Navient Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Navient First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker for today, Mr. Joe Fisher. Thank you. Please go ahead.

Thank you, Lashana. Good morning and welcome to Navient's 2020 first quarter earnings call. With me today are Jack Raimondi, 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. For Navient, these factors include, among others, the risks and uncertainties associated with the severity, magnitude, and duration of the COVID-19 pandemic. The work-from-home policies and travel restrictions that have been put in place did not negatively affect our ability to close our books and maintain our financial reporting systems. internal controls over financial reporting, or disclosure controls and procedures. 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 first quarter 2020 supplemental earnings disclosure. This is posted on the investors page at Navient.com. Thank you, and now I'll turn the call over to Jack.

Thanks, Joe. Good morning, everyone, and thank you for joining us today. I hope you and your families are healthy and staying safe. These are challenging times. This morning we will share the steps we have taken in response to the crisis, review our quarterly results, and discuss the estimates we have made about future financial impacts. Let me start with our response to the COVID-19 crisis. As this crisis evolved, we took early and decisive action to protect the health and safety of our teammates. We expanded our work from home capabilities and implemented best practices and safety and hygiene to protect those who needed to come to the office. We were able to quickly and successfully move 90% of our team to a work from home status. As a result, we have thankfully had less than a handful of positive cases among our employees. We've also focused on meeting the needs of our customers and clients. Our team rose to this challenge, not only meeting the normal workflow, but rapidly implementing and deploying COVID relief information and options across our businesses. In my call listening, it is clear that the programs we have implemented are providing important relief to our customers, some of whom are on the front lines. We've also responded to those impacted by the ongoing COVID-19 crisis by deploying hundreds of teammates to assist states in processing the surge of unemployment claims they are receiving. With just a few days to prepare, we were able to respond to incoming calls and provide support. This is a great example of how Team Navient is repurposing our skills to help during the crisis. As we prepared our team and our business for the rapidly changing environment, We also thought about how we could help support our communities. Our prior business continuity planning process had included stockpiling a supply of N95 masks. Clearly these masks met a higher need with the frontline responders in our communities. So we donated our stockpile of nearly 10,000 masks to local hospitals and others to help protect those who are treating the sick. To me, the best news of this quarter is that we kept our team healthy, met the needs of our customers and clients, and kept everyone on our team gainfully employed. Turning to our financial results, core earnings this quarter were 51 cents per share, compared to 67 cents in the fourth quarter and 58 cents in the year-ago quarter. Earnings this quarter included a $95 million provision for loan losses, or 36 cents a share. On the financial side, our company remains strong. We are carefully managing our expenses, capital expenditures, and balance sheet. We believe we have ample liquidity, and we are seeing steady performance in cash flow from our student loan portfolio and processing businesses. Early in the first quarter, we completed our planned unsecured financing activity for the year, raising new proceeds and extending the maturities of short-term bonds. We also completed $1.9 billion in term ABS issuance and most recently expanded the size and extended the maturity of some of our warehouse funding facilities. Looking forward, cash flow from our loan portfolio and services contracts remain a strong source of liquidity as our very seasoned loan portfolio has experienced lower levels of stress. To be clear, we are here to assist our customers and clients who are impacted by the virus and its economic consequences. We offer numerous relief options, including immediate payment relief to those in need, and will continue to do so. We have also seen most borrowers continue to make payments according to their payment plans. And while forbearance rates have risen, the balance of loans delinquent has not. This trend has continued into April. As a result, we expect that defaults in both our private and felt portfolios will be significantly lower in 2020 than expected at the start of the year. While we are paying close attention to our customers, it is too early to know the full impact of this crisis or the path and timing of the recovery. How long does this crisis last? How many more will lose work? and what the recovery will look like are all questions we can only guess at. Nonetheless, we have looked toward other significant economic crises, including the Great Recession, and the more recent regional natural disasters to guide us. As a result, our provision for loan losses this quarter totaled $95 million, bringing our total reserves of $2 billion at quarter end which represents reserves equal to 7.1% of our private loan portfolio and 25% of the risk-sharing component of our FELP portfolio. While our portfolio's strong credit characteristics and the historic resilience of the U.S. economy provide hope for the best, we are prepared for things to get worse. Our student loan portfolio is very seasoned and conservatively funded. Despite the volatility in rates and basis spreads over the last few weeks, net interest income was in line with expectations. Volatility in the basis spreads of our assets and liabilities was a negative this quarter for our FELP net interest margin, which was offset by higher levels of floor income. We expect this basis spread to improve in the second quarter. Other notable items for the quarter include new refi originations of $1.9 billion, up 92% over the year-ago quarter. Demand was very strong for our products through March. Given the uncertainty with both funding costs and the economic outlook, we materially reduced our marketing efforts and tightened credit to reduce future originations until we have a greater visibility in funding costs and the economic outlook. Private loan charge-offs in the first quarter declined 30% to $68 million, compared to $97 million in the fourth quarter. This decline was driven by the strength of the economy into March. We expect charge-offs during the balance of 2020 to be lower than 2019 and our original forecast for 2020, given the increased use of payment relief options. Private loans and forbearance increased to $1.6 billion, or 6.9% of the portfolio at March 31st. This increase is entirely driven by our COVID-19 relief options. Loans and forbearance continued to increase in April to $2.8 billion as of April 15th. This quarter also saw continued improvements in operating efficiency, and while total OPEX was unchanged from the fourth quarter, This quarter includes $9 million in seasonal payroll-related expenses. At quarter end, our adjusted tangible net equity ratio declined to 3.2%. While Chris will provide greater detail later in the call, I would like to remind folks that the portion of our derivative book, Hedging Floor Income, is marked to market each period and reduces equity in falling rate environments. The offsetting value we receive in floor income, however, is not marked to market, and therefore its value, which increases in falling rate environments, is not reflected in our equity. The significant decline in rates delivered a larger than normal negative mark this quarter. As a result, at March 31st, our GAAP equity position is reduced by a cumulative $629 million for derivative valuations, that will reverse to zero as hedge contracts mature. As a result, while our equity ratio is below our target range, we are comfortable with our position and our outlook. While our response to the crisis has taken center stage, we've also continued to work on other important initiatives. For example, we continue our efforts to move our remaining systems off our mainframe, and we remain focused on delivering our in-school loan products for the upcoming academic year. The COVID-19 crisis has created unprecedented challenges across all aspects of our lives. Your company entered this crisis from a position of substantial financial and operational strength to see this crisis through. Our team has responded with flexibility, resilience, and innovation to meet the needs of our clients and customers. I'm inspired by their commitment and I'm thankful for their health and safety. I'll now turn the call over to Chris for a deeper review of this quarter's results. Chris.