Good day, and thank you for standing by. Welcome to the Navient First Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. 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 Earyes, Head of Investor Relations. Please go ahead.

Hello, good morning, and welcome to Navient's Earnings Call for the first quarter of 2025. With me today are David Yowan, Navient's CEO; and Joe Fisher, Navient's CFO. After their prepared remarks, we will open up the call for questions. A presentation accompanies today's discussion, which you can find on navient.com/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 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, divestitures 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 refinancing loan volume doubled from the same period a year ago, resulting in a 46% increase in originations compared to last quarter. Increasingly, borrowers appeared 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 refinancing originations were to students with graduate degrees and reflect the high credit quality of this targeted cohort. Second, we saw strong improvement in net interest margin in our FFELP portfolio. Here, the lower levels of prepayment activity in large part a result of the expiration 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 either 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 sale 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 repeat loan growth and net interest margin 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 book 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 FFELP 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 Navient. 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 Loans segment. 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 basis points 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 has been much discussion about the resumption of federal loan repayments and a 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. Net 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 basis points 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 positions 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. The $8 million provision for FFELP loans and the $22 million provision for private education loans is primarily driven by higher-than-expected delinquency rates. The results from our Business Processing segment show that 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 TSAs are reported in the other segment. Total core earnings expenses for the quarter were lower by nearly 30% to $130 million. These expenses include three items that I want to call out. 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. 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 gives us confidence in achieving our full-year core earnings guidance of $1 to $1.20 per share. This range estimate continues to include $0.26 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.

Our first question will come from Bill Ryan from Seaport Research Partners. Your line is open.

Good morning, Dave and Joe. Obviously got a little bit of excitement on Monday. I think that was the first time we actually saw a proposal to eliminate Grad PLUS as part of the budget reconciliation process. Could you remind us what percentage of loans in the Grad PLUS program you think are underwritable by the private sector and how NAVI's products may differ from its peers? And along the same lines, do you think there might be any changes to the direct loan program, which could be impactful to your business as well?

Good morning, Bill, and thank you for your question. In the first quarter, we discussed broad proposals regarding changes in the federal government, including project 2025 and various other proposals, specifically those affecting federal education lending. On Monday, the House Education and Workforce Committee released a bill aimed at achieving the budget goals of the House reconciliation effort. This bill has some complex issues and presents both challenges and opportunities regarding changes in federal education policy. It's still uncertain how those changes, if implemented, would affect the private loan market. Some PLUS programs may be eliminated, but there will be replacements with other federal programs. So, we will have to wait and see how these developments unfold. What I can say is that our results demonstrate that we don't need to expand our product offerings to achieve growth. We are confident in our ability to grow with our existing products. Our Earnest distribution network and business model are specifically designed for graduate customers, who typically have high loan balances and relatively low acquisition costs, and who often engage through digital channels rather than financial aid offices. Therefore, if there is an expansion of the Grad PLUS program, we believe we can capture our share of that market. Regarding potential changes to the direct loan program, I will approach this from a business perspective rather than a public policy standpoint, and we'll have to monitor how that develops. However, our focus is on our current plan for this year, and while we are eager to explore any new opportunities that arise, it is too early to make predictions based on Monday's bill.

Okay. Thanks for that. And just one follow-up, obviously the provision was up both in the FFELP portfolio and private credit. You cited increases in delinquent balances. Maybe if you could provide us a little bit more color on what you actually see going on there. Is this kind of related to the moral hazard of all these loans being in deferment for a long period of time? And I presume that the reserve build in private is still concentrated in the private legacy portfolio?

I think there are a few key points to mention. First, there is a noticeable macroeconomic impact occurring. For example, the percentage of credit card balances where borrowers are only making minimum payments is at its highest level in over a decade. With inflation and rising interest rates, borrowers across the industry are facing increasing pressure, and this is being observed to varying extents across different asset classes. Student loans have had a somewhat unique experience during the pandemic. When federal loan programs and private lenders like us provided forbearance during that time, we saw rapid declines in credit statistics, delinquencies, and charge-offs, knowing that these metrics would eventually rise as normal conditions resumed. It has taken quite a while for that normalization to occur, particularly with federal loans coming off their payment holiday. Now, we are analyzing our portfolio and taking the two measures we have always employed with our borrowers. First, we are being proactive in assisting them to repay their loans, utilizing programs that have been in place for a while. Secondly, from a financial standpoint, we are adjusting based on our observations to ensure we have the appropriate provisions in place.

