NAVIENT CORP Q1 FY2025 earnings call

• 2024 was a year of transformation with divestitures, outsourcing, and cost reductions. 2025 focuses on cost reductions and capital deployment.
• First quarter highlights: Strong loan origination growth, refi loan volume doubled, originations up 46% from last quarter. NIM improvement in FFELP portfolio. Completed sale of Government services business. Over 1,300 employees departed. Repurchased $35 million of shares.
• Joe Fisher: Core earnings per share $0.25, adjusted core earnings $0.28. Segment details provided. Capital allocation: repurchased 2.6 million shares, adjusted tangible equity ratio 9.9%.

Federal Education Loans Segment

• Net interest margin for the first quarter was 61 basis points, 18 basis points higher than the fourth quarter. Prepayments were $256 million in the quarter compared to $1.6 billion a year ago. Greater than 90-day delinquency rates increased to 10.2%, charge-off rate improved to 10 basis points, and forbearance rates decreased to 14.4%.

Consumer Lending Segment

• Net interest margin was 276 basis points in the quarter, in the middle of the stated range of 270 basis points to 280 basis points. Total originations nearly doubled to $508 million compared to $259 million a year ago. Late-stage delinquencies declined from 2.7% in the fourth quarter to 2.6%, but delinquency rates are marginally higher than expectations.

Business Processing Segment

• Completed the sale of the Government services business in February, divesting the entirety of Navient's Business Processing segment. Transition services expenses and revenues are reported in the other segment. Total core earnings expenses for the quarter were lower by nearly 30% to $130 million.

• Maintained full-year core earnings guidance of $1 to $1.20 per share. Guidance includes $0.26 of net expense not part of continuing operations. Expect moderately lower rates in the back-half of 2025, no changes to Federal Student Loan policy.

• Macroeconomic conditions could materially impact results. Uncertainty around federal education loan policy changes. Volatility in market conditions affecting share repurchases and growth initiatives.

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

A: Good morning, Bill, and thanks for the question. We talked in the first quarter as you indicated, there were some very broad proposals about changes in the federal government generally, things like project 2025 and a couple of other even broader proposals, but more limited to federal education lending. Monday, the House Workforce -- Education and Workforce Committee published a bill that's designed to meet the budget targets of the House reconciliation effort. That bill has some -- it's complex, it's definitely got some puts and takes on the changes in the federal education policy and it's not clear exactly the extent to which those changes, if enacted would expand the private loan market. So we're going to have to wait and see. There's some -- there is elimination of some of the PLUS programs, but there's some replacement with other federal programs as well. So we're going to wait and see how those puts and takes work out. The two things that I would say is, one is, I think we demonstrated today in our results that we don't need an expansion of products to grow. We feel confident in our ability to grow with the products that we have. If you think about the graduate customer in general, where our earnest distribution network and business model is built for purpose around the graduate cohort. They have high loan balances, relatively low and efficient acquisition costs and tend to be distributed on a digital way as opposed to a -- through financial aid offices, etc. So we're confident if there is an expansion of the Grad PLUS program, private lending to them that we can take our fair share of that if that opportunity presents itself. I think with respect to broader changes in direct loan, I'm going to play a businessperson and not public policy expert, and we'll have to see how that evolves. But again, we're focused on the plan we have this year. And are anxious to look at any developments and opportunities that come out of that, but I think it's premature at this point based on Monday's bill to make any predictions about that.

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

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