Navient Corporation (NAVI) Q3 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Navient Third Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Mr. Nathan Rutledge, Head of Investor Relations. Please go ahead.

Thanks, Lawrence. Good morning and welcome to Navient's third quarter 2021 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 disclosed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC. During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjusted tangible equity ratio and various other non-GAAP financial measures derived from core earnings. Our GAAP results and description of our non-GAAP financial measures and a full reconciliation to GAAP can be found in the third quarter 2021 supplemental earnings disclosure. This is posted on the Investor page at navient.com. Thank you. And I will turn the call over to Jack now.

Thanks, Nathan. Good morning, everyone and thank you for joining us today and for your interest in Navient. Our business model and execution continued to deliver strong results and create value. This quarter's financial results build on our efforts to maximize cash flow from our legacy portfolio, create value from the origination of high quality student loans, and leverage our operating platform to deliver valuable outsourcing services to our clients across multiple business lines. For the quarter, core quarter earnings totaled to $149 million, with an adjusted core earnings per share of $0.92. With another quarter of exceptional financial performance, we are again raising our adjusted core EPS forecast for 2021 to at least $4.50 per share. Projected earnings per share for 2021 are now more than 40% higher than our forecast at the start of the year. This quarter's results were driven by stable margins in our lending segments, strong demand for our private education loan products, and continued strength in delivering services to our state and local clients in our Business Processing Solutions segment. Net interest income remained robust this quarter, increasing $17 million over the prior quarter. We continue to benefit from a favorable interest rate environment, lower funding costs and an increase in our private education loan balances. During the quarter, we originated $1.5 billion in refi student loans, an increase of 16% over the year ago quarter. Though the extension of the interest waiver on federal direct loans through January 31st significantly tempered demand for our refi loan product this year, we were able to grow by helping borrowers with private loans lower their interest rate. We do expect demand to increase in 2022 with the expiration of the interest and payment waiver next January. In-school loan volume in the quarter totaled $153 million and for the full-year we expect loan volume to exceed $200 million. These loans are purchased after they are fully dispersed. We're also confident that the combined loan volume will exceed our original forecast of $5.5 billion for 2021. In our Business Processing segment revenue increased 36% over the year ago quarter as a result of the extension of our contracts assisting states in various COVID-related project work. Through this work, we've been able to demonstrate the agility of our platforms and people to respond to new and large needs with speed, efficiency and effectiveness. While these contracts are expected to end this year, we are focused on leveraging this experience in demonstrating our value proposition to develop new opportunities. We are optimistic about our opportunities here, but acknowledge that the more typical RFP timelines and startup schedules are significantly longer than what we experienced during the pandemic. Credit performance remains very strong. We are seeing continued resilience from our FFELP and private education loan borrowers leading to low levels of delinquency and default. Our outlook remains cautious given the planned returned to repayment of the federal direct loan portfolio in February, and our loan loss reserves reflect this. Operating efficiency was strong with an efficiency ratio of 50% this quarter. Maintaining a strong efficiency ratio is a key focus as our VPS project work winds down and we complete our direct loan servicing transition. At the beginning of the pandemic the decline in interest rates and higher loan loss provisions negatively impacted our capital ratios. Our strong earnings through the pandemic and significantly better than anticipated credit performance to-date have seen our capital ratios return to their targeted levels of 6% or more. We continue to prioritize our allocation of capital beyond our capital targets to growing our student lending and VPS opportunities, maintaining our dividend, and returning excess capital to investors. As such, we purchased 26.9 million shares this year or 14% of shares outstanding. In a significant development, this quarter we announced an agreement to transfer our servicing contract with the Department of Education to Maximus. This transfer is now complete with the receipt of novation by the department last week. For a period of time we will provide transition services to Maximus. This transfer brings to an end the services we provide to the federal direct loan program. We will continue our existing business in the FFELP sector. The road to this point started over a year-ago