Navient Corporation (NAVI) Earnings Call Transcript & Summary

Good day, and welcome to the Navient Second Quarter 2026 Earnings Conference Call. This call is being recorded. [Operator Instructions] At this time, I will turn the call over to Roger Yankoupe, Navient's Treasurer and Head of Investor Relations. Please go ahead.

Hello. Good afternoon, and welcome to Navient's earnings call for the second quarter of 2026. Joining me today are Ed Bramson, Navient's Chief Executive Officer and Chair of the Board; and Steve Hauber, Navient Chief Financial Officer. After Ed and Steve's prepared remarks, we will open up the call for questions. Today's discussion is accompanied by a presentation, which you can find on navient.com/investors. Before we begin, keep in mind our discussion will contain predictions, expectations, forward-looking statements and other information about our business that is based on management's current expectations as of the date of the presentation. Actual results in the future may differ materially from those discussed today due to a variety of risks and uncertainties. Listeners should refer to the discussion of those factors on the company's Form 10-K and other filings with the SEC. During this conference call, we will refer to certain non-GAAP financial measures, including core earnings, adjusted tangible equity ratio and various other non-GAAP financial measures derived from core earnings. Our GAAP results, description of our non-GAAP financial measures and a reconciliation of core earnings to GAAP results can be found in Navient's second quarter 2026 earnings release, which is posted on our website. Thank you. And I will now turn the call over to Ed.

