Navient Corp (NAVI) 2020 Q4 法說會逐字稿

Thank you for standing by, and welcome to Navient's Fourth Quarter 2020 Earnings Call. (Operator Instructions)

Mr. Nathan Rutledge, you may begin.

Thanks, Andrea. Good morning, and welcome to Navient Fourth Quarter 2020 Earnings Call. With me today are Jack Remondi, 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 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, including, among other things, uncertainties associated with the severity, magnitude and duration of the COVID-19 pandemic and the related economic impact.

As reported previously, the work-from-home policies and travel restrictions that have been put in place have not negatively affected our ability to close our books and maintain our financial reporting systems, internal controls over financial reporting or disclosure controls and procedures. Listeners should refer to the discussion of those factors on the company's Form 10-K and other SEC -- other filings with the SEC.

During the conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio and other non-GAAP financial measures derived from core earnings. Our GAAP results and description of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the fourth quarter 2020 supplemental earnings disclosure. This is posted on the investor page at navient.com.

Thank you. And now I'll turn over the call to Jack.

Thanks, Nathan. Good morning, everyone, and thank you for joining us today. I appreciate your interest in Navient, and I'm excited to share some highlights of how we delivered value in a challenging year as well as our outlook for 2021.

2020 was a tumultuous year. The pandemic impacted virtually every aspect of the economy, our business and the lives of our employees and customers. Our response at Navient was rapid, impactful and solutions driven.

Like other businesses, we rapidly moved our team out of our office to work from home. This was done quickly while maintaining our quality standards and high levels of productivity.

We also responded to the rapidly changing needs of our customers and clients, and we developed and implemented new programs to advance racial equity.

For our FFELP and private loan borrowers, we implemented and continue to offer payment relief options to help those in need by reducing or eliminating monthly payment obligations. As the economy began to recover, those who could return to repayment. Today, our credit performance metrics are better than pre-COVID levels.

We also worked with our business processing clients, including federal agencies, public sector entities and health care institutions to offer relief where needed.

These changes in both our loan servicing and business processing areas dramatically reduced our daily transaction volume and our fee revenue. At the same time, our team saw that our clients were quickly becoming overwhelmed in other areas.

We were able to reposition our teammates and adapt our platform to provide immediate resources to assist our clients, including processing much needed unemployment benefits and providing contact-tracing services.

As the needs of our clients expanded, our team once again delivered as we hired, trained and deployed, all virtually, thousands of new employees to help our clients provide these critical services to their constituents.

Our ability to respond efficiently and effectively is a great demonstration of our operational and platform agility.

My colleagues also demonstrated their deep personal commitment to meeting these needs. In a recent example, our team literally worked around the clock over the weekend to ensure we could provide hundreds of new agents to meet a clients' growing requirements.

I'm super proud of our response, the quality of our work and the commitment of our team. These efforts, along with the quality of our portfolio and business design, delivered truly exceptional results in a challenging year. For the year, we earned $3.40 in adjusted core earnings per share, a 29% increase over 2019 results.

Adjusted core net income increased nearly 8% to $663 million. This year's results build on a solid trend. Even with a 23% decline in the last 3 years in our average student loan portfolio due to expected amortization, our focus on new student loan originations and our processing business has helped us to deliver strong annual growth for several years now.

For example, we've delivered a 3-year compound annual growth rate for core net income of 10% and a 3-year compound annual growth rate for core EPS of 28%.

Our results this year were driven by strong performance across all areas of the business. Net interest income increased 4%, even as our average managed loan portfolio declined 7%, as we benefited from better funding costs in a favorable interest rate environment.

As mentioned, credit performance was similarly strong across both our FFELP and private loan portfolios. And this trend is expected to continue into 2021. The economy, however, remains fragile, so our reserves remain sizable and capable of absorbing significant credit losses.

In our Business Processing segment, 2020 saw significant declines in transaction's volume and fee revenue as people stayed home. Our ability to deliver critical services in new areas generated over $95 million in new revenue, more than offsetting this decline and leading to an 18% increase in year-over-year BPS segment revenue.

The ability to respond to these new needs illustrates the strength of our business model and client relationships and is a clear example of the operational and platform agility we have built.

Our continuing efforts to deliver our services efficiently also contributed to our exceptional results. Total adjusted operating expenses declined 5% in 2020 to $931 million, even as BPS segment expenses increase as we added the new services. This resulted in an impressive efficiency ratio of 48%. We will continue our focus on improving operating efficiency.

