Navient Corporation

Good morning and welcome to the Naviant Fourth Quarter 2025 Earnings Conference Call. This call is being recorded. Currently, all participants are in a listen-only mode. Following the remarks, we will conduct a question and answer session. Instructions will be provided at that time. If anyone should require assistance during the call, please press the star key followed by zero on your telephone keypad. At this time, I will turn the call over to Jen Arias, Navient's Head of Investor Relations. Please go ahead. Hello, good morning, and welcome to Navient's earnings call for the fourth quarter of 2025. With me today are David Yohan, Navient's CEO, and Steve Hauber, Navient's CFO. After their prepared remarks, we will open up the call for questions. Today's discussion is accompanied by a presentation, which you can find on Navient.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 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, 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 the reconciliation of core earnings to GAAP results can be found in Navient's fourth quarter 2025 earnings release, which is posted on our website. Thank you, and now I will turn the call over to Dave.

Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. First, Joe Fisher is joining me this morning. I want to extend our sincere thanks to Joe for his dedicated service over 20-plus years and the solid foundation and team he helped build. We wish Joe all the best in his next endeavor. I'm also joined this morning by Steve Haber, who was appointed Chief Financial Officer earlier this month. Steve is also a 20-plus year veteran of the company and brings strong leadership and deep experience to the role. He most recently served as our chief administrative officer and played a key role in managing our transformation and our expense reduction efforts. Steve's appointment is part of a broader set of changes that better align our management structure with the business strategy for Arnest and Navient that we shared in November. As we mentioned in November, starting January 1st, our in-school lending business was transferred from Earnest to Navient to consolidate our education activities, which also includes the legacy FELP and private loan portfolios. This morning, we reported Q4 and full-year results that demonstrate our underlying ability to drive high-quality loan growth while at the same time reducing operating expenses. Our reported results include an additional provision on our private legacy portfolio and restructuring costs largely related to our expense reduction initiatives. During 2025, we effectively completed our Phase I transformation within Legacy Navient and will exceed our $400 million expense reduction objectives. These operating expense reductions increase our already substantial future life of loan cash flows by $2 billion cumulatively, providing increased financial flexibility. The benefits of our investments at Earnest and the expense reductions we have achieved are reflected in the operating leverage within our 2026 outlook. We expect that we can fund year-on-year loan growth of $1.5 billion, or 60%, The total expenses that are lower than last year are roughly 20%. As set out in November, we are operating with lower expenses and also with improved capital efficiency, which should enable us to finance our growth plans simply by utilizing the capital being released from the existing back portfolio. Earnest had its strongest quarter of the year, more than doubling origination volume year over year, accompanied by high credit quality, totaling approximately $634 million in new refi loans. This brings full-year refi originations to $2.1 billion, more than doubling volume from the prior year. In-school lending also had a great year, originating its highest ever level of new loans of $401 million, with strong credit quality and margins. Steve will take you through some more detailed statistics showing the continued momentum at Earnest in a few minutes. We continue to invest in capabilities at Earnest. An important part of the executive changes we made earlier this month was the establishment of a vertically integrated CFO role at Earnest. We're currently conducting a search for FinTech experience to fill it. The momentum at Earnest and the actions we took in 2025 position us well going into the new year. Turning to guidance for 2026, we're currently targeting total loan originations of $4 billion, which would represent growth of approximately 16% over 2025. We expect refi and in-school lending growth of over 50% each and less than $100 million for personal lending while we continue our pilot programs. As you see, we took the incremental provision in the fourth quarter, largely relating to the private legacy portfolio, which were a decade ago. There were minimal additional provisions for FELP or refi loans. While this provision has a significant impact on reported earnings per share, the effect received from the legacy portfolios is immaterial. Steve will take you through these in more detail in just a minute. We also continue to return capital to shareholders through shared purchases and dividends and expect to continue to do so in 2026, with shared purchases being opportunistic, as they were in 2025. When I assumed the CEO role in 2023, the company had multiple business lines and products supported by a significant shared service footprint of capabilities and expenses. The executive organizational structure at that time reflected an operating company business model with multiple enterprise functional heads reporting into the CEF. We have been migrating and expect to continue to migrate toward a holding company management structure with carefully managed and lower central costs. Ernest's and Navient's education finance activities will both manage directly more of the services needed to operate their respective business. The organizational structure we announced earlier this month are another step in this migration. I'm very excited about Madian's and Erna's prospects for 2026, and we look forward to reporting on our achievements in the coming quarters. With that, I'll turn it over to Steve, who will provide more detail on Q4 results and our 2026 outlook.