Okay. Thanks for taking my questions.

One moment for our next question. Our next question comes from the line of Sanjay Sakhrani from KBW. Your line is open.

Thanks, good morning. I just had a question on the strategic actions sort of multi-question here. I guess one is, I just wanted to make sure I understand what period should we expect to get to that $204 million? And I guess, is the intention to get to an earnings power that's closer to sort of where you guys were before all of this began, somewhere north of $2? And then just secondly, in terms of the growth initiatives, are we certain we're going to go down that path and maybe what kind of expenses should we consider for those growth initiatives? Thanks.

Yeah. So the completion of the sale of government services in the first quarter gives us the visibility now in terms of the timing of when we can take out the expenses that we first articulated back in January of 2024. That was $400 million on a 2023 actual basis. That was our target, that still is our target, and we still think that's well within our grasp; we're well past the sixth inning in our accounting of this in terms of where we are. What Government services does is it allows us to understand what the remaining services that we're going to provide to the buyer of that business are. Those we now think will last as long as 12 months, perhaps shorter; both we and they are motivated to try to end that TSA sooner. So, we'll work to do that and we're planning or preparing to do that but assume that that's going to be Q1 of 2026. After we are done providing those TSA services, the costs that we still have that are now stranded, they're not providing services to those businesses anymore, it's going to take us a quarter or two to get those out. So by the middle of next year, we would expect to have fully run through the $400 million that we articulated in 2023. Your other part of your question is the earnings power of the company. I think we showed in January, the impact of those savings. Remember, the $400 million was also associated with $285 million worth of revenue as well. And so the net savings and the net earnings power from what we're doing on a continuing basis is a little more than $1 a share at our current share count. Additional earnings will come from growth initiatives from the deployment of capital to repurchase shares. We talked about sharing more information about our plans relative to Earnest and growth initiatives in the second half of the year and to actually wait for that; we're still on target to do that. The growth initiatives, the key for us, I think at Earnest is demonstrating that we can grow and maintain operating leverage.

Got it. Thank you very much.

Hey, Sanjay, I just wanted to clarify something. Dave mentioned $285 million in revenues, but that's actually $285 million in expenses and a bit over $320 million in revenues linked to that. Regarding the expenses we've identified, that's the $0.26 I mentioned earlier. Our EPS range is between $1 and $1.20, but that includes the $0.26 of net expenses we plan to remove according to Dave's timeline.

Got it.

I think the last thing I would add, Sanjay, is we're not done. As we see the light at the end of that tunnel, we're looking for other opportunities to be more efficient across the enterprise, and we'll share our plans and actions with you as we develop them.

Perfect. Thank you so much for reviewing that. Just one follow-up question, Joe, on the NIM. Just going forward, you mentioned the slowdown in prepayments for the FFELP NIM; should we then expect the NIM to stabilize going forward because of that? Are there more tailwinds as prepayments normalize? I'm just curious if you could give us a little bit of color on the NIM progression on a go-forward basis? And then just one more on just Bill's second question. On the delinquencies, do you feel like you have a good handle on it in the reserve now such that there's no more reserve bills associated with the pressures that you're seeing? Thanks.

Thanks, Sanjay. So, on the FFELP NIM, certainly pleased that we're on the high end or actually exceeded our range. I would say that on a quarterly basis, the second quarter, I would anticipate that we would be, again, in that high end of the range with the rate cuts that, although moderate, are expected in the second half of the year. As you may remember, that does bring some pressure in terms of the way that the assets reset on a daily basis, whereas our funding is monthly and quarterly. So, there is a bit of a lag there that creates pressure. All in all, I feel very confident in terms of achieving our range, but there are some puts and takes here in terms of how that will play out through each quarter. But I do feel very good in terms of where we are to start the year and our outlook for the remainder of the year. As it relates to delinquencies, as I noted and Dave noted, we were certainly expecting higher delinquencies in the first quarter just as it related to some of the borrowers exiting the various disaster forbearance programs and that's starting to flow through. We did see improvement, but it was marginally higher than what our expectations were, so we appropriately took the provision for that. So, I feel good just based off of where we are, but it's certainly something we'll continue to monitor throughout the year.