when we declined to accept the next-gen servicing contract award. With this decision, it became clear that direct loan servicing was unlikely to be part of our future with only the effective date to be determined. Given our strong desire to facilitate an orderly transition, we began to explore solutions that would deliver a smooth transfer for borrowers and the 800 employees who supported this contract. This summer we identified a potential solution to work with Maximus, one of the providers under the next-gen servicing contract. We approached the department with a constructive proposal that would deliver a smooth transition for borrowers, provide a new home for our 800 employees, and provide the department with needed servicing capacity. All parties work collaboratively to ensure a strong solution. We are very proud of our long track record of successfully assisting borrowers in repaying their student loans. We've been the leader in income driven repayment plan enrollment, and we have consistently led with the lowest default rates. We're also pleased to see that many of our recommendations are now being implemented. This contract however, generates only 6% of our revenue, and was unlikely to grow in the future. It also significantly complicated our investment story, given its heightened political and regulatory position. While it is difficult to say goodbye to 800 of my colleagues, I believe we found the best solution for them and for the 5.6 million borrowers we serve. This transfer will simplify our story and allow for our full attention to center on growing our Consumer Lending and Business Processing Segments, creating increased value for our investors. This has been a busy and a productive quarter at Navient. We continue to deliver strong earnings with capital generation, while building our loan origination and business processing opportunities. Our decision to transfer our direct loan servicing contract better positions our company to focus on our meaningful growth opportunities, while simplifying and de-risking our investment story. These accomplishments are the results of the hard work of a dedicated team focused on creating value for our customers and clients and for our investors. I'm looking forward to a strong finish to 2021 and continuing to deliver on our potential in 2022 and beyond. I'll now ask Joe to provide more details on the quarter and I look forward to taking your questions later in the call. 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 third quarter results for 2021. I'll be referencing the earnings call presentation, which can be found on the company's website in the Investors section. Our third quarter results compared to our original outlook for 2021 is provided on Slide 4. Through the first nine months, we've exceeded all of our original targets and we are well-positioned for the remainder of the year. As a result of the strong performance and updated outlook, we are increasing our adjusted core earnings per share guidance to at least $4.50, an increase of over 40% compared to our original guidance. Our outlook excludes regulatory and restructuring costs, reflects the current interest rate environment, includes year-to-date debt repurchases, and assumes the utilization of the remaining share repurchase authority of $150 million. Key highlights from the quarter beginning on Slide 5, include GAAP EPS of $1.04 and adjusted core EPS of $0.92, originated $1.6 billion of private education loans, including $153 million of new in-school loans. Achieved BPS EBITDA margin of 31% in the quarter, reduced our total unsecured debt outstanding by 9%, and returned a $176 million to shareholders in the form of repurchases and dividends. Move to segment reporting, beginning with Federal Education Loans on Slide 6. Net interest margin increased 1 basis point from the prior year to 104 basis points. Net interest income declined 6%, despite a decline in the portfolio of 9%. This portfolio continues to benefit from the current interest rate environment and ongoing improvement in funding costs. Total delinquency rates declined to 8.5% from 9.3% a year ago, while charge-offs remain stable at historically low levels. Other revenue remained flat at $61 million compared to second quarter and was down $26 million from a year-ago, primarily related to the impact of COVID-19 on certain collection activities. I'll provide additional information on the transfer of our Department of Education servicing contract on Slide 7. Earlier this month, we received all necessary approvals to transfer the Department of Education servicing contract to Maximus. During the quarter, this contract contributed $34 million of revenue on 5.6 million accounts serviced compared to $36 million of revenue on the same number of accounts a year-ago. The expenses associated with the servicing platform for this contract, including the 800 dedicated employees that currently service the contract, and re-staffing efforts in anticipation of the expiration of the CARES Act will all be transferred to Maximus by year-end. For 2022, we anticipate incurring certain ongoing expense for the contract in conjunction with a transition services agreement for which we will receive offsetting revenue payments. As we manage the transition, we anticipate the impact from the transfer of this