Thank you, Dave, and thank you, everyone, for joining today's call. I will review the fourth quarter and full year 2025 results and will provide our outlook for 2026. During the fourth quarter, our actions to further reduce operating expenses conditioned us to over-deliver on the $400 million expense reduction target and our legacy activities established two years ago. At the same time, Earnest continued to demonstrate strong loan origination growth with its highest refi quarter of the year, ending the year with total originations of $2.5 billion. We also provided for additional expected credit losses in our private legacy portfolio and recorded restructuring costs related to our expense reduction efforts. In total, core earnings per share for the fourth quarter were $0.02, On a full-year basis, we reported core loss per share of $0.35. Let's turn to slide six, where I will review earnest loan origination growth in 2025. Refi originations were $2.1 billion in 2025, which doubled the volume from the prior year. Refi rate check volume, measured as prospective refi customers completing a soft credit flow to receive a personalized rate quota increased nearly three times from 2024 to 2025. This growth demonstrates positive tailwinds and strong demand for our ReFi product. We are generating demand and converting volume efficiently. As you can see on the slide, both sales and marketing and other operating expenses as a percentage of originations improved meaningfully year over year, down 29% and 35% respectively. These efficiency gains are lowering our cost per dollar of volume and driving stronger operating leverage as we scale. Capital efficiency is also improving. As we shifted toward vertical securitization structures, the amount of equity required to finance these loans has declined materially. To summarize the refi story in 2025, demand is improving. We're efficiently converting that demand into high-quality loan volume and We deliver a great customer experience, and we're benefiting from both stronger operating leverage and improved capital efficiency. In-school originations also grew to $401 million in 2025, approximately half of which related to borrowers pursuing graduate degrees. We remain focused on the 2026 peak season, the expanded market opportunities, and targeting strong growth in 2026. We are approaching the graduate lending market expansion with discipline and strong momentum. Our platform, partnerships, and underwriting discipline put us in a good position to serve our target customer segments with our highly rated products and customer experience. Slide 7 provides similar loan origination growth information and compares the fourth quarter of 2025 to the same quarter in the prior year. We maintained our positive growth momentum in the fourth quarter with refi origination growth of two times, improving trajectory for our expense efficiency metrics and strong credit quality. I'll now cover segment financial results, beginning with the consumer lending segment on slide eight. Fourth quarter net income was $25 million compared to $37 million in the fourth quarter of 2024. Consumer lending net interest income declined year over year, mostly due to lower outstanding balances and the product mix of the portfolio. Looking forward, we expect consumer lending net interest income in 2026 to remain relatively stable compared to the back half of 25. We expect new originations to outpace the amortization of the portfolio in 2026, leading to growth in our total outstanding balance of private loans. Year-over-year expenses in the fourth quarter were down slightly, as efficiency gains more than offset the expense impact and higher origination volume. Moving to credit, private charge-off rates declined from 2.48% in the third quarter to 2.24% in the fourth quarter. Delinquency rates increased from the third quarter to fourth quarter, with 31-plus day delinquency rates increasing from 6.1% to 6.3%, and 91-plus delinquencies increasing from 2.8% to 2.9%. We recorded provision of $43 million in the fourth quarter, $9 million of which was related to new origination. The remainder primarily reflects a weaker macroeconomic outlook and a response to fourth-quarter delinquency trends, largely within our legacy private loan portfolio. Federal education loan segment results are on slide 9. Fourth quarter net income was $8 million lower than the third quarter, mostly due to third quarter net interest income benefiting from the adoption of lower prepayment rate assumptions. Comparing Q4 to the prior