Q2 2022 Navient Corp Earnings Call
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Good morning, ladies and gentlemen, thank you for standing by and welcome to <unk> second quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
The speaker's presentation there'll be a question and answer session to ask a question. During this session you will need to press star. One one please be advised that today's conference maybe recorded I would now like to turn the conference over to Speaker host Jen here. Yes. Please go ahead.
Thank you Olivia good morning, and welcome to Navient second quarter 2022 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 this presentation.
Actual results in the future may be materially different from those discussed here.
Due to a variety of factors listeners should refer to the discussion of those factors on the company.
[noise] excuse me on the Companys 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 various other non-GAAP financial measures.
<unk> from core earnings our GAAP results and a description of our non-GAAP financial measures and with a full reconciliation to GAAP can be found in the second quarter of 2022 supplemental earnings disclosure. This is posted on the investors page at Navient Dot com. Thank.
Thank you and now I'll turn the call over to Jack.
Thank you John .
And good morning, everyone and thank you for joining us today and for your interest in Navient.
I'm pleased to report another quarter of strong financial results, we saw strength in net interest income credit performance.
Revenue and operating expense, even as loan demand declines in interest rates rose.
Our financial performance is the result of our ongoing efforts to leverage our strengths and reduce our risk.
This quarter's results also reflect our proactive planning to prepare for rising rates and higher inflation.
The current economic and political environment had led to a significant reduction in the demand for refi loans.
Several factors are contributing to this.
For example, the interest the increase in interest rates has reduced the balance of loans that could benefit from refinancing by more than two thirds.
In addition, the multiple extensions of the interest waiver and payment policy that will do it.
Direct loans and the potential for a broad based loan forgiveness program have led borrowers to take a wait and see approach.
As these conditions change, we expect to see renewed demand for refi loans, given our strong financial benefits it delivers.
For the quarter, we earned 92 cents and adjusted core earnings per share and a return and a 20% return on equity.
With year to date adjusted core earnings of $1 82, we are once again raising our earnings guidance.
We now expect adjusted core earnings for the full year to be between $3 35, and $3 45 per share.
In consumer lending, we originated $420 million in high quality education loans during the quarter.
We continue to project a strong year for the in school for in school originations as we enter our peak season.
Last year, we acquired going Mary, which provide the hoist, which provides high school guidance counselors with digital tools that help juniors and seniors prepare for going to college.
Through going Mary students and their families can more easily complete the faster.
Apply for local and national scholarships and compare financial aid offers from multiple schools.
Going Mary's user base increased by over 500000 during the 2021 and 2022 academic year.
Now includes an estimated 15% of all high school seniors, who are planning to go to college.
These tools help students and their families to explore ways to reduce the cost of burning their degree making.
Make informed financial decisions and capture the value of a college education.
Through these services, we are developing engaged relationships with going to college students.
Highlight and enhance the value of our consumer lending products.
And business processing solutions, we continue to leverage our core operational skills and workflow processing customer contacts and revenue cycle enhancement for our clients and government health care and commercial sectors.
While year over year revenue decreased with the expected wind down of our pandemic related projects.
We see meaningful growth potential given our strong value proposition.
This includes leveraging our pandemic related performance to win new business.
Credit performance remains particularly strong we expected and planned for increase in delinquency and default rates as COVID-19 payment pauses came to an end has not happened as it returned to repayment has been significantly stronger than expected.
In fact, private loan delinquency and default rates are lower than pre pandemic levels and.
And we expect these trends to continue.
We've taken several steps beginning last year the plan for the changing economic environment.
This included hedging for a rising rate market.
Pre funding some of our liquidity needs in anticipation of higher rates and credit spreads.
In addition, we are focused on managing our operating expenses to reflect the new levels of refi loan demand.
And the redemption and pandemic related bps services.
We are also focused on managing the impact of inflation and our ongoing efforts to consistently improve operating efficiency.
Our capital levels remain robust and support both our existing assets and the growth we seek in our consumer lending and vps segments.