Capital and liquidity remained strong throughout 2020, and our strong capital levels allowed us to return $523 million to investors during the year. And while we used -- we also used our liquidity to fund new originations and retire over $1 billion of unsecured debt.

Our strong financial performance, term funding approach and conservative capital management will allow us to continue to return excess capital in 2021 with a planned $400 million allocated for share repurchases and a continuation of our dividend during the year.

We are projecting that the strong performance of our franchise in 2020 will continue with a 2021 adjusted core EPS forecast of $3.10 to $3.25.

Our results this year demonstrate the strength of our business model and our ability to deliver predictable and meaningful cash flow and earnings in all types of economic environments.

Several factors, including 2020's EPS growth of 29%, our 3-year compound annual growth rate of 28%, our strong and consistent capital return, including a dividend yield of 5.4% and our 2021 earnings forecast combined to make a very compelling investment opportunity.

Finally, I would like to acknowledge my appreciation from my teammates. 2020 was a challenging year. The fear and anxiety caused by the pandemic could have led many to hunker down.

My colleagues, however, chose not to focus on what couldn't be done but how they could help those impacted by the pandemic with relief programs, empathy and solutions.

I'm proud of their efforts and commitment, and it's an honor to lead our company and this team. Thank you for your time, and I look forward to your questions later in the call. I'll now turn it over to Joe for more color on the quarter and our outlook for 2021. Joe?

Thank you, Jack, and thank you to everyone on today's call for your interest in Navient. During my prepared remarks, I will review the fourth quarter and full year results for 2020. I will be referencing the earnings call presentation, which can be found on the company's website in the Investors section.

Before I turn to the highlights of the quarter, I'd like to echo Jack's comments on the outstanding work that Team Navient has been delivering on behalf of our customers throughout this crisis.

We've meaningfully outperformed our original 2020 targets that were set in January of last year, and our outperformance would not have been possible without the dedication of our thousands of employees across the country. As a result of their efforts, we are well positioned for 2021 and beyond.

Our outlook for 2021 is provided on Slide 4. We are providing 2021 adjusted core earnings per share guidance of $3.10 to $3.25 per share.

Our outlook excludes regulatory and restructuring costs, reflects a favorable interest rate environment that we expect to continue for the full year and includes $400 million of planned share repurchases.

I'll provide additional detail on our outlook as I walk through the fourth quarter and full year results that begin on Slide 5.

Key highlights from the quarter and full year include: delivered fourth quarter GAAP EPS of $0.99 per share and full year GAAP EPS of $2.12; adjusted core EPS of $0.97 per share and full year adjusted core EPS of $3.40, nearly 10% higher than the high end of our original projected guidance at the beginning of 2020; provide continued payment relief options to borrowers impacted by COVID-19; originated $4.6 billion of private refi loans in the year; achieved BPS EBITDA margin of 23% in the quarter and 19% for the full year; improved efficiency ratio to 48% for 2020; strengthened our capital position, reduced outstanding unsecured debt by $1.1 billion for the year, while returning $523 million to shareholders in the form of repurchases and dividends; and increased our adjusted tangible equity ratio to 5% or 7.1% after excluding the cumulative negative mark-to-market losses related to derivative accounting.

Let's move to segment reporting, beginning with Federal Education Loans on Slide 6. Our portfolio continues to reflect strong positive trends as FFELP borrowers' transition back to repayment, resulting in continued reductions in forbearance usage to 13.8%, down over 50% since peaking at 28.5% in the second quarter.

The net interest margin improved to 106 basis points from the year ago quarter, which led to overall net interest income increasing 9% to $162 million in the quarter, even as the balance of loans declined 10%.

The increase from the year ago quarter was driven by the favorable interest rate environment we are experiencing and ongoing improvement in funding costs.

The current outlook for interest rates should continue to positively impact the net interest margin on our FFELP portfolio, and we expect the 2021 net interest margin to be in the mid- to high 90 basis point range.

Fee income and operating expenses in this segment declined primarily as a result of the expected decreases in asset recovery volume, impact of COVID-19 on certain operational activities and improvements in operating efficiencies.

Now let's turn to Slide 7 on our Consumer Lending segment. Forbearance usage peaked at 14.7% during the second quarter and has declined to 3.9%.

The stable level of forbearance compared to the third quarter is a result of continued disaster-related forbearance provided to those in need.

The trends we are seeing as borrowers' exit forbearances remain encouraging. Our delinquency rate declined 43% to 2.6% from a year ago, and the charge-off rate fell to 53 basis points.

