Navient Corporation (NASDAQ:NAVI) Q4 2022 Earnings Call Transcript

Navient Corporation (NASDAQ:NAVI) Q4 2022 Earnings Call Transcript January 25, 2023

Operator: Ladies and gentlemen, thank you for standing by. Welcome to the Navient Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference may be recorded. I would now like to hand the conference over to your speaker host for today, Jennifer Earyes, Head of Investor Relations. Please go ahead.

Jennifer Earyes: Hello, good morning, and welcome to Navient’s earnings call for the fourth quarter of 2022. With me today are Jack Remondi, Navient’s CEO; and Joe Fisher, Navient’s 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. So 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, adjustable tangible equity ratio and various other non-GAAP financial measures that are derived from core earnings. We will also refer to adjusted core earnings which are measurements derived from core earnings and adjusted to exclude one-time expenses related to regulatory and restructuring costs. Our GAAP results and description of our non-GAAP financial measures can be found in the fourth quarter 2022 supplement earnings disclosure, which is posted on the Investors page at navient.com. You will find more information about these measures beginning on Page 18 of Navient’s fourth quarter earnings release. There is also a full reconciliation of core earnings to GAAP results included in the disclosure.

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

Jack Remondi: Thank you, Jen. Good morning, everyone, and thank you for joining us today, and thank you for your interest in Navient. We completed 2022 with another quarter of strong financial performance. We delivered adjusted core earnings of $0.85 for the quarter and $3.43 for the year and a core return on equity of 17%. These results demonstrate our ability to deliver solid financial performance even in disruptive economic environments. The business environment ended 2022 very differently than it started. For example, inflation pressured operating expenses, rising rates and the CARES Act extensions virtually eliminated current demand for student loan refinancing and rule changes impacting the management of defaulted federal loans ended our portfolio management business earlier than anticipated.

A strength of our franchise is our ability to adjust to both expected and unexpected events to deliver for our customers and investors. For example, in-school originations grew 52% this year, with our growth outlook increasing. We are leveraging our client relationships to win new business processing contracts. We successfully reduced operating expense in a high inflationary environment, and our hedging strategies and efficient funding programs mitigated the impact of rising rates to our net interest margins. Your management team is focused on delivering exceptional results by executing our strategy, delivering on our growth potential, maximizing our loan portfolio cash flows, continuously improving our operating efficiency and prudent and consistent capital management.

In Consumer Lending, we are focused on growing originations of high-quality loans with attractive risk-adjusted returns. In 2022, rising rates and zero interest federal loans reduced our opportunities in refi to $1.7 billion in new originations. We rapidly adapted to these conditions to slash marketing spend and focus on our in-school products. Here, we grew new loan volume by 52% over last year to $321 million, an estimated 10x market growth. We also continued to build relationships with students planning to go to college, adding over 700,000 new students to our Going Merry platform. Here, we help students and families complete the FAFSA, compare financial aid award packages from schools and apply for scholarships. We see these products as important ways of helping students and families throughout their going to and paying-for-college journey.

In our Business Processing Solutions segment, we grew non-pandemic-related revenue by $25 million or 11%. It’s also worth noting that our pandemic-related contracts extended longer than the original award, and we have been able to leverage this to win several new contracts in 2022, both strong statements on the value we provided to our clients. Our large and profitable portfolio of student loans is a key contributor to earnings. Our goal has and continues to be to maximize the performance of this portfolio. This includes helping borrowers navigate repayment options and avoid default and innovative funding and hedging strategies to maximize net interest income. Our funding and hedging strategies helped deliver a stable net interest margin, despite the rapid rise in rates this year.

Since our founding in 2014, we have clearly excelled at maximizing the value of our portfolio, and we will continue to do so. We are also continuously improving our operating efficiency. In 2022, operating expense declined by 21% or $205 million. We delivered improved efficiency in our operating segments, and we continue to take action that reduced our risk profile. In the final area, we seek to be excellent stewards of your capital. Our goals are to be efficient and prudent while delivering attractive returns. Here, our priorities remain unchanged, invest capital and attractive and relevant growth opportunities, support our dividend and return excess capital to you via share repurchases. This consistent and transparent approach supports our business growth, our debt investors, our corporate ratings and enabled the return of $491 million via dividends and share repurchases last year.

