Good day. And thank you for standing by. Welcome to the Navient Second Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jen Earyes, Vice President Investor Relations. Please go ahead.

Thank you, Shannon. Hello, good morning and welcome to Navient's earnings call for the second quarter of 2023. With me today are Dave Yowan, Navient's CEO, and Joe Fisher, Navient's CFO. After their prepared remarks, we will open the call up for questions. You can view and download presentation slides, including slides you may find useful during this call on navient.com/investors. But 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, adjustable tangible equity ratio and other various non-GAAP financial measures that are also derived from core earnings. Our GAAP results and description of our non-GAAP financial measures can be found in the second quarter 2023 supplemental earnings disclosure which is also posted on navient.com/investor. You will find more information about these measures beginning on Page 18 of Navient's second quarter 2023 earnings release. There's also a full reconciliation of core earnings to GAAP included in the disclosure. Thank you. And I will now turn the call over to Dave.

Thanks, Jen. Good morning, everyone. Thank you for joining the call and for your interest in Navient. I want to begin with thanks to my new colleagues, team Navient for the open and warm welcome, they've provided me since I assumed this role. As most of you know, about halfway through the second quarter, I transition from a member of Navient's Board of Directors to the role of Navient's CEO. And with little more than 10 weeks under my belt, I can share that many of the views I held about Navient as a board member have been reaffirmed. Namely, I found a strong foundation of assets and capabilities, and a talented group of people. I've also become more familiar with the great work well underway to simplify the business, reduce risk, and improve efficiency. These activities remained full steam ahead. On today's call, I plan to spend some time sharing my perspectives on Navient, specifically where and why I see value in the company today, and our future potential. And I also want to share with you some information on the work we are undertaking to deliver more of that value to our shareholders. As we communicated when I was appointed in May, the board and I shared our view that it was the right time to explore and consider change. As such, I'm currently undertaking an in depth and holistic review of our business, with the goal of identifying a range of alternative opportunities to deliver greater value to our shareholders. The board and I have a sense of urgency around this review, but also intended to be comprehensive our analysis and thoughtful about any decisions and actions we may take. At this early point in this journey, it's too soon to report any observations or sense of…

Thank you, Dave, 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 2023 and provide updated guidance for the remainder of the year. First, I would like to note that we will no longer be providing the non-GAAP financial measure of adjusted core earnings per share. Our full year 2023 earnings per share guidance will now include our expectations for regulatory and restructuring expenses. We believe this will make it easier to follow our reported earnings and provide for greater consistency or coverage estimates. In addition, we've made formatting changes to our earnings presentation. To the extent information no longer appears in this presentation, you may still find it published and the full range of materials we provide, including 10-Q. Turning to results, our year-to-date reported core earnings per share was $1.73 through the second quarter, and we are updating our full year guidance to a range of $3.15 to $3.30 core earnings per share. The updated positive guidance now includes expenses of $22 million, or $0.13 related to regulatory and restructuring expense that occurred through the first six months along with our expected ongoing regulatory expense for the rest of 2023. Second quarter's positive results positioned us well for the remainder of the year, with key highlights from the quarter beginning on Slide 19, including second quarter GAAP EPS of $0.52, and core EPS of $0.70, both of which include $15 million of restructuring expenses, primarily associated with the CEO transition that took place in May. FFELP NIM of 97 basis points, private NIM of 297 basis points, originations of $197 million, business processing revenues of $83 million and overall efficiency ratio of 56% and maintained and adjusted tangible equity ratio of 8.4%…

Thank you. [Operator Instructions] Our first question comes from the line of Bill Ryan with Seaport Research Partners. Your line is now open.

Good morning. Thanks for taking my questions and welcome, Dave. So, I appreciate you're not yet ready to kind of discuss the individual lines of business and what you may be emphasizing a little bit more and maybe be emphasizing some other areas. But can you talked about cash flows and commitment to capital returns. One of the questions I had was about EPS. It's been fairly stable the last several years. As part of the initiatives that you're looking at during -- can we expect maybe some directional change maybe an EPS? Because I think next year, you're going to be hitting a revenue inflection point where the recurring businesses are going faster than the run-off. But obviously, it's a question about, you know, how are you looking at the EPS on the equation? Thanks.

