Good day. And welcome to the Navient Third Quarter 2023 Earnings Conference 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, Head of Investor Relations. Please go ahead.

Thank you, Abigail. Hello, good morning and welcome to Navient’s earnings call for the third quarter of 2023. With me today are Dave Yowan, Navient’s CEO, and Joe Fisher, Navient’s CFO. After their prepared remarks, we’re going to 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. 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 third quarter 2023 earnings release which is also posted on navient.com/investor. You will find more information about these measures beginning on Page 18 of Navient’s third 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. Our results for the quarter reflect our strong foundation of assets and capabilities as well as initial actions we are taking to deliver more value to shareholders. We received consistent net interest margins and credit performance, generated strong revenue growth in traditional business processing services and lowered our operating expense. Last quarter, I discussed the in-depth and holistic review of our entire business. I’m pleased to report that this important work is well underway and we’re making substantial progress. You’ll see some of the actions we’ve already taken reflected in our results this quarter. Core earnings for the quarter were $0.47 per share. Excluding significant items, core earnings were $0.84 per share. We’ve taken a $45 million accrual, or $0.28 per share, in connection with the CFPB litigation. We accrued for legal matters as required based on developments over the quarter. We remain confident about the strength of our case. At the same time, we’re open to finding a solution that’s acceptable to all parties to put this matter behind us. In addition, as part of our regular quarterly review of critical accounting assumptions, we updated certain accounting assumptions in the third quarter. These updates slightly reduced our overall results. Joe will highlight the impacts to individual line items in his remarks. We remain focused on helping our borrowers who have federally-owned student loans successfully navigate the resumption of payments, which includes helping them identify and access various repayment options. While it’s still early days, we have not yet seen significant changes to repayment patterns on loans we hold. Let me turn to our in-depth review. As I mentioned, while the bulk of the review work remains ongoing, initial insights led us to…

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 third quarter results for 2023 and provide updated guidance for the remainder of the year. Key highlights from the quarter beginning on slide three include third quarter GAAP EPS of $0.65 and core EPS of $0.47, which contains significant items that reduced earnings by $58 million for $0.37 that I will discuss in greater detail as I review our segment results. FFELP NIM of 152 basis points, consumer lending NIM of 317 basis points, originations of $382 million, business processing revenues of $85 million with an EBITDA margin of 15%, and overall efficiency ratio of 49%. We maintained an adjusted tangible equity ratio of 8.7% while returning $94 million to shareholders through dividends and repurchases. I’ll provide additional detail by segment beginning with federal education loans on slide four. As part of the quarterly review of our critical accounting assumptions, we updated our assumptions to reflect longer remaining life expectations on the portfolio. The increase in expected remaining loan terms resulted in slower premium amortization and increased both the FFELP NIM and provision in the quarter. The FFELP NIM of 152 basis points benefited from the revised estimate by $48 million for 45 basis points. After adjusting for this, our net interest margin was 107 basis points, which is in line with our expectations of 100 to 110 basis points for the full year. Partially offsetting the benefit to NIM from the extension of the FFELP portfolio was an increase in provision of $36 million as a greater amount of loan premium will need to be charged off in the future. Delinquencies declined to 16.8% from 18.6% with forbearances flat year-over-year. Net charge-offs increased to 19…

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

Thanks. Can we just dig a little bit more deeper into the review? I know there’s a lot of actions that have been taken, but maybe you could just update us on sort of where we are and what else we can expect.

Sure. Good morning. So, as I’ve indicated, this is a holistic and very in-depth review. We’ve got a number of cross-functional teams and a number of work streams that we have organized ourselves around. And we’re doing a deep dive into our existing strategies, processes, and operations to better understand them, not just as they exist today, but over a longer-term time horizon. As we do that, we’re trying to identify ways in which we could do things differently or do things -- do different things, as I like to say, that would improve our ability to deliver to shareholders. We have today announced a couple things that have come out, some initial actions that we’ve taken out of those reviews. When I talk about the -- I’m pleased with the substantial performance or progress we’ve had on these reviews, that indicates that I think we’ve got some other things that we’ve not announced, but we’re looking at very carefully and very closely. And as soon as we’re able to share those with you, we intend to do so.