Our financial and business success last year positions us for another year of strong performance. For 2023, we are focused on the same four objectives: profitably growing our loan origination and BPS revenue; maximizing the performance of our loan portfolios; improving operating efficiency; and prudent and consistent capital management. In Consumer Lending, we expect to double in-school loan originations, building on the progress we made in 2022. We expect that demand for refi loans will continue to be suppressed, but we are prepared to move quickly when market conditions change. We will also continue to grow and build long-term relationships with students and families as we support their going to college journey. In BPS, we are well positioned to deliver 10% growth in revenue from our traditional clients.

With this growth, we also expect to earn a high-teen EBITDA margin, and new contract wins in late 2022 and expansions of existing contracts have created a clear path to these goals. As a result of our ongoing focus on operating efficiency, we will reduce operating expense by an additional 10% in 2023. And in capital management, our plan is to complete approximately $310 million in share repurchases. Our results this quarter capped a strong year for Navient. They reflect our commitment and ability to generate high-quality, high-value products and services and deliver solid financial results even in volatile and changing markets. They also reflect our ongoing commitment to simplify our business model and reduce our risk profile. More importantly, our efforts have built a solid foundation from which to create and deliver value.

Our guidance for 2023 reflects our confidence in our ongoing ability to grow new business, maximize portfolio performance, deliver better margins through operating efficiency and deliver attractive returns on capital. I want to thank my colleagues for their efforts and commitment to success. And together, we look forward to delivering another great year of results in 2023. Joe will now provide a more detailed review of our results. Thank you for your time, and I look forward to your questions later in the call. Joe?

Joe Fisher: 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 2022 and provide our outlook for 2023. I’ll be referencing the earnings call presentation, which can be found on the company’s website in the Investors section. In 2022, we successfully met or exceeded our original full-year guidance targets. Key highlights from the quarter and year, beginning on Slide 3, includes fourth quarter adjusted core EPS of $0.85 and full-year EPS of $3.43. We achieved an ROE of 17% and an overall efficiency ratio of 52% for the year in the face of a challenging inflationary environment. FFELP NIM of 94 basis points and full-year NIM of 101 basis points, private NIM of 287 basis points and full-year NIM of 281 basis points.

Grew in-school originations by 52% to $322 million for the full-year and achieved total originations of $2 billion. Reported BPS revenues of $70 million in the quarter and $330 million for the year while achieving full-year EBITDA margins of 16%, increased our adjusted tangible equity ratio to 7.7% while returning $491 million to shareholders through dividends and repurchases. I’ll provide additional detail on the quarter and our 2023 full-year outlook by segment, beginning with Federal Education Loans on Slide 5. In the Federal Education Loan segment, we achieved a net interest margin of 101 basis points for the full-year, exceeding our original mid-90s guidance in a volatile interest rate environment. The quarter’s results continue to be impacted by an incremental level of consolidation activity from previously announced loan forgiveness proposals.

The incremental prepayments that were processed during the fourth quarter represented 3% of our portfolio. This activity reduced FFELP net interest margin by 11 basis points to 94 basis points. There has since been a significant decline in consolidation request to historical levels. Our expectation for full-year 2023 FFELP NIM of 100 basis points to 110 basis points assumes that prepayment speeds remain at historical levels in 2023. FFELP delinquency rates decreased to 15.6% from 18.6% in the third quarter, and charge-offs declined by $1 million, resulting in a net charge-off rate of 13 basis points in the quarter. We anticipate a net charge-off rate between 10 basis points and 20 basis points for the full-year 2023. Let’s turn to our Consumer Lending segment on Slide 6.

