I will be referencing the earnings call presentation, which can be found on the company's website in the Investors section.

Starting on Slide 3, adjusted core EPS was $0.43 in the fourth quarter, flat from a year ago. Full year adjusted EPS was $1.79 compared to $1.86 from a year ago. During the quarter, we recognized a $224 million noncash remeasurement loss, as we wrote down the value of our deferred tax assets due to the enactment of the Tax Cuts and Jobs Act signed in December. This resulted in a reported net loss of $0.50 per share for the quarter and reported full year EPS of $0.89 per share. We expect the change in the federal tax rate to reduce our effective overall tax rate from approximately 37% to approximately 23%.

During the quarter, we incurred $3 million of regulatory costs and a $29 million restructuring charge. This restructuring expense, along with other operating efficiency initiatives, is expected to reduce operating expenses by approximately $110 million in 2018 before corporate acquisitions.

Let's now move into our segment reporting, beginning with FFELP on Slide 4. FFELP core earnings were $65 million for the fourth quarter versus $68 million in the fourth quarter of 2016. The decrease was primarily due to the amortization of FFELP portfolio and slightly lower net interest margin. The net interest margin for the fourth quarter was 87 basis points compared to 89 basis points in the year-ago quarter. We continue to enter into derivative contracts to hedge our projected floor income and 1-month versus 3-month LIBOR interest rate risk, with more than 90% of these risks hedged today. In the fourth quarter, we acquired $463 million of FFELP loans, bringing our year-to-date FFELP acquisition total to $5.7 billion.

Now let's turn to Slide 5 in our Private Education Loan segment. Core earnings in this segment increased to $43 million from $41 million in the fourth quarter of 2016. In the fourth quarter, the net interest margin was 331 basis points. The decline from our third quarter was expected and a result of the cumulative adjustment that occurred in the third quarter and the acquisition of $822 million of Private Education Refinance Loans, including $380 million of loans that were originated in the fourth quarter.

Newly originated Private Education Refinance Loans that we acquired have an average borrower rate of 5%, which is approximately 300 basis points lower than the yield on our legacy Private Education Loan portfolio but has significantly lower loss expectations. We expect the NIM on refinanced loans to be closer to 2% as we transition loans to our lower cost ABCP facilities and securitizations.

Refinanced loans do not require the same seasoning as new in-school originations, and we anticipate that we will be more actively securitizing this portfolio. As a result of the amortization of the legacy portfolio, along with the newly originated refinanced loans, we expect our total Private Education NIM to be approximately 325 basis points in 2018.

We are very pleased with the continued improvement in our credit quality as Private Education Loan losses and delinquencies continued to decline year-over-year. Charge-off rates are at the lowest levels in over 10 years and outperformed our expectations as we transitioned the $3 billion portfolio that we acquired in the second quarter.

Let's continue to Slide 6 to review our business services segment. We are very proud of the growth we have achieved across business services, and we feel that as we shift beyond the education space, it is important to give more detail into the performance of each unit within this segment. Noneducation fee revenue grew 21% in the year and 49% in the fourth quarter alone. Excluding the acquisition of Duncan Solutions, noneducation fee revenue grew 10% and 19%, respectively.

We continue to win or renew contracts in this space, including our first healthcare RCO contract. This gives us the ability to manage the entire revenue process cycle. Opportunities like this will allow Navient to leverage our servicing experience to drive better results and streamline efficiencies for our customers.

Let's turn to Slide 7, which highlights our financing activity in the quarter. 2017 was a fantastic year for education loan acquisitions, with $1.3 billion acquired in the fourth quarter and $10 billion for the year. We have available capacity in FFELP ABCP facilities of $2.4 billion and available capacity in our Private Education Loan ABCP facilities of over $925 million. We plan to continue to fund our education refinanced loans with ABCP facilities before we securitize them to term.

