Navient Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Navient Second Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypads. Please be advised that today's conference is being recorded, and if you require any further assistance, Please press star zero for the operator. It is now my pleasure to turn the call over to your host, Mr. Joe Fisher. Mr. Fisher, the floor is yours.

Thank you, Sylvia. Good morning, and welcome to Navient's 2020 second quarter earnings call. With me today are Jack Ramondi, our CEO, and Ted Morris, our controller and acting 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 and the related economic impact. 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 second 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, and good morning, everyone. Thank you for joining us today and for your interest in Navient. Before I start, I would like to welcome Ted Morris to today's earnings call. Ted has been with Navient since 2003, where he's been an outstanding member of our finance team. As Joe said, in addition to his role as acting CFO, he's also our controller and he's our resident expert in two of my favorite accounting policies, derivative accounting and CECL. While we were sorry to see Chris move on and I wish him well, I have tremendous confidence in Ted and the rest of the finance team. So welcome, Ted. The COVID-19 crisis continues to present ongoing new challenges. Our customers and clients have seen disruptions in their lives, work, and financial health, and while it continues to produce significant uncertainty as to what comes next, we have responded. We have provided relief to millions of borrowers in need through forbearances and other payment relief options. We have worked together with many state attorneys general and consumer protection agencies to provide a uniform set of private education loan relief nationwide, and we are assisting states to meet the surge in demand for services such as unemployment claims and contract tracing. I'm extremely proud of how our team immediately and actively responded to the crisis and the needs of those we serve. In response to the uncertain environment, we took decisive action. We increased our reserves and our ability to absorb credit losses, reduced marketing campaigns for new loans, and increased our liquidity on hand and our retained capital. In an effort to keep our teammates safe, we continue to allow those who can, about 90% of our team, to work from home. Our infrastructure and technology allowed this move to happen quickly and has allowed our team to work safely, productively, and efficiently with no disruption to service quality. These steps, our strategy, The skills and dedication of our team and the strength and diversity and client focus of our business delivered outstanding results this quarter. For the quarter, adjusted core earnings per share rose 23% over the year-ago period to 91 cents. The year-ago quarter included 15 cents in gains from loan sales and debt repurchases. There were no similar gains this quarter. Our results this quarter were driven by our proactive strategy strong credit performance, a very favorable interest rate environment, operational flexibility to meet new and significant demand for business processing services, and a continued focus on improving our operating efficiency. Later, Ted will provide more details on our financial results, but first let me add some color on the highlights of the quarter. Net interest income increased nearly $33 million over the year-ago quarter, primarily due to the favorable rate environment and a $10 million increase from our refi loan portfolio. Low short-term interest rates increased floor income, particularly on the portion of the portfolio that resets each July 1st. With the rate reset earlier this month, the $30 million of floor income earned on annual reset loans will not repeat next quarter. Credit performance was strong due in part to the relief provided by disaster forbearances granted in response to COVID. The balance of loans and repayments saw meaningful decreases in delinquencies, with the 90-day delinquency rate falling 38% to 1% at June 30th. We are just beginning to see borrowers exit from disaster forbearances granted earlier this year. We have implemented an extensive data-driven outreach program to inform and assist customers before they return to repayment. Since the peak levels of forbearance in our private loan portfolio, $1.7 billion has successfully exited forbearance where the borrower has not requested additional payment relief options that are available to them. While credit performance has been strong to date, we are prepared for this to change. Our provision for loan losses and resulting reserves are able to absorb a very significant level of losses. For example, at June 30th, our loan loss reserve would cover new cumulative defaults of over 18 percent in our FELP portfolio and over 12 percent in our legacy private loan portfolio, levels significantly above what we have experienced in recent years. As I reported last quarter, in response to the uncertain economic environment, we reduced marketing spend for our refi loan products. As a result, new originations in the quarter fell to $238 million from $1.9 billion in the first quarter. With improved visibility in both credit and funding costs, we have restarted marketing efforts and expect to originate approximately $2 billion in high-quality, high-value refi loans in the second half of 2020, consistent with our return hurdles. We have also continued to prepare for the upcoming academic year with our in-school lending product. While overall demand is likely to fall from last year due to the lower enrollment levels and fewer students on campus, early results are positive, and we are confident that our product design and features will lead to an attractive and valuable business with targeted ROEs in the high teens. In our BPS segment, most clients experienced significant reductions in transaction volume due to the crisis. For example, there were fewer vehicles parking or using toll roads, and patient visits fell at hospitals due to COVID concerns. Our BPS team was able to use our operational flexibility and processing expertise to win a number of incremental contracts to help our clients respond to new needs, including COVID contact tracing and unemployment processing services. Importantly, we were able to demonstrate our ability to adapt and provide experienced people and technical capabilities on close to a real-time basis. Our rapid response led to nearly $20 million in new revenue in the quarter. The feedback from these clients and their customers has been extremely satisfying. One of our ongoing top priorities has been expense management, and the current crisis has not reduced our efforts here. While we have consistently operated at industry-leading efficiency, we are continuously improving in this area while still delivering outstanding service. As a result of these efforts, total operating expenses this quarter fell 11 percent from the year-ago quarter to $215 million. And we continue to examine every expense item to eliminate waste, reduce costs, and improve efficiency while delivering excellent service to our customers and clients. Finally, we returned $31 million to shareholders in dividends and made meaningful progress in improving our tangible capital ratio from the decline caused by last quarter's adoption of CECL. Our adjusted tangible equity ratio improved to 3.6 percent at June 30th, up from 3.2 percent at March 31st. Adding back the cumulative and temporary mark-to-market losses on derivatives that we employed to hedge floor income would increase this ratio to 6 percent at June 30th. Expected earnings easily support our dividend and will provide the ability to complete the balance of our planned capital return in 2020. During our last earnings call, I reported that our company was entering this crisis from a position of substantial financial and operational strength. Our results this quarter are the product of these strengths. Our business model and technology infrastructure allowed us to react quickly to the needs of our customers and clients, enabled our teammates to be safer as they work from home, and delivered growth in net interest income, strong credit performance, and an ability to pivot our operations to areas of critical need. Notably, these results were accomplished with lower expenses. Combined, they delivered the core earnings of 91 cents and a 27 percent return on equity. At this time, we are more confident of the outlook for the balance of the year, and assuming interest rates and basis spreads remain at similar levels, and that credit performance remains consistent with the early results we are seeing, we expect to report full-year earnings between 295 and $3 a share in 2020. This forecast is extremely gratifying and confirms the value of our franchise, our strategic plan, and our ability to build value for all of our stakeholders. Finally, it's the product of the hard work and dedication of an extraordinary team. I appreciate your interest, and I look forward to your questions after Ted provides more details on the quarter. Thank you. Ted?