The increase in 90-day delinquencies from the third quarter is trending better than our expectations as early stage delinquencies remained flat.

As borrowers continue to transition out of forbearance, we expect that the charge-off rate will rise from these historic lows and will settle between 1.5% and 2% for the year.

We feel confident that we are adequately reserved given the well-seasoned and high credit quality of our portfolio.

Provision of $2 million in the quarter primarily relates to the provision for newly originated education loans in the core of $1.1 billion, offset by realized charge-offs that were lower-than-expected in the quarter.

The average FICO score associated with newly originated loans in the quarter was 771. And we expect to originate at least $5.5 billion of high-quality private education refi loans in 2021.

The net interest margin of 302 basis points was in line with expectations as the decline from the third quarter was largely driven by a higher interest reserve related to the increase in late-stage delinquencies.

Our full year 2021 net interest margin guidance of 270 to 280 basis points assumes a greater mix of our private refi product compared to our legacy book, along with an expected increase in loan modifications for borrowers exiting forbearance. In addition, operating expenses declined by 8% from the year ago quarter, while our average balances declined 1%.

Let's continue to Slide 8 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 and infrastructure in order to respond rapidly to support states and providing unemployment benefits and contact tracing services.

These new opportunities contributed to a 58% increase in total revenue from the year ago quarter and an 18% increase for the full year in spite of the impact of COVID-19, which resulted in lower volume and processing activity on our existing business during the year.

The strong results in this segment were achieved while delivering EBITDA margins of 23% for the quarter and 19% for the full year.

The $25 million increase in expenses in the quarter associated with the growth in revenue in this segment contributed to increased total operating expenses for the company of $5 million from the year ago quarter.

As our growth businesses become a larger portion of our overall revenue and expenses, we expect our total efficiency ratio to increase. Our outlook for the 2021 efficiency ratio of approximately 52% for the company includes this change in mix.

Let's turn to Slide 9, which highlights our financing activity. During the year, we reduced our share count by 14% through the repurchase of 30.6 million shares. At today's share price, our planned repurchases of $400 million would reduce our outstanding share count by nearly 20%. In addition, we returned $123 million to shareholders in the form of dividends.

During the fourth quarter, we issued $1.6 billion of term private education refi ABS and $777 million of FFELP ABS.

Year-to-date, we issued $7.9 billion of term-funded ABS. On January 19, we priced our first private education refi securitization of the year. The investor book was oversubscribed by more than 16x.

This allowed us to take in pricing that was over 50 basis points inside of our last transaction. We continue to explore ways to lower our overall cost of funds through alternative sources of funding as we see increased demand for our attractive well-seasoned and high-quality assets.

At quarter end, we had additional capacity in our funding facilities of $2.2 billion for private education loans and $506 million for FFELP loans to go along with $1.7 billion of primary liquidity, of which $1.2 billion is cash. As a result, we ended the quarter in a solid liquidity position.

In the quarter, we retired $1.1 billion of unsecured debt, including the $579 million of debt that was originally set to mature in March of 2021. We ended the quarter with an adjusted tangible equity ratio of 5%, which was in line with our updated forecast.

The cumulative negative mark-to-market losses related to derivative accounting declined by 6% to $616 million in the quarter due to the passage of time and in line with expectations. Excluding these temporary mark-to-market losses, which will reverse to 0 as contracts mature, our adjusted tangible equity ratio is 7.1%.

Let's turn to GAAP results on Slide 10. We recorded fourth quarter GAAP net income of $186 million or $0.99 per share compared with net income of $171 million or $0.78 per share in the fourth quarter of 2019.

For the full year, we recorded GAAP net income of $412 million or $2.12 per share compared with net income of $597 million or $2.56 per share in 2019.

In summary, while we experienced many challenges associated with the impact of COVID-19, our team quickly responded by providing innovative solutions for our customers and clients.

As a result of their innovation, agility and perseverance throughout the year, we exceeded our targeted financial metrics, strengthened our capital position, all while returning $523 million to shareholders through dividends and share repurchases. I'm looking forward to 2021 and building on this momentum.

I'll now open the call for questions.

(Operator Instructions)

Your first question comes from the line of Sanjay Sakhrani of KBW.

Good results. I guess first question is sort of the EPS targets you guys are thinking about this year and their sustainability. I know the Business Processing segment's benefiting from some of the contact tracing programs and such.

So can you just talk about the sustainability of that EPS and sort of maybe parsing out that benefit in the BPS segment?