At June 30th our adjusted tangible equity ratio was a very healthy seven 5%.
Our cash flows and capital ratios continue to support our dividend and share repurchase plans.
We've delivered very strong results through the first six months of 2022 and I would like to thank my teammates for their efforts.
I'm, particularly pleased with our ongoing agility to manage volatile conditions and changing demand.
Our focus on profitability and profitably building our growth businesses.
Successfully managing interest rate volatility gen.
Generating high quality assets, improving operating efficiency and our disciplined capital management is delivering value for our customers clients and investors.
I am pleased with our strong financial performance and I am excited and confident in our ongoing ability to continue to deliver strong results.
I'll now turn the call over to Joe for more details on the quarter and I look forward to your questions later in the call Joe.
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 2022.
I'll be referencing the earnings call presentation, which can be found on the company's website in the investors section.
Key highlights from the quarter beginning on slide four second quarter GAAP EPS of $1 22.
Second quarter adjusted core EPS of <unk> 92.
Belt mill of 111 basis points.
Originated $420 million of private education loans.
Reported bps revenues of $87 million.
And increased our adjusted tangible equity ratio to seven 5%, while returning $128 million to shareholders through dividends and repurchases.
As a result of our strong earnings this quarter and our outlook for the remainder of the year, we are increasing our earnings per share guidance to a range of $3 35 to $3 45 for the full year.
I will provide additional detail on the quarter and our outlook by segment, beginning with federal education loans on slide five.
Net interest margin increased 40 basis points from the year ago quarter to 111 basis points, leading to an increase in interest income of $5 million compared to the prior year, even as the portfolio declined 11%.
The benefit of the asset rate resets along with the funding decisions. We made in anticipation of a rising rate environment contribute to both the increase over the prior quarter and prior year and more than offset a reduction of unhedged floor income.
As expected health delinquency rates increased to 15, 9% and forbearance rates declined 13, 1% from the year ago quarter with the charge off rate at nine basis points.
The decline in fee revenue and operating expenses and mid segment compared to the prior year are primarily attributable to the transfer of the department of education servicing contracts that occurred in October 2021.
Now, let's turn to slide six and our consumer lending segment.
This quarter's net interest margin of 266 basis points was 14 basis points lower than the first quarter, primarily as a result of the expected increase in the interest reserve as late stage delinquency balances rose compared to the prior period.
While credit trends continued to exceed our expectations with total delinquency rates below pre pandemic levels, we expect charge off rates to return to more normalized levels that are in line with our guidance of one 5% to 2% for the full year.
We feel confident that we are adequately reserved for the expected life of loan losses, given the well seasoned and high credit quality of our portfolio.
In the quarter, we originated $374 million private education refinance loan.
This quarter saw an expected decline in demand for refinance loans due to the higher rate environment and the continuation of the cares Act.
Our forecast for originations this year assumes that the federal government will continue to provide a zero percent interest rate to roughly 84% of the $1 seven trillion of outstanding education loan to an extension of the cares Act for the remainder of 2022.
Okay.
While the reduced new loan volume resulted in lower than expected net interest income. This is being partially offset by a slowdown in prepayment speeds of the overall portfolio at higher interest rates provide less of an incentive for existing customers to prepay.
Continuing to slide seven to review our business processing segment.
Second quarter revenues totaled $87 million with increasing revenue from our traditional government and health care bps services, partially offsetting the expected wind down of revenue from pandemic related services in the quarter.
The 16% EBIT margin for the quarter is shy of our high teen targets due to trailing costs for certain pandemic related services.
For the full year, we continue to target a high teen EBITDA margins as we leverage our existing technology enabled platform and infrastructure to provide dynamic solutions that meet emerging market demand.
Turning to our financing and capital allocation activity that is highlighted on slide eight.
During the quarter, we reduced our share count by 5% due to the purchase of 7 million shares in total we returned $128 million to shareholders through share repurchases and dividends, while increasing our adjusted tangible equity ratio to seven 5%.