contract to result in less than $0.10 in earnings per share for 2022. We will work aggressively to minimize this impact through additional expense reductions. As we look to 2022 and beyond, this transfer allows us to simplify and de-risk the investor story and increased focus on our growing Consumer Lending and BPS businesses. Now let's turn to Slide 8 and our Consumer Lending segment. The total portfolio grew modestly from the second quarter. It was down 6% from a year-ago as a result of the $1.6 billion in loan sales that occurred earlier this year. The net interest margin of 298 basis points is above our guided range. It is 26 basis points lower than the year-ago quarter largely driven by a shift toward our high quality private refi product within our Consumer Lending portfolio, which now accounts for 46% of total loans in the segment compared to 37% a year ago. In the quarter, we originated $1.6 billion of total private education loans. This includes $153 million of in-school private education loans. And these loans were made through our banking partner entirely to students attending not-for-profit institutions this fall, and 73% were first time borrowers to us. Our private education refinance loan originations of $1.5 billion in the quarter means we expect to exceed our year-end target of at least $5.5 billion in total volume. We anticipate that the end of the CARES Act that is currently scheduled to occur on January 31st will provide an opportunity for additional refinance volume, as borrowers who've been paying 0% interest for nearly two years will see loans return to their original terms and will look to refinance to lower rates. Credit trends continue to exceed our expectations. And while economic conditions continue to improve, our allowance reflects the uncertainty related to the potential negative impact to the portfolio from the end of various payment relief and stimulus benefits that recently occurred or currently forecasted to end in January 2022. The $22 million provision in the quarter was primarily related to the $1.6 billion of newly originated private education loans. As borrowers continue to transition to repayment, we feel confident that we are adequately reserved given the well-seasoned and high credit quality of our portfolio. Continue to Slide 9 to review our Business Processing segment. The $32 million increase in revenue from the prior year as we leveraged our technology-enabled platform to provide a broader scope of work is largely due to contract supporting states in their efforts to provide unemployment benefits, contact tracing and vaccine administration, as well as an increase in revenue from our traditional Business Processing services. Compared to the second quarter, the revenue from our traditional Business Processing services, as we continue to win new and expand on existing contracts, partially offset the decline in revenue from the pandemic-related contracts, which was expected. As we have discussed before, we anticipate the pandemic-related contract expirations will continue to wind down and decrease revenues in the BPS segment by 20% from the third quarter to the fourth quarter. As our growth businesses contribute a larger proportion to our overall revenue and expenses, we achieved an overall efficiency ratio for the company of 50% in the quarter, outperforming our original target of 52% set at the beginning of the year. Let's turn to our financing and capital allocation activity that is highlighted on Slide 10. During the quarter, we reduced our existing unsecured debt footprint by 9% or $757 million, resulting in a repurchase loss of $20 million or $0.09 per share. This debt was set to expire in January of 2022. Over the last 12 months, we've reduced our total unsecured debt by $2.1 billion. We have no existing maturities for the remainder of 2021 and have reduced our total unsecured debt due in 2022 to $900 million. During the quarter, we issued $2 billion of term-funded private education refinance loan ABS. We have seen increased investor demand for these transactions, as we received over $500 million of orders from first time investors in our program leading to improved spreads. These transactions demonstrate our ability to reduce our cost of funds as we manage the growth of our high quality private education loan portfolio, and the amortization of our government guaranteed FFELP portfolio. During the quarter, we repurchased [ph] 7 million shares at an average price of $21.42 all while improving our ATE ratio to 6.4%. We expect to execute the remaining $150 million of authority over the remainder of the year. Let's turn to GAAP results on Slide 11. We recorded third quarter GAAP net income of $173 million or $1.04 per share compared with net income of $207 million or $1.07 per share in the third quarter of 2020. In summary, team Navient's ability to meet the challenges and needs of our customers led to strong results across all business lines, allowing us to raise our guidance for the remainder of the year to at least $4.50. I would like to thank all of team Navient for delivering another strong quarter and recognize the 800 employees who have provided best-in-class solutions for Department of Education borrowers over the past 12 years. Thank you for your time. And I will now open the call for questions.

