Ladies and gentlemen, thank you for standing by and welcome to the Navient Second Quarter 2021 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Nathan Rutledge. Sir, please go ahead.

Thanks, Lawrence. Good morning and welcome to Navient’s second quarter 2021 earnings call. With me today are Jack Remondi, our CEO and Joe Fisher, our CFO. After their prepared remarks, we will open up the call for questions. 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 maybe materially different from those disclosed here. This could be due to a variety of factors, including, among other things, uncertainties associated with the severity, magnitude and duration of the COVID-19 pandemic and the related economic impact. As reported previously, the work from home policies and travel restrictions that have been put in place have not negatively affected our ability to close our books and maintain our financial reporting systems, internal controls over financial reporting or disclosure controls and procedures. 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 other various non-GAAP financial measures derived from core earnings. Our GAAP results and description of our non-GAAP financial measures with a full reconciliation to GAAP can be found in the second quarter 2021 supplemental earnings disclosure. This is posted on the Investors page at navient.com. Thank you. And now, I will turn the call over to Jack.

Thanks, Nathan. Good morning, everyone and thank you for joining us today and for your interest in Navient. Our business model continues to deliver exceptional results for our clients, our teammates and our investors. Each business segment this quarter exceeded expectations as we executed our business plan and created value. This quarter’s results were driven by stable margins in our lending segments, strong demand for our private education loan products, and continued strength in delivering services to our state clients and our Business Processing Solutions segment. In total, we earned $165 million in core net income and delivered adjusted core earnings per share of $0.98, an increase of 8% over the year ago quarter. We continue to focus our efforts on increasing loan originations, growing business processing revenue and improving financing and operating efficiency. This quarter, we originated $1.3 billion in private education loans, up from a pandemic impacted $238 million in the year ago quarter. We are also optimistic about demand for new in-school lending as peak season for this product is underway. As a result, we are committed to our forecast of at least $5.5 billion in combined refi and in-school originations in 2021. Demand for our Business Processing Solutions also remained strong throughout the quarter. Revenue remained above expectations as our performance and efficiency allowed us to maintain our pandemic-related project assignments longer. These projects have also allowed us to broaden the awareness of our technology-enhanced capabilities with clients and we continue to expect the revenue from our COVID-related work to decline significantly over the balance of the year as these projects come to an end. Our FFELP and private education loan borrowers continue to show very strong payment performance as the economy reopens. Forbearance rates are at or near pre-pandemic levels and delinquency rates remain near…

Thank you, Jack and thank you to everyone on today’s call for your interest in Navient. During my prepared remarks, I will review the second quarter results for 2021. I will be referencing the earnings call presentation, which can be found on the company’s website in the Investors section. Our second quarter results compared to our original outlook for 2021 is provided on Slide 4. We are currently on pace to exceed all of our original targets provided at the beginning of the year. As a result of the strong first half and updated outlook, we are increasing the range of our adjusted core earnings per share guidance to a range of $4.20 to $4.30, an increase of over 34% compared to our original guidance. Our outlook excludes regulatory and restructuring costs, reflects a favorable interest rate environment includes the announced debt repurchases and utilizing the remaining share repurchase authority, of $300 million. Key highlights from the quarter, beginning on Slide 5, include GAAP EPS of $1.05 and adjusted core EPS of $0.98. Charge-offs on both FFELP and private education loans remain at historic lows, originated $1.3 billion of private education loans, achieved BPS EBITDA margin of 30% in the quarter, strengthened our capital position and returned $227 million to shareholders in the form of repurchases and dividends. Let’s move to segment reporting, beginning with federal education loans on Slide 6. Net interest margin declined 10 basis points from the prior year and remained flat at 97 basis points compared to the first quarter. The decline from the prior year was expected following the annual resets on certain loans that occurred on July 1, 2020 and reduced floor income by $30 million compared to the year ago quarter. When adjusting for this event, net interest income was flat year-over-year at…

[Operator Instructions] And your first question comes from the line of Mark DeVries from Barclays. Please ask you question.

Yes. Thank you. Joe, you mentioned reserves kind of contemplating the end of payment holidays. Could you just talk a little bit more about what your expectations are for delinquency trends and ultimate losses once those payment holidays end?

