Navient Corporation

Please stand by, your meeting is about to begin. Good day and welcome to the Navient second quarter 2026 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 given 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 Roger Yancoup, Navient's Treasurer and Head of Investor Relations. Please go ahead.

Roger Yancoup Hello. Good afternoon and welcome to Navient's earnings call for the second quarter of 2026. Joining me today are Ed Bramson, Navient's Chief Executive Officer and Chair of the Board, and Steve Hauber, Navient's Chief Financial Officer. After Ed and Steve's 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 the presentation. Actual results in the future may differ materially from those discussed today due to a variety of risks and uncertainties. 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 certain non-GAAP financial measures, including core earnings, adjusted tangible equity ratio, and various other non-GAAP financial measures 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 second quarter 2026 earnings release, which is posted on our website. Thank you, and I will now turn the call over to Ed.

Thank you, Roger, and thank you to everyone for joining the call today. Before turning to the results themselves, I want to express our thanks to David Yowan, my predecessor's CEO, who stepped down from the role in June of this year. David led the Navigants team through a period of significant strategic change. Under his leadership, we bolstered our liquidity and accomplished a major structural reduction in fixed costs. This is a much stronger position to compete in the areas that represent offshore growth. In fact, we're already benefiting from this transformation, and I'll highlight a few of these benefits at length in my remarks. As you have seen from the release, we're having a second quarter of core earnings of $0.29 a share. During the quarter, a few significant items affected the results. We realized a gain on investment. This was partially offset by regulatory and restructuring expenses, and an upfront expense from electing to call a felt trust. The net impact of those items is a benefit of about $0.04 per share, so excluding them, core EPS would have been $0.25 for the quarter, and that compares to core EPS of $0.20 in 2025. Steve will discuss these items when he takes us through the slide presentation, and he will also cover some adjustments to loss provisions in the private loan back book, which mostly offset each other in the quarter. There are a couple of trends in the second quarter that I think are worth highlighting, as they indicate that we're seeing the initial benefits from our strategic transformation program. I also want to mention a change in capital allocation, which will support the acceleration and growth that we're experiencing. First thing I'd like to highlight is originations, which grew in both refinance and in-school products. combined originations were up by more than 60% versus the same quarter of 2025 to $815 million in total. The second item was operating expenses, which were 18% lower than they were in Q2 of last year. The rapid growth in our private loan originations in the current quarter was principally due to increased demand for student loan refinancing. In the second half of this year, we expect also have demand for in-school products, which will increase significantly as well, partly due to seasonality and partly to changes in government policy and graduate education lending. Looking a bit further ahead, as we complete the testing phase of our new personal loan products, we can foresee additional demand growth for them in 2027 and beyond. With respect to the capital allocation that I mentioned earlier, With this level of growth and originations, we think it now makes sense to consider redeploying some of the capital from our large portfolio of private legacy loans into the more strategically important product areas that we're now focusing on. Our legacy private loan portfolio is around $5.4 billion and it's profitable. but we don't make those type of loans anymore so they really don't help us strategically and their gradual decline in balances doesn't fit with our growth objectives. As a result, at the end of Q2, we classified $528 million or just under 10% of these legacy loans as held for sale and we may consider reclassifying more of them in the future. The reclassification released $19 million of allowance for losses related to these loans, which we essentially reallocated back to the balance of the loan portfolio. We've also made a change that relates to our in-school products, both graduate and undergraduate. Beginning in Q3, we'll be accounting for newly originated in-school loans at fair value. The loans we originated in Q2 and earlier are unaffected and will continue to be accounted for at amortized costs that we cease to reserve. Since essentially all of these future originations are intended to be securitized or sold, we believe that fair value will represent the economic impact of these products on our financial position better. Steve will be taking us through the slide presentations at this point.