At today's price our planned share repurchases for the remainder of 2022 of $180 million, we've reduced our outstanding share count by an additional 8%.
During the second quarter, we issued $715 million of private education refinance loan ABS in.
To mitigate the risk of rising rates on our refi and batesville portfolio by hedging our expected loan volume of originations and issuing fixed rate securitization locking in margins for the life of each loan.
These actions have benefited us in recent quarters as rates continue to rise.
Our unsecured issuance in the fourth quarter of 2021, and subsequent reduction of near term maturities left us with no upcoming unsecured debt maturities until the first quarter of 2023.
Turning to GAAP results on slide nine we recorded second quarter GAAP net income of $180 million or $1 22 per share compared with net income of $185 million or $1 five per share in 2021.
And this thing with our outlook for 2022 on slide 10, our efforts to simplify the business, while improving efficiencies in the face of a challenging environment allowed us to achieve an overall efficiency ratio of 49% in the quarter and 50% year to date.
The updated 2022 adjusted core earnings per share guidance of $3 35 to $3 45.
Reflects these efforts and is an increase of 11% compared to our original expectation.
This updated outlook excludes regulatory and restructuring costs assumes no gains from loan sales or debt repurchases reflect the continued rising interest rate environment and the extension of the cares Act through December 31 2022.
Before I turn to questions I would like to welcome journey areas as our new head of Investor Relations and to recognize my teammates across all segments. These efforts led to continued success and positive results in the quarter, while providing innovative products and solutions to our clients.
Thank you for your time and I will now open the call for questions.
Thank you, ladies and gentlemen reminder, to ask a question you will need to press star one one and our first question coming from the line of.
John Hecht from Jefferies One woman.
The first one is more of an industry question I, just think that we've all been taking a lot of questions on it one of your competitors.
Instigated a an interim review regarding policies tied to collections and discharge ability of.
Of bankrupt loans and I'm wondering do you guys think there is any kind of broader industry ramifications tied to that or do you think that thats more of just a one off.
For the industry.
You are referring to the.
Oh God.
Got it.
I don't know, we don't know any of the circumstances involved in that particular exam or investigation.
I think if you think of the process that we have been through.
Several years, we have probably been examined unaudited by more regulatory agencies than all other student loan entities combined and.
I think our practices.
We believe our practice of stand up very strong in that sense.
And continue to work with the agencies.
Crude ways that the student loan program works for borrowers, obviously with our exit from the department of education loan servicing contract.
Theres less we expect to see less of that activity going forward.
Okay.
Thanks, and then.
Yes.
Just looking at the NIM performance to date versus the guide I'm wondering maybe can you comment on some of the kind of incremental trends, we should see in the second half of the year that that drive the NIM toward a level towards the longer I guess towards the annual guidance, how does the hedging strategy contribute to that.
And so given the interest rate environment that we're in and certainly expecting for the remainder of the remainder of the year I would assume that the net interest margin will remain elevated so while our original guidance was the mid Ninety's you saw a 111 basis points and this quarter I would expect that we will remain.
<unk> above 100 basis points for the remainder of the second half of the year. So we're certainly level pace to exceed our original guidance and in terms of the private education loan NIM from that perspective the continued.
Continued movement from loans to primarily stage to late stage delinquency cut some of the pressure that you saw in this quarter just as we increase our interest reserve, but we are also on pace to be at the high end or exceed the $2 65 guidance that we originally provided.
Great, Thanks, Jack and Joe for the color.
Thank you.
Next question coming from the lineup Mark Davis with Barclays. Your line is now open.
Yes. Thanks.
Can you talk about your funding costs for private refi loans currently in and pricing to the borrower.
Of a refi incentive is still there and what is your addressable market look like today in the face of higher rates.
Yes, so historically, our client base and the refi.
Mena came from students correctly, R&D and advanced degree a master's degree or some form of doctorate or.
Larger right.