Thank you, sir. [Operator Instructions]. We have our first question from the line of Sanjay Sakhrani from KBW. Please go ahead.

Good morning and congratulations on the servicing portfolio sale. Joe, maybe you could just extrapolate out a little bit. I know we've asked this question before in previous quarters, but when we think about the new guidance range, how much of that EPS is coming from better NIM versus portfolio. And maybe think about the sustainability of that NIM going forward. And then, if we just sort of -- if we were to think about that 4.50% on a go-forward basis, what's the run rate of earnings, if you take out some of the exogenous impacts this year? Thanks.

Sure. So on the various NIM components; I think we've done a great job in terms of execution from a financing perspective of maintaining these higher levels NIM, specifically on the FFELP portfolio. So at the FFELP portfolio it's very fairly predictable, we've been providing cash flows for the last 10 plus years. So we have a good sense of where we believe, certainly those cash flows are going to come in over the next 20 plus years here. And so from a FFELP NIM perspective, I think you can feel pretty confident that it's going to be within the range is that we suggested that at the beginning of the year, that mid to high 90s. We have been exceeding that throughout this year. And so far year-to-date, we're at that high-end of the range. On the private portfolio, I'd say it's more about of a mixed component. As we originate more and more of our newly originated refi loans, those come in at a lower NIM than our legacy or our new in-school loans. So our guidance at the beginning of the year of 2.70% to 2.80% while we're closer to 3% for this year. I would imagine that as that mix shifts, that that will continue to trend lower towards that 2.70%, 2.80% range as we think about this year and then beyond it's just really be a function of mix. And then I think on the BPS segment, we've done a tremendous job of continuing to expand on existing contracts, as well as win some new contracts. So while we're not prepared to give guidance for the full-year of 2022, as it relates to the COVID -- or sorry, the pandemic-related contracts. I feel pretty good about where that success has been. And you had mentioned about just items that I think about for the run rate for next year, I would just point to the loan sales that contributed close to I think $191 million, or at this point about $0.87 year-to-date. So I think that's one of the things that you would not anticipate repeating. Although we'll continue, we've look to be opportunistic for potential loan sales here, that would not be in any future run rate. And I don't believe it's incorporated in any one EPS forecast for 2022 at this point.

Wonderful. And then, Jack, maybe you could just talk about in-school channel. I know you guys saw a nice bump in the originations. Maybe you could just talk about how things went from the lessons learned, given some of the lack of the performance last year. And then how you look towards next year and in terms of being able to build upon this? Thanks.

Yes, thanks, Sanjay. I think the in-school volume is one that build, that whole program builds upon itself each year as you gain customers and the opportunity for serialization. But also, as you gain kind of positioning with the financial aid offices and an acknowledgement that this is an entity that is here and is committed to the space. All of that takes some time. Clearly last year in the pandemic environment, we've had fewer students enrolled, many staying at home and therefore not incurring room and board-related expenses in schools providing significantly more financial aid. You saw a decrease in demand for education and finance products and so it slowed momentum down, frankly. We were pleased to see that bounce that we received this year. I think that's really a function of that how we try to differentiate our product and the features of our products to schools and to our potential customers. And so we saw a much, much stronger acknowledgement of that value proposition and you see it in the results. We're not; I wouldn't say we are satisfied with where we are. Our goal is to grow that volume in very significant ways each academic year and so just as we're wrapping up the last academic peak season where we're very busy at planning out what we're going to do for next year to expand upon our success this year as well.

Thank you. Our next question is from the line of Vincent Caintic from Stephens. Your line is now open.

Thanks. Good morning. Thanks for taking my question. Maybe just a follow-up on the NIM question and maybe a little bit longer-term thinking but, on a rising interest rate environment, if you can remind us how your segments behave and maybe if that's -- if it's a good or bad thing or the puts and takes we should think about in a rising rate environment. Thank you.

