Navient Corporation

Welcome to the Navient First Quarter 2025 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during a session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jen Arias. Head of Investor Relations, please go ahead.

Hello, good morning, and welcome to Naviant's earnings call for the first quarter of 2025. With me today are David Yohan, Naviant CEO, and Joe Fisher, Naviant CFO. After their prepared remarks, we will open up the call for questions. A presentation accompanies today's discussion, which you can find on Naviant.com slash investors. Before we begin, keep in mind our discussion will contain predictions, expectations, and 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 those factors in a discussion of them 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 that are derived from core earnings. Our GAAP results, description of our non-GAAP financial measures, and a reconciliation of core earnings to GAAP results can be found in Navient's first quarter 2025 earnings release, which is posted on our website. Thank you, and I now will turn the call over to Dave.

Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. This morning, We reported results that reflect strong loan growth and strong performance against most of our key business drivers. Joe will take you through the details in a few minutes. Let me take a few minutes to step back and ground you in where we came from, where we are, and where we are headed. 2024 was a year of great transformation. We announced and then executed on all the steps we promised. divestiture of our BPS businesses, the outsourcing of loan servicing, and the beginning of deep cost reductions that those moves enabled. 2025 is the year where we will achieve more of the cost reductions enabled by the steps we took in 2024 and focus on how best to deploy our capital to grow our earnest business and return capital to shareholders. Our first quarter results had both some residual noise from our actions in 2024, as well as demonstrate our capacity to deliver growth and return capital. Let me touch on some of the highlights of our performance during the quarter. Joe will then provide more information on our business on a continuing basis, excluding the impacts of our strategic actions. First, we saw strong loan origination growth in a relatively stable rate environment. Our refi loan volume doubled from the same period a year ago, resulting in a 46% increase in originations compared to last year. Increasingly, borrowers appear to be getting off the refinancing fence as the expectation for loan forgiveness has diminished and other federal student loan repayment-related programs have ended. Our growth in originations was also driven by iterative improvements we are making over time in converting prospects into customers with closed loans. The profile of these borrowers is strong. Roughly 55% of this quarter's refi originations were to students with graduate degrees and reflect the high credit quality of this targeted cohort. Second, we saw strong improvement in NIM in our FELP portfolio. Here, the lower levels of prepayment activity in large part a result of the exploration or elimination of federal loan forgiveness programs, created a lower loan premium amortization expense. Third, we closed on the sale of our government services business in February, completing the divestiture of BPS. Our operating expenses show that we are tracking well against our ambitious targets to reduce expenses. Altogether, the divestment of BPS outsourcing and servicing, and streamlining of corporate expenses are resulting in dramatic changes in our expense and employee footprint. During the quarter, roughly 1,300 employees departed the company through the business sale or job eliminations. At the end of the quarter, our employee base was more than 80% lower than at year-end 2023. Completing the sales of our BPS business gives us greater visibility into the timing of completing our expense reduction objectives. Transition services we're providing under the outsourced servicing and healthcare business cell transactions are expected to be largely complete during the second quarter of this year. While we are preparing to eliminate these expenses earlier, the government services TSA expenses could run through the first quarter of 2026. The reduction of our corporate expenses is ongoing and we're keenly focused on identifying additional areas of efficiency across the enterprise. Provision expense for the quarter reflects a continuation of recent trends in consumer credit in general and for student loans in particular. Some of the same trends that are driving refi loan growth and new expansion, the return to repayment and reduced loan forgiveness are also influencing repayment behavior. During the quarter, we repurchased 35 million of shares under our existing authority. We said in January that our share repurchase strategy would be more opportunistic and less programmatic than it has been in the past and would continue to be balanced with financing strong growth. Our shares continue to trade during the quarter at a significant discount to tangible bulk value. We will continue to balance the opportunity to purchase future value at a discount with opportunities to invest in growth. Our outlook for the year is, as always, dependent in large part on macroeconomic conditions. The current outlook is exceptionally uncertain. The range of outcomes is wide and even the future direction of certain drivers of our business, such as interest rates, is fluid. We are continuing to operate our business according to our plan. We have the financial and operating flexibility to respond to changes in the environment. To date, we have not yet seen any significant change in loan origination volume or felt prepayments during April. We are thus maintaining our full year guidance