In the quarter, we issued 1 FFELP ABS transaction for $751 million. For the year, we issued $5.7 billion of FFELP ABS. Our first FFELP deal of 2018 priced yesterday and was financed at a reoffer spread that was 41 basis points tighter than our first deal of 2017. We also issued our first mixed Private Education legacy and refi transaction, allowing us to bring our cost of funds to tighter levels. As we discussed in our third quarter call, this transaction priced at a spread of 101 basis points with a weighted average life of 3.5 years.

On the unsecured side, we continued to focus on our maturity profile by using the proceeds of a $250 million reopening due in 2022 to address near-term maturities. We reduced our 2018 maturities by 36% during the year.

Moving to slides 8 and 9, I want to discuss our long-term capital allocation philosophy and how we prioritize capital allocation. Consistently and dynamically balancing capital adequacy with capital allocation opportunities, including organic growth, stock repurchases and acquisitions is paramount to delivering value to our shareholders, and we are committed to ensuring excess capital is returned to shareholders.

Turning to Slide 9. From the perspective of capital allocation prioritization, we believe it is important to maintain a stable quarterly dividend. This is followed by organically grown Private Education Refinance Loan originations and opportunistically acquiring education loan portfolios. We then looked to invest our excess capital in share repurchases and strategic acquisitions. Importantly, in 2018, we will focus on integrating the acquisitions we made over the past 2 years and driving organic growth to deliver value to shareholders.

Since separation, we have returned over $800 million in dividends, $2.5 billion of share buybacks and invested approximately $585 million in complementary growth businesses. We have historically used our TNA ratio of range guidance to provide debt and equity investors with a view of our leverage, capital requirements and capital guidelines. In light of the company's continued transition, we believe it is appropriate to provide investors with a tighter near-term range within our 1.20 to 1.30x guidance to provide more capital transparency.

This tighter range is informed by our cash flow projections, refinancing requirements, internal and rating agency models and discussions with rating agencies and our equity and debt investors. At year-end, our TNA ratio is 1.20x. By the end of 2018, we expect to manage our capital position to result in a 1.23 to 1.25x TNA ratio. In light of this guidance and our increased confidence to generate capital in 2018, we plan to resume and complete our existing share repurchase authority in the second half of 2018. The existing authorization has $160 million remaining.

Let's now turn to full year 2018 guidance on Slide 10. We expect the following: operating expenses between $910 million and $930 million, excluding expenses associated with regulatory costs; full year FFELP net interest margin of approximately 75 basis points; full year Private Education Loan net interest margin of approximately 325 basis points.

Our guidance for NIM includes the impact of 2 interest rate hikes of 25 basis points each in 2018. In addition, our 2018 guidance includes the following assumptions: full year Private Education Refinance Loan originations of at least $1.5 billion, full year growth in noneducation-related revenues of at least 30%.

Finally, we see core earnings per share between $1.85 and $1.95, excluding expenses associated with regulatory costs and restructuring expenses.

Let's turn to GAAP results on Slide 11. We recorded fourth quarter GAAP net loss of $84 million or $0.32 per share compared with net income of $145 million or $0.48 per share in the fourth quarter of 2016. The primary differences between core earnings and GAAP results are the marks related to our derivative positions.

I will now open the call for questions.

(Operator Instructions) And your first question comes from John Hecht of Jefferies.

First, I wanted -- you discussed $110 million in net savings through some restructuring plans, and you mentioned that -- I think that's net of -- you're not accounting for the expense run rate from Duncan and Earnest. I'm wondering are you able to share any context to that with us to give us a sense for what that might add to the core base in order to properly model the expenses going forward?

Yes. So we don't give specific guidance for either of those entities, but I think there's a simple way to back into it in that. If you look at sort of 2016 OpEx, you remove out the $110 million, you can get to -- and then you look at our guidance, our operating expense guidance of $910 million to $930 million, you kind of come to a number that should give you a rate of where those companies operate. And it's just a good general assumption that they're both equally weighted from an expense side if you just wanted to think about it that way.

