Navient Corporation (NAVI) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen thank you for standing by. And welcome to the Navient Fourth Quarter 2019 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Joe Fisher. Thank you. Please go ahead.

Thank you, Sean. Good morning, and welcome to Navient's 2019 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 2019 supplemental earnings disclosure. This is posted on the Investors page at navient.com. Thank you. 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. I'm thrilled to share with you our exceptional results for the quarter and for 2019 overall. Our results illustrate success in executing our strategy of maximizing cash flows from our loan portfolios, improving our funding and operating efficiency, leveraging our scale and expertise in our business processing and generating high-quality loans at attractive risk-adjusted returns. I am very pleased with the results in each of these areas in 2019 and the strong foundation and momentum they have created for us to continue this success in 2020. Our actions this year also demonstrate our commitment to manage capital efficiently, to maintain a strong balance sheet while returning meaningful capital to shareholders. The results, adjusted core earnings increased 16% for the quarter to $0.67 per share, and 26% for the full year to $2.64 per share. Adjusted core net income also increased in 2019 by 12% to $616 million. Our Federal Education Loan segment delivered stable net interest margins in 2019. Benefits from declining interest rates and the execution of more efficient funding strategies more than offset a negative basis spread environment and the natural trend to lower margins. Total fee income in this segment increased 8% in 2019 on exceptional performance from our asset recovery services, which generated $230 million in asset recovery revenue in the year, a $67 million increase as we delivered outstanding results for our clients. In our Consumer Lending segment, we originated $4.9 billion in high-quality, high-value education loans, a 75% increase over the prior year. Our efficient and customer-focused origination platform makes it easy for clients to refinance their loans at rates based on the credit they have earned, generating typical savings of thousands of dollars in lower interest expense. Our digital marketing approach delivers a low-cost of acquisition and our underwriting model delivers best-in-class portfolio performance. The result is a portfolio of loans that generates a very attractive risk-adjusted return. As a result of the outstanding success from our team, our ending private education loan balance has grown in each of the last two quarters. Our private education loan net interest margin improved to 3.3% as we continue to execute more efficient funding strategies that more than offset the increasing mix of lower margin, but higher quality refi loans in the total portfolio. It also led to a 3% increase in net interest income in the fourth quarter. The continued improvement in credit performance in this portfolio contributed to a $73 million reduction in provision expense this year, and we are seeing stronger performance in delinquency and default levels, driven by a strong economy and our data-driven approach to support our customers. As discussed last quarter, the launch of our in school loan product did not meet our expectations. We've been hard at work taking the learnings from this experience to eliminate the issues that prevented us from achieving our goals. We continue to see a value creation opportunity here, and we are determined to demonstrate this in the upcoming back-to-school season. In our Business Processing segment, we absorbed the impact of two significant contract losses, one on price in 2018 and one this year, when the state ended the program we supported. We won numerous new contracts in both the government and health care segments, and in particular, revenue in the health care division grew by 12% in 2019. We continue to see value in this business segment. In 2019, we applied a concerted effort to leverage our operating efficiency skills and customer simplification solutions to improve our operating margins in this segment. So while revenue declined by $9 million, our cost reduction efforts led to an 11% increase in EBITDA to $49 million for the year and a 12% increase in our EBITDA margin to 19%. Our focus on increasing both revenue and efficiency will continue in 2020. Since we launched Navient in 2014, we've had a strong focus on maximizing cash flow and improving efficiency. During the year, we conducted detailed reviews of the projected cash flows from our loan portfolio and a study to how to accelerate our operating efficiency. These projects helped us shapen our focus and accelerate our progress. This continued focus on operating efficiency led to a 3% decline in comparable operating expense in 2019 even as we meaningfully grew asset recovery revenue and new loan volume. Also, while the more visible owned federal loan portfolio declined 19% in the year, the total federal loan volume we service for ourselves and third parties declined by a much smaller 2% due to new account placements from the Department of Education. The ending loan balance in our Customer segment was also unchanged at year-end. While significant attention is applied to operating expense, interest expense is by far our largest cost. In 2019, we continued to implement innovative solutions to more efficiently fund our loan portfolios. These efforts have both reduced our highest cost funding source unsecured debt and lowered the cost of our structured financing solutions. As a result of our efforts in 2019, we reduced the interest expense we would have incurred by over $90 million, while providing the liquidity to retire $2 billion in unsecured debt. Continuing to improve and accelerate our funding and operating efficiency remains a top priority for us. We have numerous initiatives underway that will continue to accelerate improvements in 2020. Another key component of our enterprise value is maximizing the cash flow generated by our loan portfolios. In 2019, the education loan portfolios generated $5.3 billion in cash flow, including $2.7 billion from financing activities. This strong cash flow allowed us to retire $2 billion in unsecured debt and return $587 million to shareholders via dividends and share repurchases. In addition to a dividend yield in 2019 of nearly 5%, our share repurchase program decreased outstanding shares by 13%. Our strong earnings allowed for this impressive capital return while we maintained a strong balance sheet. As a result, we are extremely well positioned for the implementation of CECL. Our confidence in our capital generation forecasts led to the new $1 billion share repurchase program announced last October, which we began implementing this year. Our results this quarter and the year were exceptional. We saw strong contributions from all areas of the company. We are confident that our efforts in 2019 will continue to deliver strong results in 2020. Thank you for your time and interests and I'll now turn the call over to Chris for a deeper review of our financial results. Chris?