Net interest income in the quarter was $147 million and resulted in a net interest margin of 287 basis points, an improvement of 11 basis points compared to the prior year. We are seeing a slowdown in prepayment speeds in the overall portfolio as borrowers with fixed interest rates have less of an incentive to refinance in the current environment, which is benefiting net interest income. We anticipate our full-year net interest margin for 2023 to be between 280 basis points and 290 basis points. Our credit trends continue to perform as expected as net charge-offs ended on the low end of our original guidance of 1.5% to 2% with 156 basis points for the quarter and 159 basis points for the full-year of 2022. The $17 million of provisions in the quarter included $3 million related to new originations.

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 and anticipate net charge-offs to remain in the 1.5% to 2% range for 2023. In the quarter, we originated $169 million of private education loans. This was comprised of $35 million of new in-school volume, representing a 52% increase compared to the prior year. The expected decline in refinance loan origination volume to $134 million was primarily driven by the higher rate environment and delay in Department of Education loans entering repayment. We expect that the higher rate environment continues throughout 2023, and the extension of the CARES Act will result in lower quarterly originations for our refi product.

Let’s continue to Slide 7 to review our Business Processing segment. Revenue from our traditional BPS services increased 27% from the year ago quarter, partially offsetting the expected wind down of revenue from pandemic-related services. Fourth quarter revenues totaled $70 million and earned an 11% EBITDA margin. The 11% margin was below our targeted levels due to wind down costs associated with pandemic-related services in the quarter. We anticipate the benefit of recent efficiency initiatives to increase the margin in this segment as we progress throughout the year. We expect to see continued fee revenue growth of 10% in our traditional services in 2023 with full-year EBITDA margins in the high teens. Turning to our financing and capital allocation activity that is highlighted on Slide 8.

During the year, we reduced our share count by 15% due to repurchase of 24.8 million shares. In total, we returned $491 million to shareholders through share repurchases and dividends while increasing our adjusted tangible equity ratio to 7.7% from 5.9% a year ago. Our 2023 guidance includes the repurchase of $310 million of shares while building our adjusted tangible equity ratio to a range of 8% to 9%. Turning to GAAP results on Slide 9. We recorded fourth quarter GAAP net income of $105 million or $0.78 per share compared with a net loss of $11 million or a loss of $0.07 per share in 2021 for the same period. In closing and turning to our outlook for 2023 on Slide 10, the success of 2022 and steps we have taken to simplify the business, improve efficiency while building capital positions us well for 2023.

As a result, we expect our 2023 adjusted core earnings per share to be $3.15 and $3.30, reflecting our continued efforts to improve efficiency. Our outlook excludes regulatory and restructuring costs, assumes no gains or losses from future loan sales or debt repurchases, reflects a continued rising interest rate environment and no meaningful impact from an expiration of the CARES Act in 2023. Thank you for your time, and I will now open the call for questions.

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Q&A Session

Operator: Thank you. And our first question coming from the line of with Jefferies. Your line is open.

Unidentified Analyst: Hi, there. I’m on for John Hecht and thanks for taking our questions. Our first one is just about funding markets. If you can provide a bit more detail on puts and takes for NIM over the next few quarters, that would be helpful.

Joe Fisher: So from a funding perspective, we feel we’re very well positioned. We have $1.3 billion due this coming year, of which $1 billion is actually being paid off today. So we have $1.5 billion sitting on our balance sheet at the end of the year. So we’re well cushioned for the remainder of 2023. And also we feel we’re well placed for entering into 2024. We certainly think that the securitization market overall is starting to move on. We’re starting to see benefits here over the last month. And for us, while we expect to do fewer securitizations compared to prior years, that’s primarily driven just by the growth of our refi business. So we do anticipate that there will be less originations on the refi side compared to prior year. But if that market potentially picks up, if you see a change in the interest rate environment or the expiration of CARES Act, I would anticipate that you would see further securitizations from us.

Unidentified Analyst: Okay. Great. Thank you. And the second question would be mix of business in the Business Services segment and what’s growing or shrinking? You mentioned COVID services slowing down. Could you provide more detail on mix otherwise?