Okay. That's perfect. And then how should we think about the provisions this year? You've -- it looks like the Chase portfolios performing a little better in terms of loss content. But then you're going to be -- you're adding on some of the Earnest loans. Could you give us a sense what the loss content is there to have taken out provisions for this year?

Yes, so on the JPMorgan Chase portfolio, as we said -- as I said in my prepared remarks, we clearly are experiencing great trends on the credit side, and that came through on that portfolio as well. I think while we haven't completely migrated that portfolio onto our services -- servicing systems, we were able to utilize a number of our strategies and analytics to help drive better results with the sub servicer. And so we feel very comfortable and confident of what's going on in that portfolio and generally, in the overall portfolio as you see in the credit trends. And so on the Earnest side of the loss content, they're insignificantly lower. And so I think you should continue to expect us to see that provision number decrease over time.

Decrease as the percentage of assets or as in, in absolute basis?

Both.

Both.

And you have a question from Moshe Orenbuch of Credit Suisse.

Actually, a couple, 2 questions. First, I guess is how do you think about the profitability of Earnest kind of vis-à-vis your guidance back at the time of the acquisition given this restructuring? Is it similar? Or is it better given that you've taken these expenses out?

Well, our expense focus, Moshe, is on -- has been on the legacy business side of the equation. As our portfolio is amortizing, we're really looking to continue to drive operating efficiency in that space. And we also believe on some of our business processing areas, there's significant opportunities for us to take advantage of many of the same things we've done in student loan servicing related to automation and data analytics that are starting to take hold there. In Earnest, we are looking for -- we believe we can generate net interest margins in the 2% range in that space. And given the excellent credit performance on refi loans, that these loans will generate returns on equity in the mid to high teens. Our job in that space though is in the asset generation arena is really to invest in that business, invest in the technology that we use to originate loans, the technology that we use for our marketing-related purposes and to grow those businesses. So I would look at that as more of a investment side of the equation versus cost take out side of the equation.

Right. And maybe if you could just talk a little, Jack, about what you think of as the asset growth prospects in 2019? And how that would impact your TNA ratio and further capital allocation decisions?

So the way we see -- I mean, we look at the refi businesses, we're -- because of the significant -- significantly better performance in terms of credit outlooks and the shorter average life of those loans, we do allocate a lower level of capital to that product than we did in the traditional or legacy private student loan side of the equation. And when you look at the amortization of the existing portfolios, both FFELP and private, and the amount of capital that those -- that, that amortization releases, when you combine that with the capital that is generated by the portfolios themselves in the business processing services segments of our company, we are generating more than enough capital to allocate to asset generation and continue to return capital to investors. Our decision on the share repurchase front was more a reflection of what we actually invested in 2017, over $450 million of capital were -- was invested in allocating capital to the private loan portfolios we purchased in the year and the 2 corporate acquisitions rather than a reflection of the capital demands of asset generation.

Just wanted to be clear though. In '19, obviously, you're going to start potentially originating private student loans yourself. I mean, any thoughts about the magnitude that, that could be in that period? Because those would have potentially different capital allocation.

Right. The way the cycle works in campus originations is you really won't see any meaningful originations until the second half of '19 because you're -- just because of the academic year cycle. January disbursements are really second disbursements on loans made in the prior year. So it does not have a big capital demand for us in '19.

And you have a question from Sanjay Sakhrani of KBW.

I guess this goes back to a question asked previously. I guess, when we think about where you'd end up in excess capital based on the range that you're assuming for your TNA, it would imply you could probably do a little bit more than the $160 million that's left on the share repurchase. Can you just talk about whether or not you're expecting to just exhaust what you have left on the share repurchase? Or even do more?