Sure. So Sanjay, this is Jack, and thanks for your comment and question. On the fee income side of the equation, we are continuing to see lower transaction volume in some of our -- in both the transportation and health care areas.

They have not yet fully recovered. And our forecast for 2021 does not assume they recover fully until very late in the year.

So as you move beyond 2021, we would expect that a combination of the wind down of the COVID-related projects and the ramp-up of our traditional activities would start to offset one another.

We're also working hard with our clients in the state and municipal side of the equation, and I think this -- the work we have done for them on some unemployment insurance and the contact tracing and more recently, some of the vaccine management activities are demonstrating what our capabilities are and the -- both the sophistication of the technology platforms we're able to bring, the analytics and insight that we can add to the equations.

And we're working with them to see where those types of skills can be used in a more long-term, more permanent opportunities.

Okay. Great. And then the $20 million of regulatory-related expenses, could you just drill down on sort of what those were? And maybe give us an update on where we are with the CFPB lawsuit, too?

Sure. So these regulatory expenses come from both the legal defense-related activities as well as some reserves we have for some of the open items with the -- on the Federal Student Loan program side.

On the cases, both the state attorney generals and the CFPB cases, they continue their frustratingly slow process through the legal system.

We're obviously very active or very interested in getting these cases to -- particularly on the CFPB side, getting it to trial and having the opportunity to defend ourselves in that -- to that legal process. It is just unfortunately slow slog.

I do think also the transition here of change in administrations and both at the state and the federal level is slowing that down a little bit.

But there are no new developments or new issues associated with those cases at this point. And as we've said before and through the legal documents, there's -- despite tons of time and access to documents and information to do their discovery in the CPB (sic) [CPFB] case, they have yet to find a borrower that supports their claims.

Your next question comes from the line of Bill Ryan with Compass Point.

A couple of questions. First question on Slide 13, just looking at the cash flows, it looks like the cash flows off the portfolio are expected to -- they were down about $600 million quarter-over-quarter, but also your unsecured debt was down $1.2 billion.

So you had a net positive of about $600 million in that number and the runoff analysis. Could you talk about the dynamics of that?

I mean was that related to better cash flows that you're seeing or just a redeployment of excess liquidity?

And then second question, any -- this is probably going to be an ongoing question, but it's any update on the Department of Education's servicing contract?

Is this something that you think we could end up being talking about for another 3 or 4 years? I'm just curious as to what your thought process is on that?

Sure. So I'll take the first part of that. On the cash flows, as we updated our cash flow assumptions, there weren't any material changes to the assumptions as you look at the 5-year forecast and obviously we'll provide a greater outlook in terms of the overall 20 years. So no real changes in terms of CPR assumption there.

I think where the benefit is, the $600 million came in a little higher than what our short-term expectations were as we continue to benefit from this favorable interest rate environment.

And as we think about the greatest sort of expenses here in the company, it's really the interest expense.

So utilizing those excess cash flows to reduce our maturities over the next several years and smooth them out to better match the cash flow forecast that we have is certainly a primary objective in reducing the overall interest expense.

So we saw an opportunity here to reduce the total debt outstanding: one, through just natural maturities; but also by retiring some of our debt that was coming due in March early here.

So in terms of our capital expectations for next year, we talk about $400 million being returned in the form of share repurchases, and we'll look to lower our overall unsecured debt footprint as well.

And as Joe described here, I mean, and I think as you're pointing out, if you look at what our forecast net of unsecured debt outstanding was at the end of 2019 to where it is at the end of 2020, plus the cash that we collected, our balances are up $1.4 billion higher than what you would have expected. And that is the combination of lowering our interest expense by being more creative and innovative in our funding strategies, the favorable interest rate environment, and of course, the addition of new loans that we are originating in our both refi and in-school business segments.

On the Department of Ed Loan servicing, this has been obviously a long -- also a long-drawn-out process.

Most recently, the department pulled back its latest RFP for the servicing contract and announced that it is going to look to extend the existing contracts with the existing service providers for another 2 years as it tries to figure out what's the right direction to take for the long term.

We haven't seen that proposal yet. We're waiting for it. I think one of the things we've been able to demonstrate over the last year is more insight and systems capabilities to be able to respond to some of the changes that came in very, very rapidly in terms of bringing interest rates to 0, bringing payments on -- putting payments on pause for long periods. And that's something that has been, I think, appreciated and noticed.

We've also participated trying to provide insight as to how different programs or aspects of the whole student loan program could better serve borrowers, both in -- during the pandemic as well as beyond post-COVID time frames.