Okay, great. I have a question on the CFPB case. I mean, what can we infer from the charge of that? An offer or is that representation of tangible progress towards a resolution?

Yes, so as you can, I’m sure, appreciate, I’m not going to discuss the specifics of the case or any other elements of it. I would, repeat what we’ve said, which is we’re very confident in the strength of our case. At the same time, we’re open to an out-of-court settlement that’s acceptable to all parties. And the accrual that we made this quarter reflects the developments to date in that matter. We also expect to file our 10-Q later today, Sanjay, and in that 10-Q under the contingency section, you’ll see the establishment of a reasonably possible loss related to this matter and a more robust discussion of the case and the uncertainties that surround the accrual and the reasonably possible loss. The range on that reasonably possible loss is zero to $250 million. And I would encourage everyone to read that and the language surrounding it when we publish it carefully, and I think that’ll, give you a better sense of where we are today in terms of the case.

Okay. If you don’t mind, can I just get one more question? I know it’s more than two allotment, but just on the in-school origination slowdown, is this a good run rate going forward? Maybe you could just give us a sense of sort of how we should think about it. And just this impact of higher pricing and backing away from the market, what kind of impact does it have in your position in the market? I’m just trying to think about, because there’s a lot of work to get into the in-school channel. I’m just wondering if you back away from it, does that have an impact on you utilizing it going forward?

Yes, so I would not characterize this as backing away from it. I would characterize this as a pause in the substantial capital commitment that was associated with the plan for the year to double origination volume. I was not confident that given the substantial amount of capital involved in this activity, and I’m talking about loan acquisition costs, upfront provision for life of loan loss, looking at the margins we were generating, the amount of equity capital that we set against that, the amount of unskilled debt capital that we need after we do ABS financing. And so those amounts were substantial given the long life of a student loan asset. It’s also a very long-term commitment of capital. And so I felt the right thing to do was to pause on that until I could make sure that the combination of all those different capital investments were going to produce an appropriate return for our shareholders. I think, and said in my remarks, I think we have a strong set of capabilities and I think there is an opportunity for us in this market. You did see us grow undergraduate volume by 22% year-on-year. That was a key focus for us this year. And so I think the team did a nice job of doing that. There’s some underlying metrics and signs, our ability, for example, to be on preferred lender lists at the colleges that we’re targeting also increased. So we’re laying the foundation for being in the market and being an able competitor in that market. I would say that I think the strategy to grow in that market is one that is steadier and more sustainable than the ambitious target that we had this year.

Okay, thank you very much.

You bet.

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

Thanks everybody for taking my questions this morning. I think I’m trying to understand and the implications of your response to Sanjay’s question and also sort of the tactical approach to in-school originations right now. As you look forward based upon the strategic review, one thing we could conclude is that you are moving more and more towards a capital light model. But at the same time, when we think about the business and the comments you just made about, building the in-school network and building the preferred lenders list, maybe there’s a different way to interpret that. Help us understand sort of what the vision’s going to be. Do you see Navient more and more capital light or do you really want to ultimately grow that private student lending business again?

Yes, so thanks for the question, Rick. I’m not sure those two things are mutually exclusive. I’d go back to maybe a little more color on in-school as well. I mentioned it in my remarks, but on the graduate market, there was a significant change in the coupon associated with federal loans versus private loans this year compared to last year. So just given the way federal loans, and I’m talking about GradPLUS loans get priced, those affected an increased year-on-year, roughly 50 basis points in rates. Private loans like ours increase close to 200 basis points because they’re more market rate driven. So if you just look at coupon, not APR, given the fee associated with GradPLUS, for most of this period, the coupon on a private loan like ours in the Graduate space was lower than a federal loan last year, but is higher this year. So when you look at our origination volume, we did pull back on loan acquisition spending. That certainly impacted our volume. But if you look at our mix of graduate and undergraduate, we’re much more weighted towards graduate volume than the overall market. And that rate environment played a role in our graduate volume, which is down 15%, 16% compared to last year. So part of that is my reason for my confidence of our ability to operate in the market is we had a rate differential this year that made it much more challenging in the graduate market. And so I don’t want to lose sight of that. I don’t want you to lose sight of that when you look at our volume and you think about our strategy going forward. We are looking for ways to reduce the capital intensity of this activity. We have a cost of capital. We…

Got it. That’s very helpful. It helps us understand sort of the palette of considerations that you’re looking at. And I appreciate there can be, we may have to hold two or three thoughts in our head at one time. It’s a little harder at 5.30 in the morning, but I do appreciate it.