Sure. So I think of them as on the FFELP portfolio coming back towards pre-pandemic levels. So when you think about the total delinquencies anywhere between 11% and 12% and forbearance ranges, call it, around 12%, the charge-offs, similar with our guidance given at the beginning of the year, we had guided towards 10 basis points. For the private portfolio, if you go back to pre-pandemic levels, you have to factor in that there is a mix of our refi book. So for the total delinquency levels, I would think, depending on the mix of refi loans, which are very high quality and low delinquency, I would expect that a more normalized environment to be in the mid to low 3% range. And then from a charge-off standpoint, I think – again, it’s contingent on the mix, but you’re getting into the low 1% range. So off of our guidance here and our outlook at the beginning of the year, we were at 1.5% to 2%. A lot of this is going to be a function of the overall refi mix for the private book. But ultimately, we would think that this stimulus ends at some point and these repayment relief options and that you would get back to more normalized levels, but our overall quality will continue to improve just as we originate more refi loans.

Okay. That’s helpful. And then, Jack, I mean you alluded to your optimism about kind of the in-school originations as you enter this peak season. Are you already getting a read on that, just based on applications? If so, how is that kind of tracking relative to what your expectations might have been?

Sure. So yes, peak application flow really starts to pick up in the second half of July and moves through August. And so we are seeing some early trends in that side of the equation. There is various measures that we look at just in terms of application flow, completed applications, approvals and then, of course, we are still a need to wait. And the last piece that happens in this process that we’re waiting for is school certifications. But where we stand right now, we’re optimistic about what we’re seeing. It is early still. But I think the product enhancements we made this year, some stronger partnerships that we have in place and the different marketing initiatives that we’ve launched, I think all are coming together nicely.

Okay. And what are your expectations for the returns on the in-school loans versus your refi product?

So we’ve been talking about mid to high ROE returns between the two, the refi at the lower end and in-school at the higher end of that range.

Okay. On a loss adjusted basis?

Yes.

Okay, great. Alright. Thank you.

Your next question comes from the line of Rick Shane from JPMorgan. Your line is open.

Good morning guys. Thanks for taking my questions this morning. You guys have been clear during the year about the potential declines or offsets in revenues from government services in the Business Processing segment. I’m curious when we look at the operating expenses there, when you think about that structure, how much of the operating expense structure is fixed cost versus variable, so that way we can start to think about what the efficiency ratio for that part of the business would be?

Sure. So these contracts were really an example of our ability to kind of ramp up and respond to rapidly rising demand as the pandemic really began to take hold. And in that area, we were doing work, such as helping states process unemployment insurance claims, did some contact tracing related work and then most recently, helping states get the message out about vaccination, where to go, how to get it, how to sign up type of information. Of course, all of that will eventually receive as these programs wind down. We responded to your point, though, with incremental variable expense. So there was certainly some technology hardware related issues that we had to bring into play. But for the most part, we responded with temporary workers and temporary expense solutions. During this time frame, we hired well over 5,000 people to respond to these needs. We’re down somewhere around 3,600 right now in those categories and expect those to continue to decline as the work winds down over the balance of this year.

Got it. Okay, thank you very much. That’s it for me.

Your next question comes from the line of John Hecht from Jefferies. Your line is open.

Good morning, guys. Maybe kind of high level question, it seems like you guys are gaining share. Maybe talk about the competitive environment so far is now a formerly public company, Wells is that sort of some process there. How do you guys kind of define or characterize the competitive environment on the private lending side?

So they are – obviously, in the private lending, we have two main product focus points. One is on the refi side of the equation with a different set of competitors in that space. Then we have in, say, the in-schools origination. I think our capacity, our capability and demonstrated results in the refi area kind of speak for themselves. We’ve been able to rapidly grow our originations in that side of the equation and take share. Demand right now for our products has been strong. It is certainly muted by the fact that the Department of Education loans that are outstanding are at a 0% interest rate with no payments required. So we’re seeing a higher concentration of the demand coming from people with borrowers with private education loans. But we expect as those loans come back into repayment, we will see refi demand increase. And we fully expect that we are either the number one or number two originator for refi products in the country. In the in-school side of the equation, that market dynamic operates a little bit differently. It’s very seasonal, and it is – and it builds on itself as you start the program. So when we began originating loans, we are very much focused on borrowers, students and families who are borrowing for the first time. And so you then capture each subsequent academic year, the opportunity to make subsequent loans to them. And so you build on your origination flow volume. It’s a slower process because of the seasonality and because of that targeted approach. But certainly, with the exit of a number of banks from the in-school origination business, we are excited about the – more excited about the opportunity than we were when we launched the products, and we fully expect that we will be able to take increasing market share as we expand each year going forward.