Yes, I think certainly we're benefiting from the current interest rate environment today, and when you look at the floor income and that's a function of just where those rates reset. As we look at the 2022 and 2023 and beyond -- 2020 -- our floor income nearly 70% of that income is hedged for next year. And I would point you to the near-term rates. So while, we certainly look at the shape of the curve, what we've seen from one-month LIBOR is that that continues to remain low, and we continue to see that benefit here. One of the things that we've recently done in the quarter is with our most recent FFELP securitization $600 million of that billion dollar deal was set at fixed rates. So to the extent that you start to see those rates rise, it's a natural hedge. And we would benefit from the fact that it's a fixed cost of funds on that side. So we're certainly looking at 2022 and beyond. And what it means for a rising interest rate environment, but for 2022, 2023 from a floor perspective we're ahead of that in terms of our hedges that are in place.

Okay, thank you for that. And then another kind of follow-up, but on the student loan sales, so appreciate that it's not in any guidance that would be given for 2022. But maybe if you could describe the kind of your appetite for more student loan sales how the environment looks like as well. Thank you.

I think you've seen some competitors talk about recent loan sales and you're still seeing elevated levels. It's something that we look at. For us, the amount of unencumbered private education legacy loans is less than $2 billion at this point. And we have facilities and avenues of ways that we can raise cash against that quickly. But certainly from a long-term perspective, we don't believe in the make and sell model. But to the extent, there's opportunities out there, we will explore them as we did this year and we've done in 2019 as well as over the past decade.

Thank you. The next one we have Mark DeVries from Barclays. Your line is now open.

Thanks. Can you give us some color on the contracts you added this quarter in the BPS segment, how long you expect those for. And also any updated thoughts on how we should think about normalized BPS revenue as some of these COVID-related revenues follow it?

Yes. So most -- the largest contracts we added were still related to, I would say pandemic-driven project work. So we had been assisting states in processing unemployment, insurance claims some special unemployment programs. Some of the vaccine information networks that the states have setup and outreached to residents to let them know where they could go to get vaccinated et cetera and then some contact tracing related work. We do expect some of this to continue into 2022, but the vast majority, which was more related on the unemployment side is definitely things that we would expect to runoff and end by the end of this year. What we've been doing is taking that experience and what we delivered in terms of value and trying to identify new opportunities that are longer-term in nature. And I think many of the states that where we see those opportunities or many of those that work where we see those opportunities are going to return to a more normalized process of issuing formal RFPs and then going through the selection process and setup. In the pandemic, when the demand expanded dramatically in a short period of time, many states didn't have an opportunity to go -- to follow that traditional route. So we were able to provide and it was really one of the things that that stood out for now and is that we were actually able to provide hundreds of people to address those issues in a relatively short period of time in standup platforms and solutions to meet those needs. I think the -- probably the most encouraging thing I've seen from our clients in this space is an acknowledgement that we were providing more than just the immediate response of people. We were providing insight and analysis and productivity levels that exceeded what they were seeing elsewhere. And so I think it really sets us out for future success in that space, just one that's going to take longer to develop. In our traditional BPS segments, work we've been doing with entities like hospitals, and toll authorities, et cetera, that business suffered during the pandemic. And so revenues actually declined as the volume of transactional activity decreased significantly. And as that has been coming up, we're starting to see that revenue grow in 2021. And we expect that growth rate -- we're more or less at fully recovered rates right now. And we would expect that to grow in double-digit levels in 2022 and beyond.

Okay, great. I think you also mentioned you do expect an uptick in demand for the refi product next year as the federal loans go back into -- to repayment. Could you help size that for us? What do you think the impact could be on demand? And how much could those originations increase on a year-over-year basis?

Well, the largest -- historically, the largest share of dollar volume that we were refinancing were students who are borrowers who had federal student debt. Most of this was graduate-related balances. And what we saw is the customer who had very high levels of income, and was looking to dramatically reduce the interest rate they were paying on their loans, and in fact, pay their loans off at an accelerated pace. During the -- with the CARES Act, when the interest rate was set to zero, it's pretty difficult to compete with free, and so many of those customers took the opportunity to basically leave their debt alone at a 0% interest rate. And most of the refinancing that we were doing was related to borrowers who either had certain types of federal loans that weren't eligible for the 0% interest rate or private student loans, which we see as a big opportunity as well. And so what you're going to have is if you look at the amount of debt that's outstanding, the largest share by far is loans under the direct loan program. And so we would expect demand to increase meaningfully next year. We have not yet issued a forecast for that, and we will be doing that in January when we have our fourth quarter earnings call.