Your next question comes from the line of Rick Shane with JPMorgan.

You provide good guidance and detailed guidance across the board. Within the Consumer Lending segment, can you give us a little bit more idea of what the strategy will be for on-campus lending this year?

It's obviously been a slower ramp. Can you talk about disbursements as we move into second semester?

But more importantly, sort of what the strategy will be, given the strength of the refi programs that you guys have affected?

Sure. So we see that the 2 programs as being complementary to one another. And the work we're doing on the in-school side of the equation is really focused on first-time borrowers.

And so as a result of that, you expect the ramp to be much slower at the beginning because you're not making any second loans or serial loans to borrowers as they come back-to-school.

This academic year, obviously, was very unusual we saw just an enormous level of disruption in terms of students going back to who was going back-to-school, who was doing virtual learning just enrollment levels in general were down.

And then you also saw very significant increases, I think, in financial aid packages from schools to families, and all of that combined to reduce borrowing levels.

We would expect as we get back to a more normal academic environment of on-campus learning that you would start to see demand returning in that side of the equation.

Our focus, in addition to first-time borrowers, our focus in the in-school arena is also on a much more -- a narrow segment of the total college-going population. We're focused on students attending higher quality 4-year educational institutions and really looking at the value proposition of what that tuition really is relative to job prospects and ultimately, earnings.

Very similar to what we do in the refi side of the equation, which is very much focused on a very high quality borrower and the financial benefits associated with that investment in one's education.

Great. Jack, and if I can pivot that question a little bit towards Joe. Joe, can you talk about the loss component you would expect between the 2 private student loans, the refi and the on-campus? And how you look at them from a CECL perspective?

Sure, Rick. So on the refi product, the way we think about the loss component and provisioning you would estimate over the life of the loan that, that would be somewhere, probably a little south of 1.25% in terms of our life of loss expectation on the refi.

Obviously, we're seeing something much lower than that today. And we have, historically, if you look at our Trust data, you're talking about numbers that are half of that at this point. So very encouraged by the signs that we're seeing so far early on in that product.

In terms of the in-school component, obviously, it's a little bit of a different dynamic because the greatest indicator of whether or not that borrower will repay the loan is whether they graduate.

So to Jack's point, in terms of what we're targeting, it's traditional 4-year institutions. So when we think of life of loan loss expectations, historically, you're somewhere around 6% for those types of schools. Obviously, we're not targeting at this stage any for-profit schools or other schools that may have led to higher default rate expectations in the past.

Got it. And I'm assuming, given the guidance that the mix is going to remain highly, highly skewed to refi, given the CECL impacts and how we would think about that for your outlook?

That's right. So for your modeling purposes, I think a good way to think about it is for every $1 billion or so of originations, you're talking about somewhere around $12 million of provision expenses associated with that.

Your next question comes from the line of Arren Cyganovich of Citi.

On credit quality, maybe you could just talk a little bit about your consumer lending estimate for net charge-offs and how that relates to your current reserve?

And whether or not that level of charge-offs is still supported by that reserve level, so essentially, as you just mentioned that the new originations will essentially be the main driver of future provisioning?

So we look at, obviously, the trends and the performance of our borrowers. And the vast majority of our borrower base is still what we would call older legacy loans, right? So not just the new refi or the new or in-school volume.

What we are seeing, and as Joe mentioned in his comments, we're seeing that as borrowers have been exiting the disaster forb that we -- forbearances that we provided early on in this pandemic that as jobs held, income levels held, these borrowers have been able to return to repayment and the delinquency statistics that we're seeing are better than what we were seeing pre-COVID.

I think there's a lot behind that. I mean, obviously, I think the pandemic and keeping people home has left some folks with more disposable income. It's also impacted other folks much more severely.

And for those, we are providing -- continuing to provide payment relief through continuation of disaster forbearances, who are interest rate reductions in order for them to be able to continue to make progress in paying down their loans.

What we -- what our reserve levels are still assume and are forecasting a fair amount of risk in the economy. As I said, the economy still remains very fragile.

And I think as a result of that, we're being conservative in terms of potential delinquencies and defaults that might result of that.

Our view is that our reserve levels as they stand today, are capable of absorbing significantly higher credit losses.

Reflecting that potential outlook. But we're seeing good signs right now, and that's something we'll continue to monitor as we move through 2021.

Okay. And then on the share repurchases, is the intent to have it more ratably than throughout the year? Or would you expect to do an accelerated share repurchase earlier in the year?