Thank you, Ed. I appreciate everyone joining us for today's call. In the second quarter, we delivered strong business performance and solid financial results and took steps to better position the company around today's lending products. I'll provide additional detail on the quarter starting with slide four. Core earnings per share were 29 cents for the quarter. Our results included several significant items. a $12 million realized gain on an investment partially offset by a $3 million loss resulting from the call of a felt securitization trust and $4 million of regulatory and restructuring expenses. In total, these items contributed a net $0.04 to second quarter results. We also recorded provision of $26 million in the quarter, which I'll cover in more detail when we review the allowance. Moving to slide five, Earnest continues to drive sustained demand and originations growth in our refinance product. Rate check and origination volume were both up over 60% compared to a year ago. The $735 million of originations in the quarter brings year-to-date originations above $1.5 billion, keeping us on pace with our 2026 origination volume outlook. Credit quality also remains strong, with weighted average FICO on new refinance originations at 774 and roughly 60% of our volume coming from borrowers with graduate degrees. In addition to improving operating leverage from higher volume, we also saw lower cost of acquisition year over year. Slide six covers in-school lending. We originated $80 million of volume in the quarter, up 40% from the same period last year. That momentum has continued in recent weeks, with year-over-year growth rates continuing to build as we move through peak season and serve borrowers and schools in the expanded graduate school market. Importantly, we are achieving this growth while also improving efficiency year-over-year. As Ed mentioned, we have elected the fair value option for in-school loans originated after June 30, 2026. Under this accounting model, we will record these loans at fair value on our balance sheet with no CECL allowance or provision. Under the prior model, in-school originations in the back half of the year would have resulted in additional provision expense in 2026. The fair value option better aligns the accounting with how we manage and evaluate these loans while also removing that near-term provision impact. Slide 7 summarizes our consumer lending segment results for the second quarter. Net income was $27 million compared with $26 million a year ago. These results included a $6 million year-over-year increase in expenses, primarily reflecting marketing and origination-related costs associated with higher volume. Even with that higher spend, our lending efficiency metrics continue to improve as we scale and optimize our strategies. Turning to credit, private delinquency rates improved modestly in the second quarter. Private charge-off rates decreased from 1.9% in the first quarter to 1.8% in the second quarter. Delinquencies also improved, with 31-plus rates declining from 5.5%, 5.4%, and 91-plus rates declining from 2.5% to 2.4%. Let's move to slide eight in the allowance for loan losses. We recorded $26 million of provision in the second quarter, with $8 million related to SELF and $18 million related to the private loan portfolio. The private provision had three components. First, we recorded $14 million of provision associated with second quarter originations. The second component relates to the $528 million of legacy loans that we classified as held for sale at the end of the second quarter, consistent with our broader effort to align the balance sheet with today's lending products. We recognize the $19 million provision benefit from releasing the allowance associated with those loans. The third component is a $23 million reserve build on the remaining private portfolio. While private credit performance continued to improve in the second quarter, the pace of improvement moderated as the quarter progressed. Given those trends and the broader macroeconomic environment, the bill reflects our current view of lifetime loss expectations across the remaining private portfolio as we continue to monitor performance. Slide 9 summarizes the results of our federal education loan segment. Net income was $26 million compared with $30 million a year ago. As expected, net interest income and operating expenses both declined as the FELP portfolio continued to pay down. Second quarter results also reflect the acceleration of $3 million of interest expense from the call of a securitization trust. While that reduced earnings in the quarter, the trust call is expected to lower interest expense in future periods and provide additional liquidity. FELP credit trends continued to normalize as disaster forbearance-related activity subsided. Self-charge-off rates improved from 29 basis points in the first quarter to 18 basis points in the second quarter. And 91-plus delinquency rates declined to 8.0%, which is 50 basis points better than last quarter and more than 200 basis points lower than the year-ago quarter. Expense results are on slide 10. Total expenses in the second quarter were $85 million compared with $100 million in the second quarter of 2025. Year-to-date operating expenses, excluding regulatory and restructuring expenses, were $167 million. We remain on pace for our full-year operating expense outlook of $350 million or lower. Capital and financing activity are highlighted on slide 11. During the quarter, we completed our first in-school securitization of the year and our second refinance loan securitization. We continue to see strong investor demands for our recently originated refinance and in-school loans, and we are achieving attractive pricing and advance rates on these certifications. We also issued $500 million of unsecured debt while retiring approximately $500 million of unsecured bonds at maturity. We continue to have ample capacity to invest in attractive loan originations while maintaining balance sheet flexibility. In the second quarter, we returned $17 million to shareholders through dividends and share repurchases. In summary, the second quarter continued our solid start to the year and reflected the progress we are making in positioning the company around today's lending products and future growth. The fair value option for new in-school originations and the health for sale classification of a portion of the legacy project portfolio both support that strategic direction. We enter the back half of the year with strong lending activity and are encouraged about both our sustained refinance growth and our ability to compete in the expanded graduate in-school lending market. We remain focused on executing with discipline as we build from that position. Before we move to Q&A, I want to thank the Naviant team for their continued focus and contributions throughout the quarter. We appreciate your time and will now open the call for questions.