And most of what was being refinanced were grad plus loans that they have taken out in pursuit of those degrees.
As interest rates have risen the vast majority of the grad plus the older Grad plus interest rates are lower than what we would offer customers today and so our refi demand is primarily coming from borrowers with.
Private student loans and most of those are variable rate private student loans.
We expect as this new crop of borrowers are going to school on borrowing a grad plus programs at higher interest rates that as interest rates stabilize and begin to come down that demand will.
Return on but right now as I said in my comments too bearish.
Of the.
Eligible customer base that we see.
And the federal loan space.
Really their interest rates on their current loans are below what we can offer.
Our funding mix our funding sources are primarily ABS funding sources in the marketplace.
So we're offering coupons today in that average.
The mid sixes to low sevens.
Okay great.
And then just a follow up question on the NIM I know youre, not providing 2023 guidance, yet, but in and Joe I heard your comment that you expect it to remain kind of above 100 bps for the back half of the year.
Is the kind of the guidance going into Europe , and nineties kind of the right way to think about where it eventually trends too.
Yes, im going to segue from 'twenty, two 'twenty three guidance.
I think.
As you model out in the future I would expect it to return to more normalized levels as we do benefit here from the rising rate environment on the asset rate mismatch okay.
Thanks I appreciate it.
Sure.
Thank you one moment for our next question.
And our next question coming from the line of Moshe Orenbuch with Credit Suisse. Your line is open.
Great. Thanks, maybe to follow up on that question, Joe could could you just talk a little bit about.
Disaggregate the impact in the quarter.
From.
The impact on that.
Funding mismatch.
The benefit that you get versus the impact of floor income and how that.
How that interplay and what you've got left in unhedged floor income.
Can you talk about prestige. Thanks.
Sure.
So we we earned about roughly 10 basis points.
On unhedged floors in terms of the component of that felt NIM.
So thats down call it roughly 70 basis points or so from the prior quarter in terms of where core basis.
The prior quarter of where we were so as I think about going forward.
The increase in the in the rates, we benefited that more than offset as well as the fact that we have.
Being proactive in terms of our fixed rate funding mix. So if you look at our fixed rate funding compared to prior year prior year roughly about 30%.
Fixed rate funded in terms of our liabilities and our assets make up about call. It 18% is fixed rate. So that delta is contributing and thats on the portfolio as a whole. So you benefit on both the private and on the belt, but that will continue to contribute.
Our stable benefit here as we enter into as we enter into next year.
Got it thanks.
Did you say that that felt prepay speeds are expected to come down.
I guess I thought.
They definitely.
Visible.
And so there are two contributing factors here that somewhat offset if you think about public service loan forgiveness. You are seeing borrowers that are consolidating away to the direct loan program. So that does put pressure in terms of pre pay Steve, but what youre seeing as borrowers just with a rising rate environment.
Naturally being less inclined to make a prepayment just given the benefit of the lower rate of the <unk> portfolio. So you are seeing those borrowers that are not consolidating away.
Less prepayments and we started to see that in more recent months.
Certainly don't want to bring this up proactively but I think in terms of loan forgiveness discussion I think a number of borrowers are also just waiting to see what happens there and certainly less inclined to prepay as a result.
I guess just to follow up on one of your competitors have noted last quarter that.
Expected prepays to potentially rise rapidly because their loans.
In other words in order to be eligible for forgiveness they'd have to consolidate like you were talking about.
The public sector.
Public sector loan forgiveness.
I guess do you have a perspective on that.
Well I think at this stage in the game there are with the lack of any details of what loan forgiveness programs might look like.
It's not clear whether.
House, how it program will be implemented and who would be eligible the only things that the president has kind of indicated is that 10000 would be the amount and there might be and there should be some income caps on the program our customer base is primarily borrowers with consolidation loans.
Which.
And given their balances imply.
Advanced degrees.
We would expect that that borrower base.
<unk> percentage of that borrowing base would be eligible based on income caps.