I think for your purposes, just to assume it's going to be ratably over the year. But certainly, if there's opportunities, we'll look to take advantage of that, but for modeling evenly across each quarter.

Your next question comes from the line of Vincent Caintic of Stephens.

I wanted to talk about this potential student debt relief, that the $10,000 that's been talked about by the Biden administration.

And what that would mean for Navient? It seems like it's more likely to happen now, but wanted to get your thoughts there.

And then specifically on it, if I wanted to get your math on how much net cash would come to Navient, if you were to get those accelerated payments and after you retire the related leverage?

So I think at this stage in the game, that the answers to that question are a little difficult, in part because there have been no real specifics other than the talk of a potential $10,000 loan forgiveness.

There are no specifics, for example, as to who would get it, which loans would be prioritized or even when that would happen. Obviously, if we were to -- if it were to be broad-based, if there was a broad-based loan forgiveness program where every borrower for loans that we own or service is -- has a $10,000 loan forgiveness, it would have an impact on earnings.

But I think as you point out, a meaningful impact on earnings. But as you point out, it would also have a positive meaningful impact on cash flow as loans are paid and cash is received from those payments, but also released from the trust, the various trusts that we have.

And our rough estimates of that would be is a very significant number that could be in the range of -- in the high hundreds to just under $1 billion net.

Okay. Very helpful. Next, just a quick follow-up on the FFELP NIM. And so it's nice to see the high -- mid- high 90s guide range. I was just kind of wondering if you could talk about how that looks exiting 2021 in terms of run rate?

Just because I know there were some benefits in 2020, you had the nice low interest rates and maybe some of that resets this year. So if you could just talk about how 2021 exits in terms of FFELP NIM?

Sure. So there's some dynamics that occur in the first quarter where typically your NIM is lower than where you are for the second and third quarter in terms of just the day count and how the four's are actually paid here.

So when you think about where we're going to exit the fourth quarter at this stage, if the interest rate environment remains stable and favorable as we're expecting, we would anticipate being higher in the fourth quarter than we would in the first quarter, but ultimately, within that band.

So I think to give you color on that, I would say, first quarter should be our lowest quarter in that range, all else equal.

Our next question comes from the line of Mark DeVries of Barclays.

Can you just remind us what kind of macro assumptions are embedded in your reserves? And also just how your current forecast of credit trends are comparing to those assumptions?

Sure. So we're certainly performing much more favorably to what our assumptions had predicted in both the second and the third quarter.

As Jack referenced, we're somewhat conservative here as there's a lot of still unknown's early on in this year. So we use, like many other financial institutions, the Moody's model and from that standpoint, we feel very adequately reserved in terms of our assumptions based off of the current economic environment as well as our ability to absorb any significant losses that could potentially occur here over the next couple of quarters.

Okay. That's helpful. And then any ability to kind of quantify for us if credit continues to trend as it has been, how much reserve could ultimately come back?

Yes. I think it's too early to make that kind of assertion. Certainly, we feel very comfortable of where we are.

And as I continue to stress, it is early, but the trends are positive, and we've seen that now for a few months.

So continuing to see that trend would obviously have us take a look at that allowance. But at this stage, it's just -- it's early, given a lot of uncertainty here early in the year.

Okay. And then what do you need to see from a macro perspective or within your own portfolio to get a little bit more comfortable with that and think about releasing some of your reserves?

Well, I think you need to see more consistency in terms of forecast of the economic outlook. Right now, there -- as Joe said, there's a lot of variability here and a lot of, well, if this happens, that could have any type of commentary.

So I think that's really the big question. And probably on everyone's mind is at what point do we start to return to an economic activity in this country that is more normal, right?

And until we have more visibility on that and both in terms of its size and timing, I think it's prudent for us to be cautious in terms of our reserve outlook.

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

I'm looking at a table, I'd just like you to comment on it. The S&P 500 is 23x earnings, you're 3.6x earnings; the S&P is 4x book value, you're about 87% of book value; the S&P yield is 1.55%, your yield 5.4%; the S&P is earning 23% on equity, and you're earning in the high 20s, call it, 26% return on equity.

Where do you think the market is thinking about you? And can you be more aggressive in capitalizing what seems to be a mispricing of our equity? I mean I assume you would think your book value is real, so you have the chance to buy it back the discount to book, which accretes the remaining shares.

And I think you started your whole buyback a number of years ago when the stock was close to [30 million].

So why are we not more aggressive? I understand the environment, but it seems to me if they forgive student debt, you're going to have a lot more cash to deal with.