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 of 2019. I'll 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 $0.67 in the fourth quarter and $2.64 for the full year. Full year EPS was nearly 30% higher than our original guidance given at the beginning of 2019. Key highlights from the quarter and full year include, refinance loan originations of $1.6 billion in the fourth quarter, more than doubled our volume from a year ago, which contributed to net interest income growth in our consumer lending segment. Total refi originations in 2019 are $4.9 billion, sustained improvement in credit quality across our entire education loan portfolio, further optimization of our capital structure, industry-leading efficiency ratio of 49% for 2019, core return on equity of 18% for the quarter and 19% for the full year and the return of $111 million to shareholders through dividends and the repurchase of 5.8 million shares. Moving to segment reporting beginning with federal education loans on slide 4, core earnings were $136 million for the fourth quarter and $525 million for the full year. The net interest margin was 87 basis points for the fourth quarter and 83 basis points for 2019. These margins benefited from the continued improvements in our funding efficiency, along with our favorable interest rate environment. As the portfolio of FFELP loans continues to amortize, we remain focused on managing our net interest margins across the portfolio and reducing charge-offs and expenses to maximize cash flow. Charge-off rates have significantly declined from a year ago, with the annual charge-off rate at 7 basis points. This performance exceeded our original estimate of 8 basis points to 10 basis points. As previously reported by the Department of Education, our federal servicing contract was extended in December for a one-year period with two additional six-month options. Asset recovery revenue increased 27% or $14 million from the year ago quarter. The increase was primarily driven by our asset recovery team’s impressive efforts to achieve higher account resolutions on a declining inventory of previously defaulted federal education loans. Now let's turn to slide 5 in our consumer lending segment. Core earnings in the segment were $89 million for the quarter and $316 million for the full-year. The year-over-year increase was driven by an improvement in net interest margins, strong education refinance loan originations and improved credit quality. A highlight of our effort to improve our funding efficiency was the restructuring of one of our bank facilities which raised nearly $650 million in the fourth quarter, had a significant interest savings. Credit quality in this segment continued its strong performance, as the total delinquency rate declined to 22% and the forbearance rate declined 10% year-over-year. The total private education portfolio of $22.2 billion was flat year-over-year, primarily driven by the growth in refi originations. During the quarter we originated $1.6 billion of education refinance loans at attractive spreads. In addition to the improvement in refi spreads, we saw a benefit from our favorable interest rate environment in the quarter. Our 2020 net interest margin guidance of 310 basis points – 300 basis points to 310 basis points reflects our less favorable interest rate environment along with a greater proportion of high-quality refinance loans in the consumer portfolio. We expect full year private education loan refinance loan originations at least $5 billion in 2020. Let’s continue to slide 6 to review our business processing segment. Total net income for the full year grew 10% to $33 million. This was accomplished by growing EBITDA margins to 19% which was at the high-end of our guidance. For the full year, we achieved EBITDA of $49 million and expect to see similar levels in 2020, as we replaced revenue from contract terminations in 2019 with new contracts in 2020 and continue to drive expense efficiencies. Let's turn to slide 7, which highlights our financing activity. During the quarter, we returned $111 million to shareholders through dividends and share repurchases, reducing shares outstanding by 13% year-over-year. As of year-end, we have $1 billion of authority remaining on our multi-year share repurchase program and ended the year in a very strong capital position as we approached the implementation of CECL. In the quarter, we issued $1.2 billion of term private education ABS and $497 million of term FFELP ABS. Our 2019 refi ABS transactions are being executed at attractive margins and in line with our long-term ROE goals. During the fourth quarter, we reduced our 2020 unsecured maturities through make-whole call of $1 billion, resulting in a loss of $14 million in the quarter. Overall, we reduced unsecured maturities by $2 billion during the year and realized gains of $33 million. This has reduced our total unsecured outstanding debt to $9.6 billion. As we have previously stated, the implementation of CECL will reduce our capital ratios, which will rebuild quickly as a result of continued increased profitability in 2020. We estimate our incremental pre-tax allowance to be approximately $800 million on Day 1 of implementation, which is in the middle of our previously disclosed range. As we referenced on the third quarter earnings call, with the implementation of CECL and the growing mix of private education loans, the TNA ratio is less aligned with our capital management targets. As our consumer assets become a greater overall percentage of our balance sheet, we feel it is appropriate to move to a tangible equity ratio that is more in-line with the capital and leverage views of rating agencies and investors. Adjusting for assets and equity related to our FFELP portfolio, we plan to maintain a tangible equity ratio above 6% by year-end 2020. This change in metric does not change our capital return philosophy and we remain committed to ensuring excess capital is returned to shareholders. We expect our 2020 capital return to be broadly in line with 2019. Before turning to GAAP results, I'd like to recap our full year 2020 EPS guidance and targeted financial metrics on slide 8, which excludes expenses associated with regulatory costs and restructuring expenses. In 2020, we expect the targeted financial metrics on slide 8 to contribute to core earnings per share between $3 and $3.10, core ROE in the high teens to low 20s, and the core efficiency ratio of approximately 50%, while ending the year with an adjusted tangible equity ratio above 6%. Finally, let's turn to GAAP results on slide 9. We recorded fourth quarter GAAP net income of $171 million or $0.78 per share compared with net income of $72 million or $0.28 per share in the fourth quarter of 2018. The differences between core earnings and GAAP results are the marks related to our derivative positions and the accounting for goodwill and intangible assets. In summary, 2019 was a very successful year. We meaningfully exceeded our targeted financial metrics for the year, saw a significant margin improvement, grew our refi business, maintained expense discipline and strengthened our capital position while returning nearly $600 million to shareholders through dividends and share repurchases. We look forward to continuing this momentum into 2020 and I will now open the call for questions.