Sure. So thanks, Bill. I'll take that one just in terms of guidance. And obviously, we're not yet providing 2024 guidance here, but as we think of the BPS business long-term, historically, we've thought of those non-pandemic related services that business growing at about 10% a year in terms of organic growth, that's certainly the target that we look to achieve from a growth perspective. They're far exceeding that so far throughout this year. But with that 10% growth, we're also focused on high-teens margin. So how I would think about next year for 2024 is that we'll continue to look to target that 10% at that high-teens, EBIDTA margin levels, and then you can translate that to your EPS assumptions.

Okay, and one quick follow up. If you could talk maybe a little about the competitive landscape here in-school originations. Obviously, you're kind of early on in the peak origination quarter. If you could talk about how Navient's product offering is being received in the marketplace? And do you still expect originations to roughly double this year?

So nice to meet you, Bill. Thanks for your question. And, look we feel, it's too early in the season to make a call on loan originations, as I'm sure you know with third quarter being the peak season. We feel really good about the products that we're offering through the Earnest subsidiary. We're focused on being very disciplined about the margins and the returns, we hope to achieve on that. And we'll certainly be ready to give you a more robust update in the third quarter on volumes, but just in the call, but we feel really good about the products we're offering and the distribution channels that we have. The team that Earnest is very focused on providing our customers with a simple experience, that has gotten some great reviews from us. I think it's wait and see on in-school for this year. It's a little too -- it is too early to make a call on that.

Okay, thanks for taking my questions.

You bet.

Thank you. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is now open.

Yes, hi. Thanks for took my questions and Dave, welcome and congratulations on the new role. Just maybe to start on the comment that Joe made on, you don't expect any meaningful benefit to refi volumes as student loan repayments get going later this year. Another big lender in this space has been making some noise and saying that there's a ramp coming and they're pitching that borrowers are going to be reifying into these longer term loans as they look to lower their monthly payment. I'm just curious, is this something that you're not expecting or expecting? Or are there any differences in your approach to the market that are more idiosyncratic that we should be aware of?

So thanks for the welcome, Jeff, and thanks for the question. Look, I think we -- as Joe indicated in his remarks, our experience and all of our insight into the market is that it is very much a rate-driven market. And given the fact that interest rates aren't declining, but the Fed may increase them at least one more time here, we don't see the addressable market increasing significantly because of payment pause. And so that's our view of it. We are absolutely open for business. Earnest has again demonstrated capacity to market those loans effectively at scale, we've got the operational and financial flexibility, if there's more demand, but you'll see in our loan forecasts that it was included in the slides that I spoke to, we've not increased that for the full year. So wait and see. We're open for business, but we don't see a significant increase in that addressable market until and unless rates begin to decline.

Got it? That's helpful. And I think just one other question for me on the NIM outlook. Just wondering on the SOFR transition away from LIBOR. Are there any impacts we should be thinking about in your asset liability management? And how to think about the trajectory of impacts from here as rates change versus what was happening under the old construct?

No. So that was actually baked in into our original guidance that we had provided. So I don't have any changes to the guidance at this point. And we have obviously changed our systems implemented the chain from LIBOR to SOFR, and things are going smoothly at this point.

Okay, got it. Thanks. That's all for me.

Thank you. And next question comes from the line of Rick Shane with JPMorgan. Your line is now open.

Thanks for taking my questions this morning. And we really appreciate the additional slides and the change the way that you guys are providing guidance is helpful. I wanted to talk a little bit about the consumer lending segment maybe private student lending. Two things, first, when we look at Slide 5, I'm assuming that the growth in cash flows over the next three years is just a reflection of in-school loans going to repayment and that's why we see the spike in 26, and then it start to sort of decay as you would expect with the prepayment speeds.

So actually, there are no originations projected in those cash flow slides. So you do not get the benefit of the future originations. It's actually a cut-off as at 6/30 [ph] with one portfolio out. But it is a good call out in terms of the increase that actually has to do with certain financings that are taking place in those outer years. As you know, Rick, we have various repurchase facilities that we use to find existing trust and then borrow against that over collateralization. So what this reflects is calling those trusts at that time and refinancing them into more traditional securitizations after paying down that debt. So it is an increase, but it has to do with the way we finance today versus new originations.

Sure. Thank you. That's really helpful. And David, I apologize. Welcome. I wanted to ask you a question related to the segment as well. As you're conducting your strategic review, if you were going to go out and create a bank today, it would look very different than the way you created a bank even a decade or two decades ago. If you think about re-entering the private student lending market and growing market share there, what do you see strategically that you will do different than perhaps the way the business was done a decade ago? Was it about chasing preferred lenders list or is it more about direct marketing and online? How does that business evolve if you were to create it, in 2023?