Right. So I agree with your comparisons, obviously, Lee. It has been frustrating. And as I mentioned in my opening remarks, we've got a 3-year track record here of delivering compound -- strong compound annual growth for A business that many, I think, look at as something that was going to be amortizing and declining.

We've been able to offset the declines in the legacy portfolio through new loan originations and some additional fee income.

I think when we started this year and our terms of our ability to return capital more aggressively, we had to adjust our outlook here for the implications on capital as a result of CECL, which, although I would argue is nothing more than a geography line item.

It did -- the rating agencies, I think look at that as being more of an increased capital requirement for financial institutions.

So we've been restoring that and building it. We're close to where we want to be. And as a result, you'll see us, I think, proportionately, continue to be aggressive in terms of our share repurchases.

So even though our capital base is lower, we're expecting to return a similar amount of capital in 2021 as we did in 2020.

And our goal here is, of course, is to demonstrate what we are able to do. The consistency of our earnings and cash flows in all the economic environments and get folks to focus on that part of the story versus perhaps what this -- what a new administration might do in the student loan space.

Well, I guess in my dollar, I would either raise the dividend or accelerate the repurchase, one of the two, but you do a fine job and I guess just go along, whatever you think.

Right. Thank you, Lee.

Your next question comes from the line of Lance Jessurun of Jeffries.

I'm on for John Hecht. Super quick question for you guys. Sorry to keep going on the share repurchases.

But as we think about the addressable tangible equity ratios and how they affect the share repurchases, are there any limitations there essentially for you guys? And how should we think about that?

Sure. So the $400 million takes into account getting back to that 5.5% adjusted tangible equity ratio. We monitor certainly the rating agencies and where they are and what they're comfortable with.

So to the extent we outperform from an earnings perspective or there's opportunities that we can address both that and accelerate share buybacks and be above that threshold. We would look to take advantage of that.

So I would say that the 5.5% and the $400 million get us comfortably within where we need to be for our current ratings outlook and any excess that could be derived during the year as an opportunity to either buy back additional shares, but we will also have a focus on reducing unsecured debt.

Sounds good. And then one more quick one on expenses. So is a 50% efficiency ratio a bit more kind of the going assumption for '21 and '22?

And what's a little bit baked into that compared to -- it was a little closer to the 47% during 2020 outside of the last quarter?

So our current guidance of the 52% for next year really takes into account the shifting mix of our growth businesses.

So that would be both the consumer lending and the business processing solutions here. So from that standpoint, obviously, the federal education loan segment continues to represent less of a portion or less of a percentage of our overall revenue expense mix.

So as that comes down and our growth businesses grow, you're going to see a little bit of pressure in terms of the efficiency ratio because the attractive margins that we're earning on the BPS, obviously, it's a capital-light business, in the mid-teens, just that general mix shift is going to increase your efficiency ratio.

(Operator Instructions) Your next question comes from the line of Mark Hammond of Bank of America.

I had 2 questions. So the first is on the adjustable tangible equity ratio target. And just seeing how you arrived at that 5.5%? And whether or not that longer-term -- or if it's a longer-term 6% target that you came out with originally in 2020, if that still stands longer term?

And so, obviously, when we came out with that above 6% guidance, that was not contemplating the impact of CECL and the very quick change -- or the rapid change that we saw in terms of the interest rates and the derivative mark that came along with that. So as we think about our longer-term focus, we are focused on maintaining the rating agency metrics. And that 5.5% growing to 6% puts us in that range.

In terms of, if you look at the RAC ratio for S&P, that would be 7% that they're using. And then sort of a similar levels for Moody's and Fitch. So as we grow here over the next year and beyond, we feel comfortable above 5.5%. And ultimately, as those derivative marks come back, that should get us above that 6% level.

Okay. So it's more of a longer term, I mean, beyond 2020 on or if it still stands, really. It's just sitting a little bit longer through the environment.

Right. So if you exclude the derivative marks today, you're above 7%.

Right. And then my second question is just a follow-up on an earlier question, I think it was Vince who asked it about debt forgiveness.

So debt, high hundreds or under $1 billion figure that Jack gave, is that net of secured debt paydown and allocated unsecured debt paydown or just secured debt paydown?

It's net of the secured debt paydowns. But on the FFELP side of the equation, it's -- virtually all the loans are funded with secured debt at this point.

Your next question comes from the line of Henry Coffey of Wedbush.

And let me add my congratulations on what's been an amazing year for Navient. Two items, both completely unrelated.