[Operator Instructions] Your first question is from the line of Rick Shane with JP Morgan.

Hey guys, thanks for taking my questions this morning. Related to the refi portfolio, I have two questions, when we look at this on a CECL basis, what should we – as a lifetime loss rate for that product?

So that's a great question. It's 1.5%, the estimated life of loan loss and what I’d highlighted and you can see this in the trust data, we are running well ahead of that as a life of loan estimate, but that is the estimate we're utilizing.

Well below it.

Well below it, sorry.

Perfect. Thank you. And then when I look at slide 17 and sort of try to reconcile the volumes with the deals that you did during the year that makes sense. I'm not sure I necessarily understand the free cash flow metric though, if you could just put a little – if you could just articulate or explain that a little bit more related to the deal size and the free cash flows?

Yes, so that's a great question because it may have been a little confused and that's the free cash flow estimate of the underlying borrower, it's a key metric that ABS investors look at to determine credit worthiness, it's just another metric along with FICO, et cetera for people to determine the underlying credit of the broader portfolio.

Got it, okay. Perfect. Thank you so much.

Your next question is from the line of Mark DeVries with Navient [ph].

Yeah, I guess I just changed the companies.

You changed jobs there, Mark?

So once again, your refi consolidations really came in quite strong above expectations. Can you just give us some color on kind of, what's driving that and kind of what your outlook is going forward?