Thank you. If you have a question at this time, please press star 1 on your telephone keypad. If your question has been answered, you may remove yourself from the queue by pressing star 2. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. And we'll take our first question from Bill Ryan with Seaport Research Partners. Please go ahead. Your line is open.

Good afternoon and thanks for taking the questions. Also kind of glad to see you adopt fair value accounting. I know we've had discussions about that over the past, I think, about a year now. But if you can maybe talk about on the fair value side of the equation, you know, looking forward in terms of your loan sales and, you know, if you're talking about doing some loan sales through ABS, some to investors, and maybe some on the balance sheet, maybe give us some idea of what the mix of what you're anticipating that will look like going forward. and as it relates to the fair value accounting itself, what the initial economics might look like relative to where the Cecil charge is today on the loans.

Yeah, I'll cover the back half of that first. In terms of the economics from the adoption of the fair value option, the way to look at that for our in-school product, given our We've been at a net reserve rate in the low to mid 3% range. So when you think about the provision, that's the reserve rate applied against volume expectations. Our expectations for the full year on the in-school side were for 50% growth, and that was on a base of $401 million from last year. So if you look at that, that would put it just above $600 million for the year. We've done $120 million through the first quarter. and so on. And then, of course, we've got a couple of other things that we're working on. We've got a couple of other things that we're working on. We've got a couple of other things that we've got a couple of other things that we've got

will the initial fair value mark be in positive territory? I assume it is given the duration of the loans.

Yeah, we feel good about the valuation. Of course, the exact number of the valuation will depend upon the loans that we're generating as we speak here in the third quarter. And so TBD in terms of exactly where that comes out in terms of the fair value mark, we'll be looking forward to providing that information when we close out the third quarter and share results here in the next call.

Okay, and then just kind of going back to the first part of that question, the thought process between what you might be passing through in securitizations versus loan sales versus retaining on the balance sheet, and will the securitization structures change in any way to be off balance sheet or will they still be on balance sheet?

I think our expectation would be, I mean, similar structure, same structure in terms of securitizations and how we have those structured and on balance sheet. In terms of the question of how much would we be retaining on our balance sheet versus selling or securitizing selling, I think all of that depends upon the general economics of the deals in question and what we see in terms of from a deal-to-deal basis, what makes the most sense for us. We have experience across all of those different options. I'd say there's not a change in direction right now, but certainly open to whatever avenue makes the most economic and strategic sense for us.

Just to add to that a little bit, Bill, specifically with relation to in-school, the volumes we've had have been relatively small. So, you know, your options on what to do with them are somewhat limited. So that's why the default for us is ABS. As you start to get more merchandise, you might start to look to actually do complete sales. But for right now, I would look at it as it's essentially all going to be securitized in the short run.

Okay, thanks. I'll hop back in here.

Thank you. And once again, out of Star 1 to ask a question. We'll take our next question from Moshe Orenbeck with TD Cowan. Please go ahead. Your line is open.

Moshe Orenbeck Great. Thanks. I was hoping we could get a little more detail on that $23 million reserve increase in the private loan portfolio. I mean, is that primarily on the newer loans that you've been making? Is that on the loans, the older loans, you know, that are the legacy loans that you just took a $19 million reserve back on? Which ones are those?

Yeah, sure. It's a mix. I mean, it's primarily on the legacy loan, private legacy loan. So when Ed talked about the $5.5 billion balance, which represents our legacy portfolio, that's where the bulk of the adjustment is. I think the way we're thinking about that $23 million, the charge-off and delinquency rates in the quarter, while they improved, The patient improvement was a lot higher, you know, kind of from fourth quarter to first quarter. Saw some improvement in the first half of the second quarter, and then that started flattening out some. So felt like in light of that, it made sense for us to address the uncertainty there by booking this additional reserve build. And like I said, it primarily relates to the legacy portfolio.