Jack Remondi: Sure. So during the pandemic, we picked up a number of contracts with various states and municipalities to deliver €“ to help them deliver our COVID relief initiatives. Some of that would be things like unemployment insurance, contact tracing, vaccination, awareness, et cetera. Those naturally do run off, and that’s a good thing, right, that they’re running off because it means we €“ as a country, we don’t need them any longer. What is growing is our traditional services. So these would be things that we do for states, in municipalities, toll authorities and in healthcare institutions. We’re pretty excited about the growth opportunities in these areas. Some of them were certainly suppressed during the pandemic, and they’re starting to rebound.

But more importantly, and as I mentioned in my comments, we’ve been able to leverage the work we did for a number of entities during the pandemic and translate that into new more permanent contracts. This is what we do, handling communications for these entities, both inbound and outbound, and kind of omnichannel types of directions, processing forms, completing applications, things of that nature. So it’s really right within our wheelhouse of the years and years of experience we’ve developed in loan servicing. So this is €“ as we said, we expect to grow that revenue by 10% next year on the traditional side, so that excludes all the pandemic-related revenue we generated, and we are forecasting a high-teens EBITDA margin in that business.

Unidentified Analyst: Got it. Thanks very much.

Operator: And our next question coming from the line of Bill Ryan with Seaport. Your line is open.

William Ryan: Thanks and good morning. A couple of questions. First, to start off with, there’s been some proposed changes in IDR and debt forgiveness in the Federal Register. I wonder if you’ve taken a look at it and maybe give some initial thoughts about how it might impact your business. It seems like the administration is trying to do an in run around the debt forgiveness program. Thanks. That’s just the first question.

Jack Remondi: Sure. Thanks, Bill. So on the first €“ on broad-based loan forgiveness, this is in limbo right now, a number of states filed lawsuits against the proposed administration, and it is now scheduled for hearing at the Supreme Court sometime later this year. Briefs are just being filed kind of as we speak. So we’ll learn more about where that goes in the next couple of weeks and months. As you pointed out, the administration also announced broad changes to the income-based repayment programs that they offer to students in the federal €“ on the federal program side of the equation. These are proposed right now. They’re open for comments and questions. They are pretty significant in terms of their reach compared to what was in place before and what Congress had initially established as the guidelines for income-based repayment plans.

So we have to €“ we’ll wait and see here what those comments are and what kinds of challenges might arise. But to some extent, you’re looking at what’s the impact on the private loan originations business. I think in the area that probably is going to have the greatest impact would be on the graduate school side of the equation, graduate school demand and how that is financed. I think the bigger questions that we would have as a taxpayer might be how do these programs release pressure on schools to kind of control the cost of education just to make it more likely or not that college costs increase faster. Those are some of the policy issues that we’ll be watching.

William Ryan: Thanks. And just as a follow-up, it looks like you kind of bumped up your adjusted tangible equity ratio target from what it had been historically, and that’s reflected in the buyback. Is that in anticipation of growing the in-school loans, which have higher capital requirements? Or is there something other type that you might be looking at?

Joe Fisher: Yes. So that’s a good question. So in terms of the 8% to 9% guidance, that is purely a function of what we anticipate our book to look like over the next year and beyond. So as the refinance loan originations, as we anticipate shrinking for this year, we hold 5% capital against refinance loans and we hold closer to 10% for our in-school. So it really is benefiting the overall capital ratio that mix shift of growing the in-school volume, which brings us above our levels that we had guided last year of about 6% to that range of 8% to 9% for this coming year.

William Ryan: Thanks for taking my questions.

Operator: Thank you. And our next question coming from the line of Sanjay Sakhrani with KBW. Your line is open.

Sanjay Sakhrani: Thanks. Good morning. Jack, could you provide us an update around the loan forgiveness plan? I think it’s with the Supreme Court right now. Maybe also just to the extent that it’s an adverse ruling, how you intend to proceed going forward?