Yes, I think this is a growing awareness of the opportunity by consumers in this space. And when you look at the way that federal loan programs work and some other private loan programs for the in-school side of the equation, they have higher interest rates, in particular on the private side, but also in the Grad PLUS arena. And for the many customers, those higher interest rates reflect the uncertainty of the customer's ability to graduate or the likelihood that they'll graduate and what kind of job opportunity they get. When we come to the refi side of the equation, we’re addressing customers who've been in repayment for three to four years and as Chris just indicated on the last question, have substantial free cash flow. That gives them the ability to demonstrate their credit worthiness stronger and so we're able to reprice those loans, saving the customer thousands of dollars, often thousands of dollars a year in interest expense. And so more and more people are becoming aware of that and taking advantage of it. Overall it's still a small fraction of the amount of loans that are made in the federal loan space. So we estimate the annual originations to be around about $16 billion a year in refi compared to about $100 billion a year of federal loans and another $15 billion or so, $12 billion to $15 billion of private education loans a year. On the outlook for 2020, as Chris said, we expect to originate at least $5 billion. And we – nothing we see at this stage in the game, where we said at this point in January would indicate anything other than a continued strong demand for the program.

Okay. Got it. And then I think Chris indicated that, the NIM guidance that you provided contemplates less favorable rate environment and I got some mixing out of some of the lower rate refi originations. But, I think Jack you alluded to seeing additional efforts in 2020 that continue to improve the funding cost, is that contemplated in your guidance? And if not, does that mean there's upside there as you execute on those opportunities?

It is contemplated and we continue to look for ways to improve on that side of the equation. So that comes from, executing at attractive spreads. We just priced an ABS deal yesterday at very attractive spreads, I think the way the market price is working today or functioning at the moment, but that's a good opportunity for us to continue to improve efficiency. Some of the financing transactions that the finance team took on this year, really leverage the excess collateral in our securitization transactions that allowed us to borrow at substantially lower rates than where we would have traditionally in the past in the unsecured markets. And you're seeing that in the net interest margins in 2019 in the roughly $90 million of interest savings that we experienced or benefited from in this year.

Okay. Got it. Thank you.

Your next question is from the line of Lee Cooperman with Omega.

Yes. Thank you. Good morning. Congratulations on your excellent performance. I have a question. You have an authorization of $1 billion that you put in October. That represents about 30% of the market cap. Stock is trading at five times the earnings guidance that you've provided, yields 4.5%. Have you ever thought about accelerating your program and doing a Dutch auction tender to get the shares out before the stock goes up a lot more?

Thanks for your comments, Lee. We have actually looked at a number of different ways that we can execute our share repurchase programs both more efficiently and in some instances more quickly as well. Because of the size of our program, we're actually buying pretty close to 10% of the trading volume, which is about where you can kind of cap out there and when we look at some of these other programs, like accelerated share repurchases or tenders, we actually don't expect that we would get a whole lot more than what we're acquiring in the open market. So to date, this has been our view that this is the most efficient way to do that. But we always look at new opportunities and evaluate this regularly going forward as well.

It may change tomorrow, but I noticed your top four holders are reducing their exposure. So Vanguard shows 22.9 million shares, they sold 2 million shares in the third quarter, Canyon reduced to under 10%, BlackRock reduced, Barrow, Mewhinney a large holder sold 5 million shares in the fourth quarter. It seems to me that you might be able to get more stock than you think on a tender offer and its highly accretive. What is the – a housekeeping question, what is the actual shares standing at year end?

The average CSC is about 222 million.

The actual was 218 million, around 218 million, 218 million.

218 million, so $1 billion, I assume most of the $1 billion is left?

Yes. Well, we just started executing against that or implementing.

I would reconsider it. Just ask your advisors, what they think would happen because it seems with the return on equity that you're projecting that the stock deserves to be selling at a much higher price is trading at and my guess is as you continue to shrink the cap, if you reproduce the results you're producing, the stock will be higher. I think the idea is to get it at the lowest price possible at the highest price possible, just a thought, but congratulations on your excellent performance.

Thank you.

Your next question is from the line of Sanjay Sakhrani with KBW.

Thanks. Good morning. Jack, you mentioned the growth in the consumer lending NII this quarter and in the fourth quarter. And I was wondering if we're getting to the point where that growth rates inflected sustainably? Or maybe you could talk about when we get there, both in consumer lending and maybe in the future on a consolidated basis.