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

Thank you, Ed. I appreciate everyone joining us for today's call. In the second quarter, we delivered strong business performance and solid financial results and took steps to better position the company around today's lending products. I'll provide additional detail on the quarter, starting with Slide 4. Core earnings per share were $0.29 for the quarter. Our results included several significant items, a $12 million realized gain on an investment, partially offset by a $3 million loss resulting from the call of a FFELP securitization trust and $4 million of regulatory and restructuring expenses. In total, these items contributed a net $0.04 to second quarter results. We also recorded provision of $26 million in the quarter, which I'll cover in more detail when we review the allowance. Moving to Slide 5. Earnest continues to drive sustained demand and originations growth in our refinance product. Rate check and origination volume were both up over 60% compared to a year ago. The $735 million of originations in the quarter brings year-to-date originations above $1.5 billion, keeping us on pace with our 2026 origination volume outlook. Credit quality also remains strong with weighted average FICO on new refinance originations at 774 and roughly 60% of our volume coming from borrowers with graduate degrees. In addition to improving operating leverage from higher volume, we also saw lower cost of acquisition year-over-year. Slide 6 covers in-school lending. We originated $80 million of volume in the quarter, up 40% from the same period last year. That momentum has continued in recent weeks with year-over-year growth rates continuing to build as we move through peak season and serve borrowers and schools in the expanded graduate school market. Importantly, we are achieving this growth while also improving efficiency year-over-year. As Ed mentioned, we have elected the fair value option for in-school loans originated after June 30, 2026. Under this accounting model, we will record these loans at fair value on our balance sheet with no CECL allowance or provision. Under the prior model, in-school originations in the back half of the year would have resulted in additional provision expense in 2026. The fair value option better aligns the accounting with how we manage and evaluate these loans while also removing that near-term provision impact. Slide 7 summarizes our Consumer Lending segment results for the second quarter. Net income was $27 million compared with $26 million a year ago. These results included a $6 million year-over-year increase in expenses, primarily reflecting marketing and origination-related costs associated with higher volume. Even with that higher spend, our lending efficiency metrics continue to improve as we scale and optimize our strategies. Turning to credit. Private delinquency rate improved modestly in the second quarter. Private charge-off rates decreased from 1.9% in the first quarter to 1.8% in the second quarter. Delinquencies also improved with 31-plus rates declining from 5.5% to 5.4% and 91-plus rates declining from 2.5% to 2.4%. Let's move to Slide 8 and the allowance for loan losses. We recorded $26 million of provision in the second quarter with $8 million related to FFELP and $18 million related to the private loan portfolio. The private provision had 3 components. First, we recorded $14 million of provision associated with second quarter originations. The second component relates to the $528 million of legacy loans that we classified as held for sale at the end of the second quarter, consistent with our broader effort to align the balance sheet with today's lending products. We recognized a $19 million provision benefit from releasing the allowance associated with those loans. The third component is a $23 million reserve build on the remaining private portfolio. While private credit performance continued to improve in the second quarter, the pace of improvement moderated as the quarter progressed. Given those trends and the broader macroeconomic environment, the build reflects our current view of lifetime loss expectations across the remaining private portfolio as we continue to monitor performance. Slide 9 summarizes the results of our Federal Education Loan segment. Net income was $26 million compared with $30 million a year ago. As expected, net interest income and operating expenses both declined as the FFELP portfolio continued to pay down. Second quarter results also reflect the acceleration of $3 million of interest expense from the call of a securitization trust. While that reduced earnings in the quarter, the trust call is expected to lower interest expense in future periods and provide additional liquidity. FFELP credit trends continue to normalize as disaster forbearance-related activity subsided. FFELP charge-off rates improved from 29 basis points in the first quarter to 18 basis points in the second quarter, and 91-plus delinquency rates declined to 8.0%, which is 50 basis points better than last quarter and more than 200 basis points lower than the year ago quarter. Expense results are on Slide 10. Total expenses in the second quarter were $85 million compared with $100 million in the second quarter of 2025. Year-to-date operating expenses, excluding regulatory and restructuring expenses were $167 million. We remain on pace for our full year operating expense outlook of $350 million or lower. Capital and financing activity are highlighted on Slide 11. During the quarter, we completed our first in-school securitization of the year and our second refinance loan securitization. We continue to see strong investor demand for our recently originated refinance and in-school loans, and we are achieving attractive pricing and advance rates on these securitizations. We also issued $500 million of unsecured debt while retiring approximately $500 million of unsecured bonds at maturity. We continue to have ample capacity to invest in attractive loan originations while maintaining balance sheet flexibility. In the second quarter, we returned $17 million to shareholders through dividends and share repurchases. In summary, the second quarter continued our solid start to the year and reflected the progress we are making in positioning the company around today's lending products and future growth. The fair value option for new in-school originations and the held-for-sale classification of a portion of the legacy private portfolio both support that strategic direction. We enter the back half of the year with strong lending activity and are encouraged about both our sustained refinance growth and our ability to compete in the expanded graduate in-school lending market. We remain focused on executing with discipline as we build from that position. Before we move to Q&A, I want to thank the Navient team for their continued focus and contributions throughout the quarter. We appreciate your time, and we'll now open the call for questions.

[Operator Instructions] We'll take our first question from Bill Ryan with Seaport Research Partners.

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

Yes. I'll cover the back half of that first. In terms of the economics from the adoption of the fair value option, the way to look at that for our in-school product, given our lending mix over the past 6 to 12 months between graduate and undergraduate and really the overall mix of the loans that we've been generating, we've been at a net reserve rate in the low to mid-3% range. So when you think about the provision, it's really -- that's the reserve rate applied against volume expectations. Our expectations for the full year on the in-school side were for 50% growth, and that was on a base of $401 million from last year. So if you look at that, that would put it just above $600 million for the year. We've done $120 million through the first half of the year. So around $480 million or so of originations would be in our outlook, which is still on track, and you can use that along with the net reserve rate in order to estimate really the impact kind of above and beyond what our original outlook was for EPS for the year.

Okay. And just quickly on that question on the initial fair value mark, obviously, the CECL going away, will the initial fair value mark be in positive territory, I assume it is given the duration of the loans?

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

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

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

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

[Operator Instructions] We'll take our next question from Moshe Orenbuch with TD Cowen.

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

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

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