Okay. So no color you're willing to provide on just how much you think you could see demand increase?

Other than I would say we expect it to be meaningful.

Thank you. The next one, we have the line of Lee Cooperman from Omega Family. Please go ahead.

Thank you. My question really relates to capital allocation. I've been on these calls for a long time. I think we started our repurchase program when the stock was in the low 30s. And we were embarrassed to see it trade down to about $8 million. We stayed with the repurchase activity; we're now back to $20 million. When you look at the trade-off between returning money via dividends or repurchase with the stock at the current price, how do you see those two alternatives?

Thanks Lee. And I'd say thank you for being a long-term investor and believer as well. We are -- we definitely still see an opportunity to do both. We don't have any plans at this stage in the game to increase our dividend. We think it's an appropriate set at an appropriate level and certainly is a -- an above market in an attractive yield even at today's stock prices. If we look at our stock price while it's certainly significantly higher than some of the lows that you mentioned, we are still trading at a discount to the market overall and expect that we still see value in returning a significant amount of our extra capital that we're generating and releasing as our legacy portfolio amortizes back through share repurchases. We will be sharing with investors again in January our expectations for share repurchase -- our share repurchase expectations, our plans for 2022 at that time.

Thank you. [Operator Instructions]. The next one we have from the line of Moshe Orenbuch from Credit Suisse. Please go ahead.

Great, thanks. Jack, could you talk a little bit about how you would see the competitive environment in 2022, when the moratorium is lifted, given that some of the your big competitors have been down perhaps 40% in originations during the pandemic from pre-pandemic levels again kind of relate that to the increase of potential for increase in volume?

Yes. So no question, we would expect the marketplace to be fairly competitive, but I don't think it would be any more competitive than it has been in an environment where demand was lighter. I think where we tried to compete in this space is with the differentiated product, it's one of the features of our product that is unique, and is extremely attractive to our customers is the ability to set their payment. And therefore, they end up with perhaps an odd number of months of a term that allows them to pay their loans off on their schedule, and their speed, which is typically faster. Our digital first approach is also somewhat unique in that it connects with customers more efficiently in where they are versus say direct mail. And perhaps best -- the one of the best features of that is it's done at a lower cost in terms of acquiring a customer. And then on the operational side, our operating efficiency here of we serve; we originate and service these loans in-house; we don't rely on third-parties for servicing activity. It gives us an advantage in terms of both efficiency, and I would say effectiveness and the effectiveness shows up most dramatically in the default statistics. If you look at historical default rates of refi ABS, our transactions typically run about half all the competition in that area. And so, we think that combination activity give combination of features and skills and advantages is really what will set us up well for competing in this space. In the second quarter, we were actually the largest originator of refi loans in the country. So we're growing faster than the competition. And by that metric obviously taking share and we would expect to be able to continue that success next year.

Got you. Okay. Given kind of two kind of competing factors from the standpoint of buyback likely in 2022, one would be faster expected loan growth, given what we just described. But on the other hand, you've also kind of built a higher capital level. So maybe could you just talk a little bit about how you see those two factors interacting?

Sure. I think in an ideal world, our loan demand would be so significant that we would be consuming all of that capital. So that would be our first, certainly our first and best use of any capital that we have. But we're in a unique situation and that our business is generating a significant amount of capital in excess of what we need. And that's really just driven by the large legacy portfolio that that exists on our balance sheet. It's amortizing and shrinking. And as that shrinks and generates earnings, it's both releasing capital and generating capital in excess of what we believe is necessary to support our loan origination activities. And so given that we would certainly expect to just [ph], it's inefficient for us to retain that capital, and not be able to put it to use, so we're returning it to shareholders through dividends and share repurchases. And as I said with -- in my responsibility, our expectation or our view right now is that our dividend is set at an appropriate level. And our preference is to return the balance through share repurchases.

Thank you. The next one we have Arren Cyganovich from Citi. Your line is open.