Well certainly the consumer lending portfolio, as I said, the net interest income actually increased in the fourth quarter and that's benefiting from two things, right. One is improving NIM and the other is the addition of the refi business. Certainly, as the refi portfolio grows to be a more material percentage of the total private loan portfolio, those factors will combine to drive net interest income higher. Our forecast right now is for the net interest margin to decline in 2020. We had a big – we had a nice benefit from the rate environment, particularly in the fourth quarter as when the fed cut relative to when the loan portfolio reset. We're not anticipating a repeat of that in 2020. So those are some of the drivers there. But we're getting very, very close to that inflection point as you pointed out.

Okay. And then I guess sort of follow-up question on some of these regulatory items that are outstanding, could you just give us an update maybe on the CFPB, some of the ED contracts as well and maybe also just touch on what might be out there in the marketplace in terms of portfolio acquisitions. Thank you.

Yes. So on the regulatory front, with the, these cases just move at a – unfortunately at a snail’s pace and that's just a function of the legal process in the civil matters. At this stage on the CFPB side of the equation we’re through fact discovery, we're in the midst of expert witness discovery and resolution. We hope to have that wrapped up sometime in the first half of this year. That would then allow us to file our typical motions for summary judgment. As we've pointed out and as the courts have actually released information, we have summaries of the depositions of the witnesses that the CFPB plans to present at the trial. And as we pointed out in the past, not a single one of those witnesses has actually asserted that we failed to disclose the information that the CFPB has said we had, in fact, they all said “No, Navient did provide me with information about income-driven repayment”. And one-third of them were actually enrolled in income-driven repayment program, so little perplexing on that side. Obviously our desire is for swift justice here. We're confident on the facts and circumstances of the case. We lead the industry in enrollments in income-driven repayment. We've developed innovative solutions that help borrowers enroll in the program more easily. I'll just take a little side tour here. We implemented a program, that the way the income-driven repayment program works under the department of ED is that, the customer has to leave a servicer’s website and go to studentloans.gov to complete a 10 page application. And we found that customers either weren't doing that or the complexity of the form was a bit overwhelming. And so we were seeing only about 27% of customer success who we’re qualifying for a lower monthly payment under IDR, successfully completing that form in 60 days. We developed an electronic solution, where we take that information, populate the application for the customer, send it to them for e-signature and we were able to increase the success rate from 27% in 60 days to 72% in 10 days. And so we're really making, these are the types of efforts and innovation that we bring to the table to help our customers, find solutions that keep them out of delinquency and default. We hope these cases get resolved quickly. And as I said, our case, our facts and circumstances remain strong. On the development side of the equation, the opportunities to buy federal portfolio is obviously getting smaller and smaller. We acquired about $500 million in 2019, most of that is rehabilitation loans. And certainly as the portfolio continues to amortize, on our books, you're seeing the same opportunities amortize away on another entities and just the sheer volume of sellers is relatively small at this point in time.

Thank you.

Welcome.

Your next question comes from the line of Mark Hammond with Bank of America.

Hi, Jack, Chris and Joe. On the capital held, why is over 6% or 6% the right level for basically private loans?

Great. Thanks for the question. The primary reason that it aligns with the rating agencies with their metrics to keep our ratings where they are and so it really is a metric that supports the – where the other rating agencies metrics are, so our analysis which is just somewhere above 5%, 6%, keeps us in compliance.

And if I could, I would just add to that, if you look at our securitization transactions and the advance rates, it's kind of – it's more or less consistent with that process and with the adoption of CECL, we're no longer – we've moved from a holding capital for unexpected losses in the near term to reserving for the full expected life of loan losses. And so a combined – the combination of the loan loss reserve and the capital levels are actually much, much higher than just the 6% level that you would have seen historically.

Sure. On the FFELP loan delinquencies year-over-year, they were up 150 basis points. And I'm just wondering if you guys are seeing anything, I guess, more broadly, that can explain that trend?

So as we came out of 2018, there are a number of natural disaster forbearances that got applied. These are program rules have been issued by the Department of Education. So if a county or areas they declare a natural disaster, any delinquent account is brought current and then held in forbearance until the disaster period is lifted. And so you end up with – as those disasters are lifted, you end up with a little bit of a bubble that moves through the curve, and that's really what you're seeing in the delinquency statistics there. Overall, our performance and our expectations on delinquency and defaults continues to be extremely strong. We're at or near all-time lows in terms of both delinquencies and defaults on both the federal and private loan portfolios and see that continuing in 2020 given the current strength of the economy.