So I'd say 2 things. One, I think it's going to be very important going forward, for us, that people -- and it seems that you may have done it, is that -- that is people fully understand the TNA ratio, the roll-off for the portfolio and the generation of capital in this business because it should give everybody a pretty -- a much tighter range of where the excess capital is and what the opportunities are around that capital. I think I'd say 2 things. One, we clearly are now committed to exhausting our 2017 repurchase authorization at the second half of 2018, and the other statement I had made that is declarative is that we are committed to returning excess capital to shareholders. And so there are a lot of ways to do that, and we will obviously assess on a weekly, monthly, quarterly basis our capital position. And you have our view that we are committed to that returning policy.

When we think about other portfolio acquisitions or acquisitions, are there active opportunities on that front for 2018 that could meaningfully impair your ability to return some of the other excess?

Most of the -- Sanjay, most of the opportunity -- the large portfolios have been acquired at this point. And there are certainly, student loans, legacy student loans out there that we would be interested in acquiring. The majority of them are FFELP, which as you know, require very little capital. So I don't see anything on the horizon on that front that would materially alter our capital requirements situation.

And on the servicing side?

You mean on the federal contracts or the -- just...

Generally like other tuck-ins that you have made, like things that you've done in the past.

For corporate acquisitions, we are going to be focused in 2018 on integrating our businesses and driving organic growth. So when we talk about the nonfederal fee revenue that we expect to generate in 2018, that is coming from businesses that are in place today and effectively organic growth rates that we expect to generate next year or this year.

Okay. And maybe to touch on, on that -- on the point you made on the DOE collections stuff that came back in December. Could you just talk about what that opportunity is for you all in this new paradigm? And then just secondly, I also want to make sure I understood the impact of CECL. To the extent that there is any as we look into early 2020 -- I know it's a while away, but I just want to think about that and how it relates to your capital management priorities.

Sure. So on the first question on the Department of Ed contract, we were awarded effectively a continuation of our prior contract with the department. And they made a very large placement of collections with us in the fourth quarter. It's not clear what happens next. This was the largest single placement that we had ever received in the 10-plus years we've been doing this work for the department. It's an attractive business for us under those metrics. And we are continuing to demonstrate the success rates that the department is looking for in that space. I think as the business moves forward and we have this RFP going on with the servicing side of the equation, it's possible that this whole metric gets wrapped up and treated differently than it has in the past. On CECL, maybe Chris can elaborate a little bit more on what we're thinking of here.

Yes. So clearly, 2020 is a ways off, but I'd highlight a couple of things. One, the revised TNA guidance that we've given starts to take into consideration if you're around the potential impacts of CECL. Two, when you go out and speak to the rating agencies about the impacts of CECL, they are still not giving a lot of clarity around what they see, the impact, and how it changes their views on things. So we're closely monitoring it. We clearly will, like every financial institution, be impacted by that change in accounting standard. But we have started to at least take it into consideration as we think about our TNA ratio guidance and what the impact could be in 2 years.

And we don't have an initial estimate of that?

We do not.

And your next question comes from Rick Shane of JPMorgan.

You've provided some good clarity in terms of how to think about yields on the refi loans versus the traditional private student loans. And obviously, what that really benefits from is the positive selection on the refis due to the graduation rates. Can you help us fill out sort of -- you filled out the yield matrix. Can you fill out the graduation rate matrix and the lifetime loss matrix, so we can think about that? I'm assuming the grad rate on the refi loans is close to 100%. What is it on the traditional student loans? And what are the lifetime loss assumptions for both types of loans?