So thanks for the welcome, Rick, and thanks for the feedback on the slides. We appreciate that, trying to provide information that's clear and helpful to you. Look, I think in Consumer Lending, you can look and see what we do today, and particularly what we've done with Earnest, which is designed to provide an experience for customers up front that is largely if not exclusively digital. It's a simple experience. As you know, many financial products if you think about the marketing funnel for those, you will lose a lot of people when they first engage because they need to provide information that's not readily available until it's about simplicity at point of sale that I think we have focused on. We don't -- it's clear, we don't need to be a bank in order to be simple as point of sale. In terms of our financial structure, obviously, we feel like we have a lot of capacity cost effective sources of capital, to finance our loans. There's a history of Navient, managing through a wide variety of market scenarios and environments. The team here is, as a former treasurer, I can tell you, the team here is really good at finding capital in a really cost effective way to managing the interest rates and other elements of other financial risks associated with these loans. So I think it's about simplicity at the point of sale, offering innovations in products, whether it's weight-driven, payment-driven, etc and having a strong financial capacity to support that business. We feel like we have those today. We'll be looking for ways across all of our businesses to do better, but we feel good about the foundation of assets and capabilities that we have today that allow us to compete effectively.

Okay, thank you. And we look forward to hearing what's next.

Thank you. [Operator Instructions] Our next question comes from the line of Sanjay Sakhrani with KBW. Your line is open.

Thanks. Welcome, Dave. Maybe if you could just elaborate a little bit more on the review you're undertaking. I know you mentioned you're in the process. And you're talking to touch a little bit on it before. But I was also just hoping you could elaborate on the philosophy that you might apply versus what was the case before? Obviously, you were on the board as well. So maybe you could just give us a little bit of a lay of land in terms of how we should think about this on a go forward basis.

Thanks, Sanjay, for the question. I think I'd call you to the imperatives that we put on the page, those are the four things that I'm focused on. And I think to your -- suggested your point, those four things are not new. They're focusing on our maximizing our cash flows, enhancing the value of growth, being more simple and more efficient, and distributing capital to the shareholders while retaining strong balance sheet growth. I think what any change in leadership does is when you look at things with a different lens, and perhaps a wider aperture than we've had before, that's how I would sort of characterize the way I'm thinking about looking at those four imperatives. I think those are the right four imperatives for the company, I don't see those changing as we think about this. But I think any new leader looks at in my experience, you have a different lens and so you look at things in a different way. I'm charged with the board, and what I would describe as having a wider aperture to think about so -- sort of nothing is off the table. I'm not here to put anything on the table, because it's too soon to do that. I talked a little bit at the end on, about some of my thinking here. This is a company that has undergone some pretty significant changes in its footprint, whether it's the acquisition of Business Processing segment, the beginning some would say, resumption, if you go back to the Sallie Mae days of being a loan originator, and our decision to exit the ed servicing contract that, as you can imagine, that significantly changed the scope and scale of our loan servicing operations. And so I talked about making sure that the scale of our business our operations is aligned with the scale of our current and future business needs. I also talked about trying to variabalize expenses, I think that's critical whether you're growing or whether it's in some parts of our business, like FFELP revenue is declining. And here, the company has a record of doing that. We sold the, our servicing platform a couple of years ago and effectively converted that fixed expense into pay by the drink expense. I think that's a good example of what we've done historically. And we're going to look for more opportunities to do things like that.

Got it. And I guess along those same lines, you know that CFPB litigation is still sort of looming out there. I'm just curious where we're at how amenable you might be to have a different outcome in some ways in terms of the process. I mean, maybe you can update us on that as well.

Sure. So, as you know, both parties filed motions for summary judgments in May of 2020. Those motions have been briefed. No trial or hearing date has been set for those motions. We feel really confident about the strength of our case. But having said that, I think we are certainly open and we'd like to find a solution that's acceptable to all parties that would put the matter behind us.

Okay. Great, thank you.

Thank you. [Operator Instructions] Our next question comes from Courtney Bahlman [ph] with Barclays. Your line is open.

Hi, thanks for the question. And welcome, David. Just a really quick one for me. Most of my questions have already been answered. I apologize if I missed but is there any change to the way that you all are thinking about bond repurchases or liability management exercises in the course of operations here?