Got it. That’s helpful. And then a last one for Chris. Your unsecured cost of debt on a spread basis is, is that a five-year low? I wonder, roughly, what's the difference between the cost of funding on that restructured bank facility you mentioned compared to where you think you could raise unsecured funding?

So it's definitely narrowed, but it's kind of pegged at somewhere around 100 basis points, but obviously, there's a term in the high-yield market, depending on tenor. So obviously, we also have noticed and been encouraged by our credit spreads getting back to where they should be or continuing to tighten but there still is a little bit of delta between the two, although I would highlight that, obviously, the tenure is different, and that is important as well.

Totally, so roughly 100 basis points?

I think today, where you're talking – I mean, I think, you're probably quoting something in the low fives-ish including the LIBOR spread, so it's somewhere around give or take.

All right, perfect. Thank you.

Your next question is from the line of Henry Coffey with Wedbush.

Yes, good morning. And let me add my congrats on a great year. On the political front, I know you mentioned a little bit about the servicing contract. I hope I got that right, I did got on late. But on political front or the education reform front, the Trump administration has basically got a year to go. Are there any initiatives that they're looking at in the Department of Ed that are of substance that you think will get accomplished by year-end, I mean, by next January? Or what exactly – I mean, we had great expectations going in. What exactly is the agenda? And what are likely accomplishments that would help education finance side of the Department of Ed, if any?

Well, the big initiative that the Department of Ed is working on, is next-generation servicing platform. And that process has been underway. And been through various rounds of RFPs now for a couple of years. The expectation is that they will actually award contracts in 2020. But to be honest, I would have said the same thing in the beginning of 2019. So we'll have to see how that goes. There is a new leadership team at FSA. They're very focused on the customer experience and improving outcomes. And really working with servicers to be able to achieve that on a kind of a collaborative way, which we view as a positive. So those are probably the biggest initiatives that we have going on. There's a lot of talk, of course, about borrower activity, how much – who's financing their loans, whether or not they're affordable. There's also a discussion about some of the repayment options that have that allow for lots of negative amortization on the loan programs, and those are things that we have talked about in the past, and pointed out that there needs to be maybe some better solutions to helping customers be successful in pursuing higher education, completing it and then also how they finance it.

And it's how would you judge the probability of us getting something of substance done by the end of 2020? Good, great?

Good it’s great goal.

I would say it’s good. I would say it’s good.

Alright thank you very much.

Welcome.

Your next question – [Operator Instructions] Your next question is from the line of Moshe Ari Orenbuch with Crédit Suisse.

Great, thanks. You guys have mentioned that your kind of core expenses were flat with the third quarter and a year ago, and the guidance for 2020 is a 50% overhead ratio up from 49% this year. Could you kind of maybe square the circle on that a little bit? I mean, are you expecting, given that the margins are expected to be down in 2020. Could you just talk a little bit about what the actual outlook for expenses kind of is in 2020 for, in dollars?

So we're giving the efficiency ratio as an estimate. Obviously, that can give you guidance around from a dollar perspective. We didn't give a dollar perspective. But what I can tell you is, from a dollar perspective, it will be down as we continue to amortize – or as we continue to work on our expense base and drive expenses down. So expenses will be down, efficiency ratio will be relatively flat, but we didn't give a specific dollar range this year.

We are working on a number of initiatives to continue to improve operating efficiency. When we sold our servicing platform, we began a process, which we're continuing to do work for the acquirer on that space. We expect many of those things to wrap up in 2020. We expect to be able to retire our mainframe as an example, which – these are some of these items that as we complete this year and move into 2021, we'll continue to see ongoing improvements in our overall operating efficiency ratios. We're pleased with what we've been able to accomplish to date. As Chris said, we expect total expenses to be down again in 2020 despite continued growth in loan origination volume and relatively flat service levels – service volume for the loan portfolios.

Right. I struggle with the fact that the interest rate environment has been very, very healthy, and you're doing the absolute right thing to take advantage of that as much as you can and for as long as it persists. But there is no kind of guarantee that, that kind of stays with you, and it's good that your expectations for 2020 do have some pressure on that net interest margin. But I guess, that's where it's kind of tricky. I guess, the question in there is, [indiscernible] business long term, I mean, no doubt the demand will be there. But how do you think about in a "normal interest rate environment" what you think the volumes you would be willing to do?