at this point in time, which is subject to change, especially considering the uncertain macroeconomic environment. In summary, our operating results demonstrate our capacity to deliver strong loan growth generate strong revenues and cash flows from our legacy assets, reduce operating expenses, and invest for growth while also distributing capital to shareholders. I want to acknowledge and thank my colleagues in the organization who delivered these strong results. With that, let me turn it over to Joe. Thank you, Dave, and everyone on today's call for your interest in NABI. We had a strong start to the year, delivering first quarter core earnings per share of $0.25. Adjusting for regulatory and restructuring expenses, we earned $0.28 on a core basis. Our results for the quarter include $0.06 of net expense that will be eliminated after completion of our transition services agreement. I will provide further context on the results by segment beginning with the federal education loan segment on slide six. The net interest margin for the first quarter was 61 basis points, 18 basis points higher than the fourth quarter. This exceeded the high end of our guided range of 45 to 60 basis points. The increase was partially driven by a slowdown in policy-driven prepayment activity. Prepayments were $256 million in the quarter compared to $1.6 billion a year ago. We expect that prepayment activity will remain low in the near term as we are seeing historically low requests for consolidation to the direct loan program. Compared to the prior year, our greater than 90-day delinquency rates increased to 10.2%. The charge-off rate improved to 10 basis points, and forbearance rates decreased to 14.4%. While there's been much discussion about the resumption of federal loan repayments and the curtailment of loan forgiveness options, It's worth remembering there remain numerous payment options available for borrowers to help manage their payments. Now let's turn to our consumer lending segment on slide seven. Mid-interest margin in this segment was 276 basis points in the quarter compared to 277 basis points in the fourth quarter and in the middle of our stated range of 270 to 280 basis points. Total originations nearly doubled to $508 million compared to $259 million a year ago. This volume is more than triple our originations just two years ago. This was a strong start to the year and positioned us well to achieve our 2025 origination target of $1.8 billion. We are not assuming any changes in federal education loan policy, but we are well positioned with the capacity, products, and customer experience to meet any potential expanded opportunities. Late stage delinquencies declined from 2.7% in the fourth quarter to 2.6%. Forbearance rates decreased from 2.7% to 1.8% as borrowers exited the natural disaster forbearance. Despite the improvement from last quarter, our delinquency rates are marginally higher than our expectations and reflect the macroeconomic and student lending headwinds Dave mentioned. Our allowance for loan loss, excluding expected future recoveries on previously charged off loans, for our entire education loan portfolio is $753 million, which is highlighted on slide eight. The $8 million provision for FELP loans and the $22 million provision for private education loans is primarily driven by higher than expected delinquency rates. Slide 9 shows the results from our business processing segment. In February, we completed the sale of the government services business. This sale, along with the sale of our healthcare services business last year, resulted in over $400 million of net proceeds and represent the divestment of the entirety of Navient's business processing segment. Under the terms of these agreements, we will continue to provide transition services to both BPS businesses for a period of time. The expenses and revenues from all of our transition services agreements, or PSAs, are reported in the other segment. Total core earnings expenses for the quarter are lowered by nearly 30% to $130 million. These expenses include three items that I want to call out on slide 10. First, there are $20 million of non-continuing expenses offset by $23 million of non-continuing revenues related to the final two months of operating government services prior to the close. Second, there are TSA expenses of $10 million offset by $11 million in TSA revenues. Third, there are $8 million of expenses incurred during the quarter that will be eliminated upon completion of the TSAs. Our corporate shared services expenses are nearly 20% lower than a year ago, and we remain highly confident in our ability to meet our overall expense reduction targets. Let's turn to our capital allocation and financing activity that is highlighted on slide 11. In the quarter, we repurchased 2.6 million shares for $35 million while remaining well capitalized with an adjusted tangible equity ratio of 9.9% compared to 8.4% a year ago. In total, we returned $51 million to shareholders through share repurchases and dividends. Our current cash and capital positions provide ample capacity to repurchase shares, and we believe the current discount presents an attractive opportunity. The strength of the first quarter results give us confidence in achieving our full-year core earnings guidance of $1 to $1.20 per share. This range estimate continues to include 26 cents of net expense on a full year basis that are not part of our continuing operations. While we have seen a lot of volatility in the market, our guidance reflects a current expectation of moderately lower rates in the back half of 2025 and no changes to federal student loan policy. As I close, I'd like to thank all of our Navient team members for their continued dedication to generating value for all stakeholders. Thank you for your time, and I will now open the call for any questions.