But then you also have the possibility of that.
Any forgiveness program would take place.
Where the borrower was versus forcing everyone into one program or another but these are all to be determined.
As I sat there is literally zero commentary on this.
Even if you look at some of the programs that they have announced like the some of the.
We closed school programs. They are still our zero details on how those programs will be implemented even though they've been publicly announced.
Got it thanks.
Okay.
Thank you one moment for our next question.
And our next question coming from the line of son, Joseph <unk> with <unk>. Your line is open.
Thanks, Amit.
I'm wondering if you guys have heard anything on the student loan moratorium and whether or not it's going to be extended and maybe sort of how you.
It impacts the.
The scenarios that you've considered.
Yes.
So we are no longer a service around the department of Ed contracts I guess, our sources are the same as what we read.
In the press and what are some of our former colleagues in the direct loan servicing business talk to us about.
And that has just been that the department has said no.
Communicate with customers yet.
Thank you.
Given where we are in the calendar and the end date of August 31.
Hard for us to believe that it does not get extended and as Joe said, our assumptions our working assumption is that the zero percent interest in the payment waiver will extend through all of 2022.
And you've contemplated that.
In your guidance.
Yes.
Okay.
One.
I wanted to sort of more high level follow up on the VTS segment that continues to do quite well I'm. Just curious how we should think about how youre thinking about that business long term, obviously, you've made a whole lot of sense. When you have that large servicing portfolio for the Doe.
Maybe just talk about.
Strategically how youre thinking about that business.
But when we when we launched our our activities in the VTS segment was leveraging the skills that we had developed and honed in and the scale that we were delivering in loan servicing for sure and those skills our ability to manage.
High levels of volume and a workflow processing.
Really creative and comprehensive omnichannel types of communication strategies for.
Our customer contacted outreach.
And then payment payment flows and revenue cycle enhancement activities during the pandemic the demand for some of these services spike Unfortunately, they spike, but we were able to respond.
To be able to answer the call there and that was about outreach to customers. It was about taking inbound calls helping them understand different programs processing forms.
And components for them.
That included unemployment insurance that included.
For some states.
Covid vaccination outreach.
Too hard to reach segments of the population to into help them get appointment schedule, then increase the state's overall vaccination levels.
For us.
We were leveraging the skill sets that we had and those skill sets remain even though we're no longer a department of education loan service. So we're still servicing our own self loans, while still servicing our private loans the telephony systems.
The workflow expertise remains and also the data analytics that we've learned through the years on that side of the equation to help us be more effective.
Are still front and center skills for us.
The big difference from bps in the last two years going forward as during the pandemic contracts and demand for services rose almost from zero to very high levels and needed to be responded to very rapidly. So in some cases, we were.
We offered services were awarded contracts and started operations in a matter of days.
In a normal normalized business processing.
Solutions contract award basis will go through Rfps bid ladders, and so the timeframe to replace pandemic work with longer term arrangements has a longer cycle.
But we are seeing.
From clients, both existing that we had during the pandemic as well as new debt.
Our performance and capabilities in that space.
It was well regarded and we expect to be able to leverage that to new and longer term contracts going forward.
Alright, thank you.
One woman for next question.
And next question is from Bill Ryan Your line is now open.
Thanks, and good morning couple of questions first.
Starting off on your in school loan demand looking back last year, you did 153 million I believe in volume.
How are things kind of progressing.
It's a little bit early but kind of like what are you seeing in terms of loan demand and I know theres been a little bit of incremental competition coming in the market.
In light of the pullback in refi volume.
And second just on the provision for loan losses.
Looked like you had about $7 million on new originations about one 7% of the volume and then you had about $11 million adjustment.
Related to the existing loan portfolio with the $11 million pretty much related to just the extension of the duration of the portfolio that I just talked about earlier and if there has there been any changes on the seasonal reserves associated with the in school and the refinance volumes. Thanks.
Got it.
