Navient Corporation

Good day and welcome to the Naviant third quarter 2023 earnings conference 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jen Arias, Head of Investor Relations. Please go ahead.

Thank you, Abigail. Hello, good morning, and welcome to Navient's earnings call for the third quarter of 2023. With me today are Dave Yohan, Navient CEO, and Joe Fisher, Navient CFO. After the prepared remarks, we're going to open the call up for some questions. You can view and download presentation slides, including slides you may find useful during this call on Naviant.com slash investors. 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 discussed here. This could be due to a variety of factors. Listeners should refer to the discussion of this factor from 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 other various 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 2023 earnings release, which is posted on naviant.com slash investors. You will find more information about these measures beginning on page 18 of Navient's third quarter 2023 earnings release. There is also a full reconciliation of core earnings to GAAP included in the disclosure. Thank you, and I will now turn the call over to Dave.

Great. Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. Our results for the quarter reflect our strong foundation of assets and capabilities, as well as initial actions we are taking to deliver more value to shareholders. We achieved consistent net interest margins and credit performance, generated strong revenue growth in traditional business processing services, and lowered operating expenses. Last quarter, I discussed the in-depth and holistic review of our entire business. I'm pleased to report that this important work is well underway and we're making substantial progress. You'll see some of the actions we've already taken reflected in our results this quarter. Core earnings for the quarter were 47 cents per share. Excluding significant items, core earnings were 84 cents per share. We've taken a $45 million accrual, or 28 cents per share, in connection with the CFPB litigation. We accrued for legal matters as required based on developments over the quarter. We remain confident about the strength of our case. At the same time, we're open to finding a solution that's acceptable to all parties to put this matter behind us. In addition, as part of our regular quarterly review of critical accounting assumptions, we updated certain accounting assumptions in the third quarter. These updates slightly reduced our overall results. Joe will highlight the impacts to individual line items in his remarks. We remain focused on helping our borrowers who have federally owned student loans successfully navigate the resumption of payments, which includes helping them identify and access various repayment options. While it's still early days, we have not yet seen significant changes to repayment patterns on loans we hold. Let me turn to our in-depth review. As I mentioned, while the bulk of the review work remains ongoing, initial insights led us to take some initial important actions. For example, we've reduced the substantial capital investment we had planned to make this year in in-school originations. And we're evaluating ways to reduce capital intensity and generate higher returns in this activity. I'll talk more about this action shortly. The scope of the reviews are comprehensive and being conducted with an open mind and a critical eye. There's no part of our business exempt from a hard look and a set of tough questions. We're also evaluating opportunities to variabilize costs across several parts of our business, including within our loan servicing activities. There are several cross-functional teams across multiple work streams. each grounded in the ultimate goal of identifying and evaluating a range of alternatives to deliver greater value to our shareholders. The executive team and I are managing the effort with regular and frequent updates and clear oversight from our board. We're pleased with the progress we've made in identifying and evaluating alternatives, and in certain instances, beginning to take actions. We look forward to continuing to provide updates as we move forward. Let me now discuss loan originations and the actions I took. We originated 204 million of in-school loans during the quarter, bringing our year-to-date total to 292 million. The year-to-date total is flat to last year. This reflects actions we took to reduce loan acquisition spending, the overall interest rate environment, and changes in interest rates on federal student loans. Our plans for the year had included an ambitious in-school loan origination growth target. That target required a substantial and long-term commitment of capital for loan acquisition costs, to establish life of loan loss reserves, and equity and unsecured debt capital. I needed to be more confident that we could achieve our targeted returns before committing that capital. As a result, I implemented a reduction in our in-school acquisition spending during the third quarter. We also adjusted our pricing in the marketplace during the third quarter to improve our margins. We took these two steps while remaining disciplined about maintaining high credit quality. These actions impacted our volume. Our in-school origination volumes also reflect a changing mix between graduate and undergraduate students. our lending to undergraduate students grew 22% year-to-date compared to the same period last year to 163 million. At the same time, our graduate volume, which represents a higher percentage than the overall in-school market, was down. There was a much smaller difference this year compared to last year in the rate of a federal graduate loan compared to a private loan. which was another contributing factor to our graduate volume being down. We have confidence in our capabilities and in the opportunities in the in-school market. We're evaluating ways to enhance capital efficiency. We believe that we can grow steadily and sustainably with margins and credit quality that deliver appropriate returns. Our refi originations during the quarter were $178 million, bringing our year-to-date total to $456 million. As we've discussed previously, the addressable market in refi is driven primarily by interest rates. While we experienced a modest increase in interest in refinancing from federal borrowers as the government payment resumption date approached, we continue to view the opportunity in refi originations to remain more limited than in prior years until rates decline significantly. Our business processing solution segment had a strong quarter. Revenue from traditional services increased 33% year over year. This segment's growing organically with very low capital requirements. The trends we're seeing in many of our target markets are encouraging and our pipeline of potential new business is promising. In the healthcare space, we're seeing renewed post-pandemic interest by medical systems and other healthcare providers. Our extend healthcare affiliate has strong credentials to navigate the increasing complexity of claims processing while providing clients with lower costs and increased cash flows. Within government services, we've grown by achieving a high percentage of contract renewals, winning new business, and applying our capabilities to new types of clients. We provide on-the-channel contact centers, that allow federal agencies, states, municipalities, tolling and parking authorities to better serve their constituents and manage revenue streams. To close out my remarks, we've achieved strong results this past quarter. While continuing to execute well against our plans for the year, we also have taken initial actions resulting from the review of our businesses and we're making great progress on ways in which we can deliver more. We look forward to providing a comprehensive update on our review as soon as possible. I want to acknowledge and thank my colleagues across the organization who make it possible to deliver these results while also focusing on ways to deliver greater value to shareholders. With that, I will turn it over to Joe for a review of this quarter's results, and I look forward to your questions later in the call.