I'd say one thing I would add on the prepayments is with the change in the administration, I think there's a fundamentally different dynamic occurring. In the prior administration, there were a series of programs, those programs would have various levels of take-up that would impact us through consolidation activity at FFELP. Some of those actions, if not most of them, were challenged by the court. And so it was a kind of a roller-coaster period of prepayments spiking and then falling off rather quickly. It was highly unpredictable for us and for you because we couldn't tell what the administration was going to do, though they were certainly inclined to look for ways to grant more forgiveness rather than less. With the change in the administration, it's really a lack of action on forgiveness. They have a different philosophy about loan forgiveness, so at the moment, the outlook would be that they're not inclined to take action. This provides two things. It gives us a little more visibility, at least for us, in terms of what to expect over the next at least six to nine months. Therefore, I think it's just a different dynamic than it was in the prior administration.

Understood. Thank you so much.

One moment for our next question. Our next question comes from the line of Nate Richam from Bank of America. Your line is open.

Good morning and thanks for taking my question. I wanted to touch on originations for a second. I know you're reiterating the $1.8 billion guide for the year. But I was curious if there's any like changes to your outlook in terms of the timing or like, yeah, the timing of the volumes. I think previously, you were expecting like 10% growth in in-school and like 40% to 50% in refinance with some back-half weighting, but the first quarter seems to be off to a much stronger start. Just curious to see if this is some pull-forward you're expecting or just I guess, conservatism in the overall origination guide?

I think there's no change in terms of our outlook on the timing. If you go back to our remarks in the fourth quarter, we had sort of a similar view on interest rates even with all of the volatility. I would say that the first quarter certainly gives us high confidence that we'll be able to achieve that, but it's just a little early at this stage to comment on the second half. Certainly, one of the bigger drivers of what could create volume beyond what we're projecting is a decline in interest rates and as I said, just fairly similar to what we had in the fourth quarter as our guidance. So I don't have any change at this point.

Okay. That's fair. And I think as a follow-up to that, I guess like, is there a threshold where you think there's like an inflection point to those originations for refinancing? Is it like a 50 basis points thing or like 100 or more basis points? Just curious how you guys are thinking about that?

Yeah. So it's a factor of two things. Certainly, one is just overall interest rates, but also just the general funding environment in terms of how we set our pricing. So certainly a 50 basis-point decline in both rates as well as the funding environment would create a significant improvement in our outlook this year. At this point, though, as I said, very similar to what we were forecasting in the fourth quarter.

Okay. That's all from me. Thank you.

One moment for our next question. Our next question comes from the line of Moshe Orenbuch from TD Cowen. Your line is open.

Sorry. Can you hear me now?

Can hear you, Moshe.

Great. Thanks. So, following up on that last question, could you talk a little bit about the spreads and return on equity of the new business that you're putting on now? Like what does that look like in the current environment?

Yeah. So, Moshe, as we've talked about before, the economics of that product and that business are driven by various all-in costs: cost of acquisition, cost of credit, cost of service, etc. We think this quarter's originations fit nicely into the portfolio that we have built over time. That's a kind of mid-teens return on equity at the time, of course, there's an upfront cost associated with booking those loans from a provision and cost of acquisition perspective, but these fit nicely into the portfolio we have, we believe.

And Moshe, I would just add that the securitization that we did in the quarter was in line with our plan. So certainly, as we think about just the cost of funds that for the first quarter here certainly met our expectations in terms of how we planned for originations and the cost associated with them.

Got it. Thanks. Could you elaborate on what you mean by opportunistic when you discuss share repurchase and the difference between the current price and tangible book?

I think there are decisions we need to make. First, we have capital to deploy, and we must choose between investing for growth or returning funds to shareholders. This quarter, we managed to do both. As we mentioned in January, we'll keep evaluating opportunities to invest for growth if we believe they will yield greater market value than our investment. Once again, we were able to do both this quarter, but that's the initial decision we face. The second decision revolves around returning capital to shareholders. The greater the difference between the tangible book value and the market price, the more aggressively we would repurchase shares, all else being equal. This reflects our opportunistic approach, in contrast to our previous programmatic practice where we would determine a fixed amount for repurchase without being closely tied to share price fluctuations.

Okay. Great. Thanks very much.

One moment for our next question. Our next question comes from the line of Mark DeVries from Deutsche Bank. Your line is open.

Yeah, thanks. I have a couple of follow-up questions. First is on Moshe's last question. Maybe for Joe. Is there a threshold for what's available to deploy, whether it's in growth or returning to capital? Should we assume that you're going to manage to this adjusted tangible equity ratio close to 10% or will it depend on the mix of the balance sheet? How should we think about what the governor is there and what that means in terms of capital that's free to either return or deploy?