So thanks for the question is our outlook for SLO, our in school origination product as I said is we're very optimistic about the demand that we will see this year and the volume that will originate.
As you pointed out it is early in peak season. So we're just starting to see application flows.
Every year is a little bit different in terms of when the demand peaks and cycles, but.
We believe our product design the application flow enhancements that we've made and the outreach that we're making as a positive comment.
Comments I made about going Mary are also significant value enhancers for us.
Our products that help students and families better plan for how to pay for college and hopefully by taking advantage of things like completing in the past.
Using the scholarship search engine and its the always scholarship search engine in the country that has both local and national scholarships as really an opportunity to help.
<unk> helps students and families find ways to reduce the amount they need to borrow and as I said it enhances the.
The value proposition of what we're bringing to the table on.
On the provision side of the equation.
Our outlook is.
Our credit performance as I said, it's been particularly strong it's been better than what we expected our reserve levels. However have not changed up or down in terms of our life of loan loss estimates.
For our in school or refi or the legacy portfolio.
We remain I think.
Conservatively positioned in terms of credit outlook, just given the uncertainty in the economy.
But as we've said credit performance to date has been significantly better than expected.
Thanks for taking my questions.
Okay.
And as a reminder, ladies and gentlemen to ask a question you will need to press star one one.
And one moment for our next question.
Our next question coming from the line of Gordon <unk> with Barclays. Your line is open.
Hey, good morning, Jack Joe Thanks for the call Linda Congrats on the results of John Congrats on your new role.
So just a quick one for you guys I know that you mentioned in the release that you'd be handling your near term maturities with our liquidity.
Todd given current valuations of the bonds. How are you guys thinking about opportunistic repurchases for the remainder of 2022 and any color on how that might fit into your capital allocation priorities. Thanks.
Yes, so as we've done in the past.
I think opportunistic is a good word so to the extent that there is availability do you look at our maturities over certainly the next 12 and 24 months of where there's opportunity then in the even in the past we've gone out well beyond 10 years, if it's attractive enough to us. So we feel very comfortable from a liquidity perspective and the.
The availability of us to raise cash quickly should there be an opportunity to pay down unsecured debt. So.
Fortunately there havent been those opportunities in the near term to take some of that down in the last two quarters, but we continue to look for that.
If that comes about we will certainly take advantage of them.
Alright, awesome Thats very helpful. Thank you so much.
Thank you.
Operator are there any more question.
<unk> from <unk> Your line is open.
Okay.
I wasn't sure.
My line is open I didn't understand what you said is my line open Yes. Your line is open great. Thank you.
I know you are probably low to comment on specific court case.
There was a ruling in early July .
In our case on the discharge ability of private student loans and bankruptcy and instead of the specifics on the case I'm. Just wondering if you could comment on just changes on view on discharge ability.
And is this kind of any material change or I'm guessing it's possible that it's just a small immaterial change, but would love your view.
So we have long been advocates for reform in bankruptcy discharge ability and.
What we are proposals have generally focused on.
Borrowers who have been in repayment for some brief period of time after school and then incur some financial hardship that they should be eligible for discharge similar to other forms of credit products.
Thank the rulings that are coming out here has to do with the weather alone as an eligible loan under that.
Under the definition.
And some of our loan products.
Our study our residency programs or <unk>.
Even some of the direct to consumer component products that we offer that Sallie Mae offered over 10 years ago, but we own some of those loans today.
<unk>.
Get it get caught up in that but it's a relatively small component piece for us.
And as I said.
Within advocates for reform I think one point I would just make.
Mind folks is that in a bankruptcy situation and the borrowers already in default.
Typically at that at that stage in the game and so it's really more about recovering the recovery of cover ability of the defaulted loan balance that gets impacted here.
Alright, perfect I appreciate your thoughts.
Okay.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to John <unk> for any closing remarks.
Thanks, Livia wed 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.
Yes.
Okay.
Ladies and gentlemen that does conclude the conference for today. Thank you for your participation you may now disconnect.
Okay.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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