Thanks. You'd mentioned that the private school refi loans actually included some private loans or that were refied. Were these graduate school loans or are you refinancing more undergrad loans now?

We are doing both. Our -- the largest customer base is still coming from the graduate side simply because they tend to have larger balances and therefore the financial benefit of refinancing is significantly stronger. But we definitely see an opportunity to work with both undergraduates as well as the parents of undergraduates who have borrowed in the private loan sector to refinance their loans. And this was really driven from a premises that when you make an in-school loan, there is -- there are two risks, right? There's the risk of graduation, will the student complete their degree and get the benefit of their investment. And then the second risk is, is their income sufficient enough to be able to manage that. When you're working in the refi space, you know the answers to those two questions. And so we're able to use that information, use their repayment experience, use our data that gives us insight into payment performance that's been built up over 40 years of participation in the program here to be able to offer borrowers a lower interest rate that saves them money and makes their student debt less burdensome.

Okay. I mean, that's interesting. My only concern would be that for undergrads. The part of this product, which made it unique for graduate students is typically they were higher earners, undergrads, typically aren't higher earners when they get out of school. You know -- what -- you have pretty limited margin to really incur any significant credit losses in the future. Are you underwriting those differently than the graduate school loan?

Our underwriting criteria is driven by, one, both the demonstration of experience in terms of repayment, and these are customers who have been in repayment for a number of years, typically anywhere from four to six years type of repayment term before they come to us on the refi side. They are underwritten based on excess cash flow, so how much cash flow you have above and beyond. And in some cases, we'll be looking at a parent as the borrower in that refinancing opportunity to rather than just the student. So there we're not taking -- we don't believe we're taking higher credit risks when underwriting a refi loan to an undergrad, someone with an undergraduate degree versus a graduate degree. It's just a matter of taking a look at those combination of credit. You need credit performance statistics to that borrower and using our 40 years of history here to be able to understand how borrowers with those types of profiles and characteristics perform in all types of economic environments. And I think if you look at our -- even if you look at our legacy portfolio, when you look at the -- we didn't underwrite loans in the historically to this type of customer base uniquely, but when we look at borrowers who fit that profile, you're going to see delinquency and default rates that are very consistent with what we're projecting in the refi space as a whole.

Thank you. The next one we have from the line of Rick Shane from J.P. Morgan. Please go ahead.

Good morning, guys. Thank you for taking my questions. Most have been asked and answered. I just like to talk a little bit about -- more about the servicing innovation. Is there anything we should think about in terms of realized gains or losses associated with this? Is there going to be any earnout for long-term revenue stream that we should be aware of, or any expenses related to severance that we should consider also?

So the costs associated with the 800 employees with existing contract that will be transferred over to Maximus as well as the re-staffing efforts as we prepare for the end of CARES Act. So you'll see a good portion or we expect to see a good portion of those expenses in this fourth quarter here. And as I said in my remarks that'll be offset by the revenues according to the TSA agreement. So we would anticipate that you'll see us that some of those continued expenses being offset by revenue into the next year. And that's taken into account with our overall EPS impact of less than $0.10 here. And so I think when you think about our -- that $0.10 and you do the math, what that means is we're going to be taking out at least north of $100 million of operating expenses. So it gives you a good sense of what 2022 is going to look like.

Got it. And then from a, actual -- I mean, yes, novation perspective, not nothing else I mean, it's just moving the revenues and the expenses, but no gains or anything beyond that?

Nothing material now.

Thank you. The next one we have the line of Bill Ryan from Seaport Research Partners. Your line is open.

Good morning, and thanks for taking my questions. Just a couple of things, just one to follow-up on the Business Processing segment, you gave a pretty detailed number going into Q4 of what your expectations are as far as revenues. And then it sounds like maybe a little bit more wind down, I'm kind of wondering what you're thinking, the baseline revenue number might be in next year, at which point you might start to roll-off of that number. And then secondly, just on the in-school originations, on prior discussions I've had with you, you've talked about the loss expectations, I believe around 6%, a little bit lower than some of what your peers are doing. And I just kind of curious as to your product positioning and who you're targeting that might lead to a little bit lower loss expectations versus your peers? Thanks.