Jack Remondi: Sure. So as I mentioned, it is at the Supreme Court, briefs have been filed from the Department of Education. The states or the plaintiffs briefs are due this Friday. Hearings will be scheduled sometime I think in February when the Supreme Court will issue their opinion is somewhat unknown. But obviously, we expect it before they recess in the June, July time frame. Right now, the proposal from the administration is only for direct loans. So FFELP loans are not eligible and borrowers cannot become €“ FFELP borrowers cannot become eligible via loan consolidation. So it’s not clear how that would necessarily impact on perception versus reality. But as Joe mentioned in his comments, last year, we saw a significant increase in consolidation activity of borrowers as they were hoping to qualify for various forgiveness initiatives from the administration or announced by the administration, that stopped and returned to pre-pandemic levels in December and January so far.

So we expect more of that. However, I think the politics of this make it an area that we will continue to watch very closely and be able to manage our portfolio and react to changes that maybe announced €“ future changes that maybe announced by the administration down the road.

Sanjay Sakhrani: Okay. Great. And then maybe just a question on economy and how you see your customers behaving? I think you added a little bit to the reserve this quarter. I mean, what are you guys assuming inside your economic forecast? And are you seeing any potential weakness of any kind?

Jack Remondi: Yes. So we €“ earlier last year, we began to be concerned about changes in economic outlook and reflect a more conservative position in terms of rising rates and potentially a significant or a mild slowdown in the economy. We’re still positioned for that. We look at our reserve and really see it is the hedging strategies that we’ve been able to employ those have helped mitigate the rise in rates that took place in 2022. So our NIMs were relatively stable. Our reserve levels, we believe are adequate for the economic outlook that we see in front of us. You’re definitely seeing some rising delinquency and charge-off rates in both our FFELP and private loan portfolios. These are consistent with what we were €“ well, they’re actually better than what we expected.

During the COVID €“ during the pandemic, we offered a number of different payment relief options and as those ended, some borrowers that were previously on a path to default slowed down and didn’t. And now they’re kind of jumping or bundling together, and you’re seeing some rise in delinquency and default rates. We expect those to return to more normalized levels next year. So the outlook for delinquencies and defaults remains pretty consistent with what we saw last year. But it does take into consideration a belief that we will have an economic slowdown here.

Sanjay Sakhrani: Okay. Great. Is there a specific like unemployment rate assumption you guys are using?

Jack Remondi: We would not in terms of the generic default rate. So our portfolio, when we look at what drives delinquencies and defaults in our portfolio, it’s really a function of where the borrowers are in their life cycle. So students who are graduating from college or leaving college early, that’s where we have our greatest exposure and where unemployment rates tend to have the biggest impact on delinquencies and defaults. We have a relatively small exposure to that right now. For borrowers that have been in repayment for extended periods of time, have high levels of income, high levels of employability. These are generally people who graduated, earn their degree and have an established career. We see less sensitivity to changes in unemployment rates.

And that’s been consistent for years and years or decades in the student loan space. Unemployment rates for college graduates typically run about half the national average. So while you might see those numbers spiking in different areas, they tend to impact college graduates €“ they definitely impact college graduates less than they do the rest of the populations.

Sanjay Sakhrani: Okay. Great. Thank you so much.

Operator: Thank you. And our next question coming from the line of Mark DeVries with Barclays. Your line is open.

Mark DeVries: Yes. Thanks. Just wanted to clarify some of the comments around the FFELP NIM and the guidance. Joe, did you imply that there was about an 11 basis point drag in the quarter from elevated prepayment speeds? And if that normalizes, that gets you to about 105 basis points kind of the midpoint of your guidance range for 2023?

Joe Fisher: That is correct. So the incremental activity was above what we were anticipating as we entered into this in the third quarter. So absent that impact, we would have been at 105 basis points.

Mark DeVries: Okay. Got it. And can you give us any sense of how kind of rate sensitive your guidance is for both the FFELP and private student loan NIM? If you got a 100 basis point rate shock kind of up or down, what might that do to your expected NIM?