So they improved just not as much as you expected, I guess. Is that what you're saying?

That's exactly right. So we're operating still at a bit of an elevated level compared to what our longer-term historical norms were. We expect continued improvement here, which will put us more in line with what those historical norms would be. So exactly right, that really the pace of improvement during the quarter was a little bit shy of what we expected, and so we provided accordingly.

But the loans that you chose to I guess you picked those to be better than the ones that are still on the balance sheet. Is that a fair?

I'd say not really. It's a discrete portfolio or segment within that portfolio that we are evaluating and have the intent to sell. So it was a portfolio where when we made that determination, the reserve gets released from there. reserve bills for the remainder of the portfolio, not for that portfolio. So really, they're kind of independent items. However, they both relate to that legacy loan portfolio in general.

I think an additional point is that if you look at the overall portfolio, a lot of it is securitized. So parts of it, you have a risk retention requirement that makes it more difficult that you didn't want to sell them. This particular portfolio did not have that. So that's a real reason for it. Got it.

Got it. Then as we think about the refinance market and your cost of funds, interest rates have been rising somewhat. When you think about the second half of the year, you mentioned that demand is strong. How should we think about the spread on those loans

It's not a great period at the moment. The rates are higher, so we have a long-term reason to do this and we're gaining share and we want to do that. The NIM isn't the same as you get on other products, but the losses are lower too. So I think we're thinking in the second half it'll probably be sort of like the first.

And then given... All these changes, in other words, more originations and other sort of things going on. I noticed that the buyback was relatively low in Q2. Should we think about that as kind of a level for the back half of the year or is there something unusual in the second quarter?

Yeah, I mean, I think, first of all, the, you know, we have $100 million authorization for the year, and I have, I think, around $75, $76 million remaining. So I think what we saw in the second quarter was certainly lower than what we had in the first quarter. And I think we have capacity to do more share purchases as conditions warrant in the back half of the year. And I don't know if you want to add to that.

Well, I would say there are two things. One of them is obviously if you're going to grow at the rates we're growing at, you need to think about how you're going to provide the capital for it. That's the broad issue. The narrow one is that for a large part of the quarter, we're really buying under a 10b-5 plan. And so if you set the number where we did, you don't buy any shares. So I wouldn't read too much into this quarter, but it's a fair question.

Thanks very much.

Thank you, and once again, that is star one to ask a question. We have a follow-up from Bill Ryan with Seaport Research Partners. Please go ahead.

Yeah, just a couple of follow-ups. One, just for clarification purposes, the $23 million on the private portfolio, the legacy portfolio, it sounds like you feel like, based on what you know today, that you're fully trued up on the reserve level on the private portfolio, and the second question is maybe if you could talk about What you expect your capital requirements are going to be in terms of your adjusted tangible equity ratio going forward.

And so first on the loan loss reserves, and we go through a very thorough process every quarter, evaluating not only the trends that we're seeing, but the composition of the portfolio, macroeconomics, et cetera. And so as with every quarter, we put that through a very thorough review process, feel good about where we ended up at the quarter. Of course, there's always uncertainty, and so we'll continue to evaluate the reserve as we move to the third and fourth quarter and onward like we always would do. In terms of the adjusted tangible equity ratio, you can see that we went up slightly from, I think, 8.9% to 9% during the quarter here. We've been managing that at a level of 8% or above. So I think kind of being in that 8% to 9% range is a reasonable expectation going forward.

Okay. Thanks for taking my follow-ups.

And once again, that is style one to ask a question. And we'll just pause a moment to allow further questions to queue. It appears we have no further questions at this time. I will turn the floor back to Roger Yancoup for closing remarks. Thanks, Tasha.

Thank you for joining today's call and for your continued interest in Naviant. If you have any follow-up questions, please contact me or Micah Andrews. We look forward to speaking with you again next quarter. Thank you.

This concludes today's meeting. We appreciate your time and participation. You may now disconnect. Thank you.