That's a great question, Mark. To address your point, it really depends on the mix of our portfolios. As we've mentioned previously, we typically allocate 10% capital for our in-school loans and about 5% for our refinancing loans. So, when we look at the mix, our long-term growth target for the adjusted tangible equity ratio has been around 8%. I anticipate that we'll maintain levels above 8% moving forward. Currently, with our earnings per share targets and without any major opportunities arising from a decrease in interest rates or changes in federal policies that could boost our in-school volumes, I expect things to remain stable for the rest of the year. However, this will be influenced by the balance between those two portfolios.

Okay. Got it. And then just to follow up on some of the questions around delinquency trends and reserves, it looks to me like reserves you took down during the quarter, both on a dollar basis, but also on a ratio basis, it was down 40 basis points despite the rise in delinquencies. Can you just talk about what drove the reduction in the coverage ratio in the quarter?

Actually, you cut off a little bit, but I believe just in terms of the coverage ratios for both portfolios. So for the FFELP portfolio relatively stable from quarter to quarter, the private portfolio ticked down slightly from the previous quarter and that's more generated just by the mix of loans that we have. So we have a lower allowance as it relates to our refinancing book as they are very high credit quality borrowers with a much lower life of loan loss expectation. So as that mix shifts to more refinancing loans, we would anticipate that coverage ratio to continue to decline.

Okay, got it. Thank you.

One moment for our next question. Our next question comes from the line of Rick Shane from JPMorgan. Your line is open.

Good morning, guys. Thanks for taking my questions. Look, the consolidation business is going well, and you guys lay out a strong case there in terms of credit quality and efficiency. At the same time, you have been back in the in-school lending business now for over five years, market share still less than 1%. One of the key initiatives brought more broadly is to reinvigorate growth. I'm curious why you're not leaning in more to that opportunity. The volume this quarter almost suggests you're sort of passively in that business. I'm curious if there is a window to accelerate the growth there and whether or not that's something you really want to do.

Thank you for the question, Rick. I don't believe we see ourselves as passively participating in that business. When considering Earnest's business model, it relies on low acquisition costs, high customer balances, and strong credit quality. Our approach is more customer-centric rather than focused on market share. In fact, we aren't involved in some markets that the leading competitor operates in; for instance, we do not engage in for-profit school lending. This is a deliberate choice. Our priority is on finding customers that align with our business model and our capabilities, which emphasize digital distribution and high average balances. This leads us to target the young professional and graduate demographic, where we feel we can effectively compete with other players.

Got it. Okay. Thank you very much.

Our next question will come from Jeff Adelson from Morgan Stanley. Your line is open.

Hey, good morning. Thanks for taking my questions. Dave, you've been willing to take a pretty hard look at the business and execute on some strategic actions here. I'm just curious, if you were to see the government opportunity open up for the in-school graduate market, would you take a look at some strategic actions for the Earnest business, including a sale potentially, or is that one you're fully happy to lean into and keep within the existing model? Thanks.

Yeah, I think you're a couple of steps ahead of our thinking. We're focused, Jeff, on executing against the plan we have today; we do intend to share more thinking about the strategic direction of Earnest in the second half and so we're continuing to do that work. I'm going to ask you to just be patient on that piece. Again, we're focused on executing against the plan we have. We do plan on sharing more information with you in the second half of the year.

Okay. Thanks. That's helpful. And just to circle back on Sanjay's question on the NIM, I guess, understood on the near term here with some of the puts and takes with lower rates. But I guess, is there a path over the medium term to getting back to this kind of 80 basis point to 100 basis point range for the FFELP NIM, or what would it take for that to happen? Thanks.

I believe it would require a couple of rate cuts, around 25 to 50 basis points, for us to begin seeing an increase in floor income. While we face pressure from resets during this time, once we reach those rate levels and expectations stabilize, we could return to an environment similar to the recent past, where we were above 80 basis points, contributing to the FFELP NIM of 80% to over 90%. Achieving this will depend on a couple of cuts, but it’s also crucial for those rates to remain stable for a period after that.

Okay, great. Thanks.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Jen for any closing remarks.

Thanks, Victor, and thank you for everybody for joining the call today. Please contact me if you have any follow-up questions.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.