Okay. That’s very helpful. And then any update on the case with DOE?

Do you mean the CFPB or...

Yes, I’m sorry, the CFPB. I apologize.

Yes. So that case just continues to grind its way through the slow – very, very slow court process. All of the discovery at this stage in the game has been completed. Depositions have been taken, and we’re kind of waiting on the judge to begin to schedule the next rounds of rulings and hopefully get to a point where we get to have our day in court. As we’ve said over the last several months, during the – through the different discovery process and the information that has been submitted to support the claims that the CFPB made, our – the customers that they – the witnesses that they believe support their claims have all acknowledged that Navient did, in fact, tell them about various income-driven repayment programs. I will also just point out our track record here is exceptional. We have the highest percentage of borrowers outside of the specialty programs, like public student loan forgiveness enrolled in income-based repayment programs of any servicer in the country. So we’re eager to have our day in court and be able to present the evidence and hopefully move on from this case.

Great. Thanks guys very much for the update.

Your next question comes from the line of Lee Cooperman from Omega Family Office. Your line is open.

Thank you very much. I have really two or three questions that are really related about capital management. Number one, do you have a view of your normalized earnings? We’re in a very unusual environment. But the normal year, what do you think you would earn is number one? Number two, what were the actual shares outstanding at the end of the second quarter? And a typical year, what do you think you have available to buy back? I know there is $300 million left this year. But you already bought a couple of hundred million, right? And so in a typical year, do you think you could do $400 million, $500 million? And lastly and importantly, at what price on the common stock would repurchase be secondary to a dividend increase? You have not bumped your dividend for over 6 years because of the money directed towards stock repurchase. As the stock goes up, repurchase becomes less attractive. You want to share with us a view of what price on the stock would make a dividend more likely – dividend increase more likely than stock repurchase? Thank you.

Sure. So I’ll answer your first question. In terms of the ending CSCs in the quarter, it was $170 million. And your question about share repurchases going forward, as you remember, at the beginning of the year, we had guided towards $400 million of planned share repurchases for 2021. With the loan sales and capital management and financing activities that we have done, we increased that to $600 million. We’ve got about $300 million left of that for the back half of this year. We haven’t given guidance for 2022. But as you think about just our natural return and what’s occurred over the last few years, we try to manage that with the natural amortization of our legacy portfolio. So as cash flows come off of that portfolio, and that’s a natural declining portfolio, you would anticipate that the amount available to repurchase shares would decline absent of any acceleration of capital into near period. So from that standpoint, I would anticipate that, that would decline year-over-year, but those decisions will be taken up with the Board, and we will obviously publicly announce that when we’re through the reauthorization of this $300 million.

Yes. And I think to add to Joe’s comments, Lee, we did take advantage of a very strong market for asset – demand for assets this year, selling loans, accelerating earnings and using that accelerate – those accelerated earnings to increase our share repurchases. Those types of decisions are made on a – as the facts and circumstances allow, but since we – since Navient was created, we have now repurchased 60% of the original shares that were outstanding at the creation of the company. So obviously, a very strong repurchase program and a commitment to returning that capital, that Joe just described, back to shareholders. Now to the extent we can grow our origination businesses as faster, that’s obviously a great alternative for us. And we certainly look at when we have distributions that the split between dividend and share repurchases certainly comes into consideration here. I still would say, based on the PE ratios of this company, the price to book values, we are still trading below our peers in the industry. And so we look at the value of the company and what we are able to do to drive earnings through origination growth, through the VPS revenue segment that we are building as strong factors that are yet to be fully perhaps recognized in the share price.

So, are you saying that the stock repurchase will be preferred to a dividend bump anywhere near current prices? Is that what you are saying?

Yes.

