Navient Corporation

Today, ladies and gentlemen, thank you for standing by, and welcome to Navient's third quarter 2022 earnings conference call. At this time, all participants are on the listen-only mode. After this speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 1. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker host today, Jennifer Arias, Head of Investor Relations. Please go ahead.

Thank you, Livia. Good morning and welcome to Navient's third quarter 2022 earnings call. With me today are Jaka Mundi, Navient's CEO, and Joe Fisher, Navient's CFO. After the prepared remarks, we're going to open the call up for questions. But before we begin, keep in mind that our discussion today will contain predictions, expectations, forward-looking statements, and other information about our business that is based on management's current expectations as of the date of this presentation. Actual results in the future may be materially different from those discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC. During this conference call, we will refer to non-GAAP financial measures, including core earnings, adjustable tangible equity ratio, and various other non-GAAP financial measures that are derived from core earnings. Our GAAP results and description of our non-GAAP financial measures can be found in the third quarter 2022 supplemental earnings disclosure, which is posted on the investors page at Naviant.com. There is also a full reconciliation of core earnings to GAAP results included in the disclosure. Thank you, and now I will turn the call over to Jack.

Thanks, Jen. Good morning, everyone, and thank you for joining us today and for your interest in Naviant. Our long-term goals are to create value by growing our loan origination and business processing solution franchises, to effectively and efficiently manage our cash flows from our legacy student loan portfolios, and to reduce our risk. We are continuing to deliver solid results in each of these areas this quarter. Highlights include adjusted core EPS of 75 cents. We increased our in-school loan originations by 41% this quarter. with our full year performance expected to be an increase of 60% or 12 times the overall growth rate of the market. Traditional BPS revenue grew 14% compared to the year-ago quarter. We delivered stable net interest income despite the rapidly rising interest rate environment. We are exceeding our guidance in operating efficiency. A particular note is the 53% decline in felt segment operating expense. And we are defensively positioned in the loan loss reserves and capital for what we expect will be a deteriorating economy in 2023. The environment of rising rates, high inflation, and a declining economic outlook creates challenges. As you can see from our financial results, we are managing these challenges successfully. The recent executive orders on federal student loan forgiveness have created additional challenges. The announcement in August created significant confusion leading to massive increases in customer call volume with questions no one could answer. The recently announced changes in eligibility have added to this confusion. To be clear, as it stands today, commercially held felt loans like our portfolio are not eligible for the forgiveness program. Regardless of the outcome, we'll continue to work with our felt customers to make loan payments manageable, supporting our decades-long track record of 30% better default rates. I'm particularly proud of how our team is working to support customers through this confusing period. As Joe will explain in his remarks, the President's executive orders on loan forgiveness did lead to incremental consolidation activity this quarter. before the FELP eligibility rules changed. You will see that the financial impact of this quarter's incremental consolidation activity, which reduced earnings per share by five cents, was consistent with the guidance we provided last month. While we'd like to be able to provide greater insight on the future of loan forgiveness and its impacts, our crystal ball is a poor predictor of political outcomes. And so we remain focused on managing what we can, execution of our strategy and delivering for our customers and investors. In consumer lending, our goal is to build a value-creating franchise that serves students and families throughout their planning and paying for college journey. We offer families tools that make it easier to complete the FAFSA, search and apply for scholarships, and compare financial aid award packages. All of these services are available for free through our Going Merry platform. For those who are dreading the task of completing the FAFSA this season, I encourage you to visit goingmerry.com for our FAFSA made easier product. These high value and easy to use tools are driving significant growth in new users with over half a million new users added year to date, nearly three times as many as a year ago. We also help families pay for college with private loans. And after graduation, we offer refinancing options so graduates can simplify their loan management journey and capture the value of their college degree. Our in-school loan product is designed to clearly inform families of the value of making payments while in school. Making payments from the start significantly reduces the all-in cost of borrowing. Our efforts to convey this benefit have been very successful, with 85% of customers electing to make payments while in school. In the quarter, in-school originations increased 41% to $216 million. Most importantly, we're well-positioned to continue to grow at above-market rates next year and beyond. Our refinance volume was lower this quarter, the result of higher interest rates which reduces the addressable market, and the prospect of loan forgiveness, which has led potential customers to wait and see. We will be ready to return to growth with our market-leading products and services when these conditions improve. In BPS, we provide workflow processing, omnichannel communication, and revenue management services to clients and government and healthcare. Our technology-enabled solutions leverage data and our broad expertise to help our clients deliver high-quality services and increase revenue. While it may not be obvious, these abilities leverage the skills we develop and utilize each day in loan servicing. While total BPS revenue this quarter declined as our pandemic-related contracts wound down as expected, revenue from core services increased 14%. In FELP, we are successfully managing our net interest margin despite the rapid rise in rates. This is the result of effective hedging and funding strategies put in place ahead of the recent rise in interest rates. Credit performance also continues to be better than expected. Though the FELP and private portfolios' 91-plus delinquencies and defaults are higher than a year ago, approximately 40% of these balances were 91 plus days delinquent prior to the pandemic and received pandemic payment relief before returning to repayment. And consistent with prior quarters, our private loan delinquency and default rates remain below pre-pandemic levels. Still, we added $28 million to our reserves for future losses. $13 million for FELP, and $15 million for private to build on our defensive position in anticipation of a deteriorating economy. Our commitment to operating efficiency continues. It's particularly noteworthy that our operating efficiency improved despite rising interest rates and high inflation. This will remain a key area of focus for the team. Earlier, I stated that we were defensively positioned. Specifically, we added to our reserves for loan losses, not due to current trends, but in anticipation of weaker economic conditions. In addition, we have been building our capital ratios. Our enhanced capital will support our ability to invest in our growth while continuing to return capital to investors. These defensive actions will serve us and investors well in a recession. Our results this quarter are the product of hard work and a solid strategy. The Navient team is a focused and committed group, and we are eager to continue to create value for our customers and investors. I look forward to your questions after Joe provides more details on this quarter's results. Thank you for listening and for your interest in Navient. Joe?