Joe Fisher: So from a FFELP perspective, keep in mind, it’s really the pace at which it increases. So the assets themselves are resetting daily and our liabilities typically lag. So they’re resetting either monthly or quarterly. So as you’ve seen over the last year, you get a benefit as rates continue to increase. So for the first half of the year, where the expectation is that those rates continue to increase, you would see a little bit of a pickup before that levels out. So that 100 basis points shock upwards would be a benefit to us. Any downward movement that we would see in terms of where we are, we would start to benefit from a floor income perspective. So we feel pretty confident just based off of where the forward rate curve is today within our guidance of that 100 basis points to 110 basis points.

And then we provide the ultimate shocks in our Qs and Ks. So you can take a look at that of what that impact is for the overall earnings. Similarly, on the private side, the impact there is, again, you have the lag of assets that are earning off of prime and funded through LIBOR. So you have the reverse where there is a drag from the rate environment increasing. And then again, as we anticipate that leveling out in this back half of the year, you would get a slight benefit there.

Mark DeVries: Okay. So just in terms of cadence over the course of the year, should we expect €“ for FFELP, it’s a little more front-end loaded and then for private, it’s a little bit more back-end loaded in terms of where the NIM averages out to?

Joe Fisher: Yes, I’d say just overall, it should be fairly consistent throughout the year within that bands, but that’s a decent way of thinking about it.

Mark DeVries: Okay. Great. Thank you.

Operator: Thank you. And our next question coming from the line of Moshe Orenbuch from Credit Suisse. Your line is now open.

Moshe Orenbuch: Great, thanks. Maybe just, Joe, a little further clarification kind of on the guide. You mentioned that on the FFELP, you expect kind of normal prepays. I mean it’s hard to know exactly what normal is given and especially since they’ve been elevated and elevated beyond your earlier expectations the last couple of quarters. And same sort of thing is like what’s the assumption in the guide for the consumer loan or private loan, given the level of originations now are kind of low?

Joe Fisher: So our overall prepay assumptions for the FFELP portfolio for loans, we tend to think about that as 8% CPR, for consolidation 5%. On the private portfolio, you see our assumptions are 15% for the refi and 10% for our legacy book. Obviously, if you go back a year on the refi side of the equation, it was much higher than that in a lower rate environment. So we are benefiting from the fact that, for our refi portfolio with less incentive to prepay, you are seeing a slowing of those CPRs. And similarly, on the FFELP side, to your point about the last two quarters, we’ve seen a dramatic drop off at the start of this year in terms of just overall consolidation requests. So we would anticipate that, that remains at these historical levels going forward.

Moshe Orenbuch: Okay. Yes. I mean, I guess, the real question is going to be how the borrower perception is with respect to the rule changes in response to the earlier question on IDR and other sorts of things. On the business services, I guess, the 10% growth, what base is that off? Could you just be a little more specific and maybe what actions you have to take to get the margins from where they are to the guidance level?

Joe Fisher: I mean that base is off of $247 million that we achieved for this year in terms of the non-pandemic-related revenues. And just to compare that to 2021, we had $222 million, I would say, more traditional services.

Moshe Orenbuch: Right.

Joe Fisher: I’m sorry, the second part of your question, just the actions that are taken, so this is just some investment in technology that we’ve taken on in the third quarter and fourth quarter in terms of new phone systems, the efficiency initiatives. And some of the restructuring that you saw in this quarter, we would expect to benefit us into 2023.

Moshe Orenbuch: Okay. Thanks, Joe.

Operator: Thank you. And our next question coming from the line of Richard Shane with JPMorgan. Your line is open.

Richard Shane: Thanks guys for taking my questions this morning. Look, you guys have done a really good job managing expenses. You’ve done a really good job of managing capital in the face of a shrinking balance sheet and revenue declines. When we look at the different business units, should we expect this year to by year-end see loan balances in the Consumer Lending segment up on a year-over-year basis? Should we see that inflection this year? Or what would need to happen for that to occur?