Well, so the refi marketplace has generally focused exclusively on customers with student loan debt from graduate schools. So they -- these are borrowers who have not only completed their undergraduate degree, they've also completed their graduate degree program as well. They have relatively large balances in terms on both their majority federal and private loans that make it attractive for them to be able to refinance into products like we offer. It is a function of their income, their credit. And most of these borrowers have been working for several years by the time, they're actually looking to do a refi component. So it's a more traditional underwriting process than just what you see in the legacy student loan space. When we look at student loans in the aggregate across both federal and private student loans, graduation rate is clearly the single best predictor of -- or graduation is the single best predictor of loan performance in that portfolio. And you can just see this by one metric that's published by the Department of Ed. That is about 2/3 of all federal student loan defaults come from borrowers who have borrowed less than $10,000. And that is the leading indicator that they started school and did not complete in the process. By contrast, only 4% of defaults come from borrowers who have borrowed more than $40,000. I know that's the opposite of what the media portrays as the problem or writes about as the problem in student debt of high debt balances, but those are the statistics from the federal loan program. We believe that our data, our history and performance here will allow us to identify high-quality borrowers based on a variety of metrics that are beyond -- not just credit bureau-related that we can expand our offering in the refi space and generate meaningful volume of very, very high-quality accounts going forward.

Okay. But when we try to pull that down to what the lifetime loss expectation on a refi versus a traditional private student loan, can you give us some clarity there?

So we would expect that loss rates in the refi space would be less than 1/3 what you would traditionally see in the in-school lending, life of loan losses in the in-school lending.

Okay. And just so I don't walk away confused, which sometimes happens to me, when you say less than 1/3, if we're looking...

So typically -- yes, I'm sorry. So in the in-school space, today's private student loans are generally estimated to have somewhere between a 6% to 7% lifetime cumulative loss, and we would expect losses to be under 2% in the refi space.

In fact, if you look at current trust -- if you look at trust data today of the refi loans, you'd actually see the evidence of something more in sort of the 30 to 40 basis point range. So again, we are at a very attractive cycle. These are very attractive assets. But that less than 2% number is a fairly conservative number when you look at the data.

Got it. I appreciate that, and I appreciate your willingness to be clear on that. I also wanted to say thanks for the guidance. It's helpful. I -- you talked about $160 million remaining on the buyback. That is, in fact -- the buyback that you reinstated is, in fact, greater than the tax savings. I'm curious why be that aggressive? Is it because you see that opportunity in terms of the stock price? Is it because the growth opportunity in terms of FFELP loans moderating? Or is it just really response to what we've seen in the market over the last 6 months?

Yes. So I think we look at it differently. As Jack mentioned, our suspension on the buyback took a number of factors into consideration. Somebody mentioned -- and also the fact we're going to origination business, the fact that our leverage had increased since spin out and gotten down to a -- at the bottom end of our range. And so as we think about what's transpired since October, we obviously went through a fairly meaningful restructuring and a cost-efficiency exercise, which will generate longer-term capital generation going forward. In addition, obviously, there is the tax benefit. But there are a number of factors that give us a lot of confidence in our ability to generate excess capital over the long term. And so we feel like that $160 million resumption of the authorization of 2017 was a prudent plan. And again, it will happen in the second half of the year, not on the first half. So we will build capital through the first half of the year and get within that, typically, by the end of the year.

And you do have a question from Arren Cyganovich with Citi.

And I apologize if I missed this when you were discussing the PEL margin, but the 325 basis point guidance includes the new refinance loans? And I think, Jack, you said that, that's about a 2% on NIM that you're expecting around there? If you were to strip that...

That's right.

If you were to strip that out of the last quarter, what would have the PEL NIM been for the legacy assets?

Yes, I'd say, it'll be sort of 7 or 8 basis points higher. And I think what you should expect for us in the future is that, as that portfolio scales we will look to break them out separately to give you more specific guidance to be able to model the 2 separate portfolios. It's just not really of scale yet to do that.

Got it, and thanks for the new disclosures on the fee business side, but -- helpful. In terms of the breakdown, the piece that is the remaining education services, how much of that is in runoff going forward?

Well, anything that is FFELP-related is runoff. The -- really, the only piece that we have related to the direct loan portfolio is our servicing contract, which is also as you know, up for -- is likely to be bid out sometime in the near -- next several months here. And that was -- that's roughly about $150 million worth of revenue in the Department of Ed servicing contract a year.