One moment for our next question. Our next question comes from Bill Ryan with Seaport Research Partners. Your line is open.

Thanks and good morning. So first question, I want to take a step back to September. And there were some initial indications that there may have been some pickup in federal student loan, FFELP portfolio refi activity, because I believe that you had to consolidate under the direct loan program to qualify for IDR or the proposed IDR guidelines. Obviously with what you did accounting-wise this quarter, it looks like you did think that, well, it really became a non-event. And I’m kind of curious what’s kind of changed in that because initially there may have been some concern and that’s obviously dissipated. And part of that is, does that also mean, the private activity that you’re really not seeing a big uptake in application flow there for refinance either?

And so I would, I’ll have to answer the second part first. So on the refi, we are seeing just a small pickup, which you can see from last quarter to this quarter. So that’s primarily driven from borrowers coming from the direct loan program that otherwise would be refinancing before. The first part of your question, I would say over the last year, we obviously saw slower prepayments than we have had in the past two years and more on a normalized or below normalized levels. That has led to, in terms of what we’re witnessing in the portfolio review, that there is an extension of the portfolio. That combined with an increase in the Stafford rates to the borrower without necessarily an increase to what they are paying, because keep in mind those Stafford loans we set every year, but if they are in payment plans where that is a steady payment, that just naturally increases the term. So all of these indicators are pointing to an extension of the portfolio. However, in saying that, there are a number of opportunities in place today for borrowers to consolidate to the Direct Loan Program. And if you are a distressed borrower or someone who is struggling to make a payment, you should be looking at those programs hard and you should be taking advantage of those and either contacting us or picking up the phone when we call you with these solutions. So I still encourage those borrowers to look at those solutions and what makes sense for them, but at this point, we’re just not seeing it in the activity in our portfolio.

Okay, thanks for the color on that. And just one follow-up, and I’m just going to throw it out there. Your discussion of the in-school channel, you’re obviously still very committed to it in the long-term. You talked about the capital intensity and other things. There’s been some discussion that one of your competitors may be looking to dispose of their business or looking for strategic alternatives. It seems like that could alleviate a lot of the pressures. I mean, it overcomes the seasonal growth issue. There’s ways it could be structured, etcetera, etcetera. Is that something that you might consider as an opportunity if such a business becomes available? Thanks.

Yes, hey, Bill. Good morning, I appreciate the question. We’re very focused right now on our in-depth reviews, and I wouldn’t comment on what other competitors are doing at this point.

Okay, thank you.

Thank you. [Operator Instructions] Our next question comes from Arren Cyganovich with Citi. Your line is open.

Thanks. So maybe, Joe, you could talk about the extension of the loan portfolios and how that’s impacting the net interest margins. I see that there’s the big catch-ups this quarter. Seems like things are moving kind of in line. How does that set it up for 2024 as we think about how it’s rolling into next year?

Yes, so what I tried to do in my remarks is just remove the significant items in terms of the adjustments that took place here. So give you a clearer look of what occurred in the quarter absent of those. And that’s while we recorded FFELP NIM of 152, 45 basis points was related to that extension. So that 107 is right in our range of 100 to 110 basis points and then similarly with the private portfolio, while we recorded 317, adjusting for that item or closer to 296. So above our guidance. So a lot of moving pieces here in terms of interest rate environment, just borrower activity with various programs that are in place. But I would say at least as we look in the near term and the way that the curve is shaped, that we’re comfortable with the ranges that we’ve given and what we’re seeing. I would say while the curve is somewhat downward sloping at this point, couldn’t put some pressure on the FFELP NIM. That’s a slight positive for the private portfolio. So somewhat of an offset there.