Sorry, on the loss expectations our life of loan loss expectations are 6%. And the reason we look at that is keep in mind, these are going entirely to not-for-profit institutions. So when you compare that to our peers, they have a mix of for-profit, as well as schools that are not traditional four-year institutions.

I would also add Bill; we are underwriting and trying to provide more financial awareness of different repayment options that are available to borrowers. And by doing that we're encouraging and seeing a higher percentage of borrowers select repayment plans where they're making payments during the in-school period and that's a -- that's one that does a couple of things. One, it keeps the loan balance from growing, right. And so the debt burden is not increasing during that timeframe. But two it's also demonstrating a strong commitment that the cosigner is there to assist not in more than just name, right, they're actually adding financial resources to it. And so we would expect the combination of those factors to be super important. And again, I would just point out, having been in this industry for so long, we have a very unique insight into borrowers through this 40 years of experience, and we're able to use that to really target our underwriting or craft our underwriting criteria to those borrowers that are most likely to be successful in this space. No one benefits by making a loan to someone who's not going to be able to repay it. So we're very, very focused on the higher quality segments of the marketplace as Joe indicated.

Then just on your first question on -- on BPS outlook, so as I said, we're not giving guidance yet for 2022. But at least for -- from the third quarter to the fourth quarter, we anticipate based off of what we know of contracts expected to end in this quarter that we would see a decline in total BPS revenue of 20%. And I think you can look at the past quarters here and where we've seen successful increases in BPS primarily related to pandemic-related contracts. Those contracts continue to extend and have shifted into other businesses with states as well. So we're very pleased with what we've been able to deliver so far. And it's certainly been better than what we've forecasted and anticipated. But at this point, it's still just a little early to say what that's going to look like for first and second quarter, but we would anticipate from third to fourth quarter a 20% decline.

Thank you. The next one, we have Henry Coffey from Wedbush. Please go ahead.

Yes, good morning, and thank you for taking my question. In what quarter, does the whole servicing business go to essentially zero? How quickly does that that take? I know you're going to -- what I mean by zero the -- when the compensating revenue and offsetting cost go away, and it's just a closed door?

So in our guidance, we are anticipating that that ends by the end of 2022.

Okay. And then just a much more abstract question. You're building up this really solid refinance business, which obviously will come back to life as we get into a more normal environment, that's a very interesting customer. SoFi has done a pretty good job. We haven't seen anyone really do a good job of converting in-school borrowers into multi-product customers. But it seems SoFi has done a pretty good job of converting that refinance borrower into a multi-product customer head. Do you have any long-term thoughts on what the real value of that refinance might be? And what that customer might look like? And what else you might be able to do with the customer? Or is that still kind of an open question?

Well I think you're spot on in terms of the opportunities here. This is a, I think, a very attractive customer from multiple characteristics here, right, high income, relatively young and on a pretty steep upward trajectory in terms of earnings capacity. I think one of the other pieces that we think is extremely valuable here is the net promoter scores that we see from customers in this space, because we are effectively taking what they see as a burden, right making payments on something they've already consumed. And we're lowering that. And so the NPS that we see from our customers are typically in the high 70s, low 80s type of range. And we do believe that that has -- that gives us the potential to be able to sell our cross-market other products or services to that customer base over time. I think we might take a slightly different approach to this space, and that we would be looking to do this with partners, rather than doing it ourselves. Primarily, because we'd be, I think looking for earnings coming from that activity. And but that's -- but that we definitely see that as something that would be an opportunity for us to look at as that customer base becomes more meaningful in size. And we don't end up clearly don't want to dilute our focus in terms of what's the real -- originating the high quality volume in the first place.

Yes. Your comment is interesting, and that SoFi has a lot of touch points with their customers, but they don't make any money doing it. So I obviously, by going and establishing affiliate relationships, you could overcome that problem.

That's right.

Thank you. There are no further questions at this time. I will turn the call back over to Mr. Nathan Rutledge.

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

This concludes today's conference call. Thank you for participating. You may now disconnect.