So the $345 million, would that -- I guess, you also would see a decline in the intercompany servicing as well?

Correct, yes. I mean, those revenues -- effectively, if you think of the business as having a legacy student loan portfolio in related services contracts associated with those, those will all be amortizing down over the remaining life of the loans. That's certainly nothing new or unexpected there. We've been modeling and providing folks with the expected cash flows from the loan portfolios over time. Those cash flows have actually been coming in a little bit better than the projections that we've shared. And we're trying to provide a little bit more disclosure on the fee side of the equation. So you can model those out as well.

Yes, that's helpful. And then just lastly, the 30% expected growth in the noneducation-related revenues, does that -- how much of that is organic versus -- I guess, you made some of those acquisitions kind of in the middle and late part of last year.

Well, it does not assume any corporate acquisitions in 2018. So it does include the full year run rate of Duncan Solutions in that component. But the rest -- I mean, it is effectively all organic growth.

(Operator Instructions) You have a question from Mark Hammond of Bank of America Merrill Lynch.

I have 2 debt questions. So I appreciate the specificity of the tangible net asset ratio guidance. But I was wondering beyond 2018, what will you manage the ratio to? Anything more specific than 1.2 to 1.3x?

So we obviously haven't given guidance past 2018, but I do think it is a good benchmark to think about out 1 year or 2. Obviously, there are a number of things we're going to manage through over the next few years. We're building out the origination franchise. CECL was mentioned as an accounting convention, that will come in 2020. So I do think that guidance is a good benchmark out a year, but we will look to provide updated guidance. And as I mentioned, it is very much informed from our discussions with rating agencies, their models, our models, et cetera, to make sure that we are in compliance with what they're thinking about from a ratings perspective.

All right. And then touching on the $250 million add-on to the six and a halves of '22, what went into the decision to add-on to the $1 billion-plus maturities in 2022 rather than issuing longer-dated bonds into years that have less maturities?

Sure. So a couple of things. One, obviously, the weighted average life of our portfolio is going down. It's not going up. And so as I think about our costs within the business, issuing longer-dated debt is more expensive. You're talking up to a whole 100 basis point increase in cost to go further out. Two, if you go to Page 15 of our Investor presentation, you'll see we've added some new disclosure in there around our Private Education Loan cash flows along with our FFELP cash flows. There is -- because of the Turbo facility that were put in place during the crisis, there is a lot of release of capital for us from those facilities past 2020. And so what we're also trying to do is match our cash flows more closely with our maturities. And so my ability to have reopened the 2022s when I know that there's going to be a lot of cash available and save costs, to me, made a lot of sense. And I felt very secure about our ability to manage that debt load given our operating income expectations. And so it really was a cost-benefit analysis and a review of our cash flows in our ability to service that debt.

So that's something that going forward, we might see more of rather than a full $500 billion issuances or $1 billion full stop, new out into the future?

So I'd say, actually, we're going to have to do -- we can do both. I mean, there's still some ability to tap a little bit. Again, we're cognizant of what's sort of a max maturity tower would be in any year past 2020. And so we'd never want to push that boundary, but there are a couple of years that we could still reopen. But inevitably, as we get through our 2019 and 2010 -- '20 towers, we still have to issue, some are longer-dated debt but, again, trying to reduce the amount of debt outstanding. We have bigger buckets in the outer years that we can increase. So we have a lot more flexibility, and it's just a huge amount of confidence in our 2019 and 2020 maturity towers and our ability to refinance them and then beyond that, just a clear path to managing the debt maturity schedule.

And your next question comes from Michael Tarkan of Compass Point.

Just on the FFELP NIM, I don't know if you touched on this, but can you tell us why it ticked up so much in the fourth quarter? And then why it's giving that back in 2018?