SoFi is merging with the SPAC at a valuation level that 1 would call modestly frothy, 40x plus earnings. And is there anything that they're doing in their student loan refinance business and in terms of harvesting that valuation opportunity, I mean, that value prop in terms of bringing in new products that you need to be looking at that would help accelerate the growth.

I mean, I know they offer a whole suite of products, maybe that's something you should be considering? Or are you sort of satisfied with the way the business is running?

So I do think there -- our customer relationships on the refi side, in particular, are super strong. We have Net Promoter scores from that customer base that generally run in the low 70s, and that -- which is very, very high for financial service products. And we do think that at some point, it might make sense for us to partner with others to exploit the potential to sell other products to those customers.

I think in SoFi's case, the other piece of -- I mean, they made a big deal in their presentation about cross selling, but they also have a big technology platform. That seems to be a part of their valuation story.

But I made the case for the fact that our fundamentals here justify and support a much higher stock price, but I wasn't arguing for a SoFi multiple.

I thought you were, no. The -- no, I mean, it's worth noting, and you are right, they have some other the tech products are a very small part of the overall earnings and revenue contribution, though they do add a little bit to the fraud.

An unrelated matter the derivative accounting impact on equity, how quickly does that get recaptured? Or how quickly can that $616 million get recaptured into earnings?

So the speed is going to be somewhat a function of the interest rate environment. So if the interest rate environment remains, as it's forecasted today, that should be somewhat ratable over the next 3 years.

If we have an increase in rates, the way the derivative marks would work is that would actually come back faster to us.

But just the passage of time is going to cause that to happen. And in fact, the majority of the increase in the ratio this quarter from September was just because of the passage of time.

Your next question comes from the line of Moshe Orenbuch of Crédit Suisse.

Great. And most of my questions have been asked and answered, but congrats on the buyback. I think that's a good step. On the private margin, can you just talk a little more about how much of an impact to expect in '21 and then beyond from the whole modification and loans coming of forbearance?

And is there an opportunity,

and in the past, you've harvested some cash from the structures in that portfolio. Are there other opportunities to do that as we go forward?

Yes. So 2 questions there. On the private loan net interest margin, there's more variability, sometimes on a seasonal basis, but really driven by the changing mix of the portfolio.

So as our refi loans become a higher proportion of our total private loan balance, obviously, the net interest margin is impacted by that.

And I think we're upwards of -- that ratio has moved from about 26% of the average loans a year ago -- in the year ago quarter to 36%, almost 37% this quarter.

One of the other factors that is impacting the net interest margin in that portfolio is CECL. And when loans become 90 days past due, we are taking into the net interest margin, the -- effectively, the reserve on that interest, putting those loans on nonaccrual effectively in the interest component.

So as the loan delinquency rates were coming down in 2020, that was a positive. And as they are starting to move back up particularly in the fourth quarter, that becomes more of a drag.

And that was more than half of the driver between the impact in the net interest margin this quarter, for example.

In terms of funding, I think one of the things that we have been very focused on, and as Joe mentioned in his comments, interest expense is our largest expense, significantly larger than operating expense.

And over the last several years, we've made a very strong effort to take advantage of kind of innovative financing strategies to lower that expense.

And as you point out, we've been able to, you call it harvest, we've been able to borrow against the excess collateral that has been building up in our securitization trust, particularly our private loan trust at rates that are 300, 400 basis points lower than what our traditional funding source would have been, which was unsecured debt.

We continue to take advantage of those opportunities. We continue to broaden our investor base. In our ABS securities, the deal we did just a couple of weeks ago was 50 basis points inside the deal we did in the fourth quarter.

So very strong performance. And obviously, all of that serves to reduce our overall interest expense, and we'll continue that effort overall.

The second question that I had has to do with the in-school market and unfortunately, accounting, you've seen a number of players, including Wells Fargo and others leaving or selling, I mean, even selling me is selling a significant percentage of its production on an annual basis because of the costs related to CECL.

I guess given how critical the whole capital return function is, I mean, how do you think about that business and your capital plans as you go forward?

So we obviously are -- view the business attractively since we're working to get into the business.

I think your point, I think there's a lot of different strategies that can be executed as to how one finances those loans long term, either through direct ownership or through whole loan sales or some other funding vehicles that address the capital tax that CECL places on long duration assets like this.

And those would certainly be part of our approach and overall balance sheet management going forward.

And at this time, there are no further questions. I would like to hand the call back to Mr. Rutledge for any closing remarks.

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

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