Joe Fisher: So yes, it’s from a private side. We would continue to expect a slight decline year-over-year. Just if you think about the CPR assumptions that I just provided in the last question, that book is running off on the legacy side, greater than 10%, on refi 15%. So our originations overall that Jack cited would not make up for the overall just decline in the book.

Richard Shane: Got it. And when we look at the contour of that runoff, as we moved into the beginning of 2022, you were starting to show growth there and then that obviously decelerated with the inflection in rates. Is the big variable there to ultimately sort of drive that growth going to be the opportunity on the consolidation side of what type of rate environment would you need to see that inflection?

Jack Remondi: Well, I think it’s a combination of both the refi opportunities in the in-school side of the equation. Refi obviously is €“ well, historically, has been a greater opportunity in terms of immediate impact because you’re addressing all loans outstanding, whereas in-school, you’re only addressing that students who are actually in-school and borrowing in the private loan segment. So it’s a bit of a smaller opportunity set year-over-year. The difference €“ the other big difference between the loans is the in-school portfolio has a much longer average life. And so a lower prepayment fee compared to refi, which has typically been about a three-year average life portfolio. We are getting closer to the inflection point.

No question about it on the private side of the equation, and it will be a function of what our overall originations are and to your point, how quickly the refi marketplace rebounds. Right now, with the rise in rates, we saw about an 80% decline in what we would say is the addressable market size, which means borrowers that have a coupon higher €“ an existing coupon on their student loans higher than what we would be offering today. Most of that’s in the federal space. In the private loan side of the equation, a significant portion of outstanding inventory is variable rate, and there is an opportunity for us to be able to offer a refinance product to those customers. We made some changes to our products to allow, for example, a cosigner on a refi loan, that would give us the opportunity to target undergraduate in-school borrowings that have a variable prime rate, for example, even in this high rate environment.

So we are working to address some of that and create additional opportunities for borrowers to save money through the refinancing activity. We like this product for what it is. We’ve always said that the two biggest risks in student lending are will the student graduate and will their income upon graduation support their debt levels and refi those risk factors are known are the answers to those questions are known, I should say. And so we continue to be highly focused on driving volume in that area when the opportunities exist.

Richard Shane: Okay. Got it. And if you would indulge one last question. I’m trying to see where the green shoots will be in terms of growth. And clearly, it’s going to be on the in-school consumer lending. Can you talk a little bit more about your go-to-market there? Is it traditional being on preferred lending list? Is it omnichannel? And when you think about the growth in 2023, is it a function of higher penetration for the existing institutions or adding new institutions? And I apologize for such a long question.

Jack Remondi: Sure. But this market is definitely the marketplace and how students and families secure financing for paying for college has been changing. So it has moved from almost universally through the financial aid office and a requirement to be on their preferred lender list. Two, some online activities, some referral activity, the in-school €“ the financial aid office continues to be an important channel. So our go-to-market strategy is really driven by those different segments. And we try to target our marketing activities and the outreach that we make, whether it be digital, mail or financial aid office with different approaches for those different market segments. One area that we see as a significant new opportunity for us is working with high school students and their families and the guidance offices of high schools through our Going Merry products by building relationships with those consumers, helping them complete the FAFSA, helping them compare their different award letters that they received from college on acceptance, helping them lower their need to borrow through scholarship opportunities is an opportunity for us to build those relationships.

And if and when they do need private student loans, be there for them with that additional product as well. So these are different ways we’re kind of targeting our opportunities in the in-school marketplace. And with the doubling of originations next year, we expect to continue to grow our market share in that space. We mentioned we grew 52% this year, which we think is 10x the market rate. So it’s a very high-growth opportunity for us, albeit just starting off a relatively small origination base.

Richard Shane: Great. Hey, thank you so much for the answers.

Operator: And our next question coming from the line of Giuliano Bologna from Compass Point. Your line is open.