year quarter, net income was $7 million lower Increase reflects lower provision and the impact of decreasing interest rates on the different index resets on assets and debt. Additionally, expenses in this segment were 20% lower, facilitated by our variable cost structure from outsourcing the servicing of our portfolio. Provision in the federal segment in the fourth quarter fell to $1 million. The total delinquency rate improved slightly from Q3, declining from 18.1% to 17.5%. while the net charge-off rate rose 8 basis points to 23 basis points. The higher charge-off rate in the quarter primarily reflects loans to borrowers affected by 2024 natural disasters that were written off in the quarter. Self-prepayments remained historically low at $225 million in the fourth quarter, compared to $322 million a year ago and over $1 billion two years ago. With the slow amortization of the self-loan portfolio, we expect relatively stable net interest income throughout 2026, barring unexpected macro events impacting the interest rate environment. The allowance for loan loss, excluding expected future recoveries on previously charged off loans, for our entire education loan portfolio is $707 million, which is highlighted on slide 10. Slide 11 shows the results from our business processing segment. In October, we completed our final obligations under the Transition Services Agreement, or TSA, for our government services business. The TSA revenues and expenses from this quarter represent the tail end of this activity, total less than $1 million, and are reported in the other segment. The earlier than expected completion of the TSA allowed us to begin our final push to remove remaining legacy shared expenses. We will over-deliver on our $400 million expense reduction target. More detail on the total expenses can be found on slide 12. We closed 2025 with fourth quarter total core operating expenses of $88 million, a 40% improvement compared to the fourth quarter of 2024. Restructuring expenses were $11 million in the quarter, as we recognized charges related to our legacy structure and environment that will no longer be in our expense run rate. This included $6 million of restructuring costs related to the earlier than expected retirement of significant components of our former technology infrastructure. Full-year 2025 total expenses were $438 million, a decrease of close to 50% compared to 2023. This decreases the direct result of our focused and aggressive efforts to reduce our expense base through divesting the VPS business, transitioning to a variable servicing expense structure, and significantly reducing our corporate expenses. As illustrated on slide 12, this momentum is continuing into 2026. Let's turn to our capital allocation and financing activity that is highlighted on slide 13. In the fourth quarter, we completed our fourth securitization of the year, bringing our total issuance in 2025 to nearly $2.2 billion of term ABS financing. We continue to see strong investor demand and achieved high effective cash advance rate in these financings. Our current cash and capital positions provide ample capacity to distribute capital and invest in strong loan origination growth. In the fourth quarter, we repurchased 2.1 million shares at an average price of $12.67, as our shares remain significantly below tangible bulk value. In total, we returned $41 million to shareholders through share repurchases and dividends, while maintaining a strong balance sheet with an adjusted tangible equity ratio of 9.1%. Slide 14 provides our outlook for full year 2026. We are targeting total loan originations of $4 billion, with growth rates over 50% for both our refined and in-school loan products. We expect to achieve this growth while reaping the benefits of our investments in capabilities at Ernest and our legacy expense reduction efforts. Specifically, we expect expenses in 2026 of $350 million, which is $88 million lower than 2025 total expenses. Our outlook for full-year 2026 core EPS is a range of 65 cents to 80 cents. This range is net of a 35 cents to 40 cents per share impact. due to upfront CECL charges and operating expenses related to our expected $1.5 billion year-over-year increase in loan originations. As I wrap up my comments, I want to express my appreciation to Joe for his years of valuable contributions to the company. I'd also like to thank the Navient team for their continued dedication throughout our strategic transformation. Thank you for your time, and I will now open the call for any questions.