Yes. So it's a great question. And as you know, we do try to reduce the volatility in our FFELP portfolio, and we have increased our hedging position as well. There is some variability in our cost of funds in the FFELP portfolio that is actually, in there to our benefit. Over the last 2 quarters, we are not projecting that to continue. That is a bit of a meaningful impact as well. Also, our floor income is an amortizing asset. And rising interest rate environment has an impact on that, too. So again, we feel very comfortable in our 75-basis point forecast. And to be truthful, our forecast, historically, over last year, was sort of in the high 70s. And we did reap some of this benefit from the financing costs. And so pretty much in line with where we were. There was just these benefits on the expense -- on the interest expense side that we were receiving given some variability, but we do not expect to continue going forward.

Okay. And then just how many rate hikes are you assuming in your guidance for 2018?

We assume 2 rate hikes of 25 basis points each.

Okay. And then lastly, just on the regulatory side. It seems like some of the pressure from CFPB given new leadership there is maybe easing a little bit. But is there any chance -- or how do you view the potential states turning up the heat a little bit on the overall industry?

So first of all, we have been presenting the facts in our case. And the facts are that we deliver high quality services to our customers, our customers perform better than other loan servicers and our enrollments in the repayment programs in the federal loan program that are available, which is really the basis of all of these cases, is inconsistent with the facts, right? Our customers are more likely to be enrolled in alternative repayment plans than other servicers. And somehow, that fact gets in the way of I think some of these politically motivated cases. A couple of things that we think are happening here. One is, is that in the federal student loan side of the equation, the statutes, the Higher Education Act makes it very clear that these are federally regulated loans and not subject to additional state rules or regulations. And we're -- we do think that changing regulatory wins here make that something that will be more prominent. Obviously, yesterday's release of kind of the new direction of the CFPB is something that we have been hoping for since the beginning, right, which is that this organization should be charged with protecting consumers but not creating rules, new rules to enforcement-related actions. And we are hopeful that, that change will lead to a different related outcome here. We do -- one of the big things that we look at in the student loan space -- and I think this is a unique challenge in this particular asset class is the public narrative on that has been going on here is one of rising delinquency and default rates, excessive debt from student graduates that is causing them to alter their economic behavior in terms of what they can and cannot do. The reality is, is that student loan delinquency and default rates have been declining significantly since the end of the financial crisis. The delinquency rates for new borrowers and repayment, for example, is 1/3 the rate it was back in 2010. But it's difficult to get those statistics out there. And one of the reasons for that is the federal government does not charge off student debt. And so in the numerator of all these calculations is the cumulative amount of all loans that we have technically declared as being in default, but the government has not written off. And so if you're never clearing out defaults, of course, your delinquency rates look like they're rising. And as I pointed out earlier, the real challenges that we see in the federal student loan program in terms of delinquency and default rates come from borrowers who start school and do not complete. And that's evidenced by the significantly higher default rates that we see for those borrowers and the fact that 2/3 of all defaults come from borrowers who owe less than $10,000. I will say the other piece that we have been continuously working on, and I think we do a better job at this than anybody else is, is reducing some of the complexity factors in the federal loan program that make it difficult for borrowers to kind of navigate their way through the process. There are 56 different repayment options available to borrowers, for example. Having them -- having a borrower who's struggling to make payments be able to understand what those different options are and be able to select the right one is a challenge. The forms are complex and numerous. One example, we just recently piloted for our customers in income-driven repayment plans is showing a -- almost a 3x increase in successful completion rates for those borrowers as they are looking to enroll or reenroll in their income-driven repayment plan. Those are the types of things that we can do and really should be, we believe, are the -- should be the focus of these changes in regulatory-related reviews.

And there are no other questions at this time. I will now turn the call back over to Mr. Fisher.

Thank you, Christy. We'd like to thank everyone for joining us on today's call. If you have any other follow-up questions, please feel free to contact me. This concludes today's call.

And thank you all for participating in this morning's conference. You may now disconnect.