Giuliano Anderes-Bologna: Good morning, and thanks for taking my question. One thing I was curious about was when we look at the FFELP NIM outlook, the 100 basis points to 110 basis points implies 105, and that’s roughly, call it, 10 basis points above the original outlook when you guys are going into 2022 €“ for 2022. And there was a discussion, I believe, in the last two quarters about how you guys were able to hedge out some of your floor income during the lows from a rate perspective and if that was having a benefit on a flow-through basis. I’m curious how we should think about that impact? And if there’s any kind of duration to those hedges that might roll off in a higher rate environment and how that could impact FFELP NIM as we move throughout 2023 and into 2024?

Joe Fisher: Sure. So two of the things here in terms of benefits. So one, we’re completely hedged for 2023 as it relates to the floor income. On the benefit that we’ve seen that I’ve been talking about the last several quarters, that has to do more so with the fact that we have increased our fixed rate funding in 2021 compared to what we have done historically. So that benefit will continue to offset the component of the unhedged floor income that has declined over the last, call it, four quarters here. So we’ve seen the benefits from that funding environment continued throughout this year. We expect that benefit to continue into 2023. As we enter into 2024 and we look at our interest rate assumptions, we’ll see if there’s opportunities there to swap the floating. But otherwise, we feel very confident based off of the current curves of achieving that 100 basis point to 110 basis point range.

Giuliano Anderes-Bologna: That’s great. Thank you. All right. I appreciate it and I’ll jump back in the queue.

Operator: Thank you. And our next question coming from the line of with Bank of America. Your line is now open.

Unidentified Analyst: Hey, good morning guys. Thanks for taking my questions. I know you mentioned that you’re paying off the $1 billion of notes due in January with cash today. I guess, you guys still have the $1.2 billion of unsecured maturities through the first half of 2024. Can you just talk about your appetite and kind of the attractiveness of refinancing that in the high-yield market currently seems to have opened up a little bit? And then can you remind us of how much capacity you have to refinance a portion of that in the ABS market?

Joe Fisher: Sure. So we have €“ as I said before, we have $1.5 billion of cash on hand. We provided our cash flow projections on the private portfolio and the FFELP portfolio in our earnings deck. So you can see the cash being generated there to meet upcoming maturities as well as we have $1.6 billion of unencumbered FFELP and private assets that we have the ability to tap into an additional $5.2 billion of over collateralization. So we have a number of funding mechanisms available to us to address maturities in 2023 and 2024 and beyond. Your comment about the unsecured markets starting to come back positively, that’s certainly something that we keep an eye on. And as we’ve done in the past and you can look at it more recently in 2021, we’ve been opportunistic.

So should there be an opportunity available to us in an attractive market, we may refinance that through unsecured debt. Otherwise, we’ll look at the other options that we have available to us, whether that’s cash on hand or the other elements that I just mentioned.

Unidentified Analyst: Hey, thanks. And then, I guess, given the delay in the CFPB resolution, as the judge entered senior status last year, have you guys had conversations with the rating agencies on potential upgrades? I know that lawsuit was kind of a point for some of the rating agencies. But just wondering now that, that’s kind of been delayed if there’s been an ability to kind of get beyond that or the conversation has been a nonstarter given the current regulatory environment?

Joe Fisher: So we have very frequent conversations with the rating agencies certainly as recently as just yesterday just in prep for this call today. So that dialogue has continued. Unfortunately, there’s no update to provide to the agencies on the path of that court case. But I do think from a quantitative perspective that we should certainly be rated higher across the board in terms of elements within our control. Our capital ratios are increasing, reduced our debt stack. I think we’ve done everything that we can do in terms of meeting certainly fixed income investors questions, beating their expectations and positioning ourselves well for the remainder of this year as well as 2024.

Unidentified Analyst: Great. Thanks guys.

Operator: Thank you. I’m showing no further questions at this time. I would now like to turn the call back over to Jennifer Earyes for any closing remarks.

Jennifer Earyes: Thank you, Olivia. 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.

Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.