Now, there's no change, Courtney, from our perspective. We're in a very good position in terms of our upcoming maturities. We have $1.3 billion of cash on hand, we have the future cash flows coming over the next several quarters that we described in our presentation, as well as $1.4 billion of unencumbered loans and another just over $5 billion of OC [ph] that we have the ability to borrow against. So we feel in a very good position here to address the upcoming charities. And as I've spoken with you before, there's opportunities to get those bonds at a discount, we certainly evaluate that, but there just haven't been as many opportunities recently.

Understood, easy enough. Thank you.

Thank you.

Thank you. Our next question is a follow up from Bill Ryan with Seaport Research Partners. Your line is now open.

Thanks. Just to a quick follow up. There's been some proposals made on changes to IDR and debt forgiveness. What's the process by which those changes would be implemented? Like what kind of timeframe? And second, do you see any potential impact on your portfolio from the changes specifically in the Federal Loan segment?

Sure Bill, so the way I think about just the various programs that that have been announced, and programs that have been announced, over the years here is that there are over 56 different repayment options available to Federal Student Loan borrowers today. So there are a host of ways to reduce the payments to have forgiveness. And I view this as another option that's again, more attractive. So we saw, obviously, pre-payments increase a year ago with would be or actually less than a year ago with just the announcement surrounding debt forgiveness. While we would anticipate some level of prepayment activity with another program, that at this point, it's just too early to gauge what that would look like. But as I said, in the past, there has been significant opportunities over the years whether interest rate reductions, debt forgiveness, various IDR programs. And you've just got a very well-seasoned FFELP portfolio at this time. So with each introduction, there's been less and less of an impact.

Okay. And then, what kind of a timeframe are we thinking about if they get implemented as is with a year from now or so?

Yeah, I think that's a tough one to tell. But I think your timeframe is the right way to think about it.

Okay. Thank you.

Welcome.

Thank you. Our next question comes from the line of Giuliano Bologna with Compass Point. Your line is now open.

Good morning. Thanks for taking my questions, and congratulations on the new role. The one question to be curious about and this might be a little bit of a follow up to what Bill is just touching on. I'd be curious if you can provide a sense of what percentage of your FFELP book is enrolled in IDR plans currently, just as it is a way to think about how that could flow through to the some of the newer kind of forgiveness programs related IDR clients.

Yep. So in terms of IDR programs today is extended the overall portfolio. It's about 35% of borrowers and 45% of balances.

It's very helpful. Then I realized a lot of these questions have been asked in many different forms. But I'd be curious, when you think about the opportunities in the review process, do you think there's a greater emphasis on figure out ways to optimize the cost structure or on the other side, is there a greater focus on trying to figure out new growth verticals for the different businesses? Or is it kind of all inclusive just trying to get a sense of if you can enhance focus on growth versus cost cutting or vice versa?

Yeah, I think -- so thanks for the question. Again, I think at this point, it's a very broad aperture that we have. And so it definitely includes and under simplicity, and efficiency, that includes becoming more efficient from looking at operating expenses, looking at the scale and scope of our operations really carefully. As I've indicated, finding ways to variable eyes as many expenses as we can. But it also includes enhancing the value of our growth businesses. And if that requires, the idea behind trying to increase the free cash flows from our portfolios, is it gives us greater flexibility and greater capacity to invest in those growth businesses and return capital to shareholders. Our first step is to undertake and see if we can increase those free cash flows. And then as we're able to do that, we'll share with you how we're going to deploy that. But, at this point, it's too soon to make a call on one versus the other at this point.

All right. That's helpful. And maybe a one quick follow up on that thread, obviously funding good -- position was a great funding structure, capital and cash flow. I'd be curious if you consider looking at M&A for asset manufacturing platforms, or if you think you have the kind of asset growth platforms internally now or can obviously build them internally.

I guess I'd say two things. I'd say, first, everything's on the table. But I would say that I think we feel really good and confident about the capabilities we have to originate private education, finance loans. I think Earnest has demonstrated particularly in the low-rate environment an ability to originate refi loans, education, finance loans at scale in a way that has pleased customers and in a way that is produced, we feel are really good returns for our shareholders. So I think we've got -- and that platform I think has -- we think has more capacity in it. So I think we feel pretty good about where we are. I wouldn't take anything off the table, but I do feel pretty comfortable with our ability to at scale, originate private education loans at the moment.

That's great. Well, thank you so much for taking my questions. And I will jump back in the queue.

Thanks.

Thank you. I would now like to hand the conference back over to Jen Earyes for closing remarks.

Thank you, Shannon. We'd like to thank everyone for joining us on today's call. Please contact me if you have any follow up question. This concludes today's call.

This concludes today's conference call. Thank you for participating. You may now disconnect.