Okay, got it. But I guess on the slowing of the in-school origination, I’m a little bit confused to tell you the truth. You’re talking about a doubling of last year’s originations, which was really not that much, a couple hundred million. I mean, relative to the market size, you have competitors who do billions of dollars and the idea of it being too capital intensive, it just seems at least at odds with what we see in the marketplace. And I don’t know if it’s just a matter of you’re just starting from such a slow level. If you have other items that you need capital for in the near term, it doesn’t really hit well, I think, at least from our standpoint.

Well, I guess I do view it as capital intensive, certainly relative to other, for example, to other consumer assets, Arren, just given the cost of origination, I think you’re, you have some visibility into the life of loan loss reserve, all those, those two things consume equity capital. And we’re trying to be good stewards of that capital and make sure that when we commit significant amounts to it, we’re earning the right returns on that. We have a 10% equity weight against SLO [Ph] loans, the advance rate on the securitizations of SLO loans, plus the equity we put against it doesn’t fully finance the loans. And so we have to issue unsecured debt in order to finance that, those are the things is particularly given perhaps my background as a balance sheet manager, those are capital intensive on a unit basis. We’re not capital constrained. It’s not that we didn’t have the capital. I didn’t want to commit that substantial amount of capital over a long period of time until I was more confident that we were going to earn the returns that I think our shareholders expect from us.

Yes. I mean, I appreciate that it is a more capital intensive product and they are longer duration, but I would just say that you’re either in the business, you’re not in the business and to pull back to that kind of level, at least from prior expectations, it seems, a little at odds.

Yes. We are, to be clear, we are in the business.

Okay. Thanks.

One moment for our next question. Our next question comes from Jeff Adelson with Morgan Stanley. Your line is open.

Hey, good morning. Thanks for taking my questions. Just in terms of the just to revisit the CFPB matter, I guess the question I have, and I know we’re going to get some more detail in the queue later today, but why establish the reasonably loss estimate now? Was there a shift in the conversation? Are you getting, is there anything happening in the, in the ongoing dialogue with the CFPB or is this more like a result of the ongoing review you’ve been doing across the business?

So, thanks for the question, Jeff. Look it’s we said that the, accrual and the establishment of the reasonably possible loss that you’ll see in our queue are based on developments in the matter since we last reported through to today. And I think I’ll just leave it at that and I encourage you to read the queue and that may provide a little more elimination.

Okay. We’ll look out for that. And just on your, your pre-pay speed assumptions, I think maybe we’re a little surprised that there haven’t been more folks taking advantage of the opportunity to consolidate into the government loan to get the IDR benefit. Is there any reason why, some of your long dated borrowers wouldn’t be consolidating over, is it just, they don’t, their incomes are too high? Maybe just help us understand. I think last quarter you mentioned like happier loans or in an IDR plan already.

Yes. So it’s a good question. And I think that we all going back a year, probably would have expected to see even higher consolidation volume at that time, given the opportunities potentially for loan forgiveness. So I’ll just try to set a base of thinking about the FFELP portfolio where these are very well seasoned borrowers at this point in time, the last loans that we originated and held on balance sheet began in 2008. So you’re talking about 15 years where there have been a substantial amount of programs and opportunities to consolidate over time with various benefits that for whatever reason borrowers have not taken advantage of. So as I said earlier, I would encourage those borrowers that are struggling to make payments where there is an opportunity for them in the direct loan program that isn’t necessarily there in the FFELP program that they should be taking advantage of that. But today we just haven’t seen it over the course. And looking at the portfolio, it was naturally extending. We thought it was appropriate to take those adjustments this quarter.

And maybe just the last one question is the July change in the safe plan, is that a date you’re watching at all? Or just based on the activity you’re seeing, you don’t think there will be any kind of shift?

Based on the early activity, there hasn’t been much of an impact. So we’ll continue to monitor it. And it’s something, again, just encourage borrowers to take advantage of it if it makes sense for them.

Okay, great. Thank you.

Thank you. That concludes the question-and-answer session. At this time, I would like to turn the call back to Jen Earyes for closing remarks.

Thanks, Abigail. We’d 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.

Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.