Okay. Do you happen to have handy for the 60% of the shares repurchase, what the average price you paid over the life of the program?

Since 2014, our average share price has been $14.46.

Got it. Okay. Thank you. Good luck. I appreciate the answers. Thank you.

Thank you.

[Operator Instructions] Your next question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is open.

Great. Thanks. Jack and Joe, any ability to kind of talk a little bit about the trajectory and net interest margin over the next several quarters given you have had a little – probably less of an increase in rates than you expected, but all of the variability and the business mix issues? Can you just kind of summarize that for us?

So, I will talk about FFELP and the consumer lending separately. So, from the FFELP perspective, if you look out on the forward yield curve, I think you are seeing fairly stable rates, at least in the near-term, and we will continue to benefit from this interest rate environment here over the next several quarters. So, I don’t anticipate much volatility on the FFELP net interest margin. Typically, as you know, Moshe, that the second half of the year is a little better than the first half of the year, just because of the mechanics of the FFELP program, but again, shouldn’t be – shouldn’t have very large movements here one way or the other. On the consumer lending side, it’s really going to be a function of the mix of the portfolio. So, as we move towards the – a greater mix of the refi book, you are going to see a continued decline in the net interest margin. Obviously, we are exceeding our expectations here through year-to-date, even though we have originated $3 billion of refi loans. But from a capital perspective, we hold 5% of capital against that. As Jack mentioned, we talk about mid to high-teens return. So, we view it as very attractive, but the net interest margin on the Consumer Lending segment should just continue to decline as the mix shifts from our legacy book to our refi portfolio.

Got it. Thanks. And I think, Joe, you had mentioned kind of tighter and better spreads from a funding standpoint, any ability to kind of do anything incremental? You have got a fair amount of unencumbered private loans still. Like what’s the – are there any steps that you are going to be taking to enhance either net interest income or cash flow?

Certainly something that I evaluate every single day, we have been very busy through the first half of the year. And I said there is no planned sales in our guidance, but we continue to look at the financing options. We have $2.3 billion of unencumbered private loans, another $300 million of unencumbered FFELP loans, as well as the over collateralization of $6 billion on our – on the rest of our book. So, those are all things that we look at as ways to improve financing and also just make better use of our facilities and the capacity that we have there. So, it is something definitely focused on. But in terms of our guidance, we have no planned loan sales.

Great. Okay. And just lastly for me, you have mentioned a $5.5 billion origination target. Anyway you can kind of tell us what proportion of that is expected to come from the in-school program? And do you think about the capital needs on those loans different than the 5%?

So, we definitely have different capital allocations for in-school and refi. And the principal difference between the two products, of course, is the refi loans – when you make an in-school loan, your two risks are, will the student graduate and does the degree, produce income sufficient to cover the loan. In the refi space, you know those two answers. And so the credit risk profile and the ultimate delinquency and defaults of those portfolios are significantly smaller. We are going to hold off, and we will talk more about the mix between in-school and refi in October when we cover peak season’s results.

Okay. Thanks very much.

Your next question comes from the line of Sanjay Sakhrani from KBW. Your line is open.

Thanks. I was wondering if you could give us an update on the servicing contract because I know one of your peers sort of backed out of their contract or would not renew with their contract. So, maybe you could just talk about that a little bit, Jack?

So, we continue to perform under the servicing contract that we have with the Department of Ed. We are currently servicing 5.5 million accounts under that program. Our contract, like all of the contracts, expires in December. And we will be working with the Department of Ed to understand the new – what their plans are and how we can help assist in that process. But it’s probably too early to say anything one way or the other here.

Got it. And then just a follow-up, the question that Lee had about sort of steady-state earnings. If we go back to sort of pre-COVID, I think you guys have guided to a number in the $3 range roughly, and we are probably over $1 higher today in terms of what the numbers are for this year. Obviously, there is the loan sales inside that number and such. But maybe, Joe, can you just speak to what you think the core number is on a go-forward basis, excluding some of the puts and takes there? Thanks.