Well, I think the volumes are really – the opportunity here is not just the demand side of what customers want, but what we're willing to finance. I think the presentation includes that summary of the financing transactions we completed in 2019 for refi originations, and those types of margins are kind of what we would expect to be able to continue to deliver. We're pricing our product for – relative to our funding costs. And we expect to generate attracted – to get to the ROE targets that we're shooting for. These are the types of margins we think we need to continue to target. What demand would be, is really a function of what the underlying interest rates are in the borrowers' loans. So for Grad PLUS and private student loans, the coupons on those loans are relatively high, and in some instances, particularly private, the majority of those loans are variable. And so customers are looking to take advantage of the fact that they borrowed when they were unemployed and a prospective good credit to three, four years into repayment are now an excellent actual credit, and the prices that we can offer them on those loans based on that credit profile are substantially better than one can get from being a prospective good credit.

Got it. Thanks.

Your next question is from the line of John Hecht with Jefferies.

Thanks guys for taking my questions. Most of my questions have been asked and answered. So a couple of kind of interesting ones. Number one is, you guys have had very strong originations. Is there any characteristics that you would say were the source of momentum that's persistent?

I think our success in the refi space is really driven by a couple of things. One is the way customers can apply for a refi loan here. It's very intuitive. It's very customer friendly. It's very – it's – the user experience is, we believe, is the best in the industry. The underwriting model we – that we employ also gives us greater insight into prospective capabilities, not just the trailing FICO score. That free cash flow number is an important part of our underwriting metrics, and it allows us to be able to better manage and understand the credit profile of the customer. And then the last feature I'll just add on that side of the application flow is the customers in this area are really looking more about how much – making a payment based on what they can – what they want to fit within their budget. And so oftentimes instead of saying I want a ten-year loan or a seven-year loan, they are looking at this and saying, I want to pay x dollars per month and that equates to a 7.2-year loan. And our underwriting process and pricing models are geared towards that, which means that they can get rates that are more interpolated relative to a five- or seven-year term, let's say, a competitor might be offering. And then the last piece I would say is our marketing approach is principally a digital marketing approach. And so we are working through digital channels, which is where our customers really want to really live and are active, and that's meeting them where they are, but it also drives a cost of acquisition of a typical account that we estimate is about half of what the national average is in this space because we don't have a heavy reliance on things like direct mail.

Okay. Thanks very much for that color. And then second question is you guys historically evaluated, you're purchasing FFELP portfolios, you've bought some special servicing platforms. Just wondering any discussion points around an acquisition pipeline or opportunities around that?

I think the opportunities to acquire legacy student loan portfolios continues to shrink as we would have expected. We made a concerted effort when we were launched in 2014 to do that. I think cumulatively, including refi loans, we've now acquired $37 billion worth of student loan since 2014. The majority of those would have been FFELP and private loan portfolios acquired. But our focus today is now on the greater opportunity, which is originations of both refi, and then for the upcoming back-to-school season, in-school lending.

All right. Great, thanks guys.

Welcome.

Your next question is from the line of Arren Cyganovich with Citi.

Thanks. The contingent collections receivables for the Business Processing business are -- have been rising, but you still have a declining amount in the federal side. Is there any opportunity to get awarded additional on the default of the federal side? And if not, should we expect just the total asset recovery revenues to decline in 2020?

Yes, on the federal side, we received a one-time very significant placement from accounts from the Department of Ed back in 2018. And that portfolio is what contributed to the growth in asset recovery revenue that has been shrinking, although will continue to be a meaningful dollar amount in 2020. We certainly are looking for more opportunities in that space with the department. One of the things that we would point out is that our recovery rates, which is really a function of assisting customers who previously defaulted on a federal loan, rehabilitate that loan, get it back in a good standing and give them the opportunity to be able to perhaps continue to pursue their education and complete it. It has been far ahead of the competition. In terms of the just the success rates in that space, we estimate that we're about 46% better than the next best performing collection agency in that space in terms of recovery rate. So I will certainly continue to pursue opportunities in that arena going forward.

Thanks.

And at this time, I'd like to turn the conference back over to Joe Fisher.

Thanks, Shaun. I'd like to thank everyone for joining us on today's call. Please contact me or my colleague, Nathan Rutledge, if you have any other follow-up questions. This concludes today's call.

Thank you all for joining today’s conference call. You may now disconnect.