Yes. So year-to-date, we have got about $0.85 benefit from the loan sales. And I am not going to give 2022 guidance here. Moshe did ask about the NIM going forward. So, I think you have got enough color there to work on. But certainly, we have been getting closer and closer to that inflection point, and you have been seeing growth in net interest income in the consumer lending in FFELP. So, without giving 2022 guidance, we feel very confident about what we have said in the past and the outlook given this interest rate environment. As I said, I don’t expect much volatility in our Federal Education Loans segment and the FFELP net interest margin there. We are going to look to achieve the efficiency ratios that we put forward as well. So, that’s something that we are going to continue to monitor. So, I think that’s something that you can plug into your models. And the biggest driver there is just going to be what does the shape of the BPS revenue look like as these various programs wind down and the recovery takes hold, we feel fairly confident that you are going to start to see the pickup in the business as usual or, call it, the legacy BPS segment versus these, hopefully, what we see as a one-time contract related to the pandemic that that’s not something that continues into next year. But we will continue to work with states to expand on those contracts to continue to do that work, but it’s a little too early to give 2022 guidance.

Got it. And maybe just one final one, on in-school originations, I guess with the big – one of the big competitors coming out of the market, I mean do you guys feel like you can take your fair share of that market share or do you think it’s a little bit early to contemplate that?

Well, I think there is a variety of factors that are at play here in terms of students enrolled in programs. We have a narrower focus than most in-school originators on what types of schools we are focused on heavy component, heavy influence on encouraging borrowers, which are typically families to make payments while they are in school, so that the loans are not negatively amortizing. But yes, we are pretty excited about the opportunity here. And with or without those competitors, we were excited about the opportunity that this marketplace presents for us.

Thank you.

You’re welcome.

Your next question comes from the line of Arren Cyganovich from Citi. Your line is open.

Thank you. The Federal loan payment suspension could potentially be pushed out another six months. How does that affect your business that run off flow a little bit during that period and does it change anything from a – allowance or reserving standpoint?

Yes. So, the – certainly, the end date is now currently projected – is currently set at September 30, and there are various recommendations for extending that. I think the most important thing for that process is making sure there is sufficient that once the date is picked that is set, so both borrowers and other participants have a clear set of expectations and timing. We have been through smaller components of things like this before, never something this large, but we think we would have a – we have a very, very strong plan on how we would respond to customers and help them make that transition. How does it impact the business? It certainly has two components to it. There is certainly a benefit to consumer credit with consumers not having to make payments in one product. They have available resources to make payments in other areas. But the bigger impact for us is really demand on the refi side of the equation. As long as the interest rate is zero, that’s not a rate that we obviously compete with on the refi side of the equation. And so we are definitely seeing borrowers who are looking to refinance their loans, holding off, at least on that portion of their outstanding debt balance until the Department and Congress decides when the extension will end.

Okay. That’s helpful. Thanks. On the EPS side of the revenues, when I am looking at the breakdown on Slide 8, it shows the increase in the healthcare, I am assuming that’s related to the COVID increases. But Government Services is also up pretty nicely year-over-year. When we talk about these programs kind of falling off, do we think it gets back to that kind of Q2 ‘20 type of level or is there some of the business that’s non-COVID pandemic related?

So, the majority of the increase is related in both government services and healthcare to pandemic-related services here. So, going back to Q2 ‘20, I think that’s a good starting point. But hopefully, we can build upon, obviously, good work that we have done here for the various states across the country, and that will lead to additional contracts, as well as just the natural reopening is going to help some of our business processing groups here, too, just as hospitals begin to reopen and focus on sort of non-pandemic related items. I think that’s going to benefit our healthcare services as well as just opening of the economy for tolling, parking, state collections, all of those things. So, I think going back to Q2 ‘20 is a good baseline, but we would certainly look to build upon that with the work that we have done over the last year.

And I guess just to follow-up on that. The – with the COVID numbers worsening in recent weeks and a discussion of booster shot that might be potentially necessary, is that additional periods of work that you might be able to extend that out further for? Is that something you have been contemplating?

My first answer would be, I hope it’s not needed. And – but to the extent it is, it does create some potential there, yes.

Got it. Thank you.

Thank you.

There are no more phone questions. Nathan, back to you.

Thanks, Lawrence. We would like to thank everyone for joining us on today’s call. Please contact me if you have any other follow-up questions. This concludes today’s call.

This concludes today’s conference call. You may now disconnect.